<PAGE>
SECURITY FUNDS
ANNUAL REPORT
DECEMBER 31, 1996
SECURITY INCOME FUND
- CORPORATE BOND SERIES
- U.S. GOVERNMENT SERIES
- LIMITED MATURITY BOND SERIES
- GLOBAL AGGRESSIVE BOND SERIES
- HIGH YIELD BOND SERIES
SECURITY TAX-EXEMPT FUND
SECURITY CASH FUND
[SDI LOGO]
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PRESIDENT'S LETTER
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SECURITY FUNDS
FEBRUARY 15, 1997
[PHOTO OF JOHN CLELAND]
JOHN CLELAND
Dear Shareholder:
1996 was not a particularly good year for fixed income investors. Interest
rates fluctuated dramatically throughout the year, with the thirty-year Treasury
bond beginning the year at 5.94% and ending it 70 basis points higher at 6.64%.
Only in the global fixed income markets did we see attractive returns. The U.S.
markets continued to be ruled by investors' fears about the reemergence of
inflationary pressures and expectations as to the future rate of economic
growth. Although growth was moderate and inflation remained well under control,
the fear, rather than the fact, dominated bond market movements.
1997 OUTLOOK FOR FIXED INCOME
We believe the fixed income outlook for 1997 is much better. We expect that
last year's moderate inflation levels will remain in place for some time.
Consumer spending, a primary force behind rising inflation, will be restrained
by the high household debt levels now in place. Although many people are
experiencing the "wealth effect" of strong stock markets, these individuals tend
to be savers rather than spenders and are content to watch their earnings grow.
BALANCED BUDGET PROSPECTS IMPROVING
A strong positive for bond markets is the likelihood that a balanced budget
proposal will become reality in 1997. Sentiment is strong on both sides of the
congressional aisle, and since 1997 is not an election year, the possibility of
bipartisan agreement is greater than usual. Should a balanced budget package
become a reality, the promise of reduced Federal spending lowers the potential
for inflation and pleases fixed income investors.
DECLINING GLOBAL INTEREST RATES
An additional plus for fixed income is the outlook for declining global
interest rates as inflation drops in many countries around the world, and as the
European nations work to meet criteria for entry into the European Monetary
Union. Many of these nations have reduced their debt levels, allowing interest
rates to come down in the process. They will continue along this track as the
January, 1998 date for selection of participants in the EMU approaches.
In our opinion, all of these factors combined make an excellent backdrop
for favorable fixed income performance in the year ahead. As always, we invite
your comments and questions.
Sincerely,
John Cleland
President, Security Funds
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MANAGERS' COMMENTARY
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SECURITY FUNDS
FEBRUARY 15, 1997
SECURITY INCOME FUND
CORPORATE BOND SERIES
At the beginning of 1996 the Corporate Bond Series' average maturity and
duration were long relative to our benchmark index, anticipating a continuation
of the previous year's low inflation, moderate economic growth and declining
interest rates. At that time the yield on the thirty-year Treasury bond was
5.94%. The first major economic release for the year, the January employment
figures, shocked bond investors when it showed much higher levels of employment
than expected. This set the tone for a year of uncertainty about economic growth
and inflation. The long Treasury bond rose to a high of almost 7.20% in June and
again in July. It closed the year down from that level, but at 6.64%, it
remained well above its opening level for the year.
EARLY STEPS TO READJUST THE PORTFOLIO
In February we began shortening the maturity structure of the portfolio to be
more in line with that of the benchmark index and with our peers. In addition,
we started purchasing issues in three newly-approved asset classes, including
U.S. dollar-denominated foreign bonds ("Yankee" bonds), high yield bonds and
mortgage-backed securities. These proved to be wise moves, as the high yield and
mortgage sectors outperformed corporate bonds throughout the year. For most of
1996 mortgage-backed securities made up about 15% of the portfolio and high
yield issues approximately 17%.
The exposure to Yankee bonds also did well, with about 12% of the portfolio
invested in such issues. The largest of these holdings is Banco Santander, one
of the largest banks in Spain with assets in excess of $132 billion (U.S.
dollars). Others in the Yankee bond sector include Abbey National Bank PLC,
Malayan Bank of New York, Panamerican Beverage Company and Banco Centrale
Hispanoamericano.(1)
HIGH YIELD HOLDINGS IN THE SECOND HALF OF THE YEAR
After we realigned the portfolio's maturity structure early in the year,
performance was strong in the second and third quarters as we outperformed both
our benchmark index and our peer group. The fourth quarter was a different
story. Performance was negatively impacted by our investment in Marvel Holdings,
Inc. bonds, which declined substantially in value after the company announced
poor earnings warning investors of liquidity problems. Another high yield issue,
Home Holdings, also lost considerable value after the company became involved in
litigation surrounding the lease on its Maiden Lane headquarters in New York.
Given the negative contribution of these two high yield bond positions, we have
refined our strategy for using high yield issues in the portfolio.
CORPORATE BOND SERIES
12-31-96
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
LEHMAN BROTHERS MUTUAL FUND
CORPORATE BOND SERIES A RATED CORPORATE INDEX
Dec-86 10,000.00 10,000.00
Mar-87 9,703.81 10,238.19
Jun-87 9,723.63 9,998.72
Sep-87 9,507.70 9,636.25
Dec-87 9,912.07 10,254.88
Mar-88 10,148.80 10,709.96
Jun-88 10,207.11 10,829.28
Sep-88 10,412.20 11,084.10
Dec-88 10,552.90 11,199.96
Mar-89 10,669.88 11,334.85
Jun-89 11,299.14 12,232.34
Sep-89 11,333.50 12,391.71
Dec-89 11,604.98 12,778.23
Mar-90 11,614.62 12,666.49
Jun-90 12,036.94 13,160.90
Sep-90 11,840.35 13,158.24
Dec-90 12,366.74 13,679.94
Mar-91 12,837.14 14,263.89
Jun-91 13,071.20 14,547.56
Sep-91 13,745.07 15,401.42
Dec-91 14,361.26 16,213.50
Mar-92 14,318.75 16,095.03
Jun-92 14,851.65 16,794.18
Sep-92 15,462.72 17,587.34
Dec-92 15,646.32 17,622.01
Mar-93 16,606.87 18,511.92
Jun-93 17,221.42 19,130.69
Sep-93 17,977.33 19,795.61
Dec-93 17,791.61 19,765.82
Mar-94 16,869.03 19,069.77
Jun-94 16,277.95 18,769.78
Sep-94 16,227.66 18,907.48
Dec-94 16,321.15 18,990.13
Mar-95 17,093.77 20,114.83
Jun-95 18,000.28 21,610.95
Sep-95 18,342.75 22,120.25
Dec-95 19,295.99 23,212.59
Mar-96 18,602.69 22,613.56
Jun-96 18,593.95 22,714.57
Sep-96 18,996.48 23,168.14
Dec-96 19,195.17 23,974.49
$10,000 OVER TEN YEARS
This chart assumes a $10,000 investment in Class A shares of Corporate Bond
Series on December 31, 1986, and reflects deduction of the 4.75% sales load. On
December 31, 1996, the value of your investment in the Series' Class A shares
(with dividends reinvested) would have grown to $19,195. By comparison, the same
$10,000 investment would have grown to $23,974 based on the performance of the
Lehman Brothers Mutual Fund A Rated Corporate Index.
The performance illustrated above is based on the performance of Class A shares.
The performance of Class B shares will be greater or less than the performance
shown for Class A shares as a result of the different loads and fees associated
with an investment in Class B shares.
The performance data illustrated above reflects past performance which is not
predictive of future results.
Investments cannot be made directly in an index. The Lehman Brothers Mutual Fund
A Rated Corporate Index includes all corporate debt securities rated A or
higher.
CORPORATE BOND SERIES
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1996
CLASS A SHARES CLASS B SHARES
1 Year -5.69% 1 Year -6.29%
5 Years 4.96% Since Inception -0.28%
10 Years 6.74% (10-19-93)
The performance data above represents past performance which is not predictive
of future results. For Class A shares these figures reflect deduction of the
maximum sales charge of 4.75%. For Class B shares the total return includes
deduction of the maximum contingent deferred sales charge.
2
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MANAGERS' COMMENTARY
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SECURITY FUNDS
FEBRUARY 15, 1997
In order to reduce the impact of negative performance by any one issue, we are
increasing the number of individual investments in the sector while keeping our
overall sector allocation unchanged. This has the effect of limiting the fund's
exposure to any one position to around 1% of portfolio assets.
THOUGHTS ABOUT 1997
We believe the outlook for bonds in 1997 is better than at this time in 1996.
Economic growth should continue at a slow but steady pace, restrained somewhat
by slow consumer spending as individuals concentrate on reducing their debt
burdens. The Federal Reserve Open Market Committee will continue its vigilant
stance against inflation. Aided by falling global inflation and interest rates,
we believe the U.S. bond markets should be able to post a near-average
performance year.
Greg Hamilton
Portfolio Manager
(1) Investing in foreign countries may involve risks, such as non-uniform
accounting practices and political instability, not associated with investing
exclusively in the U.S.
3
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MANAGERS' COMMENTARY
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SECURITY FUNDS
FEBRUARY 15, 1997
U.S. GOVERNMENT SERIES
The U.S. Government securities markets had mixed results in 1996, as the
interest rate on the long Treasury bond rose from 5.94% at the beginning of the
year to 6.64% at its close. Its total return for the year was -2.3%, while over
the same period the two-year Treasury note gained 5.2%. The U.S. Government
Series, which contains issues of varying maturities, fell in between the two
with a total return for the year of 1.26%.(1)
MORTGAGE-BACKED SECURITIES REPRESENTATION
About 30% of the portfolio was invested in mortgage-backed securities (primarily
GNMA's) most of the year. These issues perform well in bear markets because
generally as interest rates rise fewer people refinance their home mortgages.
This reduces prepayments on mortgage-backed securities and helps stabilize their
prices. The issues we hold have coupon rates ranging from 7.5% to 8.5%, adding
an attractive income stream to the portfolio's return.
REALIGNMENT OF MATURITY STRUCTURE
In February and March the yield on the thirty-year Treasury bond rose from 6.02%
to 6.64%, its largest price decline of the year. The U.S. Government Series
contained a number of long-maturity issues at the beginning of February which
hurt portfolio performance at that time. Part of these issues were sold in
March, which helped the balance of the year, but of course could not repair the
damage done before the sales.
PLANS FOR 1997
We believe that interest rates in the first half of 1997 have a good chance of
declining as economic activity slows somewhat and inflation remains well under
control. We may increase the percentage of the portfolio holdings in GNMA
mortgage-backed security issues, as we feel that the greatest portion of total
return in 1997 will come from the income stream provided by the securities. The
duration of the portfolio will probably remain close to its current level of
about five years. Although the year ahead may not be an outstanding one for
fixed income instruments, we believe it will be at least an average one for
total returns.
Steven M. Bowser
Portfolio Manager
(1) Performance figures are based on Class A shares and do not reflect deduction
of the sales charge.
U.S. GOVERNMENT SERIES
12-31-96
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
LEHMAN BROTHERS
U.S. GOVERNMENT FUND GOVERNMENT BOND INDEX
Dec-86 10,000.00 10,000.00
Mar-87 9,695.19 10,117.61
Jun-87 9,651.76 9,941.33
Sep-87 9,536.30 9,673.52
Dec-87 9,888.91 10,219.24
Mar-88 10,127.06 10,556.47
Jun-88 10,291.91 10,656.38
Sep-88 10,454.04 10,836.28
Dec-88 10,505.92 10,938.28
Mar-89 10,615.66 11,054.50
Jun-89 11,225.05 11,943.56
Sep-89 11,372.80 12,042.24
Dec-89 11,746.96 12,495.17
Mar-90 11,737.54 12,339.91
Jun-90 12,139.99 12,771.22
Sep-90 12,296.99 12,877.35
Dec-90 12,897.97 13,585.14
Mar-91 13,219.23 13,879.19
Jun-91 13,441.26 14,066.86
Sep-91 14,080.07 14,870.35
Dec-91 14,677.02 15,667.87
Mar-92 14,495.80 15,393.80
Jun-92 14,921.60 16,002.98
Sep-92 15,248.08 16,792.31
Dec-92 15,401.64 16,799.94
Mar-93 16,112.26 17,558.69
Jun-93 16,728.69 18,066.80
Sep-93 17,281.45 18,652.97
Dec-93 17,209.28 18,590.11
Mar-94 16,534.56 18,030.26
Jun-94 16,135.91 17,823.48
Sep-94 16,015.98 17,899.08
Dec-94 16,083.04 17,963.26
Mar-95 16,790.08 18,808.53
Jun-95 18,023.72 19,975.47
Sep-95 18,538.13 20,327.70
Dec-95 19,598.25 21,256.22
Mar-96 18,947.54 20,775.73
Jun-96 18,968.82 20,873.51
Sep-96 19,346.47 21,226.26
Dec-96 19,845.79 21,845.58
$10,000 OVER TEN YEARS
This chart assumes a $10,000 investment in Class A shares of U.S. Government
Series on December 31, 1986, and reflects deduction of the 4.75% sales load. On
December 31, 1996, the value of your investment in the Series' Class A shares
(with dividends reinvested) would have grown to $19,846. By comparison, the same
$10,000 investment would have grown to $21,846 based on the performance of the
Lehman Brothers Government Bond Index.
The performance illustrated above is based on the performance of Class A shares.
The performance of Class B shares will be greater or less than the performance
shown for Class A shares as a result of the different loads and fees associated
with an investment in Class B shares.
The performance data illustrated above reflects past performance which is not
predictive of future results.
The Lehman Brothers Government Bond Index is made up of all public obligations
of the U.S. Treasury, excluding flower bonds and foreign-targeted issues, all
publicly issued debt of U.S. Government agencies and quasi-federal corporations,
and corporate debt guaranteed by the U.S. Government. Investments cannot be made
directly in an index.
U.S. GOVERNMENT SERIES
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1996
CLASS A SHARES CLASS B SHARES
1 Year -3.59% 1 Year -4.97%
5 Years 5.19% Since Inception 1.95%
10 Years 7.10% (10-19-93)
The performance data above represents past performance which is not predictive
of future results. For Class A shares these figures reflect deduction of the
maximum sales charge of 4.75%. For Class B shares the total return includes
deduction of the maximum contingent deferred sales charge.
4
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MANAGERS' COMMENTARY
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SECURITY FUNDS
FEBRUARY 15, 1997
LIMITED MATURITY BOND SERIES
In its second year of existence the Limited Maturity Bond Series is doing what
it was designed to do--provide lower volatility and downside protection than
longer-maturity funds in periods of rising interest rates. In a year in which
the thirty-year Treasury bond had a total return of -2.3%, the portfolio's total
return of 2.09% looked quite good.(1)
USE OF MORTGAGE-BACKED SECURITIES IN THE PORTFOLIO
One way to reduce volatility without sacrificing the income stream is through
the use of certain mortgage-backed securities, which make up just over 20% of
the portfolio. Our strategy in this portion of the Limited Maturity portfolio
has been to combine seasoned premium mortgage-backed issues having coupons in
the 8% to 9% range with other lower-coupon discounted issues which we consider
to be undervalued. The combination of these two provides both defensive price
movement characteristics in periods of modest interest rate fluctuations and
yields generally 1/2 to 1% higher than Treasury bonds.
CORPORATE HOLDINGS IN THE FUND
In the investment grade corporate bond portion of the portfolio we are using
fewer "Yankee" bonds (dollar-denominated issues of foreign companies) than in
the other fixed income funds, and buying more domestic industrial issues. These
bonds, issued by companies such as Aluminum Company of America and Ford Motor
Company, have historically shown less price volatility than bonds in the finance
and utility sectors of the market.
The high yield portion, currently about 18% of the fund, will generally provide
a substantial income stream to enhance the total return. In the fourth quarter
of 1996, however, performance was hurt by our Marvel Holdings, Inc. bonds which
declined substantially in value after the company announced much lower than
expected earnings, coupled with liquidity problems. We sold the bonds in early
December and the company subsequently filed for bankruptcy protection. Another
high yield issue, Home Holdings, also lost considerable value and hurt overall
performance. The significant performance drag created by these two issues has
led us to take steps to lessen the impact of any future events in the high yield
sector by limiting each holding to 1% or less of the total portfolio. We will
continue to concentrate on the upper-tier rating brackets of the high yield
market.
OUTLOOK FOR 1997
We believe that in 1997 interest rates will continue to fluctuate, although
probably not as widely as in 1996. We plan to continue the volatility-reducing
strategies outlined above, possibly selling some of the longer maturity issues
in the portfolio as well. If 1997 turns out to have total returns in an average
range of 5% to 7%, the strong income component will contribute a greater part of
the return than will price appreciation.
Greg Hamilton, Portfolio Manager
(1) Performance figures are based on Class A shares and do not reflect deduction
of the sales charge.
LIMITED MATURITY BOND SERIES
12-31-96
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
LIMITED MATURITY LEHMAN BROTHERS
BOND SERIES INTERMEDIATE TERM
CORPORATE BOND INDEX
10,000.00 10,000.00
Jan-95 9,552.38 10,192.00
Feb-95 9,748.77 10,464.13
Mar-95 9,798.38 10,533.19
Apr-95 9,932.95 10,695.40
May-95 10,300.75 11,103.97
Jun-95 10,358.89 11,193.91
Jul-95 10,309.05 11,180.47
Aug-95 10,403.62 11,319.11
Sep-95 10,487.92 11,424.38
Oct-95 10,523.63 11,559.19
Nov-95 10,658.84 11,752.23
Dec-95 10,762.43 11,901.48
Jan-96 10,898.96 12,012.16
Feb-96 10,777.01 11,819.97
Mar-96 10,705.57 11,734.86
Apr-96 10,650.01 11,667.98
May-96 10,642.59 11,649.31
Jun-96 10,742.60 11,792.59
Jul-96 10,772.03 11,822.08
Aug-96 10,771.66 11,817.35
Sep-96 10,964.75 12,022.97
Oct-96 11,017.89 12,288.68
Nov-96 11,056.54 12,497.58
Dec-96 10,987.43 12,375.11
$10,000 OVER THE LIFE OF THE SERIES
This chart assumes a $10,000 investment in Class A shares of Limited Maturity
Bond Series on January 17, 1995 (date of inception), and reflects deduction of
the 4.75% sales load. On December 31, 1996, the value of your investment in the
Series' Class A shares (with dividends reinvested) would have grown to $10,987.
By comparison, the same $10,000 investment would have grown to $12,375 based on
the performance of the Lehman Intermediate Term Corporate Bond Index.
The performance illustrated above is based on the performance of Class A shares.
The performance of Class B shares will be greater or less than the performance
shown for Class A shares as a result of the different loads and fees associated
with an investment in Class B shares.
The performance data illustrated above reflects past performance which is not
predictive of future results.
The Lehman Brothers Intermediate Term Corporate Bond Index includes all
corporate debt securities rated A or higher. Investments cannot be made directly
in an index.
LIMITED MATURITY BOND SERIES
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1996
CLASS A SHARES
One Year -2.74%
Since Inception 1-17-95 4.94%
CLASS B SHARES
One Year -3.95%
Since Inception 1-17-95 4.68%
The performance data above represents past performance which is not predictive
of future results. For Class A shares these figures reflect deduction of the
maximum sales charge of 4.75%. For Class B shares the total return includes
deduction of the maximum contingent deferred sales charge.
5
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MANAGERS' COMMENTARY
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SECURITY FUNDS
FEBRUARY 15, 1997
GLOBAL AGGRESSIVE BOND SERIES
1996 was a very rewarding year for our shareholders, particularly during the
second half. While the first six months provided a total return of 2.58%, the
last six months' strong performance brought the total return of the fund for the
year up to 11.56%.(1) This compares favorably with the Lehman Brothers Global
Bond Index return of 5.37% for the year, a 0.2% return for a ten-year U.S.
Treasury note, and 10.4% average for the Lipper peer group.
INTERNATIONAL STRENGTH IN THE SECOND HALF
The second half of 1996 saw an acceleration of the trends which began earlier in
the year. Yields in peripheral European countries such as Spain, Italy, and
Portugal, which had fallen approximately 1% in the first half of the year,
declined a further 2% in the second half. Restrictive fiscal policies by these
governments brought about by their desire not to be left out of the European
Monetary Union process combined with rapidly declining inflation to produce
these dramatic declines in yields. While there is still room for this trend to
continue, we believe the majority of this convergence of yields with "core"
Europe is coming to an end.
Emerging market debt also continued its good performance. With the strongest
concentration of economic growth in the world, the credit quality of many
emerging market countries and companies is increasing and should continue on
that path in 1997.
DOLLAR BLOC PERFORMANCE
One of the differences in the second half of 1996 versus the first half is that
the dollar bloc which includes Australia, Canada, New Zealand and the United
States also performed very well. Interest rates, which had increased in these
countries in the first half on the back of a poor U.S. market, reversed their
upward trend. While longer term rates in the U.S. managed to decline slightly,
yields in the rest of the dollar bloc fell substantially, on the order of 1% to
1.5%. Recognition of the continued trend of low inflation in these countries was
the main contributing factor to the decline in yields.
OUTLOOK FOR 1997
Looking ahead to 1997, we believe that the most rewarding investments will be
those that seek out improving credit quality situations, both on the country and
company level. In particular, the return of strong growth to Latin America
should provide fertile ground for many of these opportunities. We look forward
to the challenges of the new year.
Maria Fiorini Ramirez and Denis P. Jamison
Portfolio Managers
(1) Performance figures are based on Class A shares and do not reflect deduction
of the sales charge.
Investing in foreign countries may involve risks, such as currency fluctuations
and political instability, not associated with investing exclusively in the U.S.
[MFR LOGO] [LEXINGTON LOGO]
GLOBAL AGGRESSIVE BOND SERIES
12-31-96
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
GLOBAL AGGRESSIVE LEHMAN BROTHERS
BOND SERIES GLOBAL BOND INDEX
10,000.00 10,000.00
Jun-95 9,485.71 10,069.00
Jul-95 9,619.05 10,140.49
Aug-95 9,609.52 9,907.26
Sep-95 9,851.18 10,131.16
Oct-95 9,920.00 10,257.80
Nov-95 9,969.16 10,367.56
Dec-95 10,220.30 10,521.00
Jan-96 10,401.55 10,427.36
Feb-96 10,169.96 10,358.54
Mar-96 10,217.42 10,338.86
Apr-96 10,258.45 10,293.37
May-96 10,350.78 10,318.07
Jun-96 10,484.82 10,428.48
Jul-96 10,684.03 10,613.06
Aug-96 10,851.78 10,651.27
Sep-96 10,978.22 10,731.15
Oct-96 11,127.87 10,964.02
Nov-96 11,384.42 11,128.48
Dec-96 11,403.45 11,086.19
$10,000 OVER THE LIFE OF THE SERIES
This chart assumes a $10,000 investment in Class A shares of Global Aggressive
Bond Series on June 1, 1995 (date of inception), and reflects deduction of the
4.75% sales load. On December 31, 1996, the value of your investment in the
Series' Class A shares (with dividends reinvested) would have grown to $11,403.
By comparison, the same $10,000 investment would have grown to $11,086 based on
the performance of the Lehman Brothers Global Bond Index.
The performance illustrated above is based on the performance of Class A shares.
The performance of Class B shares will be greater or less than the performance
shown for Class A shares as a result of the different loads and fees associated
with an investment in Class B shares.
The performance data illustrated above reflects past performance which is not
predictive of future results.
The Lehman Brothers Global Bond Index includes local currency-denominated
sovereign debt of 19 countries plus European Currency Units-denominated debt.
Investment cannot directly be made in an index.
GLOBAL AGGRESSIVE BOND SERIES
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1996
CLASS A SHARES
One Year 6.24%
Since Inception (6-1-95) 8.63%
CLASS B SHARES
One Year 5.67%
Since Inception (6-1-95) 8.78%
The performance data above represents past performance which is not predictive
of future results. For Class A shares these figures reflect deduction of the
maximum sales charge of 4.75%. For Class B shares the total return includes
deduction of the maximum contingent deferred sales charge.
6
<PAGE>
MANAGERS' COMMENTARY
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SECURITY FUNDS
FEBRUARY 15, 1997
HIGH YIELD SERIES
The High Yield Series began operations August 5, 1996 with a primary objective
of seeking high current income with a secondary objective of capital
appreciation. Although the Series may invest in debt issues in any rating
category below investment grade, our current focus is on issues rated BB or B,
in the upper tier of the noninvestment grade range. Given the length of the
current economic expansion in the United States, the possibility is increasing
that we may experience a slowdown in the months to come. If this happens, the
higher-rated high yield issues are likely to outperform their lower-rated
counterparts because of their stronger balance sheets.
LARGEST INDUSTRY REPRESENTATIONS
The largest industry concentration in the portfolio is in consumer goods, both
cyclical and noncyclical. Many of the issuers will be familiar to our
shareholders, including cyclical ones such as sheet and towel manufacturer
Westpoint-Stevens, Inc., cable providers Rogers Cablesystems Ltd. and Century
Communications, and gaming company Showboat, Inc. Others may be less familiar by
name, but their services are well-known: one example is K-III Communications
Corporation, publishers of Weekly Reader, Seventeen magazine, and Funk &
Wagnalls dictionaries, among other products.
Among the consumer noncyclical companies in the portfolio is AMF Group, Inc.,
provider of bowling centers and equipment. AMF is currently designing new
bowling center packages for construction in emerging market countries where
industry penetration is low or nonexistent. Other consumer noncyclicals include
Carrols Corporation, the largest operator of Burger King franchises, and Cott
Corporation, which manufactures private-label soft drinks.
OTHER SECTORS IN THE PORTFOLIO
The portfolio at this time is underweighted in basic industries, especially
those whose assets are subject to commodity pricings, such as steel and paper
companies. The energy sector, where exploration and production companies have
excellent cash flows, is overweighted in the portfolio versus the benchmark
Lehman Brothers High Yield Index, as are nonbank financial services companies.
The High Yield Series has gained a respectable 5.20% since its August
inception.(1) The performance was held back somewhat by our position in Marvel
Holdings, Inc. bonds, which declined substantially in value when the company
announced that they were experiencing liquidity problems. The bonds were sold
out of the portfolio in November, and have dropped considerably further in price
since then.
THE HIGH YIELD OUTLOOK IN 1997
As discussed earlier, our portfolio is higher in quality than many in our high
yield peer group. A number of the peer funds use common stock in their
portfolios, as well. In a bull market like we experienced in 1995 and 1996 those
portfolios may perform better, but with the likelihood of an economic slowdown
in the not-too-distant future, higher-rated issues should hold their value
better. We believe that the high yield bond markets are likely to have a good
year in 1997 relative to other fixed income asset classes, drawing a sizeable
part of their total return from their higher coupons.
Tom Swank
Portfolio Manager
(1) Performance figures are based on Class A shares and do not reflect deduction
of the sales charge.
Investors should remember that while high yield bonds provide potentially higher
yields than many other types of bonds, they also present greater credit risk.
7
<PAGE>
MANAGERS' COMMENTARY
- --------------------------------------------------------------------------------
SECURITY FUNDS
FEBRUARY 15, 1997
SECURITY TAX-EXEMPT FUND
Despite a year in which presidential candidates spoke frequently of tax cuts,
the tax-exempt market actually fared better than its Treasury and corporate
counterparts. Municipal bond investors may be realizing that in a time when a
balanced federal budget is receiving serious consideration, the likelihood of
relevant tax cuts is diminished.
MATURITY RESTRUCTURING EARLY IN 1996
At the beginning of 1996 the average duration of the bonds in the Security
Tax-Exempt Fund was quite long, at about 9.5 years. This hurt performance in
January and February as interest rates rose rapidly. We shortened the
portfolio's average maturity and duration over that time, and for the balance of
the year, it performed well in line with the benchmark index.
In order to lower the volatility of the portfolio, we have reduced the number of
issues that are subject to call risk. Callable bonds are ones which the issuers
can buy back when interest rates decline, replacing them with lower-coupon bonds
and lowering their interest expense. These issues can fluctuate widely in price
as general market levels move above or below the call price, alternately
reducing or increasing the likelihood that they will be called. Because of this
risk, callable bonds can often be purchased at a higher yield than noncallable
issues.
CREDIT RATINGS IN THE PORTFOLIO
To replace this higher yield, we have opted to take a slightly greater credit
risk, purchasing some issues rated in the low-A to high BBB range. Some of these
include bonds issued by colleges and universities, such as dormitory revenue
bonds. We plan to buy smaller block sizes when we purchase these lower-rated
issues, to minimize the impact should any issue experience credit problems. We
plan to keep the average credit rating of the portfolio slightly higher than
that of our peer funds. We believe that as Congress moves to balance the federal
budget, many costs will be pushed down to the state and local government levels,
straining those municipalities' budgets. A higher average credit rating will
afford some degree of protection against unforseen problems.
CONGRESS AND TAX CUTS
As mentioned earlier, the likelihood of significant tax cuts for individuals in
1997 has been reduced by the perception that Congress is intent on presenting a
proposal that will balance the budget in the next five years. It will be easier
in a nonelection year to take politically unpopular steps such as cutting
entitlement programs without granting an offsetting--and
electorate-pleasing--favor such as reduced taxes. A climate in which tax rate
uncertainty is diminished is one which is favorable for performance of
tax-exempt bonds.
Greg Hamilton
Portfolio Manager
TAX-EXEMPT FUND
12-31-96
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
LEHMAN BROTHERS
TAX-EXEMPT FUND MUNICIPAL BOND INDEX
10,000.00 10,000.00
Mar-87 9,784.70 10,241.75
Jun-87 9,321.86 9,963.54
Sep-87 9,211.03 9,716.06
Dec-87 9,400.74 10,150.62
Mar-88 9,679.13 10,499.11
Jun-88 9,910.13 10,702.23
Sep-88 10,104.58 10,975.54
Dec-88 10,364.69 11,179.96
Mar-89 10,184.40 11,254.22
Jun-89 10,568.45 11,920.52
Sep-89 10,562.68 11,928.33
Dec-89 10,821.70 12,387.11
Mar-90 10,834.43 12,442.35
Jun-90 11,076.16 12,733.13
Sep-90 11,097.60 12,740.60
Dec-90 11,491.95 13,290.13
Mar-91 11,733.40 13,589.47
Jun-91 11,941.86 13,880.24
Sep-91 12,393.61 14,420.09
Dec-91 12,840.77 14,904.31
Mar-92 12,845.06 14,949.05
Jun-92 13,284.31 15,516.43
Sep-92 13,567.12 15,929.78
Dec-92 13,776.37 16,219.78
Mar-93 14,187.82 16,821.68
Jun-93 14,729.87 17,372.08
Sep-93 15,257.64 17,958.90
Dec-93 15,475.16 18,210.99
Mar-94 14,359.07 17,211.33
Jun-94 14,465.14 17,401.84
Sep-94 14,449.36 17,520.91
Dec-94 14,193.57 17,269.30
Mar-95 15,150.39 18,490.34
Jun-95 15,301.79 18,936.88
Sep-95 15,642.34 19,481.53
Dec-95 16,390.67 20,284.98
Mar-96 15,978.97 20,040.31
Jun-96 16,050.42 20,193.95
Sep-96 16,396.42 20,656.82
Dec-96 16,802.00 21,183.19
$10,000 OVER TEN YEARS
This chart assumes a $10,000 investment in Class A shares of Tax-Exempt Fund on
December 31, 1986, and reflects deduction of the 4.75% sales load. On December
31, 1996, the value of your investment in the Fund's Class A shares (with
dividends reinvested) would have grown to $16,802. By comparison, the same
$10,000 investment would have grown to $21,183 based on the performance of the
Lehman Brothers Municipal Bond Index.
The performance illustrated above is based on the performance of Class A shares.
The performance of Class B shares will be greater or less than the performance
shown for Class A shares as a result of the different loads and fees associated
with an investment in Class B shares.
The performance data illustrated above reflects past performance which is not
predictive of future results.
The Lehman Brothers Municipal Bond Index is a total return performance benchmark
for the long-term, investment-grade tax-exempt bond market. Returns and
attributes are calculated semi-monthly using approximately 15,000 municipal
bonds. Investments cannot be made directly in an index.
TAX-EXEMPT FUND
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1996
CLASS A SHARES CLASS B SHARES
1 Year -2.40% 1 Year -3.76%
5 Years 4.50% Since Inception 0.27%
10 Years 5.33% (10-19-93)
The performance data above represents past performance which is not predictive
of future results. For Class A shares these figures reflect deduction of the
maximum sales charge of 4.75%. For Class B shares the total return includes
deduction of the maximum contingent deferred sales charge.
8
<PAGE>
MANAGERS' COMMENTARY
- --------------------------------------------------------------------------------
SECURITY FUNDS
FEBRUARY 15, 1997
SECURITY CASH FUND
Money market funds in 1996 became attractive alternatives for fixed-income
investors, outperforming many sectors of the bond market. Security Cash Fund
returned 4.63% over the year, approximating its Lipper peer group average of
4.80%.
AVERAGE MATURITY TARGET RANGE
One of our objectives throughout the year was to keep the average maturity of
the portfolio holdings within ten days of that published weekly in the
IBC/Donoghue Money Fund Report. We avoid the practice of skewing the average
maturity strongly, either shorter or longer than the benchmark average, in order
to try to outguess the Federal Reserve Bank and their interest rate movements.
We believe that a more conservative approach is appropriate in our money market
funds.
SECTOR REPRESENTATION IN THE PORTFOLIO
We have been adding blocks of Small Business Administration mortgage pools with
interest rates which reset monthly or quarterly based on the prime rate. These
AAA-rated issues provide better yields than commercial paper, and they are U.S.
Government securities, so there is no additional credit risk in buying them. The
greatest risk with these instruments is that the mortgages will be prepaid at a
faster-than-anticipated rate. For this reason we choose to only buy issues
priced at par, so that no premium will be lost in the event of escalated
prepayments. Our SBA holdings now make up about 13% of the portfolio.
We have also increased our holdings of government agency issues such as Federal
Farm Credit Banks, Federal Home Loan Banks and Federal National Mortgage
Association securities. These issues, with maturities of one year or less,
provide diversification from the larger position in commercial paper in the
portfolio. The IBC/Donoghue average portfolio position in commercial paper is
about 60%; we have reduced ours from almost 80% to the current 60% in order to
be more in line with that average.
LOOKING AHEAD TO 1997
In 1996 we established an overnight funds account with the Federal Home Loan
Bank in order to maximize our earnings on cash balances. We continue to study
various investment alternatives for the portfolio assets in order to provide
competitive interest rates in the fund.
We expect interest rates on short term fixed income investments to stay within a
narrow band in 1997. When inflation has been modest, as it has for the last two
years, hints of escalating economic growth cause greater fluctuations in the
longer maturities of the bond markets than in the short ones. We continue to
strive to provide a high quality portfolio with a competitive yield for our
shareholders.
Barbara Davison
Fixed Income Team
The Security Cash Fund is neither insured nor guaranteed by the U.S. Government
and there is no assurance that the fund will be able to maintain a stable net
asset value of $1.00 per share.
9
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
SECURITY INCOME FUND
CORPORATE BOND SERIES
PRINCIPAL MARKET
AMOUNT CORPORATE BONDS VALUE
- --------------------------------------------------------------------------------
AIR TRANSPORTATION - 4.6%
$2,000,000 Southwest Airlines Company, 7.875% - 2007 .......... $2,117,500
1,200,000 United Airlines, 11.21% - 2014 ..................... 1,557,000
----------
3,674,500
BANKS - 14.1%
ABN AMRO Bank NV,
1,000,000 7.55% - 2006 ..................................... 1,036,250
1,500,000 7.30% - 2026 ..................................... 1,428,750
1,250,000 Abbey National PLC, 6.69% - 2005 ................... 1,226,563
1,000,000 BCH Cayman Islands, Ltd., 7.70% - 2006 ............. 1,032,500
1,500,000 Bank of New York, Inc., 6.50% - 2003 ............... 1,473,750
2,000,000 Bankers Trust of New York Corporation, 7.125% - 2006 1,997,500
1,000,000 Maylayan Banking Berhad New York, 7.125% - 2005 .... 993,750
2,150,000 Santander Financial Issuances, Ltd., 7.00% - 2006 .. 2,136,563
----------
11,325,626
BROKERS, DEALERS & SERVICES - 6.6%
4,000,000 Bear Stearns Companies, Inc., 5.75% - 2001 ......... 3,860,000
1,450,000 Lehman Brothers, Inc., 7.25% - 2003 ................ 1,457,250
----------
5,317,250
CABLE SYSTEMS - 4.5%
1,750,000 Rogers Cablesystems, Ltd., 9.625% - 2002 ........... 1,833,125
2,000,000 TCI, 7.875% - 2013 ................................. 1,825,000
----------
3,658,125
CONSUMER GOODS & SERVICES - 2.6%
1,000,000 Semi-Tech Corporation, 0% - 2003(4) ................ 657,500
1,500,000 Nike, Inc., 6.375% - 2003 ......................... 1,471,875
----------
2,129,375
ELECTRONICS - 1.9%
1,500,000 Pioneer Standards Electronics, Inc., 8.50% - 2006 .. 1,526,250
ENTERTAINMENT - 5.4%
1,650,000 Harrah's Operating Company, Inc., 8.75% - 2000 ..... 1,685,063
750,000 Showboat, Inc., 13.50% - 2003 ...................... 826,875
1,800,000 Station Casinos, Inc., 10.125% - 2006 .............. 1,804,500
----------
4,316,438
FINANCE - 1.2%
$1,000,000 Countrywide Capital, 8.00% - 2026 .................. $987,500
FOOD & BEVERAGES - 4.2%
1,250,000 Chiquita Brands International, Inc., 10.25% - 2006 . 1,331,250
1,000,000 Coca-Cola Enterprises Inc., 6.70% - 2036(5) ........ 1,010,000
1,000,000 Panamerican Beverages, Inc., 8.125% - 2003 ......... 1,025,000
----------
3,366,250
FUNERAL HOMES - 2.2%
1,750,000 Loewen Group International, Inc., 8.25% - 2003 ..... 1,771,875
INSURANCE - 4.0%
1,250,000 American RE Corporation, 7.45% - 2026 .............. 1,248,438
2,200,000 Home Holdings, Inc., 7.75% - 1998 .................. 968,000
1,050,000 Travelers Capital Trust, 7.75% - 2036 .............. 1,018,500
----------
3,234,938
MEDIA - 3.8%
1,750,000 Time Warner, Inc., 9.125% - 2013 ................... 1,883,438
1,250,000 Viacom, Inc., 8.00% - 2006 ......................... 1,215,625
----------
3,099,063
MISCELLANEOUS - 7.5%
3,575,527 Bear Stearns Mortgage Securities, Inc.,
7.75% - 2024 CMO ................................. 3,460,719
1,322,553 GE Capital Mortgage Services, Inc., 8.30% - 2023 CMO 1,345,113
1,250,000 Securitized Asset Sales, Inc., 7.50% - 2025 CMO .... 1,250,110
----------
6,055,942
MOTOR VEHICLES - 5.0%
2,000,000 Chrysler-Auburn Hills Trust, 12.00% - 2020 ......... 3,017,500
1,000,000 Ford Motor Company, 7.25% - 2008 ................... 1,010,000
----------
4,027,500
NATURAL GAS COMPANIES - 1.2%
1,000,000 El Paso Natural Gas Company, 6.75% - 2003 .......... 992,500
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
10
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
SECURITY INCOME FUND
CORPORATE BOND SERIES (CONTINUED)
PRINCIPAL MARKET
AMOUNT CORPORATE BONDS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
OIL & GAS COMPANIES - 2.6%
$1,000,000 Seagull Energy Corporation, 8.625% - 2005 .......... $1,037,500
1,000,000 Union Pacific Resources, 7.50% - 2026 .............. 1,017,500
----------
2,055,000
PAPER & LUMBER PRODUCTS - 1.7%
1,250,000 Domtar, Inc., 9.50% - 2016 ......................... 1,371,875
PUBLISHING & PRINTING - 2.6%
375,000 Golden Books Publishing, Inc., 7.65% - 2002 ........ 338,438
1,700,000 Valassis Inserts, Inc., 9.375% - 1999 .............. 1,751,000
----------
2,089,438
REAL ESTATE - 1.9%
820,000 Chelsea GCA Realty, Inc., 7.75% - 2001 ............. 837,425
750,000 Simon DeBartolo Group, Ltd., 6.875% - 2006 ......... 729,375
----------
1,566,800
WASTE MANAGEMENT - 1.3%
1,000,000 Waste Management, 7.10% - 2026(5) .................. 1,030,000
STEEL & METAL PRODUCTS - 1.0%
750,000 AK Steel Corporation, 10.75% - 2004 ................ 817,500
TELECOMMUNICATION EQUIPMENT - 3.9%
3,000,000 Comsat Corporation, 8.125% - 2004 .................. 3,168,750
----------
Total corporate bonds--Corporate
Bond Series - 83.8% .............................. 67,582,495
GOVERNMENT & GOVERNMENT AGENCY SECURITIES
-----------------------------------------
U.S. Government Agencies - 8.8%
Federal Home Loan Mortgage Corporation,
1,500,000 7.974% - 2005 .................................... 1,508,940
751,931 8.80% - 2020 CMO ................................. 768,652
750,000 9.00% - 2020 CMO ................................. 763,009
750,000 6.50% - 2021 CMO ................................. 683,749
929,897 7.00% - 2021 CMO ................................. 854,822
Federal National Mortgage Association,
1,500,000 0% - 2004(4) ..................................... 1,472,085
989,433 9.30% - 2019 CMO ................................. 1,011,628
----------
7,062,885
PRINCIPAL
AMOUNT OR
NUMBER OF GOVERNMENT & GOVERNMENT MARKET
SHARES AGENCY SECURITIES VALUE
- --------------------------------------------------------------------------------
U.S. TREASURY NOTES - 1.2%
$1,000,000 5.625% - 1998 .................................... $995,390
----------
Total government & government agency securities -
Corporate Bond Series - 10.0% .................... 8,058,275
PREFERRED STOCK
------------------------------------------
ELECTRIC COMPANIES - 0.1%
3,100 Georgia Power Capital Trust, $1.9375 ............... 77,500
----------
Total preferred stock--Corporate Bond Series - 0.1%. 77,500
----------
Total investments - Corporate Bond Series - 93.9% .. 75,718,270
Cash and other assets, less liabilities - 6.1% ..... 4,945,375
----------
Total net assets - Corporate Bond Series - 100.0% .. $80,663,645
==========
SECURITY INCOME FUND
U.S. GOVERNMENT SERIES
U.S. GOVERNMENT & GOVERNMENT AGENCY SECURITIES
----------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION - 8.2%
$700,000 7.125% - 2001 .................................... $710,731
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 32.3%
$600,000 7.40% - 2004 ..................................... 630,168
$500,000 6.69% - 2011 ..................................... 477,420
$1,000,000 8.10% - 2019 ..................................... 1,121,370
$500,000 8.28% - 2025 ..................................... 578,175
----------
2,807,133
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 34.9%
$680,151 8.50% - 2024 ..................................... 707,105
$694,219 7.75% - 2025 ..................................... 701,371
$819,474 8.00% - 2026 ..................................... 832,013
$264,386 8.25% - 2026 ..................................... 271,822
$522,929 7.50% - 2034 ..................................... 520,494
----------
3,032,805
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
11
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
SECURITY INCOME FUND
U.S. GOVERNMENT SERIES (CONTINUED)
PRINCIPAL U.S. GOVERNMENT & GOVERNMENT MARKET
AMOUNT AGENCY SECURITIES (CONTINUED) VALUE
- --------------------------------------------------------------------------------
U.S. TREASURY NOTES - 15.0%
$810,000 7.25% - 1998 ..................................... $823,090
460,000 8.00% - 1999 ..................................... 481,717
----------
1,304,807
U.S. TREASURY BONDS - 7.7%
600,000 8.75% - 2008 ..................................... 674,448
----------
Total investments - U.S. Government Series - 98.1% . 8,529,924
Cash and other assets, less liabilities - 1.9% ..... 167,475
----------
Total net assets - U.S. Government Series - 100.0% . $8,697,399
==========
SECURITY INCOME FUND
LIMITED MATURITY BOND SERIES
CORPORATE BONDS
------------------------------------------
ALUMINUM - 2.7%
$148,000 Alcan Aluminum, Ltd., 9.20% - 2001 ................. $152,810
AUTOMOBILE REPAIR - 2.8%
150,000 Speedy Muffler King, Inc., 10.875% - 2006 .......... 160,500
BANKS - 2.1%
110,000 First Union Corporation, 8.125% - 2002 ............. 117,563
CABLE - 5.0%
125,000 Paging Network, 10.00% - 2008 ...................... 126,406
150,000 Rogers Cablesystems, Ltd., 9.625% - 2002 ........... 157,125
----------
283,531
CONSUMER GOODS - 2.2%
125,000 Cole National Group, Inc., 9.875% - 2006 ........... 128,750
ELECTRIC COMPANIES - 2.6%
150,000 Consolidated Edison Company of New York,
6.625% - 2002 .................................... 150,000
ELECTRIC & GAS COMPANIES - 2.8%
150,000 Public Service Electric & Gas Company, 8.75% - 1999. 157,875
ELECTRONICS - 3.6%
200,000 Pioneer Standard Electronics, Inc., 8.50% - 2006 ... 203,500
FINANCE - 10.9%
$150,000 Ford Motor Credit Company, 8.375% - 2000 ........... $157,688
150,000 Household Finance Corporation, 8.00% - 2004 ........ 159,750
150,000 International Lease Finance Corporation,
8.25% - 2000 ..................................... 157,125
150,000 MCN Investment Corporation, 6.32% - 2003 ........... 147,000
----------
621,563
FOOD & BEVERAGE TRADE - 1.8%
100,000 FEMSA Fomento Economico Mexicano SA, 9.50% - 1997 .. 101,375
INSURANCE - 3.3%
100,000 Home Holdings, Inc., 7.75% - 1998 .................. 44,000
150,000 Travelers Capital Trust, 7.75% - 2036 .............. 145,500
----------
189,500
MISCELLANEOUS - 4.0%
122,860 GE Capital Mortgage Services, Inc., 8.30% - 2023 CMO 124,956
100,000 Sears Mortgage Securities Corporation,
8.50% - 2022 CMO ................................. 102,959
----------
227,915
NATURAL GAS COMPANIES - 6.3%
200,000 El Paso Natural Gas Company, 6.75% - 2003 .......... 198,500
150,000 Vastar Resources, Inc., 8.75% - 2005 ............... 162,938
----------
361,438
OIL & GAS COMPANIES - 2.7%
150,000 Seagull Energy Corporation, 8.625% - 2005 .......... 155,625
PUBLISHING & PRINTING - 1.8%
100,000 Valassis Inserts, Inc., 9.375% - 1999 .............. 103,000
RETAIL TRADE - 2.7%
150,000 Wal-Mart Stores, Inc., 7.50% - 2004 ................ 156,563
SANITARY SERVICES - 2.8%
150,000 WMX Technologies, Inc., 8.25% - 1999 ............... 157,313
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
12
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
SECURITY INCOME FUND
LIMITED MATURITY BOND SERIES (CONTINUED)
PRINCIPAL MARKET
AMOUNT CORPORATE BONDS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
TOBACCO PRODUCTS - 2.8%
$150,000 Dimon, Inc., 8.875% - 2006 ......................... $156,938
----------
Total corporate bonds - Limited Maturity
Bond Series - 62.9% .............................. 3,585,759
GOVERNMENT & GOVERNMENT AGENCY SECURITIES
------------------------------------------
CANADIAN GOVERNMENT AGENCIES - 2.9%
150,000 Province of Quebec, 8.625% - 2005 .................. 164,813
U.S. GOVERNMENT AGENCIES - 24.0%
Federal Home Loan Mortgage Corporation,
200,000 8.00% - 2020 CMO ................................. 203,089
44,000 8.50% - 2020 CMO ................................. 45,408
186,000 8.00% - 2024 ..................................... 189,348
Federal National Mortgage Association,
200,000 0% - 2004(4) ..................................... 196,278
150,000 8.50% - 2005 ..................................... 157,602
126,040 5.70% - 2008 CMO ................................. 120,672
118,000 7.50% - 2019 CMO ................................. 118,563
100,000 7.00% - 2020 CMO ................................. 98,389
100,000 6.75% - 2021 CMO ................................. 98,703
160,487 6.50% - 2023 CMO ................................. 138,012
----------
1,366,064
----------
Total government & government agency securities -
Limited Maturity Bond Series - 26.9% ............. 1,530,877
----------
Total investments - Limited Maturity
Bond Series - 89.8% .............................. 5,116,636
Cash and other assets, less liabilities - 10.2% .... 582,273
----------
Total net assets - Limited Maturity
Bond Series - 100.0% ............................. $5,698,909
==========
SECURITY INCOME FUND
GLOBAL AGGRESSIVE BOND SERIES
PRINCIPAL MARKET
AMOUNT GOVERNMENT OBLIGATIONS VALUE
- --------------------------------------------------------------------------------
ARGENTINA - 4.5%
$225,000 Republic of Argentina, 9.25% - 2001 ................ $229,219
AUSTRALIA - 8.6%
250,000 Commonwealth of Australia, 9.00% - 2004(3) ......... 218,275
290,000 New South Wales Treasury Corporation,
6.50% - 2006(3) .................................. 213,347
----------
431,622
BRAZIL - 4.0%
$275,342 Government of Brazil C, 4.50% - 2014 ............... 203,496
COSTA RICA - 4.7%
$300,000 Banco Costa Rica, 6.25% - 2010 ..................... 238,500
DOMINICAN REPUBLIC - 3.8%
$250,000 Central Bank of Dominican Republic, 6.375% - 2024 .. 190,625
GREECE - 4.1%
50,000,000 Hellenic Republic, 14.00% - 2003(3) ................ 205,525
HUNGARY - 3.8%
30,000,000 Government of Hungary, 21.00% - 1999(3) ............ 189,372
JORDAN - 2.9%
$250,000 Kingdom of Jordan, 4.00% - 2023 .................... 148,125
NEW ZEALAND - 4.1%
300,000 New Zealand Government, 6.50% - 2000(3) ............ 208,929
POLAND - 7.3%
1,120,000 Government of Poland, 16.00% - 1998(3) ............. 369,024
PORTUGAL - 8.8%
Obrig Do Tes Medio Prazo,
20,000,000 11.875% - 2000(3) ................................ 149,895
35,000,000 11.875% - 2005(3) ................................ 295,546
----------
445,441
SOUTH AFRICA - 3.5%
1,000,000 Republic of South Africa, 12.00% - 2005(3) ......... 174,846
SPAIN - 3.7%
20,000,000 Bonos Y Oblig Del Estado, 10.15% - 2006(3) ......... 187,661
----------
Total government obligations - Global Aggresive
Bond Series - 63.8% .............................. 3,222,385
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
13
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
SECURITY INCOME FUND
GLOBAL AGGRESSIVE BOND SERIES (CONTINUED)
PRINCIPAL MARKET
AMOUNT CORPORATE BONDS VALUE
- --------------------------------------------------------------------------------
CANADA - 9.8%
$237,000 CHC Helicopter, 11.50% - 2002 ...................... $242,925
100,000 Roger's Communication, Inc., 10.50% - 2006(3) ...... 76,161
200,000 Stelco, Inc., 10.40% - 2009(3) ..................... 172,465
----------
491,551
CZECH REPUBLIC - 4.4%
2,500,000 CEZ, A.S., 11.30% - 2005(3) ........................ 92,809
3,500,000 Skofin, S.R.O., A.S., 11.625% - 1998(3) ............ 129,187
----------
221,996
DENMARK - 6.3%
1,000,000 Nykredit, 7.00% - 2026(3) .......................... 159,606
1,000,000 Realkredit Danmark, 7.00% - 2026(3) ................ 158,894
----------
318,500
THAILAND - 4.3%
5,200,000 Italian-Thai Development Company, 12.50% - 2005(3) . 218,374
----------
Total corporate bonds - Global Aggressive
Bond Series - 24.8% .............................. 1,250,421
SHORT-TERM INVESTMENTS
------------------------------------------
INDONESIA - 6.1%
500,000,000 Asia Pulp & Paper, 0% - 4-29-97(3) ................. 201,594
250,000,000 Chase Manhattan Bank Time Deposit,
14.00% - 1-16-97(3) .............................. 105,820
----------
307,414
----------
Total short term investments - Global
Aggressive Bond Series - 6.1% .................... 307,414
----------
Total investments - Global Aggressive
Bond Series - 94.7% .............................. 4,780,220
WRITTEN OPTIONS - (0.1%)
$275,342 Call Option on Government of Brazil
C Bond, strike price 72.75 USD, 1-97
(premium $3,050) ................................. (5,979)
Cash and other assets, less liabilities - 5.4% ..... 273,007
----------
Total net assets - Global Aggressive
Bond Series - 100.0% ............................. $5,047,248
==========
SECURITY INCOME FUND
HIGH YIELD BOND SERIES
PRINCIPAL MARKET
AMOUNT CORPORATE BONDS VALUE
- --------------------------------------------------------------------------------
APPAREL - 3.0%
$150,000 Tultex Corporation, 10.625% - 2005 ................. $163,312
AUTOMOBILES - 3.2%
170,000 Exide Corporation, 10.00% - 2005 ................... 177,225
BANKS & CREDIT - 1.9%
100,000 B.F. Saul Reit, 11.625% - 2002 ..................... 107,500
BEVERAGES - 3.7%
100,000 Cott Corporation, 9.375% - 2005 .................... 103,000
100,000 Delta Beverage Group, 9.75% - 2003 ................. 102,250
----------
205,250
BROADCAST MEDIA - 4.4%
135,000 Allbritton Communications Company, 11.50% - 2004 ... 143,100
100,000 Heritage Media Corporation, 8.75% - 2006 ........... 96,500
----------
239,600
CHEMICALS - 3.3%
170,000 Envirodyne Industries, Inc., 12.00% - 2000 ......... 180,837
CABLE SYSTEMS - 9.5%
100,000 Cablevision Systems Corporation, 10.75% - 2004 ..... 104,000
100,000 Century Communications, 9.50% - 2005 ............... 102,500
135,000 Comcast Corporation, 9.125% - 2006 ................. 138,037
170,000 Rogers Cablesystems, Ltd., 9.625% - 2002 ........... 178,075
----------
522,612
CONSUMER GOODS - 1.2%
100,000 Semi-Tech Corporation, 0% - 2003(4) ................ 65,750
ELECTRIC UTILITIES - 5.5%
135,000 AES Corporation, 10.25% - 2006 ..................... 145,800
150,000 Cal Energy Company Inc., 9.50% - 2006 .............. 154,500
----------
300,300
ENTERTAINMENT - 5.0%
180,000 Showboat, Inc., 9.25% - 2008 ....................... 177,075
100,000 Station Casinos, Inc., 10.125% - 2006 .............. 100,250
----------
277,325
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
14
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
SECURITY INCOME FUND
HIGH YIELD BOND SERIES (CONTINUED)
PRINCIPAL MARKET
AMOUNT CORPORATE BONDS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
FINANCIAL SERVICES - 1.9%
$100,000 Dollar Financial Group, 10.875% - 2006 ............. $103,000
FOOD PROCESSING - 2.6%
135,000 TLC Beatrice International Holdings, 11.50% - 2005 . 143,100
HEALTH CARE SERVICES - 1.8%
100,000 Regency Health Services, 9.875% - 2002 ............. 101,250
MANUFACTURING - 3.8%
100,000 Sequa Corporation, 9.375% - 2003 ................... 101,000
100,000 Shop Vac Corporation, 10.625% - 2003 ............... 105,250
----------
206,250
MEDICAL - 1.9%
100,000 Maxxim Medical, 10.50% - 2006 ...................... 104,500
MISCELLANEOUS - 1.8%
100,000 Jordan Industries, 10.375% - 2003 .................. 98,750
OIL & GAS COMPANIES - 5.3%
135,000 Maxus Energy, 9.50% - 2003 ......................... 136,688
150,000 Seagull Energy Corporation, 8.625% - 2005 .......... 155,625
----------
292,313
PACKAGING & CONTAINERS - 1.9%
100,000 Plastic Containers, Inc., 10.00% - 2006 ............ 103,250
PETROLEUM - 1.9%
100,000 Crown Central Petroleum, 10.875% - 2005 ............ 102,125
PUBLISHING & PRINTING - 6.2%
170,000 Golden Books Publishing, Inc., 7.65% - 2002 ........ 153,425
180,000 KIII Communications Corporation, 10.625% - 2002 .... 189,000
----------
342,425
RECREATION - 1.9%
100,000 AMF Group, Inc., 10.875% - 2006 .................... 105,500
RESTAURANTS - 2.6%
135,000 Carrols Corporation, 11.50% - 2003 ................. 143,438
STEEL & METAL PRODUCTS- 0.9%
50,000 AK Steel Corporation, 9.125% - 2006 ................ 51,375
TEXTILES - 4.4%
$100,000 Pillowtex Corporation, 10.00% - 2006 ............... $104,000
$135,000 Westpoint Stevens, Inc., 9.375% - 2005 ............. 138,713
----------
242,713
TOBACCO PRODUCTS - 2.6%
$135,000 Dimon, Inc., 8.875% - 2006 ......................... 141,244
TRANSPORTATION - 6.0%
$135,000 Teekay Shipping Corporation, 8.32% - 2003 .......... 135,000
$175,000 Atlas Air, Inc., 12.25% - 2002 ..................... 194,031
----------
329,031
----------
Total corporate bonds- High Yield
Bond Series - 88.2% .............................. 4,849,975
PREFERRED STOCK
------------------------------------------
BANKING & CREDIT - 3.6%
1,750 First Nationwide Bank .............................. 200,375
----------
Total preferred stock - High Yield
Bond Series 3.6% ................................. 200,375
----------
Total investments - High Yield Bond Series - 91.8% . 5,050,350
Cash and other assets, less liabilities - 8.2% ..... 448,756
----------
Total net assets - High Yield Bond Series - 100.0% . $5,499,106
==========
SECURITY TAX-EXEMPT FUND
MUNICIPAL BONDS
------------------------------------------
CIVIC CENTER DEVELOPMENT REVENUE - 1.0%
$250,000 District of Columbia Redevelopment Washington D.C.
Sports Arena, 5.40% - 2000 ....................... $251,250
EDUCATION REVENUE - 22.7%
$1,000,000 Illinois Chicago School, Series A, 4.90% - 2005 .... 993,750
$480,000 Iowa Higher Education St. Ambrose, 5.75% - 2011 .... 463,200
$1,000,000 Island County Washington School District
South Whidbey, 6.75% - 2007 ...................... 1,148,750
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
15
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
SECURITY TAX-EXEMPT FUND (CONTINUED)
PRINCIPAL MARKET
AMOUNT MUNICIPAL BONDS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
EDUCATION REVENUE, CONTINUED
$1,000,000 Federal Way, Washington School District,
4.80% - 2007 ..................................... $967,500
500,000 Mukwanago, Wisconsin School District, 5.00% - 2004 . 506,250
1,000,000 North Brunswick Township, New Jersey Board
of Education, 6.30% - 2013 ....................... 1,066,250
500,000 Northfield, Minnesota School District #659,
4.80% - 2007 ..................................... 490,000
----------
5,635,700
ELECTRIC UTILITY REVENUE - 17.5%
1,000,000 Georgia Municipal Electric Authority, 5.25% - 2025 . 941,250
1,200,000 Massachusetts Municipal Wholesale Electric Company
Power Supply System, Series B, 6.625% - 2004 ..... 1,299,000
1,000,000 Nebraska Public Power District Revenue,
Series A, 6.25% - 2022 ........................... 1,032,500
1,000,000 Washington Public Power Supply System Revenue
Nuclear Project #2, 6.30% - 2012 ................. 1,068,750
----------
4,341,500
GENERAL OBLIGATION - 16.7%
1,000,000 Clark County, Nevada School District, Series A,
5.50% - 2016 ..................................... 986,250
1,000,000 Dade County Florida, 5.75% - 2001 .................. 1,050,000
1,000,000 State of Illinois, 6.10% - 2003 .................... 1,073,750
1,000,000 Tulsa, Oklahoma, 5.125% - 2000 ..................... 1,021,250
----------
4,131,250
HIGHWAY REVENUE - 5.9%
1,400,000 Harris County, Texas, Series A, Toll Road & Tax,
6.125% - 2020 .................................... 1,475,250
POLLUTION CONTROL - 4.1%
1,000,000 Kansas City, Kansas General Motors Corporation
Project, 5.45% - 2006 ............................ 1,012,500
PORTS & HARBORS - 2.1%
500,000 Kansas City, Missouri Port Authority
Riverfront Park, 5.75% - 2005 .................... 513,125
SALES TAX REVENUE - 5.2%
1,300,000 Los Angeles, California, 5.625% - 2018 ............. 1,293,500
SEWER REVENUE - 17.1%
$1,000,000 DuPage County, Illinois Stormwater
Project Refunding, 5.60% - 2021 .................. $1,017,500
1,000,000 Houston, Texas Water & Sewer System
Revenue Series A, 6.20% - 2020 ................... 1,046,250
1,000,000 King County Washington Sewer
Revenue Series A, 6.25% - 2034 ................... 1,050,000
1,100,000 Los Angeles, CA Wastewater System
Revenue, 6.00% - 2014 ............................ 1,139,875
----------
4,253,625
VARIOUS PURPOSE REVENUE - 4.0%
1,000,000 Denver Metropolitan Major League Baseball Stadium
Project, 4.00% - 1999 ............................ 988,750
----------
Total investments - Tax-Exempt Fund - 96.3% ........ 23,896,450
Cash and other assets, less liabilities - 3.7% ..... 918,053
----------
Total net assets - Tax-Exempt Fund - 100.0% ........ $24,814,503
==========
SECURITY CASH FUND
COMMERCIAL PAPER
------------------------------------------
BROKERAGE - 2.8%
$1,277,000 Merrill Lynch & Company, Inc.,
5.34%, 1-15-97 ................................... $99,792
5.33%, 1-22-97 ................................... 722,746
5.35%, 2-4-97 .................................... 99,494
5.35%, 2-6-97 .................................... 350,117
----------
1,272,149
COMBINATION GAS & ELECTRIC - 4.7%
440,000 Baltimore Gas & Electric Company, 5.35%, 1-17-97 ... 438,954
700,000 Central Illinois Light Company, 5.85%, 1-13-97 ..... 698,635
1,000,000 Madison Gas & Electric Company, 5.40%, 1-15-97 ..... 997,900
----------
2,135,489
COMPUTER SYSTEMS - 4.0%
1,800,000 International Business Machines Corporation,
5.39%, 1-8-97 .................................... 998,952
5.31%, 2-24-97 ................................... 793,628
----------
1,792,580
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
16
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
SECURITY CASH FUND (CONTINUED)
PRINCIPAL MARKET
AMOUNT COMMERCIAL PAPER (CONTINUED) VALUE
- --------------------------------------------------------------------------------
ELECTRIC UTILITIES - 11.0%
$100,000 Idaho Power Company, 6.15%, 1-16-97 ................ $99,744
1,611,000 Interstate Power Company,
5.37%, 1-14-97 ................................... 210,591
5.40%, 1-15-97 ................................... 399,160
5.55%, 2-19-97 ................................... 992,446
1,301,000 Massachusetts Electric Company,
6.05%, 1-2-97 .................................... 550,907
6.00%, 1-3-97 .................................... 749,750
2,000,000 Southern California Edison Company, 5.35%, 1-13-97 . 1,996,433
----------
4,999,031
ELECTRONICS - 4.4%
2,000,000 Avnet, Inc., 5.42%, 1-6-97 ......................... 1,998,494
ENGINEERING - 4.9%
2,250,000 Fluor Corporation, 5.37%, 1-29-97 .................. 2,240,603
FOOD PROCESSING - 1.5%
700,000 McCormick & Company, Inc., 5.31%, 1-10-97 .......... 699,071
INDUSTRIAL SERVICES - 2.7%
1,250,000 PPG Industries, Inc., 5.32%, 2-10-97 ............... 1,242,611
LEASING - 3.1%
1,400,000 International Lease Finance Corporation,
5.30%, 1-23-97 ................................... 1,395,466
NATURAL GAS - 1.9%
800,000 Bay State Gas Company, 5.35%, 1-24-97 .............. 797,266
POLLUTION CONTROL - 4.4%
2,000,000 Engelhard Corporation, 5.32%, 2-14-97 .............. 1,986,996
RETAIL--GROCERY - 4.5%
2,050,000 Winn-Dixie Stores, 5.38%, 1-28-97 .................. 2,041,728
TOBACCO - 4.4%
2,000,000 B.A.T. Capital Corporation, 5.38%, 1-17-97 ......... 1,995,218
WASTE - 5.9%
2,700,000 WMX Technologies, Inc., 5.40%, 1-24-97 ............. 2,690,685
----------
Total commercial paper - Cash Fund - 60.2% ......... 27,287,387
PRINCIPAL U.S.GOVERNMENT & GOVERNMENT MARKET
AMOUNT AGENCY SECURITIES VALUE
- --------------------------------------------------------------------------------
FEDERAL FARM CREDIT BANKS - 2.2%
$1,000,000 4.95%, 3-3-97 .................................... $997,031
FEDERAL HOME LOAN BANK - 4.4%
2,000,000 5.63%, 12-17-97 .................................. 2,000,000
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 6.6%
3,000,000 4.97%, 3-10-97 ................................... 2,998,077
SBA POOLS - 13.1%
1,853,960 6.50% - 2017(1) .................................. 1,871,455
1,129,571 5.875% - 2018(2) ................................. 1,133,807
944,512 5.875% - 2020(2) ................................. 944,512
989,217 5.75% - 2021(2) .................................. 989,836
976,265 5.75% - 2021(2) .................................. 976,875
----------
5,916,485
----------
Total U.S. government & government agency
securities - Cash Fund - 26.3% ................... 11,911,593
----------
Total investments - Cash Fund - 86.5% .............. 39,198,980
Cash and other assets, less liabilities - 13.5% .... 6,131,744
----------
Total net assets - Cash Fund - 100.0% .............. $45,330,724
==========
The identified cost of investments owned at December 31, 1996, was the same for
federal income tax and book purposes, except for the Corporate Bond Series for
which the identified cost for federal income tax purposes was $75,921,420.
CMO - (Collateralized Mortgage Obligation)
1 Variable rate security which may be reset the first of each month.
2 Variable rate security which may be reset the first of each quarter.
3 Principal amount on foreign bonds is reflected in local currency (e.g.,
Danish krone) while market value is reflected in U.S. dollars.
4 Deferred interest obligation; currently zero coupon under terms of initial
offering.
5 Put bond - a type of specialty bond that gives the holder the right to
redeem to the issuer at certain specified times before maturity.
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
17
<PAGE>
BALANCE SHEETS
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SECURITY INCOME FUND
----------------------------------------------------------------
CORPORATE U.S. LIMITED GLOBAL HIGH SECURITY SECURITY
BOND GOVERNMENT MATURITY AGGRESSIVE YIELD TAX-EXEMPT CASH
SERIES SERIES BOND SERIES BOND SERIES BOND SERIES FUND FUND
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments, at value (identified
cost $75,920,997, $8,368,335,
$5,053,086, $4,636,461, $4,903,283,
$23,444,597 and $11,911,593,
respectively) ..................... $75,718,270 $8,529,924 $5,116,636 $4,780,220 $5,050,350 $23,896,450 $11,911,593
Commercial paper, at amortized cost
which approximates market value ... -- -- -- -- -- -- 27,287,387
Cash ................................ 3,819,126 19,657 480,863 10,832 335,499 470,572 --
Receivables:
Fund shares sold .................. 3,058 2,955 4,664 176 323 226 6,253,739
Securities sold ................... 30,883 -- 1,724 110,392 -- -- 65,162
Interest .......................... 1,376,532 150,717 109,306 162,365 116,259 459,712 136,935
Security Management Company ....... 1,370 427 715 104 158 -- --
Prepaid expense ..................... 2,573 3,798 2,809 -- -- 9,129 13,303
Forward foreign exchange contracts .. -- -- -- 4,917 -- -- --
------------ ----------- ----------- ---------- ----------- ------------ ------------
Total assets ................. $80,951,812 $8,707,478 $5,716,717 $5,069,006 $5,502,589 $24,836,089 $45,668,119
============ =========== =========== ========== =========== ============ ============
LIABILITIES AND NET ASSETS
Liabilities:
Payable for fund shares redeemed .. $201,806 $-- $9,800 $-- $-- $-- $70,126
Dividends payable to shareholders . -- -- -- 1,460 -- -- 163,788
Written call options outstanding .. -- -- -- 5,979 -- -- --
Cash overdraft .................... -- -- -- -- -- -- 41,507
Other liabilities:
Management fees ................. 35,769 -- -- -- -- 10,762 24,897
12b-1 distribution plan fees .... 22,667 2,591 1,694 2,033 2,972 1,180 --
Custodian and transfer agent fees 10,725 4,304 3,165 3,316 80 1,353 11,529
Administration fees ............. 6,438 786 426 188 431 1,937 1,725
Professional fees ............... 4,502 1,094 2,427 942 -- 2,530 5,003
Miscellaneous ................... 6,260 1,304 296 7,840 -- 3,824 18,820
---------- ---------- ---------- ----------- ----------- ---------- ------------
Total liabilities ............ 288,167 10,079 17,808 21,758 3,483 21,586 337,395
Net Assets:
Paid in capital ..................... 93,223,300 9,514,029 5,704,923 4,885,064 5,387,903 25,834,978 45,330,724
Undistributed net investment
income (loss) ..................... -- 158 -- 117,348 721 5,559 --
Accumulated undistributed net realized
loss on sale of investments and
foreign currency transactions ..... (12,356,928) (978,377) (69,564) (99,652) (36,585) (1,477,887) --
Net unrealized appreciation
(depreciation) in value of investments
and translation of assets and
liabilities in foreign currency ... (202,727) 161,589 63,550 144,488 147,067 451,853 --
------------ ---------- ----------- ----------- ------------ ------------ ------------
Net assets ...................... 80,663,645 8,697,399 5,698,909 5,047,248 5,499,106 24,814,503 45,330,724
------------ ---------- ----------- ----------- ------------ ------------ ------------
Total liabilities and
net assets ................. $80,951,812 $8,707,478 $5,716,717 $5,069,006 $5,502,589 $24,836,089 $45,668,119
============ ========== =========== =========== ============ ============ ============
CLASS "A" SHARES
Capital shares outstanding .......... 10,681,022 1,704,844 486,912 338,604 181,468 2,397,740 45,330,724
Net assets .......................... $73,360,359 $8,036,075 $4,937,697 $3,506,595 $2,780,234 $23,304,115 $45,330,724
Net asset value per share (net assets
divided by shares outstanding) .... $6.87 $4.71 $10.14 $10.36 $15.32 $9.72 $1.00
Add: Selling commission
(4.75% of offering price)
(excluding Cash Fund) ............. 0.34 0.23 0.51 .52 .76 0.48 --
------------ ----------- ------------ ------------ ------------ ------------ ------------
Offering price per share
(net asset value
divided by 95.25%) ................ $7.21 $4.94 $10.65 $10.88 $16.08 $10.20 $1.00
============ =========== ============ ============ ============ ============ ============
CLASS "B" SHARES
Capital shares outstanding .......... 1,057,722 140,328 75,091 148,027 177,479 155,270 --
Net assets .......................... $7,303,286 $661,324 $761,212 $1,540,653 $2,718,872 $1,510,388 --
Net asset value per share
(net assets divided
by shares outstanding) ............ $6.90 $4.71 $10.14 $10.41 $15.32 $9.73 --
============ =========== ============ ============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
18
<PAGE>
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SECURITY INCOME FUND
----------------------------------------------------------------
CORPORATE U.S. LIMITED GLOBAL HIGH SECURITY SECURITY
BOND GOVERNMENT MATURITY AGGRESSIVE YIELD TAX-EXEMPT CASH
SERIES SERIES BOND SERIES BOND SERIES BOND SERIES* FUND FUND
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest .......................... $6,648,760 $761,589 $403,999 $575,957 $192,134 $1,362,359 $2,640,745
EXPENSES
Management fees ................... 440,214 55,727 26,161 34,900 12,264 120,946 247,304
Transfer/maintenance fees ......... 106,615 18,012 3,875 1,269 274 16,538 130,682
12b-1 distribution plan fees ...... 263,503 31,385 19,017 22,956 13,262 12,756 --
Administration fees ............... 79,239 9,690 4,638 41,952 1,920 22,530 21,721
Custodian fees .................... 12,146 4,600 4,478 10,519 462 1,345 8,824
Directors' fees ................... 8,940 1,122 520 385 -- 11,241 11,766
Professional fees ................. 1,746 -- 7,514 9,739 3,000 -- 3,131
Registration fees ................. 23,243 16,374 15,016 19,296 20,855 23,076 45,264
Other expenses .................... 14,200 1,267 1,105 1,444 709 4,092 16,556
------------ ----------- ------------ ----------- ------------ ------------ ------------
949,846 138,177 82,324 142,460 52,746 212,524 485,248
Less: Earnings credits applied .... (2,590) (1,365) (1,687) -- -- (1,345) (2,633)
Reimbursement of expenses ....... (10,663) (60,974) (27,868) (38,590) (12,264) (2,358) --
------------ ----------- ------------ ----------- ------------ ------------ ------------
Total expenses ............... 936,593 75,838 52,769 103,870 40,482 208,821 482,615
------------ ----------- ------------ ------------ ------------ ------------ ------------
Net investment income ...... 5,712,167 685,751 351,230 472,087 151,652 1,153,538 2,158,130
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss)
during the period on:
Investments ..................... (1,347,012) 182,946 (46,509) 133,869 (36,585) 56,324 --
Foreign currency transactions ... -- -- -- (174,582) -- -- --
------------ ----------- ------------ ----------- ------------- ------------ ------------
Net realized gain (loss) ...... (1,347,012) 182,946 (46,509) (40,713) (36,585) 56,324 --
Net change in unrealized
appreciation (depreciation)
during the period on:
Investments ................... (5,522,985) (735,463) (186,260) 71,369 147,067 (671,331) --
Translation of assets and
liabilities in foreign
currencies .................. -- -- -- 3,699 -- -- --
------------ ----------- ----------- ---------- ------------ ------------ ------------
Net unrealized appreciation
(depreciation) ................ (5,522,985) (735,463) (186,260) 75,068 147,067 (671,331) --
------------ ----------- ----------- ---------- ------------ ------------ ------------
Net gain (loss) ................. (6,869,997) (552,517) (232,769) 34,355 110,482 (615,007) --
------------ ----------- ----------- ---------- ------------ ------------ ------------
Net increase (decrease)
in net assets resulting
from operations ............. ($1,157,830) $133,234 $118,461 $506,442 $262,134 $538,531 $2,158,130
============ =========== =========== ========== ============ ============ ============
</TABLE>
*Period August 5, 1996 (inception) through December 31, 1996.
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
19
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SECURITY INCOME FUND
----------------------------------------------------------------
CORPORATE U.S. LIMITED GLOBAL HIGH SECURITY SECURITY
BOND GOVERNMENT MATURITY AGGRESSIVE YIELD TAX-EXEMPT CASH
SERIES SERIES BOND SERIES BOND SERIES BOND SERIES* FUND FUND
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS
Net investment income ............. $5,712,167 $685,751 $351,230 $472,087 $151,652 $1,153,538 $2,158,130
Net realized gain (loss) .......... (1,347,012) 182,946 (46,509) (40,713) (36,585) 56,324 --
Unrealized appreciation
(depreciation) during the period (5,522,985) (735,463) (186,260) 75,068 147,067 (671,331) --
----------- --------- ---------- ---------- ---------- ----------- ----------
Net increase (decrease) in
net assets resulting
from operations .............. (1,157,830) 133,234 118,461 506,442 262,134 538,531 2,158,130
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income
Class A ......................... (5,393,982) (655,579) (304,962) (210,236) (79,996) (1,107,445) (2,158,130)
Class B ......................... (343,417) (32,686) (47,156) (85,158) (70,935) (44,319) --
In excess of net realized gain
Class A ......................... -- -- -- (74,660) -- -- --
Class B ......................... -- -- -- (32,900) -- -- --
Tax return of capital
Class A ......................... -- -- (5,684) -- -- -- --
Class B ......................... -- -- (879) -- -- -- --
----------- --------- ---------- ---------- ---------- ----------- ----------
Total distributions to
shareholders ................ (5,737,399) (688,265) (358,681) (402,954) (150,931) (1,151,764) (2,158,130)
CAPITAL SHARE TRANSACTIONS (A):
Proceeds from sale of shares
Class A ......................... 8,731,109 1,930,782 2,444,146 255,854 2,644,208 1,613,431 310,586,017
Class B ......................... 3,464,361 375,419 269,401 79,004 2,611,381 579,929 --
Dividends reinvested
Class A ......................... 4,241,649 543,532 284,749 283,688 79,998 626,193 1,969,086
Class B ......................... 304,987 26,151 47,452 110,636 70,935 31,495 --
Cost of shares redeemed
Class A ......................... (26,834,054) (3,998,800) (913,142) (66,489) (48) (3,379,177) (305,382,279)
Class B ......................... (1,793,517) (286,899) (267,281) (127,192) (18,571) (260,053) --
----------- --------- ---------- ---------- ---------- ----------- ----------
Net increase (decrease) from
capital share transactions .. (11,885,465) (1,409,815) 1,865,325 535,501 5,387,903 (788,182) 7,172,824
----------- --------- ---------- ---------- ---------- ----------- ----------
Total increase (decrease)
in net assets ............ (18,780,694) (1,964,846) 1,625,105 638,989 5,499,106 (1,401,415) 7,172,824
NET ASSETS:
Beginning of period ............... 99,444,339 10,662,245 4,073,804 4,408,259 -- 26,215,918 38,157,900
----------- ---------- ---------- ---------- ---------- ----------- -----------
End of period ..................... $80,663,645 $8,697,399 $5,698,909 $5,047,248 $5,499,106 $24,814,503 $45,330,724
=========== ========== ========== ========== ========== =========== ===========
Undistributed net investment
income .......................... $-- $158 $-- $117,348 $721 $5,559 $--
=========== ========== ========== ========== ========== =========== ===========
(a) Shares issued and redeemed:
Shares sold
Class A ................... 1,257,439 408,653 236,285 24,675 176,201 167,132 310,586,017
Class B ................... 497,238 79,022 25,885 7,907 174,028 59,521 --
Dividends reinvested
Class A ................... 608,432 115,124 27,590 27,930 5,270 65,031 1,969,086
Class B ................... 43,584 5,533 4,593 10,901 4,677 3,268 --
Shares redeemed
Class A ................... (3,860,010) (845,356) (88,496) (6,449) (3) (350,952) (305,382,279)
Class B ................... (256,329) (61,304) (25,864) (12,357) (1,226) (27,117) --
Net increase (decrease) ..... (1,709,646) (298,328) 179,993 52,607 358,947 (83,117) 7,172,824
=========== ========== ========== ========== ========== =========== ===========
</TABLE>
*Period August 5, 1996 (inception) through December 31, 1996.
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
20
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
SECURITY INCOME FUND
---------------------------------------------------------
CORPORATE U.S. LIMITED GLOBAL SECURITY SECURITY
BOND GOVERNMENT MATURITY AGGRESSIVE TAX-EXEMPT CASH
SERIES SERIES BOND SERIES BOND SERIES** FUND FUND
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
FROM OPERATIONS:
Net investment income ............. $6,415,436 $574,999 $211,931 $243,325 $1,281,238 $2,516,770
Net realized gain (loss) .......... 2,922,105 22,802 (23,055) (36,350) 301,901 --
Unrealized appreciation during
the period ...................... 6,960,323 1,209,772 249,810 69,420 2,117,941 --
---------- --------- --------- --------- --------- ----------
Net increase in net assets
resulting from operations .. 16,297,864 1,807,573 438,686 276,395 3,701,080 2,516,770
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A ......................... (6,158,758) (551,577) (177,005) (146,443) (1,241,504) (2,516,770)
Class B ......................... (255,751) (24,133) (34,039) (63,361) (39,808) --
In excess of net realized gain
Class A ......................... -- -- -- (5,311) -- --
Class B ......................... -- -- -- (2,584) -- --
---------- --------- --------- --------- --------- ----------
Total distributions
to shareholders ............. (6,414,509) (575,710) (211,044) (217,699) (1,281,312) (2,516,770)
CAPITAL SHARE TRANSACTIONS (A):
Proceeds from sale of shares
Class A ......................... 7,438,108 2,385,671 3,092,500 4,109,884 2,787,651 347,493,190
Class B ......................... 2,180,877 240,748 681,901 1,354,123 370,386 --
Dividends reinvested
Class A ......................... 4,740,285 434,084 172,699 151,754 712,138 2,479,477
Class B ......................... 209,073 17,062 32,734 64,040 25,374 --
Cost of shares redeemed
Class A ......................... (18,496,662) (2,223,959) (129,283) (1,330,238) (4,896,869) (369,916,482)
Class B ......................... (981,865) (53,363) (4,389) -- (54,635) --
---------- --------- --------- --------- --------- ----------
Net increase (decrease) from
capital share transactions .. (4,910,184) 800,243 3,846,162 4,349,563 (1,055,955) (19,943,815)
---------- --------- --------- --------- --------- ----------
Total increase (decrease)
in net assets ........... 4,973,171 2,032,106 4,073,804 4,408,259 1,363,813 (19,943,815)
NET ASSETS:
Beginning of period ............... 94,471,168 8,630,139 -- -- 24,852,105 58,101,715
---------- ---------- --------- --------- ---------- ----------
End of period ..................... $99,444,339 $10,662,245 $4,073,804 $4,408,259 $26,215,918 $38,157,900
========== ========== ========= ========= ========== ==========
Undistributed net investment income . $19,734 $2,672 $887 ($8,314) $3,785 $--
========== ========== ========= ========= ========== ==========
(a) Shares issued and redeemed:
Shares sold
Class A ..................... 1,055,977 507,582 307,309 406,499 289,991 347,493,190
Class B ..................... 304,780 51,475 67,767 135,204 38,553 --
Dividends reinvested
Class A ..................... 673,772 93,100 16,505 15,098 74,305 2,479,477
Class B ..................... 29,519 3,639 3,127 6,372 2,642 --
Shares redeemed
Class A ..................... (2,613,704) (485,740) (12,281) (129,149) (510,770) (369,916,482)
Class B ..................... (139,145) (11,827) (417) -- (5,598) --
---------- ---------- --------- --------- ---------- ----------
Net increase (decrease) ....... (688,801) 158,229 382,010 434,024 (110,877) (19,943,815)
========== ========== ========= ========= ========== ==========
</TABLE>
* Period January 17, 1995 (inception) through December 31, 1995.
** Period June 1, 1995 (inception) through December 31, 1995.
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
21
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
SELECTED DATA FOR EACH SHARE OF CAPITAL
STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Ratio
of Ratio
Net Divi- expen- of
Net gain Total dends Net Net ses net
Fiscal asset (loss) from (from Distri asset assets to income Port-
period value Net (real- invest- net butions value end of aver- to folio
ended begin- invest- ized & ment invest- (from Return Total end Total period age average turn-
Decem- ning of ment unreal- opera- ment capital of distri- of return (thou- net net over
ber 31 period income ized) tions income) gains) capital butions period (a) sands) assets assets rate
- ------------------------------------------------------------------------------------------------------------------------------------
CORPORATE BOND SERIES (CLASS A)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1992 $7.68 $0.61 $0.044 $0.654 $(0.614) $-- $-- $(0.614) $7.72 9.0% $104,492 1.01% 7.97% 61%
1993 7.72 0.52 0.521 1.041 (0.527) (0.424) -- (0.951) 7.81 13.4% 118,433 1.02% 6.46% 157%
1994 7.81 0.49 (1.127) (0.637) (0.493) -- -- (0.493) 6.68 (8.3%) 90,593 1.01% 6.91% 204%
1995(d)(g) 6.68 0.47 0.708 1.178 (0.468) -- -- (0.468) 7.39 18.2% 93,701 1.02% 6.62% 200%
1996(d)(g) 7.39 0.47 (0.517) (0.047) (0.473) -- -- (0.473) 6.87 (0.5%) 73,360 1.01% 6.54% 292%
CORPORATE BOND SERIES (CLASS B)
1993(b) $8.59 $0.11 $(0.324) $(0.214) $(0.112) $(0.424) $-- $(0.536) $7.84 (2.5%) $1,022 1.88% 5.16% 164%
1994(c) 7.84 0.43 (1.129) (0.699) (0.431) -- -- (0.431) 6.71 (9.0%) 3,878 1.85% 6.08% 204%
1995(c)
(d)(g) 6.71 0.40 0.725 1.125 (0.405) -- -- (0.405) 7.43 17.3% 5,743 1.85% 5.80% 200%
1996(c)
(d)(g) 7.43 0.40 (0.517) (0.117) (0.413) -- -- (0.413) 6.90 (1.4%) 7,303 1.85% 5.70% 292%
U.S. GOVERNMENT SERIES (CLASS A)
1992(c) $5.17 $0.37 $(0.126) $0.244 $(0.366) $-- $(.008) $(0.374) $5.04 5.0% $9,364 1.11% 7.22% 157%
1993(c) 5.04 0.31 0.273 0.583 (0.310) (0.344) -- (0.654) 4.97 10.9% 10,098 1.10% 5.90% 153%
1994(c) 4.97 0.30 (0.621) (0.321) (0.299) -- -- (0.299) 4.35 (6.5%) 8,309 1.10% 6.47% 220%
1995(c)
(d)(g) 4.35 0.30 0.620 0.92 (0.30) -- -- (0.30) 4.97 21.9% 10,080 1.11% 6.41% 81%
1996(c)
(d)(g) 4.97 0.31 (0.256) 0.054 (0.314) -- -- (0.314) 4.71 1.3% 8,036 0.65% 6.44% 75%
U.S. GOVERNMENT SERIES (CLASS A)
1992(c) $5.17 $0.37 $(0.126) $0.244 $(0.366) $-- $(.008) $(0.374) $5.04 5.0% $9,364 1.11% 7.22% 157%
1993(c) 5.04 0.31 0.273 0.583 (0.310) (0.344) -- (0.654) 4.97 10.9% 10,098 1.10% 5.90% 153%
1994(c) 4.97 0.30 (0.621) (0.321) (0.299) -- -- (0.299) 4.35 (6.5%) 8,309 1.10% 6.47% 220%
1995(c)
(d)(g) 4.35 0.30 0.620 0.92 (0.30) -- -- (0.30) 4.97 21.9% 10,080 1.11% 6.41% 81%
1996(c)
(d)(g) 4.97 0.31 (0.256) 0.054 (0.314) -- -- (0.314) 4.71 1.3% 8,036 0.65% 6.44% 75%
U.S. GOVERNMENT SERIES (CLASS B)
1993(b)(c)$5.51 $0.04 $(0.193) $(0.153) $(0.043) $(0.344) $-- $(0.387) $4.97 (1.4%) $140 1.61% 5.54% 114%
1994(c) 4.97 0.26 (0.624) (0.364) (0.256) -- -- (0.256) 4.35 (7.4%) 321 1.85% 5.76% 220%
1995(c)
(d)(g) 4.35 0.26 0.625 0.885 (0.265) -- -- (0.265) 4.97 20.9% 582 1.87% 5.69% 81%
1996(c)
(d)(g) 4.97 0.25 (0.254) (0.004) (0.256) -- -- (0.256) 4.71 (0.02%) 661 1.86% 5.23% 75%
LIMITED MATURITY BOND SERIES (CLASS A)
1995(c)
(d)(e)(g)$10.00 $0.62 $0.652 $1.272 $(0.612) $-- $-- $(0.612) $10.66 13.0% $3,322 0.84% 5.97% 4%
1996(c)
(d)(g) 10.66 0.72 (0.507) 0.213 (0.720) -- (0.013) (0.733) 10.14 2.1% 4,938 0.90% 6.97% 105%
LIMITED MATURITY BOND SERIES (CLASS B)
1995(c)(d)
(e)(g) $10.00 $0.53 $0.664 $1.194 $(0.524) $-- $-- $(0.524) $10.67 12.2% $752 1.71% 5.12% 4%
1996(c)
(d)(g) 10.67 0.63 (0.524) 0.106 (0.624) -- (0.012) (0.636) $10.14 1.1% 761 1.88% 5.99% 105%
GLOBAL AGGRESSIVE BOND SERIES (CLASS A)
1995(c)(d)
(f) $10.00 $0.63 $0.09 $0.72 $(0.55) $(0.02) $-- $(0.57) $10.15 7.3% $2,968 2.00% 11.04% 127%
1996(c)(d)10.15 1.06 0.064 1.124 (0.687) (0.227) -- (0.914) 10.36 11.6% 3,507 1.98% 10.39% 96%
GLOBAL AGGRESSIVE BOND SERIES (CLASS B)
1995(c)
(d)(f) $10.00 $0.56 $0.12 $0.68 $(0.49) $(0.02) $-- $(0.51) $10.17 6.9% $1,440 2.75% 10.24% 127%
1996(c)(d)10.17 0.98 0.06 1.04 (0.573) (0.227) -- (0.80) 10.41 10.7% 1,541 2.75% 9.64% 96%
HIGH YIELD BOND SERIES (CLASS A)
1996(c)(d)
(h)(g) $15.00 $0.45 $0.32 $0.77 $(0.45) $-- $-- $(0.45) $15.32 5.2% $2,780 1.54% 7.47% 168%
HIGH YIELD BOND SERIES (CLASS B)
1996(c)(d)
(h)(g) $15.00 $0.41 $0.32 $0.73 $(0.41) $-- $-- $(0.41) $15.32 4.9% $2,719 2.26% 6.74% 168%
</TABLE>
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
22
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
SELECTED DATA FOR EACH SHARE OF CAPITAL
STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Ratio
of Ratio
Net Divi- expen- of
Net gain Total dends Net Net ses net
Fiscal asset (loss) from (from Distri asset assets to income Port-
period value Net (real- invest- net butions value end of aver- to folio
ended begin- invest- ized & ment invest- (from Return Total end Total period age average turn-
Decem- ning of ment unreal- opera- ment capital of distri- of return (thou- net net over
ber 31 period income ized) tions income) gains) capital butions period (a) sands) assets assets rate
- ------------------------------------------------------------------------------------------------------------------------------------
SECURITY TAX-EXEMPT FUND (CLASS A)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1992 $9.97 $0.61 $0.092 $0.702 $(0.612) $-- $-- $(0.612) $10.06 7.3% 28,608 0.84% 6.07% 91%
1993 10.06 0.51 0.702 1.212 (0.514) (0.388) -- (0.902) 10.37 11.6% 32,115 0.82% 4.92% 118%
1994 10.37 0.47 (1.317) (0.847) (0.473) -- -- (0.473) 9.05 (8.3%) 24,092 0.82% 4.74% 88%
1995 9.05 0.48 0.891 1.371 (0.481) -- -- (0.481) 9.94 15.5% 25,026 0.86% 5.02% 103%
(c)(d)(g)
1996 9.94 0.45 (0.215) 0.235 (0.455) -- -- (0.455) 9.72 2.5% 23,304 0.78% 4.67% 54%
(c)(d)(g)
SECURITY TAX-EXEMPT FUND (CLASS B)
1993(b) $10.88 $0.10 $(0.128) $(0.028) $(0.094) $(0.388) $-- $(0.482) $10.37 (0.2%) $106 2.89% 2.71% 90%
1994(c) 10.37 0.35 (1.321) (0.971) (0.349) -- -- (0.349) 9.05 (9.5%) 760 2.00% 3.50% 88%
1995 9.05 0.37 0.902 1.272 (0.372) -- -- (0.372) 9.95 14.3% 1,190 2.00% 3.90% 103%
(c)(d)(g)
1996 9.95 0.33 (0.215) 0.115 (0.335) -- -- (0.335) 9.73 1.2% 1,510 2.01% 3.44% 54%
(c)(d)(g)
SECURITY CASH FUND
1991 $1.00 $0.051 $-- $0.051 $(0.051) $-- $-- $(0.051) 1.00 5.2% $48,843 0.96% 5.21% --
1992(c) 1.00 0.028 -- 0.028 (0.028) -- -- (0.028) 1.00 2.8% 56,694 1.00% 2.75% --
1993(c) 1.00 0.023 -- 0.023 (0.023) -- -- (0.023) 1.00 2.4% 71,870 1.00% 2.28% --
1994 1.00 0.033 -- 0.033 (0.033) -- -- (0.033) 1.00 3.4% 58,102 0.96% 3.24% --
1995 1.00 0.049 -- 0.049 (0.049) -- -- (0.049) 1.00 5.0% 38,158 1.00% 5.00% --
(c)(d)(g)
1996 1.00 0.045 -- 0.045 (0.045) -- -- (0.045) 1.00 4.6% 45,331 1.01% 4.47% --
(c)(d)(g)
</TABLE>
(a) Total return information does not take into account any charges paid at
time of purchase or contingent deferred sales charges paid at time of
redemption.
(b) Class "B" shares were initially issued on October 19, 1993. Percentage
amounts for the period, except total return, have been annualized.
(c) Fund expenses were reduced by the Investment Manager and expense ratios
absent such reimbursement would have been as follows:
1991 1992 1993 1994 1995 1996
----- ----- ----- ----- ----- -----
Corporate Bond Class B -- -- -- 2.00% 2.19% 2.05%
U.S. Government Class A 1.24% 1.20% 1.20% 1.20% 1.22% 1.17%
Class B -- -- 1.75% 2.91% 3.70% 3.26%
Limited Maturity Class A -- -- -- -- 1.04% 1.40%
Bond Class B -- -- -- -- 2.12% 2.60%
Global Aggressive Class A -- -- -- -- 2.42% 2.73%
Bond Class B -- -- -- -- 3.93% 3.75%
High Yield Class A -- -- -- -- -- 2.11%
Class B -- -- -- -- -- 2.83%
Tax-Exempt Class A -- -- -- -- 0.86% 0.78%
Class B -- -- -- 2.32% 2.45% 2.19%
Cash -- 1.03% 1.03% -- 1.04% 1.01%
(d) Net investment income was computed using the average month-end shares
outstanding throughout the period.
(e) Security Limited Maturity Bond Series was initially capitalized on January
17, 1995, with a net asset value of $10 per share. Percentage amounts for
period have been annualized, except for total return.
(f) Security Global Aggressive Bond Series was initially capitalized on June 1,
1995, with a net asset value of $10 per share. Percentage amounts for
period have been annualized, except for total return.
(g) Expense ratios including reimbursements, were calculated without the
reduction for custodian fees earnings credits beginning February 1, 1995.
Expense ratios with such reductions would have been as follows:
1995 1996
----- -----
Corporate Bond Class A 1.02% 1.01%
Class B 1.85% 1.85%
U.S. Government Class A 1.10% 0.64%
Class B 1.85% 1.85%
Limited Maturity Bond Class A 0.81% 0.87%
Class B 1.65% 1.85%
Tax-Exempt Class A 0.85% 0.77%
Class B 2.00% 2.00%
Cash Fund 1.00% 1.00%
(h) Security High Yield Bond Series was initially capitalized on August 5,
1996, with a net asset value of $15 per share. Percentage amounts for the
period have been annualized, except for total return.
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
23
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
Security Income Fund, Security Tax-Exempt Fund and Security Cash Fund (the
Funds) are registered under the Investment Company Act of 1940, as amended, as
diversified, open-end management investment companies. The shares of Security
Income Fund are currently issued in five Series, the Corporate Bond Series, the
U.S. Government Series, the Limited Maturity Bond Series, the Global Aggressive
Bond Series and the High Yield Bond Series, with each Series, in effect,
representing a separate fund. The Income Fund is required to account for each
Series separately and to allocate general expenses to each Series based upon the
net asset value of each Series. The following is a summary of the significant
accounting policies followed by the Funds in the preparation of their financial
statements. These policies are in conformity with generally accepted accounting
principles.
A. SECURITY VALUATION -- Valuations of Income Fund's and Tax-Exempt Fund's
securities are supplied by pricing services approved by the Board of Directors.
Securities listed or traded on a national securities exchange are valued on the
basis of the last sales price. If there are no sales on a particular day, then
the securities are valued at the last bid price. Securities for which market
quotations are not readily available are valued by a pricing service considering
securities with similar yields, quality, type of issue, coupon, duration and
rating. If there is no bid price or if the bid price is deemed to be
unsatisfactory by the Board of Directors or by the Fund's investment manager,
then the securities are valued in good faith by such method as the Board of
Directors determines will reflect the fair value. The Funds' officers, under the
general supervision of the Board of Directors, regularly review procedures used
by, and valuations provided by, the pricing service.
Cash Fund, by approval of the Board of Directors, utilizes the amortized
cost method for valuing portfolio securities, whereby all investments are valued
by reference to their acquisition cost as adjusted for amortization of premium
or accretion of discount.
Generally, trading in foreign securities markets is substantially completed
each day at various times prior to the close of the New York Stock Exchange. The
values of foreign securities are determined as of the close of such foreign
markets or the close of the New York Stock Exchange if earlier. All investments
quoted in foreign currency are valued in U.S. dollars on the basis of the
foreign currency exchange rate prevailing at the close of business. The Global
Aggressive Bond Series' investments in foreign securities may involve risks not
present in domestic investments. Since foreign securities may be denominated in
a foreign currency and involve settlement and pay interest in foreign
currencies, changes in the relationship of these foreign currencies to the U.S.
dollar can significantly affect the value of the investments and earnings of the
Funds. Foreign investments may also subject the Global Aggressive Bond Series to
foreign government exchange restrictions, expropriation, taxation or other
political, social or economic developments, all of which could affect the market
and/or credit risk of the investments.
B. FOREIGN CURRENCY TRANSACTIONS -- The accounting records of the Funds are
maintained in U. S. dollars. All assets and liabilities initially expressed in
foreign currencies are converted into U.S. dollars at prevailing exchange rates.
Purchases and sales of investment securities, dividend and interest income, and
certain expenses are translated at the rates of exchange prevailing on the
respective dates of such transactions.
The Funds isolate that portion of results of operations resulting from
changes in foreign exchange rates on investments from the fluctuations arising
from changes in the market prices of securities held.
Net realized foreign exchange gains or losses arise from sales of portfolio
securities, sales of foreign currencies, and the difference between asset and
liability amounts initially stated in foreign currencies and the U.S. dollar
value of the amounts actually received or paid. Net unrealized foreign exchange
gains or losses arise from changes in the value of portfolio securities and
other assets and liabilities at the end of the reporting period, resulting from
changes in the exchange rates.
C. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS - Global Aggressive Bond
Series may enter into forward foreign exchange contracts in connection with
foreign currency risk from purchase or sale of securities denominated in foreign
currency. The Series may also enter into such contracts to manage changes in
foreign currency exchange rates on portfolio positions. These contracts are
marked to market daily, by recognizing the difference between the contract
exchange rate and the current market rate as unrealized gains or losses.
Realized gains or losses are recognized when contracts are settled and are
reflected in the statement of operations. These contracts involve market risk in
excess of the amount reflected in the Balance Sheet. The face or contract amount
in U.S. dollars reflects the total exposure the Global Aggressive Bond Series
has in that particular currency contract. Losses may arise due to changes in the
value of the foreign currency or if the counterparty does not perform under the
contract.
D. OPTIONS - The Global Aggressive Bond Series and High Yield Bond Series
may purchase put and call options and write such options on a covered basis on
securities that are traded on recognized securities exchanges and
over-the-counter markets. Call and put options on securities give the holder the
right to purchase or sell, respectively (and the writer the obligation to sell
or purchase), a security at a specified price, on or until a certain date. The
primary risks associate with the use of options are an imperfect correlation
between the change in market value of the securities held by the Series and the
price of the option, the possibility of an illiquid market, and the inability of
the counter-party to meet the terms of the contract.
The premium received for a written option is recorded as an asset, with an
equal liability which is marked to market based on the option's quoted daily
settlement price. Fluctuation in the value of such instruments are recorded as
unrealized appreciation (depreciation) until terminated, at which time realized
gains and losses are recognized. The Global Aggressive Bond Series wrote covered
call options during the year in which the Series received $7,179 in premiums.
E. SECURITY TRANSACTIONS AND INVESTMENT INCOME - Security transactions are
accounted for on the date the securities are purchased or sold. Realized gains
and losses are reported on an identified cost basis. Interest income is
recognized on the accrual basis. Premium and discounts (except original issue
discounts) on debt securities are not amortized, except Security Tax-Exempt Fund
which amortizes premiums.
F. DISTRIBUTIONS TO SHAREHOLDERS - Distributions to shareholders are
recorded on the ex-dividend date. The character of distributions made during the
year from net investment income or net realized gains may differ from their
ultimate characterization for federal income tax purposes. These differences are
primarily due to the recharacterization of foreign currency gains and losses.
G. TAXES - The Funds complied with the requirements of the Internal Revenue
Code applicable to regulated investment companies and distributed all of their
taxable net income and net realized gains sufficient to relieve them from all,
or substantially all, federal income, excise and state income taxes. Therefore,
no provision for federal or state income tax is required.
H. EARNINGS CREDITS - Under the fee schedule with the custodian, the Funds
earn credits based on overnight custody cash balances. These credits are
utilized to reduce related custodial expenses. The custodian fees disclosed in
the statement of operations do not reflect the reduction in expense from the
related earnings credits.
2. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Management fees are payable to Security Management Company, LLC (SMC) under
investment advisory contracts at an annual rate of .50 of 1% of the average net
assets of each fund, except for Global Aggressive Bond Series and the High Yield
Bond Series whose fees are .75 of 1% and .60 of 1% of the average net assets of
each Series, respectively. The investment advisory contract for Income Fund
provides that the total annual expenses
24
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
of each Series of the Fund (including management fees and custodian fees net of
earnings credits, but excluding interest, taxes, brokerage commissions and
extraordinary expenses) will not exceed the level of expenses which Income Fund
is permitted to bear under the most restrictive expense limitation imposed by
any state in which shares of the Fund are then qualified for sale. For the
period ended December 31, 1996, SMC agreed to limit the total expenses of
Corporate Bond Series, U.S. Government Series and Limited Maturity Bond Series
to an annual rate of 1.1% of the average daily net asset value of Class A shares
and 1.85% of Class B shares of each respective Series. SMC also agreed to limit
the total expenses of the Global Aggressive Bond Series and the High Yield Bond
Series to 2.0% for Class A Shares and 2.75% for Class B shares. In addition, SMC
agreed to waive all of the management fees for the U.S. Government Series,
Limited Maturity Bond Series, Global Aggressive Bond Series and the High Yield
Bond Series until December 31, 1996. The investment advisory contract for
Tax-Exempt and Cash Funds provides that the total annual expenses of the Funds
net of custodian fee earnings credits will not exceed an amount equal to an
annual rate of 1.0% of the average net assets of Class A shares and 2.0% of
Class B shares of the Tax-Exempt Fund as calculated on a daily basis.
The Funds have entered into contracts with SMC for transfer agent services
and certain other administrative services which SMC provides to the Funds. SMC
is paid an annual fixed charge per account and shareholder and dividend
transaction fees.
As the administrative agent for the Funds, SMC performs administrative
functions, such as regulatory filings, bookkeeping, accounting and pricing
functions for the Funds. For this service SMC receives on an annual basis, a fee
of .09 percent of the average daily net assets of Corporate Bond Series, U.S.
Government Series, Limited Maturity Bond Series, High Yield Bond Series, and
Tax-Exempt Fund and .045 percent of the average daily net assets of Cash Fund
and Global Aggressive Bond Series, calculated daily and payable monthly. For the
identified administrative services SMC also receives, with respect to the Global
Aggressive Bond Series, an annual fee equal to the greater of .10 percent of its
average net assets or (i) $45,000 in the year ending April 29, 1997; and (ii)
$60,000 thereafter.
SMC pays the Sub-Advisor, Lexington Management Corporation (LMC) an annual
fee in an amount equal to .35% of the average net assets of Global Aggressive
Bond Series, for investment advisory and certain administrative services
provided to the Global Aggressive Bond Series. LMC agreed to waive its
sub-advisory fee until December 31, 1996. The Sub-Advisor has entered into a
sub-advisory contract with MFR Advisors, Inc., ("MFR"), under which MFR will
provide the Global Aggressive Bond Series with investment and economic research
services. For the service provided by MFR, MFR receives from the Sub-Advisor, a
fee equal to .15% of the average daily net assets of the Global Aggressive Bond
Series.
Income and Tax-Exempt Funds have adopted Distribution Plans related to the
offering of Class B shares pursuant to Rule 12b-1 under the Investment Company
Act of 1940. The Plans provide for payments at an annual rate of 1.0% of the
average net assets of Class B shares. Class A shares of Income Fund incur 12b-1
distribution fees at an annual rate of .25% of the average net assets of each
Series.
Security Distributors, Inc. (SDI), a wholly-owned subsidiary of Security
Benefit Group, Inc., a financial services holding company, is national
distributor for Income a nd Tax-Exempt Funds. SDI received net underwriting
commissions on sales of Class A shares and contingent deferred sales charges on
redemptions occurring within 5 years of the date of purchase of Class B shares,
after allowances to brokers and dealers for the period ended December 31, 1996,
in the amounts presented below:
NET UNDERWRITING BROKER/DEALER
COMMISSION ALLOWANCES
-----------------------------------------------------------------
Corporate Bond Series $23,873 $54,353
U.S. Government Series 10,849 21,835
Limited Maturity
Bond Series (377) 7,971
Global Aggressive
Bond Series 4,824 3,686
High Yield Series 283 5,491
Tax-Exempt Fund 13,059 42,066
Certain officers and directors of the Funds are also officers and/or
directors of Security Benefit Life Insurance Company and its subsidiaries, which
include SMC and SDI.
3. INVESTMENT TRANSACTIONS
Investment transactions for the period ended December 31, 1996, (excluding
overnight investments and short-term debt securities) were as follows:
PURCHASES PROCEEDS FROM SALES
-------------------------------------------------------------------
Corporate Bond Series $247,769,817 $261,981,460
U.S. Government Series 7,252,295 8,350,616
Limited Maturity
Bond Series 6,582,167 5,034,918
Global Aggressive
Bond Series 3,601,246 3,337,996
High Yield Series 8,153,564 3,220,588
Tax-Exempt Fund 13,361,690 14,342,980
4. FEDERAL INCOME TAX MATTERS
The amounts of unrealized appreciation (depreciation) as of December 31,
1996, were as follows:
AGGREGATE GROSS AGGREGATE GROSS NET UNREALIZED
UNREALIZED UNREALIZED APPRECIATION
APPRECIATION DEPRECIATION (DEPRECIATION)
- -------------------------------------------------------------------------------
Corporate Bond Series $1,185,689 ($1,388,839) ($203,150)
U.S. Government Series 184,874 (23,285) 161,589
Limited Maturity
Bond Series 115,348 (51,798) 63,550
Global Aggressive
Bond Series 240,819 (96,331) 144,488
High Yield Series 147,567 (500) 147,067
Tax-Exempt Fund 544,263 (92,410) 451,853
At December 31, 1996, the following Funds had accumulated net realized
capital loss carryovers as shown:
CAPITAL LOSS EXPIRATION
CARRYOVER YEAR
Corporate Bond Series $11,009,916 2002
1,347,012 2004
U.S. Government Series 978,377 2002
Limited Maturity Bond Series 23,055 2003
46,509 2004
Global Aggressive Bond Series 48,004 2004
High Yield Series 36,585 2004
Tax-Exempt Fund 1,477,887 2002
5. FORWARD FOREIGN EXCHANGE CONTACTS
At December 31, 1996, Global Aggressive Bond Series had the following open
forward foreign exchange contracts to sell currency (excluding foreign currency
contracts used for purchase and sale settlements):
25
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
SETTLEMENT CONTRACT CONTRACT CURRENT UNREALIZED
CURRENCY DATE AMOUNT RATE RATE GAIN
Canadian
Dollar 1/31/97 $224,215 1.3380 1.368 $4,917
6. TAX STATUS OF DIVIDENDS
Except for tax-exempt dividends, the income dividends paid by the Funds are
taxable as ordinary income on the shareholders' tax returns. None of the amount
taxable as ordinary income for the Funds qualifies for the dividends received
deduction available to corporate shareholders in accordance with the provisions
of the Internal Revenue Code.
None of the exempt-interest dividends paid by Security Tax-Exempt Fund have
been determined to be attributable to interest from specified private activity
bonds. Thus, no portion is required to be reported as a tax preference item on
Form 4626 or 6251, as appropriate.
In some states, the portion of ordinary income dividends attributable to
the Funds' investment in direct obligations of the U.S. Government may not be
subject to state taxation. For the year ended December 31, 1996, interest on
U.S. Government obligations as a percentage of gross investment income was: Cash
Fund, 5%; Corporate Bond Series, 6%; U.S. Government Series, 28%; Limited
Maturity Bond Series, 6%; and Global Aggressive Bond Series, 1%. Since the
qualifications for such exemption vary state by state, we suggest you consult
your tax advisor for applicability.
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
SECURITY INCOME FUND, SECURITY TAX-EXEMPT FUND
AND SECURITY CASH FUND
We have audited the accompanying balance sheets, including the statements
of net assets of Security Income Fund (comprising, respectively, the Corporate
Bond, U.S. Government, Limited Maturity Bond, Global Aggressive Bond and High
Yield Bond Series), Security Tax-Exempt Fund and Security Cash Fund (the Funds)
as of December 31, 1996, the related statements of operations, changes in net
assets and the financial highlights for the periods indicated therein. These
financial statements and the financial highlights are the responsibility of the
Funds' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
investments owned as of December 31, 1996, by correspondence with the custodian.
As to securities relating to uncompleted transactions, we performed other audit
procedures. 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 of the Funds (including each of the Series of Security Income Fund) at
December 31, 1996, and the results of their operations, changes in their net
assets and the financial highlights for the periods indicated therein in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Kansas City, Missouri
January 31, 1997
26
<PAGE>
THE SECURITY GROUP
OF MUTUAL FUNDS
- -------------------
Security Growth and Income Fund
Security Equity Fund
- Equity Series
- Equity Global Series
- Asset Allocation Series
- Social Awareness Series
Security Ultra Fund
Security Income Fund
- Corporate Bond Series
- U.S. Government Series
- Limited Maturity Bond Series
- Global Aggressive Bond Series
- High Yield Bond Series
Security Tax-Exempt Fund
Security Cash Fund
This report is submitted for the general information of the shareholders of the
Funds. The report is not authorized for distribution to prospective investors in
the Funds unless preceded or accompanied by an effective prospectus which
contains details concerning the sales charges and other pertinent information.
SECURITY FUNDS
OFFICERS AND DIRECTORS
DIRECTORS
Willis A. Anton
Donald A. Chubb, Jr.
John D. Cleland
Jack H. Hamilton
Donald L. Hardesty
Penny A. Lumpkin
Mark L. Morris, Jr., D.V.M.
Jeffrey B. Pantages
Hugh L. Thompson, Ph.D.
OFFICERS
John D. Cleland, President
James R. Schmank, Vice President and Treasurer
Jane A. Tedder, Vice President
Mark E. Young, Vice President
Steven M. Bowser, Assistant Vice President
Barbara J. Davison, Assistant Vice President
Greg A. Hamilton, Assistant Vice President
Amy J. Lee, Secretary
Brenda M. Harwood, Assistant Treasurer and Assistant Secretary
Christopher D. Swickard, Assistant Secretary
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