UNITED STATES
Securities and Exchange Commission
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-6477
SM&R Investments, Inc.
P.O. Box 58969
Houston, TX 77258-8969
Securities Management and Research, Inc.
P.O. Box 58969
Houston, TX 77258-8969
(800) 231-4639
Fiscal year end: August 31
Reporting period: August 31, 2004
ITEM 1. REPORT TO SHAREHOLDERS
Securities Management and Research, Inc.
P.O. Box 58969
Houston, TX 77258-8969
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[GRAPHIC]
[SM&R MUTUAL FUNDS LOGO]
WHERE WE ARE
2004
ANNUAL REPORT
FOR THE FISCAL YEAR
ENDING AUGUST 31
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[GRAPHIC]
[SM&R MUTUAL FUNDS LOGO]
2004
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[GRAPHIC]
THE BIG PICTURE
As we prepare for the Annual Report project each year, we arrive at a theme that
we feel speaks to the major market and economic trends of the time, as well as
general current events that have market implications. As we searched for our
theme (and thus accompanying graphics) for the latest fiscal year, the idea of
highlighting our daily surroundings was put forth, mostly because the
surroundings we are fortunate enough to work in every day are unique and quite
interesting, from our perspective. We thought that we would pass on a small
glimpse of our home base to you. Through the process of making the graphics
decision, it became apparent that our surroundings - the South Shore Harbour
Marina, filled from the waters of Galveston Bay - offered a strong metaphor for
all that affected the financial markets and economy over the past 12 months. We
hope you will enjoy this small glimpse of our world as we do our best to help
you create the world that you envision for yourself and your family. We only
exist because of you and the trust that you have placed in us. We pledge to do
our utmost to live up to that trust.
[SIDENOTE]
The report contained herein is included for the general information of our
shareholders. This report is not authorized for distribution to prospective
investors unless it is preceded or accompanied by a current prospectus. ALL
INVESTORS ARE ADVISED TO CONSIDER THE INVESTMENT OBJECTIVES, RISKS, AND CHARGES
AND EXPENSES OF THE INVESTMENT COMPANIES CAREFULLY BEFORE INVESTING. THE
PROSPECTUS CONTAINS THIS AND OTHER INFORMATION ABOUT THE INVESTMENT COMPANIES.
YOU SHOULD READ IT CAREFULLY BEFORE INVESTING.
A description of the policies and procedures that the fund uses to determine how
to vote proxies is available (1) without charge upon calling 1-800-231-4639 and
(2) on the SEC's website at www.sec.gov.
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2004 ANNUAL REPORT
ANNUAL REFLECTION
SM&R sits nestled amongst a backdrop that emanates tranquility and success...
the peace of a silent marina and the floating rewards that monetary success in
this society can bestow. The rewards may be the fruit of a bountiful profession
or a long-term disciplined savings program.
Retirement dreams for many may include such images of graceful palms, calm
waters and floating white vessels destined for far-off places. Or maybe the calm
waters you seek don't connect continents at all, yet offer the wooded serenity
of an out-of-the-way lake left untouched and unscathed by civilization. Perhaps
your calm waters are the metaphorical kind - simply a full, rewarding life in
retirement facilitated by the reasonable nest egg cultivated during your working
years and slowly harvested throughout the golden years. Or even a college
experience for your children in which the challenges are merely academic and not
monetary.
Whatever your financial dreams may be, there are times when the currents of
investment success carry you effortlessly forward, yet there are also periods
where all of your paddling against the liquid force yields no results. These
last 12 months featured a fair amount of both. And cross-currents, from
geo-political concerns to a Presidential election - were consistently being
reflected in asset values.
THE STOCK MARKET
The final quarter of 2003, fresh off of a blistering Gross Domestic Product
(+8.2%) number, featured a stock market on fire, placing an exclamation mark on
what had already been a fine year for virtually every equity category. Double
digit returns rewarded virtually every full year equity fund investor within the
SM&R Fund complex. The equity market rally lengthened to February, but then
began to give way to a host of crosscurrents - from interest rates to energy to
terrorism - and rolled over into late spring, rebounded to a lower high in
June, sold off to a lower low in early August and then closed out August on an
up note; lots of motion but little progress. For the bulls, the action has been
un-endingly frustrating, as the surface-level market backdrop seemed ideal: +20%
earnings growth, low interest rates, low inflation, improving corporate balanced
sheets and much improved corporate governance. But an underlying caution on the
part of corporations, combined with continuing geo-political concerns and a less
than ebullient consumer, leaves us with a sort of stop-and-start market that
continues to frustrate a bit.
THE BOND MARKET
The full-year trend of low single digit bond returns continued over the final
quarter of 2003. Since September of 2003, while intermediate and longer term
bonds experienced some pressure from rising interest rates during the spring of
2004, by the close of the fiscal year they were little changed in value from the
same time in 2003. Early 2004 bond market concerns of a more vibrant economy and
thus a more active Federal Reserve gave way to an economic "soft patch," as
Chairman Greenspan termed it, and the 10-year Treasury bond's yield
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SECURITIES MANAGEMENT AND RESEARCH, INC.
[GRAPHIC]
retreated from it's higher spring levels. Though the Central Bank has been very
open regarding its intent to raise short term rates "at a measured pace,"
longer-term rates have not followed their short brethren higher, signaling that
major bond market players see a less robust economy and continued muted
inflation going forward.
THE ECONOMY
Given that we have been inundated with the Presidential race over the course of
the last year, economic bantering has been even more pronounced than normal, and
"normal" economic chatter borders on extreme these days. On one hand, one could
argue that the economy has been remarkably resilient over the past years, given
all that it has endured since early 2000; no need to regurgitate the off-cited
list. Gross Domestic Product numbers, our best measure of economic progress,
show an economy that, while growing, is moving forward at only a steady as she
goes' pace. Given the historic productivity numbers of the last several
quarters, this muted growth has not been enough to produce ramping jobs numbers.
While jobs surged 388,000 in April, job creation swooned to only 34,000 in July,
a number too low to even accommodate the approximately 150,000 new entries into
the job market each month. Consumer confidence, largely a by product of job
creation, has been tepid at best, and has been reflected in disappointing retail
sales. Housing continues to be a shining sector in the economy, resulting from
continued low interest rates and strong immigration.
[GRAPHIC]
POLITICS
Late 2003 and early 2004 focused on who the Democratic challenger for President
would be. The market really got interested when the Democratic nominee had been
chosen and the real race for the White House began. Electoral certainty is
something the market deeply cares about, and in this year's election that won't
likely be certain until the day after the election, barring any repeated
electoral snafus.
DEFICIT
The strong economy of the 1990's, coupled with outsized stock option exercising
and a reasonably disciplined Congress led to a large budget surplus, and it
seemed we had finally won the battle against the budget deficit and were making
progress on the national debt. The bursting of the technology bubble, the bear
market and the economic downturn stopped that reality in its tracks. Add in the
war on terror, war in Iraq and new demands for homeland security, not to mention
a now un-disciplined Congress, and we have deficits that threaten to stretch
endlessly into the future. Even more foreboding is the swelling Social Security
and Medicare programs, two bulging non-discretionary budget items that will
ultimately be budget busters if just left to fester over the coming decade.
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ENERGY
The world is certainly one of marked change, and one of the most pronounced
transformations has been the emergence of China and India as worldwide economic
powers. Growing energy demand from these simmering economies, coupled with
worldwide recoveries and Middle East tension leaves in its wake dramatically
rising crude oil prices. Long gone are the days when the price of oil can be
talked down by the cartel. Growing energy demand is stretching world oil
production to the brink, and much has been written about the real possibility
that the world has reached or nearly reached its production capacity. It seems
that the all of the easy oil (light sweet crude) is being pumped as fast as
possible, with new sources of the rude crude being of a "dirtier," less
efficient variety.
[GRAPHIC]
TERRORISM/WAR
Terrorism and the threat of terrorism equal uncertainty, period. While terror
has long been a part of the international geo-political landscape, events of the
last several years have placed those fears front and center in the U.S. market's
psyche, just one additional cross-current with which the market must contend.
The attack in Spain, the Russian school seizure and the heightened terror alerts
in New York City and New Jersey are just a few of the many headline terror
events of the past year. Also unsettling is the continued Iraq war and the pall
it casts over the American mindset. While the human toll is incalculable, the
economic tab will ultimately be in the hundreds of billions of dollars. While
every American surely knows that much positive is blossoming in Iraq - real
elections promised by early in 2005, the opening of schools and incipient
patches of commerce - much toil and destruction lie ahead. A strict timeline
for withdrawal seems impossible to construct at this point, as the need for
American presence seems un deniable. Since the market tends to be driven in the
short-run by psychology, these realities are of central importance.
A great many speed bumps to be sure, but the financial markets have obviously
dealt with difficult headwinds before. The market typically looks forward. The
market doesn't reflect today's headlines as much as it is constantly offering a
preview of what's to come. We often don't recognize what it's saying at the
time, but it has an amazing ability to be accurate.
All of the meaningful voyages of life - whether they are of the nautical
variety or the wealth creation kind - pose risks. Rough seas typically stand
between where you are and the ultimate port you seek. Just as safety precautions
and devices are a part of every ocean-going vessel's supplies, so should there
be safety precautions in your portfolio. The best safeguard that most should
take is to have a solid understanding of your personal risk tolerance and the
time frame with which you are dealing. Once this necessary and fundamental
understanding is reached, understand that diversification amongst many types of
financial products typically offers the best remedy for guiding one through the
rough seas of investing. Owning some stocks for their growth and dividend
potential, bonds for their income and preservation potential, and some cash-type
instruments for complete stability could set you on a course that you may be
able to keep, whatever "winds" the markets throw your way.
AGAIN, thank you for your continued trust and confidence. We pledge to do our
utmost to direct your investments in a determined, prudent fashion.
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SECURITIES MANAGEMENT AND RESEARCH, INC.
ONGOING EXPENSES (UNAUDITED)
Each shareholder of the Company, will incur two types of expenses: (1)
transactional (e.g., sales charges, contingent deferred sales charges on
redemptions and redemption fees) and (2) ongoing (e.g., asset-based charges such
as investment advisory fees and distribution and/or 12b-1 fees). The example,
included below, is intended to help a shareholder better understand the ongoing
expenses of investing in this Company and to compare these expenses with other
mutual funds. The example is based on an investment of $1,000 invested at the
beginning of the period, March 1, 2004, and held for six months ending August
31, 2004.
ACTUAL EXPENSES
The example below provides information about actual account values and actual
expenses. A shareholder may use the information in this example, together with
the amount they have invested, to estimate the expenses that they have paid over
the period. Simply divide the account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in actual column under the heading entitled "Expenses Paid During Period" to
estimate the expenses paid on their account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The example also provides information about hypothetical account values and
hypothetical expenses based on the Company's actual expense ratios and an
assumed rate of return of 5% per year before expenses, which is not the
Company's actual return. The hypothetical account values and expenses may not be
used to estimate the actual ending account balance or expenses a shareholder
paid for the period. This information may be used to compare the ongoing
expenses of investing in the Company and other mutual funds. To do so, compare
this 5% hypothetical example with the 5% hypothetical examples that appear in
the shareholder reports of other mutual funds.
Please note that the expenses shown in this table are meant to help a
shareholder understand the ongoing expenses only and do not reflect any
transactional expenses, such as sales charges, contingent deferred sales charges
on redemptions or redemption fees. Therefore, the table is useful in comparing
ongoing expenses only, and will not help determine the relative total costs of
owning different funds. In addition, if these transactional expenses were
included, the expenses would have been higher.
<Table>
<Caption>
ACTUAL
BEGINNING ACCOUNT ANNUALIZED ENDING ACCOUNT EXPENSES PAID
FUNDS VALUE (03/01/04) EXPENSE RATIOS VALUE(08/31/04)(1) DURING PERIOD(2)
- -----------------------------------------------------------------------------------------------------
ALGER TECHNOLOGY FUND
Class A $ 1,000.00 1.14% $ 816.10 $ 4.69
Class B 1,000.00 1.44% 813.65 5.88
ALGER AGGRESSIVE GROWTH FUND
Class A 1,000.00 0.97% 882.95 4.30
Class B 1,000.00 1.35% 881.95 4.29
ALGER SMALL-CAP FUND
Class A 1,000.00 1.05% 892.70 4.69
Class B 1,000.00 1.41% 889.65 6.31
ALGER GROWTH FUND
Class A 1,000.00 0.55% 900.30 2.50
Class B 1,000.00 1.25% 897.80 5.63
GROWTH FUND
Class A 1,000.00 0.73% 971.75 3.55
Class B 1,000.00 1.01% 969.40 4.93
Class T 1,000.00 0.58% 973.15 2.83
EQUITY INCOME FUND
Class A 1,000.00 0.69% 982.25 3.42
Class B 1,000.00 0.94% 980.15 4.65
Class T 1,000.00 0.56% 983.60 2.79
BALANCED FUND
Class A 1,000.00 0.71% 982.25 3.51
Class B 1,000.00 1.00% 979.85 4.93
Class T 1,000.00 0.63% 982.75 3.12
GOVERNMENT BOND FUND
Class A 1,000.00 0.36% 999.50 1.82
Class B 1,000.00 0.55% 997.05 2.75
Class T 1,000.00 0.37% 1,000.35 1.87
TAX FREE FUND
Class A 1,000.00 0.37% 1,001.60 1.84
Class B 1,000.00 0.64% 999.20 3.04
Class T 1,000.00 0.38% 1,002.30 1.91
PRIMARY FUND 1,000.00 0.40% 1,004.10 2.04
MONEY MARKET FUND 1,000.00 0.28% 1,003.10 1.44
<Caption>
HYPOTHETICAL
ENDING ACCOUNT EXPENSES PAID
FUNDS VALUE(08/31/04) DURING PERIOD(2)
- ---------------------------------------------------------------
ALGER TECHNOLOGY FUND
Class A $ 1,009.70 $ 5.80
Class B 1,008.95 7.30
ALGER AGGRESSIVE GROWTH FUND
Class A 1,010.13 4.92
Class B 1,009.16 6.87
ALGER SMALL-CAP FUND
Class A 1,009.94 5.31
Class B 1,009.02 7.15
ALGER GROWTH FUND
Class A 1,011.18 2.81
Class B 1,009.43 6.33
GROWTH FUND
Class A 1,010.74 3.69
Class B 1,010.02 5.14
Class T 1,011.12 2.94
EQUITY INCOME FUND
Class A 1,010.83 3.52
Class B 1,010.19 4.80
Class T 1,011.15 2.87
BALANCED FUND
Class A 1,010.78 3.61
Class B 1,010.05 5.08
Class T 1,010.98 3.21
GOVERNMENT BOND FUND
Class A 1,011.66 1.84
Class B 1,011.19 2.79
Class T 1,011.63 1.89
TAX FREE FUND
Class A 1,011.65 1.86
Class B 1,011.05 3.08
Class T 1,011.61 1.93
PRIMARY FUND 1,011.55 2.06
MONEY MARKET FUND 1,011.85 1.45
</Table>
(1) The actual ending account value is based on actual total return of each
class of each of the funds for the period March 1, 2004 to August 31, 2004 after
actual expenses and will differ from the hypothetical ending account value which
is based on each class of each of the funds' actual expense ratios and a
hypothetical annual return of 5% before expenses.
(2) Expenses are equal to the * annualized expense ratios, shown in the table
above, multiplied by the average account value over the period, then multiplied
by 184/366 (to reflect the six month period).
<Page>
SM&R ALGER TECHNOLOGY FUND
MANAGER COMMENTARY
[CHART]
SECTOR WEIGHTINGS
BY
TOTAL INVESTMENTS
<Table>
Information Technology 92.67%
Consumer Discretionary 4.60%
Telecommunication Services 2.20%
Affiliated Money Market Fund 0.53%
</Table>
INVESTMENT OBJECTIVE
The SM&R Alger Technology Fund seeks to achieve long-term capital appreciation.
The Fund normally invests at least 85% 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 benefit significantly from
technological advances or improvements. During the recent fiscal year, the
management of the Fund remained unchanged: a research intensive, bottom-up
approach focusing on rapidly growing stocks. Management's growth stock
philosophy and the inherent technology focus of the Fund were of benefit during
a period in which growth outperformed value and technology stocks performed very
well.
MARKET REVIEW
The twelve months ending August 31, 2004 were relatively solid for equity
securities across most market capitalizations and styles. However, the year
began in a rather inauspicious manner. Despite an improved outlook for the
semi-conductor industry, bearish news in the labor markets and OPEC's surprise
decision to cut oil output dragged stocks down during September of 2003.
Fortunately, the trend reversed itself with the start of the fourth quarter.
Fueled in part by rising consumer confidence, a bullish outlook from the Fed and
the fastest GDP Growth in 20 years, markets trended higher during October. The
momentum continued into November. Despite a falling dollar, stocks continued to
rise on larger-than-expected growth in the manufacturing sector, bullish
forecasts in the tech sector and solid housing data. The upward trend did not
falter in December, as positive economic and geopolitical news captured most of
the headlines. Strong consumer spending and the largest productivity gains in 20
years helped to propel most equity indices significantly higher during the final
month of the year. The capture of Saddam Hussein on December 13th further
enthused investors.
While the robust momentum of 2003 seemed to wane a bit during the first quarter
of 2004, markets still managed to post positive returns throughout the
three-month period. Despite escalating fears of a stalled recovery in the labor
market, stocks advanced during the first month of the year as investors chose to
focus on rising consumer sentiment and stellar growth within the U.S. merger and
acquisition business. The forward progress continued into February. Investors
were heartened by news of significant growth in the manufacturing sector and the
Fed's indication that it would remain patient with regard to interest rate
hikes. Most equity indices trended higher during the second month of the year,
with mid-cap stocks leading the upturn. The positive momentum, however, seemed
to slow down in March, with equity indices posting mixed results. While small
and mid-cap stocks were able to remain in positive territory during the
one-month period, large-cap stocks struggled, as geopolitical uncertainty began
to weigh on investors. With continued unrest in Israel and Iraq and rising
tensions between China and Taiwan, large-cap stocks of all styles trended
downward during the final month of the quarter.
Despite a weak start to the second quarter, equity markets managed to post
modest gains during the three-month period. As the quarter began, solid
fundamentals seemed to be trumped by fear and uncertainty. Despite
better-than-expected growth in the housing market and strong earnings news,
investors were shaken by escalating violence in Iraq and fears of a looming
interest rate hike. Stocks of all sizes and styles trended downward during
April. Fortunately, the negative momentum reversed course in May. Investors were
heartened by better than expected first-quarter GDP growth and news that soaring
oil prices had begun to moderate. Stocks
7
<Page>
moved higher during the second month of the quarter, with mid cap stocks leading
the way. The advance continued into June. Despite continued uncertainty in
regards the situation in Iraq, stocks rose on strong payroll growth and a large
jump in consumer confidence. In addition, the modest 25 basis point interest
rate hike on June 30th helped to relieve investors of some of their fear and
uncertainty. Unfortunately, the positive trend came to a halt in July and
August. Disappointing job growth, surging oil prices and election-related
terrorism fears all helped to keep buyers out of the market. While value stocks
were able to withstand the downward pressure more effectively than their growth
counterparts, stocks of most styles and sizes moved lower during the final two
months of the period.
FUND PERFORMANCE
The Fund's Class A Shares returned 6.18%, before sales charge, during the
fiscal year ended August 31, 2004, versus a -6.10% return for the Lipper Science
& Technology Fund Index. Throughout the twelve-month period, the Fund benefited
from solid security selection within the consumer discretionary sector, but was
hurt by poor performance within the information technology sector.
MARKET & ECONOMIC OUTLOOK
Here we are at the end of summer. Yet, after months of positive economic data,
the markets are still drifting and the public mood is hardly what one would call
euphoric. So, we've been wondering: What explains the disconnect between how the
economy is doing and how many people think it is doing? The short answer is,
publicly traded companies are generating record profits, but workers are not
benefiting as much. Many companies are seeing significant double-digit earnings
growth; for workers, average hourly earnings are up only 2.0% year-over-year and
disposable income is up 3.9%. This gap will likely create confusion, political
battlefields, and opportunities: Confusion because the numbers won't quite make
sense to many people; battlefields because partisans will pick and choose which
numbers to emphasize; and opportunities because the net effect will be to dampen
euphoria and keep the market sober and less expensive than its fundamentals
warrant.
Regardless of market conditions, we will persist in emphasizing individual
security selection through thorough, internal research conducted by talented
analysts. Looking ahead, we will continue to seek out and invest in companies
that we believe will grow their earnings rapidly and consistently.
Best Regards,
/s/ Dan Chung
/s/ Nam Hoang
Dan Chung, CFA, Portfolio Manager
Nam Hoang, CFA, Assistant Portfolio Manager
SM&R Alger Technology Fund
[CHART]
SM&R ALGER TECHNOLOGY FUND
ANNUAL COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN SM&R ALGER
TECHNOLOGY FUND, CLASS A, AT OFFERING PRICE, AND LIPPER SCIENCE AND TECHNOLOGY
FUND INDEX AND THE S&P 500
<Table>
<Caption>
SM&R ALGER LIPPER SCIENCE AND
TECHNOLOGY S&P 500 TECHNOLOGY FUND INDEX
$ 9,497 $ 10,000 $ 10,000
$ 4,919 $ 8,731 $ 5,868
$ 3,077 $ 7,561 $ 3,680
$ 3,182 $ 7,693 $ 3,831
$ 1,586 $ 6,201 $ 2,249
$ 1,349 $ 5,527 $ 1,937
$ 1,586 $ 5,993 $ 2,245
$ 2,460 $ 6,949 $ 3,110
$ 2,393 $ 6,875 $ 3,027
$ 2,783 $ 7,712 $ 3,398
$ 2,308 $ 7,744 $ 2,920
</Table>
AVERAGE ANNUAL RETURN
Includes maximum sales charge through 8/31/04. Inception date of these classes
is 09/01/00.
<Table>
<Caption>
SHARE ONE SINCE
CLASS YEAR INCEPTION
- ----------------------------------------------------
A (10.99)% (10.69)%
B (11.51)% (29.92)%
</Table>
SM&R Alger Technology Fund performance figures reflect reinvestment of all
dividends and capital gains distributions and changes in net asset value.
Returns for Class A and B will vary due to differences in expenses and sales
charge structure. Average annual returns are based on the maximum sales charge
and reinvestment of all dividends and capital gains. The average annual returns
for Class A shares reflect the current maximum initial sales charge of 5.00%.
Class B shares reflect the applicable contingent deferred sales charge (CDSC),
which is 5% in the first year declining to 1% in the fifth year, and is
eliminated thereafter.
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL
FLUCTUATE SO THAT THE INVESTORS SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAT THE
PERFORMANCE DATE QUOTED. TO OBTAIN PERFORMANCE DATA CURRENT TO THE MOST RECENT
MONTH-END, PLEASE CALL SM&R AT (877) 239-2049.
Returns shown do not reflect the deduction of taxes that a shareholder would pay
on fund distributions or redemption of fund shares.
8
<Page>
HOLDINGS
SCHEDULE OF INVESTMENTS August 31, 2004
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- -------------------------------------------------------------------------------------------
COMMUNICATION EQUIPMENT -- 8.96%
Cisco Systems, Incorporated* 875 $ 16,415
Corning Incorporated* 1,000 10,120
Juniper Networks, Incorporated* 350 8,011
Motorola, Incorporated 1,700 27,455
QUALCOMM Incorporated 400 15,220
77,221
COMMUNICATIONS -- 5.64%
Andrew Corporation* 2,450 27,171
Avaya Incorporated* 1,050 12,726
Nextel Partners, Incorporation (Class A)* 600 8,652
48,549
COMPUTER RELATED & BUSINESS SERVICES -- 7.89%
Apple Computer, Incorporated* 450 15,521
International Business Machines Corporation 350 29,641
PalmOne, Incorporated* 700 22,855
68,017
COMPUTER SERVICES -- 1.25%
Akamai Technologies, Incorporated* 800 10,760
COMPUTER SOFTWARE -- 6.65%
NAVTEQ Corporation* 350 11,508
Novell, Incorporated* 1,000 5,900
PalmSource, Incorporated* 1,773 39,910
57,318
COMPUTERS & PERIPHERALS -- 1.21%
Dell Incorporated* 300 $ 10,452
ELECTRONIC EQUIPMENT & INSTRUMENTS -- 1.50%
Symbol Technologies, Incorporated 1,000 12,900
HOUSEHOLD DURABLES -- 1.13%
Garmin LTD 250 9,727
INFORMATION TECHNOLOGY SERVICES -- 2.09%
Accenture LTD (Class A)* 500 13,050
Kanbay International Incorporated* 250 4,978
18,028
INTERNET & CATALOG RETAIL -- 5.27%
eBay Incorporated* 210 18,173
Netflix Incorporated* 1,950 27,203
45,376
INTERNET SOFTWARE & SERVICES -- 9.73%
First Data Corporation 300 12,675
Google Incorporated (Class A)* 100 10,245
Lionbridge Technologies, Incorporated* 1,000 7,970
Netegrity, Incorporated* 1,300 7,891
SonicWALL, Incorporated* 3,650 19,710
Yahoo! Incorporated* 890 25,374
83,865
MEDIA -- 3.51%
XM Satellite Radio Holdings Incorporated* 1,100 30,217
</Table>
9
<Page>
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- -------------------------------------------------------------------------------------------
OFFICE EQUIPMENT -- 1.00%
Zebra Technologies Corporation (Class A)* 150 $ 8,572
SEMICONDUCTOR & SEMICONDUCTOR EQUIPMENT -- 7.77%
Advanced Micro Devices, Incorporated* 900 10,287
Applied Micro Circuits Corporation* 2,650 8,877
Broadcom Corporation* 600 16,284
Semiconductor Manufacturing International Corporation ADR* 1,750 17,780
Skyworks Solutions, Incorporated* 1,650 13,745
66,973
SEMICONDUCTORS -- 19.63%
Altera Corporation* 1,175 22,231
Analog Devices, Incorporated 450 15,624
Applied Materials, Incorporated* 1,850 29,397
Cypress Semiconductor Corporation* 1,300 12,688
Intel Corporation 1,600 34,064
Teradyne, Incorporated* 1,550 19,948
Texas Instruments Incorporated 1,800 35,172
169,124
SOFTWARE -- 14.79%
Activision, Incorporated* 600 8,634
Amdocs Limited* 700 14,070
Intuit Incorporated* 500 21,145
Microsoft Corporation 1,570 42,861
Oracle Corporation* 800 7,976
Take-Two Interactive Software, Incorporated* 1,000 32,750
127,436
WIRELESS TELECOMMUNICATION SERVICES -- 2.22%
SpectraSite, Incorporated* 425 $ 19,100
TOTAL COMMON STOCK -- 100.24%
(Cost $858,828) 863,635
MONEY MARKET FUNDS
SM&R Money Market Fund, 0.98% (a) 4,565 4,565
TOTAL MONEY MARKET FUNDS -- 0.53%
(Cost $4,565) 4,565
TOTAL INVESTMENTS -- 100.77%
(Cost $863,393) 868,200
LIABILITIES IN EXCESS OF
OTHER ASSETS -- (0.77)%
(6,607)
NET ASSETS -- 100.00% $ 861,593
</Table>
ABBREVIATIONS
ADR - American Depository Receipt
* - Non-income producing securities
Note to Schedule of Investments
(a) The rate quoted is the annualized seven-day yield of the fund at August 31,
2004. A complete listing of the fund's holdings are included in these
financial statements. This fund and SM&R Alger Technology Fund are
affiliated by having the same investment adviser.
See notes to financial statements.
10
<Page>
SM&R ALGER TECHNOLOGY FUND
FINANCIALS
STATEMENT OF ASSETS & LIABILITIES
August 31, 2004
<Table>
ASSETS
Investments in unaffiliated securities, at value (Cost $858,828) $ 863,635
Investments in affiliated money market funds (Cost $4,565) 4,565
Total investments (Cost $863,393) 868,200
Receivable for:
Capital stock sold 165
Dividends 298
Expense reimbursement 3,783
TOTAL ASSETS 872,446
LIABILITIES
Accrued:
Investment advisory fee 1,021
Service fee 189
Distribution fee 1,350
Other liabilities 8,293
TOTAL LIABILITIES 10,853
NET ASSETS (applicable to shares outstanding) $ 861,593
NET ASSETS ARE COMPRISED OF THE FOLLOWING:
Capital (par value and additional paid-in) $ 1,198,023
Accumulated net realized loss on investments (341,237)
Net unrealized appreciation on investments 4,807
Net Assets $ 861,593
NET ASSETS:
Class A $ 585,844
Class B $ 275,749
Total Net Assets $ 861,593
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 100,000,000
Outstanding 240,646
Class B:
Authorized 100,000,000
Outstanding 111,929
Class A:
Net asset value and redemption price per share $ 2.43
Offering price per share (Net Assets value of $2.43/95%) $ 2.56
Class B:
Net asset value and offering price per share $ 2.46
</Table>
STATEMENT OF OPERATIONS
Year Ended August 31, 2004
<Table>
INVESTMENT INCOME
Dividends $ 879
Interest from affiliated money market funds 255
TOTAL INVESTMENT INCOME 1,134
EXPENSES
Investment advisory fees 12,027
Service fees 2,227
Professional fees 4,307
Custody and transaction fees 10,232
Directors' fees 6,331
Qualification fees 5,505
Class A 7,125
Class B 7,125
Shareholder reporting expenses:
Class A 285
Class B 130
Distribution fees:
Class A 2,087
Class B 2,946
Insurance expenses 62
TOTAL EXPENSES 60,389
LESS EXPENSES REIMBURSED (39,745)
NET EXPENSES 20,644
INVESTMENT LOSS- NET (19,510)
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments 38,898
Change in unrealized depreciation of investments for the year (109,466)
NET LOSS ON INVESTMENTS (70,568)
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ (90,078)
</Table>
See notes to financial statements.
11
<Page>
STATEMENT OF CHANGES IN NET ASSETS
Year Ended August 31
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
<Table>
<Caption>
2004 2003
- --------------------------------------------------------------------------------------------
Investment loss - net $ (19,510) $ (9,238)
Net realized gain on investments 38,898 66,153
Change in unrealized appreciation (deprecation) (109,466) 170,622
Net increase (decrease) in net assets resulting from
operations (90,078) 227,537
CAPITAL SHARE TRANSACTIONS - NET
Class A 200,651 152,839
Class B 61,301 27,815
Total net capital share transactions 261,952 180,654
TOTAL INCREASE 171,874 408,191
NET ASSETS
Beginning of year 689,719 281,528
End of year $ 861,593 $ 689,719
</Table>
FINANCIAL HIGHLIGHTS
Year Ended August 31
Selected data for a share of capital stock outstanding throughout the years
indicated.
<Table>
<Caption>
CLASS A SHARES
------------------------------------------------------------
2004(1) 2003(1) 2002(4) 2001
------------------------------------------------------------
Net Asset Value, Beginning of Year $ 2.59 $ 1.67 $ 3.24 $ 10.00
Investment income (loss)- net (0.06) (0.04) (0.20) (0.37)
Net realized and unrealized gain
(loss) on investments (0.10) 0.96 (1.37) (6.39)
------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS (0.16) 0.92 (1.57) (6.76)
------------------------------------------------------------
Net Asset Value, End of Year $ 2.43 $ 2.59 $ 1.67 $ 3.24
============================================================
TOTAL RETURN (2) (6.18)% 55.09% (48.46)% (67.60)%
============================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL
DATA
Net Assets, end of year $ 585,844 $ 449,337 $ 150,553 $ 230,327
Ratio of expenses with reimbursement
to average net assets (3) 2.10% 2.10% 8.51% 10.97%
Ratio of expenses without reimbursement
to average net assets 6.15% 11.46% 12.19% 10.97%
Ratio of net investment loss with
reimbursement to average net assets (1.97)% (1.84)% (8.30)% (10.32)%
Portfolio turnover rate 215.21% 291.66% 301.01% 440.50%
<Caption>
CLASS B SHARES
------------------------------------------------------------
2004(1) 2003(1) 2002(4) 2001
------------------------------------------------------------
Net Asset Value, Beginning of Year $ 2.64 $ 1.68 $ 3.25 $ 10.00
Investment income (loss)- net (0.08) (0.05) (0.19) (0.24)
Net realized and unrealized gain
(loss) on investments (0.10) 1.01 (1.38) (6.51)
------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS (0.18) 0.96 (1.57) (6.75)
------------------------------------------------------------
Net Asset Value, End of Year $ 2.46 $ 2.64 $ 1.68 $ 3.25
============================================================
TOTAL RETURN (2) (6.82)% 57.14% (48.31)% (67.50)%
============================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL
DATA
Net Assets, end of year $ 275,749 $ 240,382 $ 130,975 $ 82,232
Ratio of expenses with reimbursement
to average net assets (3) 2.75% 2.75% 9.42% 14.71%
Ratio of expenses without reimbursement
to average net assets 8.02% 14.16% 14.23% 14.71%
Ratio of net investment loss with
reimbursement to average net assets (2.62)% (2.48)% (9.22)% (14.21)%
Portfolio turnover rate 215.21% 291.66% 301.01% 440.50%
</Table>
(1) Per share information has been calculated using the average number of
shares outstanding.
(2) Does not include the effect of sales charge.
(3) Effective June 1, 2002, SM&R has voluntarily agreed to waive or reduce
expenses to 2.10% for class A and 2.75% for class B.
(4) Per share information has been restated to reflect certain
reclassifications.
See notes to financial statements.
12
<Page>
2004 ANNUAL REPORT
SM&R ALGER AGGRESSIVE GROWTH FUND
MANAGER COMMENTARY
[CHART]
SECTOR WEIGHTINGS
BY
TOTAL INVESTMENTS
<Table>
Industrials 7.51%
Health Care 23.68%
Information Technology 30.10%
Financials 5.75%
Energy 5.59%
Consumer Discretionary 16.70%
Materials 2.89%
Telecommunication Services
Affiliated Money Market Fund 7.21%
</Table>
INVESTMENT OBJECTIVE
The SM&R Alger Aggressive Growth Fund seeks to achieve long-term capital
appreciation. The 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. During the recent fiscal year, the management of the
Fund remained unchanged: a research intensive, bottom-up approach focusing on
rapidly growing stocks. Management's growth stock philosophy was of benefit
during a period in which growth outperformed value.
MARKET REVIEW
The twelve months ending August 31, 2004 were relatively solid for equity
securities across most market capitalizations and styles. However, the year
began in a rather inauspicious manner. Despite an improved outlook for the
semi-conductor industry, bearish news in the labor markets and OPEC's surprise
decision to cut oil output dragged stocks down during September of 2003.
Fortunately, the trend reversed itself with the start of the fourth quarter.
Fueled in part by rising consumer confidence, a bullish outlook from the Fed and
the fastest GDP Growth in 20 years, markets trended higher during October. The
momentum continued into November. Despite a falling dollar, stocks continued to
rise on larger-than-expected growth in the manufacturing sector, bullish
forecasts in the tech sector and solid housing data. The upward trend did not
falter in December, as positive economic and geopolitical news captured most of
the headlines. Strong consumer spending and the largest productivity gains in 20
years helped to propel most equity indices significantly higher during the final
month of the year. The capture of Saddam Hussein on December 13th further
enthused investors.
While the robust momentum of 2003 seemed to wane a bit during the first quarter
of 2004, markets still managed to post positive returns throughout the
three-month period. Despite escalating fears of a stalled recovery in the labor
market, stocks advanced during the first month of the year as investors chose to
focus on rising consumer sentiment and stellar growth within the U.S. merger and
acquisition business. The forward progress continued into February. Investors
were heartened by news of significant growth in the manufacturing sector and the
Fed's indication that it would remain patient with regard to interest rate
hikes. Most equity indices trended higher during the second month of the year,
with mid-cap stocks leading the upturn. The positive momentum, however, seemed
to slow down in March, with equity indices posting mixed results. While small
and mid-cap stocks were able to remain in positive territory during the
one-month period, large-cap stocks struggled, as geopolitical uncertainty began
to weigh on investors. With continued unrest in Israel and Iraq and rising
tensions between China and Taiwan, large-cap stocks of all styles trended
downward during the final month of the quarter.
Despite a weak start to the second quarter, equity markets managed to post
modest gains during the three-month period. As the quarter began, solid
fundamentals seemed to be trumped by fear and uncertainty. Despite
better-than-expected growth in the housing market and strong earnings news,
investors were shaken by escalating violence in Iraq and fears of a looming
interest rate hike. Stocks of all sizes and styles trended downward during
April. Fortunately, the negative momentum reversed course in May. Investors were
heartened by better-than-expected first-quarter GDP growth and news that soaring
oil prices had begun to moderate. Stocks moved higher during the second month of
the quarter, with mid cap stocks leading the way. The advance continued into
June. Despite continued uncertainty in regards the situation in Iraq, stocks
rose on strong payroll growth and a large jump in consumer confidence. In
addition, the modest 25 basis point interest rate hike on June 30th helped to
relieve investors of some
13
<Page>
[SECURITIES MANAGEMENT AND RESEARCH, INC. LOGO]
of their fear and uncertainty. Unfortunately, the positive trend came to a halt
in July and August. Disappointing job growth, surging oil prices and
election-related terrorism fears all helped to keep buyers out of the market.
While value stocks were able to withstand the downward pressure more effectively
than their growth counterparts, stocks of most styles and sizes moved lower
during the final two months of the period.
FUND PERFORMANCE
The Fund's Class A Shares returned -3.02%, before sales charge, during the
fiscal year ended August 31, 2004, versus an 11.45% return for the S&P 500
Index. The Lipper Multi-Cap Growth Index returned 4.68% over the same time
period. The Fund benefited from solid security selection in the
telecommunication services sector, but was hurt by an overweighting in the weak
information technology sector and poor performing financial stocks.
MARKET & ECONOMIC OUTLOOK
Here we are at the end of summer. Yet, after months of positive economic data,
the markets are still drifting and the public mood is hardly what one would call
euphoric. So, we've been wondering: What explains the disconnect between how the
economy is doing and how many people think it is doing? The short answer is,
publicly traded companies are generating record profits, but workers are not
benefiting as much. Many companies are seeing significant double-digit earnings
growth; for workers, average hourly earnings are up only 2.0% year-over-year and
disposable income is up 3.9%. This gap will likely create confusion, political
battlefields, and opportunities: Confusion because the numbers won't quite make
sense to many people; battlefields because partisans will pick and choose which
numbers to emphasize; and opportunities because the net effect will be to dampen
euphoria and keep the market sober and less expensive than its fundamentals
warrant.
Regardless of market conditions, we will persist in emphasizing individual
security selection through thorough, internal research conducted by talented
analysts. Looking ahead, we will continue to seek out and invest in companies
that we believe will grow their earnings rapidly and consistently.
Best Regards,
/s/ Teresa McRoberts
/s/ Patrick Kelly
Teresa McRoberts and Patrick Kelly
Co-Portfolio Managers
SM&R Alger Aggressive Growth Fund
[CHART]
SM&R ALGER AGGRESSIVE GROWTH FUND
ANNUAL COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN SM&R ALGER
AGGRESSIVE GROWTH FUND. CLASS A, AT OFFERING PRICE AND UPPER MULTI-CAP GROWTH
INDEX AND THE S&P 500
<Table>
<Caption>
SM&R ALGER AGGRESSIVE LIPPER MULTI-CAP
S&P 500 GROWTH FUND GROWTH INDEX
9/1/2000 $ 10,000 $ 9,497 $ 10,000
12/31/2000 $ 8,731 $ 6,809 $ 7,528
8/31/2001 $ 7,561 $ 5,613 $ 5,579
12/31/2001 $ 7,693 $ 5,727 $ 5,731
8/30/2002 $ 6,201 $ 4,027 $ 3,390
9/30/2002 $ 5,527 $ 3,837 $ 3,127
12/31/2002 $ 5,993 $ 3,751 $ 3,312
8/30/2003 $ 6,949 $ 4,711 $ 4,107
9/30/2003 $ 6,875 $ 4,587 $ 4,028
12/31/2003 $ 7,712 $ 5,024 $ 4,485
8/31/2004 $ 7,744 $ 4,568 $ 4,299
</Table>
AVERAGE ANNUAL RETURN
Includes maximum sales charge through 8/31/04. Inception date of these classes
is 09/01/00.
<Table>
<Caption>
SHARE ONE SINCE
CLASS YEAR INCEPTION
- -----------------------------------------
A (7.85)% (17.79)%
B (8.58)% (17.65)%
</Table>
SM&R Alger Aggressive Growth Fund Performance figures rellect reinvestment of
all dividends and capital gains distributions and changes in net asset value
Returns for Class A and B will vary due to differences in expenses and sales
charge structure. Average annual returns are based on the maximum sales charge
and reinvestment of all dividends and capital gains. The average annual returns
for Class A shares reflect the current maximum initial sales change of 5.00%.
Class B shares reflect the applicable contingent deferred sales charge (CDSC),
which is 5% in the first year declining to 1% in the fifth year, and is
eliminated thereafter.
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL
FLUCTUATE SO THAT THE INVESTORS SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE
PERFORMANCE DATE QUOTED. TO OBTAIN PERFORMANCE DATA CURRENT TO THE MOST RECENT
MONTH-END, PLEASE CALL SM&R AT (877) 239-2049.
Returns shown do not reflect the deduction of taxes that a shareholder would
pay on Fund distributions or redemption of fund shares.
14
<Page>
HOLDINGS
SCHEDULE OF INVESTMENTS August 31, 2004
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- --------------------------------------------------------------------------------------------
AEROSPACE & DEFENSE -- 3.90%
Lockheed Martin Corporation 600 $ 32,268
United Technologies Corporation 300 28,173
60,441
BIO TECHNOLOGY -- 8.16%
Amgen Incorporated* 400 23,716
Biogen Idec Incorporated* 650 38,565
Genetech, Incorporated* 450 21,951
Gilead Sciences, Incorporated* 350 24,195
OSI Pharmaceuticals, Incorporated* 300 17,877
126,304
COMMUNICATION EQUIPMENT -- 4.13%
Corning Incorporated* 700 7,084
Juniper Networks, Incorporated* 800 18,312
QUALCOMM Incorporated 850 32,343
Sierra Wireless Incorporated* 350 6,195
63,934
COMMUNICATIONS -- 3.11%
Research In Motion LTD* 800 48,176
COMPUTER RELATED & BUSINESS SERVICES -- 2.32%
PalmOne, Incorporated* 1,100 35,915
COMPUTER SOFTWARE -- 1.17%
NAVTEQ Corporation* 550 18,084
CONSUMER FINANCE -- 2.62%
Capital One Financial Corporation 325 22,022
First Marblehead Corporation (The)* 450 18,616
40,638
ELECTRONIC EQUIPMENT & INSTRUMENTS -- 0.52%
Symbol Technologies, Incorporated 625 8,062
ENERGY EQUIPMENT & SERVICES -- 1.93%
National-Oilwell, Incorporated* 1,000 29,900
HEALTH CARE EQUIPMENT & SUPPLIES -- 4.04%
Advanced Medical Optics, Incorporated* 450 $ 16,749
Fisher Scientific International Incorporated* 300 17,091
Given Imaging LTD* 250 8,875
Kinetic Concepts, Incorporated* 400 19,908
62,623
HEALTH CARE PROVIDER & SERVICES -- 5.63%
Aetna Incorporated 150 13,898
AMERIGROUP Corporation* 400 20,536
Anthem, Incorporated* 200 16,248
PacifiCare Health Systems, Incorporated* 200 6,523
Quest Diagnostics Incorporated 350 29,960
87,165
HOTELS, RESTAURANTS & LEISURE -- 1.7%
Royal Caribbean Cruises LTD 400 16,520
INDUSTRIAL CONGLOMERATES -- 2.12%
Tyco International LTD 1,050 32,886
INFORMATION TECHNOLOGY SERVICES -- 1.06%
Cognizant Technology Solutions Corporation* 600 16,452
INSURANCE -- 3.27%
AFLAC Incorporated 400 16,040
American International Group, Incorporated 250 17,810
MGIC Investment Corporation 245 16,726
50,576
INTERNET & CATALOG RETAIL -- 5.22%
eBay Incorporated* 500 43,270
IAC/InterActiveCorp* 700 15,967
Netflix Incorporated* 1,550 21,622
80,859
</Table>
15
<Page>
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- --------------------------------------------------------------------------------------------
INTERNET SOFTWARE & SERVICES -- 4.96%
First Data Corporation 400 $ 16,900
Yahoo! Incorporated* 2,100 59,871
76,771
MEDIA -- 6.09%
Pixar* 200 15,544
Sirius Satellite Radio Incorporated* 3,900 9,048
Time Warner Incorporated* 2,400 39,240
Viacom Incorporated (Class B) 500 16,655
XM Satellite Radio Holdings Incorporated* 500 13,735
94,222
METALS -- 1.67%
United States Steel Corporation 700 25,837
METALS & MINIGS -- 1.29%
Peabody Energy Corporation 375 19,995
OFFICE EQUIPMENT -- 1.94%
Zebra Technologies Corporation (Class A)* 525 30,004
OIL & GAS -- 3.80%
BP PLC ADR 300 16,110
EOG Resources, Incorporated 400 23,108
Talisman Energy Incorporated 400 9,144
Teekay Shipping Corporation 300 10,515
58,877
PHARMACEUTICALS -- 6.45%
Allergan, Incorporated 300 22,395
Ivax Corporation* 1,350 26,136
Pfizer, Incorporated 560 18,295
Schering-Plough Corporation 900 16,614
Teva Pharmaceutical Industries LTD ADR 600 16,350
99,790
RETAILING -- 1.55%
CVS Corporation 600 24,000
SEMICONDUCTOR & SEMICONDUCTOR EQUIPMENT -- 1.49%
Broadcom Corporation* 850 23,069
SEMICONDUCTORS -- 1.87%
Applied Materials, Incorporated* 900 14,301
Novellus Systems, Incorporated* 600 14,658
28,959
SOFTWARE -- 8.36%
Activision, Incorporated* 1,300 18,707
Microsoft Corporation 2,300 62,790
PeopleSoft, Incorporated* 500 8,700
Red Hat, Incorporated* 1,600 19,616
Take-Two Interactive Software, Incorporated* 600 19,650
129,463
SPECIALTY RETAIL -- 2.32%
Aeropostale, Incorporated* 162 $ 5,046
Bed Bath & Beyond Incorporated* 500 18,710
Tractor Supply Company* 350 12,187
35,943
TEXTILES, APPAREL & LUXURY GOODS -- 0.82%
Coach, Incorporated* 300 12,645
TRANSPORTATION -- 1.68%
AMR Corporation* 900 8,046
Burlington Nothern Santa Fe Corporation 500 17,900
25,946
WIRELESS TELECOMMUNICATION SERVICES -- 0.58%
SpectraSite, Incorporated* 200 8,988
TOTAL COMMON STOCK -- 95.14%
(Cost $1,434,652) 1,473,044
MONEY MARKET FUNDS
SM&R Money Market Fund, 0.98% (a) 114,500 114,500
TOTAL MONEY MARKET FUNDS -- 7.40%
(Cost $114,500) 114,500
TOTAL INVESTMENTS -- 102.54%
(Cost $1,549,152) 1,587,544
LIABILITIES IN EXCESS OF
OTHER ASSETS -- (2.54)%
(39,290)
NET ASSETS -- 100.00% $ 1,548,254
</Table>
ABBREVIATIONS
ADR - American Depository Receipt
* Non-income producing securities
Note to Schedule of Investments
(a) The rate quoted is the annualized seven-day yield of the fund at August 31,
2004. A complete listing of the fund's holdings are included in these
financial statements. This fund and SM&R Alger Aggressive Growth Fund are
affiliated by having the same investment adviser.
See notes to financial statements.
16
<Page>
STATEMENT OF ASSETS & LIABILITIES
August 31, 2004
<Table>
ASSETS
Investments in unaffiliated securities, at value
(Cost $1,434,652) $ 1,473,044
Investments in affiliated money market funds
(Cost $114,500) 114,500
Total investments (Cost $1,549,152) 1,587,544
Receivable for:
Investment securities sold 14,184
Capital stock sold 139
Dividends 901
Expense reimbursement 3,915
TOTAL ASSETS 1,606,683
LIABILITIES
Investment securities purchased 8,792
Capital stock reacquired 36,927
Accrued:
Investment advisory fee 1,444
Service fee 344
Distribution fee 2,426
Other liabilities 8,496
TOTAL LIABILITIES 58,429
NET ASSETS (applicable to shares outstanding) $ 1,548,254
NET ASSETS ARE COMPRISED OF THE FOLLOWING:
Capital (par value and additional paid-in) $ 1,845,166
Accumulated net realized loss on investments (335,304)
Net unrealized appreciation on investments 38,392
NET ASSETS $ 1,548,254
NET ASSETS:
Class A $ 1,034,437
Class B $ 513,817
TOTAL NET ASSETS $ 1,548,254
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 100,000,000
Outstanding 214,922
Class B:
Authorized 100,000,000
Outstanding 109,607
Class A:
Net asset value and redemption price per share $ 4.81
Offering price per share: (Net Assets value of $4.81/95%) $ 5.06
Class B:
Net asset value and offering price per share $ 4.69
</Table>
STATEMENT OF OPERATIONS
Year Ended August 31, 2004
<Table>
INVESTMENT INCOME
Dividends $ 6,345
(Net of foreign tax withheld of $82)
Interest from affiliated money market funds 409
TOTAL INVESTMENT INCOME 6,754
EXPENSES
Investment advisory fees 16,947
Service fees 4,035
Professional fees 4,307
Custody and transaction fees 12,594
Directors' fees 6,331
Qualification fees 5,505
Class A 6,835
Class B 6,835
Shareholder reporting expenses:
Class A 728
Class B 407
Distribution fees:
Class A 3,835
Class B 5,181
Insurance expenses 843
TOTAL EXPENSES 74,383
LESS EXPENSES REIMBURSED (41,133)
NET EXPENSES 33,250
INVESTMENT LOSS - NET (26,496)
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments 108,477
Change in unrealized depreciation of investments
for the year (144,351)
NET LOSS ON INVESTMENTS (35,874)
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (62,370)
</Table>
See notes to financial statements.
17
<Page>
STATEMENT OF CHANGES IN NET ASSETS
Year Ended August 31
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
<Table>
<Caption>
2004 2003
--------------- ---------------
Investment loss - net $ (26,496) $ (16,999)
Net realized gain (loss) on investments 108,477 (52,512)
Change in unrealized appreciation (deprecation) (144,351) 275,926
Net increase (decrease) in net assets resulting
from operations (62,370) 206,415
CAPITAL SHARE TRANSACTIONS - NET
Class A 77,874 181,817
Class B 95,390 53,892
TOTAL NET CAPITAL SHARE TRANSACTIONS 173,264 235,709
TOTAL INCREASE 110,894 442,124
NET ASSETS
Beginning of year 1,437,360 995,236
End of year $ 1,548,254 $ 1,437,360
</Table>
FINANCIAL HIGHLIGHTS
Year Ended August 31
Selected data for a share of capital stock outstanding throughout the years
indicated.
<Table>
<Caption>
CLASS A SHARES
-------------------------------------------------------------
2004(1) 2003(1) 2002(4) 2001
-------------------------------------------------------------
Net Asset Value, Beginning of Year $ 4.96 $ 4.24 $ 5.91 $ 10.00
Investment income (loss) - net (0.08) (0.06) (0.17) (0.25)
Net realized and unrealized gain
(loss) on investments (0.07) 0.78 (1.50) (3.84)
-------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS (0.15) 0.72 (1.67) (4.09)
-------------------------------------------------------------
Net Asset Value, End of Year $ 4.81 $ 4.96 $ 4.24 $ 5.91
-------------------------------------------------------------
TOTAL RETURN (2) (3.02)% 16.98% (28.26)% (40.90)%
=============================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year $ 1,034,437 $ 994,871 $ 666,982 $ 487,497
Ratio of expenses with reimbursement
to average net assets (3) 1.85% 1.85% 4.48% 6.85%
Ratio of expenses without
reimbursement to average net assets 4.17% 5.52% 6.01% 6.85%
Ratio of net investment loss with
reimbursement to average net assets (1.43)% (1.27)% (3.99)% (5.59)%
Portfolio turnover rate 159.89% 179.56% 177.62% 70.58%
<Caption>
CLASS B SHARES
-------------------------------------------------------------
2004(1) 2003(1) 2002(4) 2001
-------------------------------------------------------------
Net Asset Value, Beginning of Year $ 4.87 $ 4.19 $ 5.89 $ 10.00
Investment income (loss) - net (0.11) (0.08) (0.21) (0.18)
Net realized and unrealized gain
(loss) on investments (0.07) 0.76 (1.49) (3.93)
-------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS (0.18) 0.68 (1.70) (4.11)
-------------------------------------------------------------
Net Asset Value, End of Year $ 4.69 $ 4.87 $ 4.19 $ 5.89
-------------------------------------------------------------
TOTAL RETURN (2) (3.70)% 16.23% (28.86)% (41.10)%
=============================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year $ 513,817 $ 442,489 $ 328,254 $ 230,547
Ratio of expenses with reimbursement
to average net assets (3) 2.50% 2.50% 5.56% 7.25%
Ratio of expenses without
reimbursement to average net assets 5.52% 7.36% 7.78% 7.25%
Ratio of net investment loss with
reimbursement to average net assets (2.09)% (1.91)% (5.08)% (6.12)%
Portfolio turnover rate 159.89% 179.56% 177.62% 70.58%
</Table>
(1) Per share information has been calculated using the average number of shares
outstanding.
(2) Does not include the effect of sales charge.
(3) Effective June 1, 2002, SM&R has voluntarily agreed to waive or reduce
expenses to 1.85% for class A and 2.50% for class B.
(4) Per share information has been restated to reflect certain
reclassifications.
See notes to financial statements.
18
<Page>
2004 ANNUAL REPORT
SM&R ALGER SMALL-CAP FUND
MANAGER COMMENTARY
[CHART]
SECTOR WEIGHTINGS
BY
TOTAL INVESTMENTS
<Table>
Industrials 16.07%
Health Care 21.25%
Information Technology 25.25%
Financials 9.26%
Energy 4.48%
Consumer Discretionary 13.91%
Materials 1.29%
Telecommunication Services 1.56%
Affiliated Money Market Fund 5.52%
Consumer Staples 1.41%
</Table>
INVESTMENT OBJECTIVE
The SM&R Alger Small-Cap Fund seeks to achieve long-term capital appreciation.
The Fund normally invests at least 80% of its total assets in the equity
securities 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 2000 Growth Index or
the S&P SmallCap 600 Index. During the recent fiscal year, the management of the
Fund remained unchanged: a research intensive, bottom-up approach focusing on
rapidly growing stocks. Management's growth stock philosophy was of benefit
during a period in which growth outperformed value.
MARKET REVIEW
The twelve months ending August 31, 2004 were relatively solid for equity
securities across most market capitalizations and styles. However, the year
began in a rather inauspicious manner. Despite an improved outlook for the
semi-conductor industry, bearish news in the labor markets and OPEC's surprise
decision to cut oil output dragged stocks down during September of 2003.
Fortunately, the trend reversed itself with the start of the fourth quarter.
Fueled in part by rising consumer confidence, a bullish outlook from the Fed and
the fastest GDP Growth in 20 years, markets trended higher during October. The
momentum continued into November. Despite a falling dollar, stocks continued to
rise on larger-than-expected growth in the manufacturing sector, bullish
forecasts in the tech sector and solid housing data. The upward trend did not
falter in December, as positive economic and geopolitical news captured most of
the headlines. Strong consumer spending and the largest productivity gains in 20
years helped to propel most equity indices significantly higher during the final
month of the year. The capture of Saddam Hussein on December 13th further
enthused investors.
While the robust momentum of 2003 seemed to wane a bit during the first quarter
of 2004, markets still managed to post positive returns throughout the
three-month period. Despite escalating fears of a stalled recovery in the labor
market, stocks advanced during the first month of the year as investors chose to
focus on rising consumer sentiment and stellar growth within the U.S. merger and
acquisition business. The forward progress continued into February. Investors
were heartened by news of significant growth in the manufacturing sector and the
Fed's indication that it would remain patient with regard to interest rate
hikes. Most equity indices trended higher during the second month of the year,
with mid-cap stocks leading the upturn. The positive momentum, however, seemed
to slow down in March, with equity indices posting mixed results. While small
and mid-cap stocks were able to remain in positive territory during the
one-month period, large-cap stocks struggled, as geopolitical uncertainty began
to weigh on investors. With continued unrest in Israel and Iraq and rising
tensions between China and Taiwan, large-cap stocks of all styles trended
downward during the final month of the quarter.
Despite a weak start to the second quarter, equity markets managed to post
modest gains during the three-month period. As the quarter began, solid
fundamentals seemed to be trumped by fear and uncertainty. Despite
better-than-expected growth in the housing market and strong earnings news,
investors were shaken by escalating violence in Iraq and fears of a looming
interest rate hike. Stocks of all sizes and styles trended downward during
April. Fortunately, the negative momentum reversed course in May. Investors were
heartened by better-than-expected first-quarter GDP growth and news that soaring
oil prices had begun to moderate. Stocks moved higher during the second month of
the quarter,
19
<Page>
with mid cap stocks leading the way. The advance continued into June. Despite
continued uncertainty in regards the situation in Iraq, stocks rose on strong
payroll growth and a large jump in consumer confidence. In addition, the modest
25 basis point interest rate hike on June 30th helped to relieve investors of
some of their fear and uncertainty. Unfortunately, the positive trend came to a
halt in July and August. Disappointing job growth, surging oil prices and
election-related terrorism fears all helped to keep buyers out of the market.
While value stocks were able to withstand the downward pressure more effectively
than their growth counterparts, stocks of most styles and sizes moved lower
during the final two months of the period.
FUND PERFORMANCE
The Fund's Class A Shares returned 4.94%, before sales charge, during
the fiscal year ended August 31, 2004, versus a 0.19% return for the
Lipper Small-Cap Growth Index. The Fund benefited from strong security
selection in the consumer discretionary, health care and materials
sectors in beating the Lipper Small-Cap Growth benchmark.
MARKET & ECONOMIC OUTLOOK
Here we are at the end of summer. Yet, after months of positive economic data,
the markets are still drifting and the public mood is hardly what one would call
euphoric. So, we've been wondering: What explains the disconnect between how the
economy is doing and how many people think it is doing? The short answer is,
publicly traded companies are generating record profits, but workers are not
benefiting as much. Many companies are seeing significant double-digit earnings
growth; for workers, average hourly earnings are up only 2.0% year-over-year and
disposable income is up 3.9%. This gap will likely create confusion, political
battlefields, and opportunities: Confusion because the numbers won't quite make
sense to many people; battlefields because partisans will pick and choose which
numbers to emphasize; and opportunities because the net effect will be to dampen
euphoria and keep the market sober and less expensive than its fundamentals
warrant.
Regardless of market conditions, we will persist in emphasizing individual
security selection through thorough, internal research conducted by talented
analysts. Looking ahead, we will continue to seek out and invest in companies
that we believe will grow their earnings rapidly and consistently.
BEST REGARDS,
/s/ Jill Greenwald
JILL GREENWALD, CFA, PORTFOLIO MANAGER
SM&R ALGER SMALL-CAP FUND
[CHART]
SM&R ALGER SMALL-CAP FUND
ANNUAL COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN SM&R ALGER
SMALL-CAP FUND, CLASS A, AT OFFERING PRICE, LPPER SMALL-CAP GROWTH INDEX AND THE
S&P 500
<Table>
SM&R ALGER LIPPER SMALL-CAP
SMALL-CAP FUND S&P 500 GROWTH INDEX
9/1/2000 $ 9,497 $ 10,000 $ 10,000
12/31/2000 $ 7,864 $ 8,731 $ 7,940
8/31/2001 $ 5,261 $ 7,561 $ 6,676
12/31/2001 $ 5,508 $ 7,693 $ 6,928
8/30/2002 $ 4,112 $ 6,201 $ 5,049
9/30/2002 $ 3,808 $ 5,527 $ 4,743
12/31/2002 $ 3,998 $ 5,993 $ 5,001
8/30/2003 $ 5,185 $ 6,949 $ 6,619
9/30/2003 $ 5,071 $ 6,875 $ 6,457
12/31/2003 $ 5,708 $ 7,712 $ 7,240
8/31/2004 $ 5,442 $ 7,744 $ 6,607
</Table>
AVERAGE ANNUAL RETURN
INCLUDES MAXIMUM SALES CHARGE THROUGH 8/31/04. INCEPTION DATE OF THESE CLASSES
IS 09/01/00.
<Table>
<Caption>
SHARE ONE SINCE
CLASS YEAR INCEPTION
- ------------------ ---------
A (0.35)% (14.11)%
B (1.22)% (13.58)%
</Table>
SM&R Alger Small Cap Fund performance figures reflect investment of all
dividends and capital gains distributions and changes in net asset value.
Returns for Class A and B will vary due to differences in expenses and sales
charge structure. Average annual returns are based on the maximum sales charge
and reinvestment of all dividends and capital gains. The average annual returns
for Class A shares reflect the maximum initial sales charge of 5.00%. Class B
shares reflect the applicable contingent deferred sales charge (CDSC), which is
5% in the first year declining to 1% in the fifth year, and is eliminated
thereafter.
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL
FLUCTUATE SO THAT THE INVESTORS SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE
PERFORMANCE DATE QUOTED. TO OBTAIN PERFORMANCE DATA CURRENT TO THE MOST RECENT
MONTH-END, PLEASE CALL SM&R AT (877) 239-2049.
Returns shown do not reflect the deduction of taxes that a shareholder would pay
on fund distributions or redemption of fund shares.
20
<Page>
SM&R ALGER SMALL-CAP FUND
HOLDINGS
SCHEDULE OF INVESTMENTS August 31, 2004
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- ------------------------------------------------------------------------------------
AEROSPACE & DEFENSE -- 1.34%
Alliant Techsystems Incorporated* 330 $ 19,120
AIRLINES -- 1.02%
AirTran Holdings, Incorporated* 1,200 14,580
BIO TECHNOLOGY -- 5.18%
Encysive Pharmaceuticals Incorporated* 900 7,110
Eyetech Pharmaceuticals Incorporated* 250 8,680
Ligand Pharmaceuticals Incorporated (Class B)* 800 7,864
Onyx Pharmaceuticals, Incorporated* 350 12,999
QLT Incorporated* 750 11,625
Telik, Incorporated* 500 9,470
Vicuron Pharmaceuticals Incorporated* 1,100 16,434
74,182
CAPITAL MARKETS -- 1.37%
Affiliated Managers Group, Incorporated* 400 19,620
COMMERCIAL BANKS -- 1.92%
Southwest Bancorporation of Texas, Incorporated 350 7,378
UCBH Holdings, Incorporated 500 20,075
27,453
COMMERCIAL SERVICES & SUPPLIES -- 5.28%
CoStar Group Incorporated* 450 19,031
Education Management Corporation* 600 17,436
Gevity HR, Incorporated 850 15,164
Universal Technical Institute Incorporated* 350 9,583
Westcorp 350 14,374
75,588
COMMUNICATION EQUIPMENT -- 1.84%
Advanced Fibre Communications, Incorporated* 700 $ 12,019
Foundry Networks, Incorporated* 800 7,296
Sierra Wireless Incorporated* 400 7,080
26,395
COMPUTER RELATED & BUSINESS SERVICES -- 1.08%
Silicon Image, Incorporated* 1,400 15,400
COMPUTER SERVICES -- 1.29%
Open Solutions Incorporated* 800 18,448
COMPUTER SOFTWARE -- 2.93%
Chordiant Software, Incorporated* 3,800 10,564
Hyperion Solutions Corporation* 500 18,280
NAVTEQ Corporation* 400 13,152
41,996
COMPUTERS & PERIPHERALS -- 1.06%
Avid Technology, Incorporated* 350 15,145
CONSUMER FINANCE -- 1.30%
First Marblehead Corporation (The)* 450 18,616
DIVERSIFIED FINANCIAL SERVICES -- 1.32%
National Financial Partners Corporation 550 18,920
ENERGY EQUIPMENT & SERVICES -- 1.36%
Varco International, Incorporated* 800 19,424
ELECTRICAL EQUIPMENT -- 0.96%
Roper Industries, Incorporated 250 13,788
</Table>
21
<Page>
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- ------------------------------------------------------------------------------------
ELECTRONIC EQUIPMENT & INSTRUMENTS -- 1.96%
Rogers Corporation* 175 $ 8,118
Trimble Navigation LTD* 725 19,967
28,085
FINANCE -- 0.90%
Piper Jaffray Companies, Incorporated* 300 12,930
FOOD & STAPLES RETAILING -- 1.42%
NeighborCare, Incorporated* 800 20,312
HEALTH CARE EQUIPMENT & SUPPLIES -- 6.03%
Advanced Medical Optics, Incorporated* 550 20,471
Immucor, Incorporated* 975 19,939
INAMED Corporation* 250 13,285
Intuitive Surgical, Incorporated* 800 19,400
Mentor Corporation 375 13,192
86,287
HEALTH CARE PROVIDER & SERVICES -- 7.15%
Accredo Health, Incorporated* 500 10,925
Molina Healthcare Incorporated* 600 19,920
Psychiatric Solutions, Incorporated* 700 15,337
Sierra Health Services, Incorporated* 450 19,404
Sunrise Senior Living, Incorporated* 550 19,481
VCA Antech, Incorporated* 900 17,244
102,311
HOTELS, RESTAURANT & LEISURE -- 3.49%
Applebee's International, Incorporated 710 17,090
Red Robin Gourmet Burgers Incorporated* 350 12,239
Station Casinos, Incorporated 450 20,700
50,029
INFORMATION TECHNOLOGY SERVICES -- 4.15%
Alliance Data Systems Corporation* 550 $ 21,010
Global Payments Incorporated 350 15,526
Kanbay International Incorporated* 1,150 22,896
59,432
INSURANCE -- 1.20%
Arch Capital Group LTD* 470 17,202
INTERNET & CATALOG RETAIL -- 1.02%
Priceline.com Incorporated* 700 14,616
INTERNET SOFTWARE & SERVICES -- 4.53%
iVillage Incorporated* 1,250 7,263
Lionbridge Technologies, Incorporated* 1,650 13,150
Netegrity, Incorporated* 1,600 9,712
Openwave Systems Incorporated* 1,266 11,799
SonicWALL, Incorporated* 2,300 12,420
ValueClick, Incorporated* 1,450 10,484
64,828
LEISURE EQUIPMENT & SERVICES -- 1.21%
LIFE TIME FITNESS, Incorporated* 700 17,395
MACHINERY -- 2.58%
Actuant Corporation (Class A)* 500 18,920
Terex Corporation* 500 18,065
36,985
MEDIA -- 2.34%
Media General, Incorporated (Class A) 275 16,002
Spanish Broadcasting System,
Incorporated (Class A)* 2,000 17,520
33,522
</Table>
22
<Page>
2004 ANNUAL REPORT
SM&R ALGER SMALL-CAP FUND
HOLDINGS
SCHEDULE OF INVESTMENTS August 31, 2004
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- --------------------------------------------------------------------------------------
MEDICAL DEVICES -- 0.70%
Wright Medical Group, Incorporated* 370 $ 9,990
OIL & GAS -- 3.14%
Evergreen Resources, Incorporated* 400 15,780
General Maritime Corporation* 400 10,912
Swift Energy Company* 900 18,315
45,007
PAPER PACKAGING & FOREST PRODUCTS -- 1.29%
Louisiana-Pacific Corporation 750 18,495
PHARMACEUTICALS -- 2.30%
Impax Laboratories, Incorporated* 1,150 16,456
Medicines Company (The)* 650 16,432
32,888
RAILROADS -- 0.88%
Hunt (J.B.) Transport Services, Incorporated 370 12,543
RETAILING -- 1.14%
Guitar Center, Incorporated* 400 16,384
ROAD & RAIL -- 0.89%
Sirva Incorporated * 600 12,708
SEMICONDUCTOR & SEMICONDUCTOR EQUIPMENT -- 0.80%
AMIS Holdings, Incorporated* 950 11,438
SEMICONDUCTORS -- 2.84%
Axcelis Technologies, Incorporated* 1,350 $ 10,530
Brooks Automation, Incorporated* 800 9,944
Integrated Circuit Systems, Incorporated* 590 12,968
Semtech Corporation* 400 7,236
40,678
SEMICONDUCTORS CAPITAL EQUIPMENT -- 1.25%
Sigmatel Incorporated* 400 6,716
SiRF Technology Holdings, Incorporated* 1,120 11,178
17,894
SOFTWARE -- 3.60%
Cerner Corporation* 300 13,143
Fair Issac Corporation 335 9,022
Quest Software, Incorporated* 800 8,096
Take-Two Interactive Software, Incorporated* 650 21,287
51,548
SPECIALTY RETAIL -- 3.70%
Aeropostale, Incorporated* 500 15,575
AnnTaylor Stores Corporation* 727 17,572
PETCO Animal Supplies, Incorporated* 600 19,872
53,019
TEXTILES, APPAREL & LUXURY GOODS -- 1.06%
Quicksilver, Incorporated* 700 15,225
THRIFTS & MORTGAGE FINANCE -- 1.29%
Bank Mutual Corporation 1,617 18,450
</Table>
23
<Page>
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- --------------------------------------------------------------------------------------
TRADING COMPANIES & DISTRIBUTORS -- 1.25%
MSC Industrial Direct Company,
Incorporated (Class A) 575 $ 17,865
WIRELESS TELECOMMUNICATION SERVICES -- 1.57%
SpectraSite, Incorporated* 500 22,470
TOTAL COMMON STOCK -- 94.93%
(Cost $1,328,460) 1,359,211
MONEY MARKET FUNDS
SM&R Money Market Fund, 0.98% (a) 79,413 79,413
TOTAL MONEY MARKET FUNDS -- 5.55%
(Cost $79,413) 79,413
TOTAL INVESTMENTS -- 100.48%
(Cost $1,407,873) 1,438,624
LIABILITIES IN EXCESS OF OTHER ASSETS -- (0.48)%
(6,845)
NET ASSETS -- 100.00% $ 1,431,779
</Table>
ABBREVIATIONS
* Non-income producing securities
Notes to Schedule of Investments
(a) The rate quoted is the annualized seven-day yield of the fund at August 31,
2004. A complete listing of the fund's holdings are included in these
financial statements. This fund and SM&R Alger Small-Cap Fund are
affiliated by having the same investment adviser.
See notes to financial statements.
24
<Page>
SM&R ALGER SMALL-CAP FUND
FINANCIALS
STATEMENT OF ASSETS & LIABILITIES
August 31, 2004
<Table>
ASSETS
Investments in unaffiliated securities, at value (Cost $1,328,460) $ 1,359,211
Investments in affiliated money market funds (Cost $79,413) 79,413
Total investments (Cost $1,407,873) 1,438,624
Receivable for:
Investment securities sold 13,605
Capital stock sold 264
Dividends 281
Expense reimbursement 3,094
TOTAL ASSETS 1,455,868
LIABILITIES
Investment securities purchased 12,642
Accrued:
Investment advisory fee 1,237
Service fee 309
Distribution fee 2,172
Other liabilities 7,729
TOTAL LIABILITIES 24,089
NET ASSETS (applicable to shares outstanding) $ 1,431,779
NET ASSETS ARE COMPRISED OF THE FOLLOWING:
Capital (par value and additional paid-in) $ 1,404,139
Accumulated net realized loss on investments (3,111)
Net unrealized appreciation on investments 30,751
NET ASSETS $ 1,431,779
NET ASSETS:
Class A $ 978,028
Class B $ 453,751
TOTAL NET ASSETS $ 1,431,779
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 100,000,000
Outstanding 170,700
Class B:
Authorized 100,000,000
Outstanding 79,710
Class A:
Net asset value and redemption price per share $ 5.73
Offering price per share: (Net Assets value of $5.73/95%) $ 6.03
Class B:
Net asset value and offering price per share $ 5.69
</Table>
STATEMENT OF OPERATIONS
Year Ended August 31, 2004
<Table>
INVESTMENT INCOME
Dividends $ 2,298
(Net of foreign tax withheld of $17)
Interest from affiliated money market funds 488
TOTAL INVESTMENT INCOME 2,786
EXPENSES
Investment advisory fees 14,006
Service fees 3,501
Professional fees 4,307
Custody and transaction fees 15,871
Directors' fees 6,331
Qualification fees 5,505
Class A 6,770
Class B 6,769
Shareholder reporting expenses:
Class A 267
Class B 163
Distribution fees:
Class A 3,336
Class B 4,474
Insurance expenses 433
TOTAL EXPENSES 71,733
LESS EXPENSES REIMBURSED (42,188)
NET EXPENSES 29,545
INVESTMENT LOSS - NET (26,759)
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments 280,322
Change in unrealized depreciation of investments for the year (215,929)
NET GAIN ON INVESTMENTS 64,393
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 37,634
</Table>
See notes to financial statements.
25
<Page>
STATEMENT OF CHANGES IN NET ASSETS
Year Ended August 31
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
<Table>
<Caption>
2004 2003
----------------------------------
Investment loss - net $ (26,759) $ (15,753)
Net realized gain (loss) on investments 280,322 (44,898)
Change in unrealized appreciation (deprecation) (215,929) 297,253
Net increase in net assets resulting from operations 37,634 236,602
CAPITAL SHARE TRANSACTIONS - NET
Class A 161,175 192,711
Class B 71,015 88,975
TOTAL NET CAPITAL SHARE TRANSACTIONS 232,190 281,686
TOTAL INCREASE 269,824 518,288
NET ASSETS
Beginning of year 1,161,955 643,667
End of year $ 1,431,779 $ 1,161,955
</Table>
FINANCIAL HIGHLIGHTS
Year Ended August 31
Selected data for a share of capital stock outstanding throughout the years
indicated.
<Table>
<Caption>
CLASS A SHARES
------------------------------------------------------------
2004(1) 2003(1) 2002(4) 2001
------------------------------------------------------------
Net Asset Value, Beginning of Year $ 5.46 $ 4.33 $ 5.54 $ 10.00
Investment income (loss) - net (0.10) (0.07) (0.32) (0.55)
Net realized and unrealized gain
(loss) on investments 0.37 1.20 (0.89) (3.91)
------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.27 1.13 (1.21) (4.46)
------------------------------------------------------------
Net Asset Value, End of Year $ 5.73 $ 5.46 $ 4.33 $ 5.54
============================================================
TOTAL RETURN (2) 4.94% 26.10% (21.84)% (44.60)%
============================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL
DATA
Net Assets, end of year $ 978,028 $ 789,625 $ 436,796 $ 295,132
Ratio of expenses with reimbursement
to average net assets (3) 1.90% 1.90% 6.60% 11.53%
Ratio of expenses without
reimbursement to average net assets 4.65% 6.89% 9.68% 11.53%
Ratio of net investment loss with
reimbursement to average net assets (1.70)% (1.64)% (6.33)% (10.61)%
Portfolio turnover rate 143.21% 131.48% 176.50% 138.73%
<Caption>
CLASS B SHARES
------------------------------------------------------------
2004(1) 2003(1) 2002(4) 2001
------------------------------------------------------------
Net Asset Value, Beginning of Year $ 5.47 $ 4.32 $ 5.65 $ 10.00
Investment income (loss) - net (0.14) (0.10) (0.41) (0.37)
Net realized and unrealized gain
(loss) on investments 0.36 1.25 (0.92) (3.98)
------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.22 1.15 (1.33) (4.35)
------------------------------------------------------------
Net Asset Value, End of Year $ 5.69 $ 5.47 $ 4.32 $ 5.65
============================================================
TOTAL RETURN (2) 4.02% 26.62% (23.54)% (43.50)%
============================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL
DATA
Net Assets, end of year $ 453,751 $ 372,330 $ 206,871 $ 171,656
Ratio of expenses with reimbursement
to average net assets (3) 2.55% 2.55% 8.05% 11.97%
Ratio of expenses without
reimbursement to average net assets 6.11% 9.05% 11.65% 11.97%
Ratio of net investment loss with
reimbursement to average net assets (2.35)% (2.29)% (7.77)% (11.25)%
Portfolio turnover rate 143.21% 131.48% 176.50% 138.73%
</Table>
(1) Per share information has been calculated using the average number of
shares outstanding.
(2) Does not include the effect of sales charge.
(3) Effective June 1, 2002, SM&R has voluntarily agreed to waive or reduce
expenses to 1.90% for class A and 2.55% for class B.
(4) Per share information has been restated to reflect certain
reclassifications.
See notes to financial statements.
26
<Page>
SM&R ALGER GROWTH FUND
MANAGER COMMENTARY
[CHART]
SECTOR WEIGHTINGS BY TOTAL INVESTMENTS
<Table>
Industrials 7.05%
Health Care 19.89%
Information Technology 29.74%
Financials 7.52%
Energy 5.66%
Consumer Discretionary 21.74%
Materials 1.42%
Affiliated Money Market Fund 2.19%
Consumer Staples 4.79%
</Table>
INVESTMENT OBJECTIVE
The SM&R Alger Growth Fund seeks to achieve long-term capital appreciation. The
Fund normally invests at least 65% of its total assets in the equity securities
of large companies listed on U.S. exchanges or in the over-the-counter market.
The fund considers a large company to have a market capitalization of $10
billion or greater. During the recent fiscal year, the management of the Fund
remained unchanged: a research intensive, bottom-up approach focusing on rapidly
growing stocks. Management's growth stock philosophy was of benefit during a
period in which growth outperformed value.
MARKET REVIEW
The twelve months ending August 31, 2004 were relatively solid for equity
securities across most market capitalizations and styles. However, the year
began in a rather inauspicious manner. Despite an improved outlook for the
semi-conductor industry, bearish news in the labor markets and OPEC's surprise
decision to cut oil output dragged stocks down during September of 2003.
Fortunately, the trend reversed itself with the start of the fourth quarter.
Fueled in part by rising consumer confidence, a bullish outlook from the Fed and
the fastest GDP Growth in 20 years, markets trended higher during October. The
momentum continued into November. Despite a falling dollar, stocks continued to
rise on larger-than-expected growth in the manufacturing sector, bullish
forecasts in the tech sector and solid housing data. The upward trend did not
falter in December, as positive economic and geopolitical news captured most of
the headlines. Strong consumer spending and the largest productivity gains in 20
years helped to propel most equity indices significantly higher during the final
month of the year. The capture of Saddam Hussein on December 13th further
enthused investors.
While the robust momentum of 2003 seemed to wane a bit during the first quarter
of 2004, markets still managed to post positive returns throughout the
three-month period. Despite escalating fears of a stalled recovery in the labor
market, stocks advanced during the first month of the year as investors chose to
focus on rising consumer sentiment and stellar growth within the U.S. merger and
acquisition business. The forward progress continued into February. Investors
were heartened by news of significant growth in the manufacturing sector and the
Fed's indication that it would remain patient with regard to interest rate
hikes. Most equity indices trended higher during the second month of the year,
with mid-cap stocks leading the upturn. The positive momentum, however, seemed
to slow down in March, with equity indices posting mixed results. While small
and mid-cap stocks were able to remain in positive territory during the
one-month period, large-cap stocks struggled, as geopolitical uncertainty began
to weigh on investors. With continued unrest in Israel and Iraq and rising
tensions between China and Taiwan, large-cap stocks of all styles trended
downward during the final month of the quarter.
Despite a weak start to the second quarter, equity markets managed to post
modest gains during the three-month period. As the quarter began, solid
fundamentals seemed to be trumped by fear and uncertainty. Despite
better-than-expected growth in the housing market and strong earnings news,
investors were shaken by escalating violence in Iraq and fears of a looming
interest rate hike. Stocks of all sizes and styles trended downward during
April. Fortunately, the negative momentum reversed course in May. Investors were
heartened by better-than-expected first-quarter GDP growth and news that soaring
oil prices had begun to moderate. Stocks moved higher during the second month of
the quarter, with mid cap stocks leading the way. The advance continued into
June. Despite continued
27
<Page>
uncertainty in regards the situation in Iraq, stocks rose on strong payroll
growth and a large jump in consumer confidence. In addition, the modest 25 basis
point interest rate hike on June 30th helped to relieve investors of some of
their fear and uncertainty. Unfortunately, the positive trend came to a halt in
July and August. Disappointing job growth, surging oil prices and
election-related terrorism fears all helped to keep buyers out of the market.
While value stocks were able to withstand the downward pressure more effectively
than their growth counterparts, stocks of most styles and sizes moved lower
during the final two months of the period.
FUND PERFORMANCE
The Fund's Class A Shares returned 0.77%, before sales charge, during the fiscal
year ended August 31, 2004, versus an 11.45% return for the S&P 500 Index. The
Lipper Large-Cap Growth Index returned 2.86% over the same time period. The Fund
benefited from solid security selection in the industrials sector, but was hurt
by an overweighting in the weak information technology sector and poor
performing consumer staples stocks in missing the S&P 500 benchmark.
MARKET & ECONOMIC OUTLOOK
Here we are at the end of summer. Yet, after months of positive economic data,
the markets are still drifting and the public mood is hardly what one would call
euphoric. So, we've been wondering: What explains the disconnect between how the
economy is doing and how many people think it is doing? The short answer is,
publicly traded companies are generating record profits, but workers are not
benefiting as much. Many companies are seeing significant double-digit earnings
growth; for workers, average hourly earnings are up only 2.0% year-over-year and
disposable income is up 3.9%. This gap will likely create confusion, political
battlefields, and opportunities: Confusion because the numbers won't quite make
sense to many people; battlefields because partisans will pick and choose which
numbers to emphasize; and opportunities because the net effect will be to dampen
euphoria and keep the market sober and less expensive than its fundamentals
warrant.
Regardless of market conditions, we will persist in emphasizing
individual security selection through thorough, internal research conducted by
talented analysts. Looking ahead, we will continue to seek out and invest in
companies that we believe will grow their earnings rapidly and consistently.
Best Regards,
/s/ Teresa McRoberts
/s/ Patrick Kelly
Teresa McRoberts and Patrick Kelly
Co-Portfolio Managers
SM&R Alger Growth Fund
[CHART]
SM&R ALGER GROWTH FUND
ANNUAL COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN SM&R ALGER GROWTH
FUND, CLASS A, AT OFFERING PRICE, AND LIPPER LARGE-CAP GROWTH INDEX AND THE S&P
500
<Table>
<Caption>
SM&R ALGER GROWTH FUND S&P 500 LIPPER LARGE-CAP GROWTH INDEX
9/1/2000 $ 9,497 Class A $ 10,000 $ 10,000
12/31/2000 $ 7,265 SinIncep -16.01% $ 8,731 $ 7,528
8/31/2001 $ 6,059 1 yr -4.20% $ 7,561 $ 5,579
12/31/2001 $ 6,126 Class B $ 7,693 $ 5,731
8/30/2002 $ 4,350 SinIncep -15.95% $ 6,201 $ 4,372
9/30/2002 $ 3,970 1 yr -4.86% $ 5,527 $ 3,949
12/31/2002 $ 4,065 $ 5,993 $ 4,120
8/30/2003 $ 4,938 $ 6,949 $ 4,855
9/30/2003 $ 4,862 $ 6,875 $ 4,751
12/31/2003 $ 5,423 $ 7,712 $ 5,231
8/31/2004 $ 4,976 $ 7,744 $ 4,993
</Table>
AVERAGE ANNUAL RETURN
Includes maximum sales charge through 8/31/04. Inception date of these classes
is 09/01/00.
<Table>
<Caption>
SHARE ONE SINCE
CLASS YEAR INCEPTION
- ----- ---- ---------
A (4.20)% (16.01)%
B (4.86)% (15.95)%
</Table>
SM&R Alger Growth Fund performance figures reflect reinvestment of all dividends
and capital gains distributions and changes in net asset value. Returns for
Class A and B will vary due to differences in expenses and sales charge
structure. Average annual returns are based on the maximum sales charge and
reinvestment of all dividends and capital gains. The average annual returns for
Class A shares reflect the current maximum initial sales charge of 5.00%. Class
B shares reflect the applicable contingent deferred sales charge (CDSC), which
is 5% in the first year declining to 1% in the fifth year, and is eliminated
thereafter.
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL
FLUCTUATE SO THAT THE INVESTORS SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE
PERFORMANCE DATE QUOTED. TO OBTAIN PERFORMANCE DATA CURRENT TO THE MOST RECENT
MONTH-END, PLEASE CALL SM&R AT (877) 239-2049.
Returns shown do not reflect the deduction of taxes that a shareholder would
pay on fund distributions or redemption of fund shares.
28
<Page>
SM&R ALGER GROWTH FUND
HOLDINGS
SCHEDULE OF INVESTMENTS August 31, 2004
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- -------------------------------------------------------------------------------------------
AEROSPACE & DEFENSE -- 0.43%
Boeing Company (The) 200 $ 10,444
Air Freight & Logistics -- 0.68%
FedEx Corporation 200 16,398
BEVERAGES -- 1.76%
Anheuser-Busch Companies, Incorporated 800 42,240
BIO TECHNOLOGY -- 8.04%
Amgen Incorporated* 200 11,858
Biogen Idec Incorporated* 1,000 59,330
Eyetech Pharmaceuticals Incorporated* 350 12,152
Genetech, Incorporated* 500 24,390
Gilead Sciences, Incorporated* 300 20,739
ImClone Systems Incorporated* 600 31,968
OSI Pharmaceuticals, Incorporated* 550 32,774
193,211
CAPITAL MARKETS -- 1.91%
Affiliated Managers Group, Incorporated* 480 23,544
L. Rowe Price Group Incorporated 450 22,288
45,832
CHEMICALS -- 1.42%
Dow Chemical Company (The) 800 34,248
COMMERCIAL BANKS -- 0.73%
Wells Fargo & Company 300 17,625
COMMUNICATION EQUIPMENT -- 3.21%
Cisco Systems, Incorporated* 2,900 54,404
QUAI COMM Incorporated 600 22,830
77,234
CONSUMER FINANCE -- 1.56%
American Express Company 750 37,515
ELECTRONIC EQUIPMENT & INSTRUMENTS -- 0.21%
Symbol Technologies, Incorporated 400 5,160
ENERGY & ENERGY SERVICES -- 2.16%
Patterson-UTI Energy, Incorporated 500 $ 8,660
Schlumberger LTD 700 43,260
51,920
ENERGY EQUIPMENT & SERVICES -- 0.50%
National-Oilwell, Incorporated* 400 11,960
FOOD & STAPLES RETAILING -- 3.07%
Wal-Mart Stores, Incorporated 1,400 73,738
HEALTH CARE EQUIPMENT & SUPPLIES -- 2.30%
Boston Scientific Corporation* 500 17,865
Medtronic, Incorporated 750 37,313
55,178
HEALTH CARE PROVIDER & SERVICES -- 2.85%
Aetna Incorporated 300 27,795
HCA, Incorporated 1,050 40,750
68,545
HOTELS, RESTAURANTS & LEISURE -- 4.15%
Carnival Corporation 500 22,895
Royal Carribean Cruises LTD 900 37,170
Starwood Hotels & Resorts Worldwide, Incorporated 900 39,780
99,845
HOUSEHOLD DURABLES -- 1.22%
Fortune Brands Incorporated 400 29,260
INDUSTRIAL CONGLOMERATES -- 5.97%
General Electric Company 1,800 59,022
Tyco International LTD 2,700 84,564
143,586
INSURANCE -- 3.36%
AFLAC Incorporated 950 38,095
American International Group, Incorporated 600 42,744
80,839
</Table>
29
<Page>
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- -------------------------------------------------------------------------------------------
INTERNET & CATALOG RETAIL -- 4.97%
eBay Incorporated* 640 $ 55,386
IAC/InterActiveCorp* 1,100 25,091
Netflix Incorporated* 2,800 39,060
119,537
INTERNET SOFTWARE & SERVICES -- 6.73%
Automatic Data Processing, Incorporation 500 19,885
First Data Corporation 1,300 54,925
Google Incorporated (Class A)* 125 12,806
Yahoo! Incorporated* 2,600 74,126
161,742
MEDIA -- 5.20%
Comcast Corporation (Special Class A)* 400 11,100
Gannett Company, Incorporated 115 9,741
Time Warner Incorporated* 2,200 35,970
Viacom Incorporated (Class B) 400 13,324
XM Satellite Radio Holdings Incorporated* 2,000 54,940
125,075
MULTI-LINE RETAIL -- 2.87%
Target Corporation 1,550 69,099
OIL & GAS -- 3.03%
BP PLC ADR 500 26,850
Devon Energy Corporation 355 23,008
EOG Resources, Incorporated 400 23,108
72,966
PHARMACEUTICALS -- 6.83%
Abbott Laboratories 700 29,183
Allergan, Incorporated 300 22,395
Ivax Corporation* 1,250 24,200
Pfizer, Incorporated 1,750 57,172
Sepracor Incorporated* 300 14,883
Teva Pharmaceutical Industries LTD ADR 600 16,350
164,183
RETAILING -- 1.58%
CVS Corporation 950 38,000
SEMICONDUCTOR & SEMICONDUCTOR EQUIPMENT -- 1.80%
Advanced Micro Devices, Incorporated* 2,000 22,860
Broadcom Corporation* 750 20,355
43,215
SEMICONDUCTORS -- 12.19%
Altera Corporation* 2,650 $ 50,138
Analog Devices, Incorporated 1,250 43,400
Applied Materials, Incorporated* 5,400 85,806
Intel Corporation 500 10,645
Linear Technology Corporation 1,550 55,444
Maxim Integrated Products, Incorporated 300 13,029
Teradyne, Incorporated* 2,700 34,749
293,211
SOFTWARE -- 5.78%
Microsoft Corporation 3,810 104,013
Oracle Corporation* 3,500 34,895
138,908
SPECIALTY RETAIL -- 1.01%
Bed Bath & Beyond Incorporated* 650 24,323
TEXTILES, APPAREL & LUXURY GOODS -- 0.86%
NIKE, Incorporated (Class B) 275 20,710
TOTAL COMMON STOCK -- 98.38%
(Cost $2,384,918) 2,365,747
MONEY MARKET FUNDS
SM&R Money Market Fund, 0.98% (a) 53,024 53,024
TOTAL MONEY MARKET FUNDS -- 2.21%
(Cost $53,024) 53,024
TOTAL INVESTMENTS -- 100.59%
(Cost $2,437,942) 2,418,771
LIABILITIES IN EXCESS
OF OTHER ASSETS -- (0.59)%
(14,141)
NET ASSETS -- 100.00% $ 2,404,630
===============
</Table>
ABBREVIATIONS
ADR - American Depository Receipt
* - Non-income producing securities
Notes to Schedule of Investments
(a) The rate quoted is the annualized seven-day yield of the fund at August 31,
2004. A complete listing of the fund's holdings are included in these
financial statements. This fund and SM&R Alger Growth Fund are affiliated
by having the same investment adviser.
See notes to financial statements.
30
<Page>
FINANCIALS
STATEMENT OF ASSETS & LIABILITIES
August 31, 2004
<Table>
ASSETS
Investments in unaffiliated securities, at value (Cost $2,384,918) $ 2,365,747
Investments in affiliated money market funds (Cost $53,024) 53,024
Total investments (Cost $2,437,942) 2,418,771
Receivable for:
Capital stock sold 593
Dividends 2,340
Expense reimbursement 3,235
TOTAL ASSETS 2,424,939
LIABILITIES
Capital stock reacquired 6,578
Accrued:
Investment advisory fee 1,780
Service fee 523
Distribution fee 3,955
Other liabilities 7,473
TOTAL LIABILITIES 20,309
NET ASSETS (applicable to shares outstanding) $ 2,404,630
NET ASSETS ARE COMPRISED OF THE FOLLOWING:
Capital (par value and additional paid-in) $ 2,826,939
Accumulated net realized loss on investments (403,138)
Net unrealized depreciation on investments (19,171)
NET ASSETS $ 2,404,630
NET ASSETS:
Class A $ 1,448,385
Class B $ 956,245
TOTAL NET ASSETS $ 2,404,630
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 100,000,000
Outstanding 276,513
Class B:
Authorized 100,000,000
Outstanding 187,901
Class A:
Net asset value and redemption price per share $ 5.24
Offering price per share: (Net Assets value of $5.24/95%) $ 5.52
Class B:
Net asset value and offering price per share $ 5.09
</Table>
STATEMENT OF OPERATIONS
Year Ended August 31, 2004
<Table>
INVESTMENT INCOME
Dividends $ 14,794
(Net of foreign tax withheld of $104)
Interest from affiliated money market funds 383
TOTAL INVESTMENT INCOME 15,177
EXPENSES
Investment advisory fees 20,214
Service fees 5,945
Professional fees 3,932
Custody and transaction fees 14,278
Directors' fees 6,331
Qualification fees 5,505
Class A 6,770
Class B 6,771
Shareholder reporting expenses:
Class A 1,324
Class B 821
Distribution fees:
Class A 4,930
Class B 9,697
Insurance expenses 1,082
TOTAL EXPENSES 87,600
LESS EXPENSES REIMBURSED (40,825)
NET EXPENSES 46,775
INVESTMENT LOSS - NET (31,598)
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain on investments 273,071
Change in unrealized depreciation of investments for the year (266,532)
NET GAIN ON INVESTMENTS 6,539
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ (25,059)
</Table>
See notes to financial statements.
31
<Page>
STATEMENT OF CHANGES IN NET ASSETS
Year Ended August 31
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
<Table>
<Caption>
2004 2003
- ------------------------------------------------------------------------------------------------------
Investment loss - net $ (31,598) $ (17,726)
Net realized gain (loss) on investments 273,071 (213,882)
Change in unrealized appreciation (deprecation) (266,532) 458,138
Net increase (decrease) in net assets resulting from operations (25,059) 226,530
CAPITAL SHARE TRANSACTIONS - NET
Class A 392,749 241,983
Class B 129,705 86,350
TOTAL NET CAPITAL SHARE TRANSACTIONS 522,454 328,333
TOTAL INCREASE 497,395 554,863
NET ASSETS
Beginning of year 1,907,235 1,352,372
End of year $ 2,404,630 $ 1,907,235
</Table>
FINANCIAL HIGHLIGHTS
Year Ended August 31
Selected data for a share of capital stock outstanding throughout the years
indicated.
<Table>
<Caption>
CLASS A SHARES CLASS B SHARES
----------------------------------------- -----------------------------------------
2004(1) 2003(1) 2002(4) 2001 2004(1) 2003(1) 2002(4) 2001
----------------------------------------- -----------------------------------------
Net Asset Value, Beginning of Year $ 5.20 $ 4.58 $ 6.38 $ 10.00 $ 5.08 $ 4.51 $ 6.31 $ 10.00
Investment loss - net (0.06) (0.04) (0.12) (0.21) (0.09) (0.07) (0.15) (0.13)
Net realized and unrealized gain
(loss) on investments 0.10 0.66 (1.68) (3.41) 0.10 0.64 (1.65) (3.56)
----------------------------------------- -----------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.04 0.62 (1.80) (3.62) 0.01 0.57 (1.80) (3.69)
----------------------------------------- -----------------------------------------
Net Asset Value, End of Year $ 5.24 $ 5.20 $ 4.58 $ 6.38 $ 5.09 $ 5.08 $ 4.51 $ 6.31
======== ======== ======== ======== ======== ======== ======== ========
TOTAL RETURN (2) 0.77% 13.54% (28.21)% (36.20)% 0.20% 12.64% (28.53)% (36.90)%
======== ======== ======== ======== ======== ======== ======== ========
</Table>
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
<Table>
<Caption>
CLASS A SHARES
----------------------------------------------------------
2004(1) 2003(1) 2002(4) 2001
----------------------------------------------------------
Net Assets, end of year $ 1,448,385 $ 1,071,035 $ 698,670 $ 608,836
Ratio of expenses with reimbursement
to average net assets (3) 1.70% 1.70% 3.54% 5.52%
Ratio of expenses without
reimbursement to average net assets 3.32% 4.76% 4.65% 5.52%
Ratio of net investment loss with
reimbursement to average net assets (1.06)% (0.86)% (2.64)% (4.49)%
Portfolio turnover rate 162.19% 222.55% 180.20% 65.24%
<Caption>
CLASS B SHARES
----------------------------------------------------------
2004(1) 2003(1) 2002(4) 2001
-------------------------------------------------------------
Net Assets, end of year $ 956,245 $ 836,200 $ 653,702 $ 456,784
Ratio of expenses with reimbursement
to average net assets (3) 2.35% 2.35% 4.13% 5.84%
Ratio of expenses without
reimbursement to average net assets 4.20% 5.53% 5.30% 5.84%
Ratio of net investment loss with
reimbursement to average net assets (1.71)% (1.51)% (3.24)% (4.91)%
Portfolio turnover rate 162.19% 222.55% 180.20% 65.24%
</Table>
(1) Per share information has been calculated using the average number of
shares outstanding.
(2) Does not include the effect of sales charge.
(3) Effective June 1, 2002, SM&R has voluntarily agreed to waive or reduce
expenses to 1.70% for class A and 2.35% for class B.
(4) Per share information has been restated to reflect certain
reclassifications.
See notes to financial statements.
32
<Page>
SM&R GROWTH FUND
MANAGER COMMENTARY
[CHART]
SECTOR WEIGHTINGS
BY
TOTAL INVESTMENTS
<Table>
Industrials 10.32%
Health Care 11.66%
Information Technology 14.19%
Financials 21.17%
Energy 6.30%
Consumer Discretionary 10.83%
Materials 2.09%
Telecomunication Services 3.98%
Consumer Staples 13.97%
Utilities 3.24%
Miscellaneous 1.06%
U.S. Government 1.19%
</Table>
A MESSAGE TO OUR SHAREHOLDERS
The SM&R Growth Fund's objective continues to be providing the opportunity for
capital appreciation over time. The Fund is guided by a strategy of investing
primarily in the stocks of well-established companies with records of consistent
and increasing earnings and cash flow growth. For the fiscal year ended August
31, 2004, the Fund's Class T Shares produced a return of 10.67%, before sales
charges (but after other expenses) versus a return of 7.99% for the Lipper
Large-Cap Core Fund Index. Over that same time period, the U.S. equity markets,
with the exception of the Nasdaq, also posted strong results, with the S&P 500
returning 11.45% and the Dow Jones Industrial Average returning 6.83%. The
Nasdaq did not fare as well during the period and returned -0.18%. The Fund
remains nearly fully invested with a cash position under 3%.
During the past fiscal year, the Fund's performance benefited from overweight
equity allocations in the industrials and financials sectors. Stock selectivity
in the financials, healthcare, consumer discretionary and industrials boosted
performance, whereas selectivity in the consumer staples, energy and technology
sectors detracted from performance. The Fund's largest sector weighting remains
the financials sector, at 23% of holdings, which is indicative of the market's
sector weights. Financial companies historically do very well in an economic
recovery due to rebounding lending and investment banking revenues. In addition,
the overhauled technology holdings discussed last time, intended to boost
representation by the larger, more established companies and reduce the overall
technology exposure down to a market representative weight, has allowed the Fund
performance to remain above the steep declines seen in the overall technology
sector. For the SM&R Growth Fund, we utilize the same disciplined stock
selection disciplines used in the SM&R Balanced and Equity Income Funds. The key
is identifying stocks of superior companies and purchasing them at discounted
valuations.
Although the recovery is underway, recent weeks have been difficult for
investors, as companies continue to lower second-half 2004 earnings guidance,
despite generally strong second quarter results. Indeed, second quarter earnings
have been good thus far, but they have not overwhelmed investors who needed
additional confidence in the face of poor guidance from software and
semiconductor companies, along with new energy price concerns. S&P 500 earnings
growth for the second quarter should register yet another quarter of well over
20% growth (compared to one year ago.) There continues to be evidence of
volume-based revenue growth and increasing pricing power across a broadening
group of industries,
33
<Page>
though rising energy costs are a concern for airlines and other energy
intensive industries, as well as for individuals. Year ago comparisons
will become tougher as 2004 unfolds and the equity markets will
reflect that slowing earnings growth. Cyclical dynamics should,
however, result in solid and sustainable economic growth which should
help boost 2004 earnings by 17% to $65 per share. Earnings for 2005
are forecast to rise 8% to $70 per share.
At 17x 2004 earnings estimates and 16x 2005 estimates, the market is not
particularly cheap at this juncture, nor is it exuberantly expensive. We are
scouring the markets for quality names with promising outlooks, stable
management, and increasing dividend yields. We believe selectivity will be the
key to performance in the coming year, as there will likely be large differences
among companies within the same market sectors. We believe the economic recovery
will continue, but we do not expect the stock market to keep pace with earnings
gains. Investors are waiting for the next catalyst to shed light on the
direction of the markets. Either P/E multiples will need to compress, or the
market will tread water until earnings growth rebounds.
The SM&R Growth Fund is well positioned for the ongoing recovery with its
holdings in technology, industrials and consumer cyclicals, while also providing
exposure to defensive sectors such as healthcare, financials and consumer
staples, should the recovery falter. The Fund continues to strive to produce
capital appreciation over time by holding a diversified collection of growing
companies with improving prospects.
Sincerely,
/s/ Andrew R Duncan
Andrew R Duncan, CFA, Portfolio Manager
SM&R Growth Fund
[CHART]
SM&R GROWTH FUND
ANNUAL COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN SM&R GROWTH FUND,
CLASS T, AT OFFERING PRICE, AND LIPPER LARGE CAP CORE INDEX AND THE S&P 500
<Table>
<Caption>
S&P 500 LIPPER LARGE-CAP CORE INDEX SM&R GROWTH FUND
- --------------------------------------------------------------------------
9/1/1994 $ 10,000 $ 10,000 $ 9,424
8/31/1995 $ 12,145 $ 11,718 $ 10,839
8/31/1996 $ 14,419 $ 13,642 $ 12,389
8/31/1997 $ 20,281 $ 18,477 $ 16,229
8/31/1998 $ 21,922 $ 19,679 $ 15,133
8/31/1999 $ 30,652 $ 26,541 $ 21,028
8/31/2000 $ 35,655 $ 32,106 $ 26,535
8/31/2001 $ 26,959 $ 23,720 $ 17,076
8/31/2002 $ 22,108 $ 19,776 $ 12,937
8/31/2003 $ 24,776 $ 21,719 $ 14,269
8/31/2004 $ 27,613 $ 23,454 $ 15,791
</Table>
AVERAGE ANNUAL RETURN
Includes maximum sales charge through 8/31/04. Inception date of these classes
is 01/01/99.
<Table>
<Caption>
SHARE ONE THREE SINCE
CLASS YEAR YEAR INCEPTION
- --------------------------------------------------------------------------------
A 4.94% (7.05)% (5.22)%
B 4.39% (6.41)% (4.81)%
</Table>
AVERAGE ANNUAL RETURN
Includes maximum sales charge of 5.75% through 8/31/04 for Class T Shares.
<Table>
10 YEAR 4.67%
5 YEAR (6.68)%
1 YEAR 4.44%
</Table>
SM&R Growth Fund performance figures reflect reinvestment of all dividends and
capital gains distributions and changes in net asset value. Returns to Class A
and B will vary due to differences in expenses and sales charge structure.
Average annual returns are based on the maximum sales charge and reinvestment of
all dividends and capital gains. The average annual returns for Class A shares
reflect the maximum initial sales charge of 5.00%. Class B shares reflect the
applicable contingent deferred sales charge (CDSC), which is 5% in the first
year declining to 1% in the fifth year, and is eliminated thereafter.
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL
FLUCTUATE SO THAT THE INVESTORS SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE
PERFORMANCE DATE QUOTED. TO OBTAIN PERFORMANCE DATA CURRENT TO THE MOST RECENT
MONTH-END, PLEASE CALL SM&R AT (877) 239-2049.
Returns shown do not reflect the deduction of taxes that a shareholder would pay
on fund distributions or redemption of fund shares.
34
<Page>
SM&R GROWTH FUND
HOLDINGS
SCHEDULE OF INVESTMENTS August 31, 2004
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- -------------------------------------------------------------------------------------------
AEROSPACE & DEFENSE -- 2.78%
Boeing Company 28,000 $ 1,462,160
Honeywell International Incorporated 47,700 1,716,246
3,178,406
AUTOMOBILES -- 1.26%
Ford Motor Company 43,354 611,725
General Motors Corporation 14,700 607,257
Harley-Davidson, Incorporated 3,700 225,774
1,444,756
BANKS -- 8.98%
Bank of America Corporation 80,000 3,598,400
PNC Financial Services Group 30,000 1,610,100
U.S. Bancorp 91,285 2,692,907
Wells Fargo & Company 40,000 2,350,000
10,251,407
BEVERAGES -- 3.10%
Anheuser-Busch Companies, Incorporated 19,000 1,003,200
Coca-Cola Company 34,300 1,533,553
PepsiCo, Incorporated 20,000 1,000,000
3,536,753
BIOTECHNOLOGY -- 2.13%
Amgen Incorporated* 17,900 1,061,291
Genentech, Incorporated* 28,000 1,365,840
2,427,131
BUILDING PRODUCTS -- 0.77%
American Standard Companies Incorporated* 23,400 880,074
CHEMICALS -- 1.31%
Dow Chemical Company (The) 15,500 $ 663,555
E.I. du Pont de Nemours and Company 11,200 473,312
PPG Industries, Incorporated 6,000 358,620
1,495,487
COMMERCIAL SERVICES & SUPPLIES -- 0.69%
H & R Block, Incorporated 16,400 791,464
COMMUNICATION EQUIPMENT -- 2.26%
Cisco Systems, Incorporated* 84,500 1,585,220
Motorola, Incorporated 61,700 996,455
2,581,675
COMPUTERS & PERIPHERALS -- 3.80%
Computer Associates International, Incorporated 7,000 169,540
Dell Incorporated* 31,700 1,104,428
EMC Corporation* 61,500 662,355
Hewlett-Packard Company 37,000 661,930
International Business Machines Corporation 18,400 1,558,296
Sun Microsystems, Incorporated* 48,100 184,704
4,341,253
CONTAINERS & PACKAGING -- 0.54%
Sealed Air Corporation* 12,500 614,000
DIVERSIFIED FINANCIALS -- 7.25%
Citigroup, Incorporated 74,100 3,451,578
J.P. Morgan Chase & Company 55,500 2,196,690
Morgan Stanley 51,000 2,587,230
Piper Jaffray Companies, Incorporated* 912 39,307
8,274,805
</Table>
35
<Page>
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- -------------------------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES -- 3.23%
Alltel Corporation 8,300 $ 453,595
BellSouth Corporation 32,500 869,700
SBC Communications Incorporated 43,400 1,119,286
Verizon Communications Incorporated 16,400 643,700
Vodafone Group PLC ADR 26,000 595,400
3,681,681
ELECTRIC UTILITIES -- 1.84%
Dominion Resources, Incorporated 3,800 246,582
Exelon Corporation 18,200 670,670
Southern Company (The) 19,200 582,720
Wisconsin Energy Corporation 18,400 602,600
2,102,572
ELECTRICAL EQUIPMENT & INSTRUMENTS -- 0.22%
Agilent Technologies, Incorporated* 4,800 98,400
Jabil Circuit, Incorporated* 4,000 82,520
Molex Incorporated 2,300 66,401
247,321
ENERGY EQUIPMENT & SERVICES -- 0.71%
Schlumberger Limited 13,100 809,580
FOOD PRODUCTS -- 2.60%
ConAgra Foods, Incorporated 43,800 1,147,560
McCormick & Company, Incorporated 38,700 1,298,385
Sensient Technologies Corporation 25,000 525,000
2,970,945
FOOD & DRUG RETAILING -- 3.41%
SUPERVALU Incorporated 27,800 732,808
Wal-Mart Stores, Incorporated 60,000 3,160,200
3,893,008
GAS -- 0.76%
El Paso Corporation 30,400 $ 248,672
Kinder Morgan, Incorporated 4,800 290,400
Sempra Energy 9,200 332,580
871,652
GOVERNMENT AGENCY -- 1.19%
Federal Home Loan Mortgage Corporation 20,200 1,355,824
HEALTH CARE EQUIPMENT & SUPPLIES -- 2.27%
Beckman Coulter, Incorporated 22,500 1,255,275
Medtronic, Incorporated 21,400 1,064,650
Zimmer Holdings, Incorporated* 3,740 266,662
2,586,587
HEALTH CARE PROVIDERS & SERVICES -- 0.69%
McKesson Corporation 25,300 783,035
HOTELS, RESTAURANTS & LEISURE -- 1.83%
Fairmont Hotels & Resorts Incorporated 8,950 241,561
Starwood Hotels & Resorts Worldwide, Incorporated 41,700 1,843,140
2,084,701
HOUSEHOLD DURABLES -- 0.74%
Stanley Works (The) 19,600 847,896
HOUSEHOLD PRODUCTS -- 3.19%
Kimberly-Clark Corporation 14,800 987,160
Newell Rubbermaid Incorporated 19,100 411,223
Procter & Gamble Company 40,000 2,238,800
3,637,183
INDUSTRIAL CONGLOMERATES -- 5.02%
3M Company 10,400 856,544
Danaher Corporation 24,400 1,254,648
General Electric Company 110,200 3,613,458
5,724,650
</Table>
36
<Page>
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- -------------------------------------------------------------------------------------------
INFORMATION TECHNOLOGY CONSULTING & SERVICES -- 0.77%
Automatic Data Processing, Incorporated 12,700 $ 505,079
Electronic Data Systems Corporation 10,900 209,498
SunGard Data Systems Incorporated* 7,100 163,300
877,877
INSURANCE -- 4.91%
American International Group, Incorporated 29,260 2,084,482
Brown & Brown, Incorporated 24,400 1,095,560
Prudential Financial, Incorporated 49,200 2,272,056
St. Paul Travelers Companies, Incorporated (The) 4,237 146,982
5,599,080
MACHINERY -- 1.04%
Ingersoll-Rand Company (Class A) 18,200 1,183,182
MEDIA -- 3.43%
Comcast Corporation (Special Class A)* 26,900 757,773
Omnicom Group Incorporated 3,200 220,192
Time Warner Incorporated* 48,600 794,610
Viacom Incorporated (Class B) 19,200 639,552
Walt Disney Company (The) 67,000 1,504,150
3,916,277
MISCELLANEOUS -- 1.05%
Nasdaq-100 Index Tracking Stock 35,400 1,203,954
MULTI-LINE RETAIL -- 0.49%
Target Corporation 12,600 561,708
OFFICE ELECTRONICS -- 0.12%
Xerox Corporation* 10,100 135,643
OIL & GAS -- 5.58%
Anadarko Petroleum Corporation 10,600 $ 627,732
BP PLC ADR 27,400 1,471,380
ChevronTexaco Corporation 14,300 1,394,250
Royal Dutch Petroleum Company ADR 32,500 1,647,425
Unocal Corporation 33,000 1,232,220
6,373,007
PAPER & FOREST PRODUCTS -- 0.24%
International Paper Company 6,900 276,138
PHARMACEUTICALS -- 6.56%
Bristol-Myers Squibb Company 17,400 412,902
Johnson & Johnson 38,500 2,236,850
Merck & Company, Incorporated 26,700 1,200,699
Pfizer, Incorporated 88,040 2,876,267
Watson Pharmaceuticals, Incorporated* 14,000 385,560
Wyeth 10,400 380,328
7,492,606
SEMICONDUCTOR EQUIPMENT & PRODUCTS -- 3.11%
Analog Devices, Incorporated 3,900 135,408
Intel Corporation 91,800 1,954,422
KLA-Tencor Corporation* 2,900 108,344
Linear Technology Corporation 3,800 135,926
Maxim Integrated Products, Incorporated 3,400 147,662
Micron Technology, Incorporated* 6,300 72,513
Texas Instruments Incorporated 46,400 906,656
Xilinx, Incorporated 3,100 85,033
3,545,964
</Table>
37
<Page>
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- -------------------------------------------------------------------------------------------
SOFTWARE -- 3.89%
Electronic Arts Incorporated* 4,800 $ 238,944
Intuit Incorporated* 3,100 131,099
Microsoft Corporation 118,000 3,221,400
Oracle Corporation* 65,700 655,029
PeopleSoft, Incorporated* 5,900 102,660
VERITAS Software Corporation* 5,650 94,468
4,443,600
SPECIALTY RETAIL -- 2.63
Bed Bath & Beyond Incorporated* 13,900 520,138
Chico's FAS, Incorporated* 18,200 744,380
Home Depot, Incorporated (The) 25,900 946,904
Limited Brands 39,300 789,144
3,000,566
WIRELESS TELECOMMUNICATION SERVICES -- 0.75%
AT&T Wireless Services Incorporated* 43,977 642,944
Nextel Communications, Incorporated (Class A)* 9,000 208,710
851,654
TOTAL COMMON STOCK -- 97.14%
(Cost $82,353,606) 110,875,102
MONEY MARKET FUNDS
SM&R Money Market Fund, 0.98% (a) 865 865
TOTAL MONEY MARKET FUNDS -- 0.00%
(Cost $865 ) 865
<Caption>
COMMERCIAL PAPER FACE AMOUNT VALUE
- -------------------------------------------------------------------------------------------
FOOD PRODUCTS -- 1.65%
Kraft Foods Incorporated, 1.55%, 09/01/04 $ 1,880,000 $ 1,880,000
GAS -- 0.63%
Michigan Consolidated Gas Company, 1.55%, 09/03/04 722,000 721,938
HOUSEHOLD DURABLES -- 0.42%
Centex Corporation, 1.57%, 09/07/04 483,000 482,873
TOTAL COMMERCIAL PAPER -- 2.70%
(Cost $3,084,811) 3,084,811
TOTAL INVESTMENTS -- 99.84%
(Cost $85,439,282) 113,960,778
CASH AND OTHER ASSETS,
LESS LIABILITIES -- 0.16%
176,916
NET ASSETS -- 100.00% $ 114,137,694
===============
</Table>
ABBREVIATIONS
ADR - American Depository Receipt
* - Non-income producing securities
Note to Schedule of Investments
(a) The rate quoted is the annualized seven-day yield of the fund at August 31,
2004. A complete listing of the fund's holdings are included in these
financial statements. This fund and SM&R Growth Fund are affiliated by
having the same investment adviser.
See notes to financial statements.
38
<Page>
FINANCIALS
STATEMENT OF ASSETS & LIABILITIES
August 31, 2004
<Table>
ASSETS
Investments in unaffiliated securities, at value (Cost $85,438,417) $ 113,959,913
Investments in affiliated money market funds (Cost $865) 865
Prepaid expenses 7,456
Receivable for:
Capital stock sold 27,741
Dividends 226,030
Expense Reimbursement 1,986
Other assets 93,341
TOTAL ASSETS 114,317,332
LIABILITIES
Capital stock reacquired 40,261
Accrued:
Investment advisory fee 72,720
Service fee 24,145
Distribution fee 10,428
Other liabilities 32,084
TOTAL LIABILITIES 179,638
NET ASSETS (applicable to shares outstanding) $ 114,137,694
NET ASSETS ARE COMPRISED OF THE FOLLOWING:
Capital (par value and additional paid-in) $ 114,372,823
Undistributed net investment income 147,481
Accumulated net realized loss on investments (28,904,106)
Net unrealized appreciation on investments 28,521,496
NET ASSETS $ 114,137,694
NET ASSETS:
Class A $ 6,017,294
Class B $ 3,364,714
Class T $ 104,755,686
TOTAL NET ASSETS $ 114,137,694
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 50,000,000
Outstanding 1,585,716
Class B:
Authorized 25,000,000
Outstanding 903,475
Class T:
Authorized 95,000,000
Outstanding 27,044,860
Class A:
Net asset value and redemption price per share $ 3.79
Offering price per share:
(Net Assets value of $3.79/95.00%) $ 3.99
Class B:
Net asset value and offering price per share $ 3.72
Class T:
Net asset value and redemption price per share $ 3.87
Offering price per share:
(Net Assets value of $3.87/94.25%) $ 4.11
</Table>
See notes to financial statements.
39
<Page>
STATEMENT OF OPERATIONS
Year Ended August 31, 2004
<Table>
INVESTMENT INCOME
Dividends $ 2,052,888
(Net of foreign tax withheld of $13,762)
Interest 39,086
Interest from affiliated money market funds 107
TOTAL INVESTMENT INCOME 2,092,081
EXPENSES
Investment advisory fees 851,235
Service fees 282,395
Professional fees 18,207
Custody and transaction fees 22,559
Directors' fees 6,331
Qualification fees 6,555
Class A 6,410
Class B 5,208
Class T 9,919
Shareholder reporting expenses:
Class A 8,551
Class B 4,664
Class T 60,694
Insurance expenses 34,800
Distribution fees:
Class A 14,577
Class B 23,783
TOTAL EXPENSES 1,355,888
LESS EXPENSES REIMBURSED (17,898)
NET EXPENSES 1,337,990
INVESTMENT INCOME - NET 754,091
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments 2,900,180
Change in unrealized appreciation of investments for the year 8,055,054
NET GAIN ON INVESTMENTS 10,955,234
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 11,709,325
</Table>
STATEMENT OF CHANGES IN NET ASSETS
Year Ended August 31
INCREASE IN NET ASSETS FROM OPERATIONS
<Table>
<Caption>
2004 2003
- -------------------------------------------------------------------------------------------
Investment income - net $ 754,091 $ 609,813
Net realized gain (loss) on investments 2,900,180 (7,083,270)
Change in unrealized appreciation 8,055,054 16,105,173
Net increase in net assets resulting from operations 11,709,325 9,631,716
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income - net
Class A (30,045) (20,780)
Class B (5,732) (2,731)
Class T (720,998) (557,596)
TOTAL DISTRIBUTIONS TO SHAREHOLDERS (756,775) (581,107)
CAPITAL SHARE TRANSACTIONS - NET
Class A 462,971 (627,924)
Class B 385,591 (115,549)
Class T (5,785,078) (6,971,637)
TOTAL NET CAPITAL SHARE TRANSACTIONS (4,936,516) (7,715,110)
TOTAL INCREASE 6,016,034 1,335,499
NET ASSETS
Beginning of year 108,121,660 106,786,161
End of year $ 114,137,694 $ 108,121,660
---------------
Undistributed Net Investment Income $ 147,481 $ 140,744
</Table>
See notes to financial statements.
40
<Page>
SM&R GROWTH FUND
FINANCIALS
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout the periods
indicated:
<Table>
<Caption>
CLASS T SHARES
---------------------------------------------------------------------------------
EIGHT MONTHS
YEAR ENDED AUGUST 31, ENDED AUGUST 31, YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
2004 2003 2002 2001 2000 1999
---------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $ 3.52 $ 3.21 $ 4.25 $ 5.60 $ 6.77 $ 5.69
Investment income - net 0.03 0.03 0.01 0.01 0.03 0.03
Net realized and unrealized gain
(loss) on investments 0.35 0.30 (1.04) (1.35) (0.65) 1.35
---------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.38 0.33 (1.03) (1.34) (0.62) 1.38
---------------------------------------------------------------------------------
Less distributions from
Investment income - net (0.03) (0.02) (0.01) (0.01) (0.03) (0.03)
Capital gains - - - (0.52) (0.27)
---------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.03) (0.02) (0.01) (0.01) (0.55) (0.30)
---------------------------------------------------------------------------------
Net Asset Value, End of Period $ 3.87 $ 3.52 $ 3.21 $ 4.25 $ 5.60 $ 6.77
=================================================================================
TOTAL RETURN (1) 10.67% 10.30% (24.24)% (23.99)%** (8.25)% 24.49%
=================================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets,
end of period (000's omitted) $ 104,756 $ 100,383 $ 98,912 $ 140,530 $ 194,150 $ 230,203
Ratio of expenses to average net assets 1.12% 1.15% 1.10% 1.08%* 0.81% 0.87%
Ratio of net investment income with
reimbursement to average net assets 0.68% 0.63% 0.64% 0.31%* 0.47% 0.44%
Portfolio turnover rate 4.93% 22.97% 41.74% 18.28% 19.68% 16.13%
</Table>
* Ratios annualized
** Returns are not annualized
*** Amount less than $0.01
(1) Does not include the effect of sales charge
(2) Effective June 1, 2002, SM&R has voluntarily agreed to waive or reduce
expenses to 1.36% for class A and 1.86% for class B
See notes to financial statements.
41
<Page>
Selected data for a share of capital stock outstanding throughout the periods
indicated.
<Table>
<Caption>
CLASS A SHARES
----------------------------------------------------------------------------------------
EIGHT MONTHS YEAR ENDED PERIOD FROM JAN. 1
YEAR ENDED AUGUST 31, ENDED AUGUST 31, DECEMBER 31, TO DECEMBER 31,
----------------------------------------------------------------------------------------
2004 2003 2002 2001 2000 1999
----------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $ 3.45 $ 3.15 $ 4.18 $ 5.55 $ 6.73 $ 5.69
Investment income (loss) - net 0.02 0.01 (0.01) 0.01 0.01
Net realized and unrealized gain
(loss) on investments 0.34 0.30 (1.02) (1.37) (0.66) 1.30
------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.36 0.31 (1.03) (1.37) (0.65) 1.31
Less distributions from
Investment income -- net (0.02) (0.01) - (0.01) -
Capital gains - - - (0.52) (0.27)
------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.02) (0.01) 0.00 0.00 (0.53) (0.27)
------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 3.79 $ 3.45 $ 3.15 $ 4.18 $ 5.55 $ 6.73
====================================================================================
TOTAL RETURN (1) 10.41% 10.00% (24.61)% (24.68)%** (8.76)% 23.45%
====================================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of period (000's omitted) $ 6,017 $ 5,039 $ 5,287 $ 5,971 $ 6,856 $ 3,776
Ratio of expenses with reimbursement
to average net assets (2) 1.36% 1.36% 1.47% 1.50%* 1.30% 1.51%
Ratio of expenses without reimbursement
to average net assets 1.54% 1.60% 1.55% 1.50%* 1.30% 1.51%
Ratio of net investment income with
reimbursement to average net assets 0.44% 0.42% (0.03)% (0.13)%* (0.02)% (0.19)%
Portfolio turnover rate 4.93% 22.97% 41.74% 18.28% 19.68% 16.13%
</Table>
<Table>
<Caption>
CLASS B SHARES
-----------------------------------------------------------------------------------------
EIGHT MONTHS YEAR ENDED PERIOD FROM JAN. 1
YEAR ENDED AUGUST 31, ENDED AUGUST 31, DECEMBER 31, TO DECEMBER 31,
-----------------------------------------------------------------------------------------
2004 2003 2002 2001 2000 1999
-----------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $ 3.39 $ 3.11 $ 4.13 $ 5.47 $ 6.66 $ 5.69
Investment income -- net 0.01 (0.01) (0.02) (0.02) (0.02) -
Net realized and unrealized gain
(loss) on investments 0.33 0.29 (1.00) (1.32) (0.65) 1.24
------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.34 0.28 (1.02) (1.34) (0.67) 1.24
Less distributions from
Investment income -- net (0.01) (0.00)*** - - -
Capital gains - - (0.52) (0.27)
------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.01) 0.00 0.00 0.00 (0.52) (0.27)
------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 3.72 $ 3.39 $ 3.11 $ 4.13 $ 5.47 $ 6.66
====================================================================================
TOTAL RETURN (1) 9.93% 9.12% (24.70)% (24.50)%** (9.17)% 22.04%
====================================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of period (000's omitted) $ 3,365 $ 2,700 $ 2,587 $ 2,826 $ 3,382 $ 1,547
Ratio of expenses with reimbursement
to average net assets (2) 1.86% 1.86% 1.97% 2.00%* 1.89% 2.01%
Ratio of expenses without reimbursement
to average net assets 2.09% 2.24% 2.19% 2.00%* 1.89% 2.01%
Ratio of net investment income with
reimbursement to average net assets (0.06)% (0.08)% (0.53)% (0.78)%* (0.66)% (0.69)%
Portfolio turnover rate 4.93% 22.97% 41.74% 18.28% 19.68% 16.13%
</Table>
See notes to financial statements.
42
<Page>
SM&R EQUITY INCOME FUND
MANAGER COMMENTARY
[CHART]
SECTOR WEIGHTINGS BY TOTAL INVESTMENTS
<Table>
Industrials 11.18%
Health Care 11.31%
Information Technology 6.75%
Financials 25.75%
Energy 9.61%
Consumer Discretionary 12.19%
Materials 3.50%
Telecommunication Services 0.99%
Consumer Staples 14.47%
Utilities 3.06%
U.S. Government 1.19%
</Table>
A MESSAGE TO OUR SHAREHOLDERS
The SM&R Equity Income Fund's objective continues to be providing dividend
income, along with an opportunity for increased share price over time. The Fund
is guided by a strategy of investing primarily in the stocks of well-established
companies with records of consistent and increasing dividend payments. For the
fiscal year ended August 31, 2004, the Fund's Class T Shares produced a return
of 12.14%, before sales charges (but after other expenses) versus a return of
14.65% for the Lipper Equity Income Fund Index. Over that same time period, the
U.S. equity markets also posted strong results--with the S&P 500 returning
11.45% and the Dow Jones Industrial Average returning 6.83%. The Fund has
continued to meet the goal of maintaining a dividend yield greater than that of
the market, as represented by the Standard & Poor's 500 stock market index. The
current dividend yield on the fund is 2.4% (before expenses) versus 1.7% for the
S&P 500. The Fund remains nearly fully invested with a cash position of 3%.
The Fund's performance during the past fiscal year benefited primarily from
overweight equity allocations in the financials and consumer discretionary
sectors, as well as an under-weighted exposure to the technology sector. Stock
selectivity in the financials, consumer staples, and consumer discretionary
sectors boosted performance, whereas selectivity in the healthcare and
industrials sectors hampered performance. Due to the strong dividend yields
found in the financial sector overall, the sector continues to represent over
one quarter of the Fund's holdings (28.9%). For the SM&R Equity Income Fund, we
utilize the same disciplined stock selection disciplines used in the SM&R
Balanced and Growth Funds. The key is identifying stocks of superior companies
and purchasing them at discounted valuations.
Although the recovery is underway, recent weeks have been difficult for
investors, as companies continue to lower second-half 2004 earnings guidance,
despite generally strong second quarter results. Indeed, second quarter earnings
have been good thus far, but they have not overwhelmed investors who needed
additional confidence in the face of poor guidance from software and
semiconductor companies, along with new energy price concerns, S&P 500 earnings
growth for the second quarter should register yet another quarter of well over
20% growth (compared to one year ago.) There continues to be evidence of
volume-based revenue growth and increasing pricing power across a broadening
group of industries, though rising energy costs are a concern for airlines and
other energy intensive industries, as well as individuals. Year ago comparisons
will become tougher
43
<Page>
as 2004 unfolds and the equity markets will reflect that slowing earnings
growth. Cyclical dynamics should, however, result in solid and sustainable
economic growth which should help boost 2004 earnings by 17% to $65 per share.
Earnings for 2005 are forecast to rise 8% to $70 per share.
At 17x 2004 earnings estimates and 16x 2005 estimates, the market is not
particularly cheap at this juncture, nor is it exuberantly expensive. We are
scouring the markets for quality names with promising outlooks, stable
management, and increasing dividend yields. We believe selectivity will be
the key to performance in the coming year, as there will likely be large
differences among companies within the same market sectors. We believe the
economic recovery will continue, but we do not expect the stock market to
keep pace with earnings gains. Investors are waiting for the next catalyst to
shed light on the direction of the markets. Either P/E multiples will need to
compress, or the market will tread water until earnings growth rebounds.
The SM&R Equity Income Fund is well positioned for the ongoing recovery with its
holdings in technology, industrials and consumer cyclicals, while also providing
exposure to defensive sectors such as healthcare, financials and consumer
staples, should the recovery falter. The Fund continues to strive to maintain a
strong dividend yield by holding a portfolio of value stocks while maintaining
low turnover, which leads to lower taxes, with the potential for share price
appreciation over time.
Sincerely,
/s/ Andrew R. Duncan
Andrew R. Duncan, CFA, Portfolio Manager
SM&R Equity Income Fund
[CHART]
SM&R EQUITY INCOME FUND
ANNUAL COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN SM&R EQUITY INCOME
FUND, CLASS T, AT OFFERING PRICE, AND LIPPER EQUITY INCOME INDEX AND THE S&P 500
<Table>
<Caption>
SM&R EQUITY INCOME FUND S&P 500 LIPPER EQUITY INCOME INDEX
9/1/1994 $ 9,426 $ 10,000 $ 10,000
8/31/1995 $ 10,933 $ 12,145 $ 11,444
8/31/1996 $ 12,587 $ 14,419 $ 13,147
8/31/1997 $ 15,846 $ 20,281 $ 17,285
8/31/1998 $ 16,200 $ 21,922 $ 17,496
8/31/1999 $ 19,640 $ 30,652 $ 21,619
8/31/2000 $ 20,558 $ 35,655 $ 22,593
8/31/2001 $ 18,518 $ 26,959 $ 22,075
8/31/2002 $ 15,735 $ 22,108 $ 19,101
8/31/2003 $ 16,811 $ 24,776 $ 20,758
8/31/2004 $ 18,851 $ 27,613 $ 23,800
</Table>
AVERAGE ANNUAL RETURN
Includes maximum sales charge through 8/31/04. Inception date of these classes
is 01/01/99.
<Table>
<Caption>
SHARE ONE THREE SINCE
CLASS YEAR YEAR INCEPTION
- ------------------------------------------
A 6.23% (2.14)% (1.51)%
B 5.81% (1.68)% (1.43)%
</Table>
AVERAGE ANNUAL RETURN
Includes maximum sales charge of 5.75% through 8/31/04 for Class T Shares
<Table>
10 YEAR 6.55%
5 YEAR (1.99)%
1 YEAR 5.71%
</Table>
SM&R Equity Income Fund performance figures reflect reinvestment of all
dividends and capital gains distributions and changes in net asset value.
Returns for Class A and B will vary from Class T as shown above due to
differences in expenses and sales charge structure. Average annual returns are
based on the maximum sales charge and reinvestment of all dividends and capital
gains. The average annual returns for Class A shares reflect the maximum initial
sales charge of 5.00%. Class B shares reflect the applicable contingent deferred
sales charge (CDSC), which is 5% in the first year declining to 1% in the fifth
year, and is estimated thereafter.
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL
FLUCTUATE SO THAT THE INVESTORS SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE
PERFORMANCE DATE QUOTED. TO OBTAIN PERFORMANCE DATA CURRENT TO THE MOST RECENT
MONTH-END, PLEASE CALL SM&R AT (877) 239-2049.
Returns shown do not reflect the deduction of taxes that a shareholder would pay
on fund distributions or redemption of fund shares.
44
<Page>
SCHEDULE OF INVESTMENTS August 31, 2004 HOLDINGS
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- ------------------------------------------------------------------------------
AEROSPACE & DEFENSE -- 2.17%
Lockheed Martin Corporation 22,600 $ 1,215,428
Northrop Grumman Corporation 24,000 1,239,600
2,455,028
AUTOMOBILES -- 1.06%
Ford Motor Company 44,074 621,884
General Motors Corporation 14,000 578,340
1,200,224
BANKS -- 8.12%
Bank of America Corporation 80,000 3,598,400
PNC Financial Services Group 33,400 1,792,578
U.S. Bancorp 67,500 1,991,250
Wells Fargo & Company 30,900 1,815,375
9,197,603
BEVERAGES -- 3.08%
Anheuser-Busch Companies, Incorporated 18,500 976,800
Coca Cola Company 25,700 1,149,047
PepsiCo, Incorporated 27,200 1,360,000
3,485,847
BIOTECHNOLOGY -- 0.75%
Amgen Incorporated* 14,400 853,776
BUILDING PRODUCTS -- 0.82%
American Standard Companies Incorporated* 24,600 925,206
CHEMICALS -- 1.55%
Dow Chemical Company (The) 20,100 860,481
E.I. du Pont de Nemours and Company 11,100 469,086
PPG Industries, Incorporated 7,200 430,344
1,759,911
COMMERCIAL SERVICES & SUPPLIES -- 0.86%
Banta Corporation 25,000 967,750
COMMUNICATION EQUIPMENT -- 1.11%
Cisco Systems, Incorporated* 67,100 $ 1,258,796
COMPUTERS & PERIPHERALS -- 0.83%
International Business Machines Corporation 11,100 940,059
CONTAINERS & PACKAGING -- 0.48%
Sealed Air Corporation* 11,100 545,232
DIVERSIFIED FINANCIALS -- 4.29%
Citigroup, Incorporated 68,400 3,186,072
J.P. Morgan Chase & Company 41,050 1,624,759
Morgan Stanley 11,500 583,395
Piper Jaffray Companies, Incorporated* 675 29,092
5,423,318
DIVERSIFIED TELECOMMUNICATION SERVICES -- 0.99%
Alltel Corporation 9,650 527,373
Verizon Communications 15,200 596,600
1,123,973
ELECTRIC UTILITIES -- 2.69%
Ameren Corporation 15,200 711,208
CenterPoint Energy, Incorporated 25,600 280,064
Constellation Energy Group Incorporated 26,300 1,080,930
Exelon Corporation 9,400 346,390
Southern Company (The) 10,000 303,500
Wisconsin Energy Corporation 9,800 320,950
3,043,042
ENERGY EQUIPMENT & SERVICES -- 1.03%
Schlumberger Limited 18,900 1,168,020
</Table>
45
<Page>
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- ------------------------------------------------------------------------------
FOOD PRODUCTS -- 3.46%
ConAgra Foods, Incorporated 40,000 $ 1,048,000
H.J. Heinz Company 19,000 720,290
McCormick & Company, Incorporated 19,500 654,225
Sara Lee Corporation 47,300 1,046,749
Sensient Technologies Corporation 21,500 451,500
3,920,764
FOOD & DRUG RETAILING -- 2.62%
Wal-Mart Stores, Incorporated 56,300 2,965,321
GOVERNMENT AGENCY -- 1.19%
Federal Home Loan Mortgage Corporation 70,000 1,342,400
HEALTH CARE EQUIPMENT & SUPPLIES -- 1.36%
Beckman Coulter, Incorporated 22,800 1,272,012
Zimmer Holdings, Incorporated* 3,760 268,088
1,540,100
HEALTH CARE PROVIDERS & SERVICES -- 0.38%
Health Management Associates, Incorporated
(Class A) 22,700 434,024
HOTELS, RESTAURANTS & LEISURE -- 1.70%
Starwood Hotels & Resorts Worldwide, Incorporated 43,500 1,922,700
HOUSEHOLD DURABLES -- 1.22%
Stanley Works (The) 17,900 774,354
Whirlpool Corporation 10,000 611,400
1,385,754
HOUSEHOLD PRODUCTS -- 3.07%
Kimberly-Clark Corporation 13,600 907,120
Newell Rubbermaid Incorporated 17,800 383,234
Procter & Gamble Company 39,000 2,182,830
3,473,184
INDUSTRIAL CONGLOMERATES -- 5.73%
3M Company 10,200 840,072
Danaher Corporation 25,000 1,285,500
General Electric Company 116,250 3,811,837
Waste Management, Incorporated 19,900 553,021
6,490,430
INSURANCE -- 5.17%
American International Group, Incorporated 33,100 2,358,044
Marsh & McLennan Companies, Incorporated 12,800 572,032
Principal Financial Group 16,700 579,657
Prudential Financials, Incorporated 34,400 1,588,592
St. Paul Travelers Companies, Incorporated (The) 21,956 761,654
5,859,979
MACHINERY -- 1.09%
Ingersoll-Rand Company (Class A) 18,900 1,228,689
MEDIA -- 3.68%
Comcast Corporation (Special Class A)* 20,000 555,000
Cox Communications, Incorporated (Class A)* 9,700 318,742
Time Warner Incorporated* 62,100 1,015,335
Viacom Incorporated (Class B) 23,300 776,123
Walt Disney Company (The) 66,900 1,501,905
4,167,105
MULTI-LINE RETAIL -- 1.79%
Federated Department Stores, Incorporated 33,700 1,462,580
Staples, Incorporated 19,700 564,996
2,027,576
</Table>
46
<Page>
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- --------------------------------------------------------------------------------------------
OIL & GAS -- 8.57%
Anadarko Petroleum Corporation 13,600 $ 805,392
BP PLC ADR 23,610 1,267,857
ChevronTexaco Corporation 16,760 1,634,100
Exxon Mobil Corporation 80,000 3,688,000
Royal Dutch Petroleum Company ADR 34,500 1,748,805
Weatherford International Limited* 12,200 565,348
9,709,502
PAPER & FOREST PRODUCTS -- 1.46%
International Paper Company 7,000 280,140
Plum Creek Timber Company, Incorporated 41,500 1,371,160
1,651,300
PHARMACEUTICALS -- 8.80%
Allergan, Incorporated 9,500 709,175
Bristol-Myers Squibb Company 37,600 892,248
Johnson & Johnson 39,200 2,277,520
Merck & Company, Incorporated 25,300 1,137,741
Pfizer, Incorporated 85,580 2,795,899
Watson Pharmaceuticals, Incorporated* 27,000 743,580
Wyeth 38,600 1,411,602
9,967,765
REAL ESTATE -- 7.65%
CenterPoint Properties Corporation 89,000 3,743,340
Health Care Property Investors, Incorporated 71,400 1,809,990
Public Storage, Incorporated 30,500 1,550,925
Weingarten Realty Investors 46,350 1,558,287
8,662,542
ROAD & RAIL -- 0.51%
USF Corporation 17,000 $ 582,420
SEMICONDUCTOR EQUIPMENT & PRODUCTS -- 1.60%
Intel Corporation 67,300 1,432,817
Texas Instruments Incorporated 19,200 375,168
1,807,985
SOFTWARE -- 3.21%
Microsoft Corporation 133,000 3,630,900
SPECIALTY RETAIL -- 1.40%
Limited Brands 46,900 941,752
Lowes Companies, Incorporated 13,000 646,100
1,587,852
TOBACCO -- 1.50%
Altria Group, Incorporated 14,700 719,565
Reynolds American Incorporated 12,949 977,650
1,697,215
TOTAL COMMON STOCK -- 97.49%
(Cost $93,124,612) 110,403,292
MONEY MARKET FUNDS
SM&R Money Market Fund, 0.98% (a) 707 707
TOTAL MONEY MARKET FUNDS -- 0.00%
(Cost $ 707) 707
</Table>
47
<Page>
<Table>
<Caption>
COMMERCIAL PAPER FACE AMOUNT VALUE
- --------------------------------------------------------------------------------------------
FOOD PRODUCTS -- 0.74%
Kraft Foods Incorporated,
1.55%, 09/01/04 $ 841,000 $ 841,000
GAS -- 0.37%
Michigan Consolidated Gas Company,
1.55%, 09/03/04 422,000 421,964
HOUSEHOLD DURABLES -- 1.33%
Centex Corporation,
1.57%, 09/07/04 1,500,000 1,499,607
TOTAL COMMERCIAL PAPER -- 2.44%
(Cost $2,762,571) 2,762,571
TOTAL INVESTMENTS -- 99.93%
(Cost $95,887,890) 113,166,570
CASH AND OTHER ASSETS,
LESS LIABILITIES -- 0.07% 73,916
NET ASSETS -- 100.00% $ 113,240,486
================
</Table>
ABBREVIATIONS
ADR - American Depository Receipt
* - Non-income producing securities
Note to Schedule of Investments
(a) The rate quoted is the annualized seven day yield of the fund at August 31,
2004. A complete listing of the fund's holdings are included in these
financial statements. This fund and SM&R Equity Fund are affiliated by
having the same investment adviser.
See notes to financial statements.
48
<Page>
SM&R EQUITY INCOME FUND
FINANCIALS
STATEMENT OF ASSETS & LIABILITIES
August 31, 2004
<Table>
ASSETS
Investments in unaffiliated securities, at value
(Cost $95,887,183) $ 113,165,863
Investments in affiliated money market funds
(Cost $707) 707
Prepaid expenses 12,726
Receivable for:
Capital stock sold 10,200
Dividends 270,276
Expense Reimbursement 2,903
Other assets 62,725
TOTAL ASSETS 113,525,400
LIABILITIES
Capital stock reacquired 139,033
Accrued:
Investment advisory fee 72,147
Service fee 23,961
Distribution fee 19,449
Other liabilities 30,324
TOTAL LIABILITIES 284,914
NET ASSETS (applicable to shares outstanding) $ 113,240,486
NET ASSETS ARE COMPRISED OF THE FOLLOWING:
Capital (par value and additional paid-in) $ 93,227,722
Undistributed net investment income 213,336
Accumulated net realized gain on investments 2,520,748
Net unrealized appreciation on investments 17,278,680
NET ASSETS $ 113,240,486
NET ASSETS:
Class A $ 8,063,009
Class B $ 7,375,612
Class T $ 97,801,865
TOTAL NET ASSETS: $ 113,240,486
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 50,000,000
Outstanding 364,607
Class B:
Authorized 25,000,000
Outstanding 343,730
Class T:
Authorized 75,000,000
Outstanding 4,295,503
Class A:
Net asset value and redemption price per share $ 22.11
Offering price per share:
(Net Assets value of $22.11/95.00%) $ 23.27
Class B:
Net asset value and offering price per share $ 21.46
Class T:
Net asset value and redemption price per share $ 22.77
Offering price per share:
(Net Assets value of $22.77/94.25%) $ 24.16
</Table>
See notes to financial statements.
49
<Page>
STATEMENT OF OPERATIONS
Year Ended August 31, 2004
<Table>
INVESTMENT INCOME
Dividends $ 2,651,817
(Net of foreign tax withheld of $13,774)
Interest 27,646
Interest from affiliated money market funds 203
TOTAL INVESTMENT INCOME 2,679,666
EXPENSES
Investment advisory fees 840,628
Service fees 279,001
Professional fees 18,207
Custody and transaction fees 20,356
Directors' fees 6,331
Qualification fees 6,598
Class A 5,714
Class B 6,532
Class T 8,514
Shareholder reporting expenses:
Class A 4,941
Class B 4,837
Class T 36,069
Insurance expenses 31,891
Distribution fees:
Class A 18,674
Class B 52,893
TOTAL EXPENSES 1,341,186
LESS EXPENSES REIMBURSED (26,784)
NET EXPENSES 1,314,402
INVESTMENT INCOME - NET 1,365,264
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments 2,785,635
Change in unrealized appreciation
of investments for the year 8,676,173
NET GAIN ON INVESTMENTS 11,461,808
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 12,827,072
</Table>
STATEMENT OF CHANGES IN NET ASSETS
Year Ended August 31
<Table>
<Caption>
INCREASE IN NET ASSETS FROM OPERATIONS
2004 2003
Investment income - net $ 1,365,264 $ 1,374,281
Net realized gain (loss) on investments 2,785,635 (3,231,463)
Change in unrealized appreciation 8,676,173 7,903,312
Net increase in net assets
resulting from operations 12,827,072 6,046,130
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income - net
Class A (92,552) (73,915)
Class B (60,397) (58,246)
Class T (1,247,477) (1,284,991)
TOTAL DISTRIBUTIONS TO SHAREHOLDERS (1,400,426) (1,417,152)
CAPITAL SHARE TRANSACTIONS - NET
Class A 1,438,879 154,525
Class B 535,908 89,680
Class T (7,226,052) (12,527,527)
TOTAL NET CAPITAL SHARE TRANSACTIONS (5,251,265) (12,283,322)
TOTAL INCREASE (DECREASE) 6,175,381 (7,654,344)
NET ASSETS
Beginning of year 107,065,105 114,719,449
End of year $ 113,240,486 $ 107,065,105
---------------- ------------------
Undistributed Net Investment Income $ 213,336 $ 248,562
</Table>
See notes to financial statements.
50
<Page>
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout the periods
indicated.
<Table>
<Caption>
CLASS T SHARES
---------------------------------------------------------------------------------------
EIGHT MONTHS
YEAR ENDED AUGUST 31, ENDED AUGUST 31, YEAR ENDED DECEMBER 31,
-------------------------------------- ---------------- ------------------------
2004 2003 2002 2001 2000 1999
---------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $ 20.56 $ 19.51 $ 23.26 $ 25.76 $ 25.30 $ 28.02
Investment income - net 0.28 0.27 0.27 0.24 0.46 0.54
Net realized and unrealized gain
(loss) on investments 2.21 1.04 (3.74) (2.57) 1.54 (0.96)
---------- ----------- ----------- ---------------- ----------- ----------
TOTAL FROM INVESTMENT OPERATIONS 2.49 1.31 (3.47) (2.33) 2.00 (0.42)
Less distributions from
Investment income - net (0.28) (0.26) (0.28) (0.17) (0.46) (0.54)
Capital gains -- -- -- -- (1.08) (1.76)
---------- ----------- ----------- ---------------- ----------- ----------
TOTAL DISTRIBUTIONS (0.28) (0.26) (0.28) (0.17) (1.54) (2.30)
---------- ----------- ----------- ---------------- ----------- ----------
Net Asset Value, End of Period $ 22.77 $ 20.56 $ 19.51 $ 23.26 $ 25.76 $ 25.30
========== =========== =========== ================ =========== ==========
TOTAL RETURN (1) 12.14% 6.83% (15.03)% (9.07)%** 8.99% (1.39)%
========== =========== =========== ================ =========== ==========
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL
DATA
Net Assets,
end of period (000's omitted) $ 97,802 $ 94,943 $ 103,396 $ 138,566 $ 160,319 $ 187,988
Ratio of expenses to
average net assets 1.10% 1.12% 1.07% 1.06%* 1.05% 1.05%
Ratio of net investment income with
reimbursement to average net assets 1.24% 1.36% 1.26% 1.43%* 1.73% 1.94%
Portfolio turnover rate 6.74% 7.57% 30.99% 18.15% 22.05% 9.81%
</Table>
* Ratios annualized
** Returns are not annualized
(1) Does not include the effect of sales charge
(2) Effective June 1, 2002, SM&R has voluntarily agreed to waive or reduce
expenses to 1.26% for class A and 1.76% for class B.
See notes to financial statements.
51
<Page>
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout the periods
indicated.
<Table>
<Caption>
CLASS A SHARES
--------------------------------------------------------------------------------------------
EIGHT MONTHS YEAR ENDED PERIOD FROM JAN 1
YEAR ENDED AUGUST 31, ENDED AUGUST 31, DECEMBER 31, TO DECEMBER 31,
------------------------------------- ---------------- -------------------------------
2004 2003 2002 2001 2000 1999
--------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $ 20.03 $ 19.04 $ 22.72 $ 25.19 $ 24.79 $ 28.02
Investment income - net 0.26 0.22 0.18 0.16 0.36 0.58
Net realized and unrealized gain
(loss) on investments 2.10 1.01 (3.63) (2.49) 1.50 (1.47)
--------- ----------- ----------- ---------------- ----------- ----------------
TOTAL FROM INVESTMENT OPERATIONS 2.36 1.23 (3.45) (2.33) 1.86 (0.89)
Less distributions from
Investment income - net (0.28) (0.24) (0.23) (0.14) (0.38) (0.58)
Capital gains -- -- -- -- (1.08) (1.76)
--------- ----------- ----------- ---------------- ----------- ----------------
TOTAL DISTRIBUTIONS (0.28) (0.24) (0.23) (0.14) (1.46) (2.34)
--------- ----------- ----------- ---------------- ----------- ----------------
Net Asset Value, End of Period $ 22.11 $ 20.03 $ 19.04 $ 22.72 $ 25.19 $ 24.79
========= =========== =========== ================ =========== ================
TOTAL RETURN (1) 11.79% 6.61% (15.27)% (9.25)%** 8.61% (3.01)%
========= =========== =========== ================ =========== ================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL
DATA
Net Assets, end of period
(000's omitted) $ 8,063 $ 5,940 $ 5,517 $ 6,330 $ 5,671 $ 4,802
Ratio of expenses with reimbursement
to average net assets (2) 1.26% 1.26% 1.44% 1.45%* 1.49% 1.51%
Ratio of expenses without
reimbursement to average net assets 1.43% 1.50% 1.45% 1.45%* 1.49% 1.51%
Ratio of net investment income with
reimbursement to average net assets 1.08% 1.21% 0.88% 1.03%* 1.32% 1.53%
Portfolio turnover rate 6.74% 7.57% 30.99% 18.15% 22.05% 9.81%
</Table>
<Table>
<Caption>
CLASS B SHARES
------------------------------------------------------------------------------------------
EIGHT MONTHS YEAR ENDED PERIOD JAN 1
YEAR ENDED AUGUST 31, ENDED AUGUST 31, DECEMBER 31, TO DECEMBER 31,
------------------------------------- ---------------- ------------ ---------------
2004 2003 2002 2001 2000 1999
------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $ 19.44 $ 18.56 $ 22.22 $ 24.69 $ 24.38 $ 28.02
Investment income - net 0.13 0.13 0.09 0.08 0.23 0.47
Net realized and unrealized gain
(loss) on investments 2.07 0.94 (3.57) (2.47) 1.45 (1.88)
--------- ----------- ----------- ---------------- ----------- ---------------
TOTAL FROM INVESTMENT OPERATIONS 2.20 1.07 (3.48) (2.39) 1.68 (1.41)
Less distributions from
Investment income - net (0.18) (0.19) (0.18) (0.08) (0.29) (0.47)
Capital gains -- -- -- -- (1.08) (1.76)
--------- ----------- ----------- ---------------- ----------- ---------------
TOTAL DISTRIBUTIONS (0.18) (0.19) (0.18) (0.08) (1.37) (2.23)
--------- ----------- ----------- ---------------- ----------- ---------------
Net Asset Value, End of Period $ 21.46 $ 19.44 $ 18.56 $ 22.22 $ 24.69 $ 24.38
========= =========== =========== ================ =========== ===============
TOTAL RETURN (1) 11.36% 5.85% (15.72)% (9.68)%** 7.95% (4.86)%
========= =========== =========== ================ =========== ===============
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL
DATA
Net Assets, end of period
(000's omitted) $ 7,375 $ 6,182 $ 5,806 $ 5,688 $ 5,324 $ 4,343
Ratio of expenses with reimbursement
to average net assets (2) 1.76% 1.76% 1.94% 1.98%* 1.99% 2.01%
Ratio of expenses without
reimbursement to average net assets 1.95% 1.99% 1.95% 1.98%* 1.99% 2.01%
Ratio of net investment income with
reimbursement to average net assets 0.58% 0.71% 0.37% 0.50%* 0.74% 1.03%
Portfolio turnover rate 6.74% 7.57% 30.99% 18.15% 22.05% 9.81%
See notes to financial statements.
</Table>
52
<Page>
SM & R BALANCED FUND
MANAGER COMMENTARY
[CHART]
SECTOR WEIGHTINGS
BY
TOTAL INVESTMENTS
<Table>
Industrials 13.03%
Health Care 8.46%
Information Technology 11.01%
Financials 22.89%
Energy 5.16%
Consumer Discretionary 12.28%
Materials 1.86%
Telecommunications Services 1.67%
Consumer Staples 12.49%
Utilities 4.15%
U.S. Government 7.00%
</Table>
A MESSAGE TO OUR SHAREHOLDERS
The SM&R Balanced Fund strives to maintain the objective of providing a balance
of both growth and income through its portfolio blend of high-yielding stocks of
well known companies, as well as bonds and money market instruments. Over the
course of the fiscal year ended August 31, 2004, the Fund's blend of about 66%
stocks, 26% bonds and 8% money market instruments has served our shareholders
well. The equity portion of the Fund produced a total return (capital
appreciation and dividend income) of approximately 12.65% while the bond portion
of the Fund has returned approximately 2.97%. During the period the overall
Fund's Class T Shares has produced a total return of 8.95%, before sales charges
(but after other expenses) versus a return of 9.10% for the Upper Balanced Fund
Index. Over that same time period, the U.S. equity markets, with the exception
of the Nasdaq, also posted strong results--with the S&P 500 returning 11.45% and
the Dow Jones Industrial Average returning 6.83%. The Nasdaq did not fare as
well during the period and returned 0.18%.
Within the fund, we have continued shortening the duration of our fixed income
holdings as we anticipate interest rates will continue to rise over the next
twelve to eighteen months. Because fixed income valuations move in the opposite
direction of interest rates, shortening the duration of the Fund's holdings will
help to minimize the expected decreasing valuations of the fixed income
securities while allowing the Fund to continue to produce income. Within the
equity portion of the Fund, we utilize the same disciplined stock selection
strategies used in the SM&R Equity Income and Growth Funds. The key is
identifying stocks of superior companies and purchasing them at discounted
valuations. During the fiscal year, the Fund benefited from over-weightings in
the industrials and energy sectors and was hampered by an overweight position in
healthcare. Stock selectivity in the financials, healthcare, consumer
discretionary and industrials boosted performance, whereas selectivity in the
consumer staples, telecommunications and technology sectors detracted from
performance.
Although the recovery is underway, recent weeks have been difficult for
investors, as companies continue to lower second-half 2004 earnings guidance,
despite generally strong second quarter results. Indeed, second quarter earnings
have been good thus far, but they have not overwhelmed investors who needed
additional confidence in the face of poor guidance from software and
semiconductor companies, along with new energy price concerns. S&P 500 earnings
growth for the second quarter should register yet another quarter of well over
20% growth (compared to one year ago.) There continues to be evidence of
volume-based revenue growth and increasing pricing power across a broadening
53
<Page>
group of industries, though rising energy costs are a concern for
airlines and other energy intensive industries, as well as for
individuals. Year ago comparisons will become tougher as 2004 unfolds
and the equity markets will reflect that slowing earnings growth.
Cyclical dynamics should, however, result in solid and sustainable
economic growth which should help boost 2004 earnings by 17% to $65
per share Earnings for 2005 are forecast to rise 8% to $70 per share.
At 17x 2004 earnings estimates and 16x 2005 estimates, the market is not
particularly cheap at this juncture, not is it exuberantly expensive. We are
scouring the markets for quality names with promising outlooks, stable
management, and increasing dividend yields. We believe selectivity will be the
key to performance in the coming year, as there will likely be large differences
among companies within the same market sectors. We believe the economic recovery
will continue, but we do not expect the stock market to keep pace with earnings
gains. Investors are warning for the next catalyst to shed light on the
direction of the markets. Either P/E multiples will need to compress, or the
market will tread water until earnings growth rebounds.
The SM&R Balanced Fund is well positioned for the ongoing recovery with its
holdings in technology, industrials and consumer cyclicals, while also providing
exposure to defensive sectors such as healthcare, financials and consumer
staples, should the recovery falter. This positioning should provide upside for
the equity portion of the Fund, while the fixed income portion protects the
overall portfolio value from potential market corrections.
SINCERELY,
/s/ Andrew R. Duncan
ANDREW R. DUNCAN, CFA, PORTFOLIO MANAGER
SM&R BALANCED FUND
[CHART]
SM&R BALANCED FUND
ANNUAL COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN SM&R BALANCED
FUND, CLASS T, AT OFFERING PRICE, AND LIPPER BALANCED FUND INDEX AND THE S&P 500
<Table>
<Caption>
SM&R BALANCED FUND S&P 500 LIPPER BALANCED FUND INDEX
9/1/1994 $ 9,426 $ 10,000 $ 10,000
8/31/1995 $ 10,610 $ 12,145 $ 11,341
8/31/1996 $ 11,601 $ 14,419 $ 12,522
8/31/1997 $ 14,153 $ 20,281 $ 15,621
8/31/1998 $ 14,394 $ 21,922 $ 16,322
8/31/1999 $ 17,199 $ 30,652 $ 19,573
8/31/2000 $ 20,655 $ 35,655 $ 21,930
8/31/2001 $ 18,200 $ 26,959 $ 20,222
8/31/2002 $ 17,095 $ 22,108 $ 18,460
8/31/2003 $ 17,475 $ 24,776 $ 20,315
8/31/2004 $ 19,921 $ 27,613 $ 22,163
</Table>
AVERAGE ANNUAL RETURN
Includes maximum sales charge through 8/31/04. Inception date of these classes
is 01/04/99.
<Table>
<Caption>
SHARE ONE THREE SINCE
CLASS YEAR YEAR INCEPTION
A 3.36% 1.72% 1.68%
B 2.88% 2.18% 2.35%
</Table>
AVERAGE ANNUAL RETURN
Includes maximum sales charge of 5.75% through 8/31/04 for Class T Shares.
<Table>
10 YEAR 7.13%
5 YEAR 1.77%
1 YEAR 2.68%
</Table>
SM&R Balanced Fund performance figures reflect reinvestment of all dividends and
capital gains distributions and changes in net asset value. Returns for Class A
and B will vary due to differences in expenses and sales charge structure.
Average annual returns are based on the maximum sales charge and reinvestment of
all dividends and capital gains. The average annual returns for Class A shares
reflect the maximum initial sales charge of 5.00%. Class B shares reflect the
applicable contingent deferred sales charge (CDSC), which is 5% in the first
year declining to 1% in the fifth year, and is eliminated thereafter.
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENTS RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL
FLUCTUATE SO THAT THE INVESTORS SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE
PERFORMANCE DATE QUOTED. TO OBTAIN PERFORMANCE DATA CURRENT TO THE MOST RECENT
MONTH-END, PLEASE CALL SM&R AT (877) 239-2049.
Returns shown do not reflect the deduction of taxes that a shareholder would pay
on fund distributions or redemption of fund shares.
54
<Page>
HOLDINGS
SCHEDULE OF INVESTMENT August 31, 2004
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- ---------------------------------------------------------------------------------------------------------
AEROSPACE & DEFENSE -- 0.70%
Honeywell International Incorporated 5,900 $ 212,282
AIR FREIGHT & COURIERS -- 0.39%
United Parcel Service, Incorporated (Class B) 1,600 116,880
AUTOMOBILES -- 0.92%
Ford Motor Company 11,168 157,581
General Motors Corporation 2,900 119,799
277,380
BANKS -- 7.39%
Bank of America Corporation 18,800 845,624
PNC Financial Services Group 6,100 327,387
U.S. Bancorp 14,500 427,750
Wachovia Corporation 3,600 168,876
Wells Fargo & Company 7,800 458,250
2,227,887
BEVERAGES -- 1.93%
Anheuser-Busch Companies, Incorporated 3,100 163,680
Coca Cola Company 6,000 268,260
PepsiCo, Incorporated 3,000 150,000
581,940
BIOTECHNOLOGY -- 0.49%
Amgen Incorporated* 2,500 148,225
BUILDING PRODUCTS -- 0.56%
American Standard Companies Incorporated* 4,500 $ 169,245
CHEMICALS -- 0.97%
Dow Chemical Company (The) 3,100 132,711
LI.du Pont de Nemours and Company 1,900 80,294
PPG Industries, Incorporated 1,300 77,701
290,706
COMMERCIAL SERVICES & SUPPLIES -- 1.10%
Banta Corporation 5,200 201,292
H & R Block, Incorporated 2,700 130,302
331,594
COMMUNICATIONS EQUIPMENT -- 1.60%
Cisco Systems, Incorporated* 23,100 433,356
Motorola, Incorporated 3,100 50,065
483,421
COMPUTERS & PERIPHERALS -- 2.90%
Dell Incorporated* 6,900 240,396
EMC Corporation* 20,100 216,477
Hewlett-Packard Company 1,800 32,202
International Business Machines Corporation 3,800 321,822
Sun Microsystems, Incorporated* 16,700 64,128
875,025
</Table>
55
<Page>
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- ---------------------------------------------------------------------------------------------------------
CONTAINERS & PACKAGING -- 0.39%
Sealed Air Corporation* 2,400 $ 117,888
DIVERSIFIED FINANCIALS -- 4.42%
American Express Company 3,600 180,072
Citigroup, Incorporated 14,500 675,410
JP Morgan Chase & Company 4,092 161,961
Morgan Stanley 6,100 309,453
Piper Jaffray Companies Incorporated* 145 6,250
1,333,146
DIVERSIFIED TELECOMMUNICATION SERVICES -- 1.66%
Alltel Corporation 2,000 109,300
SBC Communications Incorporated 8,000 206,320
Verizon Communications Incorporated 1,480 58,090
Vodafone Group PLC ADR 5,500 125,950
499,660
ELECTRIC UTILITIES -- 1.85%
Ameren Corporation 3,000 140,370
CenterPoint Energy, Incorporated 5,500 60,170
Constellation Energy Group 5,000 205,500
Exelon Corporation 1,400 51,590
Southern Company (The) 1,600 48,560
Wisconsin Energy Corporation 1,600 52,400
558,590
ENERGY EQUIPMENT & SERVICES -- 0.82%
Schlumberger Limited 4,000 $ 247,200
FOOD PRODUCTS -- 2.54%
ConAgra Foods, Incorporated 6,100 159,820
H.J. Heinz Company 2,600 98,566
McCormick & Company, Incorporated 5,700 191,235
Sara Lee Corporation 7,200 159,336
Sensient Technologies Corporation 7,400 155,400
764,357
FOOD & DRUG RETAILING -- 1.63%
Wal Mart Stores, Incorporated 9,300 489,831
GOVERNMENT AGENCY -- 0.87%
Federal Home Loan Mortgage Corporation 3,900 261,768
HEALTH CARE EQUIPMENT & SUPPLIES -- 1.09%
Abbott Laboratories 4,200 175,098
Beckman Counter, Incorporated 2,400 133,896
Zimmer Holdings, Incorporated * 260 18,538
327,532
HEALTH CARE PROVIDERS & SERVICES -- 0.24%
Health Management Associates, Incorporated (Class A) 3,800 72,656
HOTELS, RESTAURANTS & LEISURE -- 1.07%
Starwood Hotels & Resorts Worldwide, Incorporated 7,300 322,660
</Table>
56
<Page>
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- ---------------------------------------------------------------------------------------------------------
HOUSEHOLD DURABLES -- 2.07%
Black & Decker Corporation 6,900 $ 475,617
Stanley Works (The) 3,400 147,084
622,701
HOUSEHOLD PRODUCTS -- 2.09%
Kimberly-Clark Corporation 2,200 146,740
Newell Rubbermaid Incorporated 3,800 81,814
Procter & Gamble Company 7,200 402,984
631,538
INDUSTRIAL CONGLOMERATES -- 3.53%
3M Company 1,900 156,484
Danaher Corporation 4,000 205,680
General Electric Company 21,400 701,706
1,063,870
INFORMATION TECHNOLOGY CONSULTING & SERVICES -- 0.07%
Electronic Data Systems Corporation 600 11,532
Sungard Data Systems Incorporated* 400 9,200
20,732
INSURANCE -- 2.34%
American International Group, Incorporated 5,731 408,276
Prudential Financial, Incorporated 5,800 267,844
St. Paul Travelers Companies, Incorporated (The) 854 29,625
705,745
LEISURE EQUIPMENT & PRODUCTS -- 0.61%
Brunswick Corporation 4,700 $ 184,757
MACHINERY -- 0.63%
Ingersoll-Rand Company (Class A) 2,900 188,529
MEDIA -- 1.59%
Comcast Corporation (Special Class A)* 2,000 55,500
Cox Communications, Incorporated (Class A)* 1,700 55,862
Viacom Incorporated (Class B) 4,000 133,240
Walt Disney Company (The) 10,400 233,480
478,082
METALS & MINING -- 0.33%
Alcoa Incorporated 3,100 100,378
MULTI-LINE RETAIL -- 0.85%
Federated Department Stores, Incorporated 5,900 256,060
OIL & GAS -- 4.31%
Anadarko Petroleum Corporation 1,800 106,596
BP PLC ADR 5,092 273,440
ChevronTexaco Corporation 2,600 253,500
Exxon Mobil Corporation 6,500 299,650
Royal Dutch Petroleum Company ADR 4,200 212,898
Unocal Corporation 4,100 153,095
1,299,178
</Table>
57
<Page>
<Table>
<Caption>
COMMON STOCK SHARES VALUE
- ---------------------------------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS -- 0.16%
International Paper Company 1,200 $ 48,024
PERSONAL PRODUCTS -- 0.34%
Gillette Company (The) 2,400 102,000
PHARMACEUTICALS -- 6.59%
Allergan, Incorporated 1,700 126,905
Bristol-Myers Squibb Company 5,800 137,634
Hospira, Incorporated* 420 11,634
Johnson & Johnson 9,200 534,520
Merck & Company, Incorporated 5,300 238,341
Pfizer, Incorporated 21,555 704,202
Watson Pharmaceuticals, Incorporated* 4,400 121,176
Wyeth 3,100 113,367
1,987,779
ROAD & RAIL -- 0.59%
USI Corporation 5,200 175,152
SEMICONDUCTOR EQUIPMENT & PRODUCTS -- 1.82%
Intel Corporation 21,600 459,864
Texas Instruments Incorporated 4,600 89,884
549,748
SOFTWARE -- 2.35%
Microsoft Corporation 23,300 636,090
Oracle Corporation* 3,700 36,889
VERITAS Software Corporation* 2,200 36,784
709,763
SPECIALTY RETAIL -- 1.74%
Home Depot, Incorporated (The) 6,200 $ 226,672
Limited Brands 7,600 152,608
Lowe's Companies, Incorporated 2,900 144,130
523,410
TOTAL COMMON STOCK -- 67.54%
(Cost $16,775,067) 20,360,319
</Table>
58
<Page>
<Table>
<Caption>
BONDS AND NOTES FACE AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------
AUTO COMPONENTS -- 1.71%
Cooper Tire & Rubber Company,
7.75%, 12/15/09 $ 450,000 $ 516,009
BANKS -- 1.84%
Royal Bank of Scotland, yankee bond,
6.40%, 04/01/09 500,000 553,285
DIVERSIFIED FINANCIALS -- 2.87%
Morgan (J.P.) & Company, Incorporated,
6.00%, 01/15/09 500,000 540,637
Southwestern Bell Capital Corporation,
7.11%, 08/14/06 300,000 324,681
865,318
ELECTRONIC EQUIPMENT & INSTRUMENTS -- 2.19%
Koninklijke Philips Electronics,
yankee bond, 8.375%, 09/15/06 600,000 660,332
INDUSTRIAL CONGLOMERATES -- 2.67%
Tyco International Group,
yankee bond, 5.875%, 11/01/04 (a) 800,000 804,871
INSURANCE -- 1.97%
Mony Group Incorporated (The),
8.35%, 03/15/10 500,000 594,778
REAL ESTATE -- 1.92%
Weingarten Realty Investors,
7.35%, 07/20/09 500,000 580,217
TRANSPORTATION INFRASTRUCTURE -- 2.78%
Hertz Corporation, 7.40%, 03/01/11 $ 455,000 $ 492,924
Union Tank Car Company,
6.63%, 10/03/04 (a) 345,000 346,153
839,077
U S GOVERNMENT AGENCY SECURITIES -- 6.09%
Federal Home Loan Bank,
2.45%, 03/23/07 1,500,000 1,483,230
Federal Home Loan Bank,
1.87%, 07/21/08 (c) 300,000 300,454
Federal Home Loan
Mortgage Corporation,
Pool #298759, 8.00%, 08/01/17 2,531 2,768
Federal Home Loan
Mortgage Corporation,
Pool #284839, 8.50%, 01/01/17 10,233 11,293
Federal National Mortgage Association,
Pool #048974, 8.00%, 06/01/17 33,595 36,795
1,834,540
TOTAL BONDS AND NOTES -- 24.04%
(Cost $6,762,322) 7,248,427
MONEY MARKET FUNDS
SM&R Money Market Fund, 0.98% (b) 301 301
TOTAL MONEY MARKET FUNDS -- 0.00%
(Cost $ 301) 301
</Table>
59
<Page>
<Table>
<Caption>
COMMERCIAL PAPER FACE AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------
FOOD PRODUCTS -- 3.90%
Kraft Foods Incorporated,
1.55%, 09/01/04 $ 1,176,000 $ 1,176,000
GAS -- 2.28%
Michigan Consolidated Gas Company,
1.55%, 09/03/04 688,000 687,941
HOUSEHOLD DURABLES -- 1.66%
Centex Corporation, 1.57%, 09/07/04 500,000 499,869
TOTAL COMMERCIAL PAPER -- 7.84%
(Cost $2,363,810) 2,363,810
TOTAL INVESTMENTS -- 99.42%
(Cost $25,901,500) 29,972,857
CASH AND OTHER ASSETS,
LESS LIABILITIES -- 0.58% 173,980
NET ASSETS -- 100.00% $ 30,146,837
</Table>
ABBREVIATIONS
ADR - American Depository Receipt
* - Non-income producing securities
Note to Schedule of Investments
(a) Long term obligations that will mature in less than one year.
(b) The rate quoted is the annualized seven-day yield of the fund at August 31,
2004. A complete listing of the fund's holdings are included in these
financial statements. This fund and SM&R Balanced Fund are affiliated by
having the same investment adviser.
(c) A security originally issued with a zero coupon that converts to a coupon
at a stated date and rate. The interest rate shown represents the yield to
maturity rate.
See notes to financial statements.
60
<Page>
SM&R BALANCED FUND
FINANCIALS
STATEMENT OF ASSETS & LIABILITIES
August 31, 2004
<Table>
ASSETS
Investments in unaffiliated securities,
at value (Cost $25,901,199) $ 29,972,556
Investments in affiliated
money market funds (Cost $301) 301
Prepaid expenses 4,680
Receivable for:
Investments securities sold 470
Capital stock sold 11,194
Dividends 43,569
Interest 155,841
Expense Reimbursement 2,321
Other assets 15,067
TOTAL ASSETS 30,205,999
LIABILITIES
Capital stock reacquired 5,522
Accrued:
Investment advisory fee 19,658
Service fee 6,553
Distribution fee 8,539
Other liabilities 18,890
TOTAL LIABILITIES 59,162
NET ASSETS (applicable to shares outstanding) $ 30,146,837
NET ASSETS ARE COMPRISED OF THE FOLLOWING:
Capital (par value and additional paid-in) $ 25,907,856
Undistributed net investment income 74,012
Accumulated net realized gain on investments 93,612
Net unrealized appreciation on investments 4,071,357
NET ASSETS $ 30,146,837
NET ASSETS:
Class A $ 4,409,278
Class B $ 2,952,066
Class T $ 22,785,493
TOTAL NET ASSETS: $ 30,146,837
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 50,000,000
Outstanding 250,546
Class B:
Authorized 25,000,000
Outstanding 166,077
Class T:
Authorized 25,000,000
Outstanding 1,251,367
Class A:
Net asset value and redemption price per share $ 17.60
Offering price per share:
(Net Assets value of $17.60/95.00%) $ 18.53
Class B:
Net asset value and offering price per share $ 17.78
Class T:
Net asset value and redemption price per share $ 18.21
Offering price per share:
(Net Assets value of $18.21/94.25%) $ 19.32
</Table>
See notes to financial statements.
61
<Page>
STATEMENT OF OPERATIONS
Year Ended August 31, 2004
<Table>
INVESTMENT INCOME
Dividends $ 395,657
Interest 443,524
Interest from affiliated money market funds 1,513
TOTAL INVESTMENT INCOME 840,694
EXPENSES
Investment advisory fees 223,984
Service fees 74,661
Professional fees 14,107
Custody and transaction fees 15,734
Directors' fees 6,331
Qualification fees 5,423
Class A 6,221
Class B 3,940
Class T 7,470
Shareholder reporting expenses:
Class A 2,896
Class B 1,913
Class T 4,547
Insurance expenses 11,390
Distribution fees:
Class A 10,218
Class B 20,476
TOTAL EXPENSES 409,312
LESS EXPENSES REIMBURSED (22,947)
NET EXPENSES 386,365
INVESTMENT INCOME - NET 454,329
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments 356,971
Change in unrealized appreciation
of investments for the year 1,617,148
NET GAIN ON INVESTMENTS 1,974,119
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 2,428,448
</Table>
STATEMENT OF CHANGES IN NET ASSETS
Year Ended August 31
<Table>
<Caption>
2004 2003
--------------- ---------------
INCREASE IN NET ASSETS FROM OPERATIONS
Investment income - net $ 454,329 $ 523,545
Net realized gain (loss) on investments 356,971 (759,011)
Change in unrealized appreciation 1,617,148 1,981,012
Net increase in net assets
resulting from operations 2,428,448 1,745,546
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income - net
Class A (68,108) (76,409)
Class B (35,072) (40,931)
Class T (365,311) (451,037)
Capital Gains
Class A (45,377) -
Class B (30,287) -
Class T (264,673) -
TOTAL DISTRIBUTIONS TO SHAREHOLDERS (808,828) (568,377)
CAPITAL SHARE TRANSACTIONS - NET
Class A 793,615 79,843
Class B 486,952 128,178
Class T (76,867) (980,917)
TOTAL NET CAPITAL SHARE TRANSACTIONS 1,203,700 (772,896)
TOTAL INCREASE 2,823,320 404,273
NET ASSETS
Beginning of year 27,323,517 26,919,244
End of year $ 30,146,837 $ 27,323,517
Undistributed Net Investment Income $ 74,012 $ 86,180
</Table>
See notes to financial statements.
62
<Page>
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout the periods
indicated.
<Table>
<Caption>
CLASS T SHARES
------------------------------------------------------------------------------
EIGHT MONTHS
YEAR ENDED AUGUST 31, ENDED AUGUST 31, YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
2004 2003 2002 2001 2000 1999
------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $ 17.18 $ 16.42 $ 17.91 $ 19.40 $ 20.67 $ 19.63
Investment income - net 0.29 0.34 0.43 0.31 0.56 0.42
Net realized and unrealized gain
(loss) on investments 1.24 0.77 (1.50) (1.58) 0.01 1.84
------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.53 1.11 (1.07) (1.27) 0.57 2.26
Less distributions from
Investment income - net (0.29) (0.35) (0.42) (0.22) (0.55) (0.42)
Capital gains (0.21) - - - (1.29) (0.80)
------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.50) (0.35) (0.42) (0.22) (1.84) (1.22)
------------------------------------------------------------------------------
Net Asset Value, End of Period $ 18.21 $ 17.18 $ 16.42 $ 17.91 $ 19.40 $ 20.67
==============================================================================
TOTAL RETURN (1) 8.95% 6.95% (6.07)% (6.54)%** 3.64% 11.87%
==============================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets,
end of period (000Os omitted) $ 22,785 $ 21,569 $ 21,631 $ 24,798 $ 28,223 $ 30,146
Ratio of expenses with
reimbursement to average net assets 1.23% 1.25% 1.25% 1.25%* 1.25% 1.25%
Ratio of expenses without
reimbursement to average net assets 1.23% 1.26% 1.27% 1.25%* 1.34% 1.41%
Ratio of net investment income with
reimbursement to average net assets 1.58% 2.08% 2.47% 2.52%* 2.63% 2.15%
Portfolio turnover rate 11.15% 23.83% 25.80% 14.77% 13.17% 18.01%
</Table>
* Ratios annualized
** Returns are not annualized
(1) Does not include the effect of sales charge
(2) Effective June 1, 2002, SM&R has voluntarily agreed to waive or reduce
expenses to 1.30% for Class A and 1.80% for class B.
See notes to financial Statements
63
<Page>
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout the periods
indicated.
<Table>
<Caption>
CLASS A SHARES
----------------------------------------------------------------------------------------
EIGHT MONTHS YEAR ENDED PERIOD FROM JAN. 1
YEAR ENDED AUGUST 31, ENDED AUGUST 31, DECEMBER 31, TO DECEMBER 31,
------------------------------- ---------------- ------------ ------------------
2004 2003 2002 2001 2000 1999
----------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $ 16.65 $ 15.93 $ 17.44 $ 18.93 $ 20.30 $ 19.63
Investment income - net 0.28 0.32 0.39 0.23 0.37 0.47
Net realized and unrealized gain
(loss) on investments 1.18 0.77 (1.47) (1.53) (0.06) 1.47
----------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.46 1.09 (1.08) (1.30) 0.31 1.94
Less distributions from
Investment income - net (0.30) (0.37) (0.43) (0.19) (0.39) (0.47)
Capital gains (0.21) - - - (1.29) (0.80)
----------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.51) (0.37) (0.43) (0.19) (1.68) (1.27)
----------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 17.60 $ 16.65 $ 15.93 $ 17.44 $ 18.93 $ 20.30
========================================================================================
TOTAL RETURN (1) 8.83% 7.02% (6.29)% (6.87)%** 3.35% 10.13%
========================================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of period (000's omitted) $ 4,409 $ 3,419 $ 3,183 $ 2,713 $ 2,512 $ 1,777
Ratio of expenses with reimbursement
to average net assets (2) 1.30% 1.30% 1.45% 1.50%* 1.50% 1.51%
Ratio of expenses without reimbursement
to average net assets 1.64% 1.69% 1.73% 1.50%* 1.92% 1.51%
Ratio of net investment income with
reimbursement to average net assets 1.51% 2.02% 2.27% 1.98%* 2.40% 1.87%
Portfolio turnover rate 11.15% 23.83% 25.80% 14.77% 13.17% 18.01%
<Caption>
CLASS B SHARES
-----------------------------------------------------------------------------------------
EIGHT MONTHS YEAR ENDED PERIOD FROM JAN. 1
YEAR ENDED AUGUST 31, ENDED AUGUST 31, DECEMBER 31, TO DECEMBER 31,
-------------------------------- ---------------- ----------- ------------------
2004 2003 2002 2001 2000 1999
-----------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $ 16.83 $ 16.18 $ 17.72 $ 19.26 $ 20.64 $ 19.63
Investment income -- net 0.20 0.24 0.30 0.20 0.35 0.40
Net realized and unrealized gain
(loss) on investments 1.19 0.72 (1.47) (1.59) (0.08) 1.81
-----------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.39 0.96 (1.17) (1.39) 0.27 2.21
Less distributions from
Investment income -- net (0.23) (0.31) (0.37) (0.15) (0.36) (0.40)
Capital gains (0.21) - - - (1.29) (0.80)
-----------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.44) (0.31) (0.37) (0.15) (1.65) (1.20)
-----------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 17.78 $ 16.83 $ 16.18 $ 17.72 $ 19.26 $ 20.64
=========================================================================================
Total Return (1) 8.33% 6.10% (6.69)% (7.23)%** 2.79% 11.52%
=========================================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of period (000's omitted) $ 2,952 $ 2,336 $ 2,105 $ 1,917 $ 2,081 $ 1,119
Ratio of expenses with reimbursement
to average net assets (2) 1.80% 1.80% 1.95% 2.00%* 2.00% 2.01%
Ratio of expenses without reimbursement
to average net assets 2.13% 2.18% 2.22% 2.00%* 2.23% 2.01%
Ratio of net investment income with
reimbursement to average net assets 1.00% 1.51% 1.77% 1.55%* 1.89% 1.36%
Portfolio turnover rate 11.15% 23.83% 25.80% 14.77% 13.17% 18.01%
</Table>
See notes to financial statements.
64
<Page>
SM&R GOVERNMENT BOND FUND
MANAGER COMMENTARY
[CHART]
SECTOR WEIGHTINGS BY TOTAL INVESTMENTS
<Table>
Financials 1.92%
Materials 3.52%
U.S. Government 92.74%
Canadian Corporation 1.82%
</Table>
A MESSAGE TO OUR SHAREHOLDERS
The SM&R Government Bond Fund is focused on providing competitive levels of
current income through investments in securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities, as well as securities of
corporate issuers deemed by SM&R to be of higher credit quality and financial
strength.
Over the past fiscal year ending August 31, 2004, the Fund has provided a total
return of 3.15% to Class T investors at net asset value. The year-to-date total
return for the eight months ended August 31, 2004 was 1.26%, before sales
charge. The Fund has an average maturity of 3.5 years, a market-weighted average
coupon of 3.87%, and a modified duration of 3.1 years.
The Fund has benefited over the past year from a small exposure to the corporate
sector, but is shorter in duration (measure of price sensitivity of a fixed
income security to an interest rate change of 1%) than its index thus a rise in
interest rates would be expected to negatively affect the Fund less than its
index, and vice versa. Fund performance has suffered in the short run due to the
shorter duration, but the Fund remains well positioned to take advantage of any
rise in interest rates.
A key issue for investors is how rapidly the Federal Reserve will
"normalize" short-term interest rates. The current real overnight rate
is actually negative after inflation is considered. With core
inflation under a 2% rate, the Fed is likely to bring the real rate
to at least a neutral position by year-end, implying a 2% expectation
for the Federal Funds rate. Longer-term, the expectation for
short-term rates is about 1-1/2% above underlying inflation.
The Federal Reserve did as expected and raised short-term rates 25
basis points at the August 10th meeting, following the 25 basis point
hike from the June meeting. The tightening lifted the effective funds
rate to 1-1/2%, a 50% increase from the 40 year low hit in June of
last year. The Fed also signaled its commitment to continue hiking
rates at a "measured pace" even while noting an acknowledged
moderation in economic growth, particularly tied to the rise in
energy prices; disappointment over labor market conditions; and a
transitory rise in inflation. The Fed still remains bullish on the
growth outlook, stating that "the economy nevertheless appears poised
to resume a stronger pace of expansion going forward."
The U.S. economy did slow in the second quarter, when household
spending decelerated in response to a jump in consumer prices. While
recent hurricanes and the oil spike probably preclude an early return
to above-trend growth, financial conditions remain favorable for
continued growth. Corporate profit growth has surpassed revenue growth
for the last four quarters, indicating that
65
<Page>
corporations have relied on productivity and excess capacity rather
than adding jobs and making capital expenditures to drive the bottom
line. However, as capacity is absorbed and productivity gains reach
their limits, a normal rate of capital spending and hiring should
resume.
The liquidity of U.S. markets continues to attract international funds
in an environment of terrorism fears and geopolitical concerns.
However, large trade deficits suggest potential weakness in the
dollar, which will lead to higher return requirements to attract these
funds to U.S. markets.
In general, most fixed income sectors remain close to levels we began the year
with; however volatility remains high. Although the impact of rising oil prices
have increased uncertainty in the bond market, long term inflation expectations
remain stable. We expect 10-year Treasury yields in the 4.40 - 4.70% range at
year-end with a gradual rise toward the 5% level by mid 2005.
Generally, in a rising rate environment, the bond market does not provide
attractive nominal returns in relation to other asset classes, particularly
equities. Even as rates rise, however, bonds will remain an important component
of a well diversified portfolio, and in current market conditions, could
continue offering attractive returns on a risk-adjusted basis. Our Fund is well
positioned for an upward trend in rates. While maturities are laddered, we have
shortened the Fund's duration over the last year in an attempt to provide
greater price protection of holdings.
BEST REGARDS,
By: /s/ Anne M. LeMire
--------------------
ANNE M. LEMIRE, CPA, CFA, PORTFOLIO MANAGER
SM&R GOVERNMENT BOND FUND
[CHART]
SM&R GOVERNMENT BOND FUND
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN THE SM&R GOVERNMENT BOND
FUND, CLASS T, AT OFFERING PRICE, AND THE LIPPER GENERAL U.S. GOVERNMENT FUND
INDEX
<Table>
<Caption>
SM&R GOVERNMENT LIPPER GENERAL
BOND FUND U.S. GOVERNMENT FUND INDEX
9/1/1994 $ 9,554 $ 10,000
8/31/1995 $ 10,686 $ 10,967
8/31/1996 $ 10,967 $ 11,261
8/31/1997 $ 11,995 $ 12,310
8/31/1998 $ 12,992 $ 13,592
8/31/1999 $ 13,091 $ 13,414
8/31/2000 $ 13,822 $ 14,367
8/31/2001 $ 15,467 $ 15,984
8/31/2002 $ 16,407 $ 17,302
8/31/2003 $ 16,811 $ 17,588
8/31/2004 $ 17,341 $ 18,483
</Table>
AVERAGE ANNUAL RETURN
Includes maximum sales charge through 8/31/04. Inception date of these classes
is 01/01/99.
<Table>
<Caption>
SMALL ONE THREE SINCE
CLASS YEAR YEAR INCEPTION
- --------------------------------------------------
A (1.79)% 4.54% 3.78%
B (0.41)% 5.05% 4.20%
</Table>
AVERAGE ANNUAL RETURN
Includes maximum sales charge of 4.5% through 8/31/04 for Class T Shares
<Table>
10 Year 5.66%
5 Year 4.81%
1 Year (1.49)%
</Table>
SM&R Government Bond Fund performance figures reflect reinvestment of all
dividends and capital gains distributions and changes in net asset value.
Returns for Class A and B will vary from Class T as shown above due to
differences in expense and sales charge structure. Average annual returns are
based on the maximum sales charge and reinvestment of all dividends and capital
gains. The average annual returns for Class A shares reflect the current maximum
initial sales charge of 4.75%. Class B shares reflect the applicable contingent
deferred sales charge (CDSC), which is 8% in the first year, declines to 1% in
the third year, and is eliminated thereafter.
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL
FLUCTUATE SO THAT THE INVESTORS SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN
THE PERFORMANCE DATE QUOTED. TO OBTAIN PERFORMANCE DATA CURRENT TO THE MOST
RECENT MONTH-END, PLEASE CALL SM&R AT (877) 239-2049.
Returns shown do not reflect the deduction of taxes that a shareholder would pay
on fund distributions or redemption of fund shares.
66
<Page>
SM&R GOVERNMENT BOND FUND
HOLDINGS
SCHEDULE OF INVESTMENTS August 31, 2004
<Table>
<Caption>
MATURITY INTEREST/STATED FACE
DATE RATE (%) AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS
DIVERSIFIED FINANCIALS 1.91%
MBNA Master Credit Card Trust 02/15/12 7.000 $ 500,000 $ 571,117
METALS & MINING -- 3.51%
Carpenter Technology Corporation 05/15/13 6.625 1,000,000 1,046,594
TOTAL CORPORATE BONDS -- 5.42%
(Cost $1,515,640) 1,617,711
----------------
FOREIGN BONDS
U.S. DOLLAR DENOMINATED FOREIGN GOVERNMENT BONDS -- 1.81%
Province of Quebec, Canada 02/15/09 5.750 500,000 541,753
TOTAL FOREIGN BONDS -- 1.81%
(Cost $471,526) 541,753
----------------
</Table>
67
<Page>
U.S. GOVERNMENT AGENCY & U.S. GOVERNMENT SECURITIES
<Table>
<Caption>
MATURITY INTEREST/STATED FACE
DATE RATE (%) AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY SECURITIES -- 33.77%
Federal Home Loan Bank 10/25/05 6.230 $ 150,000 $ 156,980
Federal Home Loan Mortgage Corporation (a) 08/10/05 6.750 165,000 172,142
Federal Home Loan Mortgage Corporation 09/15/05 2.875 500,000 503,898
Federal Home Loan Mortgage Corporation 03/15/07 4.875 1,600,000 1,679,376
Federal Home Loan Mortgage Corporation 03/16/07 2.700 1,585,000 1,579,433
Federal Home Loan Mortgage Corporation 09/15/07 3.500 2,000,000 2,025,634
Federal Home Loan Mortgage Corporation 11/15/13 4.875 500,000 511,893
Federal National Mortgage Association 08/15/08 3.250 1,200,000 1,193,669
Federal National Mortgage Association 02/01/11 6.250 1,850,000 2,043,528
Freddie Mac, Series 1205-G
Government National Mortgage Association, 03/15/07 7.000 85,281 86,105
Series 2002-60-L 03/20/27 6.000 115,079 114,938
Private Export Funding 01/15/10 7.200 15,000 17,388
10,084,984
U.S. GOVERNMENT SECURITIES -- 43.15%
U.S. Treasury Bonds 02/28/06 1.625 2,000,000 1,983,906
U.S. Treasury Notes 05/15/06 6.875 1,120,000 1,205,882
U.S. Treasury Notes 11/15/06 2.625 2,800,000 2,808,532
U.S. Treasury Notes 02/15/08 3.000 2,000,000 2,007,188
U.S. Treasury Notes 05/15/08 2.625 3,850,000 3,803,230
U.S. Treasury Notes 05/15/08 5.625 500,000 546,133
U.S. Treasury Notes 11/15/08 4.750 500,000 531,894
12,886,765
TOTAL U.S. GOVERNMENT AGENCY
& U.S. GOVERNMENT SECURITIES -- 76.92%
(Cost $23,093,107) 22,971,749
</Table>
68
<Page>
SCHEDULE OF INVESTMENTS August 31, 2004
U.S. GOVERNMENT AND AGENCY SHORT TERM OBLIGATIONS
<Table>
<Caption>
MATURITY INTEREST/STATED FACE
DATE RATE (%) AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------------
GOVERNMENT AGENCIES - 15.32%
Federal Farm Credit Bank 09/01/04 1.470 $ 2,314,000 $ 2,314,000
Federal Home Loan Bank 09/01/04 1.430 993,000 993,000
Federal Home Loan Bank 09/08/04 1.475 350,000 349,900
Federal Home Loan Bank 09/17/04 1.420 349,000 348,780
Federal Home Loan Mortgage Corporation 09/01/04 1.320 250,000 250,000
Federal Home Loan Mortgage Corporation 09/08/04 1.320 150,000 149,961
Federal National Mortgage Association 09/01/04 1.480 169,000 169,000
TOTAL U.S.GOVERNMENT AND
AGENCY SHORT-TERM OBLIGATIONS -- 15.32%
(Cost $4,574,641) 4,574,641
</Table>
MONEY MARKET FUNDS
<Table>
<Caption>
SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------------
SM&R Money Market Fund, 0.98% (b) 161 161
TOTAL MONEY MARKET FUNDS -- 0.00%
(Cost $161) 161
TOTAL INVESTMENTS -- 99.47%
(Cost $29,655,075) 29,706,015
CASH AND OTHER ASSETS, LESS LIABILITIES -- 0.53% 158,353
TOTAL NET ASSETS -- 100.00% $ 29,864,368
================
</Table>
Notes to Schedule of Investments.
(a) Long term obligations that will mature in less than one year.
(b) The rate quoted is the annualized seven day yield of the fund at August 31,
2004. A complete listing of the fund's holdings are included in these
financial statements. This fund and SM&R Government Bond Fund are
affiliated by having the same investment adviser.
See notes to financial statements.
69
<Page>
FINANCIALS
STATEMENT OF ASSETS & LIABILITIES
August 31, 2004
<Table>
ASSETS
Investment in unaffiliated securities, at value (Cost $29,654,914) $ 29,705,854
Investment in affiliated money market funds (Cost $161) 161
Prepaid expenses 15,062
Receivable for:
Capital stock sold 7,292
Interest 233,522
Expense reimbursement 8,110
Other assets 2,782
TOTAL ASSETS 29,972,783
LIABILITIES
Capital stock reacquired 72,022
Distribution payable 898
Accrued:
Investment advisory fee 13,020
Service fee 6,510
Distribution fee 2,875
Other liabilities 13,090
TOTAL LIABILITIES 108,415
NET ASSETS (applicable to shares outstanding) $ 29,864,368
NET ASSETS ARE COMPRISED OF THE FOLLOWING:
Capital (par value and additional paid-in) $ 29,796,181
Undistributed net investment income 19
Accumulated net realized gain on investments 17,228
Net unrealized appreciation of investments 50,940
NET ASSETS $ 29,864,368
NET ASSETS:
Class A $ 982,563
Class B $ 1,131,900
Class T $ 27,749,905
TOTAL NET ASSETS $ 29,864,368
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 100,001,150
Outstanding 93,005
Class B:
Authorized 100,000,000
Outstanding 107,251
Class T:
Authorized 23,000,000
Outstanding 2,660,840
Class A:
Net asset value and redemption price per share $ 10.56
Offering price per share:
(Net Assets value of $10.56/95.25%) $ 11.09
Class B:
Net asset value and offering price per share $ 10.55
Class T:
Net asset value and redemption price per share $ 10.43
Offering price per share:
(Net Assets value of $10.43/95.5%) $ 10.92
</Table>
See notes to financial statements.
70
<Page>
<Table>
<Caption>
STATEMENTS OF OPERATIONS
Year Ended August 31, 2004
INVESTMENT INCOME
Interest $ 859,884
Interest from affiliated money market funds 243
TOTAL INVESTMENT INCOME 860,127
EXPENSES
Investment advisory fees 151,002
Service fees 75,501
Professional fees 12,807
Custody and transaction fees 7,788
Directors' fees 7,820
Qualification fees 6,070
Class A 7,933
Class B 4,429
Class T 7,837
Shareholder reporting expenses:
Class A 1,327
Class B 859
Class T 2,858
Insurance expenses 13,792
Distribution fees:
Class A 2,670
Class B 9,877
TOTAL EXPENSES 312,570
LESS EXPENSES REIMBURSED (85,560)
NET EXPENSES 227,010
INVESTMENT INCOME - NET 633,117
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments 16,973
Change in unrealized appreciation of investments for the year 287,515
NET GAIN ON INVESTMENTS 304,488
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 937,605
</Table>
<Table>
<Caption>
STATEMENT OF CHANGES IN NET ASSETS
Year Ended August 31
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
2004 2003
-------------- ---------------
Investment income - net $ 633,117 $ 1,106,154
Net realized gain on investments 16,973 1,246,280
Change in unrealized appreciation (depreciation) 287,515 (1,625,574)
Net increase in net assets resulting from operations 937,605 726,860
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income - net
Class A (22,707) (45,677)
Class B (21,638) (43,390)
Class T (588,821) (1,026,403)
Capital gains
Class A (29,006) -
Class B (39,495) -
Class T (770,369) -
TOTAL DISTRIBUTIONS TO SHAREHOLDERS (1,472,036) (1,115,470)
CAPITAL SHARE TRANSACTIONS- NET
Class A (240,334) 123,301
Class B (488,459) 908,563
Class T 298,110 1,483,521
TOTAL NET CAPITAL SHARE TRANSACTIONS (430,683) 2,515,385
TOTAL INCREASE (DECREASE) (965,114) 2,126,775
NET ASSETS
Beginning of Year 30,829,482 28,702,707
End of Year $ 29,864,368 $ 30,829,482
Undistributed Net Investment Income $ 19 $ 68
</Table>
See notes to financial statements.
71
<Page>
FINANCIAL HIGHLIGHTS
Year Ended August 31
Selected data for a share of capital stock outstanding throughout the years
indicated.
<Table>
<Caption>
CLASS T SHARES
---------------------------------------------------------------------
2004 2003 2002 2001 2000
---------------------------------------------------------------------
Net Asset Value, Beginning of Year $ 10.62 $ 10.75 $ 10.64 $ 10.05 $ 10.10
Investment income - net 0.22 0.40 0.52 0.58 0.59
Net realized and unrealized gain (loss) on investments 0.11 (0.13) 0.11 0.59 (0.05)
---------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.33 0.27 0.63 1.17 0.54
Less distributions from
Investment income - net (0.22) (0.40) (0.52) (0.58) (0.59)
Capital gains (0.30) - - - -
---------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.52) (0.40) (0.52) (0.58) (0.59)
---------------------------------------------------------------------
Net Asset Value, End of Year $ 10.43 $ 10.62 $ 10.75 $ 10.64 $ 10.05
=====================================================================
TOTAL RETURN (1) 3.15% 2.46% 6.08% 11.90% 5.58%
=====================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year (000's omitted) $ 27,750 $ 27,946 $ 26,807 $ 25,278 $ 22,928
Ratio of expenses with reimbursement
to average net assets (2) 0.73% 0.73% 0.93% 0.97% 0.98%
Ratio of expenses without reimbursement
to average net assets 0.95% 0.91% 0.95% 0.97% 0.98%
Ratio of net investment income with
reimbursement to average net assets 2.12% 3.60% 4.92% 5.55% 5.91%
Portfolio turnover rate 50.62% 99.26% 25.87% 14.01% 30.87%
</Table>
(1) Does not include the effect of sales charge
(2) Effective June 1, 2002, SM&R has voluntarily agreed to waive or reduce
expenses to 0.73% for classes T and A; and 1.23% for class B.
See notes to financial statements.
72
<Page>
FINANCIAL HIGHLIGHTS
Year Ended August 31
Selected data for a share of capital stock outstanding throughout the years
indicated.
<Table>
<Caption>
CLASS A SHARES
---------------------------------------------------------------------
2004 2003 2002 2001 2000
---------------------------------------------------------------------
Net Asset Value, Beginning of Year $ 10.75 $ 10.88 $ 10.75 $ 10.14 $ 10.20
Investment income - net 0.23 0.40 0.48 0.53 0.57
Net realized and unrealized gain (loss) on investments 0.11 (0.13) 0.13 0.61 (0.06)
---------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.34 0.27 0.61 1.14 0.51
Less distributions from
Investment income - net (0.23) (0.40) (0.48) (0.53) (0.57)
Capital gains (0.30) - - - -
---------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.53) (0.40) (0.48) (0.53) (0.57)
---------------------------------------------------------------------
Net Asset Value, End of Year $ 10.56 $ 10.75 $ 10.88 $ 10.75 $ 10.14
=====================================================================
TOTAL RETURN (1) 3.14% 2.51% 5.82% 11.46% 5.15%
======================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year (000's omitted) $ 983 $ 1,240 $ 1,137 $ 626 $ 127
Ratio of expenses with reimbursement
to average net assets (2) 0.73% 0.73% 1.12% 1.25% 1.25%
Ratio of expenses without reimbursement
to average net assets 2.04% 1.75% 1.80% 1.27% 1.29%
Ratio of net investment income with
reimbursement to average net assets 2.13% 3.62% 4.73% 5.25% 5.68%
Portfolio turnover rate 50.62% 99.26% 25.87% 14.01% 30.87%
</Table>
See notes to financial statements.
73
<Page>
FINANCIAL HIGHLIGHTS
Year Ended August 31
Selected data for a share of capital stock outstanding throughout the years
indicated.
<Table>
<Caption>
CLASS B SHARES
---------------------------------------------------------------------
2004 2003 2002 2001 2000
---------------------------------------------------------------------
Net Asset Value, Beginning of Year $ 10.74 $ 10.86 $ 10.74 $ 10.14 $ 10.16
Investment income - net 0.17 0.33 0.43 0.48 0.49
Net realized and unrealized gain (loss) on investments 0.11 (0.12) 0.12 0.60 (0.02)
---------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.28 0.21 0.55 1.08 0.47
Less distributions from
Investment income - net (0.17) (0.33) (0.43) (0.48) (0.49)
Capital gains (0.30) - - - -
---------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.47) (0.33) (0.43) (0.48) (0.49)
---------------------------------------------------------------------
Net Asset Value, End of Year $ 10.55 $ 10.74 $ 10.86 $ 10.74 $ 10.14
=====================================================================
TOTAL RETURN (1) 2.65% 1.96% 5.27% 10.88% 4.74%
=====================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year (000's omitted) $ 1,131 $ 1,643 $ 758 $ 211 $ 78
Ratio of expenses with reimbursement
to average net assets (2) 1.23% 1.23% 1.57% 1.75% 1.75%
Ratio of expenses without reimbursement
to average net assets 2.06% 1.95% 2.61% 1.79% 1.84%
Ratio of net investment income with
reimbursement to average net assets 1.65% 2.99% 4.20% 4.69% 5.12%
Portfolio turnover rate 50.62% 99.26% 25.87% 14.01% 30.87%
</Table>
(1) Does not include the effect of sales charge
(2) Effective June 1, 2002, SM&R has voluntarily agreed to waive or reduce
expenses to 0.73% for classes T and A; and 1.23% for class B.
See notes to financial statements.
74
<Page>
SM & R TAX FREE FUND
MANAGER COMMENTARY
[CHART]
SECTOR WEIGHTINGS
BY
TOTAL INVESTMENTS
<Table>
GENERAL OBLIGATIONS 37.43%
UTILITIES 15.88%
EDUCATION 16.43%
TRANSPORTATION 14.67%
MISCELLANEOUS 6.35%
HEALTH CARE 5.30%
POLLUTION 3.40%
HOUSING 0.54%
</Table>
A MESSAGE TO OUR SHAREHOLDERS
The SM&R Tax Free Fund is a well-diversified portfolio designed to produce
monthly tax-free dividends to investors seeking current income, while minimizing
federal tax liability. The Fund focuses primarily on issuers of the highest
quality rating and often in insured issues. We analyze the credit worthiness and
financial strength of both the insurers and the underlying issuers in an effort
to minimize the default risk within the Fund to a level below the municipal
market in general. Our overall average credit rating is maintained at AA because
we do not believe that the market adequately compensates for the risk profile of
lower rated issuers.
Over the past fiscal year ending August 31, 2004, the Fund has provided a total
return of 5.20% to Class T investors at net asset value. The year-to-date total
return for the eight months ended August 31, 2004 was 1.72%, before sales
charge, for the same share class. The Fund has an average maturity of 9.3 years,
a market-weighted average coupon of 5.00%, and a modified duration of 7 years.
Because the Fund maintains a very high average quality, returns sometimes lag
general municipal bond indices. This happens because these indices are much more
likely to feature lower credit quality bonds in the Fund, which, over the short
run, can lead to increased returns. We have long preferred to just maintain
consistently high quality.
The average maturity and duration of the Fund reflect our belief in the value of
the intermediate maturity range on the yield curve. The slope of the municipal
curve is quite steep, providing payment for accepting the risk of intermediate
maturities. Our rationale for accepting this interest rate risk in the Fund is
twofold. First, from a risk/reward standpoint, the additional yield provided by
the steepness of the curve far outweighs the risk/reward profile of migrating
down the credit quality ladder for additional yield. Secondly, on average,
municipal yields display only 60% of the volatility of taxables in both rising
and declining interest rate environments. Therefore, if rates rise as we expect,
positions in municipal bonds should be attractive in comparison to government or
corporate bonds, whose prices should fall more dramatically.
Municipal bonds remain a core holding in the portfolio of investors in many tax
brackets. On an after-tax basis, municipal bonds can provide returns that equal
or exceed taxable alternatives, often with less credit risk.
BEST REGARDS,
/s/ Anne M. LeMire
Anne M. LeMire, CPA, CFA, Portfolio Manager
SM&R Tax Free Fund
75
<Page>
SECURITIES MANAGEMENT AND RESEARCH,INC.
[CHART]
SM&R TAX FREE FUND
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN THE SM&R TAX FREE FUND
CLASS T, AT OFFERING PRICE, AND THE LIPPER GENERAL MUNICIPAL DEBT INDEX
<Table>
<Caption>
SM&R TAX FREE FUND LIPPER GENERAL MUNICIPAL DEBT INDEX
- --------------------- -----------------------------------
9/1/1994 $ 9,553 $ 10,000
8/31/1995 $ 10,427 $ 10,777
8/31/1996 $ 10,968 $ 11,317
8/31/1997 $ 11,912 $ 12,361
8/31/1998 $ 12,935 $ 13,424
8/31/1999 $ 12,899 $ 13,268
8/31/2000 $ 13,693 $ 13,981
8/31/2001 $ 15,007 $ 15,385
8/31/2002 $ 15,793 $ 16,106
8/31/2003 $ 16,168 $ 16,520
8/31/2004 $ 17,009 $ 17,650
</Table>
AVERAGE ANNUAL RETURN
INCLUDES MAXIMUM SALES CHARGE THROUGH 8/31/04. INCEPTION DATE OF THESE CLASSES
IS 01/01/99.
<Table>
<Caption>
SHARE ONE THREE SINCE
CLASS YEAR YEAR INCEPTION
- -------- -------- ------ ---------
A 0.16% 4.50% 3.52%
B 1.46% 5.03% 3.90%
</Table>
AVERAGE ANNUAL RETURN
INCLUDES MAXIMUM SALES CHARGE OF 4.5% THROUGH 8/31/04 FOR CLASS T SHARES.
<Table>
10 YEAR 5.45%
5 YEAR 4.72%
1 YEAR 0.46%
</Table>
SM&R Tax Free Fund Performance figures reflect reinvestment of all dividends and
capital gains distributions and changes in net asset value. Returns for Class A
and B will vary from Class T as shown above due to differences in expense and
sales charge structure. Average annual returns are based on the maximum sales
charge and reinvestment of all dividends and capital gains. The average annual
returns for Class A shares reflect the current maximum initial sales charge of
4.75%. Class B shares reflect the applicable contingent deferred sales charge
(CDSC), which is 3% in the first year, declines to 1% in the third year, and is
eliminated thereafter.
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL
FLUCTUATE SO THAT THE INVESTORS SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE
PERFORMANCE DATA QUOTED. TO OBTAIN PERFORMANCE DATA CURRENT TO THE MOST RECENT
MONTH-END, PLEASE CALL SM&R AT (877) 239-2049.
Returns shown do not reflect the deduction of taxes that a shareholder would pay
on fund distribution or redemption of fund shares.
76
<Page>
SM&R TAX FREE FUND
HOLDINGS
<Table>
<Caption>
MUNICIPAL BONDS MATURITY INTEREST/STATED FACE
RATING (a) DATE RATE (%) AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
CALIFORNIA -- 0.19%
A3/A California State General Obligation Bonds Unlimited 06/01/11 5.250 $ 25,000 $ 26,558
- ---------------------------------------------------------------------------------------------------------------------------------
FLORIDA -- 9.31%
Aaa/AAA Dade County, Florida Water & Sewer System
Revenue Bonds 10/01/16 5.375 400,000 438,400
Aaa/AAA Miami-Dade County Solid Waste System
Revenue Bonds 10/01/18 4.750 400,000 412,908
Aaa/AAA Miami Dade County, Florida Expressway Authority Toll
System Revenue Bonds 07/01/29 6.375 400,000 474,384
1,325,692
- ---------------------------------------------------------------------------------------------------------------------------------
ILLINOIS -- 8.14%
Aaa/AAA Chicago, Illinois-General Obligation Bonds Unlimited 01/01/25 5.125 100,000 101,201
Aaa/AAA Chicago, Illinois-Park District General Obligation
Bonds Unlimited, Series C 01/01/16 4.850 230,000 242,468
Aaa/AAA Regional Transportation Authority of Illinois Revenue
Bonds, Refunding MBIA 06/01/18 5.500 200,000 209,086
Aaa/NR Rockford, Illinois-General Obligation Bonds Unlimited 12/15/18 4.500 180,000 182,954
Aaa/AAA State of Illinois Build Illinois Bonds, Sales Tax Revenue
Bonds, Series V 06/15/17 6.375 200,000 211,660
Aaa/AAA State of Illinois General Obligation Bonds Unlimited 03/01/19 5.000 200,000 210,784
1,158,653
- ---------------------------------------------------------------------------------------------------------------------------------
INDIANA -- 1.12%
Aaa/AAA South Bend, Indiana-Building Corporation
Revenue Bonds 02/01/13 4.500 150,000 160,208
</Table>
77
<Page>
<Table>
<Caption>
MUNICIPAL BONDS MATURITY INTEREST/STATED FACE
RATING (a) DATE RATE (%) AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LOUISIANA -- 8.35%
Aaa/AAA Louisiana Public Facilities Authority Hospital
Revenue Bonds, Series C 07/01/19 5.000 $ 400,000 $ 416,604
Aaa/AAA Monroe, Louisiana Sales and Use Tax Revenue Bonds 07/01/16 4.000 200,000 201,744
Aaa/AAA New Orleans, Louisiana Sewer Service
Revenue Bonds 06/01/18 5.000 300,000 320,001
Ba1/NR Plaquemines, Louisiana-Port, Harbour & Terminal District,
Marine Terminal Facilities Revenue Bonds 09/01/07 5.000 250,000 249,553
1,187,902
- ---------------------------------------------------------------------------------------------------------------------------------
MASSACHUSETTS -- 3.44%
Aaa/AAA Massachusetts State Water Revenues Authority,
General Purpose-Series A 11/01/21 5.500 450,000 489,735
- ---------------------------------------------------------------------------------------------------------------------------------
NEW MEXICO -- 0.73%
Aaa/AAA Central Consolidated School District No.22 San Juan
County, New Mexico General Obligation School
Building Bonds 08/15/09 5.300 100,000 103,417
- ---------------------------------------------------------------------------------------------------------------------------------
NEW YORK -- 8.24%
Aaa/AAA New York City, New York-General Obligation
Bonds Unlimited, Series J 02/15/07 5.000 100,000 105,769
A2/A New York City, New York General Obligation
Bonds Unlimited, Series I 08/01/18 5.000 200,000 206,464
Aa2/AA+ New York City, New York-Transitional Financial
Authority Revenue Bonds, Series C 05/01/19 5.000 250,000 261,415
</Table>
78
<Page>
<Table>
<Caption>
MUNICIPAL BONDS MATURITY INTEREST/STATED FACE
RATING (a) DATE RATE (%) AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
NEW YORK -- 8.24% (cont'd)
Aaa/AAA New York-State Tollway Authority
Highway & Bridge Revenue Bonds, Series B 04/01/10 3.850 $ 200,000 $ 209,778
Aa3/AAA Triborough Bridge & Tunnel Authority, New York,
Revenue Bonds, General Purpose Series B 01/01/27 5.200 350,000 390,016
1,173,442
- ---------------------------------------------------------------------------------------------------------------------------------
OHIO -- 3.03%
Aaa/AAA Franklin County, Ohio-General Obligation Bonds Limited 12/01/08 5.100 300,000 322,773
Aaa/AAA Franklin County, Ohio-General Obligation Bonds Limited 12/01/11 5.300 100,000 108,023
430,796
- ---------------------------------------------------------------------------------------------------------------------------------
OKLAHOMA -- 0.18%
Aaa/NR Oklahoma Housing Finance Agency Single Family
Mortgage Revenue Bonds (Homeownership Loan
Program), 1994 Series A-1 (b) 09/01/07 6.250 25,000 25,163
- ---------------------------------------------------------------------------------------------------------------------------------
TEXAS -- 39.22%
Aaa/AAA Aransas County, Texas Correctional Facility Improvements
General Obligation Bonds Limited 02/15/13 3.875 250,000 255,887
Aaa/AAA Austin, Texas-Community College District
Revenue Bonds 02/01/10 4.000 100,000 105,270
Aaa/AAA Austin, Texas-Independent School District General
Obligation Bonds Unlimited Series A 08/01/12 3.750 150,000 153,426
Aaa/AAA Baytown, Texas Water and Sewer Revenue Bonds 02/01/14 5.950 100,000 101,890
Aaa/AAA City of Austin, Texas-Combined Utility Systems
Revenue Refunding Bonds, Series 1994 05/15/16 6.250 80,000 82,325
</Table>
79
<Page>
<Table>
<Caption>
MUNICIPAL BONDS MATURITY INTEREST/STATED FACE
RATING (a) DATE RATE (%) AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
TEXAS -- 39.22% (cont'd)
Aaa/AAA College Station, Texas Utility Systems
Revenue Bonds 02/01/13 4.125 $ 200,000 $ 207,608
Aaa/AAA College Station, Texas Utility Systems
Revenue Bonds 02/01/14 4.250 65,000 67,294
Aaa/AAA Collin County, Texas Community College District,
Consolidated Fund, Revenue Bonds 02/01/15 5.250 400,000 424,480
Aaa/AAA Dallas-Fort Worth International Airport-Dallas-Fort
Worth Regional Airport, Joint Revenue Refunding
Bonds, Series 1994A 11/01/10 6.000 100,000 100,704
Aaa/AAA Dallas, Texas Independent School District,
General Obligation Bonds Unlimited 02/15/09 4.200 100,000 106,408
Aaa/AAA El Paso, Texas-Public Improvement, General Obligation
Bonds Limited 08/15/17 4.000 270,000 268,645
Aaa/NR Flower Mound, Texas Refunding and Improvement,
General Obligation Bonds Unlimited 03/01/17 5.500 200,000 214,424
Aaa/NR Galveston County, Texas-Public Improvements,
General Obligation Bonds Unlimited 02/01/10 4.300 25,000 26,690
Aaa/NR Galveston County, Texas-Public Improvements,
General Obligation Bonds Limited 02/01/11 4.375 125,000 133,531
Aa1/AA+ Harris County, Texas Tax and Revenue Certificates
of Obligation, Series 1994 10/01/13 6.100 125,000 125,499
Aaa/AAA Jefferson County, Texas-Public Improvement Certificates
of Obligation, Series B 08/01/16 4.125 255,000 257,458
Aaa/AAA League City, Texas-Public Improvements,
General Obligation Bonds Limited 02/15/13 4.750 100,000 107,867
Aaa/AAA Lubbock County, Texas General
Obligation Bonds Limited 02/15/17 5.500 250,000 279,142
</Table>
80
<Page>
<Table>
<Caption>
MUNICIPAL BONDS MATURITY INTEREST/STATED FACE
RATING (a) DATE RATE (%) AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
TEXAS -- 39.22% (cont'd)
Aaa/AAA Lubbock, Texas Municipal Drainage Utility General
Obligation Bonds Limited 02/15/14 4.000 $ 250,000 $ 254,827
Aaa/AAA Mission Texas Consolidated Independent School
District-General Obligation Bonds Unlimited 02/15/18 4.500 200,000 201,972
Aaa/AAA Montgomery County, Texas-Public Improvement
General Obligation Bonds Limited 03/01/12 4.000 250,000 260,362
Aaa/AAA Rockwell, Texas-Waterworks & Sewer
General Obligation Bonds Limited 08/01/11 3.700 115,000 118,195
Aaa/AAA Round Rock, Texas-Independent School District Refunding
and Improvement General Obligation Bonds Unlimited 08/01/11 4.400 250,000 262,635
Aaa/AAA San Antonio, Texas-River Authority Sewer Refunding
and Improvement Martinez Salatrillo, Revenue Bonds 07/01/12 3.750 100,000 102,317
Aaa/NR Tarrant County Health Facilities Development
Corporation-Health System Revenue Bonds,
(Harris Methodist Health System), Series 1994 (c) 09/01/14 6.000 200,000 236,016
Aa1/AA+ Texas A&M University Revenue and Financing System
Revenue Refunding Bonds, Series A 05/15/17 5.000 250,000 268,782
Aaa/AAA Texas Turnpike Authority-Dallas North Tollway System
Revenue Bonds, Series 1995 (President George
Bush Turnpike) 01/01/15 5.400 100,000 106,866
Aaa/AAA University of Texas Permanent University Fund
Revenue Bonds, Prerefunded Series A 07/01/13 6.250 45,000 53,483
Aaa/AAA University of Texas Permanent University Fund
Revenue Bonds, Prerefunded-Series A To 01/01/2012 07/01/13 6.250 55,000 65,528
Aaa/AAA University of Texas Permanent University Fund
Revenue Bonds, Prerefunded-Series A To 01/01/2013 07/01/13 6.250 55,000 66,024
Aaa/AAA Waco, Texas-General Obligation
Bonds Limited 02/01/16 4.000 250,000 250,153
</Table>
81
<Page>
<Table>
<Caption>
MUNICIPAL BONDS MATURITY INTEREST/STATED FACE
RATING (a) DATE RATE (%) AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
TEXAS -- 39.22% (cont'd)
Aaa/NR Weslaco, Texas Independent School District
General Obligation Bonds 02/15/13 5.650 $ 100,000 $ 105,264
Aaa/AAA West University Place, Texas-General Obligation
Bonds Limited, Permanent Improvement 02/01/14 5.650 100,000 105,542
NR/AAA Wylie, Texas Independent School District General
Obligation Bonds Unlimited 08/15/12 4.375 100,000 105,853
5,582,367
- ---------------------------------------------------------------------------------------------------------------------------------
UTAH -- 0.29%
Aaa/AAA Utah Housing Finance Agency Single Family
Mortgage Bonds, 1995 Issue A, (Federally
Insured or Guaranteed Mortgage Loans) (b) 07/01/12 7.150 5,000 5,133
Aaa/NR Utah State Housing Financial Agency
Single Family Mortgage Bonds, Series F1 07/01/13 6.000 15,000 15,321
Aa2/AA Utah State Housing Financial Agency-Single Family
Revenue Bonds (b) 07/01/21 6.000 20,000 20,191
40,645
- ---------------------------------------------------------------------------------------------------------------------------------
WASHINGTON -- 4.00%
Aaa/AAA Seattle, Washington-Municipal Light & Power
Revenue Bonds, Series B 06/01/24 5.000 100,000 101,768
Aa1/AA State of Washington-General Obligation Bonds,
Series 1994B 09/01/16 6.000 100,000 100,000
Aa1/AA State of Washington General Obligation Bonds Unlimited,
Series B 05/01/18 5.500 300,000 340,272
Aaa/AAA Washington State Public Power Supply System Nuclear
Project Number 1 Refunding Revenue Bonds, Series C 07/01/10 5.500 25,000 27,049
569,089
TOTAL MUNICIPAL BONDS -- 86.24%
(Cost $11,550,881) 12,273,667
</Table>
82
<Page>
SM&R TAX FREE FUND
HOLDINGS
SCHEDULE OF INVESTMENTS August 31, 2004
U S GOVERNMENT AND AGENCY
SHORT-TERM OBLIGATIONS
<Table>
<Caption>
MATURITY INTEREST/STATED FACE
DATE RATE (%) AMOUNT VALUE
-------------------------------------------------------
GOVERNMENT AGENCIES -- 12.83%
Federal Home Loan Bank 09/03/04 1.450 $ 428,000 $ 427,965
Federal Home Loan Bank 09/03/04 1.490 700,000 699,942
Federal Home Loan Bank 09/15/04 1.460 400,000 399,773
Federal National Mortgage Association 09/01/04 1.410 299,000 299,000
TOTAL U S GOVERNMENT AND AGENCY
SHORT-TERM OBLIGATIONS -- 12.83%
(Cost $1,826,680) 1,826,680
<Caption>
MONEY MARKET FUNDS SHARES VALUE
--------------------------
SM&R Money Market Fund, 0.98% (d) 98 98
TOTAL MONEY MARKET FUNDS -- 0.00%
(Cost $98) 98
TOTAL INVESTMENTS -- 99.07%
(Cost $13,377,659) 14,100,445
CASH AND OTHER ASSETS,
LESS LIABILITIES -- 0.93%
131,902
TOTAL NET ASSETS -- 100.00% $ 14,232,347
============
</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.
(d) The rate quoted is the annualized seven-day yield of the fund at August 31,
2004. A complete listing of the fund's holdings are included in these
financial statements. This fund and SM&R Tax Free Fund are affiliated by
having the same investment adviser.
See notes to financial statements.
83
<Page>
FINANCIALS
STATEMENT OF ASSETS & LIABILITIES
August 31, 2004
<Table>
ASSETS
Investment in unaffiliated securities,
at value (Cost $13,377,561) $ 14,100,347
Investment in affiliated
money market funds(Cost $98) 98
Prepaid expenses 16,481
Receivable for:
Capital stock sold 200
Interest 128,959
Expense reimbursement 4,902
Other assets 3,211
TOTAL ASSETS 14,254,198
LIABILITIES
Distribution payable 2,712
Accrued:
Investment advisory fee 6,193
Service fee 3,097
Distribution fee 1,424
Other liabilities 8,425
TOTAL LIABILITIES 21,851
NET ASSETS (applicable to shares outstanding) $ 14,232,347
NET ASSETS ARE COMPRISED OF THE FOLLOWING:
Capital (par value and additional paid-in) $ 13,507,003
Accumulated net realized gain on investments 2,558
Net unrealized appreciation of investments 722,786
NET ASSETS $ 14,232,347
NET ASSETS:
Class A $ 542,502
Class B $ 536,101
Class T $ 13,153,744
TOTAL NET ASSETS $ 14,232,347
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 100,000,101
Outstanding 50,171
Class B:
Authorized 100,000,000
Outstanding 49,608
Class T:
Authorized 21,000,000
Outstanding 1,227,397
Class A:
Net asset value and redemption price per share $ 10.81
Offering price per share:
(Net Assets value of $10.81/95.25%) $ 11.35
Class B:
Net asset value and offering price per share $ 10.81
Class T:
Net asset value and redemption price per share $ 10.72
Offering price per share:
(Net Assets value of $10.72/95.5%) $ 11.23
</Table>
See notes to financial statements.
84
<Page>
STATEMENT OF OPERATIONS
Year Ended August 31, 2004
<Table>
INVESTMENT INCOME
Interest $ 664,244
Interest from affiliated money market funds --
TOTAL INVESTMENT INCOME 664,244
EXPENSES
Investment advisory fees 72,508
Service fees 36,254
Professional fees 7,707
Custody and transaction fees 6,321
Directors' fees 6,331
Qualification fees 4,860
Class T 7,295
Shareholder reporting expenses:
Class A 259
Class B 191
Class T 818
Insurance expenses 7,723
Distribution fees:
Class A 1,440
Class B 4,402
TOTAL EXPENSES 156,109
LESS EXPENSES REIMBURSED (44,426)
NET EXPENSES 111,683
INVESTMENT INCOME -- NET 552,561
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS
Net realized gain on investments 2,466
Change in unrealized appreciation
of investments for the year 162,363
NET GAIN ON INVESTMENTS 164,829
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 717,390
</Table>
STATEMENT OF CHANGES IN NET ASSETS
Year Ended August 31
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
<Table>
<Caption>
2004 2003
------------- -------------
Investment income -- net $ 552,561 $ 576,143
Net realized gain on investments 2,466 29,123
Change in unrealized
appreciation (depreciation) 162,363 (283,272)
Net increase in net assets
resulting from operations 717,390 321,994
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income -- net
Class A (22,086) (22,631)
Class B (19,572) (18,736)
Class T (510,895) (541,077)
Capital gains
Class A (1,149) --
Class B (1,146) --
Class T (26,744) --
TOTAL DISTRIBUTIONS TO SHAREHOLDERS (581,592) (582,444)
CAPITAL SHARE TRANSACTIONS - NET
Class A (107,327) 271,035
Class B 33,526 (7,926)
Class T (299,995) 1,098,089
TOTAL NET CAPITAL SHARE TRANSACTIONS (373,796) 1,361,198
TOTAL INCREASE (DECREASE) (237,998) 1,100,748
NET ASSETS
Beginning of Year 14,470,345 13,369,597
End of Year $ 14,232,347 $14,470,345
</Table>
See notes to financial statements.
85
<Page>
FINANCIAL HIGHLIGHTS
Year Ended August 31
Selected data for a share of capital stock outstanding throughout the years
indicated.
<Table>
<Caption>
CLASS T SHARES
----------------------------------------------------------
2004 2003 2002 2001 2000
----------------------------------------------------------
Net Asset Value, Beginning of Year $ 10.61 $ 10.80 $ 10.71 $ 10.25 $ 10.14
Investment income -- net 0.41 0.44 0.46 0.48 0.49
Net realized and unrealized gain (loss) on investments 0.13 (0.18) 0.08 0.48 0.12
----------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.54 0.26 0.54 0.96 0.61
Less distributions from
Investment income -- net (0.41) (0.45) (0.45) (0.48) (0.49)
Capital gains (0.02) -- -- (0.02) (0.01)
----------------------------------------------------------
TOTAL DISTRIBUTIONS (0.43) (0.45) (0.45) (0.50) (0.50)
----------------------------------------------------------
Net Asset Value, End of Year $ 10.72 $ 10.61 $ 10.80 $ 10.71 $ 10.25
==========================================================
TOTAL RETURN (1) 5.20% 2.38% 5.24% 9.59% 6.16%
==========================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year (000's omitted) $ 13,154 $ 13,330 $ 12,472 $ 11,700 $ 11,030
Ratio of expenses with reimbursement
to average net assets (2) 0.75% 0.75% 0.75% 0.75% 0.75%
Ratio of expenses without reimbursement
to average net assets 1.04% 1.03% 1.05% 1.08% 1.11%
Ratio of net investment income with
reimbursement to average net assets 3.83% 4.08% 4.34% 4.59% 4.84%
Portfolio turnover rate 1.15% 18.23% 8.80% 0.18% 7.61%
</Table>
(1) Does not include the effect of sales charge
(2) Effective June 1, 2002, SM&R has voluntarily agreed to waive or reduce
expenses to 0.75% for classes T and A; and 1.25% for class B.
See notes to financial statements.
86
<Page>
FINANCIAL HIGHLIGHTS
Year Ended August 31
Selected data for a share of capital stock outstanding throughout the years
indicated.
<Table>
<Caption>
CLASS A SHARES
----------------------------------------------------------
2004 2003 2002 2001 2000
----------------------------------------------------------
Net Asset Value, Beginning of Year $ 10.71 $ 10.89 $ 10.80 $ 10.33 $ 10.22
Investment income -- net 0.42 0.44 0.43 0.46 0.46
Net realized and unrealized gain (loss) on investments 0.12 (0.18) 0.09 0.49 0.12
----------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.54 0.26 0.52 0.95 0.58
Less distributions from
Investment income -- net (0.42) (0.44) (0.43) (0.46) (0.46)
Capital gains (0.02) -- -- (0.02) (0.01)
----------------------------------------------------------
TOTAL DISTRIBUTIONS (0.44) (0.44) (0.43) (0.48) (0.47)
----------------------------------------------------------
Net Asset Value, End of Year $ 10.81 $ 10.71 $ 10.89 $ 10.80 $ 10.33
==========================================================
TOTAL RETURN (1) 5.12% 2.40% 4.99% 9.34% 5.86%
==========================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year $ 542,502 $ 643,287 $ 384,438 $ 245,697 $ 211,755
Ratio of expenses with reimbursement
to average net assets (2) 0.75% 0.75% 0.93% 1.00% 1.00%
Ratio of expenses without reimbursement
to average net assets 1.26% 1.24% 1.26% 1.33% 1.35%
Ratio of net investment income with
reimbursement to average net assets 3.84% 4.09% 4.14% 4.34% 4.59%
Portfolio turnover rate 1.15% 18.23% 8.80% 0.18% 7.61%
</Table>
See notes to financial statements.
87
<Page>
FINANCIAL HIGHLIGHTS
Year Ended August 31
Selected data for a share of capital stock outstanding throughout the years
indicated.
<Table>
<Caption>
CLASS B SHARES
----------------------------------------------------------
2004 2003 2002 2001 2000
----------------------------------------------------------
Net Asset Value, Beginning of Year $ 10.71 $ 10.90 $ 10.79 $ 10.32 $ 10.20
Investment income -- net 0.36 0.40 0.37 0.40 0.41
Net realized and unrealized gain (loss) on investments 0.12 (0.19) 0.11 0.49 0.13
----------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.48 0.21 0.48 0.89 0.54
Less distributions from
Investment income -- net (0.36) (0.40) (0.37) (0.40) (0.41)
Capital gains (0.02) -- -- (0.02) (0.01)
----------------------------------------------------------
TOTAL DISTRIBUTIONS (0.38) (0.40) (0.37) (0.42) (0.42)
----------------------------------------------------------
Net Asset Value, End of Year $ 10.81 $ 10.71 $ 10.90 $ 10.79 $ 10.32
----------------------------------------------------------
TOTAL RETURN (1) 4.59% 1.91% 4.57% 8.74% 5.47%
==========================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year $ 536,101 $ 496,912 $ 513,273 $ 178,880 $ 115,025
Ratio of expenses with reimbursement
to average net assets (2) 1.25% 1.25% 1.42% 1.50% 1.50%
Ratio of expenses without reimbursement
to average net assets 1.78% 1.74% 1.75% 1.84% 1.87%
Ratio of net investment income with
reimbursement to average net assets 3.34% 3.59% 3.65% 3.82% 4.12%
Portfolio turnover rate 1.15% 18.23% 8.80% 0.18% 7.61%
</Table>
(1) Does not include the effect of sales charge
(2) Effective June 1, 2002, SM&R has voluntarily agreed to waive or reduce
expenses to 0.75% for classes T and A; and 1.25% for class B.
See notes to financial statements.
88
<Page>
SM&R PRIMARY FUND
MANAGER COMMENTARY
[CHART]
SECTOR WEIGHTINGS BY TOTAL INVESTMENTS
<Table>
Industrials 9.62%
Health Care 13.79%
Financials 23.45%
Consumer Discretionary 19.31%
Materials 5.20%
Consumer Staples 12.52%
Utilities 7.83%
U.S. Government 7.78%
</Table>
A MESSAGE TO OUR SHAREHOLDERS
The SM&R Primary Fund is focused on providing competitive levels of current
income through investments in short term government and corporate securities.
Over the past fiscal year ending August 31, 2004, the Fund has provided a total
return of 0.83%. The year-to-date total return for the eight months ended August
31, 2004 was 0.55%.
A key issue for investors is how rapidly the Federal Reserve will "normalize"
short-term interest rates. The current real overnight rate is actually negative
after inflation is considered. With core inflation under a 2% rate, the Fed is
likely to bring the real rate to at least a neutral position by year-end,
implying a 2% expectation for the Federal Funds rate. Longer term, the
expectation for short-term rates is about 1-1/2% above underlying inflation.
The Federal Reserve did as expected and raised short-term rates 25 basis points
at the August 10th meeting, following the 25 basis point hike from the June
meeting. The tightening lifted the effective funds rate to 1-1/2%, a 50%
increase from the 40+ year low hit in June of last year. The Fed also signaled
its commitment to continue hiking rates at a "measured pace" even while noting
an acknowledged moderation in economic growth, particularly tied to the rise in
energy prices, disappointment over labor market conditions, and a transitory
rise in inflation. The Fed still remains bullish on the growth outlook, stating
that "the economy nevertheless appears poised to resume a stronger pace of
expansion going forward."
The U.S. economy did slow in the second quarter, when household spending
decelerated in response to a jump in consumer prices. While recent hurricanes
and the oil spike probably preclude an early return to above-trend growth,
financial conditions remain favorable for continued growth. Corporate profit
growth has surpassed revenue growth for the last four quarters, indicating that
corporations have relied on productivity and excess capacity rather than adding
jobs and making capital expenditures to drive the bottom line. However, as
capacity is absorbed and productivity gains reach their limits, a normal rate of
capital spending and hiring should resume.
89
<Page>
Generally, in a rising rate environment, the bond market does not provide
attractive nominal returns in relation to other asset classes, particularly
equities. Even as rates rise, however, bonds will remain an important component
of a well-diversified portfolio, and in current market conditions could continue
offering attractive returns on risk adjusted basis. The SM&R Primary Fund
provides fixed income investors with an opportunity to invest in shorter
duration assets with less interest rate risk than long term bonds.
Best Regards,
/s/ Anne M. LeMire
Anne M. LeMire, CPA, CFA, Portfolio Manager
SM&R Primary Fund
[CHART]
SM&R PRIMARY FUND
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN THE SM&R PRIMARY FUND,
AND LIPPER SHORT INVESTMENT GRADE FUND INDEX
<Table>
<Caption>
LIPPER SHORT INVESTMENT
SM&R PRIMARY FUND GRADE FUND INDEX
9/1/1994 $ 10,000 $ 10,000
8/31/1995 $ 10,501 $ 10,685
8/31/1996 $ 11,033 $ 11,208
8/31/1997 $ 11,582 $ 12,021
8/31/1998 $ 12,179 $ 12,791
8/31/1999 $ 12,758 $ 13,218
8/31/2000 $ 13,355 $ 13,957
8/31/2001 $ 14,192 $ 15,282
8/31/2002 $ 14,381 $ 15,845
8/31/2003 $ 14,575 $ 16,336
8/31/2004 $ 14,696 $ 16,752
</Table>
AVERAGE ANNUAL RETURN
Through 8/31/04. Inception date of this fund 03/16/92.
<Table>
10 YEAR 3.92%
5 YEAR 2.87%
1 YEAR 0.83%
</Table>
SM&R Primary Fund performance figures reflect reinvestment of all dividends and
capital gains distributions and changes in net asset value. The Primary Fund
does not have a sales charge. Average annual returns include reinvestment of all
dividends and capital gains.
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL
FLUCTUATE SO THAT THE INVESTORS SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE
PERFORMANCE DATE QUOTED. TO OBTAIN PERFORMANCE DATA CURRENT TO THE MOST RECENT
MONTH-END, PLEASE CALL SM&R AT (877) 239-2049.
Returns shown do not reflect the deduction of taxes that a shareholder would pay
on fund distributions or redemption of funds shares.
90
<Page>
SM&R PRIMARY FUND
HOLDINGS
SCHEDULE OF INVESTMENTS August 31, 2004
<Table>
<Caption>
MATURITY INTEREST/STATED FACE
COMMERCIAL PAPER DATE RATE (%) AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------
AEROSPACE & DEFENSE -- 4.79%
ITT Industries Incorporated 09/07/04 1.570 $ 1,254,000 $ 1,253,672
AIR FREIGHT/COURIERS -- 3.86%
Burlington Northern Santa Fe Corporation 10/07/04 1.640 1,012,000 1,010,339
CHEMICALS -- 3.89%
Praxair Incorporated 09/27/04 1.560 1,019,000 1,017,852
DISTRIBUTORS -- 4.81%
Deluxe Corporation 09/16/04 1.650 1,262,000 1,261,132
DIVERSIFIED FINANCIALS -- 12.67%
Block Financial Corporation 09/13/04 1.570 1,086,000 1,085,431
Countrywide Home Loans Incorporated 09/20/04 1.570 1,036,000 1,035,141
General Motors Acceptance Corporation 09/23/04 1.650 1,200,000 1,198,790
3,319,362
ELECTRIC UTILITIES -- 7.83%
IDACORP Incorporated 09/08/04 1.580 1,158,000 1,157,644
PacifiCorp 09/10/04 1.600 893,000 892,643
2,050,287
FOOD PRODUCTS -- 8.70%
Campbell Soup Company 09/28/04 1.550 1,000,000 998,837
Sara Lee Corporation 09/14/04 1.550 1,282,000 1,281,282
2,280,119
FOOD & DRUG RETAILING -- 3.81%
CVS Corporation 09/02/04 1.570 998,000 997,956
</Table>
91
<Page>
<Table>
<Caption>
MATURITY INTEREST/STATED FACE
COMMERCIAL PAPER DATE RATE (%) AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------
HEALTH CARE EQUIPMENT & SUPPLIES -- 4.19%
Locap Incorporated 09/22/04 1.600 $ 1,100,000 $ 1,098,973
HEALTH CARE PROVIDERS/SERVICE -- 4.96%
St. Jude Medical Incorporated 09/09/04 1.600 1,300,000 1,299,537
INSURANCE -- 4.62%
Torchmark Corporation 09/21/04 1.560 1,212,000 1,210,950
LEISURE EQUIPMENT & PRODUCTS -- 3.78%
Mattel Incorporated 09/15/04 1.620 991,000 990,375
MEDIA -- 7.40%
McClatchy Company 10/12/04 1.670 1,000,000 998,097
Tribune Company 09/03/04 1.450 941,000 940,924
1,939,021
METALS & MINING -- 1.31%
Alcan Aluminum Corporation 09/09/04 1.600 344,000 343,878
PHARMACEUTICALS -- 4.62%
Schering-Plough Corporation 09/01/04 1.600 1,210,000 1,210,000
TEXTILES & APPAREL -- 3.80%
VF Corporation 09/17/04 1.600 996,000 995,291
TOTAL COMMERCIAL PAPER -- 85.04%
(Cost $22,278,744) 22,278,744
</Table>
92
<Page>
SM&R PRIMARY FUND
HOLDINGS
SCHEDULE OF INVESTMENTS August 31, 2004
<Table>
<Caption>
MATURITY INTEREST/STATED FACE
CORPORATE BONDS DATE RATE (%) AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------
BUILDING PRODUCTS -- 0.97%
Armstrong World Industries, Incorporated (a) 08/15/03 6.350 $ 500,000 $ 255,000
DIVERSIFIED FINANCIALS 6.14%
JPMorgan Chase & Company 08/15/06 5.625 500,000 525,898
Southwestern Bell Capital Corporation 08/14/06 7.110 1,000,000 1,082,270
1,608,168
TOTAL CORPORATE BONDS -- 7.11 %
(Cost $2,101,082) 1,863,168
U S GOVERNMENT AGENCY &
U S GOVERNMENT SECURITIES
U S GOVERNMENT AGENCY SECURITIES -- 3.83%
Federal Home Loan Bank (b) 06/30/05 2.310 500,000 500,076
Federal Home Loan Bank 06/21/07 3.870 500,000 503,219
1,003,295
U S GOVERNMENT SECURITIES -- 3.95%
U S Treasury Bonds 02/15/29 5.250 1,000,000 1,033,477
TOTAL U S GOVERNMENT AGENCY &
U S GOVERNMENT SECURITIES -- 7.78%
(Cost $1,888,118) 2,036,772
TOTAL INVESTMENTS -- 99.93%
(Cost $26,27,944) 26,178,684
CASH AND OTHER ASSETS,
LESS LIABILITIES -- 0.07% 18,715
TOTAL NET ASSETS -- 100.00% $ 26,197,399
</Table>
Notes to Schedule of Investments
(a) Security is in default of interest. Armstrong World Industries, Inc. has
had its Chapter 11 case reassigned to U.S. District Court Judge Edwardo C.
Robreno and is uncertain when confirmation of its Plan of Reorganization
will be considered by the U.S. District Court.
(b) Long term obligations that mature in less than one year.
See notes to financial statements.
93
<Page>
FINANCIALS
STATEMENT OF ASSETS & LIABILITIES
August 31, 2004
<Table>
ASSETS
Investment in securities
at value (Cost $26,267,944) $ 26,178,684
Cash 607
Receivable for:
Capital stock sold 2,503
Interest 44,945
Expense reimbursement 2,686
Other assets 2,782
TOTAL ASSETS 26,232,207
LIABILITIES
Capital stock reacquired 2,400
Distribution payable 1,802
Accrued:
Investment advisory fee 11,426
Service fee 5,713
Other liabilities 13,467
TOTAL LIABILITIES 34,808
NET ASSETS $ 26,197,399
Shares of capital stock outstanding,
(2,176,000,000 shares authorized,
$.01 par value per share) 26,421,947
Net asset value $ 0.99
NET ASSETS ARE COMPRISED OF THE FOLLOWING:
Capital (par value and additional paid in) $ 26,427,999
Accumulated net realized loss on investments (141,340)
Net unrealized depreciation of investments (89,260)
NET ASSETS $ 26,197,399
</Table>
STATEMENT OF OPERATIONS
Year Ended August 31, 2004
<Table>
INVESTMENT INCOME
Interest $ 438,160
EXPENSES
Investment advisory fees 134,638
Service fees 67,319
Professional fees 7,107
Custody and transaction fees 11,329
Directors' fees 6,331
Qualification fees 1,905
Shareholder reporting expenses 3,001
Insurance expenses 13,045
Other expenses 52
TOTAL EXPENSES 244,727
LESS EXPENSES REIMBURSED (29,339)
NET EXPENSES 215,388
INVESTMENT INCOME - NET 222,772
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS
Change in unrealized appreciation
of investments for the year 32,505
NET GAIN ON INVESTMENTS 32,505
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 255,277
</Table>
See notes to financial statements.
94
<Page>
SM&R PRIMARY FUND
FINANCIALS
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
<Table>
<Caption>
2004 2003
-------------- --------------
Investment income - net $ 222,772 $ 376,143
Change in unrealized appreciation (depreciation) 32,505 (116,082)
Net increase in net assets resulting from operations 255,277 260,061
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income-net (222,772) (376,143)
CAPITAL SHARE TRANSACTION-NET
Capital share transactions-net (1,243,907) 220,849
TOTAL INCREASE (DECREASE) (1,211,402) 104,767
NET ASSETS
Beginning of Year 27,408,801 27,304,034
End of Year $ 26,197,399 $ 27,408,801
</Table>
See notes to financial statements.
95
<Page>
FINANCIAL HIGHLIGHTS
Year Ended August 31
Selected data for a share of capital stock outstanding throughout the years
indicated.
<Table>
<Caption>
2004 2003 2002 2001 2000
-----------------------------------------------------------------------
Net Asset Value, Beginning of Year $ 0.99 $ 0.99 $ 1.00 $ 0.99 $ 1.00
Investment income - net 0.01 0.01 0.02 0.05 0.06
Net realized and unrealized gain (loss) on investments (0.01) 0.01 (0.01)
TOTAL FROM INVESTMENT OPERATIONS 0.01 0.01 0.01 0.06 0.05
Less distributions from
Investment income - net (0.01) (0.01) (0.02) (0.05) (0.06)
TOTAL DISTRIBUTIONS (0.01) (0.01) (0.02) (0.05) (0.06)
Net Asset Value, End of Year $ 0.99 $ 0.99 $ 0.99 $ 1.00 $ 0.99
-----------------------------------------------------------------------
TOTAL RETURN 0.83% 1.35% 1.33% 6.20% 4.68%
=======================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net Assets, end of year (000's omitted) $ 26,197 $ 27,409 $ 27,304 $ 31,857 $ 26,795
Ratio of expenses with reimbursement
to average net assets 0.80% 0.80% 0.80% 0.80% 0.80%
Ratio of expenses without reimbursement
to average net assets 0.91% 0.89% 0.92% 0.97% 1.04%
Ratio of net investment income
with reimbursement to average net assets 0.83% 1.35% 2.29% 5.10% 5.55%
Portfolio turnover rate 70.47% 18.46%
</Table>
See notes to financial statements.
96
<Page>
SM&R MONEY MARKET FUND
HOLDINGS
SCHEDULE OF INVESTMENTS August 31, 2004
<Table>
<Caption>
MATURITY INTEREST/STATED FACE
DATE RATE (%) AMOUNT VALUE
---------- --------------- ----------- ------------
COMMERCIAL PAPER
DIVERSIFIED FINANCIALS -- 2.99%
International Lease Finance Corporation 09/20/04 1.500 $ 2,850,000 $ 2,847,742
ELECTRIC -- 4.56%
Florida Power & Light Company 09/13/04 1.500 4,350,000 4,347,825
ELECTRONIC EQUIPMENT & INSTRUMENTS -- 4.93%
Sharp Electronics Corporation 10/13/04 1.600 4,700,000 4,691,221
FOOD PRODUCTS -- 4.72%
7-Eleven Incorporated 09/21/04 1.520 4,496,000 4,492,200
INSURANCE -- 4.23%
Alfa Corporation 09/07/04 1.520 4,027,000 4,025,979
TOTAL COMMERCIAL PAPER -- 21.43%
(Cost $20,404,967) 20,404,967
</Table>
97
<Page>
SECURITIES MANAGEMENT AND RESEARCH, INC.
US GOVERNMENT AND AGENCY
SHORT-TERM OBLIGATIONS
<Table>
<Caption>
MATURITY INTEREST/STATED FACE
DATE RATE (%) AMOUNT VALUE
---------- --------------- ----------- ------------
GOVERNMENT AGENCIES -- 78.03%
Federal Home Loan Bank 09/03/04 1.420 $ 6,374,000 $ 6,373,497
Federal Home Loan Bank 09/10/04 1.450 7,825,000 7,822,163
Federal Home Loan Bank 09/15/04 1.490 3,676,000 3,673,869
Federal Home Loan Bank 09/22/04 1.505 8,097,000 8,089,889
Federal Home Loan Mortgage Corporation 09/14/04 1.500 6,200,000 6,196,640
Federal Home Loan Mortgage Corporation 09/28/04 1.525 7,435,000 7,426,496
Federal Home Loan Mortgage Corporation 09/30/04 1.510 6,633,000 6,624,927
Federal Home Loan Mortgage Corporation 10/05/04 1.520 2,713,000 2,709,103
Federal National Mortgage Association 09/01/04 1.320 7,548,000 7,548,000
Federal National Mortgage Association 09/02/04 1.460 7,805,000 7,804,683
Federal National Mortgage Association 09/08/04 1.320 2,714,000 2,713,302
Federal National Mortgage Association 09/17/04 1.480 7,309,000 7,304,191
TOTAL US GOVERNMENT AND
AGENCY SHORT-TERM OBLIGATIONS -- 78.03%
(Cost $74,286,760) 74,286,760
TOTAL INVESTMENTS -- 99.46%
(Cost $94,691,727) 94,691,727
CASH AND OTHER ASSETS, LESS LIABILITIES -- 0.54% 509,807
TOTAL NET ASSETS -- 100.00% $ 95,201,534
</Table>
See notes to financial statements.
98
<Page>
SM&R MONEY MARKET FUND
FINANCIALS
STATEMENT OF ASSETS & LIABILITIES
August 31, 2004
<Table>
ASSETS
Investment in securities, at value (Cost $94,691,727) $ 94,691,727
Prepaid expenses 14,377
Cash 624
Receivable for:
Expense Reimbursement 5,183
Capital stock sold 671,465
TOTAL ASSETS 95,383,376
LIABILITIES
Capital stock reacquired 130,029
Distribution payable 3,991
Accrued:
Investment advisory fee 19,566
Service fee 19,566
Other Liabilities 8,690
TOTAL LIABILITIES 181,842
NET ASSETS $ 95,201,534
Shares of capital stock outstanding, (2,000,000,000 shares authorized,
$.01 par value per share) $ 95,201,534
Net asset value $ 1.00
NET ASSETS ARE COMPRISED OF THE FOLLOWING:
Capital (par value and additional paid-in) $ 95,201,534
NET ASSETS $ 95,201,534
</Table>
STATEMENT OF OPERATIONS
Year Ended August 31, 2004
<Table>
INVESTMENT INCOME
Interest $ 897,221
EXPENSES
Investment advisory fees 207,552
Service fees 207,370
Professional fees 6,607
Custody and transaction fees 17,219
Directors' fees 6,331
Qualification fees 14,753
Shareholder reporting expenses 4,771
Insurance expenses 33,639
Other expenses 258
TOTAL EXPENSES 498,500
LESS EXPENSES REIMBURSED (84,347)
NET EXPENSES 414,153
INVESTMENT INCOME - NET $ 483,068
</Table>
See notes to financial statements.
99
<Page>
STATEMENT OF CHANGES IN NET ASSETS
Year Ended August 31
DECREASE IN NET ASSETS FROM OPERATIONS
<Table>
<Caption>
2004 2003
--------------- ---------------
Investment income - net $ 483,068 $ 1,000,180
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income - net (483,068) (1,000,180)
CAPITAL SHARE TRANSACTION - NET
Capital share transaction - net (8,267,569) (51,140,904)
TOTAL DECREASE (8,267,569) (51,140,904)
NET ASSETS
Beginning of Year 103,469,103 154,610,007
End of Year $ 95,201,534 $ 103,469,103
</Table>
FINANCIAL HIGHLIGHTS
Year Ended August 31
Selected data for a share of capital stock outstanding throughout the years
indicated.
<Table>
<Caption>
2004 2003 2002 2001 2000
----------------------------------------------------------------------
Net Asset Value, Beginning of Year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Investment income - net 0.01 0.01 0.02 0.05 0.05
----------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.01 0.01 0.02 0.05 0.05
Less Distributions from
Investment income - net (0.01) (0.01) (0.02) (0.05) (0.05)
----------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.01) (0.01) (0.02) (0.05) (0.05)
----------------------------------------------------------------------
Net Asset Value, End of Year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======================================================================
TOTAL RETURN 0.58% 0.80% 1.53% 4.92% 5.56%
======================================================================
</Table>
RATIOS (IN PERCENTAGES) / SUPPLEMENTAL DATA
<Table>
Net Assets, end of year (000's omitted) $ 95,202 $ 103,469 $ 154,610 $ 102,092 $ 54,258
Ratio of expenses with reimbursement
to average net assets 0.50% 0.50% 0.50% 0.49% 0.49%
Ratio of expenses without reimbursement
to average net assets 0.60% 0.58% 0.56% 0.49% 0.66%
Ratio of net investment income with
reimbursement to average net assets 0.58% 0.84% 1.48% 4.63% 5.58%
</Table>
See notes to financial statements.
100
<Page>
SM&R NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
The SM&R Investments, Inc. (the "Company"), is a diversified open-end management
investment company registered as a series fund under the Investment Company Act
of 1940, as amended. The Company is comprised of the SM&R Alger Technology Fund
("Alger Technology Fund"), SM&R Alger Aggressive Growth Fund ("Alger Aggressive
Growth Fund"), SM&R Alger Small-Cap Fund ("Alger Small-Cap Fund"), SM&R Alger
Growth Fund ("Alger Growth Fund"), SM&R Growth Fund ("Growth Fund"), SM&R Equity
Income Fund ("Equity Income Fund"), SM&R Balanced Fund ("Balanced Fund"), SM&R
Government Bond Fund ("Government Bond Fund"), SM&R Tax Free Fund ("Tax Free
Fund"), SM&R Primary Fund ("Primary Fund") and SM&R Money Market Fund ("Money
Market Fund"). The Government Bond Fund, Tax Free Fund, Money Market Fund and
Primary Fund are collectively referred to as the "Fixed Income Funds", while the
Alger Technology Fund, Alger Aggressive Growth Fund, Alger Small-Cap Fund, Alger
Growth Fund, Growth Fund, Equity Income Fund and Balanced Fund are referred to
as the "Equity Funds".
The Growth Fund, Equity Income Fund, Balanced Fund, Government Bond Fund and Tax
Free Fund have adopted a Multiple Class Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940, as amended. Each has three single classes of
shares. Class T shares are subject to an initial sales charge. The Class A
shares are subject to an initial sales charge and a distribution and shareholder
servicing plan ("12b-1 Plan"). The Class B shares are subject to a contingent
deferred sales charge and a 12b-1 Plan.
The Alger Technology Fund, Alger Aggressive Growth Fund, Alger Small-Cap Fund
and Alger Growth Fund, each offer two classes of shares, they are: the Class A
shares subject to an initial sales charge and a 12b-1 Plan; and the Class B
shares subject to a contingent deferred sales charge and a 12b-1 Plan.
CHANGE IN FISCAL YEAR END:
The Growth Fund, Equity Income Fund and Balanced Fund changed their fiscal year
end from December 31 to August 31, effective January 1, 2001 when they were
added as a separate series of the Company.
The following is a summary of significant accounting policies consistently
followed by the Company in the preparation of its financial statements. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.
Other 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 at fair value as determined in
good faith by or under the direction of the Company's Board of Directors in
accordance with the Company's Fair Value Pricing Policy. Commercial paper is
stated at amortized cost, which is equivalent to value. Investments in
affiliated money market funds are valued at the end of the day net asset value
per share.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME:
The Company records security transactions based on trade date. Dividend income
is recognized on the ex-dividend date, and interest income is recognized on an
accrual basis. Premiums and discounts on securities are amortized, over the
lives of the respective securities. Withholding taxes on foreign dividends have
been provided for in accordance with the company's understanding of the
applicable country's tax rules and rates.
101
<Page>
On a daily basis, income, unrealized and realized gains and losses, and expenses
which are not class specific are allocated to each class based on their
respective relative shares outstanding. Class specific expenses, such as
distribution expenses, are applied to the class to which they are attributed.
FEDERAL INCOME TAXES:
For federal income tax purposes, each series is treated as a separate entity.
The Company intends to comply with requirements of the Internal Revenue Code
relating to regulated investment companies and intends 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.
TAX YEAR ENDING AUGUST 31, 2004
<Table>
<Caption>
LOSS EXPIRATION
CARRYFORWARDS DATES
- --------------------------------------------------------------------------------
ALGER TECHNOLOGY FUND
$ 188,304 2009
$ 113,717 2010
ALGER AGGRESSIVE GROWTH FUND
$ 77,565 2009
$ 255,670 2010
ALGER SMALL-CAP FUND
$ 1,991 2010
ALGER GROWTH FUND
$ 105,461 2009
$ 283,240 2010
GROWTH FUND
$ 2,201,708 2009
$ 19,618,628 2010
$ 7,083,770 2011
PRIMARY FUND
$ 36,349 2007
$ 88 2008
$ 242 2009
$ 104,661 2010
</Table>
CAPITAL STOCK TRANSACTIONS AND DISTRIBUTIONS TO SHAREHOLDERS:
Fund shares are sold in a continuous public offering at net asset value plus a
sales charge, except for the Primary and Money Market Funds. All transactions
for the Primary and Money Market Funds are made at net asset value. The Company
may repurchase shares at net asset value. Dividends and other distributions are
recorded by each fund on the ex-dividend date and may be reinvested at net asset
value.
EXPENSES:
Distribution, qualification fees or other 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.
102
<Page>
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 Company. Investment advisory fees paid to SM&R are
computed as a percentage of the average daily net assets as follows:
<Table>
EQUITY FUNDS:
Alger Technology Fund 1.35%
Alger Aggressive Growth Fund 1.05%
Alger Small-Cap Fund 1.00%
Alger Growth Fund 0.85%
</Table>
GROWTH, EQUITY INCOME AND BALANCED FUNDS
<Table>
<Caption>
INVESTMENT
NET ASSETS ADVISORY FEE
- -----------------------------------------------------
Less than $100,000,000 0.750%
$100,000,000 -- $200,000,000 0.625%
$200,000,000 -- $300,000,000 0.500%
More than $300,000,000 0.400%
</Table>
Through an investment sub-advisory agreement, SM&R has delegated the day-to-day
investment management of Alger Technology Fund, Alger Aggressive Growth Fund,
Alger Small-Cap Fund and Alger Growth Fund to Fred Alger Management, Inc. Fred
Alger Management makes investment decisions for each of these funds and
continuously reviews and administers the investment program. SM&R monitors Fred
Alger Management's buying and selling of securities and administration of these
series' investment program. Pursuant to the sub-advisory agreement, SM&R is
responsible for paying a sub-advisory fee to Fred Alger Management for each of
these series. The series are not responsible for paying the sub-advisory fee
directly.
FIXED INCOME FUNDS:
<Table>
<Caption>
INVESTMENT
NET ASSETS ADVISORY FEE
- -----------------------------------------------------
Government Bond and Tax Free Funds
Less than $100,000,000 0.50%
$100,000,000 - $300,000,000 0.45%
More than $300,000,000 0.40%
Primary Fund
All average daily net assets 0.50%
Money Market Fund
All average daily net assets 0.25%
</Table>
ADMINISTRATIVE SERVICE FEES:
Administrative service fees paid to SM&R by the each of the series are computed
as a percentage of average daily net assets as follows:
<Table>
<Caption>
NET ASSETS SERVICE FEES
- -----------------------------------------------------
Less than $100,000,000 0.25%
$100,000,000 -- $200,000,000 0.20%
$200,000,000 -- $300,000,000 0.15%
More than $300,000,000 0.10%
</Table>
SM&R has contractually agreed to reimburse the Growth Fund, Equity Income Fund,
Balanced Fund, Government Bond Fund, Tax Free Fund and Primary Fund for regular
operating expenses in excess of 1.25% per annum of the average daily net assets,
and the Money Market Fund 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.
Effective June 1, 2002, and until December 31, 2004, SM&R has voluntarily agreed
to reimburse expenses (after applicable waivers) which exceed the following
percentages of each funds' average daily net assets:
<Table>
<Caption>
CLASS A CLASS B CLASS T UNIVERSAL
--------- --------- --------- ---------
Alger Technology Fund 2.10% 2.25%
Alger Aggressive Growth Fund 1.85% 2.50%
Alger Small-Cap Fund 1.90% 2.55%
Alger Growth Fund 1.70% 2.35%
Growth Fund 1.36% 1.86% -
Equity Income Fund 1.26% 1.76% -
Balanced Fund 1.30% 1.80% -
Government Bond Fund 0.73% 1.23% 0.73%
Tax Free Fund 0.75% 1.25% 0.75%
Primary Fund 0.80%
</Table>
103
<Page>
Fee waivers and/or reductions, other than those stated in the Administrative
Service Agreement, may be rescinded by SM&R at any time without notice to
investors. These waivers are not subject to recapture or recoupment.
DISTRIBUTION AND SHAREHOLDER SERVICING FEES:
The Company has adopted a 12b-1 Plan, for each series, except the Primary and
Money Market Funds, with respect to each series' Class A shares and Class B
shares (the "Class A Plan" and the "Class B 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 Plans also
permit a shareholder servicing fee to compensate SM&R, or enable SM&R to
compensate Service Providers, for providing ongoing servicing to shareholders of
the Company.
These fees are computed as an annual percentage of the average daily net assets
of each class of shares of a series, as follows:
<Table>
<Caption>
DISTRIBUTION SERVICE TOTAL 12b-1
FEE FEE FEE
- -------------------------------------------------------------------------------------------
GROWTH, EQUITY INCOME, BALANCED,
GOVERNMENT BOND AND TAX FREE FUNDS
Class A Shares 0.25% 0.25%
Class B Shares 0.50% 0.25% 0.75%
ALGER TECHNOLOGY, ALGER AGGRESSIVE GROWTH,
ALGER SMALL-CAP AND ALGER GROWTH FUNDS
Class A Shares 0.35% 0.35%
Class B Shares 1.00% - 1.00%
</Table>
For the year ended August 31, 2004, each series paid or accrued the following,
as compensation under the Plans:
<Table>
Alger Technology Fund $ 5,033
Alger Aggressive Growth Fund $ 9,016
Alger Small-Cap Fund $ 7,810
Alger Growth Fund $ 14,627
Growth Fund $ 38,360
Equity Income Fund $ 71,567
Balanced Fund $ 30,694
Government Bond Fund $ 12,547
Tax Free Fund $ 5,842
</Table>
SALES CHARGES:
During the year ended August 31, 2004, SM&R, as principal underwriter, received
as sales charges on sales of capital stock of each series and made reallowances
to dealers as follows:
<Table>
<Caption>
SALES CHARGE SALES CHARGE
RECEIVE REALLOWED
BY SM&R TO DEALERS
- -----------------------------------------------------------------------------
Alger Technology Fund $ 6,052 $ 143
Alger Aggressive Growth $ 10,223 $ 348
Alger Small-Cap Fund $ 5,988 $ 401
Alger Growth Fund $ 12,531 $ 1,221
Growth Fund $ 81,833 $ 3,290
Equity Income Fund $ 123,407 $ 2,611
Balanced Fund $ 50,872 $ 972
Government Bond Fund $ 9,087 $ 415
Tax Free Fund $ 1,043 $
</Table>
For the year ended August 31, 2004, SM&R received $18,698 for contingent
deferred sales charges imposed on the redemptions of Class B shares of capital
stock of the series.
104
<Page>
SM&R is a wholly-owned subsidiary of American National Insurance Company
("American National"). As of August 31, 2004, SM&R and American National had the
following ownership in these series:
<Table>
<Caption>
AMERICAN NATIONAL
SM&R AMERICAN NATIONAL SUBSIDIARIES
- ----------------------------------------------------------------------------------------------------------------------
PERCENT OF SHARES PERCENT OF SHARES PERCENT OF SHARES
SHARES OUTSTANDING SHARES OUTSTANDING SHARES OUTSTANDING
- ----------------------------------------------------------------------------------------------------------------------
Growth Fund 226,864 0.77% 1,128,858 3.82% 1,489,872 5.04%
Equity Income Fund 20,433 0.41% - - - -
Balanced Fund 151,513 9.08% 94,561 5.67% 272,570 16.34%
Government Bond Fund 653,737 22.85% 123,051 4.30% 891,197 31.15%
Tax Free Fund 163,905 12.35% - - 822,307 61.96%
Primary Fund 16,603 0.06% 23,484,406 88.88% 6,147 0.02%
Money Market Fund 1,197,167 1.26% 65,573,560 68.88% 6,979,965 7.33%
</Table>
Through the investment sub-advisory agreement, Fred Alger Management, Inc. is
affiliated with SM&R. As of August 31, 2004, Fred Alger Management, Inc. had the
following ownership in these series:
<Table>
<Caption>
PERCENT OF SHARES
SHARES OUTSTANDING
- ---------------------------------------------------------------------
Alger Technology Fund
25,000 7.09%
Alger Aggressive Growth Fund
25,000 7.70%
Alger Small-Cap Fund
25,000 9.98%
Alger Growth Fund
25,000 5.38%
</Table>
The Company pays directors' fees and expenses for all the independent directors.
Fred Alger and Company, Incorporated ("Alger Inc.") is an affiliated
broker-dealer of Fred Alger Management. During the year ended August 31, 2004,
the Alger Technology Fund, Alger Aggressive Growth, Alger Small-Cap Fund and
Alger Growth Fund paid commissions for portfolio transactions to Alger Inc., in
the amount of $1,981, $3,937, $2,312 and $7,164, respectively.
INVESTMENTS INTO AFFILIATED MONEY MARKET FUNDS:
The Company has received an exemptive order issued by the Securities and
Exchange Commission ("SEC") allowing the Company to sweep uninvested cash into
the SM&R Money Market Fund. The SM&R Money Market Fund is one of the eleven
funds included in the Company and is therefor considered to be affiliated. The
transactions in investments in the affiliated money market for the year ended
August 31, 2004 were:
<Table>
Purchases $ 20,031,267
Sales $ 20,089,533
</Table>
105
<Page>
NOTE 3 -- COST, PURCHASES AND SALES OF INVESTMENT SECURITIES
Aggregate purchases and sales of investments in securities, other than
commercial paper, were as follows:
<Table>
<Caption>
PURCHASES SALES
------------- --------------
Alger Technology Fund
$ 2,124,030 $ 1,809,576
Alger Aggressive Growth
$ 2,573,255 $ 2,465,390
Alger Small-Cap Fund
$ 2,045,271 $ 1,877,507
Alger Growth Fund
$ 4,200,242 $ 3,726,903
Growth Fund
$ 5,540,456 $ 11,121,605
Equity Income Fund
$ 7,527,258 $ 12,974,806
Balanced Fund
$ 4,548,996 $ 3,055,507
Government Bond Fund
$ 13,854,520 $ 16,707,916
Tax Free Fund
$ 152,691 $ 1,892,425
Primary Fund
$ 3,131,090 $ 2,600,000
</Table>
Gross unrealized appreciation and depreciation as of August 31, 2004, based on
the cost for federal income tax purposes is as follows:
<Table>
<Caption>
COST APPRECIATION DEPRECIATION
- --------------------------------------------------------------------------------------------------------
Alger Technology Fund
$ 902,609 $ 51,777 $ 86,186
Alger Aggressive Growth Fund
$ 1,551,221 $ 118,201 $ 81,878
Alger Small-Cap Fund
$ 1,408,993 $ 139,681 $ 110,050
Alger Growth Fund
$ 2,452,379 $ 143,021 $ 176,629
Growth Fund
$ 85,439,282 $ 32,219,175 $ 3,697,679
Equity Income Fund
$ 95,887,890 $ 27,652,563 $ 10,373,883
Balanced Fund
$ 25,901,500 $ 4,691,852 $ 620,495
Government Bond Fund
$ 29,655,075 $ 243,568 $ 192,628
Tax Free Fund
$ 13,377,659 $ 722,786 $ -
Primary Fund
$ 26,267,944 $ 155,740 $ 245,000
</Table>
The difference between book basis and tax basis unrealized appreciation
(depreciation) is attributable primarily to the tax deferral of losses on wash
sales.
106
<Page>
SM&R ALGER TECHNOLOGY FUND Year Ended August 31,
<Table>
<Caption>
2004 2003
----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------------------------------
SALE OF CAPITAL SHARES:
Class A 76,763 $ 229,178 89,106 $ 163,787
Class B 29,807 87,566 17,041 34,919
Total sale of capital shares 106,570 316,744 106,147 198,706
REDEMPTION OF CAPITAL SHARES OUTSTANDING:
Class A (9,623) (28,527) (5,853) (10,948)
Class B (8,789) (26,265) (4,253) (7,104)
Total redemptions of capital shares outstanding (18,412) (54,792) (10,106) (18,052)
Net increase in capital shares outstanding 88,158 $ 261,952 96,041 180,654
Shares outstanding at beginning of year 264,417 168,376
Shares outstanding at end of year 352,575 264,417
</Table>
SM&R ALGER AGGRESSIVE GROWTH FUND Year Ended August 31,
<Table>
<Caption>
2004 2003
----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------------------------------
SALE OF CAPITAL SHARES:
Class A 59,498 $ 311,976 77,608 $ 327,865
Class B 29,874 155,115 21,048 88,381
Total sale of capital shares 89,372 467,091 98,656 416,246
REDEMPTIONS OF CAPITAL SHARES OUTSTANDING:
Class A (45,089) (234,102) (34,535) (146,048)
Class B (11,191) (59,725) (8,460) (34,489)
Total redemptions of capital shares outstanding (56,280) (293,827) (42,995) $ (180,537)
Net increase in capital shares outstanding 33,092 $ 173,264 55,661 $ 235,709
Shares outstanding at beginning of year 291,437 235,776
Shares outstanding at end of year 324,529 291,437
</Table>
107
<Page>
SM&R ALGER SMALL-CAP FUND Year Ended August 31,
<Table>
<Caption>
2004 2003
----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------------------------------
SALE OF CAPITAL SHARES:
Class A 38,835 $ 240,264 71,735 $ 315,392
Class B 18,500 113,845 28,597 124,091
Total sale of capital shares 57,335 354,109 100,332 439,483
REDEMPTIONS OF CAPITAL SHARES OUTSTANDING:
Class A (12,631) (79,089) (28,028) (122,681)
Class B (6,919) (42,830) (8,309) (35,116)
Total redemptions of capital shares outstanding (19,550) (121,919) (36,337) (157,797)
Net increase in capital shares outstanding 37,785 $ 232,190 63,995 $ 281,686
Shares outstanding at beginning of year 212,625 148,630
Shares outstanding at end of year 250,410 212,625
</Table>
SM&R ALGER GROWTH FUND Year Ended August 31,
<Table>
<Caption>
2004 2003
----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------------------------------
SALE OF CAPITAL SHARES:
Class A 100,919 $ 564,204 77,891 $ 352,230
Class B 39,259 217,224 27,628 122,182
Total sale of capital shares 140,178 781,428 105,519 474,412
REDEMPTIONS OF CAPITAL SHARES OUTSTANDING:
Class A (30,423) (171,455) (24,439) (110,247)
Class B (15,905) (87,519) (8,170) (35,832)
Total redemptions of capital shares outstanding (46,328) (258,974) (32,609) (146,079)
Net increase in capital shares outstanding 93,850 $ 522,454 72,910 $ 328,333
Shares outstanding at beginning of year 370,564 297,654
Shares outstanding at end of year 464,414 370,564
</Table>
108
<Page>
SM&R GROWTH FUND Year Ended August 31,
<Table>
<Caption>
2004 2003
---------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
- ------------------------------------------------------------------------------------------------------------------
SALES OF CAPITAL SHARES:
Class T 1,036,658 $ 3,969,869 1,294,556 $ 4,080,119
Class A 312,211 1,165,074 215,845 673,356
Class B 210,611 773,751 178,083 543,928
Total sale of capital shares 1,559,480 5,908,694 1,688,484 5,297,403
INVESTMENT INCOME DIVIDENDS REINVESTED:
Class T 178,937 703,586 166,989 543,862
Class A 7,789 30,032 6,547 20,778
Class B 1,519 5,694 901 2,711
Total investment income dividends reinvested 188,245 739,312 174,437 567,351
REDEMPTIONS OF CAPITAL SHARES OUTSTANDING:
Class T (2,713,858) (10,458,533) (3,702,391) (11,595,618)
Class A (195,072) (732,135) (438,935) (1,322,058)
Class B (104,786) (393,854) (214,947) (662,188)
Total redemptions of capital shares outstanding (3,013,716) (11,584,522) (4,356,273) (13,579,864)
Net decrease in capital shares outstanding (1,265,991) $ (4,936,516) (2,493,352) $ (7,715,110)
Shares outstanding at beginning of year 30,800,042 33,293,394
Shares outstanding at end of year 29,534,051 30,800,042
</Table>
109
<Page>
SM&R EQUITY INCOME FUND Year Ended August 31,
<Table>
<Caption>
2004 2003
--------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
- ------------------------------------------------------------------------------------------------------------------
SALES OF CAPITAL SHARES:
Class T 151,449 $ 3,396,666 163,042 $ 3,070,746
Class A 113,356 2,427,248 90,653 1,642,882
Class B 53,879 1,136,604 78,644 1,369,294
Total sale of capital shares 318,684 6,960,518 332,339 6,082,922
INVESTMENT INCOME DIVIDENDS REINVESTED:
Class T 53,868 1,200,006 66,034 1,238,312
Class A 4,242 92,286 4,000 73,101
Class B 2,882 60,204 3,241 57,761
Total investment income dividends reinvested 60,992 1,352,496 73,275 1,369,174
REDEMPTIONS OF CAPITAL SHARES OUTSTANDING:
Class T (527,147) (11,822,724) (911,376) (16,836,585)
Class A (49,600) (1,080,655) (87,859) (1,561,458)
Class B (31,018) (660,900) (76,770) (1,337,375)
Total redemptions of capital shares outstanding (607,765) (13,564,279) (1,076,005) (19,735,418)
Net decrease in capital shares outstanding (228,089) $ (5,251,265) (670,391) $ (12,283,322)
Shares outstanding at beginning of year 5,231,929 5,902,320
Shares outstanding at end of year 5,003,840 5,231,929
</Table>
110
<Page>
SM&R BALANCED FUND Year Ended August 31,
<Table>
<Caption>
2004 2003
---------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------------
SALES OF CAPITAL SHARES:
Class T 62,069 $ 1,173,999 63,682 $ 1,009,907
Class A 76,425 1,347,439 75,124 1,162,866
Class B 38,671 686,949 45,999 716,608
Total Sale of Capital shares 177,165 3,158,387 184,805 2,889,381
INVESTMENT INCOME DIVIDENDS REINVESTED:
Class T 19,570 353,059 27,285 436,436
Class A 3,892 68,100 4,909 76,392
Class B 1,964 34,600 2,567 40,298
Total investment income dividends reinvested 25,426 455,759 34,761 553,126
DISTRIBUTIONS FROM NET REALIZED GAINS REINVESTED:
Class T 14,509 259,992
Class A 2,612 45,377 - -
Class B 1,701 29,862 - -
Total distributions from net realized gains reinvested: 18,822 335,231 -
REDEMPTIONS OF CAPITAL SHARES OUTSTANDING:
Class T (100,111) (1,813,917) (152,989) (2,427,260)
Class A (37,694) (667,301) (74,555) (1,159,415)
Class B (15,042) (264,459) (39,905) (628,728)
Total redemptions of capital shares outstanding (152,847) (2,745,677) (267,449) (4,215,403)
Net increase (decrease) in capital shares outstanding 68,566 $ 1,203,700 (47,883) $ (772,896)
Shares outstanding at beginning of year 1,599,424 1,647,307
Shares outstanding at end of year 1,667,990 1,599,424
</Table>
111
<Page>
SM&R GOVERNMENT BOND FUND Year Ended August 31,
<Table>
<Caption>
2004 2003
---------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------------
SALE OF CAPITAL SHARES:
Class T 43,336 $ 455,315 252,906 $ 2,734,200
Class A 23,001 245,659 78,358 858,856
Class B 14,598 155,483 119,318 1,304,310
Total Sale of Capital shares 80,935 856,457 450,582 4,897,366
INVESTMENT INCOME DIVIDENDS REINVESTED:
Class T 55,114 578,455 93,203 1,007,451
Class A 2,120 22,557 4,173 45,640
Class B 1,997 21,246 3,818 41,758
Total investment income dividends reinvested 59,231 622,258 101,194 1,094,849
DISTRIBUTIONS FROM NET REALIZED GAINS REINVESTED:
Class T 72,885 761,648
Class A 2,742 29,006 - -
Class B 3,736 39,494 -
Total distributions from net realized gains reinvested: 79,363 830,148 -
REDEMPTIONS OF CAPITAL SHARES OUTSTANDING:
Class T (142,256) (1,497,308) (207,111) (2,258,130)
Class A (50,225) (537,556) (71,706) (781,195)
Class B (66,003) (704,682) (39,990) (437,505)
Total redemptions of capital shares outstanding (258,484) (2,739,546) (318,807) (3,476,830)
Net increase (decrease) in capital shares outstanding (38,955) $ (430,683) 232,969 $ 2,515,385
Shares outstanding at beginning of year 2,900,051 2,667,082
Shares outstanding at end of year 2,861,096 2,900,051
</Table>
112
<Page>
SM&R TAX FREE FUND Year Ended August 31,
<Table>
2004 2003
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------
SALES OF CAPITAL SHARES:
Class T 26,360 $ 287,510 68,922 $ 748,476
Class A 2,449 26,742 35,017 383,329
Class B 16,947 182,000 8,174 89,258
Total sale of capital shares 45,756 496,252 112,113 1,221,063
INVESTMENT INCOME DIVIDENDS REINVESTED:
Class T 44,800 480,180 47,349 512,152
Class A 2,041 22,085 2,073 22,631
Class B 1,579 17,071 1,615 17,631
Total investment income dividends reinvested 48,420 519,336 51,037 552,420
DISTRIBUTIONS FROM NET REALIZED GAINS REINVESTED:
Class T 2,343 25,417 -
Class A 105 1,149 -
Class B 91 998 -
Total distributions from net realized gains reinvested: 2,539 27,564 -
REDEMPTIONS OF CAPITAL SHARES OUTSTANDING:
Class T (102,397) (1,093,102) (15,012) (162,539)
Class A (14,496) (157,303) (12,316) (134,925)
Class B (15,423) (166,543) (10,479) (114,821)
Total redemptions of capital shares outstanding (132,316) (1,416,948) (37,807) (412,285)
Net increase (decrease) in capital shares outstanding (35,601) $ (373,796) 125,343 $ 1,361,198
Shares outstanding at beginning of year 1,362,777 1,237,434
Shares outstanding at end of year 1,327,176 1,362,777
</Table>
113
<Page>
SM&R PRIMARY FUND Year Ended August 31,
<Table>
<Caption>
2004 2003
--------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ -------------
Sale of capital shares 2,094,512 $ 2,073,568 3,763,133 $ 3,729,719
Investment income dividends reinvested 203,831 201,793 358,525 355,830
Redemptions of capital shares outstanding (3,554,816) (3,519,268) (3,901,482) (3,864,700)
Net increase (decrease) in capital shares outstanding (1,256,473) $ (1,243,907) 220,176 $ 220,849
Shares outstanding at beginning of year 27,678,420 27,458,244
Shares outstanding at end of year 26,421,947 27,678,420
</Table>
SM&R MONEY MARKET Year Ended August 31,
<Table>
<Caption>
2004 2003
---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------
Sale of capital shares 232,967,298 $ 232,967,298 222,003,976 $ 222,003,976
Investment income dividends reinvested 450,077 450,077 951,422 951,422
Redemptions of capital shares outstanding (241,684,944) (241,684,944) (274,096,302) (274,096,302)
Net increase (decrease) in capital shares outstanding (8,267,569) $ (8,267,569) (51,140,904) $ (51,140,904)
Shares outstanding at beginning of year 103,469,103 154,610,007
Shares outstanding at end of year 95,201,534 103,469,103
</Table>
RECLASSIFICATION OF CAPITAL ACCOUNTS:
The Company accounts and reports for distributions to shareholders in accordance
with the American Institute of Certified Public Accountant's Statement of
Position 93-2: Determination, Disclosure, and Financial Statement Presentation
of Income, Capital and Return of Capital Distributions by Investment Companies.
For the year ended August 31, 2004, each series recorded the following
reclassification to the accounts listed below:
<Table>
<Caption>
ACCUMULATED NET ACCUMULATED NET
PAID IN CAPITAL INVESTMENT LOSS REALIZED LOSS
- ------------------------------------------------------------------------------------------------
Alger Technology Fund $ (19,510) $ 19,510 -
Alger Aggressive Growth Fund $ (26,496) $ 26,496 -
Alger Small Cap Fund $ (26,759) $ 26,759 -
Alger Growth Fund $ (31,598) $ 31,598 -
Growth Fund $ 46,836 $ 9,421 $ (56,257)
Equity Income Fund $ 63,099 $ (64) $ (63,035)
Balanced Fund $ 12,156 $ 1,994 $ (14,150)
Government Bond Fund $ (22) $ 22
Tax Free Fund $ 29 $ (8) $ (21)
Primary Fund $ 88 - $ (88)
</Table>
114
<Page>
NOTE 5 -- DISTRIBUTIONS TO SHAREHOLDERS AND TAX COMPONENTS OF NET ASSETS
DISTRIBUTIONS TO SHAREHOLDERS:
The tax character of distributions paid during the following years ended
August 31:
<Table>
<Caption>
2004 2003
- ------------------------------------------------------------------------------------
SM&R GROWTH FUND
CLASS T
Distributions paid from:
Ordinary income $ 720,998 $ 557,596
Long-term capital gain - -
-------------------------
$ 720,998 $ 557,596
=========================
CLASS A
Distributions paid from:
Ordinary income $ 30,045 $ 20,780
Long-term capital gain - -
-------------------------
$ 30,045 $ 20,780
=========================
CLASS B
Distributions paid from:
Ordinary income $ 5,732 $ 2,731
Long-term capital gain - -
-------------------------
$ 5,732 $ 2,731
=========================
SM&R BALANCED FUND
CLASS T
Distributions paid from:
Ordinary income $ 365,311 $ 451,037
Long-term capital gain 264,673 -
-------------------------
$ 629,984 $ 451,037
=========================
CLASS A
Distributions paid from:
Ordinary income $ 68,108 $ 76,409
Long-term capital gain 45,377 -
-------------------------
$ 113,485 $ 76,409
=========================
CLASS B
Distributions paid from:
Ordinary income $ 35,072 $ 40,931
Long-term capital gain 30,287 -
-------------------------
$ 65,359 $ 40,931
=========================
SM&R EQUITY INCOME FUND
CLASS T
Distributions paid from:
Ordinary income $ 1,247,477 $ 1,284,991
Long-term capital gain - -
-------------------------
$ 1,247,477 $ 1,284,991
=========================
CLASS A
Distributions paid from:
Ordinary income $ 92,552 $ 73,915
Long-term capital gain - -
-------------------------
$ 92,552 $ 73,915
=========================
CLASS B
Distributions paid from:
Ordinary income $ 60,397 $ 58,246
Long-term capital gain - -
-------------------------
$ 60,397 $ 58,246
=========================
SM&R GOVERNMENT BOND FUND
CLASS T
Distributions paid from:
Ordinary income $ 739,715 $ 1,026,403
Long-term capital gain 619,475 -
-------------------------
$ 1,359,190 $ 1,026,403
=========================
CLASS A
Distributions paid from:
Ordinary income $ 28,389 $ 45,677
Long-term capital gain 23,324 -
-------------------------
$ 51,713 $ 45,677
=========================
CLASS B
Distributions paid from:
Ordinary income $ 29,374 $ 43,390
Long-term capital gain 31,759 -
-------------------------
$ 61,133 $ 43,390
=========================
</Table>
115
<Page>
DISTRIBUTIONS TO SHAREHOLDERS:
The tax character of distributions paid during the following years ended
August 31:
<Table>
<Caption>
2004 2003
- ------------------------------------------------------------------------------------
SM&R TAX FREE FUND
CLASS T
Distributions paid from:
Ordinary income $ 510,895 $ 541,077
Long-term capital gain 26,744 -
-------------------------
$ 537,639 $ 541,077
=========================
CLASS A
Distributions paid from:
Ordinary income $ 22,086 $ 22,631
Long-term capital gain 1,149 -
-------------------------
$ 23,235 $ 22,631
=========================
CLASS B
Distributions paid from:
Ordinary income $ 19,572 $ 18,736
Long-term capital gain 1,146 -
-------------------------
$ 20,718 $ 18,736
=========================
SM&R PRIMARY FUND
CLASS T
Distributions paid from:
Ordinary income $ 222,772 $ 376,143
-------------------------
$ 222,772 $ 376,143
=========================
SM&R MONEY MARKET FUND
Distributions paid from:
Ordinary income $ 483,068 $ 1,000,180
-------------------------
$ 483,068 $ 1,000,180
=========================
</Table>
116
<Page>
NOTE 5 DISTRIBUTIONS TO SHAREHOLDERS AND TAX COMPONENTS OF NET ASSETS
TAX COMPONENTS OF NET ASSETS:
As of August 31, 2004, the components of net assets on a tax basis were as
follows:
<Table>
ALGER TECHNOLOGY FUND
Unrealized appreciation
(depreciation) - investments $ (34,409)
Capital loss carryforward (302,021)
Paid in capital 1,198,023
TOTAL NET ASSETS $ 861,593
ALGER AGGRESSIVE GROWTH FUND
Unrealized appreciation
(depreciation) - investments $ 36,323
Capital loss carryforward (333,235)
Paid-in-capital 1,845,166
TOTAL NET ASSETS $ 1,548,254
ALGER SMALL CAP FUND
Unrealized appreciation
(depreciation) - investments $ 29,631
Capital loss carryforward (1,991)
Paid-in-capital 1,404,139
TOTAL NET ASSETS $ 1,431,779
ALGER GROWTH FUND
Unrealized appreciation
(depreciation) - investments $ (33,608)
Capital loss carryforward (388,701)
Paid in capital 7,826,939
TOTAL NET ASSETS $ 2,404,630
GROWTH FUND
Undistributed ordinary income $ 147,481
Unrealized appreciation
(depreciation) - investments 28,571,496
Capital loss carryforward (28,904,106)
Paid in capital 114,372,823
TOTAL NET ASSETS $ 114,137,694
EQUITY INCOME FUND
Undistributed ordinary income $ 213,336
Unrealized appreciation
(depreciation) - investments 17,278,680
Undistributed capital gains 2,520,748
Paid-in-capital 93,227,722
TOTAL NET ASSETS $ 113,240,486
</Table>
117
<Page>
TAX COMPONENTS OF NET ASSETS:
As of August 31, 2004, the components of net assets on a tax basis were as
follows:
<Table>
BALANCED FUND
Undistributed ordinary income $ 74,012
Unrealized appreciation
(depreciation) - investments 4,071,357
Undistributed capital gains 93,612
Paid-in-capital 25,907,856
TOTAL NET ASSETS $ 30,146,837
GOVERNMENT BOND FUND
Undistributed ordinary income $ 19
Unrealized appreciation
(depreciation) - investments 50,940
Undistributed capital gains 17,228
Paid-in-capital 29,796,181
TOTAL NET ASSETS $ 29,864,368
TAX FREE FUND
Undistributed ordinary income $ 2,558
Unrealized appreciation
(depreciation) - investments 722,786
Paid-in-capital 13,507,003
TOTAL NET ASSETS $ 14,232,347
PRIMARY FUND
Unrealized appreciation
(depreciation) - investments $ (89,260)
Capital loss carryforward (141,340)
Paid in capital 26,427,999
TOTAL NET ASSETS $ 26,197,399
</Table>
The difference between book basis and tax basis unrealized appreciation
(depreciation) is attributable primarily to the tax deferral of losses on wash
sales.
INFORMATION ABOUT THE PORTFOLIO HOLDINGS
(UNAUDITED)
Beginning with its first and third fiscal quarters ending on or after July 9,
2004, SM&R Investments, Inc. will file its complete schedule of portfolio
holdings with the SEC on Form N-Q. The Company's Form N-Q will be available
without charge, upon request, by calling 1-800-231-4639. Furthermore, you can
obtain the Form N-Q on the SEC at www.sec.gov.
118
<Page>
PERSONAL NOTES SECTION
119
<Page>
120
<Page>
Report of Independent Registered Accounting Firm
To the Shareholders and Board of Directors
SM&R Investments, Inc.
League City, Texas
We have audited the accompanying statements of assets and liabilities of SM&R
Investments, Inc. comprised of SM&R Alger Technology Fund, SM&R Alger Aggressive
Growth Fund, SM&R Alger Small-Cap Fund, SM&R Alger Growth Fund, SM&R Growth
Fund, SM&R Equity Income Fund, SM&R Balanced Fund, SM&R Government Bond Fund,
SM&R Tax Free Fund, SM&R Primary Fund and SM&R Money Market Fund, including the
schedule of investments as of August 31, 2004, 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 and the financial highlights for
each of the five years in the period then ended (with respect to the Alger
Technology, Alger Aggressive Growth, Alger Small-Cap and Alger Growth Funds for
the four years ended August 31, 2004) and (with respect to Growth, Equity Income
and Balanced Funds for each of the two years in the period ended December 31,
2000, for the period January 1, 2001 to August 31, 2001 and for the three years
in the period ended August 31, 2004). 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.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board United States. 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, 2004, by correspondence with the custodian and
brokers. 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 each
fund comprising SM&R Investments, Inc. as of August 31, 2004, the results of
their operations for the year then ended, the changes in their net assets for
each of the two years in the period then ended and the financial highlights for
each of the five years in the period then ended (with respect to the Alger
Technology, Alger Aggressive Growth, Alger Small-Cap and Alger Growth Funds for
the four years ended August 31, 2004) and (with respect to Growth, Equity Income
and Balanced Funds for each of the two years in the period ended December 31,
2000, for the period January 1, 2001 to August 31, 2001 and for the three years
in the period ended August 31, 2004), in conformity with accounting principles
generally accepted in the United States of America.
TAIT, WELLER & BAKER
PHILADELPHIA, PENNSYLVANIA
OCTOBER 8, 2004
121
<Page>
SUPPLEMENTAL INFORMATION (UNAUDITED)
Information pertaining to the Directors of the Fund is set forth below. The
statement of additional information (SAI) includes additional information about
the Directors and is available without charge, upon request by calling
(800)231-4639.
INDEPENDENT DIRECTORS
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
POSITION(S) HELD TERM OF OFFICE AND PRINCIPAL OCCUPATION(S) OVERSEEN
NAME, ADDRESS, & AGE WITH FUND LENGTH OF TIME SERVED DURING PAST 5 YEARS BY DIRECTOR
- ------------------------------------------------------------------------------------------------------------------------------------
Ernest S. Bartutt, Ph. D. - Director Indefinite Since 8/90 - Marie B. Gale Centennial 19*
245D South Shore Blvd. - Audit Committee Professor in Psychiatry,
League City, TX 77573 Indefinite Since 12/97 Cognitive Neuroscience
Age 79 Laboratory, Department of
Psychiatry and Behavioral
Sciences, University of Texas
Medical Branch
Edwin K. Nolan - Director Indefinite Since 11/97 - Investor and Attorney, Law 19*
2450 South Shore Blvd. - Nominating Indefinite Since 11/00 Offices, Edwin K. Nolan, P.C.
League City, TX 77573 Committee Director/Owner of Canyon Lake
Age 61 - Audit Committee Indefinite Since 11/03 Aviation, Inc.
- Director of Hancock Mini Mart,
Inc.
Robert V. Shattuck - Director Indefinite Since 11/97 - Attorney, Law Offices, Robert V. 19*
2450 South Shore Blvd. - Nominating Indefinite Since 11/00 Shattuck, Jr.
League City, TX 77573 Committee
Age 62
Donald P. Stevens - Director Indefinite Since 9/00 - Assistant to the President for 19*
2450 South Shore Blvd. - Nominating Indefinite Since 11/00 Governmental Relations of the
League City, TX 77573 Committee University of Texas Medical
Age 57 Branch, Galveston, TX
- Vice President and Director,
Jurnail Galveston Foundation (a
family charitable foundation)
Steven H. Stubbs - Director Indefinite Since 9/00 - President and Director of 19*
2450 South Shore Blvd. - Audit Committee Indefinite Since 8/03 Dancing Rabbit Press, Inc. (a
League City, TX 77573 Chairman publishing company)
Age 65 - Director, Neshoba County Public
Library
</Table>
INTERESTED DIRECTORS
<Table>
Michael W. McCroskey (1) President & Indefinite Since 8/94 - President, CEO, Director and 19*
2450 South Shore Blvd. Director member of Executive Committee of
League City, TX 77573 Securities Management and
Age 61 Research, Inc. (SM&R)^
- Executive Vice President and
Treasurer of American National
Insurance Company
- Director and President of ANREM
Corporation (real estate
management company)^
- President and Director of ANTAC
Corporation (real estate
management company)^
- Director of Comprehensive
Investment Services, Inc.
(investment services company)^
- Vice President of Garden State
Life Insurance Company^
- Vice President of American
National Property & Casualty
Company^
- Vice President of Standard Life &
Accident Insurance Company^
- Vice President of Pacific
Property and Casualty Company^
- Assistant Secretary of American
National General Insurance
Company^
- Assistant Secretary of American
National Life Insurance Company
of Texas^
- Vice President of Farm Family
Life Insurance Company^
- Vice President of Farm Family
Casualty Insurance Company^
- Vice President of United Farm
Family Insurance Company^
Leo McLeod Mathews (2) Director Indefinite Since 8/94 - Communications Specialist, 19*
2450 South Shore Blvd. National Western Life Insurance
League City, TX 77573 Company 5/02-present
Age 42 - Director of Garden State Life
Insurance Company^
- Senior Communications
Specialist, Texas Guaranteed
Student Loan Corporation
1/01-5/02
- Internal Publications Manager,
Tivoli Software 4/00-1/01
- Communications Consultant, Texas
Association of School Boards
8/99-4/00
- Technical Writer/Publications
Editor, National Western Life
Insurance Company 1/92-8/99
Ann McLeod Moody (3) Director Indefinite Since 11/97 - Housewife, Personal Investments 19*
2450 South Shore Blvd. - Director of Moody Gardens, Inc.
League City, TX 77573 (a charitable organization)
Age 67
Jamie G. Williams (4) Director Indefinite Since 11/97 - Regional Grants Director, The 19*
2450 South Shore Blvd. Moody Foundation (a charitable
League City, TX 77573 foundation)
Age 58 - Academic Language therapist and
Educational Consultant Director,
Center for Computer Assistance
to the Disabled (C-CAD)
</Table>
OFFICERS
<Table>
Michael W. McCroskey President & Indefinite/Since 8/94 - SEE INTERESTED DIRECTOR TABLE ABOVE 19*
2450 South Shore Blvd. Director**
League City, TX 77573
Age 61
Brenda T. Koelemay Vice President Indefinite/Since 1992 - Vice President & Treasurer of SM&R 19*
2450 South Shore Blvd. & Treasurer**
League City, TX 77573
Age 49
Teresa E. Axelson Vice President Indefinite/Since 1983 - Vice President & Secretary of SM&R 19*
2450 South Shore Blvd. & Secretary**
League City, TX 77573
Age 56
</Table>
INTERESTED DIRECTOR RELATIONSHIP
(1) Mr. McCroskey serves as an officer and director of SM&H, the Fund's
investment advisor. He also serves as an officer of SM&R's parent company,
American National Insurance Company ("American National").
(2) Ms. Matthews is the step-daughter of Robert I. Moody. Mr. Moody is the
Chairman of the Board and Chief Executive Officer of American National, the
parent of SM&R. Mr. Moody is also a trustee of The Moody Foundation, a
charitable foundation established for charitable and educational purposes,
which owns approximately 23.3% of the outstanding common shares of American
National, and he serves as Chairman of the Board and Chief Executive
Officer of The Moody National Bank of Galveston (the "Bank"), which, in its
capacity as trustee and custodian, votes approximately 46.8% of the
outstanding common shares of American National. Mr. Moody is also the
President and a director of the companies owning the controlling interests
in such bank, and he is a life income beneficiary of one of such trusts.
Ms. Mathews is the daughter of Fund director Ann McLeod Moody
(3) Mr. Moody is the spouse of Robert L. Moody. See footnote 2 above. Ms. Moody
is the mother of Fund director Lea McLeod Mathews.
(4) Ms. Williams is an employee of The Moody Foundation, which owns
approximately 23.3% of American National, the parent of SM&R
FOOT NOTES
* Also a Director of American National Investment Accounts, Inc., another
investment company advised by SM&R, which has 11 portfolios.
^ Under control of American National
# Under common control with American National.
** Positions also held with American National Investment Accounts, Inc.,
another investment company advised by SM&R.
<Page>
FUNDS LISTING
SM&R Alger Technology Fund
SM&R Alger Aggressive Growth Fund
SM&R Alger Small-Cap Fund
SM&R Alger Growth Fund
SM&R Growth Fund
SM&R Equity Income Fund
SM&R Balanced Fund
SM&R Government Bond Fund
SM&R Tax Free Fund
SM&R Primary Fund
SM&R Money Market Fund
HOW TO REACH US:
Investor Services: 800.231.4639
Fund Quotes and Investor Hotline: 877.239.2049
Sales and Marketing: 800.526.8346
To Request a Prospectus: 800.231.4639
Visit our website at: www.smrinvest.com
Securities Management and Research, Inc.
Manager & Distributor / Member NASD, SIPC
2450 South Shore Blvd., Suite 400
League City, TX 77573 - 281.334.2469
DIRECTORS
Ernest S. Barratt, Ph.D.
Lea McLeod Matthews
Michael W. McCroskey
Ann McLeod Moody
Edwin K. Nolan
Robert V. Shattuck, Jr.
Donald P. Stevens
Steven H. Stubbs
Jamie G. Williams
OFFICERS
Michael W. McCroskey, President
Brenda T. Koelemay, Vice President and Treasurer
Teresa E. Axelson, Vice President and Secretary
INVESTMENT ADVISOR AND MANAGER
Securities Management and Research, Inc.
P.O. Box 58969 - Houston, TX 77258-8969
CUSTODIAN
Securities Management and Research, Inc.
P.O. Box 58969 - Houston, TX 77258-8969
LEGAL COUNSEL
Greer, Herz & Adams, L.L.P.
One Moody Plaza - Galveston, Texas 77550
UNDERWRITER AND REDEMPTION AGENT
Securities Management and Research, Inc.
P.O. Box 58969 - Houston, TX 77258-8969
TRANSFER AGENT, REGISTRAR AND DIVIDEND PAYING AGENT
Securities Management and Research, Inc.
P.O. Box 58969 - Houston, TX 77258-8969
INDEPENDENT AUDITORS
Tait, Weller & Baker
1818 Market Street, Suite 2400
Philadelphia, PA 19103
<Page>
ITEM 2. CODE OF ETHICS
Adoption of a Code of Ethics for Senior Officers
WHEREAS, the Fund's management recommends to the Board the adoption of a
Senior Officer Code of Ethics in compliance with the Sarbanes-Oxley Act;
ACCORDINGLY BE IT FURTHER RESOLVED, that the following
resolution is hereby adopted and approved:
BE IT RESOLVED, that the SM&R Family of Funds adopts the Senior Officers
Code of Ethics as follows:
THE SM&R FAMILY OF FUNDS
CODES OF ETHICS FOR SENIOR OFFICERS
STATEMENT OF GENERAL PRINCIPLES
The Board of Directors of the SM&R Family of Funds (the "Funds") have adopted
this Code of Ethics ("Code") applicable to their Principal Executive Officer and
Principal Financial and Accounting Officer and others who may serve in similar
functions (the "Covered Officers") to promote:
* Honest and ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between personal and professional relationships;
* Full, fair, accurate, timely and understandable disclosure in documents
filed with the Securities and Exchange Commissions ("SEC") and in other public
communications;
* Compliance with applicable governmental laws, rules and regulations;
* The prompt internal reporting to an appropriate person or persons identified
in the Code of violations of the Code; and
* Accountability for adherence to the Code.
No Code can address every situation that a Senior Officer might face. As a
guiding principle, Senior Officers should adhere to a high standard of business
ethics and strive to implement the spirit as well as the letter of applicable
laws, rules and regulations, and to provide the type of clear and complete
disclosure and information that Fund shareholders have a right to expect.
SECTION 1. HONEST AND ETHICAL CONDUCT
Each Covered Officer named in Exhibit A of this Code owes a duty to the Funds
and the Funds shareholders to act with integrity and honesty in the conduct of
his/her duties and responsibilities while maintaining the confidentiality of
information. Integrity requires, among other things, being honest and candid.
Deceit and subordination of principle are inconsistent with integrity.
SECTION 2. AVOIDANCE OF CONFLICTS OF INTEREST
Definition:
A "conflict of interest" occurs when a Covered Officer's private interest
interferes with the interests of, or his service to, the Funds. For example,
a conflict of interest would arise if a Covered Officer, or a member of his
family, receives improper personal benefits as a result of his position with
the Funds.
Covered Officers must avoid any actual or apparent conflict of interest, direct
or indirect, between personal and professional relationships. A Covered
Officer should not engage in personal, business or professional relationships
or dealings which would impair his/her independence or judgement or adversely
affect the performance of his/her duties in the best interests of the Funds and
its shareholders. Any relationship or dealing that would present a conflict
for a Covered Officer could also present a conflict if it is related to a
member of his/her immediate family.
Certain conflicts of interest covered by this Code arise out of the
relationships between Covered Officers and the Funds and are already subject
to conflict of interest provisions in the Investment Company Act of 1940 and
the Investment Advisers Act of 1940. This Code does not, and is not intended
to, repeat or replace these programs and procedures, and such conflicts fall
outside of the parameters of this Code.
It is recognized by the Board that, conflicts may arise from, or as a result
of, the contractual relationship between the Funds and the investment adviser
of which the Covered Officers are also officers or employees. As a result, the
Board recognizes that the Covered Officers will, in the normal course of their
duties (whether formally for the Funds or for the adviser, or for both), be
involved in establishing policies and implementing decisions that will have
different effects on the adviser and the Funds. The Board recognizes that
participation of the Covered Officers in such activities is inherent in the
contractual relationship between the Funds and the adviser and is consistent
with the expectation of the Board of the performance by the Covered Officers
of their duties as officers of the Funds.
Each Covered Officer must:
* Handle any actual or apparent conflict of interest ethically;
* Avoid conflicts of interest wherever possible;
* Not use his/her personal influence or personal relationships to influence
investment decisions or financial reporting by the Funds whereby the Covered
Officer would benefit personally to the detriment of any of the Funds;
* Not cause any of the Funds to take action, or fail to take action, for the
individual personal benefit of the Covered Officer rather than the benefit of
any of the Funds;
Not use knowledge of portfolio transactions made or contemplated for the Funds
to profit or cause others to profit, by market effect of such transactions;
Some conflict of interest or potential conflict of interest situations should
always be discussed with the Funds Legal Counsel, if material, include:
* Service as a director on the board of any public or private company;
* Any outside business activity that detracts from an individual's ability to
devote appropriate time and attention to his/her responsibilities with the
Funds;
* The receipt of any entertainment from any company with which the Funds
have current or prospective business dealings unless such entertainment is
business-related, reasonable in cost, appropriate as to time and place, and not
so frequent as to raise any question of impropriety or other formulation as the
Funds already use in another code of ethics or conduct;
* A direct ownership interest in, or any consulting or employment relationship
with, any of the Funds; service providers, other than its investment adviser,
principal underwriter, or other SM&R and its parent organization's affiliated
entities and other than a de minimis ownership interest (for purposes of this
section of the Code an ownership interest of 1% or less shall constitute a de
minimis ownership interest, and any ownership interest of more than 1% creates
a rebuttable presumption that there may be a material conflict of interest);
and
* A direct or indirect financial interest in commissions, transaction charges
or spreads paid by the Funds for effecting portfolio transactions or for
selling or redeeming shares other than an interest arising from the Covered
Officer's employment with SM&R, its subsidiaries, its parent organizations and
any affiliates or subsidiaries thereof, such as compensation or equity
ownership,and other than an interest arising from a de minimis ownership
interest in a company with the Funds execute portfolio transactions or a
company that receives commissions or other fees related to its sales and
redemptions of shares of the Funds (for purposes of this section of the Code an
ownership interest of 1% or less shall constitute a de minimis ownership
interest, and an ownership interest of more than 1% creates a rebuttable
presumption that there may be a material conflict of interest).
SECTION 3. DISCLOSURE
Covered Officers have a supervisory role with respect to the financial
information included in reports filed with regulatory agencies and public
disclosures by the Funds, and have particular responsibilities in connection
with these communications.
Therefore, Each Covered Officer must:
* familiarize himself/herself with the disclosure requirements applicable to
the Funds as well as the business and financial operations of the Funds;
* not knowingly misrepresent, or cause others to misrepresent, facts about the
Funds to others, whether within or outside the Funds, including to the Funds
directors and auditors, and to governmental regulators and self-regulatory
organizations;
* ensure that reasonable steps are taken within his/her area of responsibility
and consult with other officers and employees of the Funds and the adviser to
promote full, fair, accurate, timely and understandable disclosure in all
regulatory filings, as well as when communicating with the Funds' shareholders
or the general public, in accordance with applicable law.
SECTION 4. COMPLIANCE
It is each Funds policy to comply in all material respects with all applicable
governmental laws, rules and regulations. It is the personal responsibility
of each Covered Officer to adhere to the standards and restrictions imposed by
those laws, rules and regulations, including those relating to affiliated
transactions, accounting and auditing matters.
SECTION 5. REPORTING AND ACCOUNTABILITY
Each Covered Officer must:
* Upon receipt of the Code or upon becoming a Covered Officer, sign and submit
to the Chief Compliance Officer of the Funds an acknowledgement stating that
he/she has received, read and understands the Code;
* Annually thereafter submit a form to the Chief Compliance Officer of the
Funds confirming that he/she has received, read and understands the Code and
has complied with the requirements of the Code;
* Notify Legal Counsel promptly if he/she becomes aware of any existing or
potential violation of this Code;.
* Not retaliate against any other Covered Officer or any employee of the Funds
or their affiliated persons for reports of potential violations that are made
in good faith.
Except as described otherwise below, Legal Counsel is responsible for applying
this Code to specific situations in which questions are presented to him/her
and has the authority to interpret this Code in any particular situation.
Legal Counsel shall take all action he/she considers appropriate to investigate
any actual or potential violations reported to him/her. Legal Counsel is
authorized to consult, as appropriate, with Chairman of the Audit Committee of
the Board and is encouraged to do so.
Legal Counsel is responsible for granting waivers and determining sanctions, as
appropriate. Additionally, the Chairman of the Audit Committee may also
consider approvals, interpretations, or waivers sought by the Covered Officers.
The Funds will follow these procedures in investigating and enforcing this
Code;
* Legal Counsel will take all appropriate action to investigate any potential
violations reported to him/her;
* violations and potential violations will be reported to the Chairman of the
Audit Committee of the Board after the investigation has been completed;
* if the Chairman of the Audit Committee determines that a violation has
occurred, he/she will inform the Board, which will take all appropriate
disciplinary or preventive action;
* appropriate disciplinary action, may include a letter of censure, suspension,
dismissal or, in the event of criminal or other serious violations of law,
notification to the SEC or other appropriate law enforcement authorities;
* Legal Counsel will be responsible for granting waivers, as appropriate; and
* any changes to or waivers of this Code will, to the extent required, be
disclosed on Form N-CSR as provided by SEC rules.
SECTION 6. OTHER POLICIES AND PROCEDURES
The Funds' and their investment adviser's and principal underwriter's codes of
ethics under Rule 17j-1 of the Investment Company Act and the Corporate
Policies and Conflict of Interest and Sensitive Transaction Policies of SM&R's
parent, American National Insurance Company are separate requirements applying
to the Covered Officers and others, and are not part of this Code.
SECTION 7. AMENDMENTS
Any amendments to this Code, other than amendments to Exhibit A, must be in
written form and approved or ratified by a majority vote of the Funds Boards,
including a majority of the independent directors.
SECTION 8. CONFIDENTIALITY
All reports and records prepared or maintained pursuant to this Code will be
considered confidential and shall be maintained and protected accordingly.
Except as otherwise required by law or this Code, such matters shall not be
disclosed to anyone other than the appropriate Board and its counsel.
SECTION 9. INTERNAL USE
The Code is intended solely for the internal use by the Funds and does not
constitute an admission, by or on behalf of any Funds, as to any fact,
circumstance, or legal conclusion.
Date: October 1, 2003
Exhibit A
Persons Covered by this Code of Ethics
Michael W. McCroskey, President, Chief Executive Officer
Brenda T. Koelemay, Chief Financial Officer
THE SM&R FAMILY OF FUNDS
CODES OF ETHICS FOR SENIOR OFFICERS
ACKNOWLEDGEMENT
I hereby acknowledged that I am a Principal Officer of the Funds and I am aware
of and subject to the Funds' Code of Ethics. Accordingly, I have read and
understood the requirements of the Code of Ethics and I am committed to fully
comply with the Code of Ethics.
I recognize my obligations to promote:
1. Honest and ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between personal and professional relationships;
2. Full, fair, accurate, timely, and understandable disclosure in reports and
documents that the Funds file with, or submit to, the Commission and in other
public communications made by the Funds; and
3. Compliance with applicable governmental laws, rules and regulations.
Date: November 8, 2004 Name:/S/ Michael W. McCroskey
Title: President, Chief Executive Officer
THE SM&R FAMILY OF FUNDS
CODES OF ETHICS FOR SENIOR OFFICERS
ACKNOWLEDGEMENT
I hereby acknowledged that I am a Principal Officer of the Funds and I am aware
of and subject to the Funds' Code of Ethics. Accordingly, I have read and
understood the requirements of the Code of Ethics and I am committed to fully
comply with the Code of Ethics.
I recognize my obligations to promote:
1. Honest and ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between personal and professional relationships;
2. Full, fair, accurate, timely, and understandable disclosure in reports and
documents that the Funds file with, or submit to, the Commission and in other
public communications made by the Funds; and
3. Compliance with applicable governmental laws, rules and regulations.
Date: November 8, 2004 Name:__/S/ Brenda T. Koelemay__
Title:_Vice President, Chief Financial Officer
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT
The Board of Directors has determined that the registrant has at least one
Audit committee financial expert serving on its Audit Committee. The Audit
Committee financial expert is Seven H. Stubbs. Mr. Stubbs is "independent"
within the meaning of that term used in Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit fees for SM&R Investments, Inc. totaled approximately $76,800 in 2004 and
approximately $74,700 in 2003, including fees associated with the annual audit
and filings of the Portfolio's Form N-1A and Form N-SAR.]
Fees for tax services to SM&R Investments, Inc., including tax compliance, tax
advice and tax planning, totaled approximately $8,250 in 2004 and $8,250 in
2003.
ITEM 5. [Reserved]
ITEM 6. [Reserved]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND
PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT
COMPANIES.
Not applicable
ITEM 8. [Reserved]
ITEM 9. CONTROLS AND PROCEDURES
As of February 27, 2004, an evaluation was performed under the supervision
and with the participation of the officers of SM&R Investments, Inc. (the
"Company"), including the Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO"), of the effectiveness of the Company's disclosure
controls and procedures. Based on that evaluation, the officers, including the
CEO and CFO, conclude that, as of February 27, 2004, the company's
disclosure controls and procedures were reasonably designed so as to ensure
that material information relating to the Company is made known to the CEO
and CFO. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation and until the filling of this
report, including any corrective actions with regard to significant
deficiencies and material weaknesses.
ITEM 10. EXHIBITS.
(a) Not applicable.
(b) (1) In connection with the Certified Shareholder Report of SM&R
Investments, Inc. (the "Company") on Form N-CSR for the period ended
August 31, 2004 as filed with the Securities and Exchange Commission on the
date hereof (the "Report"), I, Michael W. McCroskey, President of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
(2) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(3) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Date: October 29, 2004
\S\ Michael W. McCroskey
-------------------------------------
President
A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature
that appears in typed form within the electronic version of this written
statement required by Section 906, has been provided to the company and will
be retained by the Company and furnished to the Securities and Exchange
Commission or its staff upon request.
(b) (1) In connection with the Certified Shareholder Report of SM&R
Investments, Inc. (the "Company") on Form N-CSR for the period ended
August 31, 2004 as filed with the Securities and Exchange Commission on the
date hereof (the "Report"), I, Brenda T. Koelemay, Vice President and Treasurer
of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(2) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(3) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Date: October 29, 2004
\S\ Brenda T. Koelemay
- -------------------------------------
Vice President and Treasurer
A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature
that appears in typed form within the electronic version of this written
statement required by Section 906, has been provided to the company and will
be retained by the Company and furnished to the Securities and Exchange
Commission or its staff upon request.