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, 2005
Item 1 Report to Shareholders
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TWO THOUSAND AND FIVE
ANNUAL REPORT
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FOR THE FISCAL YEAR ENDING AUGUST 31
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2005 ANNUAL REPORT
SECURITIES MANAGEMENT AND RESEARCH, INC.
INVESTING WISDOM
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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.
The investment advisor is responsible for exercising the voting rights
associated with the securities purchased and held by the Funds. A description of
the policies and procedures the investment advisor uses in fulfilling this
responsibility is included in the Funds' Statement of Additional Information and
is available without charge, upon request, by calling 1-800-231-4639. The
policies and procedures are also available on the Securities and Exchange
Commission's website at http://www.sec.gov. Information on how the Funds voted
proxies relating to portfolio securities during the most recent 12 month period
ended June 30 is available without charge, upon request, by calling
1-800-231-4639 and is also available on the SEC's website at http://www.sec.gov.
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SECURITIES MANAGEMENT AND RESEARCH, INC.
2005
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GETTING THERE: A PRACTICAL APPROACH
MOST INVESTORS envision a time in their lives where they reach a level of
financial independence. A time where they can place their particular interests
or hobbies ahead of, or perhaps in place of, the demands of the workplace.
Perhaps they look forward to a long comfortable retirement, or maybe they have
no plans to retire completely, but a more comfortable lifestyle, based on
financial strength, is widely coveted.
From our perspective, there is no elusive strategy, no mystical formula
available to only a precious few, there are only tried and true investing
fundamentals that have catapulted investors to financial shangri la.
1 PAY YOURSELF FIRST
QUESTION: Can you make a small lifestyle sacrifice to direct a regular stream of
disposable income toward your "tomorrows" rather than your "today's?"
The great majority of successful investors began with such a simple blueprint
from which most of us can benefit. They viewed themselves as their most
important bill. Not sexy, just effective. Before any other bill is paid, an
amount of money right for them is simply deducted from their bank account each
month into a mix of investments right for them, based on their individual
circumstances. After all,
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in the beginning the challenge is not to invest in the just the right thing, the
challenge is to simply invest regularly. Instill the discipline early and
practice it often over your entire working life. While riches cannot be
guaranteed, a certain amount of success can be virtually assured via consistent
investment.
2 MAINTAIN REALISTIC RETURN EXPECTATIONS
WHILE THERE IS virtually always some investment of the moment offering outsized
(and undersized) returns, performance numbers tend to revert to the long-term
averages over a long investment life. Understand that over the past 80 years,
large company stocks, as measured by the unmanaged Standard and Poor's 500
index, have offered a return of a bit better than 10%. But within that time
period are shorter durations that have offered higher and lower rates of return.
No one can say with any certainty that your experience will mirror the long-term
number, but it is reasonable to at least understand this baseline. Investing in
longer term bonds over this time period has offered returns of a little better
than 5%, while cash investments have traditionally done a little better than
inflation, coming in a bit better than 3%.
Again, market and economic conditions over your investment lifespan, as well as
your own actions will determine whether or not these returns are in the cards
for you. But once again, it is wise to have these frames of reference in mind.
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3 CREATE AND STICK TO A PLAN
DECIDE HOW MUCH to save and stick with it, through all kinds of market
environments. Be prepared for the market to throw you a curveball and make your
plan seem misguided. Don't give in to the temptation to hastily make changes
every time the market moves to your disadvantage. The market is constantly
cycling. Just accept this investing fact of life early on in your quest for
wealth creation. If you utilize several asset classes you may be able to
somewhat insulate yourself from dramatic volatility so despised by investors.
Also, be mindful not to alter your sensible plan and jump on the latest
investing craze, because it may just be about to fizzle by the time it becomes
widely recognized by the investing masses. That which becomes investment chatter
de jour at backyard barbecues has typically long since passed the actionable
phase.
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4 RE-BALANCE AS IT BECOMES NECESSARY
RE-BALANCING MEANS taking control of your investment destiny, rather than ceding
control to the market. The market has a mind of its own and, if you aren't
careful, can lead you much astray on your lifelong wealth creation journey. If
you believe that the right balance for you is to maintain a 50-50 ratio between
stocks and bonds, and you experience a mighty rally in bonds, you may find
yourself out of balance with the original intent of your investment plan. This
is the time to take action. At some juncture that makes sense for you -- perhaps
as frequently as once per quarter, but surely no more infrequent than once
yearly -- get your allocation back in line. Re-position the gains into the less
stellar recent performers so you maintain the risk/reward profile you determined
was right for you (income taxes may apply). Remember, it's your money and it's
your plan...be in control of it.
WHAT SOLUTIONS CAN SM&R MUTUAL FUNDS OFFER YOU?
AT SM&R, WE OFFER one family of Funds employing two distinctly different
investment approaches. The traditional SM&R Funds are managed a little more
defensively, while the SM&R Alger Funds, which are sub-advised by Fred Alger
Management, Inc., feature an all-growth philosophy. We offer these dual
strategies because we know that no one way is always the right way. At different
times, in dissimilar environments, each philosophy can prove to be more
successful.
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But the key is, including some of both in your investment approach will probably
benefit your investment returns over your lifetime. The trick is to choose your
investment mix based solely upon your individual circumstances, monitor it
regularly, re-allocate when appropriate, and remain steadfast in your approach.
If you can do this, your chances for success will increase dramatically. But
will you be in the sweet spot over every market cycle? Probably not, but you may
have positioned yourself in such a way as to weather the inevitable market
storms much more comfortably.
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THE SM&R PHILOSOPHY
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THE SM&R INVESTMENT FOUNDATION RESTS FIRMLY ON:
1. An equity selection approach focused on identifying undervalued
companies
2. A core of blue chip investment ideas
3. Team approach to portfolio management
4. Broad diversification
The investment professionals at SM&R believe that over time, strong
performance is derived from a DISCIPLINED approach to investing. At the
heart of this disciplined approach is a BOTTOM-UP method of stock
selection, which demands:
- Building a portfolio company by company, rather than attempting to
mold the portfolio to bold macroeconomic predictions.
- Ensuring that the companies meet rigorous performance criteria.
To aid in this thorough evaluation, two specific computer models are
engaged.
- - CASHFLOW MODEL SM&R's cash flow search engine allows comprehensive
screening of thousands of potential investment candidates to discover those
experiencing strong cash flows, which can be an important precursor to
future earnings growth.
- - EARNINGS SCREENING MODEL SM&R operates under the tenet that over time stock
prices track earnings. The ability to accurately forecast which companies
are poised for accelerating earnings is a critical factor in long-term
investment success. This model provides a systematic, unemotional mechanism
which aids in the quest of deriving an accurate earnings picture.
After the companies survive the rigors of the models, SM&R expert fund
managers and analysts begin a hands-on process of more subjective analysis,
including
- Interacting with Wall Street analysts who cover the particular
industry full time.
- Assessing the potential impact of macroeconomic trends
- Comparing the idea to other strong choices within the same industry.
Those ideas which survive the process and remain attractive from a
valuation perspective then go to the investment team for the final
decision.
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THE ALGER PHILOSOPHY
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THE ALGER INVESTMENT FOUNDATION RESTS FIRMLY ON:
Over its 35-plus years of operation, Alger has stood firm and maintained
the same disciplined philosophy of investing.
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1. Buying the stocks of America's fastest growing companies.
2. A tremendous commitment to proprietary, bottom-up investment research.
3. A business philosophy in which the company strives to be the best
money management firm in America. To that end, the company is
committed to always having an Alger family member at the helm.
Throughout its history, Alger has been guided by the philosophy that the
most profitable investment opportunities are found in companies
experiencing a period of rapid change. Alger believes these companies fall
into one of two categories:
- - HIGH UNIT VOLUME GROWTH These are vital, creative companies which offer
goods and services to a rapidly expanding marketplace. They include both
established companies and newer, emerging firms, offering new or improved
products, or firms simply fulfilling an increased demand for an existing
line.
- - POSITIVE LIFE CYCLE CHANGE These are companies experiencing a major change
that is expected to produce advantageous results. These changes may be as
varied as new management, products or technologies, restructuring or
reorganization, or merger or acquisition.
Alger believes companies in both of these categories are likely to enjoy
dynamic earnings growth which will stimulate investor response and create a
powerful upward movement in their stock prices.
- - A COMMITMENT TO RESEARCH Alger research analysts are experts who cover
specific groups of stocks and industries. They vigorously search for new
investment ideas by analyzing trade publications, attending industry trade
shows, and speaking frequently with management, customers and suppliers of
the companies they cover.
- - PURCHASE DECISION Alger's bottom-up approach to stock selection places
primary emphasis on individual security selection. After thorough primary
research, an analyst presents an investment idea directly to senior
management. Spreadsheets are analyzed and the results of proprietary
analytical filters are reviewed during these sessions. If senior management
agrees with the case made for a stock, a buy program is implemented
immediately.
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KNOW THYSELF
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AND FOR THE FINAL WORD ...
KNOW THYSELF!
This may sound a little ridiculous. . .of course you know yourself. But do
you know yourself as an investor? Money can elicit strong emotions, and
many of them may not serve you well. Fear, uncertainty and helplessness
register on the negative side of the ledger, while confidence, excitement
and even out-and-out exuberance are generally more welcomed feelings.
Actually, both sets of emotions can serve you poorly or well, depending
upon your reaction to the feelings.
But as balances grow the stakes become higher and self-imposed obstacles
may become greater. Previously overlooked market adjustments may be more
difficult to simply disregard as the absolute dollars involved grow. A 10%
decline on a $10,000 balance can be a lot easier to stomach than the same
decline on $250,000, because of the potential lifestyle alteration.
The natural tendency is to get fearful as balances plummet and more
exuberant as balances storm higher. As famed sage Warren Buffet has said so
many times, a better approach may be to get greedy when others are fearful,
and fearful when others are greedy. A tall order, but possible.
Speak to your investment professional when you feel uneasy. It is their job
to provide sound counsel devoid of potentially destructive emotion.
And once again, at the end of this fiscal year, we are humbled and honored
by the trust and confidence you have bestowed upon us. We take this
fiduciary responsibility very seriously, and we offer our sincere thanks to
you. May the next 12 months be truly rewarding -- financially, and in all
ways - to you and your family.
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AN EXAMPLE OF ON-GOING EXPENSES (UNAUDITED):
Each shareholder of the Company may 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, 2005, and held for six months ending August 31,
2005.
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 HYPOTHETICAL
BEGINNING ACCOUNT *ANNUALIZED ENDING ACCOUNT EXPENSES PAID ENDING ACCOUNT EXPENSES PAID
FUNDS VALUE (03/01/05) EXPENSE RATIOS VALUE (08/31/05)(1) DURING PERIOD(2) VALUE (08/31/05) DURING PERIOD(2)
ALGER TECHNOLOGY FUND
Class A $ 1,000.00 2.10% $ 1,298.70 $ 12.17 $ 1,014.62 $ 10.66
Class B 1,000.00 2.71% 1,297.50 15.69 1,011.54 13.74
ALGER AGGRESSIVE
GROWTH FUND
Class A $ 1,000.00 1.85% $ 1,191.90 $ 10.22 $ 1,015.88 $ 9.40
Class B 1,000.00 2.50% 1,186.00 13.77 1,012.60 12.68
ALGER SMALL-CAP FUND
Class A $ 1,000.00 1.90% $ 1,240.50 $ 10.73 $ 1,015.63 $ 9.65
Class B 1,000.00 2.55% 1,229.30 14.33 1,012.35 12.93
ALGER GROWTH FUND
Class A $ 1,000.00 1.70% $ 1,188.70 $ 9.38 $ 1,016.64 $ 8.64
Class B 1,000.00 2.35% 1,179.60 12.91 1,013.36 11.93
GROWTH FUND
Class A $ 1,000.00 1.36% $ 1,018.90 $ 6.92 $ 1,018.35 $ 6.92
Class B 1,000.00 1.86% 1,009.40 9.42 1,015.83 9.45
Class T 1,000.00 1.24% 1,015.10 6.30 1,018.95 6.31
EQUITY INCOME FUND
Class A $ 1,000.00 1.26% $ 1,007.10 $ 6.37 $ 1,018.85 $ 6.41
Class B 1,000.00 1.76% 1,001.50 8.88 1,016.33 8.94
Class T 1,000.00 1.17% 1,008.00 5.92 1,019.31 5.96
BALANCED FUND
Class A $ 1,000.00 1.30% $ 1,003.40 $ 6.56 $ 1,018.65 $ 6.61
Class B 1,000.00 1.80% 997.40 9.06 1,016.13 9.15
Class T 1,000.00 1.27% 1,003.20 6.41 1,018.80 6.46
GOVERNMENT BOND FUND
Class A $ 1,000.00 0.73% $ 1,042.40 $ 3.76 $ 1,021.53 $ 3.72
Class B 1,000.00 1.19% 1,037.40 6.11 1,019.21 6.06
Class T 1,000.00 0.72% 1,040.70 3.70 1,021.58 3.67
TAX FREE FUND
Class A $ 1,000.00 0.74% $ 1,033.60 $ 3.79 $ 1,021.48 $ 3.77
Class B 1,000.00 1.25% 1,030.10 6.40 1,018.90 6.36
Class T 1,000.00 0.75% 1,035.40 3.85 1,021.42 3.82
PRIMARY FUND $ 1,000.00 0.80% $ 1,024.10 $ 4.08 $ 1,021.17 $ 4.08
MONEY MARKET FUND $ 1,000.00 0.47% $ 1,025.30 $ 2.40 $ 1,022.84 $ 2.40
</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, 2005 to August 31, 2005
after actual expenses and will differ from the hypothetical ending account
value which is based on each class of each of the funds and actual expense
ratios and a hypothetical annual return of 5% before expenses.
(2) Expenses are equal to the annualized expense ratio's, shown in the table
above, multiplied by the average account value over the period, then
multiplied by 184 over 365 (to reflect the six month period).
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APPROVAL OF INVESTMENT ADVISORY AND SUB-ADVISORY AGREEMENTS
The Board of Directors of SM&R Investments, Inc. has renewed the investment
advisory arrangements with Securities Management and Research, Inc.
("Manager") for the SM&R Tax Free Fund effective May 26, 2005.
Additionally, the Board renewed the investment advisory arrangements with
the Manager and sub-advisory arrangements with Fred Alger Management, Inc.
("Sub-advisor") effective August 28, 2005 for the SM&R Alger Technology
Fund, SM&R Alger Aggressive Growth Fund, SM&R Alger Small-Cap Fund and SM&R
Alger Growth Fund. The Board considered a variety of factors in connection
with its review of the advisory and sub-advisory contracts ("Contracts"),
also taking into account information provided by the Manager and
Sub-advisor during the course of the year as discussed below:
- - NATURE, EXTENT, AND QUALITY OF SERVICES
The Board considered the nature, quality and extent of the services
provided to the funds by the Manager and Sub-advisor based upon information
provided by the Manager and Sub-advisor relating to its operations and
personnel. These services included, but were not limited to, management of
the funds' portfolios and a variety of activities related to portfolio
management.
The Board also took into account its familiarity with the Manager's and
Sub-advisor's investment management through Board meetings, discussions and
reports during the preceding year. After careful consideration of these
matters, the Board concluded that it was satisfied with the nature, quality
and extent of the services provided by the Manager and Sub-advisor.
- - EXPENSES AND PERFORMANCE
The Board evaluated reports prepared by the Manager detailing the advisory
fee and total expense ratios of each of the funds' share classes as
compared to other open-end investment companies deemed to be comparable
based upon the Morningstar Principia Pro database with similar Morningstar
category and prospectus objective to each class of the funds. The Board
took into account the Manager's current undertakings to maintain the
expense limitations for the funds. Also taken under consideration was the
current size of each class of the funds, and the level and method of
computing the management fees.
The Board reviewed the funds' average annual total returns and compared
these returns to previously agreed upon comparable performance measures.
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including those supplied by Lipper and Morningstar. On the basis of this
evaluation and the Board's ongoing reviews of investment results, the Board
concluded that the funds' performance was satisfactory.
- - COST, BENEFITS, PROFITS AND ECONOMIES OF SCALE
The Board reviewed detailed information regarding the revenues received by
the Manager and Sub-advisor under the Contracts and other benefits that the
Manager or Sub-Advisory may have realized from its relationship with the
funds. The Board also received information on the direct costs incurred by
the Manager as well as profits realized. After careful consideration of
this information, the Board concluded that the Manager's profits were
reasonable in light of the services provided to the funds.
The Board reviewed reports prepared by the Manager comparing the funds' fee
breakpoints to other comparable funds. The Board concluded that the
advisory fee structure for the funds continued to provide for a reasonable
sharing of benefits from any economies of scale with the fund's investors.
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ADVISORY REVIEW
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2005 ANNUAL REPORT
SM&R ALGER TECHNOLOGY FUND
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.
The inherent technology focus of the fund was of benefit during a period in
which technology stocks performed very well relative to the rest of the
market.
MARKET REVIEW AND PORTFOLIO PERFORMANCE:
The twelve months ended August 31, 2005 were a solid period for equity
securities across all market capitalizations and styles. Small and mid cap
stocks (as measured by the broad Russell 2000 index and the Russell MidCap
index) led the way with returns greater than 20% during the time period, while
large cap stocks (as measured by the S&P 500 and the Russell 1000 index) posted
hearty returns of 12% or higher.
To start the fiscal year, September 2004 was a positive month for virtually all
major indices. Investors put aside their concerns of high oil and gas prices,
Iraq, the U.S. Presidential election and questions about the overall health of
the economy, and the markets bounced back from the difficult period we saw in
July and August of 2004.
The positive momentum that began in September carried into the fourth quarter
of 2004, and the final three months of the calendar year were a solid period
for the equity markets. Despite rising oil prices, a ballooning budget
deficit and the dollar's continual decline, stocks moved higher in October,
as investors chose to focus on strong corporate earnings reports and minimal
inflation. That trend continued into November. With the smooth reelection of
President Bush, better-than-expected consumer spending and merger activity on
the rise, investors found good reason to buy. Despite the Fed's 25 basis
point interest rate hike on November 10th, indices of all sizes and styles
moved higher during the penultimate month of the year, with small-cap stocks
leading the way. Buyers continued to dominate the markets during the final
month of the year. Markets didn't seem to be phased by the Fed's December
14th decision to raise interest rates for the second time in as many months.
Despite the 25 basis point hike, investors again seemed determined to focus
on the positive: strong growth in the manufacturing sector, a reemergence of
the U.S. IPO market and a retreat in the surging oil prices. As the new year
approached, optimism seemed to be trumping fear and uncertainty.
In spite of the upbeat end to 2004, the first quarter of 2005 was a difficult
period for most equity indices. Despite solid employment data in January and
strong corporate earnings in the banking sector, stocks sank on inflationary
jitters and tightening interest rates. The negative trend briefly reversed
itself in February. Despite a slumping dollar and the Federal Reserve's
decision to raise interest rates by 25 basis points on February 2nd,
investors chose to focus on the strong retail and M&A markets. During the
second month of the calendar year, most indices trended upward, with mid-cap
value stocks leading the way. Unfortunately, the first quarter ended on an
inauspicious note. Surging oil prices, continued inflationary fears and the
Federal Reserve's March 22nd decision to raise interest rates yet again all
combined to keep buyers out of the market in March. Stocks of all sizes and
styles sank during the final month of the quarter, with small-cap growth
stocks leading the downturn.
The downward trend we saw in the first quarter of 2005 continued
through April, as the threat of inflation and ongoing interest rate
increases weighed on the minds of investors. Despite an eighth
consecutive 1/4 point rate increase from the Fed on the
[SIDENOTE]
[CHART]
SECTOR WEIGHTINGS BY TOTAL INVESTMENTS
<Table>
AFFILIATED MONEY MARKET 5.09%
CONSUMER DISCRETIONARY 7.19%
INDUSTRIALS 2.33%
INFORMATION TECHNOLOGY 81.47%
TELECOMMUNICATION SERVICES 3.92%
</Table>
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3rd of the month, the market's downward trend finally reversed itself
in May. Small and mid cap growth stocks that had been beaten down in
the first few months of the year led the recovery. Consumer confidence
improved for the second straight month in June, leading to positive
returns for the last month of the quarter, despite a sell-off in late
June that was spurred on by another surge in oil prices. Even with the
strong positive returns we saw in the second quarter, most major
indices struggled to break through to positive territory for the first
half of the calendar year.
In July, the equity markets registered healthy gains once again, as
second quarter earnings reports came in above earlier estimates. After
an exceptionally strong July, the markets dipped in August. Investors
gave back some of their gains from the previous month as rising oil
prices weighed heavily on all market segments.
The SM&R Alger Technology Fund returned 25.56% during the fiscal year
ended August 31, 2005, versus a 20.96% return for the Lipper Science
& Technology Fund index.
MARKET & ECONOMIC OUTLOOK:
The economy remains in a "sweet spot" and corporate earnings continue to boom.
Year-to-date, even though GDP growth is less than 4%, corporate profits are up
nearly 15%. Some economists are predicting a coming "profits recession, "but we
think that prediction will be as wrong as predictions of deflation and recession
were two years ago. And stocks, in this scenario, are looking as cheap relative
to bonds - not to mention real estate - as they have in nearly a generation.
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
Dan Chung, CFA, 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
[PLOT POINTS TO COME]
AVERAGE ANNUAL RETURN
Include maximum sales charge through 8/31/05. Inception date of these classes is
09/01/00.
<Table>
<Caption>
SHARE ONE FIVE
CLASS YEAR YEAR
- ---------------------------------------------
A 17.97% (22.10)%
B 16.99% (21.40)%
</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 charges 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 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 distributions or redemption of fund shares.
MANAGER COMMENTARY
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SCHEDULE OF INVESTMENTS August 31, 2005
<Table>
<Caption>
COMMON STOCK SHARES VALUE
CONSUMER DISCRETIONARY:
LEISURE EQUIPMENT & SERVICES - 0.92%
Shanda Interactive Entertainment Ltd.* 315 $ 10,477
MEDIA - 6.31%
Harris Interactive Inc.* 3,850 16,170
Neustar, Inc. (Class A)* 50 1,375
Sirius Satellite Radio Inc.* 4,000 27,520
XM Satellite Radio Holdings Inc. (Class A)* 750 26,437
71,502
TOTAL CONSUMER DISCRETIONARY - 7.23% 81,979
----------------------------------------------------------------------------
INDUSTRIALS:
COMMERCIAL SERVICES & SUPPLIES - 2.34%
Monster Worldwide Inc.* 850 26,554
TOTAL INDUSTRIALS - 2.34% 26,554
----------------------------------------------------------------------------
INFORMATION TECHNOLOGY:
COMMUNICATIONS EQUIPMENT - 6.92%
Arris Group Inc.* 2,500 26,225
Cisco Systems, Inc.* 1,025 18,060
Corning Inc.* 1,000 19,960
Nokia Oyj ADR 900 14,193
78,438
COMPUTER RELATED & BUSINESS SERVICES - 11.68%
Apple Computer, Inc.* 1,100 $ 51,623
EMC Corp.* 1,850 23,791
Network Appliance, Inc.* 880 20,891
Palm, Inc.* 450 15,381
Western Digital Corp.* 1,500 20,775
132,461
COMPUTER SOFTWARE - 8.01%
Check Point Software Technologies Ltd.* 1,020 23,011
NAVTEQ Corp.* 300 13,962
Symantec Corp.* 1,440 30,211
TIBCO Software Inc.* 3,100 23,684
90,868
COMPUTERS & PERIPHERALS - 0.53%
Mobility Electronics, Inc.* 550 6,023
ELECTRONIC EQUIPMENT & INSTRUMENTS - 7.58%
Evergreen Solar, Inc.* 4,400 31,020
Flextronics International Ltd.* 2,600 33,956
Multi-Fineline Electronix, Inc.* 820 20,951
85,927
INFORMATION TECHNOLOGY SERVICES - 0.87%
Global Payments Inc. 150 9,867
INTERNET & CATALOG RETAIL - 5.40%
eBay Inc.* 820 33,202
Netflix Inc.* 1,300 28,028
61,230
</Table>
<Page>
<Table>
<Caption>
COMMON STOCK SHARES VALUE
INTERNET SOFTWARE & SERVICES - 10.93%
aQuantive, Inc.* 1,050 $ 18,963
IVillage, Inc.* 3,400 21,828
Netease.com Inc. ADR* 600 43,602
WebMD Corp.* 1,050 11,508
Yahoo! Inc.* 840 28,006
123,907
SEMICONDUCTORS - 15.67%
Applied Materials, Inc. 1,550 28,380
Cypress Semiconductor Corp.* 1,350 21,101
Intel Corp. 2,100 54,012
Marvell Technology Group Ltd.* 400 18,876
Microsemi Corp.* 900 21,681
National Semiconductor Corp. 1,350 33,656
177,706
SEMICONDUCTORS CAPITAL EQUIPMENT - 2.69%
SiRF Technology Holdings, Inc.* 1,200 30,480
SOFTWARE - 11.69%
Microsoft Corp. 2,920 80,008
Oracle Corp.* 4,050 52,529
132,537
TOTAL INFORMATION TECHNOLOGY - 81.97% 929,444
-------------------------------------------------------------------
TELECOMMUNICATION SERVICES:
COMMUNICATIONS - 3.47%
Nextel Partners, Inc. (Class A)* 1,500 $ 39,360
WIRELESS TELECOMMUNICATION SERVICES - 0.47%
Inphonic, Inc.* 350 5,369
TOTAL TELECOMMUNICATION SERVICES - 3.94% 44,729
-------------------------------------------------------------------
TOTAL COMMON STOCK - 95.48%
-------------------------------------------------------------------
(Cost $916,044) 1,082,706
MONEY MARKET FUND
SM&R Money Market Fund, 2.92% (a) 58,110 58,110
TOTAL MONEY MARKET FUND - 5.13%
-------------------------------------------------------------------
(Cost $58,110) 58,110
TOTAL INVESTMENTS - 100.61%
-------------------------------------------------------------------
(Cost $974,154) 1,140,816
LIABILITIES IN EXCESS
OF OTHER ASSETS - (0.61%) (6,899)
-------------------------------------------------------------------
NET ASSETS - 100.00% $ 1,133,917
-------------------------------------------------------------------
</Table>
* - Non-income producing securities
ABBREVIATIONS
ADR - American Depositary Receipt
NOTE TO SCHEDULE OF INVESTMENTS:
(a) The rate quoted is the annualized seven-day yield of the fund at August 31,
2005. 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 advisor.
See notes to financial statements.
HOLDINGS
<Page>
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 2005
<Table>
ASSETS
Investments in unaffiliated securities, at value (Cost $916,044) $ 1,082,706
Investments in affiliated money market fund (Cost $58,110) 58,110
Total investments (Cost $974,154) 1,140,816
Prepaid expenses 6,946
Receivable for:
Investment securities sold 46
Capital stock sold 70
Dividends 448
Expense reimbursement 4,222
TOTAL ASSETS 1,152,548
LIABILITIES
Payable to investment advisor for fund expenses 9,147
Accrued:
Investment advisory fee 1,359
Administrative service fee 252
Distribution fee 1,483
Other liabilities 6,390
TOTAL LIABILITIES 18,631
NET ASSETS (APPLICABLE TO SHARES OUTSTANDING) $ 1,133,917
NET ASSETS ARE COMPRISED OF THE FOLLOWING:
Capital (par value and additional paid-in) 1,245,889
Accumulated net realized loss on investments (278,634)
Net unrealized appreciation of investments 166,662
NET ASSETS $ 1,133,917
NET ASSETS:
Class A $ 798,200
Class B $ 335,717
TOTAL NET ASSETS $ 1,133,917
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 100,000,000
Outstanding 264,534
Net asset value and redemption price per share $ 3.02
Offering price per share:
(Net asset value of $3.02/95%) $ 3.18
Class B:
Authorized 100,000,000
Outstanding 110,917
Net asset value and offering price per share $ 3.03
</Table>
See notes to financial statements.
<Page>
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 2005
<Table>
INVESTMENT INCOME
Dividends (Net of foreign tax withheld of $87) $ 6,402
Interest from affiliated money market fund 1,190
TOTAL INVESTMENT INCOME 7,592
EXPENSES
Investment advisory fee 13,678
Administrative service fee 2,533
Professional fees 4,785
Custody and transaction fees 12,312
Directors' fees 5,660
Insurance expenses 98
Compliance expenses 115
Qualification fees 6,074
Class A 7,460
Class B 7,450
Shareholder reporting expenses
Class A 3,031
Class B 2,049
Distribution fee
Class A 2,462
Class B 3,097
TOTAL EXPENSES 70,804
LESS EXPENSES REIMBURSED (47,483)
NET EXPENSES 23,321
INVESTMENT LOSS - NET (15,729)
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments 62,603
Change in unrealized appreciation of investments 161,855
NET GAIN ON INVESTMENTS 224,458
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 208,729
</Table>
See notes to financial statements.
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED AUGUST 31,
<Table>
<Caption>
2005 2004
----------------------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Investment loss - net $ (15,729) $ (19,510)
Net realized gain on investments 62,603 38,898
Change in unrealized appreciation (depreciation) 161,855 (109,466)
of investments
Net increase (decrease) in net assets resulting 208,729 (90,078)
from operations
CAPITAL SHARE TRANSACTIONS - NET
Class A 67,874 200,651
Class B (4,279) 61,301
TOTAL NET CAPITAL SHARE TRANSACTIONS 63,595 261,952
TOTAL INCREASE IN NET ASSETS 272,324 171,874
NET ASSETS
Beginning of year 861,593 689,719
End of year $ 1,133,917 $ 861,593
</Table>
See notes to financial statements.
FINANCIALS
<Page>
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<Table>
<Caption>
YEAR ENDED AUGUST 31 2005 2004(1) 2003(1) 2002(4) 2001
- -----------------------------------------------------------------------------------------------------------------------------
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE YEARS INDICATED.
Net asset value, beginning of year $ 2.43 $ 2.59 $ 1.67 $ 3.24 $ 10.00
Investment loss - net (0.04) (0.06) (0.04) (0.20) (0.37)
Net realized and unrealized gain
(loss) on investments 0.63 (0.10) 0.96 (1.37) (6.39)
------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.59 (0.16) 0.92 (1.57) (6.76)
------------------------------------------------------------------------
Net asset value, end of year $ 3.02 $ 2.43 $ 2.59 $ 1.67 $ 3.24
========================================================================
TOTAL RETURN(2) 24.28% (6.18)% 55.09% (48.46)% (67.60)%
========================================================================
RATIOS (IN PERCENTAGES)/ SUPPLEMENTAL DATA
Net assets, end of year $ 798,200 $ 585,844 $ 449,337 $ 150,553 $ 230,327
Ratio of expenses with reimbursement
to average net assets (3) 2.10% 2.10% 2.10% 8.51% 10.97%
Ratio of expenses without
reimbursement to average net assets 6.29% 6.15% 11.46% 12.19% 10.97%
Ratio of net investment loss to average net assets (1.36)% (1.97)% (1.84)% (8.30)% (10.32)%
Portfolio turnover rate 269.32% 215.21% 291.66% 301.01% 440.50%
</Table>
<Page>
CLASS B SHARES
<Table>
<Caption>
YEAR ENDED AUGUST 31 2005 2004(1) 2003(1) 2002(4) 2001
- -----------------------------------------------------------------------------------------------------------------------------
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE YEARS INDICATED.
Net asset value, beginning of year $ 2.46 $ 2.64 $ 1.68 $ 3.25 $ 10.00
Investment loss - net (0.06) (0.08) (0.05) (0.19) (0.24)
Net realized and unrealized gain
(loss) on investments 0.63 (0.10) 1.01 (1.38) (6.51)
------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.57 (0.18) 0.96 (1.57) (6.75)
------------------------------------------------------------------------
Net asset value, end of year $ 3.03 $ 2.46 $ 2.64 $ 1.68 $ 3.25
========================================================================
TOTAL RETURN(2) 23.17% (6.82)% 57.14% (48.31)% (67.50)%
========================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year $ 335,717 $ 275,749 $ 240,382 $ 130,975 $ 82,232
Ratio of expenses with reimbursement
to average net assets (3) 2.75% 2.75% 2.75% 9.42% 14.71%
Ratio of expenses without reimbursement
to average net assets 8.53% 8.02% 14.16% 14.23% 14.71%
Ratio of net investment loss to average net assets (2.01)% (2.62)% (2.48)% (9.22)% (14.21)%
Portfolio turnover rate 269.32% 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) SM&R has voluntarily agreed to waive or reduce expenses to 2.10% for class A
and 2.75% for class B until December 31, 2005.
(4) Per share information has been restated to reflect certain
reclassifications.
See notes to financial statements.
<Page>
SM&R ALGER AGGRESSIVE GROWTH FUND
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 a slight disadvantage in this market segment as the Russell 3000 Growth
index underperformed the Russell 3000 Value index.
MARKET REVIEW AND PORTFOLIO PERFORMANCE:
The twelve months ended August 31, 2005 were a solid period for equity
securities across all market capitalizations and styles. Small and mid cap
stocks (as measured by the broad Russell 2000 index and the Russell MidCap
index) led the way with returns greater than 20% during the time period,
while large cap stocks (as measured by the S&P 500 and the Russell 1000
index) posted hearty returns of 12% or higher.
To start the fiscal year, September 2004 was a positive month for virtually
all major indices. Investors put aside their concerns of high oil and gas
prices, Iraq, the U.S. Presidential election and questions about the overall
health of the economy, and the markets bounced back from the difficult period
we saw in July and August of 2004.
The positive momentum that began in September carried into the fourth quarter of
2004, and the final three months of the calendar year were a solid period for
the equity markets. Despite rising oil prices, a ballooning budget deficit and
the dollar's continual decline, stocks moved higher in October, as investors
chose to focus on strong corporate earnings reports and minimal inflation. That
trend continued into November. With the smooth reelection of President Bush,
better-than-expected consumer spending and merger activity on the rise,
investors found good reason to buy. Despite the Fed's 25 basis point interest
rate hike on November 10th, indices of all sizes and styles moved higher during
the penultimate month of the year, with small-cap stocks leading the way. Buyers
continued to dominate the markets during the final month of the year. Markets
didn't seem to be phased by the Fed's December 14th decision to raise interest
rates for the second time in as many months. Despite the 25 basis point hike,
investors again seemed determined to focus on the positive: strong growth in the
manufacturing sector, a reemergence of the U.S. IPO market and a retreat in the
surging oil prices. As the new year approached, optimism seemed to be trumping
fear and uncertainty.
In spite of the upbeat end to 2004, the first quarter of 2005 was a difficult
period for most equity indices. Despite solid employment data in January and
strong corporate earnings in the banking sector, stocks sank on inflationary
jitters and tightening interest rates. The negative trend briefly reversed
itself in February. Despite a slumping dollar and the Federal Reserve's decision
to raise interest rates by 25 basis points on February 2nd, investors chose to
focus on the strong retail and M&A markets. During the second month of the
calendar year, most indices trended upward, with mid-cap value stocks leading
the way. Unfortunately, the first quarter ended on an inauspicious note. Surging
oil prices, continued inflationary fears and the Federal Reserve's March 22nd
decision to raise interest rates yet again all combined to keep buyers out of
the market in March. Stocks of all sizes and styles sank during the final month
of the quarter, with small-cap growth stocks leading the downturn.
The downward trend we saw in the first quarter of 2005 continued
through April, as the threat of inflation and ongoing interest rate
increases weighed on the minds of investors. Despite an eighth
consecutive 1/4 point rate increase from the Fed on the 3rd of the
month,
[SIDENOTE]
[CHART]
SECTOR WEIGHTINGS BY TOTAL INVESTMENTS
<Table>
AFFILIATED MONEY MARKET 5.50%
CONSUMER DISCRETIONARY 14.77%
CONSUMER STAPLES 7.03%
ENERGY 6.59%
FINANCIALS 7.02%
HEALTH CARE 21.72%
INDUSTRIALS 10.59%
INFORMATION TECHNOLOGY 21.53%
MATERIALS 2.29%
TELECOMMUNICATION SERVICES 2.96%
</Table>
<Page>
the market's downward trend finally reversed itself in May. Small
and mid cap growth stocks that had been beaten down in the first
few months of the year led the recovery. Consumer confidence
improved for the second straight month in June, leading to
positive returns for the last month of the quarter, despite a
sell-off in late June that was spurred on by another surge in oil
prices. Even with the strong positive returns we saw in the
second quarter, most major indices struggled to break through to
positive territory for the first half of the calendar year.
In July, the equity markets registered healthy gains once again, as second
quarter earnings reports came in above earlier estimates. After an exceptionally
strong July, the markets dipped in August. Investors gave back some of their
gains from the previous month as rising oil prices weighed heavily on all market
segments.
It was a strong twelve month period for the SM&R Alger Aggressive Growth Fund.
The fund returned 27.51% during the fiscal year ended August 31, 2005 versus
returns of 12.56% for the S&P 500 index and 20.02% for the Lipper Multi-Cap
Growth Fund index. Relative to the S&P 500 index, the fund benefited from solid
security selection throughout the portfolio, with the greatest returns coming
from the Energy, Materials and Telecommunications Services sectors. We also saw
solid returns in the overweight Health Care and Information Technology sectors.
MARKET & ECONOMIC OUTLOOK:
The economy remains in a "sweet spot" and corporate earnings continue to boom.
Year-to-date, even though GDP growth is less than 4%, corporate profits are up
nearly 15%. Some economists are predicting a coming "profits recession," but we
think that prediction will be as wrong as predictions of deflation and recession
were two years ago. And stocks, in this scenario, are looking as cheap relative
to bonds - not to mention real estate - as they have in nearly a generation.
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 LIPPER MULTI-CAP GROWTH
INDEX AND THE S&P 500
[PLOT POINTS TO COME]
AVERAGE ANNUAL RETURN
Include maximum sales charge through 8/31/05. Inception date of these classes is
09/01/00.
<Table>
<Caption>
SHARE ONE FIVE
CLASS YEAR YEAR
- ---------------------------------------------
A 19.96% (10.43)%
B 18.83% (10.29)%
</Table>
SM&R Alger Aggressive 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 charges 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 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 distributions or redemption of fund shares.
MANAGER COMMENTARY
<Page>
SCHEDULE OF INVESTMENTS August 31, 2005
<Table>
<Caption>
COMMON STOCK SHARES VALUE
CONSUMER DISCRETIONARY:
HOTELS, RESTAURANTS & LEISURE - 1.40%
Hilton Hotels Corp. 430 $ 9,963
Penn National Gaming, Inc.* 570 19,426
29,389
LEISURE EQUIPMENT & SERVICES - 0.99%
Shanda Interactive Entertainment Ltd* 625 20,788
MEDIA - 5.28%
Pixar* 470 20,633
Time Warner Inc.* 1,240 22,221
Viacom, Inc. (Class B) 1,025 34,840
Walt Disney Co. (The) 1,315 33,125
110,819
MULTI-LINE RETAIL - 1.13%
Kohl's Corp.* 450 23,603
RETAILING - 2.66%
CVS Corp. 1,900 55,803
SPECIALTY RETAIL - 2.34%
Abercrombie & Fitch Co. (Class A) 170 9,454
Bed Bath & Beyond Inc.* 500 20,275
Lowe's Companies, Inc. 300 19,293
49,022
TEXTILES, APPAREL & LUXURY GOODS - 1.03%
Polo Ralph Lauren Corp. (Class A) 170 8,424
Coach, Inc.* 400 13,276
21,700
TOTAL CONSUMER DISCRETIONARY - 14.83% 311,124
----------------------------------------------------------------------------
CONSUMER STAPLES:
BEVERAGES - 1.83%
PepsiCo, Inc. 700 $ 38,395
CONSUMER PRODUCTS - 1.28%
Gillette Co. 500 26,935
FOOD & STAPLES RETAILING - 1.43%
Performance Food Group Co.* 101 3,128
Wal-Mart Stores, Inc. 600 26,976
30,104
HOUSEHOLD PRODUCTS - 1.06%
Proctor & Gamble Co. 400 22,192
PERSONAL CARE - 0.69%
Bausch & Lomb Inc. 190 14,400
PERSONAL PRODUCTS - 0.76%
Avon Products, Inc. 485 15,918
TOTAL CONSUMER STAPLES - 7.05% 147,944
----------------------------------------------------------------------------
ENERGY:
ENERGY & ENERGY SERVICES - 1.55%
Patterson-UTI Energy, Inc. 450 15,309
Schlumberger Ltd. 200 17,246
32,555
ENERGY EQUIPMENT & SERVICES - 3.06%
National-Oilwell, Inc.* 1,000 64,210
OIL & GAS - 2.00%
BP PLC ADR 100 6,838
General Maritime Corp. 220 8,219
Talisman Energy Inc. 550 26,934
41,991
TOTAL ENERGY - 6.61% 138,756
----------------------------------------------------------------------------
</Table>
<Page>
<Table>
<Caption>
COMMON STOCK SHARES VALUE
FINANCIALS:
CAPITAL MARKETS - 1.42%
Ameritrade Holding Corp.* 450 $ 8,955
Legg Mason, Inc. 200 20,906
29,861
COMMERCIAL BANKS - 0.57%
Wells Fargo & Co. 200 11,924
DIVERSIFIED FINANCIAL SERVICES - 1.69%
Citigroup Inc. 450 19,696
Lehman Brothers Holdings Inc. 150 15,849
35,545
INSURANCE - 2.62%
American International Group, Inc. 200 11,840
CIGNA Corp. 200 23,064
Genworth Financial Inc. (Class A) 400 12,868
St. Paul Travelers Companies, Inc. (The) 165 7,097
54,869
THRIFTS & MORTGAGE FINANCE - 0.75%
Hudson City Bancorp, Inc. 1,250 15,625
TOTAL FINANCIALS - 7.05% 147,824
----------------------------------------------------------------------------
HEALTH CARE:
BIOTECHNOLOGY - 5.11%
Affymetrix, Inc.* 150 $ 7,423
Amgen Inc.* 400 31,960
Genentech, Inc.* 450 42,273
Gilead Sciences, Inc.* 250 10,750
Medimmune, Inc.* 155 4,639
Vertex Pharmaceuticals Inc. 550 10,120
107,165
DRUG DISTRIBUTION - 1.13%
Phelps Dodge Corp. 220 23,657
HEALTH CARE ADMINISTRATIVE SERVICES - 0.22%
McKesson Corp. 100 4,667
HEALTH CARE EQUIPMENT & SUPPLIES - 2.05%
Medtronic, Inc. 375 21,375
St. Jude Medical, Inc.* 470 21,573
42,948
HEALTH CARE PROVIDERS & SERVICES - 4.18%
AmerisourceBergen Corp. 200 14,934
Caremark Rx, Inc.* 400 18,692
Community Health Systems Inc.* 300 11,049
PacifiCare Health Systems, Inc.* 300 22,614
Wellpoint Inc. 275 20,419
87,708
</Table>
HOLDINGS
<Page>
<Table>
<Caption>
COMMON STOCK SHARES VALUE
PHARMACEUTICALS - 9.12%
Astrazeneca Plc ADR 250 $ 11,530
Celgene Corp.* 250 12,547
IVAX Corp.* 1,150 29,785
Johnson & Johnson 650 41,204
Novartis AG ADR 450 21,938
Pfizer, Inc. 760 19,357
Sanofi-Aventis ADR 450 19,242
Schering-Plough Corp. 1,000 21,410
Sepracor Inc.* 285 14,307
191,320
TOTAL HEALTH CARE - 21.81% 457,465
----------------------------------------------------------------------------
INDUSTRIALS:
AEROSPACE & DEFENSE - 2.28%
General Dynamics Corp. 200 22,918
United Technologies Corp. 500 25,000
47,918
AIR FREIGHT & LOGISTICS - 2.40%
FedEx Corp. 200 16,288
UTI Worldwide, Inc. 450 33,957
50,245
INDUSTRIAL CONGLOMERATES - 3.75%
General Electric Co. 1,700 57,137
Tyco International Ltd. 775 21,568
78,705
MACHINERY - 1.32%
Caterpillar, Inc. 500 $ 27,745
TRANSPORTATION - 0.87%
Burlington Northern Santa Fe Corp. 345 18,292
TOTAL INDUSTRIALS - 10.62% 222,905
----------------------------------------------------------------------------
INFORMATION TECHNOLOGY:
COMMUNICATIONS EQUIPMENT - 1.36%
Nokia Oyj ADR 800 12,616
QUALCOMM Inc. 400 15,884
28,500
COMPUTERS & PERIPHERALS - 0.51%
Dell, Inc.* 300 10,680
COMPUTER RELATED & BUSINESS SERVICES - 2.41%
Apple Computer, Inc.* 135 6,336
EMC Corp.* 555 7,137
Network Appliance, Inc.* 880 20,891
Western Digital Corp.* 1,165 16,135
50,499
COMPUTER SOFTWARE - 2.81%
NAVTEQ Corp.* 950 44,213
VeriFone Holdings, Inc.* 675 14,816
59,029
</Table>
023
<Page>
<Table>
<Caption>
COMMON STOCK SHARES VALUE
INTERNET SOFTWARE & SERVICES - 5.12%
Google Inc. (Class A)* 70 $ 20,020
Netease. com Inc. ADR* 560 40,695
Yahoo! Inc.* 1,400 46,676
107,391
SEMICONDUCTOR & SEMICONDUCTOR EQUIPMENT - 0.52%
Broadcom Corp. (Class A)* 200 8,700
Tessera Technologies Inc. 65 2,157
10,857
SEMICONDUCTORS - 4.29%
Intel Corp. 1,595 41,023
Marvell Technology Group Ltd.* 795 37,516
Photronics, Inc.* 550 11,424
89,963
SOFTWARE - 4.59%
Microsoft Corp. 2,985 81,789
Oracle Corp.* 1,125 14,591
96,380
TOTAL INFORMATION TECHNOLOGY - 21.61% 453,299
----------------------------------------------------------------------------
MATERIALS:
CHEMICALS - 0.39%
Lubrizol Corp. 200 8,270
METALS & MINING - 1.91%
Alpha Natural Resources, Inc.* 200 5,966
Peabody Energy Corp. 475 34,043
40,009
TOTAL MATERIALS - 2.30% 48,279
----------------------------------------------------------------------------
TELECOMMUNICATION SERVICES:
COMMUNICATIONS - 1.19%
Nextel Partners, Inc. (Class A)* 950 $ 24,928
WIRELESS TELECOMMUNICATION SERVICES - 1.78%
Alamosa Holdings, Inc.* 795 13,754
American Tower Corp.* 643 15,341
NII Holdings Inc.* 110 8,384
37,479
TOTAL TELECOMMUNICATION SERVICES - 2.97% 62,407
----------------------------------------------------------------------------
TOTAL COMMON STOCK - 94.85%
----------------------------------------------------------------------------
(Cost $1,743,913) 1,990,003
MONEY MARKET FUND
SM&R Money Market Fund, 2.92% (a) 115,726 115,726
TOTAL MONEY MARKET FUND - 5.52%
----------------------------------------------------------------------------
(Cost $115,726) 115,726
TOTAL INVESTMENTS - 100.37%
----------------------------------------------------------------------------
(Cost $1,859,639) 2,105,729
LIABILITIES IN EXCESS
OF OTHER ASSETS - (0.37)% (7,741)
----------------------------------------------------------------------------
NET ASSETS - 100.00% $ 2,097,988
----------------------------------------------------------------------------
</Table>
* - Non-income producing securities
ABBREVIATIONS
ADR - American Depositary Receipt
NOTE TO SCHEDULE OF INVESTMENTS:
(a) The rate quoted is the annualized seven-day yield of the fund at August 31,
2005. 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 advisor.
See notes to financial statements.
<Page>
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 2005
<Table>
ASSETS
Investments in unaffiliated securities, at value
(Cost $1,743,913) $ 1,990,003
Investments in affiliated money market fund (Cost $115,726) 115,726
Total investments (Cost $1,859,639) 2,105,729
Prepaid expenses 8,817
Receivable for:
Investment securities sold 14,853
Dividends 2,113
Expense reimbursement 5,172
TOTAL ASSETS 2,136,684
LIABILITIES
Investment securities purchased 16,100
Payable to investment advisor for fund expenses 9,874
Accrued:
Investment advisory fee 1,981
Administrative service fee 472
Distribution fee 2,911
Other liabilities 7,358
TOTAL LIABILITIES 38,696
NET ASSETS (APPLICABLE TO SHARES OUTSTANDING) $ 2,097,988
NET ASSETS ARE COMPRISED OF THE FOLLOWING:
Capital (par value and additional paid-in) $ 1,962,686
Accumulated net realized loss on investments (110,788)
Net unrealized appreciation of investments 246,090
NET ASSETS $ 2,097,988
NET ASSETS:
Class A $ 1,402,928
Class B $ 695,060
TOTAL NET ASSETS $ 2,097,988
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 100,000,000
Outstanding 231,021
Net asset value and redemption price per share $ 6.07
Offering price per share:
(Net asset value of $6.07/95%) $ 6.39
Class B:
Authorized 100,000,000
Outstanding 118,411
Net asset value and offering price per share $ 5.87
</Table>
See notes to financial statements.
<Page>
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 2005
<Table>
INVESTMENT INCOME
Dividends (Net of foreign tax withheld of $234) $ 19,471
Interest from affiliated money market fund 2,519
TOTAL INVESTMENT INCOME 21,990
EXPENSES
Investment advisory fee 19,777
Administrative service fee 4,709
Professional fees 4,789
Custody and transaction fees 18,381
Directors' fees 5,660
Insurance expenses 180
Compliance expenses 196
Qualification fees 6,052
Class A 6,873
Class B 6,902
Shareholder reporting expenses
Class A 4,682
Class B 2,794
Distribution fee
Class A 4,446
Class B 6,131
TOTAL EXPENSES 91,572
LESS EXPENSES REIMBURSED (52,704)
NET EXPENSES 38,868
INVESTMENT LOSS - NET (16,878)
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments 224,516
Change in unrealized appreciation of investments 207,698
NET GAIN ON INVESTMENTS 432,214
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 415,336
</Table>
See notes to financial statements.
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED AUGUST 31,
<Table>
<Caption>
2005 2004
----------------------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Investment loss - net $ (16,878) $ (26,496)
Net realized gain on investments 224,516 108,477
Change in unrealized appreciation (depreciation) of
investments 207,698 (144,351)
Net increase (decrease) in net assets resulting
from operations 415,336 (62,370)
CAPITAL SHARE TRANSACTIONS - NET
Class A 86,880 77,874
Class B 47,518 95,390
TOTAL NET CAPITAL SHARE TRANSACTIONS 134,398 173,264
TOTAL INCREASE IN NET ASSETS 549,734 110,894
NET ASSETS
Beginning of year 1,548,254 1,437,360
End of year $ 2,097,988 $ 1,548,254
</Table>
See notes to financial statements.
FINANCIALS
<Page>
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<Table>
<Caption>
YEAR ENDED AUGUST 31 2005 2004(1) 2003(1) 2002(4) 2001
- -----------------------------------------------------------------------------------------------------------------------------
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE YEARS INDICATED.
Net asset value, beginning of year $ 4.81 $ 4.96 $ 4.24 $ 5.91 $ 10.00
Investment loss - net (0.04) (0.08) (0.06) (0.17) (0.25)
Net realized and unrealized gain
(loss) on investments 1.30 (0.07) 0.78 (1.50) (3.84)
------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.26 (0.15) 0.72 (1.67) (4.09)
------------------------------------------------------------------------
Net asset value, end of year $ 6.07 $ 4.81 $ 4.96 $ 4.24 $ 5.91
========================================================================
TOTAL RETURN(2) 26.20% (3.02)% 16.98% (28.26)% (40.90)%
========================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year $ 1,402,928 $ 1,034,437 $ 994,871 $ 666,982 $ 487,497
Ratio of expenses with reimbursement
to average net assets (3) 1.85% 1.85% 1.85% 4.48% 6.85%
Ratio of expenses without
reimbursement to average net assets 4.43% 4.17% 5.52% 6.01% 6.85%
Ratio of net investment loss to average net assets (0.68)% (1.43)% (1.27)% (3.99)% (5.59)%
Portfolio turnover rate 167.62% 159.89% 179.56% 177.62% 70.58%
</Table>
<Page>
CLASS B SHARES
<Table>
<Caption>
YEAR ENDED AUGUST 31 2005 2004(1) 2003(1) 2002(4) 2001
- -----------------------------------------------------------------------------------------------------------------------------
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE YEARS INDICATED.
Net asset value, beginning of year $ 4.69 $ 4.87 $ 4.19 $ 5.89 $ 10.00
Investment loss - net (0.07) (0.11) (0.08) (0.21) (0.18)
Net realized and unrealized gain
(loss) on investments 1.25 (0.07) 0.76 (1.49) (3.93)
------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.18 (0.18) 0.68 (1.70) (4.11)
------------------------------------------------------------------------
Net asset value, end of year $ 5.87 $ 4.69 $ 4.87 $ 4.19 $ 5.89
========================================================================
TOTAL RETURN(2) 25.16% (3.70)% 16.23% (28.86)% (41.10)%
========================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year $ 695,060 $ 513,817 $ 442,489 $ 328,254 $ 230,547
Ratio of expenses with reimbursement
to average net assets (3) 2.50% 2.50% 2.50% 5.56% 7.25%
Ratio of expenses without reimbursement
to average net assets 5.75% 5.52% 7.36% 7.78% 7.25%
Ratio of net investment loss to average net assets (1.33)% (2.09)% (1.91)% (5.08)% (6.12)%
Portfolio turnover rate 167.62% 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) SM&R has voluntarily agreed to waive or reduce expenses to 1.85% for class A
and 2.50% for class B until December 31, 2005.
(4) Per share information has been restated to reflect certain
reclassifications.
See notes to financial statements.
<Page>
SM&R ALGER SMALL-CAP FUND
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 Small Cap 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 bias provided a slight advantage in the small cap
space as the Russell 2000 Growth index outperformed the Russell 2000 Value
index.
MARKET REVIEW AND PORTFOLIO PERFORMANCE:
The twelve months ended August 31, 2005 were a solid period for equity
securities across all market capitalizations and styles. Small and mid cap
stocks (as measured by the broad Russell 2000 index and the Russell MidCap
index) led the way with returns greater than 20% during the time period, while
large cap stocks (as measured by the S &P 500 and the Russell 1000 index) posted
hearty returns of 12% or higher.
To start the fiscal year, September 2004 was a positive month for virtually
all major indices. Investors put aside their concerns of high oil and gas
prices, Iraq, the U.S. Presidential election and questions about the
overall health of the economy, and the markets bounced back from the
difficult period we saw in July and August of 2004.
The positive momentum that began in September carried into the fourth quarter of
2004, and the final three months of the calendar year were a solid period for
the equity markets. Despite rising oil prices, a ballooning budget deficit and
the dollar's continual decline, stocks moved higher in October, as investors
chose to focus on strong corporate earnings reports and minimal inflation. That
trend continued into November. With the smooth reelection of President Bush,
better-than-expected consumer spending and merger activity on the rise,
investors found good reason to buy. Despite the Fed's 25 basis point interest
rate hike on November 10th, indices of all sizes and styles moved higher during
the penultimate month of the year, with small-cap stocks leading the way. Buyers
continued to dominate the markets during the final month of the year. Markets
didn't seem to be phased by the Fed's December 14th decision to raise interest
rates for the second time in as many months. Despite the 25 basis point hike,
investors again seemed determined to focus on the positive: strong growth in the
manufacturing sector, a reemergence of the U.S. IPO market and a retreat in the
surging oil prices. As the new year approached, optimism seemed to be trumping
fear and uncertainty.
In spite of the upbeat end to 2004, the first quarter of 2005 was a difficult
period for most equity indices. Despite solid employment data in January and
strong corporate earnings in the banking sector, stocks sank on inflationary
jitters and tightening interest rates. The negative trend briefly reversed
itself in February. Despite a slumping dollar and the Federal Reserve's decision
to raise interest rates by 25 basis points on February 2nd, investors chose to
focus on the strong retail and M&A markets. During the second month of the
calendar year, most indices trended upward, with mid-cap value stocks leading
the way. Unfortunately, the first quarter ended on an inauspicious note. Surging
oil prices, continued inflationary fears and the Federal Reserve's March 22nd
decision to raise interest rates yet again all combined to keep buyers out of
the market in March. Stocks of all sizes and styles sank during the final month
of the quarter, with small-cap growth stocks leading the downturn.
The downward trend we saw in the first quarter of 2005 continued through April,
as the threat of inflation and ongoing interest rate increases weighed on the
minds of investors. Despite an eighth
[SIDENOTE]
[CHART]
SECTOR WEIGHINGS BY TOTAL INVESTMENTS
<Table>
AFFILIATED MONEY MARKET 4.33%
CONSUMER DISCRETIONARY 13.08%
CONSUMER STAPLES 1.00%
ENERGY 8.36%
FINANCIALS 8.77%
HEALTH CARE 20.58%
INDUSTRIALS 16.16%
INFORMATION TECHNOLOGY 21.01%
MATERIALS 3.95%
TELECOMMUNICATION SERVICES 2.76%
</Table>
<Page>
consecutive 1/4 point rate increase from the Fed on the 3rd of the month, the
market's downward trend finally reversed itself in May. Small and mid cap growth
stocks that had been beaten down in the first few months of the year led the
recovery. Consumer confidence improved for the second straight month in June,
leading to positive returns for the last month of the quarter, despite a
sell-off in late June that was spurred on by another surge in oil prices.
Even with the strong positive returns we saw in the second quarter, most major
indices struggled to break through to positive territory for the first half of
the calendar year.
In July, the equity markets registered healthy gains once again, as second
quarter earnings reports came in above earlier estimates. After
an exceptionally strong July, the markets dipped in August. Investors gave
back some of their gains from the previous month as rising oil prices
weighed heavily on all market segments.
It was a strong twelve month period for the SM&R Alger Small-Cap Fund. The
fund returned 34.25% during the fiscal year ended August 31, 2005 versus a
25.07% return for the Lipper Small-Cap Growth Fund index. We also saw
solid returns in the Financials, Industrials and Materials sectors.
MARKET & ECONOMIC OUTLOOK:
The economy remains in a "sweet spot" and corporate earnings continue to boom.
Year-to-date, even though GDP growth is less than 4%, corporate profits are up
nearly 15%. Some economists are predicting a coming "profits recession, "but we
think that prediction will be as wrong as predictions of deflation and recession
were two years ago. And stocks, in this scenario, are looking as cheap relative
to bonds - not to mention real estate - as they have in nearly a generation.
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, LIPPER SMALL-CAP GROWTH INDEX AND
THE S&P 500
[PLOT POINTS TO COME]
AVERAGE ANNUAL RETURN
Includes maximum sales charge through 8/31/05. Inception date of these classes
is 09/01/00.
<Table>
<Caption>
SHARE ONE FIVE
CLASS YEAR YEAR
- ---------------------------------------------
A 26.04% (6.31)%
B 25.20% (5.78)%
</Table>
SM&R Alger Small-Cap 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 maximum initial sales
charge for Class A shares reflect the average annual returns 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 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 distributions or redemption of fund shares.
MANAGER COMMENTARY
<Page>
SCHEDULE OF INVESTMENTS August 31, 2005
<Table>
<Caption>
COMMON STOCK SHARES VALUE
CONSUMER DISCRETIONARY:
HOTELS, RESTAURANTS & LEISURE - 2.89%
Applebee's International, Inc. 960 $ 21,226
Isle of Capri Casinos, Inc.* 410 9,016
Red Robin Gourmet Burgers Inc.* 430 20,674
Ruth's Chris Steak House, Inc.* 365 6,862
57,778
LEISURE EQUIPMENT & SERVICES - 1.15%
LIFE TIME FITNESS, Inc.* 685 22,947
MEDIA - 3.28%
Harris Interactive Inc.* 3,100 13,020
Media General, Inc. (Class A) 275 18,092
Spanish Broadcasting System, Inc. (Class A)* 2,100 16,212
World Wrestling Entertainment, Inc. 1,450 18,313
65,637
RETAILING - 2.77%
A. C. Moore Arts & Crafts, Inc.* 800 18,208
Guitar Center, Inc.* 300 17,220
Phillips-Van Heusen Corp. 595 19,927
55,355
SPECIALTY RETAIL - 3.09%
Ann Taylor Stores Corp.* 750 19,200
DSW, Inc.* 710 15,975
Pacific Sunwear of California, Inc.* 600 14,328
PETCO Animal Supplies, Inc.* 550 12,166
61,669
TOTAL CONSUMER DISCRETIONARY - 13.18% 263,386
----------------------------------------------------------------------------
CONSUMER STAPLES:
FOOD & STAPLES RETAILING - 1.01%
Performance Food Group Co.* 650 $ 20,130
TOTAL CONSUMER STAPLES - 1.01% 20,130
----------------------------------------------------------------------------
ENERGY:
ENERGY & ENERGY SERVICES - 1.25%
Grey Wolf, Inc.* 3,200 25,056
ENERGY EQUIPMENT & SERVICES - 4.62%
Hornbeck Offshore Services, Inc.* 800 28,400
Lone Star Technologies, Inc.* 350 19,355
Pioneer Drilling Co.* 1,100 17,160
Todco (Class A)* 791 27,464
92,379
OIL & GAS - 2.55%
General Maritime Corp. 200 7,472
Range Resources Corp. 750 26,123
Whiting Petroleum Corp.* 400 17,328
50,923
TOTAL ENERGY - 8.42% 168,358
----------------------------------------------------------------------------
FINANCIALS:
CAPITAL MARKETS - 2.00%
Affiliated Managers Group, Inc.* 300 21,783
Greenhill & Co., Inc. 450 18,099
39,882
</Table>
<Page>
<Table>
<Caption>
COMMON STOCK SHARES VALUE
COMMERCIAL BANKS - 1.13%
Boston Private Financial Holdings, Inc. 850 $ 22,584
DIVERSIFIED FINANCIALS - 1.10%
National Financial Partners Corp. 500 21,950
FINANCIAL SERVICES - 0.72%
GFI Group Inc.* 435 14,390
INSURANCE - 1.93%
Ohio Casualty Corp. 890 22,481
Universal American Financial Corp.* 700 16,065
38,546
INSURANCE, AGENTS, BROKERS, & SERVICES - 1.11%
Platinum Underwriters Holdings, Ltd. 685 22,249
THRIFTS & MORTGAGE FINANCE - 0.85%
Brookline Bancorp, Inc. 1,100 16,984
TOTAL FINANCIALS - 8.84% 176,585
----------------------------------------------------------------------------
HEALTH CARE:
BIOTECHNOLOGY - 5.83%
Alkermes, Inc.* 1,200 22,536
Encysive Pharmaceuticals Inc.* 1,550 19,189
Protein Design Labs, Inc.* 800 21,392
Rigel Pharmaceuticals, Inc.* 750 15,097
Theravance, Inc.* 1,010 20,715
Vertex Pharmaceuticals Inc.* 950 17,480
116,409
HEALTH CARE EQUIPMENT & SUPPLIES - 5.23%
Haemonetics Corp.* 350 $ 15,554
Hologic, Inc. 425 20,498
Illumina, Inc.* 1,530 18,666
Immucor, Inc.* 562 13,303
Intuitive Surgical, Inc.* 255 18,972
Sybron Dental Specialties, Inc.* 450 17,446
104,439
HEALTH CARE PROVIDERS & SERVICES - 7.03%
Psychiatric Solutions, Inc.* 500 23,900
Sierra Health Services, Inc.* 350 23,555
Sunrise Senior Living, Inc.* 400 23,756
Symbion, Inc.* 1,000 26,770
VCA Antech, Inc.* 750 17,992
WellCare Health Plans Inc.* 650 24,440
140,413
MEDICAL SERVICES - 0.24%
Ventana Medical Systems, Inc.* 120 4,859
MEDICAL TECHNOLOGY - 1.79%
Adams Respiratory Therapeutics, Inc.* 435 14,720
Allscripts Healthcare Solutions, Inc.* 665 11,824
Syneron Medical Ltd.* 250 9,230
35,774
PHARMACEUTICALS - 0.64%
Impax Laboratories, Inc.* 1,150 12,719
TOTAL HEALTH CARE - 20.76% 414,613
----------------------------------------------------------------------------
</Table>
HOLDINGS
<Page>
<Table>
<Caption>
COMMON STOCK SHARES VALUE
INDUSTRIALS:
AEROSPACE - 1.11%
BE Aerospace, Inc.* 1,400 $ 22,204
AEROSPACE & DEFENSE - 2.53%
Esterline Technologies Corp.* 650 28,373
SI International Inc.* 710 22,280
50,653
AIRLINES - 0.83%
AirTran Holdings, Inc.* 1,600 16,528
COMMERCIAL SERVICES & SUPPLIES - 4.29%
CoStar Group Inc.* 400 18,704
FTI Consulting, Inc.* 950 23,655
Gevity HR, Inc. 950 21,185
Universal Technical Institute Inc.* 695 22,247
85,791
CONSTRUCTION & ENGINEERING - 1.02%
URS Corp.* 540 20,347
FREIGHT - 1.18%
Landstar System, Inc.* 650 23,608
MACHINERY - 4.23%
Actuant Corp. (Class A)* 500 21,200
Bucyrus International, Inc. 450 20,304
Gardner Denver Inc.* 625 26,138
Watts Water Technologies, Inc. (Class A) 500 16,930
84,572
TRANSPORTATION - 1.09%
Genco Shipping & Trading Ltd.* 1,060 21,730
TOTAL INDUSTRIALS - 16.28% 325,433
----------------------------------------------------------------------------
INFORMATION TECHNOLOGY:
COMMUNICATIONS EQUIPMENT - 2.32%
Arris Group Inc.* 1,390 $ 14,581
F5 Networks, Inc.* 350 14,452
Powerwave Technologies, Inc.* 1,650 17,292
46,325
COMPUTER SERVICES - 1.16%
Open Solutions Inc.* 1,030 23,257
COMPUTER SOFTWARE - 1.99%
Hyperion Solutions Corp.* 300 13,011
VeriFone Holdings, Inc.* 1,220 26,779
39,790
INFORMATION TECHNOLOGY SERVICES - 2.11%
Global Payments Inc. 370 24,339
Kanbay International Inc.* 800 17,832
42,171
INTERNET SOFTWARE & SERVICES - 4.03%
aQuantive, Inc.* 905 16,344
IVillage Inc.* 2,250 14,445
Jupitermedia Corp.* 880 14,696
Netease.com Inc.* 265 19,258
Openwave Systems Inc.* 916 15,764
80,507
SEMICONDUCTOR & SEMICONDUCTOR EQUIPMENT - 3.05%
FormFactor Inc.* 650 17,661
Tessera Technologies Inc.* 670 22,231
Trident Microsystems, Inc.* 600 21,072
60,964
</Table>
<Page>
<Table>
<Caption>
COMMON STOCK SHARES VALUE
SEMICONDUCTORS - 3.73%
ATMI, Inc.* 650 $ 20,040
Microsemi Corp.* 850 20,477
Photronics, Inc.* 750 15,578
Veeco Instruments Inc.* 1,005 18,462
74,557
SEMICONDUCTORS CAPITAL EQUIPMENT - 1.06%
SiRF Technology Holdings, Inc.* 830 21,082
SOFTWARE - 1.72%
Fair Isaac Corp. 435 17,778
Quest Software, Inc.* 1,230 16,679
34,457
TOTAL INFORMATION TECHNOLOGY - 21.17% 423,110
----------------------------------------------------------------------------
MATERIALS:
CHEMICALS - 1.98%
Lubrizol Corp. 550 22,742
Westlake Chemical Corp. 615 16,912
39,654
METALS & MINING - 2.01%
Alpha Natural Resources, Inc.* 750 22,372
Cleveland-Cliffs Inc. 250 17,770
40,142
TOTAL MATERIALS - 3.99% 79,796
----------------------------------------------------------------------------
TELECOMMUNICATION SERVICES:
WIRELESS TELECOMMUNICATION SERVICES - 2.78%
Inphonic, Inc.* 1,050 $ 16,107
SBA Communications Corp. 985 14,824
UbiquiTel Inc.* 2,850 24,709
55,640
TOTAL TELECOMMUNICATION SERVICES - 2.78% 55,640
----------------------------------------------------------------------------
TOTAL COMMON STOCK - 96.43%
----------------------------------------------------------------------------
(Cost $1,613,188) 1,927,051
MONEY MARKET FUND
SM&R Money Market Fund, 2.92% (a) 87,174 87,174
TOTAL MONEY MARKET FUND - 4.36%
----------------------------------------------------------------------------
(Cost $87,174) 87,174
TOTAL INVESTMENTS - 100.79%
----------------------------------------------------------------------------
(Cost $1,700,362) 2,014,225
LIABILITIES IN EXCESS
OF OTHER ASSETS - (0.79%) (15,864)
----------------------------------------------------------------------------
NET ASSETS - 100.00% $ 1,998,361
</Table>
* - 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,
2005. 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 advisor.
See notes to financial statements.
<Page>
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 2005
<Table>
ASSETS
Investments in unaffiliated securities, at value
(Cost $1,613,188) $ 1,927,051
Investments in affiliated money market fund
(Cost $87,174) 87,174
Total investments (Cost $1,700,362) 2,014,225
Prepaid expenses 7,874
Receivable for:
Investment securities sold 861
Capital stock sold 100
Dividends 660
Expense reimbursement 4,927
TOTAL ASSETS 2,028,647
LIABILITIES
Investment securities purchased 8,342
Payable to investment advisor for fund expenses 9,668
Accrued:
Investment advisory fee 1,804
Administrative service fee 451
Distribution fee 2,674
Other liabilities 7,347
TOTAL LIABILITIES 30,286
NET ASSETS (APPLICABLE TO SHARES OUTSTANDING) $ 1,998,361
NET ASSETS ARE COMPRISED OF THE FOLLOWING:
Capital (par value and additional paid-in) 1,524,975
Accumulated net realized gain on investments 159,523
Net unrealized appreciation of investments 313,863
NET ASSETS $ 1,998,361
NET ASSETS:
Class A $ 1,388,538
Class B $ 609,823
TOTAL NET ASSETS $ 1,998,361
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 100,000,000
Outstanding 186,735
Net asset value and redemption price per share $ 7.44
Offering price per share:
(Net asset value of $7.44/95%) $ 7.83
Class B:
Authorized 100,000,000
Outstanding 83,124
Net asset value and offering price per share $ 7.34
</Table>
See notes to financial statements.
<Page>
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 2005
<Table>
INVESTMENT INCOME
Dividends $ 5,015
Interest from affiliated money market fund 2,300
TOTAL INVESTMENT INCOME 7,315
EXPENSES
Investment advisory fee 17,644
Administrative service fee 4,411
Professional fees 5,165
Custody and transaction fees 19,474
Directors' fees 5,659
Insurance expenses 174
Compliance expenses 181
Qualification fees 6,103
Class A 6,880
Class B 6,880
Shareholder reporting expenses
Class A 3,764
Class B 2,488
Distribution fee
Class A 4,273
Class B 5,434
TOTAL EXPENSES 88,530
LESS EXPENSES REIMBURSED (51,436)
NET EXPENSES 37,094
INVESTMENT LOSS - NET (29,779)
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments 230,960
Change in unrealized appreciation of investments 283,112
NET GAIN ON INVESTMENTS 514,072
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 484,293
</Table>
See notes to financial statements.
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED AUGUST 31,
<Table>
<Caption>
2005 2004
----------------------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Investment loss - net $ (29,779) $ (26,759)
Net realized gain on investments 230,960 280,322
Change in unrealized appreciation
(depreciation) of investments 283,112 (215,929)
Net increase in net assets
resulting from operations 484,293 37,634
DISTRIBUTIONS TO SHAREHOLDERS FROM
Capital Gains
Class A (26,456) -
Class B (12,091) -
TOTAL DISTRIBUTIONS
TO SHAREHOLDERS (38,547) -
CAPITAL SHARE TRANSACTIONS - NET
Class A 100,319 161,175
Class B 20,517 71,015
TOTAL NET CAPITAL
SHARE TRANSACTIONS 120,836 232,190
TOTAL INCREASE IN NET ASSETS 566,582 269,824
NET ASSETS
Beginning of year 1,431,779 1,161,955
End of year $ 1,998,361 $ 1,431,779
</Table>
See notes to financial statements.
FINANCIALS
<Page>
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<Table>
<Caption>
YEAR ENDED AUGUST 31 2005 2004(1) 2003(1) 2002(4) 2001
- --------------------------------------------------------------------------------------------------------------------------------
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE YEARS INDICATED.
Net asset value, beginning of year $ 5.73 $ 5.46 $ 4.33 $ 5.54 $ 10.00
Investment loss - net (0.10) (0.10) (0.07) (0.32) (0.55)
Net realized and unrealized gain
(loss) on investments 1.96 0.37 1.20 (0.89) (3.91)
--------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.86 0.27 1.13 (1.21) (4.46)
Less distributions from Capital gains (0.15) - - - -
--------------------------------------------------------------------------------
Net asset value, end of year $ 7.44 $ 5.73 $ 5.46 $ 4.33 $ 5.54
================================================================================
TOTAL RETURN(2) 32.64% 4.94% 26.10% (21.84)% (44.60)%
================================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year $ 1,388,538 $ 978,028 $ 789,625 $ 436,796 $ 295,132
Ratio of expenses with reimbursement
to average net assets (3) 1.90% 1.90% 1.90% 6.60% 11.53%
Ratio of expenses without
reimbursement to average net assets 4.55% 4.65% 6.89% 9.68% 11.53%
Ratio of net investment loss to average
net assets (1.49)% (1.70)% (1.64)% (6.33)% (10.61)%
Portfolio turnover rate 126.84% 143.21% 131.48% 176.50% 138.73%
</Table>
<Page>
CLASS B SHARES
<Table>
<Caption>
YEAR ENDED AUGUST 31 2005 2004(1) 2003(1) 2002(4) 2001
- --------------------------------------------------------------------------------------------------------------------------------
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE YEARS INDICATED.
Net asset value, beginning of year $ 5.69 $ 5.47 $ 4.32 $ 5.65 $ 10.00
Investment loss - net (0.14) (0.14) (0.10) (0.41) (0.37)
Net realized and unrealized gain
(loss) on investments 1.94 0.36 1.25 (0.92) (3.98)
--------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.80 0.22 1.15 (1.33) (4.35)
Less distributions from Capital gains (0.15) - - - -
--------------------------------------------------------------------------------
Net asset value, end of year $ 7.34 $ 5.69 $ 5.47 $ 4.32 $ 5.65
================================================================================
TOTAL RETURN(2) 31.80% 4.02% 26.62% (23.54)% (43.50)%
================================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year $ 609,823 $ 453,751 $ 372,330 $ 206,871 $ 171,656
Ratio of expenses with reimbursement
to average net assets (3) 2.55% 2.55% 2.55% 8.05% 11.97%
Ratio of expenses without
reimbursement to average net assets 6.06% 6.11% 9.05% 11.65% 11.97%
Ratio of net investment loss to average
net assets (2.14)% (2.35)% (2.29)% (7.77)% (11.25)%
Portfolio turnover rate 126.84% 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) SM&R has voluntarily agreed to waive or reduce expenses to 1.90% for class
A and 2.55% for class B until December 31, 2005.
(4) Per share information has been restated to reflect certain
reclassifications.
See notes to financial statements.
<Page>
SM&R ALGER GROWTH FUND
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 bias provided a slight disadvantage in the large cap space as the
Russell 1000 Growth index underperformed the Russell 1000 Value index.
MARKET REVIEW AND PORTFOLIO PERFORMANCE:
The twelve months ended August 31, 2005 were a solid period for equity
securities across all market capitalizations and styles. Small and mid cap
stocks (as measured by the broad Russell 2000 index and the Russell MidCap
index) led the way with returns greater than 20% during the time period, while
large cap stocks (as measured by the S&P 500 and the Russell 1000 index) posted
hearty returns of 12% or higher.
To start the fiscal year, September 2004 was a positive month for virtually
all major indices. Investors put aside their concerns of high oil and gas
prices, Iraq, the U.S. Presidential election and questions about the
overall health of the economy, and the markets bounced back from the
difficult period we saw in July and August of 2004.
The positive momentum that began in September carried into the fourth quarter of
2004, and the final three months of the calendar year were a solid period for
the equity markets. Despite rising oil prices, a ballooning budget deficit and
the dollar's continual decline, stocks moved higher in October, as investors
chose to focus on strong corporate earnings reports and minimal inflation. That
trend continued into November. With the smooth reelection of President Bush,
better-than-expected consumer spending and merger activity on the rise,
investors found good reason to buy. Despite the Fed's 25 basis point interest
rate hike on November 10th, indices of all sizes and styles moved higher during
the penultimate month of the year, with small-cap stocks leading the way. Buyers
continued to dominate the markets during the final month of the year. Markets
didn't seem to be phased by the Fed's December 14th decision to raise interest
rates for the second time in as many months. Despite the 25 basis point hike,
investors again seemed determined to focus on the positive: strong growth in the
manufacturing sector, a reemergence of the U.S. IPO market and a retreat in the
surging oil prices. As the new year approached, optimism seemed to be trumping
fear and uncertainty.
Inspite of the upbeat end to 2004, the first quarter of 2005 was a difficult
period for most equity indices. Despite solid employment data in January and
strong corporate earnings in the banking sector, stocks sank on inflationary
jitters and tightening interest rates. The negative trend briefly reversed
itself in February. Despite a slumping dollar and the Federal Reserve's
decision to raise interest rates by 25 basis points on February 2nd, investors
chose to focus on the strong retail and M&A markets. During the second month of
the calendar year, most indices trended upward, with mid-cap value stocks
leading the way. Unfortunately, the first quarter ended on an inauspicious note.
Surging oil prices, continued inflationary fears and the Federal Reserve's March
22nd decision to raise interest rates yet again all combined to keep buyers out
of the market in March. Stocks of all sizes and styles sank during the final
month of the quarter, with small-cap growth stocks leading the downturn.
The downward trend we saw in the first quarter of 2005 continued through
April, as the threat of inflation and ongoing interest rate increases
weighed on the minds of investors. Despite an eighth consecutive 1/4 point
rate increase from the Fed on the 3rd of the month, the market's downward
trend finally reversed itself in May. Small and mid cap growth stocks that
had been beaten down in the first few months of the year led the recovery.
Consumer confidence improved for the second straight month in June, leading
to positive returns for the last month of the quarter, despite a sell-off
in late June that was
[SIDENOTE]
[CHART]
SECTOR WEIGHTINGS BY TOTAL INVESTMENTS
<Table>
AFFILIATED MONEY MARKET 1.90%
CONSUMER DISCRETIONARY 20.33%
CONSUMER STAPLES 6.54%
ENERGY 10.58%
FINANCIALS 10.17%
HEALTH CARE 18.32%
INDUSTRIALS 4.08%
INFORMATION TECHNOLOGY 22.27%
MATERIALS 1.84%
TELECOMMUNICATION SERVICES 3.97%
</Table>
<Page>
spurred on by another surge in oil prices. Even with the strong positive
returns we saw in the second quarter, most major indices struggled to break
through to positive territory for the first half of the calendar year.
In July, the equity markets registered healthy gains once again, as second
quarter earnings reports came in above earlier estimates. After
an exceptionally strong July, the markets dipped in August. Investors gave
back some of their gains from the previous month as rising oil prices
weighed heavily on all market segments.
It was a strong twelve month period for the SM&R Alger Growth Fund. The fund
returned 23.67% during the fiscal year ended August 31, 2005, versus a return of
12.56% for the S&P 500 index. The fund also outperformed the Lipper Large-Cap
Growth Fund index, which returned 15.47% over the same time period. Relative to
the S&P 500 index, the fund benefited from solid security selection throughout
the portfolio, with the greatest returns coming from the Energy and Materials
sectors. We also saw solid returns in the overweight Consumer Discretionary and
Information Technology sectors.
MARKET & ECONOMIC OUTLOOK:
The economy remains in a "sweet spot" and corporate earnings continue to boom.
Year-to-date, even though GDP growth is less than 4%, corporate profits are up
nearly 15%. Some economists are predicting a coming "profits recession," but we
think that prediction will be as wrong as predictions of deflation and
recession were two years ago. And stocks, in this scenario, are looking as cheap
relative to bonds - not to mention real estate - as they have in nearly a
generation.
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
Dan Chung, CFA, Portfolio Manager
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
[PLOT POINTS TO COME]
AVERAGE ANNUAL RETURN
Includes maximum sales charge through 8/31/05. Inception date of these classes
is 09/01/00.
<Table>
<Caption>
SHARE ONE FIVE
CLASS YEAR YEAR
- -------------------------------
A 15.94% (9.48)%
B 15.30% (9.36)%
</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 charges 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 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 distributions or redemption of fund shares.
MANAGER COMMENTARY
<Page>
SCHEDULE OF INVESTMENTS August 31, 2005
<Table>
<Caption>
COMMON STOCK SHARES VALUE
CONSUMER DISCRETIONARY:
HOTELS, RESTAURANTS & LEISURE - 2.11%
Penn National Gaming Inc.* 400 $ 13,632
Yum! Brands, Inc. 1,030 48,801
62,433
INTERNET & CATALOG RETAIL - 3.14%
eBay Inc.* 1,480 59,925
Netflix Inc.* 1,530 32,987
92,912
MEDIA - 6.21%
News Corp. (Class A) 2,700 43,767
Sirius Satellite Radio Inc.* 6,585 45,305
Walt Disney Co. (The) 1,450 36,525
XM Satellite Radio Holdings Inc. (Class A)* 1,650 58,162
183,759
MULTI-LINE RETAIL - 1.73%
Federated Department Stores, Inc. 540 37,249
J.C. Penney Co., Inc (Holding Co.) 285 13,860
51,109
RETAILING - 3.21%
CVS Corp. 2,005 58,887
Saks Inc.* 1,660 36,039
94,926
SPECIALTY RETAIL - 2.39%
Bed Bath & Beyond, Inc.* 1,025 41,564
Lowe's Companies, Inc. 455 29,261
70,825
TEXTILES, APPAREL & LUXURY GOODS - 1.49%
Polo Ralph Lauren Corp. (Class A) 895 44,347
TOTAL CONSUMER DISCRETIONARY - 20.28% 600,311
---------------------------------------------------------------------------
CONSUMER STAPLES:
BEVERAGES - 1.01%
PepsiCo, Inc. 545 $ 29,893
CONSUMER PRODUCTS - 1.74%
Gillette Co. 955 51,446
FOOD & STAPLES RETAILING - 0.74%
Wal-Mart Stores, Inc. 485 21,806
PERSONAL PRODUCTS - 2.18%
Avon Products, Inc. 1,970 64,655
TOBACCO - 0.86%
Altria Group, Inc. 360 25,452
TOTAL CONSUMER STAPLES - 6.53% 193,252
---------------------------------------------------------------------------
ENERGY:
ENERGY & ENERGY SERVICES - 1.67%
Suncor Energy, Inc. 835 49,482
ENERGY EQUIPMENT & SERVICES - 3.34%
National-Oilwell, Inc.* 745 47,836
Transocean Inc.* 860 50,774
98,610
OIL & GAS - 5.55%
Exxon Mobil Corp. 1,135 67,987
Sasol Ltd. ADR 715 23,881
Talisman Energy Inc. 975 47,746
Williams Companies, Inc. 1,100 24,684
164,298
TOTAL ENERGY - 10.56% 312,390
---------------------------------------------------------------------------
</Table>
<Page>
<Table>
<Caption>
COMMON STOCK SHARES VALUE
FINANCIALS:
BANKS - 1.01%
Wachovia Corp. 600 $ 29,772
CAPITAL MARKETS - 1.04%
Legg Mason, Inc. 295 30,836
DIVERSIFIED FINANCIALS - 3.21%
Citigroup Inc. 875 38,299
Franklin Resources, Inc. 350 28,154
Merrill Lynch & Co., Inc. 500 28,580
95,033
FINANCIAL SERVICES - 0.79%
Principal Financial Group, Inc. 510 23,358
INSURANCE - 4.09%
American International Group, Inc. 500 29,600
CIGNA Corp. 505 58,237
Genworth Financial Inc. (Class A) 600 19,302
Marsh & McLennan Companies, Inc. 500 14,025
121,164
TOTAL FINANCIALS - 10.14% 300,163
---------------------------------------------------------------------------
HEALTH CARE:
BIOTECHNOLOGY - 2.17%
Amgen Inc.* 185 14,781
Genentech, Inc.* 525 49,319
64,100
HEALTH CARE - 2.12%
Humana Inc.* 1,305 62,849
HEALTH CARE EQUIPMENT & SUPPLIES - 2.32%
Medtronic, Inc. 645 $ 36,765
St. Jude Medical, Inc. 350 16,065
Varian Medical Systems, Inc.* 400 15,928
68,758
HEALTH CARE PROVIDERS & SERVICES - 7.41%
AmerisourceBergen Corp. 450 33,601
Caremark Rx, Inc.* 900 42,057
HCA, Inc. 1,100 54,230
Health Management Associates, Inc. (Class A) 1,830 44,506
Medco Health Solutions, Inc.* 910 44,836
219,230
PHARMACEUTICALS - 4.26%
Schering-Plough Corp. 2,280 48,815
Sepracor Inc.* 625 31,375
Wyeth 1,000 45,790
125,980
TOTAL HEALTH CARE - 18.28% 540,917
---------------------------------------------------------------------------
INDUSTRIALS:
AEROSPACE & DEFENSE - 2.53%
Boeing Co. 450 30,159
General Dynamics Corp. 390 44,690
74,849
MACHINERY - 1.54%
Caterpillar Inc. 820 45,502
TOTAL INDUSTRIALS - 4.07% 120,351
---------------------------------------------------------------------------
</Table>
HOLDINGS
<Page>
SCHEDULE OF INVESTMENTS August 31, 2005
<Table>
<Caption>
COMMON STOCK SHARES VALUE
INFORMATION TECHNOLOGY:
COMMUNICATIONS EQUIPMENT - 3.50%
Cisco Systems Inc.* 2,100 $ 37,002
Corning Inc.* 1,550 30,938
Motorola, Inc. 1,635 35,774
103,714
COMPUTER RELATED & BUSINESS SERVICES - 4.77%
Apple Computer, Inc.* 1,615 75,792
EMC Corp.* 1,450 18,647
Network Appliance, Inc.* 1,965 46,649
141,088
COMPUTER SOFTWARE - 1.02%
NAVTEQ Corp.* 650 30,251
INTERNET SOFTWARE & SERVICES - 3.11%
Google Inc. (Class A)* 115 32,890
Yahoo! Inc.* 1,775 59,179
92,069
SEMICONDUCTORS - 3.98%
Intel Corp. 1,660 42,695
Linear Technology Corp. 1,295 49,119
Marvell Technology Group Ltd.* 550 25,955
117,769
SOFTWARE - 5.83%
Electronic Arts Inc.* 425 24,344
Microsoft Corp. 3,865 105,901
Oracle Corp.* 3,260 42,282
172,527
TOTAL INFORMATION TECHNOLOGY - 22.21% 657,418
---------------------------------------------------------------------------
MATERIALS:
METALS & MINING - 1.84%
Peabody Energy Corp. 760 54,469
TOTAL MATERIALS - 1.84% 54,469
TELECOMMUNICATION SERVICES:
COMMUNICATIONS - 2.71%
Nextel Partners, Inc. (Class A)* 1,200 $ 31,488
Sprint Nextel Corp. 1,875 48,619
80,107
DIVERSIFIED TELECOMMUNICATION SERVICES - 1.26%
ALLTEL Corp. 600 37,194
TOTAL TELECOMMUNICATION SERVICES - 3.97% 117,301
---------------------------------------------------------------------------
TOTAL COMMON STOCK - 97.88%
---------------------------------------------------------------------------
(Cost $2,656,926) 2,896,572
MONEY MARKET FUND:
SM&R Money Market Fund, 2.92%(a) 56,044 56,044
TOTAL MONEY MARKET FUND - 1.89%
---------------------------------------------------------------------------
(Cost $56,044) 56,044
TOTAL INVESTMENTS - 99.77%
---------------------------------------------------------------------------
(Cost $2,712,970) 2,952,616
CASH AND OTHER ASSETS, LESS LIABILITIES - 0.23% 6,791
---------------------------------------------------------------------------
NET ASSETS - 100.00% $ 2,959,407
---------------------------------------------------------------------------
</Table>
* - Non-income producing securities
ABBREVIATIONS
ADR - American Depositary Receipt
NOTE TO SCHEDULE OF INVESTMENTS:
(a) The rate quoted is the annualized seven-day yield of the fund at August 31,
2005. 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 advisor.
See notes to financial statements.
<Page>
FINANCIALS
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 2005
<Table>
ASSETS
Investments in unaffiliated securities, at value
(Cost $2,656,926) $ 2,896,572
Investments in affiliated money market fund 56,044
(Cost $56,044)
Total investments (Cost $2,712,970) 2,952,616
Prepaid expenses 9,854
Receivable for:
Investment securities sold 64,700
Capital stock sold 30
Dividends 2,722
Expense reimbursement 5,403
TOTAL ASSETS 3,035,325
LIABILITIES
Investment securities purchased 49,496
Payable to investment advisor for fund expenses 10,501
Accrued:
Investment advisory fee 2,283
Administrative service fee 672
Distribution fee 4,504
Other liabilities 8,462
TOTAL LIABILITIES 75,918
NET ASSETS (APPLICABLE TO SHARES OUTSTANDING) $ 2,959,407
NET ASSETS ARE COMPRISED OF THE FOLLOWING:
Capital (par value and additional paid-in) 2,817,103
Accumulated net realized loss on investments (97,342)
Net unrealized appreciation of investments 239,646
NET ASSETS $ 2,959,407
NET ASSETS:
Class A $ 1,815,584
Class B $ 1,143,823
TOTAL NET ASSETS $ 2,959,407
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 100,000,000
Outstanding 283,574
Net asset value and redemption price per share $ 6.40
Offering price per share:
(Net asset value of $6.40/95%) $ 6.74
Class B:
Authorized 100,000,000
Outstanding 185,011
Net asset value and offering price per share $ 6.18
</Table>
See notes to financial statements.
FINANCIALS
<Page>
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31,2005
<Table>
INVESTMENT INCOME
Dividends (Net of foreign tax withheld of $213) $ 36,812
Interest from affiliated money market fund 1,308
TOTAL INVESTMENT INCOME 38,120
EXPENSES
Investment advisory fee 23,514
Administrative service fee 6,916
Professional fees 5,165
Custody and transaction fees 21,998
Directors' fees 5,660
Insurance expenses 449
Compliance expenses 287
Qualification fees 6,077
Class A 6,898
Class B 7,023
Shareholder reporting expenses
Class A 5,499
Class B 3,810
Distribution fee
Class A 5,794
Class B 11,108
TOTAL EXPENSES 110,198
LESS EXPENSES REIMBURSED (55,919)
NET EXPENSES 54,279
INVESTMENT LOSS - NET (16,159)
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments 305,796
Change in unrealized appreciation of investments 258,817
NET GAIN ON INVESTMENTS 564,613
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 548,454
</Table>
See notes to financial statements.
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED AUGUST 31,
<Table>
<Caption>
2005 2004
---------------------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Investment loss - net $ (16,159) $ (31,598)
Net realized gain on investments 305,796 273,071
Change in unrealized appreciation 258,817 (266,532)
(depreciation) of investments
Net increase (decrease) in net assets
resulting from operations 548,454 (25,059)
CAPITAL SHARE TRANSACTIONS - NET
Class A 32,629 392,749
Class B (26,306) 129,705
TOTAL NET CAPITAL
SHARE TRANSACTIONS 6,323 522,454
TOTAL INCREASE IN NET ASSETS 554,777 497,395
NET ASSETS
Beginning of year 2,404,630 1,907,235
End of year $ 2,959,407 $ 2,404,630
</Table>
See notes to financial statements.
<Page>
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<Table>
<Caption>
YEAR ENDED AUGUST 31 2005 2004(1) 2003(1) 2002(4) 2001
- --------------------------------------------------------------------------------------------------------------------------------
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE YEARS INDICATED.
Net asset value, beginning of year $ 5.24 $ 5.20 $ 4.58 $ 6.38 $ 10.00
Investment loss - net (0.02) (0.06) (0.04) (0.12) (0.21)
Net realized and unrealized gain (loss)
on investments 1.18 0.10 0.66 (1.68) (3.41)
--------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.16 0.04 0.62 (1.80) (3.62)
--------------------------------------------------------------------------------
Net asset value, end of year $ 6.40 $ 5.24 $ 5.20 $ 4.58 $ 6.38
================================================================================
TOTAL RETURN(2) 22.14% 0.77% 13.54% (28.21)% (36.20)%
================================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year $ 1,815,584 $ 1,448,385 $ 1,071,035 $ 698,670 $ 608,836
Ratio of expenses with reimbursement to
average net assets (3) 1.70% 1.70% 1.70% 3.54% 5.52%
Ratio of expenses without reimbursement to
average net assets 3.63% 3.32% 4.76% 4.65% 5.52%
Ratio of net investment loss to average
net assets (0.33)% (1.06)% (0.86)% (2.64)% (4.49)%
Portfolio turnover rate 256.52% 162.19% 222.55% 180.20% 65.24%
</Table>
CLASS B SHARES
<Table>
<Caption>
YEAR ENDED AUGUST 31 2005 2004(1) 2003(1) 2002(4) 2001
- --------------------------------------------------------------------------------------------------------------------------------
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE YEARS INDICATED.
Net asset value, beginning of year $ 5.09 $ 5.08 $ 4.51 $ 6.31 $ 10.00
Investment loss - net (0.06) (0.09) (0.07) (0.15) (0.13)
Net realized and unrealized gain (loss)
on investments 1.15 0.10 0.64 (1.65) (3.56)
--------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.09 0.01 0.57 (1.80) (3.69)
--------------------------------------------------------------------------------
Net asset value, end of year $ 6.18 $ 5.09 $ 5.08 $ 4.51 $ 6.31
================================================================================
TOTAL RETURN(2) 21.41% 0.20% 12.64% (28.53)% (36.90)%
================================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year $ 1,143,823 $ 956,245 $ 836,200 $ 653,702 $ 456,784
Ratio of expenses with reimbursement to
average net assets (3) 2.35% 2.35% 2.35% 4.13% 5.84%
Ratio of expenses without reimbursement to
average net assets 4.51% 4.20% 5.53% 5.30% 5.84%
Ratio of net investment loss to average
net assets (0.98)% (1.71)% (1.51)% (3.24)% (4.91)%
Portfolio turnover rate 256.52% 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) SM&R has voluntarily agreed to waive or reduce expenses to 1.70% for class
A and 2.35% for class B until December 31, 2005.
(4) Per share information has been restated to reflect certain
reclassifications.
See notes to financial statements.
<Page>
SM&R GROWTH FUND
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, 2005, the fund produced a return of 9.01%,
before sales charges (but after other expenses), to Class T investors at
net asset value. Over that same time period, the U.S. equity markets also
posted strong results, -with the S&P 500 returning 10.35%, the NASDAQ
returning 16.30%, and the Dow Jones Industrial Average returning 3.08%.
The fund remains nearly fully invested with a cash position under 5%.
During the period, the fund's performance benefited from overweight equity
allocations in the utilities and consumer discretionary sectors. Stock
selectivity in the telecommunication services, consumer discretionary and
industrials sectors boosted performance, whereas selectivity in the materials,
energy and consumer staples sectors detracted from performance. Some of the
strongest performing stocks included gas utilities Sempra Energy and Kinder
Morgan. A few picks that did not fare as expected include the chemical companies
Dow and DuPont, both hurt by rising energy costs. The portfolio's largest sector
weighting remains the financials sector, at 19% of holdings, which is indicative
of the market's sector weights. For the Growth Fund, we utilize the same
conservative stock selection disciplines used in the SM&R Equity Income and
Balanced Funds. The key is identifying stocks of superior companies and
purchasing them at discounted valuations.
Over the past fiscal year there were basically two time periods in
which the equity markets fared well: the fourth quarter of 2004 and
the April through July period of 2005. The Energy and Utilities
sectors are still really the only bright spots this year, and account
for most of the gains in the S&P 500. All other sectors are basically
flat to down. Stocks in general have not been blatantly cheap over the
past 12 months, but they do not appear to be dramatically overvalued
either. Considering the ongoing low levels of long term interest
rates, appreciation in the stock market over the next year will
probably be determined by earnings growth as it is unlikely that
price/earnings multiples will be able to expand materially.
Though the past 12 months have witnessed rising energy costs and
continued unwinding of monetary accommodation, consumers have
surprisingly given the economic expansion renewed momentum. In
particular, June retail sales surged 1.7% as sales incentives
fueled a surge in auto sales. Core sales (excluding auto dealers,
gasoline stations and building materials) rose 0.6% in June and
at a 6.9% pace in the second quarter. Several influences
contributed to the improved resilience of consumer spending
during the past fiscal year, including accelerated growth in the
trend of nominal income and the increase in household net worth
[SIDENOTE]
[CHART]
SECTOR WEIGHTINGS BY TOTAL INVESTMENTS
<Table>
CONSUMER DISCRETIONARY 12.41%
CONSUMER STAPLES 8.61%
ENERGY 8.47%
FINANCIALS 19.10%
HEALTH CARE 12.16%
INDUSTRIALS 11.99%
INFORMATION TECHNOLOGY 14.32%
MATERIALS 2.31%
MISCELLANEOUS 5.18%
TELECOMMUNICATION SERVICES 2.08%
UTILITIES 3.37%
</Table>
<Page>
(up nearly 25% in the past two years), particularly relative to the incremental
cost of energy. Over the calendar year 2004, for instance, personal income
jumped $527 billion versus a $50 billion increment in energy expenses for
consumers. Hence, fears of an imminent collapse in consumer spending have not
been supported by the last 12 months of data.
There are, and have been over the past year, some good reasons to discount
some of the positive economic signs: the boost from auto incentives will
soon fade; core service price inflation appears to be heading higher over
the last several months of the fiscal year; and rising energy prices will
promote a new squeeze on spending and deterioration in trade later this
year. But it would be a mistake to miss the main message the economy is and
has been sending: that the U.S. remains in a cyclically sound position with
supports in place for 3-4% GDP growth and 2.0-2.5% inflation to be
sustained over much of the coming fiscal year. The bottom line is, the
economy was sound over the previous 12 months, and the fund benefited from
this reality. That should continue.
The SM&R Growth Fund is well positioned for a slow growth economy with its
holdings in financials and healthcare, while also providing exposure to growth
sectors such as technology, energy, and utilities. 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
[PLOT POINTS TO COME]
AVERAGE ANNUAL RETURN
Includes maximum sales charge through 8/31/05. Inception date of these classes
is 01/01/99.
<Table>
<Caption>
SHARE ONE FIVE SINCE
CLASS YEAR YEAR INCEPTION
- ----------------------------------------------------------
A 3.58% (9.60)% (3.21)%
B 2.75% (9.24)% (2.96)%
</Table>
AVERAGE ANNUAL RETURN
Includes maximum sales charge of 5.75% through 8/31/05. for class T shares
<Table>
10 YEAR 4.12%
5 YEAR (9.36)%
1 YEAR 2.65%
</Table>
SM&R 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 maximum initial sales charge for Class A
shares reflect the average annual returns 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 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 distributions or redemption of fund shares.
MANAGER COMMENTARY
<Page>
SCHEDULE OF INVESTMENTS August 31, 2005
<Table>
<Caption>
COMMON STOCK SHARES VALUE
CONSUMER DISCRETIONARY:
HOTELS, RESTAURANTS & LEISURE - 1.39%
Fairmont Hotels & Resorts Inc. 8,950 $ 280,851
Starwood Hotels & Resorts Worldwide, Inc. 21,700 1,265,110
1,545,961
HOUSEHOLD DURABLES - 1.21%
Newell Rubbermaid Inc. 19,100 447,513
Stanley Works (The) 19,600 896,700
1,344,213
INTERNET & CATALOG RETAIL - 0.93%
eBay Inc. 25,400 1,028,446
MEDIA - 4.55%
Comcast Corp. (Special Class A)* 26,900 827,175
News Corp (Class A) 32,100 520,341
Omnicom Group Inc. 6,300 506,772
Time Warner Inc. 48,600 870,912
Viacom Inc. (Class B) 19,200 652,608
Walt Disney Co. (The) 67,000 1,687,730
5,065,538
MULTI-LINE RETAIL - 1.36%
J. C. Penney Co., Inc (Holding Co.) 11,600 564,108
Kohl's Corp. * 5,200 272,740
Target Corp. 12,600 677,250
1,514,098
SPECIALTY RETAIL - 2.98%
Bed Bath & Beyond Inc. * 13,900 563,645
Best Buy Co., Inc. 15,600 743,496
Home Depot, Inc. (The) 13,000 524,160
Limited Brands, Inc. 39,300 863,814
Lowe's Companies, Inc. 9,700 623,807
3,318,922
TOTAL CONSUMER DISCRETIONARY - 12.42% 13,817,178
---------------------------------------------------------------------------------
CONSUMER STAPLES:
BEVERAGES - 2.34%
Coca-Cola Co. (The) 34,300 $ 1,509,200
PepsiCo, Inc. 20,000 1,097,000
2,606,200
FOOD PRODUCTS - 1.02%
McCormick & Co., Inc. 19,700 668,027
Sensient Technologies Corp. 25,000 469,250
1,137,277
FOOD & DRUG RETAILING - 2.43%
Wal-Mart Stores, Inc. 60,000 2,697,600
HOUSEHOLD PRODUCTS - 2.82%
Kimberly-Clark Corp. 14,800 922,336
Procter & Gamble Co. 40,000 2,219,200
3,141,536
TOTAL CONSUMER STAPLES - 8.61% 9,582,613
---------------------------------------------------------------------------------
ENERGY:
ENERGY EQUIPMENT & SERVICES - 0.85%
Schlumberger Ltd. 6,600 569,118
Weatherford International Ltd.* 5,600 379,176
948,294
OIL & GAS - 7.62%
Anadarko Petroleum Corp. 5,300 481,611
BP PLC ADR 3,800 259,844
Chevron Texaco Corp. 35,922 2,205,610
Exxon Mobil Corp. 72,800 4,360,720
Kerr-McGee Corp. 2,323 204,494
Royal Dutch Petroleum Co., ADR (Class A) 14,900 967,904
8,480,183
TOTAL ENERGY - 8.47% 9,428,477
---------------------------------------------------------------------------------
</Table>
<Page>
<Table>
<Caption>
COMMON STOCK SHARES VALUE
FINANCIALS:
BANKS - 7.85%
Bank of America Corp. 60,000 $ 2,581,800
PNC Financial Services Group, Inc. 30,000 1,686,900
U.S. Bancorp 54,085 1,580,364
Wachovia Corp. 21,300 1,056,906
Washington Mutual, Inc. 13,400 557,172
Wells Fargo & Co. 21,400 1,275,868
8,739,010
DIVERSIFIED FINANCIALS - 5.93%
American Express Co. 15,500 856,220
Citigroup Inc. 74,100 3,243,357
Goldman Sachs Group, Inc. (The) 5,000 555,900
JPMorgan Chase & Co. 27,700 938,753
MorganStanley 19,700 1,002,139
6,596,369
INSURANCE - 5.33%
Allstate Corp.(The) 12,300 691,383
American International Group, Inc. 29,260 1,732,192
Brown & Brown, Inc. 12,200 579,134
Marsh & McLennan Companies, Inc. 18,000 504,900
Prudential Financial, Inc. 20,100 1,293,837
St. Paul Travelers Companies, Inc.(The) 26,137 1,124,152
5,925,598
TOTAL FINANCIALS - 19.11% 21,260,977
---------------------------------------------------------------------------------
HEALTH CARE:
BIOTECHNOLOGY - 2.47%
Amgen Inc.* 17,900 1,430,210
Genentech, Inc.* 14,000 1,315,160
2,745,370
HEALTH CARE EQUIPMENT & SUPPLIES - 2.50%
Beckman Coulter, Inc. 22,500 $ 1,255,275
Medtronic, Inc. 21,400 1,219,800
Zimmer Holdings, Inc.* 3,740 307,316
2,782,391
HEALTH CARE PROVIDERS & SERVICES - 1.06%
McKesson Corp. 25,300 1,180,751
PHARMACEUTICALS - 6.13%
Bristol-Myers Squibb Co. 17,400 425,778
Johnson & Johnson 38,500 2,440,515
Merck & Co., Inc. 26,700 753,741
Pfizer Inc. 88,040 2,242,379
Watson Pharmaceuticals, Inc.* 14,000 482,720
Wyeth 10,400 476,216
6,821,349
TOTAL HEALTH CARE - 12.16% 13,529,861
---------------------------------------------------------------------------------
INDUSTRIALS:
AEROSPACE & DEFENSE - 3.40%
Boeing Co. 16,400 1,099,128
Goodrich Corp. 17,300 792,686
Honeywell International Inc. 14,500 555,060
Rockwell Collins, Inc. 16,100 774,893
United Technologies Corp. 11,300 565,000
3,786,767
BUILDING PRODUCTS - 0.96%
American Standard Companies Inc. 23,400 1,067,040
COMMERCIAL SERVICES & SUPPLIES - 0.89%
Apollo Group, Inc.* 6,900 542,754
ServiceMaster Co.(The) 32,500 446,550
989,304
</Table>
HOLDINGS
<Page>
<Table>
<Caption>
COMMON STOCK SHARES VALUE
CONSTRUCTION & ENGINEERING - 0.46%
Cemex S.A. de C.V. ADR 10,600 $ 505,302
INDUSTRIAL CONGLOMERATES - 4.42%
3M Co. 10,400 739,960
General Electric Co. 110,200 3,703,822
Tyco International Ltd. 17,100 475,893
4,919,675
MACHINERY - 1.87%
Danaher Corp. 12,200 653,432
Illinois Tool Works Inc. 8,300 699,524
Ingersoll-Rand Co. (Class A) 9,100 724,542
2,077,498
TOTAL INDUSTRIALS - 12.00% 13,345,586
---------------------------------------------------------------------------------
INFORMATION TECHNOLOGY:
COMMUNICATIONS EQUIPMENT - 2.43%
Cisco Systems, Inc.* 84,500 1,488,890
Motorola, Inc. 30,900 676,092
Nokia Oyj ADR 34,100 537,757
2,702,739
COMPUTERS & PERIPHERALS - 2.29%
Dell Inc.* 31,700 1,128,520
EMC Corp.* 30,800 396,088
Hewlett-Packard Co. 37,000 1,027,120
2,551,728
ELECTRONIC EQUIPMENT & INSTRUMENTS - 0.14%
Agilent Technologies, Inc.* 4,800 154,368
INTERNET SOFTWARE & SERVICES - 1.00%
Google Inc.(Class A)* 3,900 1,115,400
IT CONSULTING & SERVICES - 0.52%
First Data Corp. 13,800 $ 573,390
SEMICONDUCTOR EQUIPMENT & PRODUCTS - 4.11%
Analog Devices, Inc. 3,900 142,155
Fairchild Semiconductor International, Inc.* 63,900 1,076,715
Intel Corp. 73,400 1,887,848
KLA-Tencor Corp. 2,900 147,204
Linear Technology Corp. 15,200 576,536
Maxim Integrated Products, Inc. 3,400 145,010
Texas Instruments Inc. 15,600 509,808
Xilinx, Inc. 3,100 87,079
4,572,355
SOFTWARE - 3.83%
Electronic Arts Inc.* 8,800 504,064
Intuit Inc.* 3,100 142,104
Microsoft Corp. 101,000 2,767,400
Oracle Corp.* 65,700 852,129
4,265,697
TOTAL INFORMATION TECHNOLOGY - 14.32% 15,935,677
---------------------------------------------------------------------------------
MATERIALS:
CHEMICALS - 1.55%
Dow Chemical Co. 15,500 669,600
Ecolab Inc. 7,000 231,000
E.I. du Pont de Nemours and Co. 11,200 443,184
PPG Industries, Inc. 6,000 377,880
1,721,664
CONTAINERS & PACKAGING - 0.57%
Sealed Air Corp. * 12,500 634,375
PAPER & FOREST PRODUCTS - 0.19%
International Paper Co. 6,900 212,865
TOTAL MATERIALS - 2.31% 2,568,904
---------------------------------------------------------------------------------
</Table>
<Page>
<Table>
<Caption>
COMMON STOCK SHARES VALUE
TELECOMMUNICATION SERVICES:
DIVERSIFIED TELECOMMUNICATION SERVICES - 2.08%
ALLTEL Corp. 14,400 $ 892,656
Sprint Nextel Corp. 34,007 881,802
Verizon Communications Inc. 16,400 536,444
2,310,902
TOTAL TELECOMMUNICATION
SERVICES - 2.08% 2,310,902
---------------------------------------------------------------------------------
UTILITIES:
ELECTRIC UTILITIES - 2.27%
Ameren Corp. 11,100 609,723
Dominion Resources, Inc. 3,800 290,624
Exelon Corp. 9,100 490,399
Southern Co.(The) 19,200 660,480
Wisconsin Energy Corp. 12,100 473,957
2,525,183
GAS UTILITIES - 1.10%
El Paso Corp. 30,400 352,640
Kinder Morgan, Inc. 4,800 458,256
Sempra Energy 9,200 412,344
1,223,240
TOTAL UTILITIES - 3.37% 3,748,423
---------------------------------------------------------------------------------
TOTAL COMMON STOCK - 94.85%
---------------------------------------------------------------------------------
(Cost $79,658,157) 105,528,598
MONEY MARKET FUND
SM&R Money Market Fund, 2.92% (a) 658 658
TOTAL MONEY MARKET FUND -0.00%
---------------------------------------------------------------------------------
(Cost $658) 658
<Caption>
COMMERCIAL PAPER FACE AMOUNT VALUE
COMMUNICATIONS EQUIPMENT - 0.40%
Motorola Inc., 3.59%, 09/06/05 $ 442,000 $ 441,779
ELECTRIC UTILITIES - 1.78%
OGE Energy Corp., 3.58%, 09/02/05 1,978,000 1,977,803
FOOD PRODUCTS - 0.27%
Kraft Foods Inc., 3.55%, 09/08/05 303,000 302,791
HOUSEHOLD DURABLES - 0.85%
Fortune Brands Inc., 3.58%,09/01/05 947,000 947,000
MEDIA - 1.89%
Walt Disney Co., 3.57%, 09/07/05 2,101,000 2,099,750
TOTAL COMMERCIAL PAPER - 5.19%
-----------------------------------------------------------------------------------
(Cost $5,769,123) 5,769,123
TOTAL INVESTMENTS - 100.04%
-----------------------------------------------------------------------------------
(Cost $85,427,938) 111,298,379
LIABILITIES IN EXCESS
OF OTHER ASSETS - (0.04%) (45,498)
-----------------------------------------------------------------------------------
NET ASSETS - 100.00% $ 111,252,881
-----------------------------------------------------------------------------------
</Table>
* - Non-income producing securities
ABBREVIATIONS
ADR - American Depositary Receipt
NOTE TO SCHEDULE OF INVESTMENTS:
(a) The rate quoted is the annualized seven-day yield of the fund at August 31,
2005. 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 advisor.
See notes to financial statements.
<Page>
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 2005
<Table>
ASSETS
Investments in unaffiliated securities, at value
(Cost $85,427,280) $ 111,297,721
Investments in affiliated money market fund
(Cost $658) 658
Total investments (Cost $85,427,938) 111,298,379
Prepaid expenses 57,323
Receivable for:
Investment securities sold 47
Capital stock sold 22,834
Dividends 244,673
Expense reimbursement 1,788
Other assets 93,341
TOTAL ASSETS 111,718,385
LIABILITIES
Capital stock reacquired 200,639
Payable to investment advisor for fund expenses 74,636
Accrued:
Investment advisory fee 74,841
Administrative service fee 24,854
Distribution fee 10,661
Other liabilities 79,873
TOTAL LIABILITIES 465,504
NET ASSETS (APPLICABLE TO SHARES OUTSTANDING) $ 111,252,881
NET ASSETS ARE COMPRISED OF THE FOLLOWING:
Capital (par value and additional paid-in) 102,900,887
Undistributed net investment income 171,424
Accumulated net realized loss on investments (17,689,871)
Net unrealized appreciation of investments 25,870,441
NET ASSETS $ 111,252,881
NET ASSETS:
Class A $ 6,154,299
Class B $ 3,455,626
Class T $ 101,642,956
TOTAL NET ASSETS: $ 111,252,881
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 50,000,000
Outstanding 1,506,134
Net asset value and redemption price per share $ 4.09
Offering price per share:
(Net asset value of $4.09/95%) $ 4.30
Class B:
Authorized 25,000,000
Outstanding 863,207
Net asset value and offering price per share $ 4.00
Class T:
Authorized 95,000,000
Outstanding 24,362,738
Net asset value and redemption price per share $ 4.17
Offering price per share:
(Net asset value of $4.17/94.25%) $ 4.43
</Table>
<Page>
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 2005
<Table>
INVESTMENT INCOME
Dividends (Net of foreign tax withheld of $14,454) $ 2,644,272
Interest 91,323
Interest from affiliated money market fund 370
TOTAL INVESTMENT INCOME 2,735,965
EXPENSES
Investment advisory fee 840,075
Administrative service fee 278,824
Professional fees 18,689
Custody and transaction fees 23,271
Directors' fees 5,600
Insurance expenses 34,958
Compliance expenses 12,081
Qualification fees 7,088
Class A 6,483
Class B 4,541
Class T 7,260
Shareholder reporting expenses 16,435
Class A
Class B 8,978
Class T 119,585
Distribution fee
Class A 15,474
Class B 26,614
TOTAL EXPENSES 1,425,956
LESS EXPENSES REIMBURSED (32,218)
NET EXPENSES 1,393,738
INVESTMENT INCOME - NET 1,342,227
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments 11,214,235
Change in unrealized depreciation of investments (2,651,055)
NET GAIN ON INVESTMENTS 8,563,180
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 9,905,407
</Table>
See notes to financial statements.
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED AUGUST 31,
<Table>
<Caption>
2005 2004
------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Investment income - net $ 1,342,227 $ 754,091
Net realized gain on investments 11,214,235 2,900,180
Change in unrealized appreciation
(depreciation) of investments (2,651,055) 8,055,054
Net increase in net assets
resulting from operations 9,905,407 11,709,325
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income - net
Class A (65,264) (30,045)
Class B (24,873) (5,732)
Class T (1,228,147) (720,998)
TOTAL DISTRIBUTIONS TO SHAREHOLDERS (1,318,284) (756,775)
CAPITAL SHARE TRANSACTIONS - NET
Class A (318,767) 462,971
Class B (161,881) 385,591
Class T (10,991,288) (5,785,078)
TOTAL NET CAPITAL SHARE TRANSACTIONS (11,471,936) (4,936,516)
TOTAL INCREASE (DECREASE) IN NET ASSETS (2,884,813) 6,016,034
NET ASSETS
Beginning of year 114,137,694 108,121,660
End of year $ 111,252,881 $ 114,137,694
Undistributed Net $ 171,424 $ 147,481
Investment Income
</Table>
See notes to financial statements.
FINANCIALS
<Page>
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
8 MONTHS ENDED YEAR ENDED
YEAR ENDED AUGUST 31, AUGUST 31, DECEMBER 31,
CLASS A SHARES 2005 2004 2003 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
Net asset value, beginning of
period $ 3.79 $ 3.45 $ 3.15 $ 4.18 $ 5.55 $ 6.73
Investment income (loss) - net 0.04 0.02 0.01 (0.01) - 0.01
Net realized and unrealized gain
(loss) on investments 0.30 0.34 0.30 (1.02) (1.37) (0.66)
--------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS 0.34 0.36 0.31 (1.03) (1.37) (0.65)
Less distributions from investment
income - net (0.04) (0.02) (0.01) - - (0.01)
Capital gains - - - - - (0.52)
--------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.04) (0.02) (0.01) 0.00 0.00 (0.53)
--------------------------------------------------------------------------------------------
Net asset value, end of period $ 4.09 $ 3.79 $ 3.45 $ 3.15 $ 4.18 $ 5.55
============================================================================================
TOTAL RETURN(1) 9.05% 10.41% 10.00% (24.61)% (24.68)%** (8.76)%
============================================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of period
(000's omitted) $ 6,154 $ 6,017 $ 5,039 $ 5,287 $ 5,971 $ 6,856
Ratio of expenses with
reimbursement to average net
assets (2) 1.36% 1.36% 1.36% 1.47% 1.50%* 1.30%
Ratio of expenses without
reimbursement to average net
assets 1.69% 1.54% 1.60% 1.55% 1.50%* 1.30%
Ratio of net investment income
(loss) to average net assets 1.03% 0.44% 0.42% (0.03)% (0.13)%* (0.02)%
Portfolio turnover rate 24.18% 4.93% 22.97% 41.74% 18.28% 19.68%
<Caption>
8 MONTHS ENDED YEAR ENDED
YEAR ENDED AUGUST 31, AUGUST 31, DECEMBER 31,
CLASS B SHARES 2005 2004 2003 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
Net asset value, beginning of
period $ 3.72 $ 3.39 $ 3.11 $ 4.13 $ 5.47 $ 6.66
Investment income (loss) - net 0.02 0.01 (0.01) (0.02) (0.02) (0.02)
Net realized and unrealized gain
(loss) on investments 0.29 0.33 0.29 (1.00) (1.32) (0.65)
---------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS 0.31 0.34 0.28 (1.02) (1.34) (0.67)
Less distributions from investment
income - net (0.03) (0.01) (0.00)*** - - -
Capital gains - - - - - (0.52)
---------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.03) (0.01) 0.00 0.00 0.00 (0.52)
---------------------------------------------------------------------------------------------
Net asset value, end of period $ 4.00 $ 3.72 $ 3.39 $ 3.11 $ 4.13 $ 5.47
=============================================================================================
TOTAL RETURN(1) 8.27% 9.93% 9.12% (24.70)% (24.50)%** (9.17)%
=============================================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of period
(000's omitted) $ 3,456 $ 3,365 $ 2,700 $ 2,587 $ 2,826 $ 3,382
Ratio of expenses with
reimbursement to average net
assets (2) 1.86% 1.86% 1.86% 1.97% 2.00%* 1.89%
Ratio of expenses without
reimbursement to average
net assets 2.20% 2.09% 2.24% 2.19% 2.00%* 1.89%
Ratio of net investment income
(loss) to average net assets 0.52% (0.06)% (0.08)% (0.53)% (0.78)%* (0.66)%
Portfolio turnover rate 24.18% 4.93% 22.97% 41.74% 18.28% 19.68%
</Table>
<Page>
<Table>
<Caption>
8 MONTHS ENDED YEAR ENDED
YEAR ENDED AUGUST 31, AUGUST 31, DECEMBER 31,
CLASS T SHARES 2005 2004 2003 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
Net asset value, beginning of
period $ 3.87 $ 3.52 $ 3.21 $ 4.25 $ 5.60 $ 6.77
Investment income - net 0.05 0.03 0.03 0.01 0.01 0.03
Net realized and unrealized gain
(loss) on investments 0.30 0.35 0.30 (1.04) (1.35) (0.65)
--------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS 0.35 0.38 0.33 (1.03) (1.34) (0.62)
Less distributions from investment
income - net (0.05) (0.03) (0.02) (0.01) (0.01) (0.03)
Capital gains - - - - - (0.52)
--------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.05) (0.03) (0.02) (0.01) (0.01) (0.55)
--------------------------------------------------------------------------------------------
Net asset value, end of period $ 4.17 $ 3.87 $ 3.52 $ 3.21 $ 4.25 $ 5.60
============================================================================================
TOTAL RETURN(1) 9.01% 10.67% 10.30% (24.24)% (23.99)%** (8.25)%
============================================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of period
(000's omitted) $ 101,643 $ 104,756 $ 100,383 $ 98,912 $ 140,530 $ 194,150
Ratio of expenses to average net
assets 1.19% 1.12% 1.15% 1.10% 1.08%* 0.81%
Ratio of net investment income to
average net assets 1.20% 0.68% 0.63% 0.34% 0.31%* 0.47%
Portfolio turnover rate 24.18% 4.93% 22.97% 41.74% 18.28% 19.68%
</Table>
* Ratios annualized
** Returns are not annualized
*** Amount less than $0.01
(1) Does not include the effect of sales charge.
(2) SM&R has voluntarily agreed to waive or reduce expenses to 1.36% for
class A and 1.86% for class B until December 31, 2005.
See notes to financial statements.
<Page>
SM&R EQUITY INCOME FUND
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, 2005, the fund
produced a return of 9.35%, before sales charges (but after other
expenses), to Class T investors at net asset value. Over that same time
period, the U.S. equity markets also posted strong results-with the S&P
500 returning 10.35%, the NASDAQ returning 16.30%, and the Dow Jones
Industrial Average returning 3.08%. 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 2.3% (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 period benefited from overweight equity
allocations in the financials, utilities and consumer discretionary sectors.
Stock selectivity in the financials, industrials, and consumer discretionary
sectors boosted performance, whereas selectivity in the healthcare and consumer
staples sectors hampered performance. Some of the fund's strongest performers
included Constellation Energy and Exelon Corp., both electric utilities. A few
selections which hampered performance include Sensient Technology and Wal-Mart,
both in the consumer staples sector. Due to the strong dividend yields found in
the financial sector overall, that sector continues to receive the fund's
largest sector weighting. For the Equity Income Fund, we utilize the same
conservative stock selection disciplines used in the SM&R Growth and Balanced
Funds. The key is identifying stocks of superior companies and purchasing them
at discounted valuations.
Over the past fiscal year there were basically two time periods in
which the equity markets fared well: the fourth quarter of 2004 and
the April through July period of 2005. The Energy and Utilities
sectors are still really the only bright spots this year, and account
for most of the gains in the S&P 500. All other sectors are basically
flat to down. Stocks in general have not been blatantly cheap over the
past 12 months, but they do not appear to be dramatically overvalued
either. Considering the ongoing low levels of long term interest
rates, appreciation in the stock market over the next year will
probably be determined by earnings growth as it is unlikely that
price/earnings multiples will be able to expand materially.
Though the past 12 months have witnessed rising energy costs and
continued unwinding of monetary accommodation, consumers have
surprisingly given the economic expansion renewed momentum. In
particular, June retail sales surged 1.7% as sales incentives
fueled a surge in auto sales. Core sales (excluding auto dealers,
gasoline stations and building materials) rose 0.6% in June and
at a 6.9% pace in the second quarter. Several influences
contributed to the improved resilience of consumer spending
during the past fiscal year, including accelerated growth in the
trend of nominal income and the increase in household net worth
(up nearly 25% in the past two years), particularly relative to
the
[SIDENOTE]
[CHART]
SENIOR WEIGHTINGS BY TOTAL INVESTMENTS
<Table>
AFFILIATED MONEY MARKET 0.08%
CONSUMER DISCRETIONARY 11.88%
CONSUMER STAPLES 10.69%
ENERGY 10.80%
FINANCIALS 24.33%
HEALTH CARE 11.69%
INDUSTRIALS 11.03%
INFORMATION TECHNOLOGY 7.97%
MATERIALS 2.72%
MISCELLANEOUS 2.68%
TELECOMMUNICATION SERVICES 2.61%
UTILITIES 3.52%
</Table>
<Page>
incremental cost of energy. Over the calendar year 2004, for instance,
personal income jumped $527 billion versus a $50 billion increment in
energy expenses for consumers. Hence, fears of an imminent collapse in
consumer spending have not been supported by the last 12 months of data.
There are, and have been over the past year, some good reasons to
discount some of the positive economic signs: the boost from auto
incentives will soon fade; core service price inflation appears to be
heading higher over the last several months of the fiscal year; and
rising energy prices will promote a new squeeze on spending and
deterioration in trade later this year. But it would be a mistake to
miss the main message the economy is, and has been, sending: that the
U.S. remains in a cyclically sound position with supports in place for
3-4% GDP growth and 2.0-2.5% inflation to be sustained over much of
the coming fiscal year. The bottom line is, the economy was sound over
the previous 12 months, and the fund benefited from this reality. That
should continue.
The SM&R Equity Income Fund is well positioned for the current environment with
its holdings in energy, utilities, industrials and consumer discretionary, while
also providing exposure to defensive sectors such as healthcare and consumer
staples. The fund continues to strive to maintain a strong dividend yield by
holding a portfolio of value stocks while maintaining low turnover-which helps
to minimize 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
[PLOT POINTS TO COME]
AVERAGE ANNUAL RETURN
Includes maximum sales charge through 8/31/05. Inception date of these classes
is 01/01/99.
<Table>
<Caption>
SHARE ONE FIVE SINCE
CLASS YEAR YEAR INCEPTION
- ----------------------------------------------------------------
A 3.81% (1.21)% 0.03%
B 3.20% (0.97)% 0.02%
</Table>
AVERAGE ANNUAL RETURN
Includes maximum sales charge of 5.75% through 8/31/05 for Class T Shares
<Table>
10 YEAR 5.92%
5 YEAR (1.13)%
1 YEAR 3.06%
</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 maximum initial sales charge for Class A shares reflect the average
annual returns 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 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 distributions or redemption of fund shares.
MANAGER COMMENTARY
<Page>
SCHEDULE OF INVESTMENTS August 31, 2005
<Table>
<Caption>
COMMON STOCK SHARES VALUE
CONSUMER DISCRETIONARY:
HOTELS, RESTAURANTS & LEISURE - 1.13%
Starwood Hotels & Resorts Worldwide, Inc. 21,800 $ 1,270,940
HOUSEHOLD DURABLES - 1.64%
Newell Rubbermaid Inc. 17,800 417,054
Stanley Works (The) 17,900 818,925
Tupperware Corp. 27,600 604,992
1,840,971
MEDIA - 5.43%
Comcast Corp. (Special Class A)* 20,000 603,600
Comcast Corp. (Class A)* 16,800 516,600
News Corp (Class A) 33,000 534,930
Time Warner Inc. 110,700 1,983,744
Viacom Inc. (Class B) 23,300 791,967
Walt Disney Co. (The) 66,900 1,685,211
6,116,052
MULTI-LINE RETAIL - 0.77%
Kohl's Corp.* 5,400 283,230
Target Corp. 10,900 585,875
869,105
SPECIALTY RETAIL - 2.91%
Best Buy Co., Inc. 16,050 764,943
Limited Brands, Inc. 46,900 1,030,862
Lowe's Companies, Inc. 13,000 836,030
Staples, Inc. 29,550 648,918
3,280,753
TOTAL CONSUMER DISCRETIONARY - 11.88% 13,377,821
-----------------------------------------------------------------------
CONSUMER STAPLES:
BEVERAGES - 2.33%
Coca-Cola Co. (The) 25,700 $ 1,130,800
PepsiCo, Inc. 27,200 1,491,920
2,622,720
FOOD PRODUCTS - 1.55%
H.J. Heinz Co. 19,000 682,480
McCormick & Co., Inc. 19,500 661,245
Sensient Technologies Corp. 21,500 403,555
1,747,280
FOOD & DRUG RETAILING - 2.25%
Wal-Mart Stores, Inc. 56,300 2,531,248
HOUSEHOLD PRODUCTS - 2.67%
Kimberly-Clark Corp. 13,600 847,552
Procter & Gamble Co. 39,000 2,163,720
3,011,272
TOBACCO - 1.89%
Altria Group, Inc. 14,700 1,039,290
Reynolds American Inc. 12,949 1,086,939
2,126,229
TOTAL CONSUMER STAPLES - 10.69% 12,038,749
-----------------------------------------------------------------------
</Table>
<Page>
<Table>
<Caption>
COMMON STOCK SHARES VALUE
ENERGY:
ENERGY EQUIPMENT & SERVICES - 1.61%
Schlumberger Ltd. 11,400 $ 983,022
Weatherford International Ltd.* 12,200 826,062
1,809,084
OIL & GAS - 9.19%
Anadarko Petroleum Corp. 13,600 1,235,832
BP PLC ADR 17,510 1,197,334
ChevronTexaco Corp. 39,026 2,396,196
Enterprise Products Partner L.P. 10,700 259,796
ExxonMobil Corp. 62,100 3,719,790
Kerr-McGee Corp. 4,711 414,709
Royal Dutch Shell PLC ADR (Class A) 17,300 1,123,808
10,347,465
TOTAL ENERGY - 10.80% 12,156,549
-----------------------------------------------------------------------
FINANCIALS:
BANKS - 8.45%
AmSouth Bancorporation 22,300 586,936
Bank of America Corp. 48,700 2,095,561
KeyCorp 17,100 566,352
PNC Financial Services Group, Inc. 33,400 1,878,082
U.S. Bancorp 67,500 1,972,350
Washington Mutual, Inc. 13,700 569,646
Wells Fargo & Co. 30,900 1,842,258
9,511,185
DIVERSIFIED FINANCIALS - 5.97%
Allied Capital Corp. 20,500 593,475
Citigroup Inc. 68,400 2,993,868
Morgan Stanley 11,500 585,005
Principal Financial Group, Inc. 16,700 764,860
Weingarten Realty Investors 46,350 1,786,793
6,724,001
INSURANCE - 5.64%
Allstate Corp. (The) 12,600 $ 708,246
American International Group, Inc. 33,100 1,959,520
Marsh & McLennan Companies, Inc. 18,500 518,925
Prudential Financial, Inc. 34,400 2,214,328
St. Paul Travelers Companies, Inc. (The) 21,956 944,328
6,345,347
REAL ESTATE - 4.27%
Health Care Property Investors, Inc. 45,200 1,228,084
Plum Creek Timber Co., Inc. 41,500 1,525,125
Public Storage, Inc. 30,500 2,059,360
4,812,569
TOTAL FINANCIALS - 24.33% 27,393,102
-----------------------------------------------------------------------
HEALTH CARE:
BIOTECHNOLOGY - 1.02%
Amgen Inc.* 14,400 1,150,560
HEALTH CARE EQUIPMENT & SUPPLIES - 1.41%
Beckman Coulter, Inc. 22,800 1,272,012
Zimmer Holdings, Inc.* 3,760 308,959
1,580,971
HEALTH CARE PROVIDERS & SERVICES - 0.49%
Health Management Associates, Inc. (Class A) 22,700 552,064
PHARMACEUTICALS - 8.77%
Allergan, Inc. 9,500 874,475
Bristol-Myers Squibb Co. 37,600 920,072
Johnson & Johnson 39,200 2,484,888
Merck & Co., Inc. 25,300 714,219
Pfizer Inc. 85,580 2,179,723
Watson Pharmaceuticals, Inc.* 27,000 930,960
Wyeth 38,600 1,767,494
9,871,831
TOTAL HEALTH CARE - 11.69% 13,155,426
-----------------------------------------------------------------------
</Table>
HOLDINGS
<Page>
<Table>
<Caption>
COMMON STOCK SHARES VALUE
INDUSTRIALS:
AEROSPACE & DEFENSE - 1.28%
United Technologies Corp. 28,800 $ 1,440,000
BUILDING PRODUCTS - 1.00%
American Standard Companies Inc. 24,600 1,121,760
COMMERCIAL SERVICES & SUPPLIES - 1.17%
Banta Corp. 12,500 611,875
ServiceMaster Co.(The) 51,500 707,610
1,319,485
INDUSTRIAL CONGLOMERATES - 5.68%
3M Co. 10,200 725,730
General Electric Co. 116,250 3,907,162
Textron Inc. 17,600 1,254,880
Tyco International Ltd. 18,300 509,289
6,397,061
MACHINERY - 1.91%
Danaher Corp. 12,500 669,500
Illinois Tool Works Inc. 8,600 724,808
Ingersoll-Rand Co. (Class A) 9,400 748,428
2,142,736
TOTAL INDUSTRIALS - 11.04% 12,421,042
-----------------------------------------------------------------------
INFORMATION TECHNOLOGY:
COMMUNICATIONS EQUIPMENT - 1.54%
Cisco Systems, Inc.* 67,100 1,182,302
Nokia Oyj ADR 35,000 551,950
1,734,252
COMPUTERS & PERIPHERALS - 0.72%
Hewlett-Packard Co. 29,400 816,144
IT CONSULTING & SERVICES - 0.63%
First Data Corp. 17,000 $ 706,350
SEMICONDUCTOR EQUIPMENT & PRODUCTS - 1.97%
Intel Corp. 67,300 1,730,956
Linear Technology Corp. 12,900 489,297
2,220,253
SOFTWARE - 3.11%
Electronic Arts Inc.* 8,200 469,696
Microsoft Corp. 110,500 3,027,700
3,497,396
TOTAL INFORMATION TECHNOLOGY - 7.97% 8,974,395
-----------------------------------------------------------------------
MATERIALS:
CHEMICALS - 1.77%
Dow Chemical Co. 20,100 868,320
Ecolab Inc. 7,100 234,300
E.I. du Pont de Nemours and Co. 11,100 439,227
PPG Industries, Inc. 7,200 453,456
1,995,303
CONTAINERS & PACKAGING - 0.50%
Sealed Air Corp.* 18,400 563,325
METALS & MINING - 0.44%
Alcoa Inc. 11,100 492,936
PAPER & FOREST PRODUCTS - 0.01%
Neenah Paper, Inc. 412 12,484
TOTAL MATERIALS - 2.72% 3,064,048
-----------------------------------------------------------------------
</Table>
<Page>
<Table>
<Caption>
COMMON STOCK SHARES VALUE
TELECOMMUNICATION SERVICES:
DIVERSIFIED TELECOMMUNICATION SERVICES - 2.61%
ALLTEL Corp. 9,650 $ 598,203
SBC Communications Inc. 23,500 565,880
Sprint Nextel Corp. 49,116 1,273,578
Verizon Communications Inc. 15,200 497,192
2,934,853
TOTAL TELECOMMUNICATION SERVICES - 2 61% 2,934,853
-----------------------------------------------------------------------
UTILITIES:
ELECTRIC UTILITIES - 3.52%
Ameren Corp. 15,200 834,936
Constellation Energy Group 26,300 1,545,125
Entergy Corp. 4,600 344,586
Exelon Corp. 9,400 506,566
Southern Co. (The) 10,000 344,000
Xcel Energy, Inc. 20,000 384,800
3,960,013
TOTAL UTILITIES - 3.52% 3,960,013
-----------------------------------------------------------------------
TOTAL COMMON STOCK - 97.25%
-----------------------------------------------------------------------
(Cost $92,048,648) 109,475,998
MONEY MARKET FUND
SM&R Money Market Fund, 2.92% (a) 90,080 90,080
TOTAL MONEY MARKET FUND - 0.08%
-----------------------------------------------------------------------
(Cost $90,080) 90,080
<Caption>
COMMERCIAL PAPER FACE AMOUNT VALUE
ELECTRIC UTILITIES - 0.80%
OGE Energy Corp., 3.58%, 09/02/05 $ 907,000 $ 906,910
FOOD & DRUG RETAILING - 0.32%
CVS Corp., 3.55%, 09/06/05 356,000 355,824
HOUSEHOLD DURABLES - 0.87%
Fortune Brands Inc., 3.58%, 09/01/05 978,000 978,000
MEDIA - 0.69%
Walt Disney Co., 3.58%, 09/02/05 780,000 779,536
TOTAL COMMERCIAL PAPER - 2.68%
-----------------------------------------------------------------------
(Cost $3,020,270) 3,020,270
TOTAL INVESTMENTS - 100.01%
-----------------------------------------------------------------------
(Cost $95,158,998) 112,586,348
LIABILITIES IN EXCESS
OF OTHER ASSETS - (0.01)% (9,774)
-----------------------------------------------------------------------
NET ASSETS - 100.00% $ 112,576,574
-----------------------------------------------------------------------
</Table>
* - Non-income producing securities
ABBREVIATIONS
ADR - American Depositary Receipt
NOTE TO SCHEDULE OF INVESTMENTS:
(a) The rate quoted is the annualized seven-day yield of the fund at August 31,
2005. A complete listing of the fund's holdings are included in these
financial statements. This fund and SM&R Equity Income Fund are affiliated
by having the same investment advisor.
See notes to financial statements.
<Page>
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 2005
<Table>
ASSETS
Investments in unaffiliated securities, at value
(Cost $95,068,918) $ 112,496,268
Investments in affiliated money market fund
(Cost $90,080) 90,080
Total investments (Cost $95,158,998) 112,586,348
Prepaid expenses 57,234
Receivable for:
Investment securities sold 44
Capital stock sold 3,151
Dividends 260,216
Expense reimbursement 4,541
Other assets 62,725
TOTAL ASSETS 112,974,259
LIABILITIES
Capital stock reacquired 154,065
Payable to investment advisor for fund expenses 66,464
Accrued:
Investment advisory fee 75,417
Administrative service fee 25,037
Distribution fee 20,488
Other liabilities 56,214
TOTAL LIABILITIES 397,685
NET ASSETS (APPLICABLE TO SHARES OUTSTANDING) $ 112,576,574
NET ASSETS ARE COMPRISED OF THE FOLLOWING:
Capital (par value and additional paid-in) 86,743,139
Undistributed net investment income 211,614
Accumulated net realized gain on investments 8,194,471
Net unrealized appreciation of investments 17,427,350
NET ASSETS $ 112,576,574
NET ASSETS:
Class A $ 9,088,353
Class B $ 7,743,847
Class T $ 95,744,374
TOTAL NET ASSETS: $ 112,576,574
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 50,000,000
Outstanding 391,483
Net asset value and redemption price per share $ 23.22
Offering price per share:
(Net asset value of $23.22/95%) $ 24.44
Class B:
Authorized 25,000,000
Outstanding 344,255
Net asset value and offering price per share $ 22.49
Class T:
Authorized 75,000,000
Outstanding 3,994,877
Net asset value and redemption price per share $ 23.97
Offering price per share:
(Net asset value of $23.97/94.25%) $ 25.43
</Table>
See notes to financial statements.
<Page>
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 2005
<Table>
INVESTMENT INCOME
Dividends (Net of foreign tax withheld of $15,230) $ 3,148,249
Interest 79,301
Interest from affiliated money market fund 458
TOTAL INVESTMENT INCOME 3,228,008
EXPENSES
Investment advisory fee 845,084
Administrative service fee 280,427
Professional fees 19,689
Custody and transaction fees 22,450
Directors' fees 5,610
Insurance expenses 36,541
Compliance expenses 12,176
Qualification fees 6,180
Class A 5,296
Class B 7,023
Class T 8,818
Share holder reporting expenses
Class A 10,910
Class B 10,650
Class T 66,288
Distribution fee
Class A 21,722
Class B 57,711
TOTAL EXPENSES 1,416,575
LESS EXPENSES REIMBURSED (43,067)
NET EXPENSES 1,373,508
INVESTMENT INCOME - NET 1,854,500
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments 8,257,550
Change in unrealized appreciation of investments 148,670
NET GAIN ON INVESTMENTS 8,406,220
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 10,260,720
</Table>
See notes to financial statements.
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED AUGUST 31,
<Table>
<Caption>
2005 2004
-------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS
Investment income - net $ 1,854,500 $ 1,365,264
Net realized gain on investments 8,257,550 2,785,635
Change in unrealized appreciation of investments 148,670 8,676,173
Net increase in net assets resulting from operations 10,260,720 12,827,072
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income - net
Class A (147,054) (92,552)
Class B (97,366) (60,397)
Class T (1,611,802) (1,247,477)
Capital Gains (194,102) -
Class A
Class B (179,300) -
Class T (2,210,425) -
TOTAL DISTRIBUTIONS TO SHAREHOLDERS (4,440,049) (1,400,426)
CAPITAL SHARE TRANSACTIONS - NET
Class A 615,300 1,438,879
Class B 2,101 535,908
Class T (7,101,984) (7,226,052)
TOTAL NET CAPITAL SHARE TRANSACTIONS (6,484,583) (5,251,265)
TOTAL INCREASE (DECREASE) IN NET ASSETS (663,912) 6,175,381
NET ASSETS
Beginning of year 113,240,486 107,065,105
End of year $ 112,576,574 $ 113,240,486
Undistributed Net Investment Income $ 211,614 $ 213,336
</Table>
See notes to financial statements.
FINANCIALS
<Page>
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
8 MONTHS ENDED YEAR ENDED
YEAR ENDED AUGUST 31, AUGUST 31, DECEMBER 31,
CLASS A SHARES 2005 2004 2003 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
Net asset value, beginning of period $ 22.11 $ 20.03 $ 19.04 $ 22.72 $ 25.19 $ 24.79
Investment income - net 0.35 0.26 0.22 0.18 0.16 0.36
Net realized and unrealized gain (loss) on investments 1.68 2.10 1.01 (3.63) (2.49) 1.50
--------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 2.03 2.36 1.23 (3.45) (2.33) 1.86
Less distributions from investment income - net (0.39) (0.28) (0.24) (0.23) (0.14) (0.38)
Capital gains (0.53) - - - - (1.08)
--------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.92) (0.28) (0.24) (0.23) (0.14) (1.46)
--------------------------------------------------------------------------
Net asset value, end of period $ 23.22 $ 22.11 $ 20.03 $ 19.04 $ 22.72 $ 25.19
==========================================================================
TOTAL RETURN(1) 9.25% 11.79% 6.61% (15.27)% (9.25)%** 8.61%
==========================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $ 9,088 $ 8,063 $ 5,940 $ 5,517 $ 6,330 $ 5,671
Ratio of expenses with reimbursement to average
net assets(2) 1.26% 1.26% 1.26% 1.44% 1.45%* 1.49%
Ratio of expenses without reimbursement to average net
assets 1.50% 1.43% 1.50% 1.45% 1.45%* 1.49%
Ratio of net investment income to average net assets 1.53% 1.08% 1.21% 0.88% 1.03%* 1.32%
Portfolio turnover rate 18.45% 6.74% 7.57% 30.99% 18.15% 22.05%
<Caption>
8 MONTHS ENDED YEAR ENDED
YEAR ENDED AUGUST 31, AUGUST 31, DECEMBER 31,
CLASS B SHARES 2005 2004 2003 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
Net asset value, beginning of period $ 21.46 $ 19.44 $ 18.56 $ 22.22 $ 24.69 $ 24.38
Investment income - net 0.23 0.13 0.13 0.09 0.08 0.23
Net realized and unrealized gain (loss) on investments 1.61 2.07 0.94 (3.57) (2.47) 1.45
--------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.84 2.20 1.07 (3.48) (2.39) 1.68
Less distributions from investment income - net (0.28) (0.18) (0.19) (0.18) (0.08) (0.29)
Capital gains (0.53) - - - - (1.08)
--------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.81) (0.18) (0.19) (0.18) (0.08) (1.37)
Net asset value, end of period $ 22.49 $ 21.46 $ 19.44 $ 18.56 $ 22.22 $ 24.69
==========================================================================
TOTAL RETURN(1) 8.64% 11.36% 5.85% (15.72)% (9.68)%** 7.95%
==========================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $ 7,744 $ 7,375 $ 6,182 $ 5,806 $ 5,688 $ 5,324
Ratio of expenses with reimbursement to average
net assets(2) 1.76% 1.76% 1.94% 1.98% 1.99%* 1.99%
Ratio of expenses without reimbursement to average
net assets 2.05% 1.95% 1.99% 1.95% 1.98%* 1.99%
Ratio of net investment income to average net assets 1.04% 0.58% 0.71% 0.37% 0.50%* 0.74%
Portfolio turnover rate 18.45% 6.74% 7.57% 30.99% 18.15% 22.05%
</Table>
<Page>
<Table>
<Caption>
8 MONTHS ENDED YEAR ENDED
YEAR ENDED AUGUST 31, AUGUST 31, DECEMBER 31,
CLASS T SHARES 2005 2004 2003 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
Net asset value, beginning of period $ 22.77 $ 20.56 $ 19.51 $ 23.26 $ 25.76 $ 25.30
Investment income - net 0.40 0.28 0.27 0.27 0.24 0.46
Net realized and unrealized gain(loss) on investments 1.72 2.21 1.04 (3.74) (2.57) 1.54
---------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 2.12 2.49 1.31 (3.47) (2.33) 2.00
Less distributions from investment income - net (0.39) (0.28) (0.26) (0.28) (0.17) (0.46)
Capital gains (0.53) - - - - (1.08)
---------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.92) (0.28) (0.26) (0.28) (0.17) (1.54)
---------------------------------------------------------------------------
Net asset value, end of period $ 23.97 $ 22.77 $ 20.56 $ 19.51 $ 23.26 $ 25.76
===========================================================================
TOTAL RETURN(1) 9.35% 12.14% 6.83% (15.03)% (9.07)%** 8.99%
===========================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $ 95,744 $ 97,802 $ 94,943 $103,396 $ 138,566 $ 160,319
Ratio of expenses to average net assets 1.14% 1.10% 1.12% 1.07% 1.06%* 1.05%
Ratio of net investment income to average net assets 1.66% 1.24% 1.36% 1.26% 1.43% 1.73%
Portfolio turnover rate 18.45% 6.74% 7.57% 30.99% 18.15% 22.05%
</Table>
* Ratios annualized
** Returns are not annualized
(1) Does not include the effect of sales charge.
(2) SM&R has voluntarily agreed to waive or reduce expenses to 1.26% for
class A and 1.76% for class B until December 31, 2005.
See notes to financial statements.
FINANCIALS
<Page>
SM&R BALANCED FUND
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,
2005, the fund's blend of about 65% stocks, 30% bonds and 5% 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 9.24% while the bond portion of the fund has returned
approximately 2.51%. During the period the overall fund produced a total
return of 5.77%, before sales charges (but after other expenses), to Class
T investors at net asset value. Over that same time period, the U.S.
equity markets also posted strong results-with the S&P 500 returning
10.35%, the NASDAQ returning 16.30%, and the Dow Jones Industrial Average
returning 3.08%.
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 Growth and Equity Income 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
financials. Stock selectivity in the telecommunications, consumer discretionary
and industrials sectors boosted performance, whereas selectivity in the consumer
staples, health care and materials sectors detracted from performance. Some of
the strongest performing stocks included Anadarko Petroleum and Constellation
Energy. A few picks that did not fare as expected include the chemical companies
Dow and DuPont, both hurt by rising energy costs.
Over the past fiscal year there were basically two time periods in which the
equity markets fared well: the fourth quarter of 2004 and the April through July
period of 2005. The Energy and Utilities sectors are still really the only
bright spots this year, and account for most of the gains in the S&P 500. All
other sectors are basically flat to down. Stocks in general have not been
blatantly cheap over the past 12 months, but they do not appear to be
dramatically overvalued either. Considering the ongoing low levels of long term
interest rates, appreciation in the stock market over the next year will
probably be determined by earnings growth as it is unlikely that price/earnings
multiples will be able to expand materially.
Though the past 12 months have witnessed rising energy costs and continued
unwinding of monetary accommodation, consumers have surprisingly given the
economic expansion renewed momentum. In particular, June retail sales surged
1.7% as sales incentives fueled a surge in auto sales. Core sales (excluding
auto dealers, gasoline stations and building materials) rose 0.6% in June and at
a 6.9% pace in the second quarter. Several influences
[SIDENOTE]
[CHART]
SECTOR WEIGHTINGS BY TOTAL INVESTMENTS
<Table>
CONSUMER DISCRETIONARY 8.94%
CONSUMER STAPLES 6.30%
ENERGY 6.44%
FINANCIALS 23.08%
HEALTH CARE 8.22%
INDUSTRIALS 9.25%
INFORMATION TECHNOLOGY 10.32%
MATERIALS 1.88%
MISCELLANEOUS 10.35%
TELECOMMUNICATION SERVICES 3.11%
U S GOVERNMENT 9.74%
UTILITIES 2.37%
</Table>
<Page>
contributed to the improved resilience of consumer spending during the past
fiscal year, including accelerated growth in the trend of nominal income and the
increase in household net worth (up nearly 25% in the past two years),
particularly relative to the incremental cost of energy. Over the calendar year
2004, for instance, personal income jumped $527 billion versus a $50 billion
increment in energy expenses for consumers. Hence, fears of an imminent collapse
in consumer spending have not been supported by the last 12 months of data.
There are, and have been over the past year, some good reasons to discount
some of the positive economic signs: the boost from auto incentives will
soon fade; core service price inflation appears to be heading higher over
the last several months of the fiscal year; and rising energy prices will
promote a new squeeze on spending and deterioration in trade later this
year. But it would be a mistake to miss the main message the economy is,
and has been, sending: that the U.S. remains in a cyclically sound position
with supports in place for 3-4% GDP growth and 2.0-2.5% inflation to be
sustained over much of the coming fiscal year. The bottom line is, the
economy was sound over the previous 12 months, and the fund benefited form
this reality. That should continue.
The SM&R Balanced Fund is well positioned for the current environment with its
holdings in energy, technology, industrials and consumer discretionary, while
also providing exposure to defensive sectors such as healthcare, financials and
consumer staples. 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
[PLOT POINTS TO COME]
AVERAGE ANNUAL RETURN
Includes maximum sales charge through 8/31/05. Inception date of these classes
is 01/01/99.
<Table>
<Caption>
SHARE ONE FIVE SINCE
CLASS YEAR YEAR INCEPTION
- -------------------------------------------------
A 0.43% (0.79)% 2.28%
B (0.13)% (0.53)% 2.76%
</Table>
AVERAGE ANNUAL RETURN
Includes maximum sales charge of 5.75% through 8/31/05 for Class T Shares
<Table>
10 YEAR 6.47%
5 YEAR (0.78)%
1 YEAR (0.30)%
</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 maximum initial sales charge for Class A
shares reflect the average annual returns 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 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 distributions or redemption of fund shares.
MANAGER COMMENTARY
<Page>
SCHEDULE OF INVESTMENTS August 31, 2005
<Table>
<Caption>
COMMON STOCK SHARES VALUE
CONSUMER DISCRETIONARY:
HOTELS, RESTAURANTS & LEISURE - 0.70%
Starwood Hotels & Resorts Worldwide, Inc. 3,700 $ 215,710
HOUSEHOLD DURABLES - 0.79%
Newell Rubbermaid Inc. 3,800 89,034
Stanley Works (The) 3,400 155,550
244,584
LEISURE EQUIPMENT & PRODUCTS - 0.67%
Brunswick Corp. 4,700 206,800
MEDIA - 2.67%
Comcast Corp. (Special Class A)* 2,000 60,360
Comcast Corp. (Class A)* 3,500 107,625
News Corp (Class A) 6,100 98,881
Time Warner Inc. 9,000 161,280
Viacom Inc. (Class B) 4,000 135,960
Walt Disney Co. (The) 10,400 261,976
826,082
MULTI-LINE RETAIL - 0.86%
J. C. Penney Co., Inc. (Holding Co.) 2,200 106,986
Kohl's Corp.* 1,000 52,450
Target Corp. 2,000 107,500
266,936
SPECIALTY RETAIL - 1.61%
Best Buy Co., Inc. 3,000 142,980
Limited Brands, Inc. 7,600 167,048
Lowe's Companies, Inc. 2,900 186,499
496,527
TOTAL CONSUMER DISCRETIONARY - 7.30% 2,256,639
-------------------------------------------------------------------------------
CONSUMER STAPLES:
BEVERAGES - 1.38%
Coca-Cola Co. (The) 6,000 $ 264,000
PepsiCo, Inc. 3,000 164,550
428,550
FOOD PRODUCTS - 1.38%
H.J. Heinz Co. 2,600 93,392
McCormick & Co., Inc. 5,700 193,287
Sensient Technologies Corp. 7,400 138,898
425,577
FOOD & DRUG RETAILING - 1.35%
Wal-Mart Stores, Inc. 9,300 418,128
HOUSEHOLD PRODUCTS - 1.74%
Kimberly-Clark Corp. 2,200 137,104
Procter & Gamble Co. 7,200 399,456
536,560
PERSONAL PRODUCTS - 0.42%
Gillette Co. 2,400 129,288
TOTAL CONSUMER STAPLES - 6.27% 1,938,103
-------------------------------------------------------------------------------
ENERGY:
ENERGY EQUIPMENT & SERVICES - 0.73%
Schlumberger Ltd. 1,200 103,476
Weatherford International Ltd.* 1,800 121,878
225,354
</Table>
<Page>
<Table>
<Caption>
COMMON STOCK SHARES VALUE
OIL & GAS - 5.68%
Anadarko Petroleum Corp. 1,800 $ 163,566
BP PLC ADR 5,092 348,191
ChevronTexaco Corp. 7,601 466,701
Exxon Mobil Corp. 13,000 778,700
1,757,158
TOTAL ENERGY - 6.41% 1,982,512
-------------------------------------------------------------------------------
FINANCIALS:
BANKS - 4.97%
Bank of America Corp. 13,300 572,299
PNC Financial Services Group, Inc 6,100 343,003
U.S. Bancorp 7,200 210,384
Wachovia Corp. 3,600 178,632
Wells Fargo & Co. 3,900 232,518
1,536,836
DIVERSIFIED FINANCIALS - 5.65%
American Express Co. 3,600 198,864
Citigroup Inc. 14,500 634,665
Federal Home Loan Mortgage Corp. 3,900 235,482
Goldman Sachs Group, Inc. (The) 1,000 111,180
JPMorgan Chase & Co. 4,092 138,678
Morgan Stanley 8,400 427,308
1,746,177
INSURANCE - 3.36%
Allstate Corp. (The) 2,300 $ 129,283
American International Group, Inc. 5,731 339,275
Marsh & McLennan Companies, Inc. 3,400 95,370
Prudential Financial, Inc. 3,900 251,043
St. Paul Travelers Companies, Inc. (The) 5,254 225,975
1,040,946
TOTAL FINANCIALS - 13.98% 4,323,959
-------------------------------------------------------------------------------
HEALTH CARE:
BIOTECHNOLOGY - 0.64%
Amgen Inc.* 2,500 199,750
HEALTH CARE EQUIPMENT & SUPPLIES - 0.50%
Beckman Coulter, Inc. 2,400 133,896
Zimmer Holdings, Inc.* 260 21,364
155,260
HEALTH CARE PROVIDERS & SERVICES - 0.30%
Health Management Associates, Inc. (Class A) 3,800 92,416
PHARMACEUTICALS - 6.73%
Abbott Laboratories 4,200 189,546
Allergan, Inc. 1,700 156,485
Bristol-Myers Squibb Co. 5,800 141,926
Hospira, Inc.* 420 16,733
Johnson & Johnson 9,200 583,188
Merck & Co., Inc. 5,300 149,619
Pfizer Inc. 21,555 549,006
Watson Pharmaceuticals, Inc.* 4,400 151,712
Wyeth 3,100 141,949
2,080,164
TOTAL HEALTH CARE - 8.17% 2,527,590
-------------------------------------------------------------------------------
</Table>
HOLDINGS
<Page>
<Table>
<Caption>
COMMON STOCK SHARES VALUE
INDUSTRIALS:
AEROSPACE & DEFENSE - 0.85%
Goodrich Corp. 3,300 $ 151,206
Honeywell International Inc. 2,900 111,012
262,218
AIR FREIGHT & COURIERS - 0.36%
United Parcel Service, Inc. (Class B) 1,600 113,424
BUILDING PRODUCTS - 0.66%
American Standard Companies Inc. 4,500 205,200
COMMERCIAL SERVICES & SUPPLIES - 1.10%
Banta Corp. 5,200 254,540
ServiceMaster Co. (The) 6,200 85,188
339,728
CONSTRUCTION & ENGINEERING - 0.31%
Cemex S.A. de C.V. ADR 2,000 95,340
INDUSTRIAL CONGLOMERATES - 3.05%
3M Co. 1,900 135,185
General Electric Co. 21,400 719,254
Tyco International Ltd. 3,200 89,056
943,495
MACHINERY - 1.41%
Danaher Corp. 4,000 214,240
Illinois Tool Works Inc. 1,400 117,992
Ingersoll-Rand Co. (Class A) 1,300 103,506
435,738
TOTAL INDUSTRIALS - 7.74% 2,395,143
-------------------------------------------------------------------------------
INFORMATION TECHNOLOGY:
COMMUNICATIONS EQUIPMENT - 1.44%
Cisco Systems, Inc.* 11,700 $ 206,154
Motorola, Inc. 6,200 135,656
Nokia Oyj ADR 6,500 102,505
444,315
COMPUTERS & PERIPHERALS - 2.25%
Dell Inc.* 6,900 245,640
EMC Corp.* 20,100 258,486
Hewlett-Packard Co. 6,900 191,544
695,670
SEMICONDUCTOR EQUIPMENT & PRODUCTS - 1.75%
Intel Corp. 13,000 334,360
Linear Technology Corp. 1,500 56,895
Texas Instruments Inc. 2,300 75,164
Xilinx, Inc. 2,700 75,843
542,262
SOFTWARE - 2.81%
Electronic Arts Inc.*
Microsoft Corp. 1,500 85,920
Oracle Corp.* 23,300 638,420
11,100 143,967
868,307
TOTAL INFORMATION TECHNOLOGY - 8.25% 2,550,554
-------------------------------------------------------------------------------
</Table>
<Page>
<Table>
<Caption>
COMMON STOCK SHARES VALUE
MATERIALS:
CHEMICALS - 1.08%
Dow Chemical Co. 3,100 $ 133,920
Ecolab Inc. 1,300 42,900
E.I. du Pont de Nemours and Co. 1,900 75,183
PPG Industries, Inc. 1,300 81,874
333,877
CONTAINERS & PACKAGING - 0.39%
Sealed Air Corp.* 2,400 121,800
METALS & MINING - 0.27%
Alcoa Inc. 3,100 83,049
PAPER & FOREST PRODUCTS - 0.13%
International Paper Co. 1,200 37,020
Neenah Paper, Inc. 66 2,000
39,020
TOTAL MATERIALS - 1.87% 577,746
-------------------------------------------------------------------------------
TELECOMMUNICATION SERVICES:
DIVERSIFIED TELECOMMUNICATION SERVICES - 1.61%
ALLTEL Corp. 2,400 148,776
Sprint Nextel Corp. 10,263 266,119
Verizon Communications Inc. 2,580 84,392
499,287
WIRELESS TELECOMMUNICATION SERVICES - 0.49%
Vodafone Group PLC ADR 5,500 149,875
TOTAL TELECOMMUNICATION SERVICES - 2.10% 649,162
-------------------------------------------------------------------------------
UTILITIES:
ELECTRIC UTILITIES - 2.36%
AmerenCorp 3,000 $ 164,790
CenterPoint Energy, Inc. 5,500 78,155
Constellation Energy Group 5,000 293,750
Exelon Corp. 1,400 75,446
Southern Co. (The) 1,600 55,040
Wisconsin Energy Corp. 1,600 62,672
729,853
TOTAL UTILITIES - 2.36% 729,853
-------------------------------------------------------------------------------
TOTAL COMMON STOCK - 64.45%
-------------------------------------------------------------------------------
(Cost $16,194,077) 19,931,261
</Table>
<Page>
<Table>
<Caption>
BONDS AND NOTES FACE AMOUNT VALUE
CONSUMER DISCRETIONARY:
AUTO COMPONENTS - 1.59%
Cooper Tire & Rubber Co.,
7.75%, 12/15/09 $ 450,000 $ 493,067
TOTAL CONSUMER DISCRETIONARY - 1.59% 493,067
-------------------------------------------------------------------------------
FINANCIALS:
BANKS - 2.52%
Royal Bank of Scotland GRP PLC,
yankee bond, 6.40%, 04/01/09 500,000 532,991
Washington Mutual Inc.,
4.20%, 01/15/10 250,000 247,038
780,029
DIVERSIFIED FINANCIALS - 4.60%
General Electric Capital Corp.,
3.75%, 12/15/09 350,000 342,258
JPMorgan Chase & Co., Inc.,
6.00%, 01/15/09 500,000 524,452
Weingarten Realty Investors,
7.35%, 07/20/09 500,000 555,857
1,422,567
INSURANCE - 1.86%
Money Group Inc. (The),
8.35%, 03/15/10 500,000 573,167
TOTAL FINANCIALS - 8.98% 2,775,763
-------------------------------------------------------------------------------
INDUSTRIALS:
TRANSPORTATION INFRASTRUCTURE - 1.46%
Hertz Corp., 7.40%, 03/01/11 $ 455,000 $ 450,273
TOTAL INDUSTRIALS - 1.46% 450,273
-------------------------------------------------------------------------------
INFORMATION TECHNOLOGY:
ELECTRONIC EQUIPMENT & INSTRUMENTS - 2.02%
Koninklijke Philips Elec.,
yankee bond, 8.375%, 09/15/06 600,000 624,496
TOTAL INFORMATION TECHNOLOGY - 2.02% 624,496
-------------------------------------------------------------------------------
TELECOMMUNICATION SERVICES:
DIVERSIFIED TELECOMMUNICATION SERVICES - 0.99%
SBC Communications Capital Corp.,
7.11%, 08/14/06 (a) 300,000 306,615
TOTAL TELECOMMUNICATION SERVICES - 0.99% 306,615
-------------------------------------------------------------------------------
</Table>
<Page>
<Table>
<Caption>
BONDS AND NOTES FACE AMOUNT VALUE
U S GOVERNMENT AGENCY SECURITIES:
U S GOVERNMENT AGENCY SECURITIES - 9.69%
Federal Farm Credit Bank
4.70%, 10/06/08 $ 400,000 $ 400,667
Federal Farm Credit Bank
4.15%, 11/30/09 350,000 347,040
Federal Home Loan Bank,
2.45%, 03/23/07 1,500,000 1,465,225
Federal Home Loan Bank,
4.40%, 12/28/09 750,000 740,393
Federal Home Loan Mortgage Corp.,
Pool #284839, 8.50%, 01/01/17 9,567 10,346
Federal National Mortgage Association,
Pool #048974, 8.00%, 06/01/17 29,938 32,056
2,995,727
TOTAL US GOVERNMENT AGENCY SECURITIES - 9.69% 2,995,727
-------------------------------------------------------------------------------
TOTAL BONDS AND NOTES - 24.73%
-------------------------------------------------------------------------------
(Cost $7,406,139) 7,645,941
MONEY MARKET FUND
SM&R Money Market Fund, 2.92% (b) 784 784
TOTAL MONEY MARKET FUND - 0.00%
-------------------------------------------------------------------------------
(Cost $784) 784
<Caption>
COMMERCIAL PAPER FACE AMOUNT VALUE
COMMUNICATIONS EQUIPMENT - 0.56%
Motorola Corp., 3.59%, 09/06/05 $ 173,000 $ 172,914
ELECTRIC UTILITIES - 2.31%
OGE Energy Corp., 3.58%, 09/02/05 714,000 713,929
FOOD PRODUCTS - 1.95%
Kraft Foods Inc., 3.55%, 09/08/05 602,000 601,584
HOUSEHOLD DURABLES - 3.82%
Fortune Brands, 3.58%, 09/01/05 1,182,000 1,182,000
MEDIA - 1.66%
Walt Disney Co., 3.57%, 09/07/05 514,000 513,694
TOTAL COMMERCIAL PAPER - 10.30%
-------------------------------------------------------------------------------
(Cost $3,184,121) 3,184,121
TOTAL INVESTMENTS - 99.48%
-------------------------------------------------------------------------------
(Cost $26,785,121) 30,762,107
CASH AND OTHER ASSETS,
LESS LIABILITIES - 0.52% 160,750
-------------------------------------------------------------------------------
NET ASSETS - 100.00% $ 30,922,857
-------------------------------------------------------------------------------
</Table>
* - Non-income producing securities
ABBREVIATIONS
ADR - American Depositary Receipt
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,
2005. 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 advisor.
See notes to financial statements.
<Page>
SM&R BALANCED FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 2005
<Table>
ASSETS
Investments in unaffiliated securities, at value
(Cost $26,784,337) $ 30,761,323
Investments in affiliated money market fund
(Cost $784) 784
Total investments (Cost $26,785,121) 30,762,107
Prepaid expenses 23,856
Receivable for:
Investments securities sold 169
Capital stock sold 7,587
Dividends 47,153
Interest 148,823
Expense reimbursement 4,684
Other assets 15,067
TOTAL ASSETS 31,009,446
LIABILITIES
Capital stock reacquired 2,850
Payable to investment advisor for fund expenses 22,382
Accrued:
Investment advisory fee 21,073
Administrative service fee 7,024
Distribution fee 9,117
Other liabilities 24,143
TOTAL LIABILITIES 86,589
NET ASSETS (APPLICABLE TO SHARES OUTSTANDING) $ 30,922,857
NET ASSETS ARE COMPRISED OF THE FOLLOWING:
Capital (par value and additional paid-in) 25,624,452
Undistributed net investment income 92,271
Accumulated net realized gain on investments 1,229,148
Net unrealized appreciation of investments 3,976,986
NET ASSETS $ 30,922,857
NET ASSETS:
Class A $ 5,029,904
Class B $ 3,094,756
Class T $ 22,798,197
TOTAL NET ASSETS: $ 30,922,857
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 50,000,000
Outstanding 276,579
Net asset value and redemption price per share $ 18.19
Offering price per share:
(Net asset value of $18.19/95%) $ 19.14
Class B:
Authorized 25,000,000
Outstanding 168,443
Net asset value and offering price per share $ 18.37
Class T:
Authorized 25,000,000
Outstanding 1,209,479
Net asset value and redemption price per share $ 18.85
Offering price per share:
(Net asset value of $18.85/94.25%) $ 20.00
</Table>
See notes to financial statements.
<Page>
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 2005
<Table>
INVESTMENT INCOME
Dividends (Net of foreign tax withheld of $1,806) $ 513,531
Interest 468,998
Interest from affiliated money market fund 101
TOTAL INVESTMENT INCOME 982,630
EXPENSES
Investment advisory fee 233,307
Administrative service fee 77,769
Professional fees 14,354
Custody and transaction fees 16,084
Directors' fees 5,566
Insurance expenses 8,956
Compliance expenses 3,254
Qualification fees 5,143
Class A 7,158
Class B 4,124
Class T 5,351
Shareholder reporting expenses
Class A 8,132
Class B 5,615
Class T 10,346
Distribution fee
Class A 12,200
Class B 23,425
TOTAL EXPENSES 440,784
LESS EXPENSES REIMBURSED (34,740)
NET EXPENSES 406,044
INVESTMENT INCOME - NET 576,586
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments 1,243,042
Change in unrealized depreciation of investments (94,371)
NET GAIN ON INVESTMENTS 1,148,671
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,725,257
</Table>
See notes to financial statements.
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED AUGUST 31,
<Table>
<Caption>
2005 2004
----------------------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Investment income - net $ 576,586 $ 454,329
Net realized gain on investments 1,243,042 356,971
Change in unrealized appreciation
(depreciation) of investments (94,371) 1,617,148
Net increase in net assets resulting
from operations 1,725,257 2,428,448
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income - net
Class A (93,764) (68,108)
Class B (44,074) (35,072)
Class T (420,489) (365,311)
Capital Gains
Class A (17,004) (45,377)
Class B (10,979) (30,287)
Class T (79,523) (264,673)
TOTAL DISTRIBUTIONS TO SHAREHOLDERS (665,833) (808,828)
CAPITAL SHARE TRANSACTIONS - NET
Class A 466,400 793,615
Class B 40,698 486,952
Class T (790,502) (76,867)
TOTAL NET CAPITAL SHARE TRANSACTIONS (283,404) 1,203,700
TOTAL INCREASE IN NET ASSETS 776,020 2,823,320
NET ASSETS
Beginning of year 30,146,837 27,323,517
End of year $ 30,922,857 $ 30,146,837
Undistributed Net
Investment Income $ 92,271 $ 74,012
</Table>
See notes to financial statements.
FINANCIALS
<Page>
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
8 MONTHS ENDED YEAR ENDED
YEAR ENDED AUGUST 31, AUGUST 31, DECEMBER 31,
CLASS A SHARES 2005 2004 2003 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------------
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
Net asset value, beginning of period $ 17.60 $ 16.65 $ 15.93 $ 17.44 $ 18.93 $ 20.30
Investment income - net 0.35 0.28 0.32 0.39 0.23 0.37
Net realized and unrealized gain (loss)
on investments 0.65 1.18 0.77 (1.47) (1.53) (0.06)
-------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.00 1.46 1.09 (1.08) (1.30) 0.31
Less distributions from investment
income - net (0.35) (0.30) (0.37) (0.43) (0.19) (0.39)
Capital gains (0.06) (0.21) - - - (1.29)
-------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.41) (0.51) (0.37) (0.43) (0.19) (1.68)
-------------------------------------------------------------------------------------
Net asset value, end of period $ 18.19 $ 17.60 $ 16.65 $ 15.93 $ 17.44 $ 18.93
=====================================================================================
TOTAL RETURN(1) 5.73% 8.83% 7.02% (6.29)% (6.87)%** 3.35%
=====================================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of period
(000's omitted) $ 5,030 $ 4,409 $ 3,419 $ 3,183 $ 2,713 $ 2,512
Ratio of expenses with reimbursement
to average net assets (2) 1.30% 1.30% 1.30% 1.45% 1.50%* 1.50%
Ratio of expenses without
reimbursement to average net assets 1.73% 1.64% 1.69% 1.73% 1.50%* 1.92%
Ratio of net investment income to
average net assets 1.85% 1.51% 2.02% 2.27% 1.99%* 2.40%
Portfolio turnover rate 23.18% 11.15% 23.83% 25.80% 14.77% 13.17%
</Table>
<Table>
<Caption>
8 MONTHS ENDED YEAR ENDED
YEAR ENDED AUGUST 31, AUGUST 31, DECEMBER 31,
CLASS B SHARES 2005 2004 2003 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------------
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
Net asset value, beginning of period $ 17.78 $ 16.83 $ 16.18 $ 17.72 $ 19.26 $ 20.64
Investment income - net 0.25 0.20 0.24 0.30 0.20 0.35
Net realized and unrealized gain (loss)
on investments 0.66 1.19 0.72 (1.47) (1.59) (0.08)
-------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.91 1.39 0.96 (1.17) (1.39) 0.27
Less distributions from investment
income - net (0.26) (0.23) (0.31) (0.37) (0.15) (0.36)
Capital gains (0.06) (0.21) - - - (1.29)
-------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.32) (0.44) (0.31) (0.37) (0.15) (1.65)
-------------------------------------------------------------------------------------
Net asset value, end of period $ 18.37 $ 17.78 $ 16.83 $ 16.18 $ 17.72 $ 19.26
=====================================================================================
TOTAL RETURN(1) 5.15% 8.33% 6.10% (6.69)% (7.23)%** 2.79%
=====================================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of period
(000's omitted) $ 3,095 $ 2,952 $ 2,336 $ 2,105 $ 1,917 $ 2,081
Ratio of expenses with reimbursement
to average net assets (2) 1.80% 1.80% 1.80% 1.95% 2.00%* 2.00%
Ratio of expenses without reimbursement
to average net assets 2.23% 2.13% 2.18% 2.22% 2.00%* 2.23%
Ratio of net investment income to
average net assets 1.36% 1.00% 1.51% 1.77% 1.55%* 1.89%.
Portfolio turnover rate 23.18% 11.15% 23.83% 25.80% 14.77% 13.17%
</Table>
<Page>
<Table>
<Caption>
8 MONTHS ENDED YEAR ENDED
YEAR ENDED AUGUST 31, AUGUST 31, DECEMBER 31,
CLASS T SHARES 2005 2004 2003 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------------
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
Net asset value, beginning of period $ 18.21 $ 17.18 $ 16.42 $ 17.91 $ 19.40 $ 20.67
Investment income - net 0.36 0.29 0.34 0.43 0.31 0.56
Net realized and unrealized gain (loss)
on investments 0.68 1.24 0.77 (1.50) (1.58) 0.01
-------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.04 1.53 1.11 (1.07) (1.27) 0.57
Less distributions from investment
income - net (0.34) (0.29) (0.35) (0.42) (0.22) (0.55)
Capital gains (0.06) (0.21) - - - (1.29)
-------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.40) (0.50) (0.35) (0.42) (0.22) (1.84)
-------------------------------------------------------------------------------------
Net asset value, end of period $ 18.85 $ 18.21 $ 17.18 $ 16.42 $ 17.91 $ 19.40
=====================================================================================
TOTAL RETURN(1) 5.77% 8.95% 6.95% (6.07)% (6.54)%** 3.64%
=====================================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of period
(000's omitted) $ 22,798 $ 22,785 $ 21,569 $ 21,631 $ 24,798 $ 28,223
Ratio of expenses with reimbursement to
average net assets 1.24% 1.23% 1.25% 1.25% 1.25%* 1.25%
Ratio of expenses without reimbursement
to average net assets 1.24% 1.23% 1.26% 1.27% 1.25%* 1.34%
Ratio of net investment income to
average net assets 1.92% 1.58% 2.08% 2.47% 2.52%* 2.63%
Portfolio turnover rate 23.18% 11.15% 23.83% 25.80% 14.77% 13.17%
</Table>
* Ratios annualized
** Returns are not annualized
(1) Does not include the effect of sales charge.
(2) SM&R has voluntarily agreed to waive or reduce expenses to 1.30% for class
A and 1.80% for class B until December 31, 2005.
See notes to financial statements.
<Page>
SM&R GOVERNMENT BOND FUND
A MESSAGE TO OUR SHAREHOLDERS:
The SM&R Government Bond Fund is focused on providing competitive levels of
current income to the conservative investor through investments in
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, as well as securities of corporate issuers deemed to be
of higher credit quality and financial strength.
Over the past fiscal year ending August 31, 2005, the fund has provided a
total return of 1.84% to Class T investors at net asset value. The year to
date total return for the eight months ended August 31, 2005 was 1.82%. The
fund has an average maturity of 3.7 years, a market-weighted average coupon
of 4.09%, and a modified duration of 3 years.
The fund was positioned with a shorter duration than its index in expectation of
rising interest rates. The Federal Reserve has been raising the short-term
federal funds rate at each Federal Open Market Committee meeting since June
2005. However, longer term rates did not follow the upward movement, resulting
in a 15-month flattening trend in the yield curve by the end of August.
Over the past 12 months, trade deficits and low interest rates around the globe
continued to fuel huge foreign demand for U.S. Treasuries, and inflation fears
remained mostly contained. As a result, long-term nominal and real Treasury
yields remained below historic norms. While this past fiscal year did feature
some bond market volatility, the fixed income market rebounded from significant
sell-offs numerous times over the last year. Of course, the fund does generally
mimic market direction. Although the benchmark 10-year Treasury yield reached a
four-month high in terms of its yield in early August, it was back near 4% by
the end of the month, the lowest level since June.
The reasons for the most recent rally can be attributed the Hurricane
Katrina related uncertainties and rising oil prices. Most economists have
lowered near-term GDP growth forecasts in the wake of Katrina, but note
that longer-term cleanup, rebuilding and related federal funding will boost
future growth. Meanwhile oil prices peaked at around $70 per barrel at the
end of August, and Katrina's effect on refining production in the Gulf of
Mexico caused a sharp rise in gasoline prices.
Energy prices are closely watched by fixed-income markets, from an
inflationary standpoint certainly, but more importantly form the
impact on consumer discretionary income. Since consumer spending has
been a key driver of U.S. economic growth, any factor affecting
household spending translates directly to trends in economic growth
patterns. Generally, slower spending means slower growth and less
upward pressure on interest rates.
[SIDENOTE]
[CHART]
SECTOR WEIGHTINGS BY TOTAL INVESTMENTS
<Table>
AFFILIATED MONEY MARKET 0.21%
FINANCIALS 1.92%
MATERIALS 3.87%
MISCELLANEOUS 1.40%
U S GOVERNMENT 92.60%
</Table>
<Page>
We expect long-term rates to remain in their recent trading range and the yield
curve to remain flat to slightly positive for the next 6 months. These
conditions should not vary substantially from what we saw over the past fiscal
year, therefore the next 12 months may feel similar to the previous 12 months,
at least in terms of Fund performance. However, we will be closely monitoring
the situation for any signs of a changing bond market course, and any
opportunities we see arising from the change.
Best Regards,
/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
[PLOT POINTS TO COME]
AVERAGE ANNUAL RETURN
Includes maximum sales charge through 8/31/05. Inception date of these classes
is 01/01/99.
<Table>
<Caption>
SHARE ONE FIVE SINCE
CLASS YEAR YEAR INCEPTION
- ----------------------------------------
A (2.94)% 3.89% 3.50%
B (1.64)% 4.38% 3.78%
</Table>
AVERAGE ANNUAL RETURN
Includes maximum sales charge of 4.5% through 8/31/05 for Class T Shares
<Table>
10 YEAR 5.47%
5 YEAR 4.07%
1 YEAR (2.73)%
</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 current maximum initial sales charge for Class A shares is 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 distributions or redemption of fund shares.
MANAGER COMMENTARY
<Page>
SCHEDULE OF INVESTMENTS August 31, 2005
<Table>
<Caption>
MATURITY INTEREST/STATED FACE
CORPORATE BONDS DATE RATE(%) AMOUNT VALUE
FINANCIALS:
DIVERSIFIED FINANCIALS - 1.90%
MBNA Master Credit Card Trust 02/15/12 7.000 $ 500,000 $ 550,393
TOTAL FINANCIALS - 1.90% 550,393
-----------------------------------------------------------
MATERIALS:
METALS & MINING - 3.84%
Carpenter Technology Corp. 05/15/13 6.625 1,000,000 1,107,836
TOTAL MATERIALS - 3.84% 1,107,836
-----------------------------------------------------------
TOTAL CORPORATE BONDS - 5.74%
-----------------------------------------------------------
(Cost $1,513,516) 1,658,229
U S GOVERNMENT AGENCY AND U S GOVERNMENT SECURITIES:
U S GOVERNMENT AGENCY SECURITIES - 46.40%
Federal Home Loan Bank (a) 10/25/05 6.230 150,000 150,559
Federal Home Loan Bank (a) 03/06/06 5.125 2,000,000 2,012,522
Federal Home Loan Bank (a) 03/15/06 2.500 1,600,000 1,588,286
Federal Home Loan Mortgage Corp.(a) 09/15/05 2.875 500,000 499,827
Federal Home Loan Mortgage Corp.(a) 11/15/05 2.125 1,990,000 1,983,431
Federal Home Loan Mortgage Corp. 03/16/07 2.700 900,000 882,261
Federal Home Loan Mortgage Corp. 08/03/07 3.750 500,000 497,254
Federal Home Loan Mortgage Corp. 06/12/13 4.000 1,900,000 1,840,992
Federal National Mortgage Assoc. 02/01/08 3.875 500,000 496,185
Federal National Mortgage Assoc. 02/01/11 6.250 1,850,000 2,014,254
Federal National Mortgage Assoc. 03/15/11 5.500 1,300,000 1,383,546
Federal Home Loan Mortgage Corp., Series 1205-G 03/15/07 7.000 37,822 37,764
Private Export Funding 01/15/10 7.200 15,000 16,788
13,403,669
U S GOVERNMENT SECURITIES - 45.40%
U S Treasury Bond (a) 02/28/06 1.625 2,000,000 1,979,766
U S Treasury Note (a) 05/15/06 6.875 1,120,000 1,144,149
U S Treasury Note 11/15/06 2.625 2,800,000 2,761,282
U S Treasury Note 05/15/08 2.625 700,000 678,535
U S Treasury Note 05/15/08 5.625 500,000 522,813
</Table>
<Page>
<Table>
<Caption>
MATURITY INTEREST/STATED FACE
U S GOVERNMENT AGENCY AND US GOVERNMENT SECURITIES DATE RATE(%) AMOUNT VALUE
U S GOVERNMENT SECURITIES - 45.40% (CONT'D)
U S Treasury Note 02/15/11 5.000 $1,900,000 $ 2,004,648
U S Treasury Note 05/15/14 4.750 1,319,000 1,389,432
U S Treasury Note 08/15/14 4.250 2,000,000 2,033,672
U S Treasury Note 02/15/15 4.000 600,000 598,242
13,112,539
TOTAL U S GOVERNMENT AGENCY AND
U S GOVERNMENT SECURITIES - 91.80%
-----------------------------------------------------------
(Cost $26,603,633) 26,516,208
U S GOVERNMENT AGENCY SHORT-TERM OBLIGATIONS:
GOVERNMENT AGENCIES - 1.39%
Federal Home Loan Bank 09/01/05 3.380 102,000 102,000
Federal Home Loan Bank 09/06/05 3.410 300,000 299,858
401,858
TOTAL U S GOVERNMENT AGENCY
SHORT-TERM OBLIGATIONS - 1.39%
-----------------------------------------------------------
(Cost $401,858) 401,858
</Table>
<Table>
<Caption>
SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------
MONEY MARKET FUND - 0.21%
SM&R Money Market Fund, 2.92% (b) 60,038 60,038
TOTAL MONEY MARKET FUND - 0.21%
-----------------------------------------------------------
(Cost $60,038) 60,038
TOTAL INVESTMENTS - 99.14%
-----------------------------------------------------------
(Cost $28,579,045) 28,636,333
CASH AND OTHER ASSETS,
LESS LIABILITIES - 0.86% 249,703
-----------------------------------------------------------
NET ASSETS - 100.00% $ 28,886,036
-----------------------------------------------------------
</Table>
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,
2005. 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 advisor.
See notes to financial statements.
HOLDINGS
<Page>
SM&R GOVERNMENT BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 2005
<Table>
ASSETS
Investments in unaffiliated securities, at value
(Cost $28,519,007) $ 28,576,295
Investments in affiliated money market fund
(Cost $60,038) 60,038
Total Investments (Cost $28,579,045) 28,636,333
Prepaid expenses 27,943
Receivable for:
Capital stock sold 5,549
Interest 271,957
Expense reimbursement 10,116
Other assets 2,782
TOTAL ASSETS 28,954,680
LIABILITIES
Capital stock reacquired 10,440
Distribution payable 459
Payable to investment advisor for fund expenses 18,958
Accrued:
Investment advisory fee 12,955
Administrative service fee 6,477
Distribution fee 2,571
Other liabilities 16,784
TOTAL LIABILITIES 68,644
NET ASSETS (APPLICABLE TO SHARES OUTSTANDING) $ 28,886,036
NET ASSETS ARE COMPRISED OF THE FOLLOWING:
Capital (par value and additional paid-in) 29,005,874
Undistributed net investment income 522
Accumulated net realized loss on investments (177,648)
Net unrealized appreciation of investments 57,288
NET ASSETS $ 28,886,036
NET ASSETS:
Class A $ 1,036,111
Class B $ 1,008,641
Class T $ 26,841,284
TOTAL NET ASSETS $ 28,886,036
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 100,001,150
Outstanding 98,689
Net asset value and redemption price per share $ 10.50
Offering price per share:
(Net asset value of $10.50/95.25%) $ 11.02
Class B:
Authorized 100,000,000
Outstanding 96,164
Net asset value and offering price per share $ 10.49
Class T:
Authorized 23,000,000
Outstanding 2,589,927
Net asset value and redemption price per share $ 10.36
Offering price per share:
(Net asset value of $10.36/95.5%) $ 10.85
</Table>
See notes to financial statements.
<Page>
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 2005
<Table>
INVESTMENT INCOME
Interest $ 925,292
Interest from affiliated money market fund 769
TOTAL INVESTMENT INCOME 926,061
EXPENSES
Investment advisory fee 146,675
Administrative service fee 73,338
Professional fees 13,671
Custody and transaction fees 7,730
Directors' fees 6,293
Compliance expenses 2,997
Insurance expenses 7,790
Other expenses 9
Qualification fees 10,308
Class A 8,548
Class B 4,971
Class T 8,406
Shareholder reporting expenses
Class A 3,201
Class B 2,280
Class T 4,106
Distribution fee
Class A 2,559
Class B 8,054
TOTAL EXPENSES 310,936
LESS EXPENSES REIMBURSED (91,439)
NET EXPENSES 219,497
INVESTMENT INCOME - NET 706,564
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on investments (177,508)
Change in unrealized appreciation of investments 6,348
NET LOSS ON INVESTMENTS (171,160)
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 535,404
</Table>
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED AUGUST 31,
<Table>
<Caption>
2005 2004
-------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Investment income - net $ 706,564 $ 633,117
Net realized gain (loss) on investments (177,508) 16,973
Change in unrealized appreciation of
investments 6,348 287,515
Net increase in net assets resulting from
operations 535,404 937,605
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income - net
Class A (24,908) (22,707)
Class B (20,641) (21,638)
Class T (660,768) (588,821)
Capital gains
Class A (579) (29,006)
Class B (620) (39,495)
Class T (15,913) (770,369)
TOTAL DISTRIBUTIONS TO SHAREHOLDERS (723,429) (1,472,036)
CAPITAL SHARE TRANSACTIONS - NET
Class A 60,012 (240,334)
Class B (116,102) (488,459)
Class T (734,217) 298,110
TOTAL NET CAPITAL SHARE TRANSACTIONS (790,307) (430,683)
TOTAL DECREASE IN NET ASSETS (978,332) (965,114)
NET ASSETS
Beginning of year 29,864,368 30,829,482
End of year $ 28,886,036 $ 29,864,368
Undistributed Net Investment Income $ 522 $ 19
</Table>
See notes to financial statements.
FINANCIALS
<Page>
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<Table>
<Caption>
YEAR ENDED AUGUST 31 2005 2004 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------------
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE YEARS INDICATED.
Net asset value, beginning of year $ 10.56 $ 10.75 $ 10.88 $ 10.75 $ 10.14
Investment income - net 0.25 0.23 0.40 0.48 0.53
Net realized and unrealized gain (loss) on investments (0.06) 0.11 (0.13) 0.13 0.61
--------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.19 0.34 0.27 0.61 1.14
Less distributions from investment income - net (0.25) (0.23) (0.40) (0.48) (0.53)
Capital gains (0.00)* (0.30) - - -
--------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.25) (0.53) (0.40) (0.48) (0.53)
--------------------------------------------------------------
Net asset value, end of year $ 10.50 $ 10.56 $ 10.75 $ 10.88 $ 10.75
==============================================================
TOTAL RETURN(1) 1.93% 3.14% 2.51% 5.82% 11.46%
==============================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $ 1,036 $ 983 $ 1,240 $ 1,137 $ 626
Ratio of expenses with reimbursement to average net assets (2) 0.73% 0.73% 0.73% 1.12% 1.25%
Ratio of expenses without reimbursement to average net assets 2.32% 2.04% 1.75% 1.80% 1.27%
Ratio of net investment income to average net assets 2.43% 2.13% 3.62% 4.73% 5.25%
Portfolio turnover rate 51.35% 50.62% 99.26% 25.87% 14.01%
</Table>
CLASS B SHARES
<Table>
<Caption>
YEAR ENDED AUGUST 31 2005 2004 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------------
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE YEARS INDICATED.
Net asset value, beginning of year $ 10.55 $ 10.74 $ 10.86 $ 10.74 $ 10.14
Investment income - net 0.20 0.17 0.33 0.43 0.48
Net realized and unrealized gain (loss) on investments (0.06) 0.11 (0.12) 0.12 0.60
--------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.14 0.28 0.21 0.55 1.08
Less distributions from investment income - net (0.20) (0.17) (0.33) (0.43) (0.48)
Capital gains (0.00)* (0.30) - - -
--------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.20) (0.47) (0.33) (0.43) (0.48)
--------------------------------------------------------------
Net asset value, end of year $ 10.49 $ 10.55 $ 10.74 $ 10.86 $ 10.74
==============================================================
TOTAL RETURN(1) 1.44% 2.65% 1.96% 5.27% 10.88%
==============================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $ 1,009 $ 1,131 $ 1,643 $ 758 $ 211
Ratio of expenses with reimbursement to average net assets (2) 1.23% 1.23% 1.23% 1.57% 1.75%
Ratio of expenses without reimbursement to average net assets 2.34% 2.06% 1.95% 2.61% 1.79%
Ratio of net investment income to average net assets 1.92% 1.65% 2.99% 4.20% 4.69%
Portfolio turnover rate 51.35% 50.62% 99.26% 25.87% 14.01%
</Table>
<Page>
CLASS T SHARES
<Table>
<Caption>
YEAR ENDED AUGUST 31 2005 2004 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------------
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE YEARS INDICATED.
Net asset value, beginning of year $ 10.43 $ 10.62 $ 10.75 $ 10.64 $ 10.05
Investment income - net 0.25 0.22 0.40 0.52 0.58
Net realized and unrealized gain (loss) on investments (0.07) 0.11 (0.13) 0.11 0.59
--------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.18 0.33 0.27 0.63 1.17
Less distributions from investment income - net (0.25) (0.22) (0.40) (0.52) (0.58)
Capital gains (0.00)* (0.30) - - -
--------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.25) (0.52) (0.40) (0.52) (0.58)
--------------------------------------------------------------
Net asset value, end of year $ 10.36 $ 10.43 $ 10.62 $ 10.75 $ 10.64
==============================================================
TOTAL RETURN(1) 1.84% 3.15% 2.46% 6.08% 11.90%
==============================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $ 26,841 $ 27,750 $ 27,946 $ 26,807 $ 25,278
Ratio of expenses with reimbursement to average net assets (2) 0.73% 0.73% 0.73% 0.93% 0.97%
Ratio of expenses without reimbursement to average net assets 0.96% 0.95% 0.91% 0.95% 0.97%
Ratio of net investment income to average net assets 2.43% 2.12% 3.60% 4.92% 5.55%
Portfolio turnover rate 51.35% 50.62% 99.26% 25.87% 14.01%
</Table>
* Amount less that $0.01
(1) Does not include the effect of sales charge.
(2) SM&R has voluntarily agreed to waive or reduce expenses to 0.73% for class
A, 1.23% for class B and 0.73% for class T until December 31, 2005.
See notes to financial statements.
<Page>
SM&R TAX FREE FUND
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
creditworthiness and financial strength of both the insurers (such as AMBAC
and MBIA, two market-leading municipal bond private insurers) and the
underlying issuers in an effort to minimize the default risk within the
portfolio to a level below the municipal market in general. Our overall
average credit rating is maintained at AAA 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, 2005, the fund has provided a total
return of 2.72% to Class T investors at net asset value. The year-to-date total
return for the eight months ended August 31, 2005 was 1.70%. The fund has an
average maturity of 8.5 years, a market-weighted average coupon of 4.825%, and a
modified duration of 6.5 years. Because the fund maintains a very high average
quality, returns sometimes lag general municipal bond indices.
The Federal Reserve began raising short-term interest rates in June 2004 and has
continued tightening at each meeting since, right through the recent fiscal
year. Despite the Fed actions and positive economic data over the last year,
longer-term bond yields fell. The municipal bond yield curve flattened as well,
meaning that the yield spread between short and long term rates got narrower,
but not to the extent of the flattening within Treasury rates. This action had a
slightly negative impact on the fund.
The fund is positioned with an intermediate position on the yield curve. We
chose not to lengthen the duration of the portfolio, as the long-end of the
yield curve tends to significantly underperform in Fed tightening cycles. While
this was the case when the Fed raised rates in both 1994 and 1999, it has not
held true under the current cycle. In fact, longer dated municipals have
outperformed both short and intermediate maturities over the last twelve months.
Our shorter duration, in addition to maintaining a AAA average rating, caused
the fund to underperform the municipal market over the past year, as
longer-term and higher-yielding (lower-rated) municipal debt led market total
returns.
After the recent devastation of Hurricane Katrina, municipal bond investors
have focused on the ability of municipalities to service debt when
catastrophe strikes. The SM&R Tax Free Fund holds less than a 10%
geographic exposure to the hurricane affected area. Approximately 80% of
these holdings are credit enhanced with municipal bond insurers. While it
is a possibility that some issuers may have to rely on
[SIDENOTE]
[CHART]
SECTOR WEIGHTINGS BY TOTAL INVESTMENTS
<Table>
DEVELOPMENT 5.35%
EDUCATION 17.81%
GENERAL OBLIGATION 34.04%
HOUSING 0.07%
MEDICAL 6.50%
MISCELLANEOUS 9.20%
POLLUTION 2.89%
TRANSPORTATION 10.74%
UTILITIES 13.40%
</Table>
<Page>
insurers temporarily to make payments on their debt, cash flow to the bondholder
should be uninterrupted. Early reports confirm that the municipal insurers will
be able to handle reported exposure and maintain their AAA financial strength
ratings. While underlying municipalities could face rating downgrades, most
severely distressed municipalities do not go into bankruptcy, unlike corporate
sector issuers.
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
[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
[PLOT POINTS TO COME]
AVERAGE ANNUAL RETURN
Includes maximum sales charge through 8/31/05. Inception date of these classes
is 01/01/99.
<Table>
<Caption>
SHARE ONE FIVE SINCE
CLASS YEAR YEAR INCEPTION
- ----------------------------------
A (2.16)% 3.86% 3.40%
B (0.83)% 4.38% 3.64%
</Table>
AVERAGE ANNUAL RETURN
Includes maximum sales charge of 4.5% through 8/31/05 for Class T Shares
<Table>
10 YEAR 4.81%
5 YEAR 4.04%
1 YEAR (1.95)%
</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 current maximum
initial sales charge for Class A shares is 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 distributions or redemption of fund shares.
MANAGER COMMENTARY
<Page>
SCHEDULE OF INVESTMENTS August 31, 2005
<Table>
<Caption>
MATURITY INTEREST/STATED FACE
RATING (a) MUNICIPAL BONDS DATE RATE(%) AMOUNT VALUE
MUNICIPAL BONDS:
ALABAMA - 1.30%
Aaa/AAA Alabama Drinking Water Financing Authority, Revolving
Fund Loan, Series A - Revenue Bond 08/15/16 4.000 $ 180,000 $ 182,572
CALIFORNIA - 0.18%
A2/A California State - General Obligation Bonds Unlimited 06/01/11 5.250 25,000 25,656
FLORIDA - 9.23%
Aaa/AAA Dade County, Florida Water & Sewer System - Revenue
Bonds 10/01/16 5.375 400,000 426,448
Aaa/AAA Miami-Dade County, Florida Solid Waste System - Revenue
Bonds 10/01/18 4.750 400,000 412,856
Aaa/AAA Miami-Dade County, Florida Expressway Authority Toll
System - Revenue Bonds 07/01/29 6.375 400,000 457,928
1,297,232
HAWAII - 1.96%
Aaa/AAA Honolulu, Hawaii City & County - General Obligation
Bonds 07/01/13 5.000 250,000 275,487
ILLINOIS - 5.25%
Aaa/AAA Chicago, Illinois - General Obligation Bonds Unlimited 01/01/25 5.125 100,000 102,626
Aaa/AAA Chicago, Illinois, Park District - General Obligation
Bonds Unlimited, Series C 01/01/16 4.850 230,000 239,517
Aaa/NR Rockford, Illinois - General Obligation Bonds Unlimited 12/15/18 4.500 180,000 183,933
Aaa/AAA State of Illinois - General Obligation Bonds Unlimited 03/01/19 5.000 200,000 212,048
738,124
INDIANA - 4.19%
Aaa/AAA Aurora, Indiana-Building Corp. - Revenue Bonds 07/15/13 4.500 405,000 430,292
Aaa/AAA South Bend, Indiana-Building Corp. - Revenue Bonds 02/01/13 4.500 150,000 158,966
589,258
LOUISIANA - 8.44%
Aaa/AAA Louisiana Public Facilities Authority Hospital -
Revenue Bonds, Series C 07/01/19 5.000 400,000 420,100
Aaa/AAA Monroe, Louisiana Sales and Use Tax - Revenue Bonds 07/01/16 4.000 200,000 203,578
Aaa/AAA New Orleans, Louisiana Sewer Service - Revenue Bonds 06/01/18 5.000 300,000 310,410
Ba2/BB Plaquemines, Louisiana - Port, Terminal Harbor &
District, Marine Terminal Facilities - Revenue Bonds 09/01/07 5.000 250,000 251,928
1,186,016
</Table>
<Page>
<Table>
<Caption>
MATURITY INTEREST/STATED FACE
RATING (a) MUNICIPAL BONDS DATE RATE(%) AMOUNT VALUE
MASSACHUSETTS - 3.33%
Aaa/AAA Massachusetts State Water Revenues Authority - General
Purpose, Series A 11/01/21 5.500 $ 450,000 $ 467,924
MISSISSIPPI - 3.78%
NR/AAA Greenville Mississippi Public School District - General
Obligation Unlimited 12/15/11 3.250 205,000 204,104
Aaa/AAA Mississippi Development Bank Special Obligation Clinton
Recreational Facilities & Municipal Building - Revenue
Bond 11/01/10 4.500 310,000 327,828
531,932
NEW YORK - 8.45%
Aaa/AAA New York City, New York - General Obligation Bonds
Unlimited, Series J 02/15/07 5.000 100,000 102,469
A1/A New York City, New York - General Obligation Bonds
Unlimited, Series J 08/01/18 5.000 200,000 208,410
Aa1/AA+ New York City, New York - Transitional Financial
Authority Revenue Bonds, Series C 05/01/19 5.000 250,000 266,680
Aaa/AAA New York-State Tollway Authority - Highway & Bridge
Revenue Bonds, Series B 04/01/10 3.850 200,000 205,626
Aa1/AA- Triborough Bridge & Tunnel Authority, New York -
Revenue Bonds, General Purpose, Series B 01/01/27 5.200 350,000 404,107
1,187,292
NORTH CAROLINA - 1.48%
Aa1/AAA North Carolina State - General Obligation Bonds
Unlimited 03/01/15 4.000 200,000 208,236
OHIO - 5.35%
Aaa/AAA Franklin County, Ohio - General Obligation Bonds Limited 12/01/08 5.100 300,000 310,689
Aaa/AAA Franklin County, Ohio - General Obligation Bonds Limited 12/01/11 5.300 100,000 103,806
Aaa/AAA Ohio State Department of Administrative Services -
Certificate Participation 09/01/15 5.250 300,000 338,064
752,559
TEXAS - 37.18%
Aaa/AAA Aransas County, Texas - Correctional Facility
Improvements General Obligation Bonds Limited 02/15/13 3.875 250,000 255,162
Aaa/AAA Austin, Texas - Community College District - Revenue
Bonds 02/01/10 4.000 100,000 103,081
</Table>
HOLDINGS
<Page>
<Table>
<Caption>
MATURITY INTEREST/STATED FACE
RATING (a) MUNICIPAL BONDS DATE RATE(%) AMOUNT VALUE
TEXAS - 37.18% (CONT'D)
Aaa/AAA Austin, Texas - Independent School District - General
Obligation Bonds Unlimited Series A 08/01/12 3.750 $ 150,000 $ 153,162
Aaa/AAA College Station, Texas Utility Systems - Revenue Bonds 02/01/13 4.125 200,000 206,484
Aaa/AAA College Station, Texas Utility Systems - Revenue Bonds 02/01/14 4.250 65,000 67,276
Aaa/AAA Collin County, Texas - Community College District,
Consolidated Fund - Revenue Bonds 02/01/15 5.250 400,000 412,140
Aaa/AAA Dallas-Fort Worth International Airport - Dallas-Fort
Worth Regional Airport - Joint Revenue Refunding Bonds,
Series 1994A 11/01/10 6.000 100,000 100,236
Aaa/AAA Dallas, Texas - Independent School District - General
Obligation Bonds Unlimited 02/15/09 4.200 100,000 103,527
Aaa/AAA El Paso, Texas - Public Improvement - General
Obligation Bonds Limited 08/15/17 4.000 270,000 271,828
Aaa/AA- Flower Mound, Texas - Refunding and Improvement -
General Obligation Bonds Unlimited 03/01/17 5.500 200,000 207,236
Aaa/NR Galveston County, Texas - Public Improvements - General
Obligation Bonds Unlimited 02/01/10 4.300 25,000 26,076
Aaa/NR Galveston County, Texas - Public Improvements - General
Obligation Bonds Limited 02/01/11 4.375 125,000 131,391
Aaa/AAA Jefferson County, Texas - Public Improvement
Certificates of Obligation, Series B 08/01/16 4.125 255,000 260,263
Aaa/AAA League City, Texas - Public Improvements - General
Obligation Bonds Limited 02/15/13 4.750 100,000 106,826
Aaa/AAA Lubbock County, Texas - General Obligation Bonds
Limited 02/15/17 5.500 250,000 280,120
Aaa/AAA Lubbock, Texas - Municipal Drainage Utility - General
Obligation Bonds Limited 02/15/14 4.000 250,000 254,918
Aaa/AAA Mission, Texas - Consolidated Independent School
District - General Obligation Bonds Unlimited 02/15/18 4.500 200,000 202,454
Aaa/AAA Montgomery County, Texas - Public Improvement General
Obligation Bonds Limited 03/01/12 4.000 250,000 258,138
Aaa/AAA Rockwell, Texas - Waterworks & Sewer - General
Obligation Bonds Limited 08/01/11 3.700 115,000 117,049
Aaa/AAA Round Rock, Texas - Independent School District
Refunding and Improvement - General Obligation Bonds
Unlimited 08/01/11 4.400 250,000 260,054
Aaa/AAA SanAntonio, Texas - River Authority Sewer Refunding
and Improvement - Martinez Salatrillo, Revenue Bonds 07/01/12 3.750 100,000 101,809
</Table>
<Page>
<Table>
<Caption>
MATURITY INTEREST/STATED FACE
RATING (a) MUNICIPAL BONDS DATE RATE(%) AMOUNT VALUE
TEXAS - 37.18% (CONT'D)
Aaa/NR Tarrant County Health Facilities Development Corp. -
Health System Revenue Bonds,
(Harris Methodist Health System), Series 1994 (c) 09/01/14 6.000 $ 200,000 $ 232,726
Aa1/AA+ Texas A&M University Revenue and Financing System -
Revenue Refunding Bonds, Series A 05/15/17 5.000 250,000 271,080
Aaa/AAA Texas Turnpike Authority-Dallas North Tollway System -
Revenue Bonds, Series 1995(President George Bush
Turnpike) 01/01/15 5.400 100,000 102,856
Aaa/AAA University of Texas Permanent University Fund - Revenue
Bonds, Prerefunded, Series A To 07/01/11 07/01/13 6.250 45,000 52,015
Aaa/AAA University of Texas Permanent University Fund - Revenue
Bonds, Prerefunded, Series A To 01/01/12 07/01/13 6.250 55,000 63,861
Aaa/AAA University of Texas Permanent University Fund - Revenue
Bonds, Prerefunded, Series A To 01/01/13 07/01/13 6.250 55,000 64,861
Aaa/AAA Waco, Texas - General Obligation Bonds Limited 02/01/16 4.000 250,000 252,533
Aaa/NR Weslaco, Texas - Independent School District - General
Obligation Bonds 02/15/13 5.650 100,000 101,209
Aaa/AAA West University Place, Texas - General Obligation Bonds
Limited, Permanent Improvement 02/01/14 5.650 100,000 101,193
NR/AAA Wylie, Texas - Independent School District - General
Obligation Bonds Unlimited 08/15/12 4.375 100,000 104,902
5,226,466
UTAH - 0.07%
Aa2/AA Utah State Housing Financial Agency - Single Family
Revenue Bonds (b) 07/01/21 6.000 10,000 10,061
WASHINGTON - 5.21%
Aaa/AAA Seattle, Washington - Municipal Light & Power - Revenue
Bonds, Series B 06/01/24 5.000 100,000 104,750
Aa1/AA State of Washington - General Obligation Bonds
Unlimited, Series B 05/01/18 5.500 300,000 337,179
Aa2/NR Tumwater, Washington - Office Building - Revenue Bonds 07/01/15 5.250 240,000 264,756
Aaa/AAA Washington State Public Power Supply System Nuclear
Project Number 1 - Refunding Revenue Bonds, Series C 07/01/10 5.500 25,000 26,006
732,691
TOTAL MUNICIPAL BONDS - 95.40%
---------------------------------------------------------
(Cost $12,835,563) 13,411,506
</Table>
<Page>
<Table>
<Caption>
MATURITY INTEREST/STATED FACE
U S GOVERNMENT AGENCY SHORT-TERM OBLIGATIONS DATE RATE(%) AMOUNT VALUE
U S GOVERNMENT AGENCY SHORT-TERM OBLIGATIONS:
U S GOVERNMENT AGENCIES - 3.57%
Federal Home Loan Bank 09/01/05 3.380 $ 150,000 $ 150,000
Federal Home Loan Bank 09/09/05 3.420 252,000 251,809
Federal Home Loan Mortgage Corp. 09/06/05 3.380 100,000 99,953
501,762
TOTAL U S GOVERNMENT
AGENCY SHORT-TERM OBLIGATIONS - 3.57%
---------------------------------------------------------
(Cost $501,762) 501,762
</Table>
<Table>
<Caption>
MONEY MARKET FUND SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
SM&R Money Market Fund, 2.92% (d) 693 693
TOTAL MONEY MARKET FUND - 0.00%
---------------------------------------------------------
(Cost $693) 693
---------------------------------------------------------
TOTAL INVESTMENTS - 98.97%
---------------------------------------------------------
(Cost $13,338,018) 13,913,961
CASH AND OTHER ASSETS,
LESS LIABILITIES - 1.03% 145,364
---------------------------------------------------------
TOTAL NET ASSETS - 100.00% $ 14,059,325
---------------------------------------------------------
</Table>
NOTE TO SCHEDULE OF INVESTMENTS:
(a) Ratings assigned by Moody's Investor's Service, Inc. ("Moody's") and
Standard & Poor's Corp. ("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,
2005. 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 advisor.
See notes to financial statements.
<Page>
FINANCIALS
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 2005
<Table>
ASSETS
Investments in unaffiliated securities, at value $ 13,913,268
(Cost $13,337,325)
Investments in affiliated money market fund
(Cost $693) 693
Total Investments (Cost $13,338,018) 13,913,961
Prepaid expenses 30,412
Receivable for:
Capital stock sold 200
Interest 142,711
Expense reimbursement 5,630
Other assets 3,211
TOTAL ASSETS 14,096,125
LIABILITIES
Distribution payable 1,597
Payable to investment advisor for fund expenses 15,434
Accrued:
Investment advisory fee 6,307
Administrative service fee 3,154
Distribution fee 1,347
Other liabilities 8,961
TOTAL LIABILITIES 36,800
NET ASSETS (APPLICABLE TO SHARES OUTSTANDING) $ 14,059,325
NET ASSETS ARE COMPRISED OF THE FOLLOWING:
Capital (par value and additional paid-in) 13,482,282
Undistributed net investment income 79
Accumulated net realized gain on investments 1,021
Net unrealized appreciation of investments 575,943
NET ASSETS $ 14,059,325
NET ASSETS:
Class A $ 519,889
Class B $ 538,594
Class T $ 13,000,842
TOTAL NET ASSETS $ 14,059,325
CAPITAL STOCK, $0.01 PAR VALUE PER SHARE:
Class A:
Authorized 100,000,101
Outstanding 48,583
Net asset value and redemption price per share $ 10.70
Offering price per share:
(Net asset value of $10.70/95.25%) $ 11.23
Class B:
Authorized 100,000,000
Outstanding 50,357
Net asset value and offering price per share $ 10.70
Class T:
Authorized 21,000,000
Outstanding 1,225,839
Net asset value and redemption price per share $ 10.61
Offering price per share:
(Net asset value of $10.61/95.5%) $ 11.11
</Table>
See notes to financial statements.
FINANCIALS
<Page>
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 2005
<Table>
INVESTMENT INCOME
Interest $ 628,627
Interest from affiliated money market fund 851
TOTAL INVESTMENT INCOME 629,478
EXPENSES
Investment advisory fee 71,032
Administrative service fee 35,516
Professional fees 8,771
Custody and transaction fees 7,052
Directors' fees 5,800
Compliance expenses 1,443
Insurance expenses 2,791
Other expenses 10
Qualification fees 6,380
Class A 7,052
Class B 5,150
Class T 7,607
Shareholder reporting expenses
Class A 912
Class B 864
Class T 1,637
Distribution fee
Class A 1,328
Class B 4,022
TOTAL EXPENSES 167,367
LESS EXPENSES REIMBURSED (58,141)
NET EXPENSES 109,226
INVESTMENT INCOME - NET 520,252
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments 989
Change in unrealized depreciation of investments (146,843)
NET LOSS ON INVESTMENTS (145,854)
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 374,398
</Table>
See notes to financial statements.
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED AUGUST 31,
<Table>
<Caption>
2005 2004
-------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Investment income - net $ 520,252 $ 552,561
Net realized gain on investments 989 2,466
Change in unrealized appreciation
(depreciation) of investments (146,843) 162,363
Net increase in net assets resulting from
operations 374,398 717,390
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income - net
Class A (19,542) (22,086)
Class B (17,062) (19,572)
Class T (483,570) (510,895)
Capital gains
Class A (95) (1,149)
Class B (94) (1,146)
Class T (2,336) (26,744)
TOTAL DISTRIBUTIONS FROM SHAREHOLDERS (522,699) (581,592)
CAPITAL SHARE TRANSACTIONS - NET
Class A (16,983) (107,327)
Class B 8,014 33,526
Class T (15,752) (299,995)
TOTAL NET CAPITAL SHARE TRANSACTIONS (24,721) (373,796)
TOTAL DECREASE IN NET ASSETS (173,022) (237,998)
NET ASSETS
Beginning of year 14,232,347 14,470,345
End of year $ 14,059,325 $ 14,232,347
Undistributed Net Investment Income $ 79 $ -
</Table>
See notes to financial statements.
<Page>
FINANCIAL HIGHLIGHTS
CLASS A SHARES
<Table>
<Caption>
YEAR ENDED AUGUST 31 2005 2004 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------------
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE YEARS INDICATED.
Net asset value, beginning of year $ 10.81 $ 10.71 $ 10.89 $ 10.80 $ 10.33
Investment income - net 0.40 0.42 0.44 0.43 0.46
Net realized and unrealized gain(loss) on investments (0.11) 0.12 (0.18) 0.09 0.49
--------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.29 0.54 0.26 0.52 0.95
Less distributions from investment income - net (0.40) (0.42) (0.44) (0.43) (0.46)
Capital gains (0.00)* (0.02) - - (0.02)
--------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.40) (0.44) (0.44) (0.43) (0.48)
--------------------------------------------------------------
Net asset value, end of year $ 10.70 $ 10.81 $ 10.71 $ 10.89 $ 10.80
==============================================================
TOTAL RETURN(1) 2.72% 5.12% 2.40% 4.99% 9.34%
==============================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year $ 519,889 $ 542,502 $ 643,287 $ 384,438 $ 245,697
Ratio of expenses with reimbursement to average net assets (2) 0.75% 0.75% 0.75% 0.93% 1.00%
Ratio of expenses without reimbursement to average net assets 2.73% 1.26% 1.24% 1.26% 1.33%
Ratio of net investment income to average net assets 3.68% 3.84% 4.09% 4.14% 4.34%
Portfolio turnover rate 7.50% 1.15% 18.23% 8.80% 0.18%
</Table>
* Amount less than $0.01
(1) Does not include the effect of sales charge.
(2) SM&R has voluntarily agreed to waive or reduce expenses to 0.75% for Class
A until December 31, 2005.
See notes to financial statements.
<Page>
CLASS B SHARES
<Table>
<Caption>
YEAR ENDED AUGUST 31 2005 2004 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------------
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE YEARS INDICATED.
Net asset value, beginning of year $ 10.81 $ 10.71 $ 10.90 $ 10.79 $ 10.32
Investment income - net 0.34 0.36 0.40 0.37 0.40
Net realized and unrealized gain(loss) on investments (0.11) 0.12 (0.19) 0.11 0.49
--------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.23 0.48 0.21 0.48 0.89
Less distributions from investment income - net (0.34) (0.36) (0.40) (0.37) (0.40)
Capital gains (0.00)* (0.02) - - (0.02)
--------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.34) (0.38) (0.40) (0.37) (0.42)
--------------------------------------------------------------
Net asset value, end of year $ 10.70 $ 10.81 $ 10.71 $ 10.90 $ 10.79
==============================================================
TOTAL RETURN(1) 2.20% 4.59% 1.91% 4.57% 8.74%
==============================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year $ 538,594 $ 536,101 $ 496,912 $ 513,273 $ 178,880
Ratio of expenses with reimbursement to average net assets (2) 1.25% 1.25% 1.25% 1.42% 1.50%
Ratio of expenses without reimbursement to average net assets 2.85% 1.78% 1.74% 1.75% 1.84%
Ratio of net investment income to average net assets 3.18% 3.34% 3.59% 3.65% 3.82%
Portfolio turnover rate 7.50% 1.15% 18.23% 8.80% 0.18%
</Table>
<Page>
CLASS T SHARES
<Table>
<Caption>
YEAR ENDED AUGUST 31 2005 2004 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------------
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE YEARS INDICATED.
Net asset value, beginning of year $ 10.72 $ 10.61 $ 10.80 $ 10.71 $ 10.25
Investment income - net 0.39 0.41 0.44 0.46 0.48
Net realized and unrealized gain(loss) on investments (0.11) 0.13 (0.18) 0.08 0.48
--------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.28 0.54 0.26 0.54 0.96
Less distributions from investment income - net (0.39) (0.41) (0.45) (0.45) (0.48)
Capital gains (0.00)* (0.02) - - (0.02)
--------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.39) (0.43) (0.45) (0.45) (0.50)
--------------------------------------------------------------
Net asset value, end of year $ 10.61 $ 10.72 $ 10.61 $ 10.80 $ 10.71
==============================================================
TOTAL RETURN(1) 2.72% 5.20% 2.38% 5.24% 9.59%
==============================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $ 13,001 $ 13,154 $ 13,330 $ 12,472 $ 11,700
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 1.05% 1.04% 1.03% 1.05% 1.08%
Ratio of net investment income to average net assets 3.68% 3.83% 4.08% 4.34% 4.59%
Portfolio turnover rate 7.50% 1.15% 18.23% 8.80% 0.18%
</Table>
* Amount less than $0.01
(1) Does not include the effect of sales charge.
(2) SM&R has voluntarily agreed to waive or reduce expenses to 1.25% for Class
B and 0.75% for Class T until December 31, 2005.
See notes to financial statements.
<Page>
SM&R PRIMARY FUND
A MESSAGE TO OUR SHARE HOLDERS:
The SM&R Primary Fund is focused on providing competitive levels of current
income to the conservative investor through investments in short term
government and corporate securities.
Over the past fiscal year ending August 31, 2005, the fund has provided a
total return of 2.99%. The year-to-date total return for the eight months
ended August 31, 2005 was 2.52%.
Over the past 12 months, trade deficits and low interest rates around the globe
continued to fuel huge foreign demand for U.S. Treasuries, and inflation fears
remained mostly contained. As a result, long-term nominal and real Treasury
yields remain below historic norms. While this past fiscal year did feature some
bond market volatility, the fixed income market rebounded from significant
sell-offs numerous times over the last year. Although the benchmark 10-year
Treasury yield reached a four-month high in early August, it was near 4% by the
end of the month, the lowest level since June. Short term rates, however,
marched steadily higher over the past 12 months, as the Federal Reserve
continued its steady work of removing fiscal accommodation. Given the generally
short maturities within the Primary Fund, rising short term yields tend to be a
net positive on Fund performance.
The reasons for the most recent rally can be attributed to the
uncertainties related to Hurricane Katrina and rising oil prices. Most
economists have lowered near-term GDP growth forecasts in the wake of
Katrina, but note that longer-term cleanup, rebuilding and related federal
funding will boost future growth. Meanwhile oil prices peaked at around $70
per barrel at the end of August, and Katrina's effect on refining
production in the Gulf of Mexico caused a sharp rise in gasoline prices.
Energy prices are closely watched by fixed-income markets, from an
inflationary standpoint certainly, but more importantly from the
impact on consumer discretionary income. Since consumer spending has
been a key driver of U.S. economic growth, any factor affecting
household spending translates directly to trends in economic growth
patterns. Generally, slower spending means slower growth and less
upward pressure on interest rates. Over the last year, consumers have
remained generally strong, thus the steadily increasing short term
rates we have witnessed over the past 12 months. These increases have
been a positive for the fund.
[SIDENOTE]
[CHART]
SECTOR WEIGHTINGS BY TOTAL INVESTMENTS
<Table>
CONSUMER DISCRETIONARY 33.27%
CONSUMER STAPLES 11.13%
ENERGY 3.03%
FINANCIALS 8.76%
HEALTH CARE 11.10%
INDUSTRIALS 6.21%
INFORMATION TECHNOLOGY 4.08%
MATERIALS 7.95%
TELECOMMUNICATION SERVICES 4.05%
U S GOVERNMENT 6.47%
UTILITES 3.95%
</Table>
<Page>
While most of the total rate of return in the bond market has come from
longer-dated maturities over the last year, the SM&R Primary Fund provides fixed
income investors with an opportunity to invest in a 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
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
[PLOT POINTS TO COME]
AVERAGE ANNUAL RETURN
Through 8/31/05. Inception date of this fund 03/16/92.
<Table>
10 YEAR 3.72%
5 YEAR 2.53%
1 YEAR 2.99%
</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 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 distributions or redemption of fund shares.
MANAGER COMMENTARY
<Page>
SCHEDULE OF INVESTMENTS August 31, 2005
<Table>
<Caption>
MATURITY INTEREST/STATED FACE
COMMERCIAL PAPER DATE RATE(%) AMOUNT VALUE
CONSUMER DISCRETIONARY:
AUTOMOBILES - 8.82%
DaimlerChrysler NA Holding 09/16/05 3.630 $ 1,230,000 $ 1,228,137
Nissan Motor Co. Ltd. 09/28/05 3.670 1,000,000 997,247
2,225,384
HOUSEHOLD DURABLES - 3.77%
Fortune Brands Inc. 09/23/05 3.670 953,000 950,861
TEXTILES & APPAREL - 3.93%
VF Corp. 09/08/05 3.550 994,000 993,312
MEDIA - 3.36%
Dow Jones & Co. Inc. 09/07/05 3.520 848,000 847,501
MULTI-LINE RETAIL - 8.70%
TJX Companies Inc. 09/26/05 3.600 1,200,000 1,196,998
Wal-Mart Stores, Inc. 09/02/05 3.450 1,000,000 999,904
2,196,902
SPECIALTY RETAIL - 4.67%
AutoZone Inc. 09/14/05 3.580 1,181,000 1,179,471
TOTAL CONSUMER DISCRETIONARY - 33.25% 8,393,431
-----------------------------------------------------------
CONSUMER STAPLES:
FOOD PRODUCTS - 11.12%
General Mills Inc. 09/22/05 3.600 313,000 312,342
Heinz (HJ) Finance Co. 09/01/05 3.550 1,183,000 1,183,000
Kellogg Co. 09/29/05 3.660 1,048,000 1,045,016
Kraft Foods Inc. 09/07/05 3.600 268,000 267,839
2,808,197
TOTAL CONSUMER STAPLES - 11.12% 2,808,197
-----------------------------------------------------------
</Table>
<Page>
<Table>
<Caption>
MATURITY INTEREST/STATED FACE
COMMERCIAL PAPER DATE RATE(%) AMOUNT VALUE
ENERGY:
OIL & GAS - 3.02%
Sunoco Inc. 09/19/05 3.580 $ 765,000 $ 763,629
TOTAL ENERGY - 3.02% 763,629
-----------------------------------------------------------
FINANCIALS:
DIVERSIFIED FINANCIAL SERVICES - 2.13%
Deluxe Corp. 09/22/05 3.580 538,000 536,876
INSURANCE - 4.62%
Hartford Financial Services 09/13/05 3.570 1,168,000 1,166,606
TOTAL FINANCIALS - 6.75% 1,703,482
-----------------------------------------------------------
HEALTH CARE:
HEALTH CARE EQUIPMENT & SUPPLIES - 6.82%
Becton Dickinson & Co. 09/12/05 3.480 730,000 729,222
Boston Scientific Corp. 09/21/05 3.570 995,000 993,025
1,722,247
PHARMACEUTICALS - 4.28%
Alcon Capital Corp. 09/09/05 3.440 1,080,000 1,079,173
TOTAL HEALTH CARE - 11.10% 2,801,420
-----------------------------------------------------------
INDUSTRIALS:
ELECTRICAL EQUIPMENT - 4.81%
Siemens Capital Co. LLC 09/15/05 3.470 1,215,000 1,213,358
TOTAL INDUSTRIALS - 4.81% 1,213,358
-----------------------------------------------------------
</Table>
HOLDINGS
<Page>
<Table>
<Caption>
MATURITY INTEREST/STATED FACE
COMMERCIAL PAPER DATE RATE(%) AMOUNT VALUE
INFORMATION TECHNOLOGY:
COMMUNICATIONS EQUIPMENT - 4.07%
Motorola Inc. 09/06/05 3.560 $ 1,029,000 $ 1,028,490
TOTAL INFORMATION TECHNOLOGY - 4.07% 1,028,490
-----------------------------------------------------------
MATERIALS:
CONTAINERS & PACKAGING - 4.06%
Bemis Co. 09/20/05 3.550 1,027,000 1,025,074
METALS & MINING - 3.88%
Alcoa Inc. 10/03/05 3.650 983,000 979,810
TOTAL MATERIALS - 7.94% 2,004,884
-----------------------------------------------------------
UTILITIES :
GAS UTILITIES - 3.95%
Laclede Gas Co. 09/27/05 3.600 1,000,000 997,398
TOTAL UTILITIES - 3.95% 997,398
-----------------------------------------------------------
TOTAL COMMERCIAL PAPER - 86.01%
-----------------------------------------------------------
(Cost $21,714,289) 21,714,289
</Table>
<Page>
<Table>
<Caption>
MATURITY INTEREST/STATED FACE
CORPORATE BONDS DATE RATE(%) AMOUNT VALUE
FINANCIALS:
DIVERSIFIED FINANCIALS - 2.00%
JPMorgan Chase & Co.(a) 08/15/06 5.625 $ 500,000 $ 505,786
INDUSTRIALS:
BUILDING PRODUCTS - 1.41%
Armstrong Holdings Inc.(b) 08/15/03 6.350 500,000 355,000
TELECOMMUNICATION SERVICES:
DIVERSIFIED TELECOMMUNICATION SERVICES - 4.05%
SBC Communications Capital Corp.(a) 08/14/06 7.110 1,000,000 1,022,049
TOTAL CORPORATE BONDS - 7.46%
-----------------------------------------------------------
(Cost $2,050,066) 1,882,835
-----------------------------------------------------------
U S GOVERNMENT AGENCY AND U S GOVERNMENT SECURITIES:
U S GOVERNMENT AGENCY SECURITIES - 1.96%
Federal Home Loan Bank 06/21/07 3.870 500,000 494,083
U S GOVERNMENT SECURITIES - 4.51%
U S Treasury Bond 02/15/29 5.250 1,000,000 1,137,852
TOTAL U S GOVERNMENT AGENCY AND
U S GOVERNMENT SECURITIES - 6.47%
-----------------------------------------------------------
(Cost $1,390,177) 1,631,935
TOTAL INVESTMENTS - 99.94%
-----------------------------------------------------------
(Cost $25,154,532) 25,229,059
CASH AND OTHER ASSETS, LESS LIABILITIES - 0.06% 16,034
-----------------------------------------------------------
TOTAL NET ASSETS - 100.00% $ 25,245,093
-----------------------------------------------------------
</Table>
NOTE TO SCHEDULE OF INVESTMENTS:
(a) Long term obligations that mature in less than one year.
(b) Security is in default. On February 24, 2005, a U.S. District Court Judge
issued a ruling finding that Armstrong World Industries, Inc.'s Plan of
Reorganization in its Chapter 11 case from the U.S. Bankruptcy Court in
Wilmington, Delaware was not confirmable. On April 25, 2005 Armstrong's
Attorney advised the Court that Armstrong was pursuing an appeal of the
Judge's decision.
See notes to financial statements.
<Page>
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 2005
<Table>
ASSETS
Investments in unaffiliated securities, at value
(Cost $25,154,532) $ 25,229,059
Cash 602
Prepaid expenses 9,035
Receivable for:
Capital stock sold 2,255
Interest 42,988
Expense reimbursement 3,008
Other assets 2,782
TOTAL ASSETS 25,289,729
LIABILITIES
Capital stock reacquired 1,400
Distribution payable 578
Payable to investment advisor for fund expenses 14,553
Accrued:
Investment advisory fee 11,652
Administrative service fee 5,826
Other liabilities 10,627
TOTAL LIABILITIES 44,636
NET ASSETS $ 25,245,093
Shares of capital stock outstanding,
(2,176,000,000 shares authorized,
$.01 par value per share) 25,307,543
Net asset value $ 1.00
NET ASSETS ARE COMPRISED OF THE FOLLOWING:
Capital (par value and additional paid-in) 25,311,906
Undistributed net realized loss on investments (141,340)
Net unrealized appreciation of investments 74,527
NET ASSETS $ 25,245,093
</Table>
See notes to financial statements.
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 2005
<Table>
INVESTMENT INCOME
Interest $ 722,217
EXPENSES
Investment advisory fee 131,669
Administrative service fee 65,834
Professional fees 7,772
Custody and transaction fees 11,056
Directors' fees 5,799
Compliance expenses 2,668
Insurance expenses 5,938
Qualification fees 4,570
Shareholder reporting expenses 4,482
Other expenses 77
TOTAL EXPENSES 239,865
LESS EXPENSES REIMBURSED (29,184)
NET EXPENSES 210,681
INVESTMENT INCOME - NET 511,536
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Change in unrealized appreciation of investments 163,787
NET GAIN ON INVESTMENTS 163,787
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 675,323
</Table>
See notes to financial statements.
<Page>
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED AUGUST 31,
<Table>
<Caption>
2005 2004
----------------------------
INCREASE IN NET ASSETS FROM OPERATIONS
Investment income - net $ 511,536 $ 222,772
Change in unrealized appreciation of investments 163,787 32,505
Net increase in net assets resulting from operations 675,323 255,277
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income - net (511,536) (222,772)
CAPITAL SHARE TRANSACTIONS - NET (1,116,093) (1,243,907)
TOTAL DECREASE IN NET ASSETS (952,306) (1,211,402)
NET ASSETS
Beginning of year 26,197,399 27,408,801
End of year $ 25,245,093 $ 26,197,399
</Table>
See notes to financial statements.
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
YEAR ENDED AUGUST 31 2005 2004 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE YEARS INDICATED.
Net asset value, beginning of year $ 0.99 $ 0.99 $ 0.99 $ 1.00 $ 0.99
Investment income - net 0.02 0.01 0.01 0.02 0.05
Net realized and unrealized gain(loss) on investments 0.01 - - (0.01) 0.01
------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.03 0.01 0.01 0.01 0.06
Less distributions from investment income - net (0.02) (0.01) (0.01) (0.02) (0.05)
------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.02) (0.01) (0.01) (0.02) (0.05)
------------------------------------------------------------------------
Net asset value, end of year $ 1.00 $ 0.99 $ 0.99 $ 0.99 $ 1.00
========================================================================
TOTAL RETURN 2.99% 0.83% 1.35% 1.33% 6.20%
========================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $ 25,245 $ 26,197 $ 27,409 $ 27,304 $ 31,857
Ratio of expenses with reimbursement to
average net assets (1) 0.80% 0.80% 0.80% 0.80% 0.80%
Ratio of expenses without reimbursement
to average net assets 0.91% 0.91% 0.89% 0.92% 0.97%
Ratio of net investment income to average net assets 1.94% 0.83% 1.35% 2.29% 5.10%
Portfolio turnover rate - 70.47% - - -
</Table>
(1) SM&R has voluntarily agreed to waive or reduce expenses to 0.80% until
December 31, 2005.
See notes to financial statements.
FINANCIALS
<Page>
SM&R MONEY MARKET FUND
SCHEDULE OF INVESTMENTS August 31, 2005
<Table>
<Caption>
MATURITY INTEREST/STATED FACE
COMMERCIAL PAPER DATE RATE(%) AMOUNT VALUE
AUTOMOBILES - 4.74%
Dollar Thrifty Funding 09/14/05 3.520 $ 3,651,000 $ 3,646,358
TOTAL COMMERCIAL PAPER - 4.74%
-----------------------------------------------------------
(Cost $3,646,358) 3,646,358
U S GOVERNMENT AGENCY SHORT - TERM OBLIGATIONS:
U S GOVERNMENT AGENCIES - 95.32%
Federal Farm Credit Bank 09/01/05 3.370 5,875,000 5,875,000
Federal Home Loan Bank 09/02/05 3.380 5,562,000 5,561,477
Federal Home Loan Bank 09/09/05 3.390 5,248,000 5,244,043
Federal Home Loan Bank 09/14/05 3.380 8,158,000 8,148,036
Federal Home Loan Bank 09/15/05 3.390 10,156,000 10,142,610
Federal Home Loan Bank 09/15/05 3.400 9,117,000 9,104,943
Federal Home Loan Mortgage Corp. 09/13/05 3.420 5,640,000 5,633,565
Federal National Mortgage Assoc. 09/06/05 3.330 9,020,000 9,015,822
Federal National Mortgage Assoc. 09/07/05 3.330 5,085,000 5,082,174
Federal National Mortgage Assoc. 09/08/05 3.330 2,565,000 2,563,337
Federal National Mortgage Assoc. 09/12/05 3.380 6,930,000 6,922,834
73,293,841
TOTAL U S GOVERNMENT
AGENCY SHORT-TERM OBLIGATIONS - 95.32%
-----------------------------------------------------------
(Cost $73,293,841) 73,293,841
TOTAL INVESTMENTS - 100.06%
-----------------------------------------------------------
(Cost $76,940,199) 76,940,199
LIABILITIES IN EXCESS OF OTHER ASSETS - (0.06)% (50,451)
-----------------------------------------------------------
TOTAL NET ASSETS - 100.00% $ 76,889,748
-----------------------------------------------------------
</Table>
See notes to financial statements.
HOLDINGS
<Page>
FINANCIALS
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 2005
<Table>
ASSETS
Investments in unaffiliated securities,
at cost and value $ 76,940,199
Cash 871
Prepaid expenses 80,023
Receivable for:
Capital stock sold 525,513
Expense reimbursement 9,770
TOTAL ASSETS 77,556,376
LIABILITIES
Capital stock reacquired 579,129
Distribution payable 692
Payable to investment advisor for fund expenses 43,781
Accrued:
Investment advisory fee 17,710
Administrative service fee 17,710
Other liabilities 7,606
TOTAL LIABILITIES 666,628
NET ASSETS $ 76,889,748
Shares of capital stock outstanding,
(2,000,000,000 shares authorized,
$.01 par value per share) 76,889,748
Net asset value $ 1.00
NET ASSETS ARE COMPRISED OF THE FOLLOWING:
Capital (par value and additional paid-in) 76,889,748
NET ASSETS $ 76,889,748
</Table>
See notes to financial statements.
FINANCIALS
<Page>
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 2005
<Table>
INVESTMENT INCOME
Interest $ 2,290,070
EXPENSES
Investment advisory fee 230,922
Administrative service fee 230,758
Professional fees 7,871
Custody and transaction fees 17,771
Directors' fees 5,800
Compliance expenses 8,854
Insurance expenses 28,509
Qualification fees 8,906
Shareholder reporting expenses 7,313
Other expenses 284
TOTAL EXPENSES 546,988
LESS EXPENSES REIMBURSED (85,109)
NET EXPENSES 461,879
INVESTMENT INCOME - NET $ 1,828,191
</Table>
See notes to financial statements.
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED AUGUST 31,
<Table>
<Caption>
2005 2004
-----------------------------
INCREASE IN NET ASSETS FROM OPERATIONS
Investment income - net $ 1,828,191 $ 483,068
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income - net (1,828,191) (483,068)
CAPITAL SHARE
TRANSACTIONS - NET (18,311,786) (8,267,569)
TOTAL DECREASE
IN NET ASSETS (18,311,786) (8,267,569)
NET ASSETS
Beginning of year 95,201,534 103,469,103
End of year $ 76,889,748 $ 95,201,534
</Table>
See notes to financial statements.
<Page>
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
YEAR ENDED AUGUST 31 2005 2004 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE YEARS INDICATED.
Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Investment income - net 0.02 0.01 0.01 0.02 0.05
------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.02 0.01 0.01 0.02 0.05
Less distributions from Investment income - net (0.02) (0.01) (0.01) (0.02) (0.05)
------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.02) (0.01) (0.01) (0.02) (0.05)
------------------------------------------------------------------------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========================================================================
TOTAL RETURN 2.03% 0.58% 0.80% 1.53% 4.92%
========================================================================
RATIOS (IN PERCENTAGES)/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $ 76,890 $ 95,202 $ 103,469 $ 154,610 $ 102,092
Ratio of expenses with reimbursement to
average net assets 0.50% 0.50% 0.50% 0.50% 0.49%
Ratio of expenses without reimbursement to
average net assets 0.59% 0.60% 0.58% 0.56% 0.49%
Ratio of net investment income to average net assets 1.98% 0.58% 0.84% 1.48% 4.63%
</Table>
See notes to financial statements.
<Page>
SM&R NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
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, Primary Fund and Money
Market 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 as determined by the Board of
Directors. Commercial paper and short-term obligations are stated at amortized
cost, which is equivalent to value. Investments in the affiliated money market
fund are valued at the 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.
<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 net assets. 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, 2005
<Table>
<Caption>
LOSS CARRY FORWARDS EXPIRATION DATES
- ----------------------------------------------------------------------------
Alger Technology Fund $ 157,247 2009
$ 113,717 2010
Alger Aggressive Growth Fund $ 110,202 2010
Alger Growth Fund $ 62,633 2010
Growth Fund $ 10,606,101 2010
$ 7,083,770 2011
Government Bond Fund $ 140 2013
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 Class B shares of the respective funds and 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 all
of the series based on the relative amount of each series' net assets or
shareholders, and then allocated among the classes of that series.
<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:
EQUITY FUNDS
<Table>
<Caption>
INVESTMENT ADVISORY FEE
- -------------------------------------------------------------
Alger Technology Fund 1.35%
Alger Aggressive Growth Fund 1.05%
Alger Small-Cap Fund 1.00%
Alger Growth Fund 0.85%
</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, Inc. makes investment decisions for each of these funds and
continuously reviews and administers the investment program. SM&R monitors Fred
Alger Management, Inc.'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, Inc. for
each of these series. The series are not responsible for paying the sub-advisory
fee directly.
GROWTH, EQUITY INCOME AND BALANCED FUNDS
<Table>
<Caption>
INVESTMENT
NET ASSETS ADVISORY FEE
- --------------------------------------------------------------------------
Not exceeding $100,000,000 0.750%
Exceeding $100,000,000 - but not exceeding $200,000,000 0.625%
Exceeding $200,000,000 - but not exceeding $300,000,000 0.500%
Exceeding $300,000,000 0.400%
</Table>
FIXED INCOME FUNDS
Government Bond and Tax Free Funds
<Table>
<Caption>
INVESTMENT
NET ASSETS ADVISORY FEE
- --------------------------------------------------------------------------
Not exceeding $100,000,000 0.50%
Exceeding $100,000,000 - but not exceeding $300,000,000 0.45%
Exceeding $300,000,000 0.40%
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
- --------------------------------------------------------------------------
Not exceeding $100,000,000 0.25%
Exceeding $100,000,000 - but not exceeding $200,000,000 0.20%
Exceeding $200,000,000 - but not exceeding $300,000,000 0.15%
Exceeding $300,000,000 0.10%
</Table>
SM&R has 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 year 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 do not include the
distribution and shareholder servicing fee.
Effective June 1, 2002, and until December 31, 2005, SM&R has voluntarily agreed
to reimburse expenses (after applicable waivers) which exceed the following
percentages of each fund's average daily net assets:
<Page>
<Table>
<Caption>
CLASS A CLASS B CLASS T UNIVERSAL
- -----------------------------------------------------------------------------
Alger Technology Fund 2.10% 2.75%
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>
Fee waivers and/or reductions, other than those stated in the Administrative
Service Agreement, may be rescinded by SM&R at any time after December 31, 2005
without notice to investors.
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:
GROWTH, EQUITY INCOME, BALANCED, GOVERNMENT BOND AND TAX FREE FUNDS
<Table>
<Caption>
DISTRIBUTION FEE SERVICE FEE TOTAL 12b-1 FEE
- --------------------------------------------------------------------------------
Class A Shares 0.25% - 0.25%
Class B Shares 0.50% 0.25% 0.75%
</Table>
ALGER TECHNOLOGY, ALGER AGGRESSIVE GROWTH, ALGER SMALL-CAP AND ALGER GROWTH
FUNDS
<Table>
Class A Shares 0.35% - 0.35%
Class B Shares 1.00% - 1.00%
</Table>
For the year ended August 31, 2005, each series paid or accrued the following,
as compensation under the Plans:
<Table>
Alger Technology Fund $ 5,559
Alger Aggressive Growth Fund $ 10,577
Alger Small-Cap Fund $ 9,707
Alger Growth Fund $ 16,902
Growth Fund $ 42,088
Equity Income Fund $ 79,433
Balanced Fund $ 35,625
Government Bond Fund $ 10,613
Tax Free Fund $ 5,350
</Table>
SALES CHARGES:
During the year ended August 31, 2005, 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 CHARGES SALES CHARGES
RECEIVED BY SM&R REALLOWED TO DEALERS
- ----------------------------------------------------------------------
Alger Technology Fund $ 1,843 $ 80
Alger Aggressive Growth Fund $ 6,309 $ 163
Alger Small-Cap Fund $ 6,157 $ 746
Alger Growth Fund $ 8,312 $ 886
Growth Fund $ 75,256 $ 2,180
Equity Income Fund $ 91,693 $ 2,396
Balanced Fund $ 44,288 $ 994
Government Bond Fund $ 6,481 $ 249
Tax Free Fund $ 2,775 $ -
</Table>
For the year ended August 31, 2005, SM&R received $45,694 for contingent
deferred sales charges imposed on the redemptions of Class B shares of capital
stock of the series.
NOTES TO FINANCIAL STATEMENTS
<Page>
SM&R is a wholly-owned subsidiary of American National Insurance Company
("American National"). As of August 31, 2005, SM&R and American National had the
following ownership in these series:
<Table>
<Caption>
SM&R AMERICAN NATIONAL AMERICAN NATIONAL SUBSIDIARIES
- -----------------------------------------------------------------------------------------------------------------------------
PERCENT OF SHARES PERCENT OF SHARES PERCENT OF SHARES
SHARES OUTSTANDING SHARES OUTSTANDING SHARES OUTSTANDING
- -----------------------------------------------------------------------------------------------------------------------------
Growth Fund 229,517 0.86% 350 - 2,597,480 9.72%
Equity Income Fund 21,226 0.45% - - - -
Balanced Fund 154,816 9.36% - - 365,031 22.06%
Government Bond Fund 670,236 24.07% 5,229 0.19% 1,035,535 37.19%
Tax Free Fund 170,099 12.84% - - 854,017 64.46%
Primary Fund 16,928 0.07% 22,564,600 89.16% 6,267 0.02%
Money Market Fund 2,432,733 3.16% 38,361,286 49.89% 23,837,382 31.00%
</Table>
Through the investment sub-advisory agreement, Fred Alger Management, Inc. is
affiliated with SM&R. As of August 31, 2005, Fred Alger Management, Inc. had the
following ownership in these series:
<Table>
<Caption>
PERCENT OF SHARES
SHARES OUTSTANDING
- ------------------------------------------------------------
Alger Technology Fund 25,000 5.34%
Alger Aggressive Growth Fund 25,000 9.26%
Alger Small-Cap Fund 25,000 7.15%
Alger Growth Fund 25,000 6.66%
</Table>
The Company pays directors' fees and expenses for all the independent directors.
The Company also pays the salary and other expenses of the Chief Compliance
Officer.
Fred Alger and Company, Incorporated ("Alger Inc.") is an affiliated
broker-dealer of Fred Alger Management, Inc. During the year ended August 31,
2005, the Alger Technology Fund, Alger Aggressive Growth Fund, Alger Small-Cap
Fund and Alger Growth Fund paid commissions for portfolio transactions to Alger
Inc., in the amount of $2,581, $3,567, $2,256 and $11,071, respectively.
INVESTMENTS INTO AFFILIATED MONEY MARKET FUND:
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 therefore considered to be affiliated. The
transactions in investments in the affiliated money market fund for the year
ended August 31, 2005 were:
<Table>
Purchases $ 19,961,128
Sales $ 19,745,456
</Table>
<Page>
NOTE 3 - COST, PURCHASES AND SALES OF INVESTMENT SECURITIES
Investments have the same cost for tax and financial statement purposes.
Aggregate purchases and sales of investments in securities, other than
commercial paper, were as follows:
<Table>
<Caption>
PURCHASES SALES
- -----------------------------------------------------------------
ALGER TECHNOLOGY FUND $ 2,580,139 $ 2,585,440
ALGER AGGRESSIVE GROWTH FUND $ 3,008,654 $ 2,923,909
ALGER SMALL-CAP FUND $ 2,143,184 $ 2,089,355
ALGER GROWTH FUND $ 6,920,936 $ 6,954,726
GROWTH FUND $ 26,670,748 $ 40,580,436
EQUITY INCOME FUND $ 20,596,167 $ 29,633,476
BALANCED FUND $ 6,516,934 $ 7,567,145
GOVERNMENT BOND FUND $ 17,293,465 $ 13,912,202
TAX FREE FUND $ 2,245,902 $ 969,900
PRIMARY FUND $ - $ 500,000
</Table>
Gross unrealized appreciation and depreciation as of August 31, 2005, based on
the cost for federal income tax purposes is as follows:
<Table>
<Caption>
NET APPRECIATION
COST APPRECIATION DEPRECIATION (DEPRECIATION)
- -----------------------------------------------------------------------------------------------------
ALGER TECHNOLOGY FUND $ 981,824 $ 173,941 $ 14,949 $ 158,992
ALGER AGGRESSIVE GROWTH FUND $ 1,860,225 $ 270,603 $ 25,099 $ 245,504
ALGER SMALL-CAP FUND $ 1,701,393 $ 360,103 $ 47,271 $ 312,832
ALGER GROWTH FUND $ 2,747,679 $ 254,275 $ 49,338 $ 204,937
GROWTH FUND $ 85,427,938 $ 28,644,593 $ 2,774,152 $ 25,870,441
EQUITY INCOME FUND $ 95,158,998 $ 27,661,793 $ 10,234,443 $ 17,427,350
BALANCED FUND $ 26,785,121 $ 4,708,469 $ 731,483 $ 3,976,986
GOVERNMENT BOND FUND $ 28,579,045 $ 247,557 $ 190,269 $ 57,288
TAX FREE FUND $ 13,338,018 $ 584,989 $ 9,046 $ 575,943
PRIMARY FUND $ 25,154,532 $ 247,675 $ 173,148 $ 74,527
</Table>
The difference between book basis and tax basis unrealized appreciation
(depreciation) is attributable primarily to the tax deferral of losses on wash
sales.
NOTES TO FINANCIAL STATEMENTS
<Page>
NOTE 4 - CAPITAL STOCK
SM&R ALGER TECHNOLOGY FUND Year Ended August 31,
<Table>
<Caption>
2005 2004
------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------
SALES OF CAPITAL SHARES:
Class A 55,007 $ 153,445 76,763 $ 229,178
Class B 20,774 55,752 29,807 87,566
Total sales of capital shares 75,781 209,197 106,570 316,744
REDEMPTIONS OF CAPITAL SHARES OUTSTANDING:
Class A (31,119) (85,571) (9,623) (28,527)
Class B (21,786) (60,031) (8,789) (26,265)
Total redemptions of capital shares outstanding (52,905) (145,602) (18,412) (54,792)
Net increase in capital shares outstanding 22,876 $ 63,595 88,158 $ 261,952
Shares outstanding at beginning of year 352,575 264,417
Shares outstanding at end of year 375,451 352,575
</Table>
SM&R ALGER AGGRESSIVE GROWTH FUND Year Ended August 31,
<Table>
<Caption>
2005 2004
------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------
SALES OF CAPITAL SHARES:
Class A 55,628 $ 306,350 59,498 $ 311,976
Class B 20,571 110,355 29,874 155,115
Total sales of capital shares 76,199 416,705 89,372 467,091
REDEMPTIONS OF CAPITAL SHARES OUTSTANDING:
Class A (39,529) (219,470) (45,089) (234,102)
Class B (11,767) (62,837) (11,191) (59,725)
Total redemptions of capital shares outstanding (51,296) (282,307) (56,280) (293,827)
Net increase in capital shares outstanding 24,903 $ 134,398 33,092 $ 173,264
Shares outstanding at beginning of year 324,529 291,437
Shares outstanding at end of year 349,432 324,529
</Table>
<Page>
SM&R ALGER SMALL-CAP FUND Year Ended August 31,
<Table>
<Caption>
2005 2004
------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------
SALES OF CAPITAL SHARES:
Class A 43,077 $ 281,607 38,835 $ 240,264
Class B 15,746 101,681 18,500 113,845
Total sales of capital shares 58,823 383,288 57,335 354,109
DISTRIBUTIONS FROM NET REALIZED GAINS REINVESTED:
Class A 3,363 22,803 - -
Class B 1,799 12,091 - -
Total distributions from net realized gains reinvested 5,162 34,894 - -
REDEMPTIONS OF CAPITAL SHARES OUTSTANDING:
Class A (30,405) (204,091) (12,631) (79,089)
Class B (14,131) (93,255) (6,919) (42,830)
Total redemptions of capital shares outstanding (44,536) (297,346) (19,550) (121,919)
Net increase in capital shares outstanding 19,449 $ 120,836 37,785 $ 232,190
Shares outstanding at beginning of year 250,410 212,625
Shares outstanding at end of year 269,859 250,410
</Table>
SM&R ALGER GROWTH FUND Year Ended August 31,
<Table>
<Caption>
2005 2004
------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------
SALES OF CAPITAL SHARES:
Class A 59,792 $ 341,796 100,919 $ 564,204
Class B 44,939 258,227 39,259 217,224
Total sales of capital shares 104,731 600,023 140,178 781,428
REDEMPTIONS OF CAPITAL SHARES OUTSTANDING:
Class A (52,731) (309,167) (30,423) (171,455)
Class B (47,829) (284,533) (15,905) (87,519)
Total redemptions of capital shares outstanding (100,560) (593,700) (46,328) (258,974)
Net increase in capital shares outstanding 4,171 $ 6,323 93,850 $ 522,454
Shares outstanding at beginning of year 464,414 370,564
Shares outstanding at end of year 468,585 464,414
</Table>
NOTES TO FINANCIAL STATEMENTS
<Page>
SM&R GROWTH FUND Year Ended August 31,
<Table>
<Caption>
2005 2004
--------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------
SALES OF CAPITAL SHARES:
Class A 219,222 $ 872,857 312,211 $ 1,165,074
Class B 147,296 580,982 210,611 773,751
Class T 850,091 3,477,691 1,036,658 $ 3,969,869
Total sales of capital shares 1,216,609 4,931,530 1,559,480 5,908,694
INVESTMENT INCOME DIVIDENDS REINVESTED:
Class A 16,074 65,260 7,789 30,032
Class B 6,205 24,698 1,519 5,694
Class T 289,329 1,197,822 178,937 703,586
Total investment income dividends reinvested 311,608 1,287,780 188,245 739,312
REDEMPTIONS OF CAPITAL SHARES OUTSTANDING:
Class A (314,879) (1,256,884) (195,072) (732,135)
Class B (193,769) (767,561) (104,786) (393,854)
Class T (3,821,541) (15,666,801) (2,713,858) (10,458,533)
Total redemptions of capital shares outstanding (4,330,189) (17,691,246) (3,013,716) (11,584,522)
Net decrease in capital shares outstanding (2,801,972) $ (11,471,936) (1,265,991) $ (4,936,516)
Shares outstanding at beginning of year 29,534,051 30,800,042
Shares outstanding at end of year 26,732,079 29,534,051
</Table>
<Page>
SM&R EQUITY INCOME FUND Year Ended August 31,
<Table>
<Caption>
2005 2004
--------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------
SALES OF CAPITAL SHARES:
Class A 61,265 $ 1,399,945 113,356 $ 2,427,248
Class B 33,895 749,754 53,879 1,136,604
Class T 93,180 2,200,242 151,449 3,396,666
Total sales of capital shares 188,340 4,349,941 318,684 6,960,518
INVESTMENT INCOME DIVIDENDS REINVESTED:
Class A 6,445 147,032 4,242 92,286
Class B 4,398 97,146 2,882 60,204
Class T 66,099 1,553,475 53,868 1,200,006
Total investment income dividends reinvested 76,942 1,797,653 60,992 1,352,496
DISTRIBUTIONS FROM NET REALIZED GAINS REINVESTED:
Class A 8,390 194,094 - -
Class B 7,989 179,148 - -
Class T 89,584 2,136,120 - -
Total distributions from net realized gains reinvested: 105,963 2,509,362 - -
REDEMPTIONS OF CAPITAL SHARES OUTSTANDING:
Class A (49,225) (1,125,771) (49,600) (1,080,655)
Class B (45,757) (1,023,947) (31,018) (660,900)
Class T (549,488) (12,991,821) (527,147) (11,822,724)
Total redemptions of capital shares outstanding (644,470) (15,141,539) (607,765) (13,564,279)
Net decrease in capital shares outstanding (273,225) $ (6,484,583) (228,089) $ (5,251,265)
Shares outstanding at beginning of year 5,003,840 5,231,929
Shares outstanding at end of year 4,730,615 5,003,840
</Table>
NOTES TO FINANCIAL STATEMENTS
<Page>
SM&R BALANCED FUND Year Ended August 31,
<Table>
<Caption>
2005 2004
------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------
SALES OF CAPITAL SHARES:
Class A 64,985 $ 1,169,814 76,425 $ 1,347,439
Class B 19,642 358,570 38,671 686,949
Class T 47,933 897,004 62,069 1,123,999
Total sales of capital shares 132,560 2,425,388 177,165 3,158,387
INVESTMENT INCOME DIVIDENDS REINVESTED:
Class A 5,203 93,772 3,892 68,100
Class B 2,390 43,470 1,964 34,600
Class T 21,755 405,823 19,570 353,059
Total investment income dividends reinvested 29,348 543,065 25,426 455,759
DISTRIBUTIONS FROM NET REALIZED GAINS REINVESTED:
Class A 928 17,004 2,612 45,377
Class B 585 10,849 1,701 29,862
Class T 4,102 77,859 14,509 259,992
Total distributions from net realized gains reinvested: 5,615 105,712 18,822 335,231
REDEMPTIONS OF CAPITAL SHARES OUTSTANDING:
Class A (45,083) (814,190) (37,694) (667,301)
Class B (20,251) (372,191) (15,042) (264,459)
Class T (115,678) (2,171,188) (100,111) (1,813,917)
Total redemptions of capital shares outstanding (181,012) (3,357,569) (152,847) (2,745,677)
Net increase (decrease) in capital shares outstanding (13,489) $ (283,404) 68,566 $ 1,203,700
Shares outstanding at beginning of year 1,667,990 1,599,424
Shares outstanding at end of year 1,654,501 1,667,990
</Table>
<Page>
SM&R GOVERNMENT BOND FUND Year Ended August 31,
<Table>
<Caption>
2005 2004
------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------
SALES OF CAPITAL SHARES:
Class A 18,584 $ 194,747 23,001 $ 245,659
Class B 9,777 102,362 14,598 155,483
Class T 52,700 544,848 43,336 455,315
Total sales of capital shares 81,061 841,957 80,935 856,457
INVESTMENT INCOME DIVIDENDS REINVESTED:
Class A 2,386 24,982 2,120 22,557
Class B 1,958 20,486 1,997 21,246
Class T 63,169 652,977 55,114 578,455
Total investment income dividends reinvested 67,513 698,445 59,231 622,258
DISTRIBUTIONS FROM NET REALIZED GAINS REINVESTED:
Class A 55 579 2,742 29,006
Class B 59 620 3,736 39,494
Class T 1,522 15,913 72,885 761,648
Total distributions from net realized gains reinvested: 1,636 17,112 79,363 830,148
REDEMPTIONS OF CAPITAL SHARES OUTSTANDING:
Class A (15,341) (160,296) (50,225) (537,556)
Class B (22,880) (239,570) (66,003) (704,682)
Class T (188,305) (1,947,955) (142,256) (1,497,308)
Total redemptions of capital shares outstanding (226,526) (2,347,821) (258,484) (2,739,546)
Net increase (decrease) in capital shares outstanding (76,316) $ (790,307) (38,955) $ (430,683)
Shares outstanding at beginning of year 2,861,096 2,900,051
Shares outstanding at end of year 2,784,780 2,861,096
</Table>
<Page>
SM&R TAX FREE FUND Year Ended August 31,
<Table>
<Caption>
2005 2004
------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------
SALES OF CAPITAL SHARES:
Class A 644 $ 6,928 2,449 $ 26,742
Class B 417 4,500 16,947 182,000
Class T 18,573 197,512 26,360 287,510
Total sales of capital shares 19,634 208,940 45,756 496,252
INVESTMENT INCOME DIVIDENDS REINVESTED:
Class A 1,820 19,542 2,041 22,085
Class B 1,371 14,711 1,579 17,071
Class T 42,933 456,705 44,800 480,180
Total investment income dividends reinvested 46,124 490,958 48,420 519,336
DISTRIBUTIONS FROM NET REALIZED GAINS REINVESTED:
Class A 9 95 105 1,149
Class B 8 81 91 998
Class T 207 2,218 2,343 25,417
Total distributions from net realized gains reinvested: 224 2,394 2,539 27,564
REDEMPTIONS OF CAPITAL SHARES OUTSTANDING:
Class A (4,061) (43,548) (14,496) (157,303)
Class B (1,047) (11,278) (15,423) (166,543)
Class T (63,271) (672,187) (102,397) (1,093,102)
Total redemptions of capital shares outstanding (68,379) (727,013) (132,316) (1,416,948)
Net decrease in capital shares outstanding (2,397) $ (24,721) (35,601) $ (373,796)
Shares outstanding at beginning of year 1,327,176 1,362,777
Shares outstanding at end of year 1,324,779 1,327,176
</Table>
<Page>
SM&R PRIMARY FUND Year Ended August 31,
<Table>
<Caption>
2005 2004
----------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------
Sales of capital shares 713,272 $ 710,223 2,094,512 $ 2,073,568
Investment income dividends reinvested 486,077 484,509 203,831 201,793
Redemptions of capital shares outstanding (2,313,753) (2,310,825) (3,554,816) (3,519,268)
Net increase (decrease) in capital shares outstanding (1,114,404) $ (1,116,093) (1,256,473) $ (1,243,907)
Shares outstanding at beginning of year 26,421,947 27,678,420
Shares outstanding at end of year 25,307,543 26,421,947
</Table>
SM&R MONEY MARKET FUND Year Ended August 31,
<Table>
<Caption>
2005 2004
------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------
Sales of capital shares 220,001,683 $ 220,001,683 232,967,298 $ 232,967,298
Investment income dividends reinvested 1,729,264 1,729,264 450,077 450,077
Redemptions of capital shares outstanding (240,042,733) (240,042,733) (241,684,944) (241,684,944)
Net decrease in capital shares outstanding (18,311,786) $ (18,311,786) (8,267,569) $ (8,267,569)
Shares outstanding at beginning of year 95,201,534 103,469,103
Shares outstanding at end of year 76,889,748 95,201,534
</Table>
RECLASSIFICATION OF CAPITAL ACCOUNTS:
Accounting principles generally accepted in the United States of America require
that certain components of net assets be reclassified between financial and tax
reporting. These reclassifications have no net effect on net assets or net asset
value per share. For the year ended August 31, 2005, each series recorded the
following reclassification to the accounts listed below:
<Table>
<Caption>
ACCUMULATED NET ACCUMULATED NET
PAID IN CAPITAL INVESTMENT LOSS REALIZED GAIN (LOSS)
--------------- --------------- --------------------
Alger Technology Fund $ (15,729) $ 15,729 $ -
Alger Aggressive Growth Fund $ (16,878) $ 16,878 $ -
Alger Small Cap Fund $ $ 29,779 $ (29,779)
Alger Growth Fund $ (16,159) $ 16,159 $ -
Government Bond Fund $ $ 256 $ (256)
</Table>
NOTES TO FINANCIAL STATEMENTS
<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:
ALGER SMALL-CAP
<Table>
<Caption>
2005 2004
- --------------------------------------------------------------------------------
CLASS A
Distributions paid from:
Ordinary income - -
Long-term capital gain $ 26,456 -
---------------------------
$ 26,456 -
===========================
CLASS B
Distributions paid from:
Ordinary income - -
Long-term capital gain $ 12,091 -
---------------------------
$ 12,091 -
===========================
</Table>
SM&R GROWTH FUND
<Table>
<Caption>
2005 2004
- --------------------------------------------------------------------------------
CLASS A
Distributions paid from:
Ordinary income $ 65,264 $ 30,045
Long-term capital gain - -
---------------------------
$ 65,264 $ 30,045
===========================
CLASS B
Distributions paid from:
Ordinary income $ 24,873 $ 5,732
Long-term capital gain - -
---------------------------
$ 24,873 $ 5,732
===========================
CLASS T
Distributions paid from:
Ordinary income $ 1,228,147 $ 720,998
Long-term capital gain - -
---------------------------
$ 1,228,147 $ 720,998
===========================
</Table>
SM&R EQUITY INCOME FUND
<Table>
<Caption>
2005 2004
- --------------------------------------------------------------------------------
CLASS A
Distributions paid from:
Ordinary income $ 147,054 $ 92,552
Long-term capital gain 194,102 -
---------------------------
$ 341,156 $ 92,552
===========================
CLASS B
Distributions paid from:
Ordinary income $ 97,366 $ 60,397
Long-term capital gain $ 179,300 -
---------------------------
$ 276,666 $ 60,397
===========================
CLASS T
Distributions paid from:
Ordinary income $ 1,611,802 $ 1,247,477
Long-term capital gain 2,210,425 -
---------------------------
$ 3,822,227 $ 1,247,477
===========================
</Table>
<Page>
SM&R BALANCED FUND
<Table>
<Caption>
2005 2004
- --------------------------------------------------------------------------------
CLASS A
Distributions paid from:
Ordinary income $ 103,785 $ 68,108
Long-term capital gain 6,983 45,377
---------------------------
$ 110,768 $ 113,485
===========================
CLASS B
Distributions paid from:
Ordinary income $ 50,545 $ 35,072
Long-term capital gain 4,508 30,287
---------------------------
$ 55,053 $ 65,359
===========================
CLASS T
Distributions paid from:
Ordinary income $ 467,355 $ 365,311
Long-term capital gain 32,657 264,673
---------------------------
$ 500,012 $ 629,984
===========================
</Table>
SM&R GOVERNMENT BOND FUND
<Table>
<Caption>
2005 2004
- --------------------------------------------------------------------------------
CLASS A
Distributions paid from:
Ordinary income $ 24,908 $ 28,389
Long-term capital gain 579 23,324
---------------------------
$ 25,487 $ 51,713
===========================
CLASS B
Distributions paid from:
Ordinary income $ 20,641 $ 29,374
Long-term capital gain 620 31,759
---------------------------
$ 21,261 $ 61,133
===========================
CLASS T
Distributions paid from:
Ordinary income $ 660,768 $ 739,715
Long-term capital gain 15,913 619,475
---------------------------
$ 676,681 $ 1,359,190
===========================
</Table>
SM&R TAX FREE FUND
<Table>
<Caption>
2005 2004
- --------------------------------------------------------------------------------
CLASS A
Distributions paid from:
Exempted interest dividends $ 18,007 $ 20,893
Ordinary income 1,535 1,193
Long-term capital gain 95 1,149
---------------------------
$ 19,637 $ 23,235
===========================
CLASS B
Distributions paid from:
Exempted interest dividends $ 15,714 $ 18,515
Ordinary income 1,348 1,057
Long-term capital gain 94 1,146
---------------------------
$ 17,156 $ 20,718
===========================
CLASS T
Distributions paid from:
Exempted interest dividends $ 445,596 $ 483,178
Ordinary income 37,974 27,717
Long-term capital gain 2,336 26,744
---------------------------
$ 485,906 $ 537,639
===========================
</Table>
SM&R PRIMARY FUND
<Table>
Distributions paid from:
Ordinary income $ 511,536 $ 222,772
---------------------------
$ 511,536 $ 222,772
===========================
</Table>
SM&R MONEY MARKET FUND
<Table>
Distributions paid from:
Ordinary income $ 1,828,191 $ 483,068
---------------------------
$ 1,828,191 $ 483,068
===========================
</Table>
<Page>
Tax Components of Net Assets: As of August 31, 2005, the components of net
assets on a tax basis were as follows:
<Table>
ALGER TECHNOLOGY FUND
Unrealized appreciation of investments $ 158,992
Capital loss carryforward (270,964)
Paid-in-capital 1,245,889
NET ASSETS $ 1,133,917
ALGER AGGRESSIVE GROWTH FUND
Unrealized appreciation of investments 245,504
Capital loss carryforward (110,202)
Paid-in-capital 1,962,686
NET ASSETS $ 2,097,988
ALGER SMALL-CAP FUND
Undistributed ordinary income $ 81,092
Unrealized appreciation of investments 312,832
Undistributed capital gains 79,462
Paid-in-capital 1,524,975
NET ASSETS $ 1,998,361
ALGER GROWTH FUND
Unrealized appreciation of investments $ 204,937
Capital loss carryforward (62,633)
Paid-in-capital 2,817,103
NET ASSETS $ 2,959,407
GROWTH FUND
Undistributed ordinary income $ 171,424
Unrealized appreciation of investment 25,870,441
Capital loss carryforward (17,689,871)
Paid-in-capital 102,900,887
NET ASSETS $ 111,252,881
</Table>
<Page>
<Table>
EQUITY INCOME FUND
Undistributed ordinary income $ 304,338
Unrealized appreciation of investments 17,427,350
Undistributed capital gains 8,101,747
Paid-in-capital 86,743,139
NET ASSETS $ 112,576,574
BALANCED FUND
Undistributed ordinary income $ 122,353
Unrealized appreciation of investments 3,976,986
Undistributed capital gains 1,199,066
Paid-in-capital 25,624,452
NET ASSETS $ 30,922,857
GOVERNMENT BOND FUND
Post-October capital loss deferral $ (177,508)
Undistributed ordinary income 522
Unrealized appreciation of investments 57,288
Capital loss carryforward (140)
Paid-in-capital 29,005,874
NET ASSETS $ 28,886,036
TAX FREE FUND
Undistributed ordinary income $ 1,100
Unrealized appreciation of investments 575,943
Paid-in-capital 13,482,282
NET ASSETS $ 14,059,325
PRIMARY FUND
Unrealized appreciation of investments $ 74,527
Capital loss carryforward (141,340)
Paid-in-capital 25,311,906
NET ASSETS $ 25,245,093
</Table>
Under the current tax law, capital losses realized after October 31st, prior to
the funds' fiscal year end may be deferred as occurring on the first day of the
following fiscal year.
INFORMATION ABOUT THE PORTFOLIO HOLDINGS (UNAUDITED)
The funds file their complete schedule of holdings with the SEC for the first
and third quarters of each fiscal year on Form N-Q. The funds' Form N-Q is
available on the SEC's website, beginning with the November 30, 2004 report, at
http://www.sec.gov. You may review and make copies at the SEC's Public
Reference Room in Washington, D.C. You may also obtain copies after paying a
duplicating fee by writing the SEC's Public Reference Section, Washington, D.C.
20549-0102 or by electronic request to publicinfo@sec.gov. A copy of the
quarterly holdings report is available, without charge, upon request, by calling
1-800-231-4639.
NOTES TO FINANCIAL STATEMENTS
<Page>
SM&R REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM
REPORT OF INDEPENDENT REGISTERED PUBLIC 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. comprising of SM&R Alger Technology Fund, SM&R
Alger Aggressive Growth Fund, SM&R Small-Cap Fund, SM&R Alger Growth
Fund, SM&R Growth Fund, SM&R Equity Income Fund, SM&R Balanced Fund,
SM&R Government 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, 2005, and 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 Growth, Equity
Income and Balanced Funds for the year ended December 31, 2000, for the
period January 1, 2001 to August 31, 2001 and for the four years in the
period ended August 31, 2005). These financial statements and financial
highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements
and financial highlights based on our audits.
We conducted our audits in accordance with the 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. We were not engaged to
perform an audit of the Trust's internal control over financial
reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the Trust's internal control over
financial reporting. Accordingly, we express no such opinion. An audit
also 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, 2005, by
correspondence with the custodian and brokers or by other appropriate
auditing procedures where replies from broker were not received. 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,
2005, 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 Growth, Equity Income and Balanced
Funds for the year ended December 31, 2000, for the period January 1,
2001 to August 31, 2001 and for the four years in the period ended
August 31, 2005), in conformity with accounting principles generally
accepted in the United States of America.
Tait, Weller & Baker LLP
Philadelphia, Pennsylvania
September 16, 2005
<Page>
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.
<Table>
<Caption>
INDEPENDENT DIRECTORS
- ------------------------------------------------------------------------------------------------------------------------------------
TERM OF OFFICE NUMBER OF PORTFOLIOS
POSITION(S) HELD AND LENGTH PRINCIPAL OCCUPATIONS(S) DURING IN FUND COMPLEX
NAME & AGE ADDRESS WITH FUND OF TIME SERVED PAST 5 YEARS OVERSEEN BY DIRECTOR
- ------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT DIRECTORS
Edwin K. Nolan 2450 South Shore Blvd. Director Indefinite - Investor and Attorney, 19*
Age 62 League City, TX 77573 Nominating Since 11/97 Law Offices, Edwin K. Nolan,
Committee Indefinite P.C.
Audit Committee Since 11/00 - Director/Owner of Canyon Lake
Indefinite Aviation, Inc.
Since 11/03 - Director of Hancock Mini Mart,
Inc.
Robert V. Shattuck 2450 South Shore Blvd. Director Indefinite - Attorney, Law Offices, 19*
Age 63 League City, TX 77573 Nominating Since 11/97 Robert V. Shattuck, Jr.
Committee Indefinite
Since 11/00
Donald P. Stevens 2450 South Shore Blvd. Director Indefinite - Assistant to the President for 19*
Age 59 League City, TX 77573 Nominating Since 9/00 Governmental Relations of the
Committee Indefinite University of Texas Medical
Since 11/00 Branch, Galveston, TX
- Vice President and Director,
Jamail Galveston Foundation (a
family charitable foundation)
Steven H. Stubbs 2450 South Shore Blvd. Director Indefinite - President and Director of 19*
Age 65 League City, TX 77573 Audit Committee Since 9/00 Dancing Rabbit Press, Inc.
Chairman Indefinite (a publishing company)
Since 8/03 - Director, Neshoba County
Public Library
INTERESTED DIRECTORS
Michael W. McCroskey(1) 2450 South Shore Blvd. President & Indefinite - President, CEO, Director and 19*
Age 62 League City, TX 77573 Director Since 8/94 member of Executive Committee
of Securities Management and
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^
Lea McLeod Matthews(2) 2450 South Shore Blvd. Director Indefinite - Psychology Intern, Vanderbilt 19*
Age 43 League City, TX 77573 Since 8/94 University Medical Center,
Division of Adult Psychiatry
8/05-present
- Communications Specialist National
Western Life Insurance Company
5/02 8/05
- 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(3,2) 2450 South Shore Blvd. Director Indefinite - Housewife, Personal 19*
Age 68 League City, TX 7757 Since 11/97 Investments
- Director of Moody Gardens,
Inc. (a charitable
organization)
Jamie G. Williams(4) 2450 South Shore Blvd. Director Indefinite - Regional Grants Director, 19*
Age 59 League City, TX 77573 Since 11/97 The Moody Foundation (a
charitable foundation)
- Academic Language Therapist
and Educational Consultant
- President's Advisory Council,
Dallas Center for Performing
Arts Foundation (an
organization that supports the
arts in Dallas, TX area)
OFFICERS
Michael W. McCroskey 2450 South Shore Blvd. President & Indefinite - SEE INTERESTED DIRECTOR 19
Age 62 League City, TX 77573 Director | Since 8/94 TABLE ABOVE
Brenda T. Koelemay 2450 South Shore Blvd. Vice President & Indefinite - Vice President & Treasurer 19
Age 50 League City, TX 77573 Treasurer | Since 7/92 of SM&R
Teresa E. Axelson 2450 South Shore Blvd. Vice President & Indefinite - Vice President & Secretary of 19
Age 56 League City, TX 77573 Secretary | Since 5/83 SM&R
Debbie Hankins 2450 South Shore Blvd. Chief Compliance Indefinite - Manager & Supervisor, 19
Age 49 League City, TX 77573 Officer | Since 10/04 Financial Reporting of SM&R
and Assistant Treasurer
</Table>
INTERESTED DIRECTOR RELATIONSHIP
(1) Mr. McCroskey serves as an officer and director of SM&R, 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 L. 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 23.7% of the outstanding common shares of American
National, and he serves as Chairman of the Board, President, 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. Matthews is the daughter of Fund director Ann McLeod Moody.
(3) Ms. Moody is the spouse of Robert L. Moody. See footnote 2 above. Ms. Moody
is the mother of Fund director Lea McLeod Matthews.
(4) Ms. Williams is an employee of The Moody Foundation, which owns
approximately 23.7% 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.
| Positions also held with American National Investment Accounts, Inc.,
another investment company advised by SM&R.
<Page>
DIRECTORS
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
Debbie L. Hankins, Chief Compliance Officer
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
REGISTERED PUBLIC ACCOUNTING FIRM
Tait, Weller & Baker
1818 Market Street, Suite 2400
Philadelphia, PA 19103
FUNDS LISTING
[SM&R ALGER LOGO]
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
10/05 9202 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.
Item 2 Code of Ethics.
(a) The registrant has adopted a code of ethics that applies to the
registrants principal executive officer, principal financial
officer, principal accounting officer or controller, or persons
performing similar functions (the Code).
(b) For purposes of this Item, the term code of ethics means
written standards that are reasonably designed to deter wrong-
dong and 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 a registrant
files with, or submits to, the Commission and in other
public communications made by the registrant;
(3) Compliance with applicable governmental laws, rules,
and regulations;
(4) The prompt internal reporting of violations of the Code
to an appropriate person or persons identified in the
Code; and
(5) Accountability for adherence to the Code.
(c) There were no amendments to the Code during the perid covered
by the report.
(d) The registrant did not grant any waivers, including implicit
waivers, from any provisions of the Code to the principal executive
officer, principal financial officer, principal accounting officer
or controller, or persons performing similar functions during the
period covered by this report.
(e) Not applicable
(f) See item 12 (a) (1) regarding the filing of the Code of Ethics for
Principal Executive and Principal Financial Officers of SM&R
Investments, Inc.
Item 3 Audit Committee Financial Expert.
(a) The Board of Directors has determined that the registrant has at
least one Audit committee financial expert serving on its Audit
Committee.
(b) 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.
(a) Audit fees for SM&R Investments, Inc. totaled approximately $79,000
in 2005 and approximately $76,800 in 2004, including fees associated
with the annual audit and filings of the Portfolios Form N-1A and
Form N-SAR.
(b) None
(c) Fees for tax services to SM&R Investments, Inc., including tax
compliance, tax advice and tax planning, totaled approximately
$8,250 in 2005 and $8,250 in 2004.
(d) None
(e) (1) The registrants audit committee has adopted policies and
procedures that require the audit committee to pre-approve
all audit and non-audit services provided to the registrant
by the principal accountant.
(2) All of the services described in paragraphs (b) through (d)
of Item 4 were approved by the audit committee.
(f) All services performed on the engagement to audit the registrants
financial statements for the most recent fiscal year-end were
performed by the principal accountants full-time, permanent
employees.
(g) None
(h) The registrants independent auditor did not provide any non-audit
services to the registrants investment adviser or any entity
controlling, controlled by or controlled with the registrants
investment adviser that provides ongoing services to the registrant.
Item 5 Audit Committee of Listed Registrants.
Not applicable
Item 6 Schedule of Investments.
The Schedule of Investments is filed under Item 1 of this form.
Item 7 Disclosure of Proxy Voting Policies and Procedures for Closed-end
Management Investment Companies.
Not applicable
Item 8 Portfolio Managers of Closed-end Management Investment Companies.
Not applicable
Item 9 Purchases of Equity Securities by Closed-end Management Investment
Company and Affiliated Purchasers.
Not applicable
Item 10 Submission of Matters to a Vote of Security Holders.
There have been no material changes to the procedures by which shareholders
may recommend nominees to the registrants board of directors during this
period.
Item 11 Controls and Procedures.
(a) As of October 28, 2005, 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 October 28, 2005, 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.
(b) 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
filing of this report, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Item 12 Exhibits.
(a) (1) Code of Ethics pursuant to Item 2 of Form N-CSR is filed and
attached hereto.
(2) Certifications pursuant to Rule 30a-2(a) under the
Investment Act of 1940 are filed and attached hereto.
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 are filed and attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SM&R Investments, Inc.
By: \S\ Michael W. McCroskey
-------------------------------------
Principal Executive Officer
Date: November 8, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registant and in the capacities and on the
dates indicated.
By: \S\ Michael W. McCroskey
-------------------------------------
Principal Executive Officer
Date: November 8, 2005
By: \S\ Brenda T. Koelemay
-------------------------------------
Principal Financial Officer
Date: November 8, 2005