<PAGE>
File No. 811-3225
File No. 2-73223
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |_|
Post-Effective Amendment No. 17 |X|
----
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |_|
Amendment No. 17 |X|
----
(Check appropriate box or boxes)
SECURITY TAX-EXEMPT FUND
(Exact Name of Registrant as Specified in Charter)
700 HARRISON STREET, TOPEKA, KANSAS 66636-0001
(Address of Principal Executive Offices/Zip Code)
Registrant's Telephone Number, including area code:
(785) 431-3127
Copies To:
John D. Cleland, President Amy J. Lee, Secretary
Security Tax-Exempt Fund Security Tax-Exempt Fund
700 Harrison Street 700 Harrison Street
Topeka, KS 66636-0001 Topeka, KS 66636-0001
(Name and address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
|_| immediately upon filing pursuant to paragraph (b)
|_| on April 30, 1998, pursuant to paragraph (b)
|_| 60 days after filing pursuant to paragraph (a)(1)
|X| on April 30, 1998, pursuant to paragraph (a)(1)
|_| 75 days after filing pursuant to paragraph (a)(2)
|_| on April 30, 1998, pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
|_| this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Title of Securities being Registered: Shares of common stock, par value $.10.
<PAGE>
SECURITY TAX-EXEMPT FUND
FORM N-1A
CROSS REFERENCE SHEET
FORM N-1A
ITEM NUMBER CAPTION
- ----------- -------
PART A PROSPECTUS
- ------ ----------
1. Cover Page
2. Not Applicable
2a. Transaction and Operating Expense Table
3. Financial Highlights; Performance
4. Investment Objectives and Policies of the Funds
5. Management of the Funds; Portfolio Management; Trading
Practices and Brokerage
6. General Information; Organization; Stockholder Inquiries;
Dividends and Taxes
7. How to Purchase Shares; Alternative Purchase Options; Class
A Shares; Class A Distribution Plan; Class B Shares; Class
B Distribution Plan; Calculation and Waiver of Contingent
Deferred Sales Charge; Arrangements with Broker/Dealers and
Others; Determination of Net Asset Value; Purchases at Net
Asset Value; Stockholder Services; Accumulation Plan;
Exchange Privilege; Exchange by Telephone; Retirement
Plans; Appendix C
8. How to Redeem Shares; Telephone Redemptions; Systematic
Withdrawal Program
9. Not Applicable
PART B STATEMENT OF ADDITIONAL INFORMATION
10. Cover Page
11. Table of Contents
12. Not Applicable
13. Investment Objectives and Policies of the Funds; Municipal
Bond Fund's Fundamental Policies; Investment Policy
Limitations
14. Officers and Directors
15. Remuneration of Directors and Others
16. Investment Management; Portfolio Management; Distributor;
Custodian, Transfer Agent and Dividend-Paying Agent
17. Allocation of Portfolio Brokerage
18. Organization
<PAGE>
PART B (Continued) STATEMENT OF ADDITIONAL INFORMATION
19. How to Purchase Shares; Alternative Purchase Options; Class
A Shares; Class A Distribution Plan; Class B Shares; Class
B Distribution Plan; Calculation and Waiver of Contingent
Deferred Sales Charge; Arrangements with Broker/Dealers and
Others; Determination of Net Asset Value; How to Redeem
Shares; How to Exchange Shares; Telephone Redemptions;
Purchases at Net Asset Value; Accumulation Plan; Systematic
Withdrawal Program; Exchange by Telephone; Retirement
Plans; Individual Retirement Accounts (IRAs); Roth IRAs;
SIMPLE IRAs; Pension and Profit Sharing Plans; 403(b)
Retirement Plans; Simplified Employee Pension Plans
(SEPPs); Appendix A
20. Dividends and Taxes
21. Distributor
22. Performance Information; Tax-Exempt vs. Taxable Income
23. Financial Statements; Independent Auditors
<PAGE>
Security Funds
PROSPECTUS
May 1, 1998
* Security Income Fund
- Corporate Bond Series
- Limited Maturity Bond Series
- U.S. Government Series
- High Yield Series
* Security Municipal Bond Fund
* Security Cash Fund
[SDI Logo]
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
SECURITY INCOME FUND
o CORPORATE BOND SERIES PROSPECTUS
o LIMITED MATURITY BOND SERIES MAY 1, 1998
o U.S. GOVERNMENT SERIES
o HIGH YIELD SERIES
SECURITY MUNICIPAL BOND FUND
SECURITY CASH FUND
MEMBERS OF THE SECURITY BENEFIT GROUP OF COMPANIES,
700 HARRISON, TOPEKA, KANSAS 66636-0001
The investment objective of the CORPORATE BOND SERIES ("Corporate Bond Fund")
is conservation of principal while generating interest income by investing
primarily in a diversified portfolio of investment grade corporate debt
securities. The investment objective of the LIMITED MATURITY BOND SERIES
("Limited Maturity Bond Fund") is to seek a high level of income consistent with
moderate price fluctuation by investing primarily in short- and
intermediate-term debt securities. The investment objective of the U.S.
GOVERNMENT SERIES ("U.S. Government Fund") is to provide a high level of
interest income with security of principal by investing primarily in securities
which are guaranteed or issued by the U.S. Government, its agencies or
instrumentalities. The investment objective of the HIGH YIELD SERIES ("High
Yield Fund") is to seek high current income. Capital appreciation is a secondary
objective. The Fund seeks to achieve its objective by investing primarily in a
broad range of income producing securities, including domestic and foreign
high-yield, lower rated debt securities. THE FUND INVESTS PRIMARILY (AND MAY
INVEST UP TO 100% OF ITS ASSETS) IN LOWER RATED BONDS, COMMONLY KNOWN AS "JUNK
BONDS," THAT ENTAIL GREATER RISKS, INCLUDING DEFAULT RISKS, THAN THOSE FOUND IN
HIGHER RATED SECURITIES. INVESTORS SHOULD CAREFULLY CONSIDER THESE RISKS BEFORE
INVESTING. SEE "INVESTMENT METHODS AND RISK FACTORS" - "RISKS ASSOCIATED WITH
LOWER RATED DEBT SECURITIES" ON PAGE 19.
The investment objective of SECURITY MUNICIPAL BOND FUND ("Municipal Bond
Fund") (formerly Security Tax-Exempt Fund) is to obtain as high a level of
interest income exempt from regular federal income taxes as is consistent with
preservation of stockholders' capital by investing primarily in debt securities
which are exempt from federal income tax. Except at times when the Fund is
invested defensively, at least 80 percent of its total assets will be invested
in securities exempt from federal income taxes. The Fund may invest in
securities which generate income that is subject to the federal alternative
minimum tax.
The investment objective of SECURITY CASH FUND ("Cash Fund") is to earn as
high a level of current income as is consistent with preservation of capital and
liquidity through investments in money market instruments with maturities of not
longer than thirteen months. AN INVESTMENT IN CASH FUND IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT CASH FUND
WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
This Prospectus sets forth concisely the information that a prospective
investor should know about the Funds. It should be read and retained for future
reference. Certain additional information is contained in a Statement of
Additional Information about the Funds, dated May 1, 1998, which has been filed
with the Securities and Exchange Commission. The Statement of Additional
Information, as it may be supplemented from time to time, is incorporated by
reference in this Prospectus. It is available at no charge by writing Security
Distributors, Inc., 700 Harrison Street, Topeka, Kansas 66636-0001, or by
calling (785) 431-3127 or (800) 888-2461.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
AN INVESTMENT IN THE FUND INVOLVES RISK, INCLUDING LOSS OF PRINCIPAL, AND IS NOT
A DEPOSIT OR OBLIGATION OF, OR GUARANTEED BY ANY BANK. THE FUNDS ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER AGENCY.
- --------------------------------------------------------------------------------
<PAGE>
SECURITY FUNDS
CONTENTS
================================================================================
Page
Transaction and Operating Expense Table..................................... 1
Financial Highlights........................................................ 2
Investment Objective and Policies of the Funds.............................. 4
Security Income Fund...................................................... 4
Corporate Bond Fund..................................................... 4
Limited Maturity Bond Fund.............................................. 5
U.S. Government Fund.................................................... 7
High Yield Fund......................................................... 8
Security Municipal Bond Fund.............................................. 9
Security Cash Fund........................................................ 11
Investment Methods and Risk Factors......................................... 12
Management of the Funds..................................................... 20
Portfolio Management...................................................... 22
How to Purchase Shares...................................................... 22
Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield and
Municipal Bond Funds.................................................... 23
Alternative Purchase Options.............................................. 23
Class A Shares............................................................ 23
Security Income and Municipal Bond Funds' Class A Distribution Plans...... 24
Class B Shares............................................................ 24
Class B Distribution Plan................................................. 25
Calculation and Waiver of Contingent Deferred Sales Charges............... 25
Arrangements with Broker-Dealers and Others............................... 26
Cash Fund................................................................. 26
Purchases at Net Asset Value................................................ 27
Trading Practices and Brokerage............................................. 27
How to Redeem Shares........................................................ 28
Telephone Redemptions .................................................... 29
Dividends and Taxes......................................................... 29
Foreign Taxes............................................................. 31
Determination of Net Asset Value............................................ 31
Performance................................................................. 32
Stockholder Services........................................................ 33
Accumulation Plan......................................................... 33
Systematic Withdrawal Program............................................. 33
Exchange Privilege........................................................ 33
Exchange by Telephone..................................................... 34
Retirement Plans.......................................................... 34
General Information......................................................... 34
Organization.............................................................. 34
Stockholder Inquiries..................................................... 35
Appendix A.................................................................. 36
Appendix B.................................................................. 38
Appendix C.................................................................. 40
Security Cash Fund Application.............................................. 42
- --------------------------------------------------------------------------------
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
TRANSACTION AND OPERATING EXPENSE TABLE
- --------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
CORPORATE BOND, LIMITED
MATURITY BOND, U.S. GOVERNMENT,
HIGH YIELD AND MUNICIPAL BOND FUNDS CASH FUND
------------------------------------- ---------
CLASS A CLASS B(1)
------- ------------------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of offering price) 4.75% None None
Maximum Sales Load Imposed on Reinvested Dividends None None None
Deferred Sales Load (as a percentage of original purchase price
or redemption proceeds, whichever is lower) None(2) 5% during the first year, None
decreasing to 0% in the
sixth and following years
<CAPTION>
LIMITED MATURITY
CORPORATE BOND FUND BOND FUND U.S. GOVERNMENT FUND
------------------- ------------------- --------------------
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Management Fees (after fee waivers)(3) ........... 0.50% 0.50% 0.00% 0.00% 0.00% 0.00%
12b-1 Fees(4) .................................... 0.25% 1.00% 0.25% 1.00% 0.25% 1.00%
Other Expenses (after expense reimbursements)(5) . 0.26% 0.35% 0.65% 0.88% 0.40% 0.86%
---- ---- ---- ---- ---- ----
Total Fund Operating Expenses (after fee
waivers and expense reimbursements)(6) ......... 1.01% 1.85% 0.90% 1.88% 0.65% 1.86%
==== ==== ==== ==== ==== ====
EXAMPLE
You would pay the following expenses ........ 1 Year $ 57 $ 69 $ 56 $ 69 $ 54 $ 69
on a $1,000 investment, assuming ............ 3 Years 78 88 75 89 67 88
(1) 5 percent annual return and ............. 5 Years 101 120 95 122 82 121
(2) redemption at the end of each ........... 10 Years 165 217 153 220 125 218
time period
EXAMPLE
You would pay the following expenses on ..... 1 Year $ 57 $ 19 $ 56 $ 19 $ 54 $ 19
a $1,000 investment, assuming (1) 5 ......... 3 Years 78 58 75 59 67 58
percent annual return and (2) no redemption . 5 Years 101 100 95 102 82 101
10 Years 165 217 153 220 125 218
<CAPTION>
HIGH YIELD FUND MUNICIPAL BOND FUND CASH FUND
------------------- ------------------- ---------
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B CLASS A CLASS B
------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Management Fees (after fee waivers)(3) ........... 0.00% 0.00% 0.50% 0.50% 0.50%
12b-1 Fees(4) .................................... 0.25% 1.00% 0.25% 1.00% None
Other Expenses (after expense reimbursements)(5) . 1.29% 1.26% 0.33% 0.56% 0.51%
---- ---- ---- ---- ----
Total Fund Operating Expenses (after fee
waivers and expense reimbursements)(6) ......... 1.54% 2.26% 1.08% 2.06% 1.01%
==== ==== ==== ==== ====
EXAMPLE
You would pay the following expenses ........ 1 Year $62 $ 73 $ 57 $ 70 $ 10
on a $1,000 investment, assuming ............ 3 Years 94 101 78 93 32
(1) 5 percent annual return and ............. 5 Years -- -- 100 128 55
(2) redemption at the end of each ........... 10 Years -- -- 164 233 122
time period
EXAMPLE
You would pay the following expenses on ..... 1 Year $62 $ 23 $ 57 $ 20 $ 10
a $1,000 investment, assuming (1) 5 ......... 3 Years 94 71 78 63 32
percent annual return and (2) no redemption . 5 Years -- -- 100 108 55
10 Years -- -- 164 233 122
</TABLE>
1 Class B shares convert tax-free to Class A shares automatically after eight
years.
2 Purchases of Class A shares in amounts of $1,000,000 or more are not subject
to an initial sales load; however, a contingent deferred sales charge of 1%
is imposed in the event of redemption within one year of purchase. See "Class
A Shares" on page 23.
3 During the fiscal year ended December 31, 1997, the Investment Manager waived
the investment advisory fees of the Limited Maturity Bond, U.S. Government
and High Yield Funds and, during the fiscal year ending December 31, 1998
will waive the investment advisory fees of such Funds; absent such fee
waivers, "Management Fees" would have been as follows: .5% for each of the
Limited Maturity Bond and U.S. Government Funds and .6% for the High Yield
Fund.
4 Long-term holders of shares that are subject to an asset-based sales charge
may pay more than the equivalent of the maximum front-end sales charge
otherwise permitted by NASD Rules.
5 During the fiscal year ended December 31, 1997, the Investment Manager
reimbursed certain expenses of the Funds. Absent such reimbursement, "Other
Expenses" would have been as follows: ___% for Class B shares of Corporate
Bond Fund; ___% for Class B shares of Limited Maturity Bond Fund; ___% for
Class B shares of U.S. Government Fund; and ___% for Class B shares of
Municipal Bond Fund.
6 During the fiscal year ended December 31, 1997, the Investment Manager waived
and/or reimbursed certain expenses of the Funds and, during the fiscal year
ending December 31, 1998 will waive the investment advisory fees of Limited
Maturity Bond, U.S. Government and High Yield Funds. Absent such
reimbursement and waiver, "Total Fund Operating Expenses" would have been as
follows: ___% for Class A shares and ___% for Class B shares of Corporate
Bond Fund; ___% for Class A shares and ___% for Class B shares of Limited
Maturity Bond Fund; ___% for Class A shares and ___% for Class B shares of
U.S. Government Fund; ___% for Class A shares and ___% for Class B shares of
High Yield Fund; and ___% for Class A and ___% for Class B shares of
Municipal Bond Fund.
THE ABOVE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES AS ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN. THE
ASSUMED FIVE PERCENT ANNUAL RETURN IS HYPOTHETICAL AND SHOULD NOT BE CONSIDERED
A REPRESENTATION OF PAST OR FUTURE ANNUAL RETURN. THE ACTUAL RETURN MAY BE
GREATER OR LESSER THAN THE ASSUMED AMOUNT.
The purpose of the foregoing fee table is to assist the investor in
understanding the various costs and expenses that an investor in Corporate Bond,
Limited Maturity Bond, U.S. Government, High Yield, Municipal Bond or Cash Funds
will bear directly or indirectly. For a more detailed discussion of the Funds'
fees and expenses, see the discussion under "Management of the Funds," page 20.
Information on the Funds' 12b-1 Plans may be found under the headings "Security
Income and Municipal Bond Funds' Class A Distribution Plans" on page 24 and
"Class B Distribution Plan" on page 25. See "How to Purchase Shares," page 22,
for more information concerning the sales load. Also, see Appendix C for a
discussion of "Rights of Accumulation" and "Statement of Intention," which
options may serve to reduce the front-end sales load on purchases of Class A
Shares.
- --------------------------------------------------------------------------------
1
<PAGE>
SECURITY FUNDS
FINANCIAL HIGHLIGHTS
================================================================================
The following financial highlights for each of the years in the period ended
December 31, 1997, have been audited by Ernst & Young LLP. Such information for
each of the five years in the period ended December 31, 1997, should be read in
conjunction with the financial statements of the Funds and the report of Ernst &
Young LLP, the Funds' independent auditors, appearing in the December 31, 1997
Annual Report which is incorporated by reference in this Prospectus. The Funds'
Annual Report also contains additional information about the performance of the
Funds and may be obtained without charge by calling Security Distributors, Inc.
at 1-800-888-2461. The information for each of the periods preceding and
including the year ended December 31, 1992, is not covered by the report of
Ernst & Young LLP.
<TABLE>
<CAPTION>
NET GAINS DISTRI-
NET ASSET (LOSSES) ON DIVIDENDS BUTIONS
VALUE NET SECURITIES TOTAL FROM (FROM NET (FROM RETURN
FISCAL BEGINNING INVESTMENT (REALIZED & INVESTMENT INVESTMENT CAPITAL OF
YEAR END OF PERIOD INCOME UNREALIZED) OPERATIONS INCOME) GAINS) CAPITAL
- ------------------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CORPORATE BOND FUND (CLASS A)
1988 ................... $ 7.78 $ .77 $ (.292) $ .478 $ (.778) $ -- $ --
1989 ................... 7.48 .74 (.031) .709 (.739) -- --
1990 ................... 7.45 .69 (.232) .458 (.688) -- --
1991 ................... 7.22 .65 .458 1.108 (.648) -- --
1992 ................... 7.68 .61 .044 .654 (.614) -- --
1993 ................... 7.72 .52 .521 1.041 (.527) (.424) --
1994 ................... 7.81 .49 (1.127) (.637) (.493) -- --
1995(d)(g) ............. 6.68 .47 0.708 1.178 (.468) -- --
1996(d)(g) ............. 7.39 .47 (.517) (.047) (.473) -- --
1997(d)(g)
CORPORATE BOND FUND (CLASS B)
1993(b) ................ $ 8.59 $ .11 $ (.324) $ (.214) $ (.112) $ (.424) $ --
1994(c) ................ 7.84 .43 (1.129) (.699) (.431) -- --
1995(c)(d)(g) .......... 6.71 .40 .725 1.125 (.405) -- --
1996(c)(d)(g) .......... 7.43 .40 (.517) (.117) (.413) -- --
1997(d)(g)
LIMITED MATURITY BOND FUND (CLASS A)
1995(c)(d)(e)(g) ....... $ 10.00 $ .62 $ .652 $ 1.272 $ (.612) $ -- $ --
1996(c)(d)(g) .......... 10.66 .72 (.507) .213 (.720) -- (.013)
1997(d)(g)
LIMITED MATURITY BOND FUND (CLASS B)
1995(c)(d)(e)(g) ....... $ 10.00 $ .53 $ .664 $ 1.194 $ (.524) $ -- $ --
1996(c)(d)(g) .......... 10.67 .63 (.524) .106 (.624) -- (.012)
1997(d)(g)
U.S. GOVERNMENT FUND (CLASS A)
1988(c) ................ $ 5.00 $ .48 $ (.18) $ .30 $ (.49) $ -- $ --
1989(c) ................ 4.81 .46 .078 .538 (.458) -- --
1990(c) ................ 4.89 .42 .032 .452 (.412) -- --
1991(c) ................ 4.93 .40 .248 .648 (.404) -- (.004)
1992(c) ................ 5.17 .37 (.126) .244 (.366) -- (.008)
1993(c) ................ 5.04 .31 .273 .583 (.310) (.344) --
1994(c) ................ 4.97 .30 (.621) (.321) (.299) -- --
1995(c)(d)(g) .......... 4.35 .30 .620 .920 (.30) -- --
1996(c)(d)(g) .......... 4.97 .31 (.256) .054 (.314) -- --
1997(d)(g)
U.S. GOVERNMENT FUND (CLASS B)
1993(b)(c) ............. $ 5.51 $ .04 $ (.193) $ (.153) $ (.043) $ (.344) $ --
1994(c) ................ 4.97 .26 (.624) (.364) (.256) -- --
1995(c)(d)(g) .......... 4.35 .26 .625 .885 (.265) -- --
1996(c)(d)(g) .......... 4.97 .25 (.254) (.004) (.256) -- --
1997(d)(g)
HIGH YIELD FUND (CLASS A)
1996(c)(d)(h) .......... $ 15.00 $ .45 $ .32 $ .77 $ (.45) $ -- $ --
1997(d)(g)
HIGH YIELD FUND (CLASS B)
1996(c)(d)(h) .......... $ 15.00 $ .41 $ .32 $ .73 $ (.41) $ -- $ --
1997(d)(g)
MUNICIPAL BOND FUND (CLASS A)
1988(c) ................ $ 10.76 $ .76 $ (.656) $ .104 $ (.774) $ (.12) $ --
1989 ................... 9.97 .73 (.257) .473 (.723) -- --
1989(f) ................ 9.72 .61 (.106) .504 (.624) -- --
1990 ................... 9.60 .64 (.072) .568 (.638) -- --
1991 ................... 9.53 .63 .446 1.076 (.636) -- --
1992 ................... 9.97 .61 .092 .702 (.612) -- --
<CAPTION>
NET RATIO OF RATIO
ASSET NET ASSETS EXPENSES OF NET
TOTAL VALUE END OF TO INCOME PORTFOLIO
FISCAL DISTRI- END OF TOTAL PERIOD AVERAGE TO AVERAGE TURNOVER
YEAR END BUTIONS PERIOD RETURN (A) (THOUSANDS) NET ASSETS NET ASSETS RATE
- ------------------------ ------------ ------------ ------------ ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
CORPORATE BOND FUND (CLASS A)
1988 ................... $ (.778) $ 7.48 6.5% $ 52,296 1.02% 10.04% 83%
1989 ................... (.739) 7.45 9.9% 56,184 1.04% 9.83% 57%
1990 ................... (.688) 7.22 6.6% 65,962 1.10% 9.42% 87%
1991 ................... (.648) 7.68 16.1% 85,824 1.03% 8.75% 32%
1992 ................... (.614) 7.72 9.0% 104,492 1.01% 7.97% 61%
1993 ................... (.951) 7.81 13.4% 118,433 1.02% 6.46% 157%
1994 ................... (.493) 6.68 (8.3%) 90,593 1.01% 6.91% 204%
1995(d)(g) ............. (.468) 7.39 18.2% 93,701 1.02% 6.62% 200%
1996(d)(g) ............. (.473) 6.87 (.5%) 73,360 1.01% 6.54% 292%
1997(d)(g)
CORPORATE BOND FUND (CLASS B)
1993(b) ................ $ (.536) $ 7.84 (2.5%) $ 1,022 1.88% 5.16% 164%
1994(c) ................ (.431) 6.71 (9.0%) 3,878 1.85% 6.08% 204%
1995(c)(d)(g) .......... (.405) 7.43 17.3% 5,743 1.85% 5.80% 200%
1996(c)(d)(g) .......... (.413) 6.90 (1.4%) 7,303 1.85% 5.70% 292%
1997(d)(g)
LIMITED MATURITY BOND FUND (CLASS A)
1995(c)(d)(e)(g) ....... $ (.612) $ 10.66 13.0% $ 3,322 .84% 5.97% 4%
1996(c)(d)(g) .......... (.733) 10.14 2.1% 4,938 .90% 6.97% 105%
1997(d)(g)
LIMITED MATURITY BOND FUND (CLASS B)
1995(c)(d)(e)(g) ....... $ (.524) $ 10.67 12.2% $ 752 1.71% 5.12% 4%
1996(c)(d)(g) .......... (.636) 10.14 1.1% 761 1.88% 5.99% 105%
1997(d)(g)
U.S. GOVERNMENT FUND (CLASS A)
1988(c) ................ $ (.49) $ 4.81 6.2% $ 4,229 1.00% 9.83% 107%
1989(c) ................ (.458) 4.89 11.8% 4,551 1.11% 9.46% 52%
1990(c) ................ (.412) 4.93 9.8% 6,017 1.11% 8.60% 22%
1991(c) ................ (.408) 5.17 13.8% 7,319 1.11% 7.94% 41%
1992(c) ................ (.374) 5.04 5.0% 9,364 1.11% 7.22% 157%
1993(c) ................ (.654) 4.97 10.9% 10,098 1.10% 5.90% 153%
1994(c) ................ (.299) 4.35 (6.5%) 8,309 1.10% 6.47% 220%
1995(c)(d)(g) .......... (.30) 4.97 21.9% 10,080 1.11% 6.41% 81%
1996(c)(d)(g) .......... (.314) 4.71 1.3% 8,036 .65% 6.44% 75%
1997(d)(g)
U.S. GOVERNMENT FUND (CLASS B)
1993(b)(c) ............. $ (.387) $ 4.97 (1.4%) $ 140 1.61% 5.54% 114%
1994(c) ................ (.256) 4.35 (7.4%) 321 1.85% 5.76% 220%
1995(c)(d)(g) .......... (.265) 4.97 20.9% 582 1.87% 5.69% 81%
1996(c)(d)(g) .......... (.256) 4.71 .02% 661 1.86% 5.23% 75%
1997(d)(g)
HIGH YIELD FUND (CLASS A)
1996(c)(d)(h) .......... $ (.45) $ 15.32 5.2% $ 2,780 1.54% 7.47% 168%
1997(d)(g)
HIGH YIELD FUND (CLASS B)
1996(c)(d)(h) .......... $ (.41) $ 15.32 4.9% $ 2,719 2.26% 6.74% 168%
1997(d)(g)
MUNICIPAL BOND FUND (CLASS A)
1988(c) ................ $ (.894) $ 9.97 1.3% $ 17,814 1.00% 7.60% 83%
1989 ................... (.723) 9.72 4.9% 19,898 .98% 7.47% 33%
1989(f) ................ (.624) 9.60 4.1% 20,426 .97%* 6.97%* 75%*
1990 ................... (.638) 9.53 6.2% 20,566 .96% 6.75% 74%
1991 ................... (.636) 9.97 11.7% 23,218 .89% 6.55% 38%
1992 ................... (.612) 10.06 7.3% 28,608 .84% 6.07% 91%
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
2
<PAGE>
SECURITY FUNDS
FINANCIAL HIGHLIGHTS (CONTINUED)
================================================================================
<TABLE>
<CAPTION>
NET GAINS DISTRI-
NET ASSET (LOSSES) ON DIVIDENDS BUTIONS
VALUE NET SECURITIES TOTAL FROM (FROM NET (FROM RETURN
FISCAL BEGINNING INVESTMENT (REALIZED & INVESTMENT INVESTMENT CAPITAL OF
YEAR END OF PERIOD INCOME UNREALIZED) OPERATIONS INCOME) GAINS) CAPITAL
- ----------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
MUNICIPAL BOND FUND (CLASS A) (CONTINUED)
1993 .................. $ 10.06 $ .51 $ .702 $ 1.212 $ (.514) $ (.388) $ --
1994 .................. 10.37 .47 (1.317) (.847) (.473) -- --
1995(c)(d)(g) ......... 9.05 .48 .891 1.371 (.481) -- --
1996(c)(d)(g) ......... 9.94 .45 (.215) .235 (.455) -- --
1997(d)(g)
MUNICIPAL BOND FUND (CLASS B)
1993(b) ............... $ 10.88 $ .10 $ (.128) $ (.028) $ (.094) $ (.388) $ --
1994(c) ............... 10.37 .35 (1.321) (.971) (.349) -- --
1995(c)(d)(g) ......... 9.05 .37 .902 1.272 (.372) -- --
1996(c)(d)(g) ......... 9.95 .33 (.215) .115 (.335) -- --
1997(d)(g)
CASH FUND
1988(c) ............... $ 1.00 $ .061 $ -- $ .061 $ (.061) $ -- $ --
1989(c) ............... 1.00 .070 -- .070 (.070) -- --
1989(c)(f) ............ 1.00 .069 -- .069 (.069) -- --
1990(c) ............... 1.00 .073 -- .073 (.073) -- --
1991 .................. 1.00 .051 -- .051 (.051) -- --
1992(c) ............... 1.00 .028 -- .028 (.028) -- --
1993(c) ............... 1.00 .023 -- .023 (.023) -- --
1994 .................. 1.00 .033 -- .033 (.033) -- --
1995(c)(d) ............ 1.00 .049 -- .049 (.049) -- --
1996(c)(d)(g) ......... 1.00 .045 -- .045 (.045) -- --
1997(d)(g)
<CAPTION>
NET RATIO OF RATIO
ASSET NET ASSETS EXPENSES OF NET
TOTAL VALUE END OF TO INCOME PORTFOLIO
FISCAL DISTRI- END OF TOTAL PERIOD AVERAGE TO AVERAGE TURNOVER
YEAR END BUTIONS PERIOD RETURN (A) (THOUSANDS) NET ASSETS NET ASSETS RATE
- ----------------------- ------------ ------------ ------------ ------------ ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
MUNICIPAL BOND FUND (CLASS A) (CONTINUED)
1993 .................. $ (.902) $ 10.37 11.6% $ 32,115 .82% 4.92% 118%
1994 .................. (.473) 9.05 (8.3%) 24,092 .82% 4.74% 88%
1995(c)(d)(g) ......... (.481) 9.94 15.5% 25,026 .86% 5.02% 103%
1996(c)(d)(g) ......... (.455) 9.72 2.5% 23,304 .78% 4.67% 54%
1997(d)(g)
MUNICIPAL BOND FUND (CLASS B)
1993(b) ............... $ (.482) $ 10.37 (.2%) $ 106 2.89% 2.71% 90%
1994(c) ............... (.349) 9.05 (9.5%) 760 2.00% 3.50% 88%
1995(c)(d)(g) ......... (.372) 9.95 14.3% 1,190 2.00% 3.90% 103%
1996(c)(d)(g) ......... (.335) 9.73 1.2% 1,510 2.01% 3.44% 54%
1997(d)(g)
CASH FUND
1988(c) ............... $ (.061) $ 1.00 6.3% $ 43,038 1.00% 6.10% --
1989(c) ............... (.070) 1.00 7.3% 46,625 1.00% 7.09% --
1989(c)(f) ............ (.069) 1.00 7.1% 54,388 1.00%* 8.26%* --
1990(c) ............... (.073) 1.00 7.6% 65,018 1.00% 7.31% --
1991 .................. (.051) 1.00 5.2% 48,843 .96% 5.21% --
1992(c) ............... (.028) 1.00 2.8% 56,694 1.00% 2.75% --
1993(c) ............... (.023) 1.00 2.4% 71,870 1.00% 2.28% --
1994 .................. (.033) 1.00 3.4% 58,102 .96% 3.24% --
1995(c)(d) ............ (.049) 1.00 5.0% 38,158 1.00% 5.00% --
1996(c)(d)(g) ......... (.045) 1.00 4.6% 45,331 1.01% 4.47% --
1997(d)(g)
</TABLE>
(a) Total return information does not reflect deduction of any sales charge
imposed at the time of purchase for Class A shares or upon redemption for
Class B shares.
(b) Class "B" shares were initially offered on October 19, 1993. Percentage
amounts for the period, except total return, have been annualized.
(c) Fund expenses were reduced by the Investment Manager during the period, and
expense ratios absent such reimbursement would have been as follows:
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Corporate Bond Class A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Class B N/A N/A N/A N/A N/A N/A 2.00% 2.19% 2.05%
U.S. Government Class A 1.31% 1.37% 1.34% 1.24% 1.20% 1.20% 1.20% 1.22% 1.17%
Class B N/A N/A N/A N/A N/A 1.75% 2.91% 3.70% 3.26%
Limited Maturity Bond Class A N/A N/A N/A N/A N/A N/A N/A 1.04% 1.40%
Class B N/A N/A N/A N/A N/A N/A N/A 2.12% 2.60%
High Yield Class A N/A N/A N/A N/A N/A N/A N/A N/A 2.11%
Class B N/A N/A N/A N/A N/A N/A N/A N/A 2.83%
Municipal Bond Class A 1.03% N/A N/A N/A N/A N/A N/A 0.86% .78%
Class B N/A N/A N/A N/A N/A N/A 2.32% 2.45% 2.19%
Cash 1.04% 1.13%** 1.01% N/A 1.03% 1.03% N/A 1.04% 1.01%
1.03%***
</TABLE>
(d) Net investment income was computed using the average month-end shares
outstanding throughout the period.
(e) Security Limited Maturity Bond Fund was initially capitalized on January
17, 1995, with a net asset value of $10 per share. Percentage amounts for
the period have been annualized, except for total return.
(f) Effective December 31, 1989, the fiscal year ends of Municipal Bond and
Cash Funds were changed from January 31 and February 28, respectively, to
December 31. The information presented in the table above for the fiscal
year ended December 31 represents 11 months of performance for Municipal
Bond Fund and 10 months of performance for Cash Fund. The data for years
1988 and 1989, are for the fiscal year ended January 31 for Municipal Bond
Fund and for the fiscal year ended February 28 for Cash Fund.
(g) Expense ratios were calculated without the reduction for custodian fees
earnings credits. Expense ratios with such reductions would have been as
follows: 1995 1996 1997
1995 1996 1997
----- ----- -----
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%
Municipal Bond Class A 0.85% 0.77%
Class B 2.00% 2.00%
Cash 1.00% 1.00%
(h) Security High Yield Fund was initially capitalized on August 5, 1996 with a
net asset value of $15.00 per share. Percentage amounts for the period have
been annualized, except for total return.
*Percentage amounts for the period, except total return, have been annualized.
**This information represents the expense ratio absent reimbursements for the
period February 1, 1989 through December 31, 1989.
***This information represents the expense ratio absent reimbursements for the
fiscal year ended February 28, 1989.
- --------------------------------------------------------------------------------
3
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
Security Income, Municipal Bond and Cash Funds are diversified open-end
management investment companies, which were organized as Kansas corporations on
September 9, 1970, July 14, 1981, and March 21, 1980, respectively. Each of the
Corporate Bond Fund, Limited Maturity Bond Fund, U.S. Government Fund and High
Yield Fund, series of Security Income Fund, and Security Municipal Bond Fund and
Cash Fund (collectively, "the Funds") has its own investment objective and
policies which are described below. There, of course, can be no assurance that
such investment objectives will be achieved. While there is no present intention
to do so, the investment objective and policies of each Fund may be changed by
the Board of Directors of the Funds without the approval of stockholders.
However, stockholders will be given 30 days written notice of any such change.
If a change in investment objective is made, stockholders should consider
whether the Fund remains an appropriate investment in light of their then
current financial position and needs.
Each of the Funds is also subject to certain investment policy limitations,
which may not be changed without stockholder approval. Among these limitations,
some of the more important ones are that each Fund will not invest more than 5
percent of the value of its assets in any one issuer other than the U.S.
Government or its instrumentalities (for Cash, Municipal Bond and High Yield
Funds, this limitation applies only with respect to 75 percent of the value of
its total assets), purchase more than 10 percent of the outstanding voting
securities of any one issuer or invest 25 percent or more of its total assets in
any one industry. The Municipal Bond Fund will not invest more than 20 percent
of its assets in securities that are not tax-exempt securities, except for
temporary defensive purposes. In addition, the full text of the investment
policy limitations of each Fund is set forth in the Funds' Statement of
Additional Information.
Each of the Funds may borrow money from banks as a temporary measure for
emergency purposes or to facilitate redemption requests. See "Investment Methods
and Risk Factors" for a discussion of borrowing. Pending investment in
securities or to meet potential redemptions, each of the Funds may invest in
certificates of deposit, bank demand accounts, repurchase agreements and high
quality money market instruments.
SECURITY INCOME FUND
Security Income Fund ("Income Fund") is a series investment company, with
each Series representing a different investment objective and having its own
identified assets and net asset values. The investment objectives of Corporate
Bond, Limited Maturity Bond, U.S. Government and High Yield Funds are each
described below.
CORPORATE BOND FUND
The investment objective of Corporate Bond Fund is to preserve capital while
generating interest income. In pursuing its investment objective, the Fund will
invest in a broad range of debt securities, including (i) securities issued by
U.S. and Canadian corporations; (ii) securities issued or guaranteed by the U.S.
Government or any of its agencies or instrumentalities, including Treasury
bills, certificates of indebtedness, notes and bonds; (iii) securities issued or
guaranteed by the Dominion of Canada or provinces thereof; (iv) securities
issued by foreign governments, their agencies and instrumentalities, and foreign
corporations, provided that such securities are denominated in U.S. dollars; (v)
higher yielding, high risk debt securities (commonly referred to as "junk
bonds"); (vi) certificates of deposit issued by a U.S. branch of a foreign bank
("Yankee CDs"); and (vii) investment grade mortgage backed securities ("MBSs").
Under normal circumstances, at least 65 percent of the Fund's total assets will
be invested in corporate debt securities which at the time of issuance have a
maturity greater than one year.
Corporate Bond Fund will invest primarily in corporate debt securities rated
Baa or higher by Moody's Investors Service, Inc. ("Moody's") or BBB or higher by
Standard & Poor's Corporation ("S&P") at the time of purchase, or if unrated, of
equivalent quality as determined by the Investment Manager. See Appendix A to
this Prospectus for a description of corporate bond ratings. Included in such
securities may be convertible bonds or bonds with warrants attached which are
rated at least Baa or BBB at the time of purchase, or if unrated, of equivalent
quality as determined by the Investment Manager. A "convertible bond" is a bond,
debenture or preferred share which may be exchanged by the owner for common
stock or another security, usually of the same company, in accordance with the
terms of the issue. A "warrant" confers upon its holder the right to purchase an
amount of securities at a particular time and price. Securities rated Baa by
Moody's or BBB by S&P have speculative characteristics. See "Investment Methods
and Risk Factors" for a discussion of the risks associated with such securities.
- --------------------------------------------------------------------------------
No dealer, salesperson, or other person has been authorized to give any
information or to make any representations, other than those contained in this
Prospectus and in the Statement of Additional Information in connection with the
offer contained in this Prospectus, and, if given or made, such other
information or representations must not be relied upon as having been authorized
by the Funds, the Investment Manager, or the Distributor.
- --------------------------------------------------------------------------------
4
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
Corporate Bond Fund may invest up to 25 percent of its net assets in higher
yielding debt securities in the lower rating (higher risk) categories of the
recognized rating services (commonly referred to as "junk bonds"). Such
securities include securities rated Ba or lower by Moody's or BB or lower by S&P
and are regarded as predominantly speculative with respect to the ability of the
issuer to meet principal and interest payments. The Fund will not invest in junk
bonds which are rated in default at the time of purchase. See "Investment
Methods and Risk Factors" for a discussion of the risks associated with
investing in such securities.
The Fund may purchase securities which are obligations of, or guaranteed by,
the Dominion of Canada or provinces thereof and debt securities issued by
Canadian corporations. Canadian securities will not be purchased if subject to
the foreign interest equalization tax and unless payable in U.S. dollars.
The Fund may invest in Yankee CDs which are certificates of deposit issued by
a U.S. branch of a foreign bank denominated in U.S. dollars and held in the U.S.
Yankee CDs are subject to somewhat different risks than are the obligations of
domestic banks. The Fund also may invest in debt securities issued by foreign
governments, their agencies and instrumentalities and foreign corporations,
provided that such securities are denominated in U.S. dollars. The Fund's
investment in foreign securities, including Canadian securities, will not exceed
25 percent of the Fund's net assets. See "Investment Methods and Risk Factors"
for a discussion of the risks associated with investing in foreign securities.
The Fund may invest in investment grade mortgage backed securities (MBSs),
including mortgage pass-through securities and collateralized mortgage
obligations (CMOs). The Fund may invest up to 10 percent of its net assets in
securities known as "inverse floating obligations," "residual interest bonds,"
or "interest-only" (IO) or "principal-only" (PO) bonds, the market values of
which generally will be more volatile than the market values of most MBSs. The
Fund will hold less than 25 percent of its net assets in MBSs. For a discussion
of MBSs and the risks associated with such securities, see "Investment Methods
and Risk Factors."
The Fund may invest in zero coupon securities which are debt securities that
pay no cash income but are sold at substantial discounts from their face value.
Certain zero coupon securities also provide for the commencement of regular
interest payments at a deferred date. See "Investment Methods and Risk Factors"
for a discussion of zero coupon securities.
Corporate Bond Fund may purchase securities on a "when-issued" or "delayed
delivery" basis in excess of customary settlement periods for the types of
security involved. For a discussion of such securities, see "Investment Methods
and Risk Factors." It is anticipated that securities invested in by this Fund
will be held by the Fund on an average from one and a half to three years and
that the average weighted maturity of the Fund's portfolio will range from 5 to
15 years under normal circumstances.
LIMITED MATURITY BOND FUND
The investment objective of the Limited Maturity Bond Fund is to seek a high
level of income consistent with moderate price fluctuation by investing
primarily in short- and intermediate-term bonds. As used herein the term "short-
and intermediate-term bonds" is used to describe any debt security with a
maturity of 15 years or less. In pursuing its investment objective, the Fund
will invest in a broad range of debt securities, including (i) securities issued
by U.S. and Canadian corporations; (ii) securities issued or guaranteed by the
U.S. Government or any of its agencies or instrumentalities, including Treasury
bills, certificates of indebtedness, notes and bonds; (iii) securities issued or
guaranteed by, the Dominion of Canada or provinces thereof; (iv) securities
issued by foreign governments, their agencies and instrumentalities, and foreign
corporations, provided that such securities are denominated in U.S. dollars; (v)
higher yielding, high risk debt securities (commonly referred to as "junk
bonds"); (vi) certificates of deposit issued by a U.S. branch of a foreign bank
("Yankee CDs"); (vii) investment grade mortgage backed securities ("MBSs"); and
(viii) investment grade asset-backed securities. High yield debt securities,
Yankee CDs, MBSs and asset-backed securities are described in further detail
under "Investment Methods and Risk Factors." Under normal circumstances, the
Fund will invest at least 65 percent of the value of its total assets in short-
and intermediate-term bonds. It is anticipated that the dollar weighted average
maturity of the Fund's portfolio will range from 2 to 10 years. It will not
exceed 10 years.
Limited Maturity Bond Fund will invest primarily in debt securities rated Baa
or higher by Moody's or BBB or higher by S&P at the time of purchase, or if
unrated, of equivalent quality as determined by the Investment Manager. See
Appendix A to this Prospectus for a description of corporate bond ratings.
Included in such securities may be convertible bonds or bonds with warrants
attached which are rated at least Baa or BBB at the time of purchase, or if
unrated, of equivalent quality as determined by the Investment Manager. A
"convertible bond" is a bond, debenture or preferred share which may be
exchanged, by the owner, for common stock or another security, usually of the
same company, in accordance with the terms of the issue. A "warrant" confers
upon its holder the right to purchase an amount of securities at a particular
time and price. Securities rated Baa by Moody's or BBB by S&P have speculative
characteristics as described under "Investment Methods and Risk Factors"--"Baa
or BBB Securities."
- --------------------------------------------------------------------------------
5
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
The Fund may invest in higher yielding debt securities in the lower rating
(higher risk) categories of the recognized rating services (commonly referred to
as "junk bonds"); however, the Fund will not hold more than 25 percent of its
net assets in junk bonds. This includes securities rated Ba or lower by Moody's
or BB or lower by S&P, and such securities are regarded as predominantly
speculative with respect to the ability of the issuer to meet principal and
interest payments. The Fund will not invest in junk bonds which are rated in
default at the time of purchase. See "Investment Methods and Risk Factors" for a
discussion of the risks associated with investing in such securities.
For the year ended December 31, 1997, the dollar weighted average of Limited
Maturity Bond Fund's holdings (excluding equities) had the following credit
quality characteristics.
PERCENT OF
INVESTMENT NET ASSETS
- --------- ----------
U.S. Government and
Government Agency Securities....... 0%
Cash and other Assets, Less
Liabilities........................ %
Rated Fixed Income Securities
AAA................................ %
AA................................. %
A.................................. %
Baa/BBB............................ %
Ba/BB.............................. %
B.................................. %
Caa/CCC............................ 0%
Unrated Securities Comparable in
Quality to A....................... 0%
Baa/BBB............................ 0%
Ba/BB.............................. 0%
B.................................. 0%
Caa/CCC............................ 0%
---
100%
The foregoing table is intended solely to provide disclosure about Limited
Maturity Bond Fund's asset composition for the year ended December 31, 1997. The
asset composition after this may or may not be approximately the same as shown
above.
The Fund may purchase securities which are obligations of, or guaranteed by,
the Dominion of Canada or provinces thereof and debt securities issued by
Canadian corporations. Canadian securities will not be purchased if subject to
the foreign interest equalization tax and unless payable in U.S. currency.
The Fund may invest in Yankee CDs which are certificates of deposit issued by
a U.S. branch of a foreign bank denominated in U.S. dollars and held in the
United States. Yankee CDs are subject to somewhat different risks than are the
obligations of domestic banks. The Fund may also invest in debt securities
issued by foreign governments, their agencies and instrumentalities, and foreign
corporations, provided that such securities are denominated in U.S. dollars. The
Fund's investment in foreign securities, including Canadian securities, will not
exceed 25 percent of the Fund's net assets. For a discussion of the risks
associated with foreign securities, see "Investment Methods and Risk Factors."
The Fund may invest in U.S. Government securities. U.S. Government securities
include bills, certificates of indebtedness, notes and bonds issued by the
Treasury or by agencies or instrumentalities of the U.S. Government. For a
discussion of the varying levels of guarantee associated with particular types
of U.S. Government Securities, see "Investment Methods and Risk Factors" --
"U.S. Government Securities."
Limited Maturity Bond Fund may acquire certain securities that are restricted
as to disposition under the federal securities laws, provided that such
securities are eligible for resale to qualified institutional investors pursuant
to Rule 144A under the Securities Act of 1933, and subject to the Fund's policy
that not more than 15 percent of the Fund's net assets will be invested in
illiquid assets. See "Investment Methods and Risk Factors" for a discussion of
Rule 144A Securities.
The Fund may invest in investment grade mortgage backed securities (MBSs),
including mortgage pass-through securities and collateralized mortgage
obligations (CMOs). The Fund may invest up to 10 percent of its net assets in
securities known as "inverse floating obligations," "residual interest bonds,"
and "interest-only" (IO) and "principal-only" (PO) bonds, the market values of
which will generally be more volatile than the market values of most MBSs. The
Fund will hold less than 25 percent of its net assets in MBSs, including CMOs
and mortgage pass-through securities. For a discussion of MBSs and the risks
associated with such securities, see "Investment Methods and Risk Factors."
The Fund may also invest in investment grade "asset-backed securities." These
include secured debt instruments backed by automobile loans, credit card loans,
home equity loans, manufactured housing loans and other types of secured loans
providing the source of both principal and interest. Asset-backed securities are
subject to risks similar to those discussed with respect to MBSs. See
"Investment Methods and Risk Factors."
The Fund may invest in zero coupon securities which are debt securities that
pay no cash income but are sold at substantial discounts from their face value.
Certain zero coupon securities also provide for the commencement of regular
interest payments at a deferred date. See "Investment Methods and Risk Factors"
for a discussion of zero coupon securities.
Limited Maturity Bond Fund may purchase securities on a "when-issued" or
"delayed delivery" basis in excess of
- --------------------------------------------------------------------------------
6
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
customary settlement periods for the type of security involved. See "Investment
Methods and Risk Factors."
From time to time, Limited Maturity Bond Fund may invest part or all of its
assets in commercial notes or money market instruments.
U.S. GOVERNMENT FUND
The investment objective of the U.S. Government Fund is to provide a high
level of interest income with security of principal by investing primarily in
U.S. Government securities. U.S. Government securities include bills,
certificates of indebtedness, notes and bonds issued by the Treasury or by
agencies or instrumentalities of the U.S. Government. Under normal
circumstances, the Fund will invest at least 80 percent of the value of its
total assets in U.S. Government securities. For a discussion of the varying
levels of guarantee associated with particular types of U.S. Government
Securities, see "Investment Methods and Risk Practices" -- "U.S. Government
Securities."
From time to time the portfolio of the U.S. Government Fund may consist
primarily of Government National Mortgage Association ("GNMA") certificates, or
"Ginnie Maes," which are mortgage-backed securities representing part ownership
of a pool of mortgage loans on which timely payment of interest and principal is
guaranteed by GNMA and backed by the full faith and credit of the U.S.
Government. These loans, issued by lenders such as mortgage bankers, commercial
banks and savings and loan associations, are either insured by the Federal
Housing Administration or guaranteed by the Veterans' Administration. A "pool"
or group of such mortgages is assembled and, after being approved by GNMA, is
offered to investors through securities dealers. Once approved by GNMA, the
timely payment of interest and principal on each mortgage is guaranteed by GNMA
and backed by the full faith and credit of the U.S. Government. Ginnie Mae
certificates differ from bonds in that principal is paid back monthly by the
borrower over the term of the loan rather than returned in a lump sum at
maturity. Ginnie Mae certificates are called "pass through" securities because
both interest and principal payments (including prepayments) are passed through
to the holder of the certificate. Upon receipt, principal payments generally
will be used to purchase additional Ginnie Mae certificates or other U.S.
Government securities. Although the Fund invests in securities guaranteed by
GNMA and backed by the U.S. Government, neither the value of the Fund's
portfolio nor the value or yield of its shares is so guaranteed. The Fund may,
for defensive purposes, temporarily invest part or all of its assets in money
market instruments, including deposits and bankers' acceptances in depository
institutions insured by the FDIC, and short-term U.S. Government and agency
securities.
The potential for appreciation in GNMAs, which might otherwise be expected to
occur as a result of a decline in interest rates, may be limited or negated by
increased principal prepayments of the underlying mortgages. Prepayments of GNMA
certificates occur with increasing frequency when mortgage rates decline
because, among other reasons, mortgagors may be able to refinance their
outstanding mortgages at lower interest rates or prepay their existing
mortgages. Such prepayments would then be reinvested by the Fund at the lower
current interest rates.
While mortgages underlying GNMA certificates have a stated maturity of up to
30 years, it has been the experience of the mortgage industry that the average
life of comparable mortgages, owing to prepayments, refinancings and payments
from foreclosures, is considerably less.
The Fund may invest in other mortgage backed securities (MBSs) as discussed
under "Investment Methods and Risk Factors" -- "Mortgage Backed Securities and
Collateralized Mortgage Obligations." MBSs include certain securities issued by
the United States government or one of its agencies or instrumentalities, such
as GNMAs, and securities issued by private issuers. The Fund may not invest more
than 20 percent of the value of its total assets in MBSs issued by private
issuers.
The Fund may invest in zero coupon securities which are debt securities that
pay no cash income but are sold at substantial discounts from their face value.
Certain zero coupon securities also provide for the commencement of regular
interest payments at a deferred date. See "Investment Methods and Risk Factors"
for a discussion of zero coupon securities.
The Fund will attempt to maximize the return on its portfolio by taking
advantage of market developments and yield disparities, which may include use of
the following strategies:
1. Shortening the average maturity of its portfolio in anticipation of a
rise in interest rates so as to minimize depreciation of principal;
2. Lengthening the average maturity of its portfolio in anticipation of a
decline in interest rates so as to maximize appreciation of principal;
3. Selling one type of U.S. Government obligation and buying another when
disparities arise in the relative values of each; and
4. Changing from one U.S. Government obligation to an essentially similar
U.S. Government obligation when their respective yields are distorted due
to market factors.
These strategies may result in increases or decreases in the Fund's current
income available for distribution to Fund stockholders, and the Fund may hold
obligations which sell at moderate to substantial premiums or discounts from
face value.
- --------------------------------------------------------------------------------
7
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
HIGH YIELD FUND
The investment objective of the High Yield Fund is to seek high current
income. Capital appreciation is a secondary objective. Under normal
circumstances, the Fund will seek its investment objective by investing
primarily in a broad range of income producing securities, including (i) higher
yielding, higher risk, debt securities (commonly referred to as "junk bonds");
(ii) preferred stock; (iii) securities issued by foreign governments, their
agencies and instrumentalities, and foreign corporations, provided that such
securities are denominated in U.S. dollars; (iv) mortgage-backed securities
("MBSs"); (v) asset-backed securities; (vi) securities issued or guaranteed by
the U.S. Government or any of its agencies or instrumentalities, including
Treasury bills, certificates of indebtedness, notes and bonds; (vii) securities
issued or guaranteed by, the Dominion of Canada or provinces thereof; and (viii)
zero coupon securities. The Fund may also invest up to 35 percent of its assets
in common stocks (which may include ADRs), warrants and rights. Under normal
circumstances, at least 65 percent of the Fund's total assets will be invested
in high-yielding, high risk debt securities.
High Yield Fund may invest up to 100 percent of its assets in debt securities
that, at the time of purchase, are rated below investment grade ("high yield
securities" or "junk bonds"), which involve a high degree of risk and are
predominantly speculative. A description of debt ratings is included as Appendix
A to this Prospectus. See "Investment Methods and Risk Factors" for a discussion
of the risks associated with investing in junk bonds. Included in the debt
securities which the High Yield Fund may purchase are convertible bonds, or
bonds with warrants attached. A "convertible bond" is a bond, debenture, or
preferred share which may be exchanged by the owner for common stock or another
security, usually of the same company, in accordance with the terms of the
issue. A "warrant" confers upon the holder the right to purchase an amount of
securities at a particular time and price. See "Investment Methods and Risk
Factors" for a discussion of the risks associated with such securities.
For the year ended December 31, 1997, the dollar weighted average of High
Yield Fund's holdings (excluding equities) had the following credit quality
characteristics.
PERCENT OF
INVESTMENT NET ASSETS
- ---------- ----------
U.S. Government Securities........... 0%
Cash and other Assets, Less
Liabilities........................ %
Rated Fixed Income Securities
Ba/BB.............................. %
B.................................. %
D.................................. %
Unrated Securities Comparable in
Quality to A....................... 0%
Baa/BBB............................ 0%
Ba/BB.............................. 0%
B.................................. 0%
Caa/CCC............................ 0%
-----
100.0%
The foregoing table is intended solely to provide disclosure about High Yield
Fund's asset composition for the year ended December 31, 1997. The asset
composition after this may or may not be approximately the same as shown above.
The Fund may purchase securities which are obligations of, or guaranteed by,
the Dominion of Canada or provinces thereof and debt securities issued by
Canadian corporations. Canadian securities will not be purchased if subject to
the foreign interest equalization tax and unless payable in U.S. dollars. The
Fund may also invest in debt securities issued by foreign governments (including
Brady Bonds), their agencies and instrumentalities and foreign corporations
(including those in emerging markets), provided such securities are denominated
in U.S. dollars. The Fund's investment in foreign securities, excluding Canadian
securities, will not exceed 25 percent of the Fund's net assets. See "Investment
Methods and Risk Factors" for a discussion of the risks associated with
investing in foreign securities, Brady Bonds and emerging markets.
The Fund may invest in MBSs, including mortgage pass-through securities and
collateralized mortgage obligations (CMO's). The Fund may invest in securities
known as "inverse floating obligations," "residual interest bonds," or "interest
only" (IO) or "principal only" (PO) bonds, the market values of which generally
will be more volatile than the market values of most MBSs. This is due to the
fact that such instruments are more sensitive to interest rate changes and to
the rate of principal prepayments than are most other MBSs. The Fund will hold
less than 25 percent of its net assets in MBSs. For a discussion of MBSs and the
risks associated with such securities, see "Investment Methods and Risk
Factors."
The Fund may also invest in asset-backed securities. These include secured
debt instruments backed by automobile loans, credit card loans, home equity
loans, manufactured housing loans and other types of secured loans providing the
source of both principal and interest payments. Asset-backed securities are
subject to risks similar
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SECURITY FUNDS
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to those discussed with respect to MBSs. See "Investment Methods and Risk
Factors."
The Fund may invest in U.S. Government securities. U.S. Government securities
include bills, certificates of indebtedness, notes and bonds issued by the
Treasury or by agencies or instrumentalities of the U.S. Government. For a
discussion of the varying levels of guarantee associated with particular types
of U.S. Government Securities, see "Investment Methods and Risk Factors" - "U.S.
Government Securities."
The Fund may invest in zero coupon securities which are debt securities that
pay no cash income but are sold at substantial discounts from their face value.
Certain zero coupon securities also provide for the commencement of regular
interest payments at a deferred date. See "Investment Methods and Risk Factors"
for a discussion of zero coupon securities.
The High Yield Fund may acquire certain securities that are restricted as to
disposition under federal securities laws, including securities eligible for
resale to qualified institutional investors pursuant to Rule 144A under the
Securities Act of 1933, subject to the Fund's policy that not more than 10
percent of the Fund's net assets will be invested in illiquid assets. See
"Investment Methods and Risk Factors" for a discussion of restricted securities.
The High Yield Fund may purchase securities on "when issued" or "delayed
delivery" basis in excess of customary settlement periods for the type of
security involved. The Fund may also purchase or sell securities on a "forward
commitment" basis and may enter into "repurchase agreements," "reverse
repurchase agreements" and "roll transactions." The Fund may lend securities to
broker-dealers, other institutions or other persons to earn additional income.
The value of loaned securities may not exceed 33 1/3 percent of the Fund's total
assets. In addition, the Fund may purchase loans, loan participations and other
types of direct indebtedness. See "Investment Methods and Risk Factors" for a
discussion of the risks associated with these investment practices.
The Fund may enter into futures contracts (a type of derivative) (or options
thereon) to hedge all or a portion of its portfolio, as a hedge against changes
in prevailing levels of interest rates or as an efficient means of adjusting its
exposure to the bond market. The Fund will not use futures contracts for
leveraging purposes. The Fund will limit its use of futures contracts so that
initial margin deposits or premiums on such contracts used for non-hedging
purposes will not equal more than 5 percent of the Funds net asset value. The
Fund may purchase call and put options and write such options on a "covered"
basis. The Fund may also enter into interest rate and index swaps and purchase
or sell related caps, floors and collars. The aggregate market value of the
Fund's portfolio securities covering call or put options will not exceed 25
percent of the Fund's net assets. See the discussion of "Options, Futures and
Forward Currency Transactions," and "Swaps, Caps, Floors and Collars" under
"Investment Methods and Risk Factors."
From time to time, the High Yield Fund may invest part or all of its assets
in U.S. Government securities, commercial notes or money market instruments. It
is anticipated that the dollar weighted average maturity of the Fund's portfolio
will range from 5 to 15 years under normal circumstances.
SECURITY MUNICIPAL BOND FUND
The investment objective of Municipal Bond Fund is to obtain as high a level
of interest income exempt from regular federal income taxes as is consistent
with preservation of stockholders' capital. Municipal Bond Fund attempts to
achieve its objective by investing primarily in debt securities, the interest on
which is exempt from federal income taxes. Under normal circumstances, at least
80 percent of the Fund's net assets will be invested in municipal obligations
the interest on which is exempt from regular federal income tax. A portion of
the Fund's dividends paid in respect of its shares may be subject to the federal
alternative minimum tax.
The securities in which the Fund invests include debt obligations issued by
or on behalf of the states, territories and possessions of the United States,
the District of Columbia, and their political subdivisions, agencies,
authorities and instrumentalities, including multi-state agencies or authorities
(and may include certain private activity bonds the interest on which is subject
to the alternative minimum tax). These securities are referred to as "municipal
securities."
Municipal bonds are debt obligations which generally have a maturity at the
time of issue in excess of one year. They are issued to obtain funds for various
public purposes, including construction of a wide range of public facilities
such as bridges, highways, housing, hospitals, mass transportation, schools,
streets, and water and sewer works. Other public purposes for which municipal
bonds may be issued include the refunding of outstanding obligations, obtaining
funds for general operating expenses and obtaining funds to loan to other public
institutions and facilities. In addition, certain types of industrial
development bonds and other private activity bonds are issued by or on behalf of
public authorities to obtain funds to provide for privately-operated housing
facilities, and certain facilities for water supply, gas, electricity or sewage
or solid waste disposal.
The two principal classifications of municipal bonds are "general obligation"
and "revenue" bonds. General obligation bonds are secured by the issuer's pledge
of its full faith, credit and taxing power for the payment of principal and
interest. Revenue bonds are payable only from the revenues derived from a
particular facility or class of facilities, or, in some cases, from the proceeds
of a special
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SECURITY FUNDS
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excise or specific revenue source. Revenue securities may include private
activity bonds. Such bonds may be issued by or on behalf of public authorities
to finance various privately operated facilities and are not payable from the
unrestricted revenues of the issuer. As a result, the credit quality of private
activity bonds is frequently related directly to the credit standing of private
corporations or other entities. In addition, the interest on private activity
bonds issued after August 7, 1986 is subject to the federal alternative minimum
tax. The Fund will not be restricted with respect to the proportion of its
assets that may be invested in such obligations. Accordingly, the Fund may not
be a suitable investment vehicle for individuals or corporations that are
subject to the federal alternative minimum tax. Municipal Bond Fund will not
invest more than 5% of its net assets in securities where the principal and
interest are the responsibility of a private corporation or other entity which
has, including predecessors, less than three years' operational history.
There are, depending on numerous factors, variations in the risks involved in
holding municipal securities, both within a particular rating classification and
between classifications. The market values of outstanding municipal bonds will
vary as a result of the rating of the issue and changing evaluations of the
ability of the issuer to meet interest and principal payments. Such market
values will also change in response to changes in the interest rates payable on
new issues of municipal bonds. Should such interest rates rise, the values of
outstanding bonds, including those held in Municipal Bond Fund's portfolio,
would decline; should such interest rates decline, the values of outstanding
bonds would increase.
As a result of litigation or other factors, the power or ability of issuers
of municipal securities to pay principal and/or interest might be adversely
affected. Municipal securities are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Code, and laws, if any, which may be enacted by
Congress or state legislatures extending the time for payment of principal or
interest or both, or imposing other constraints upon enforcement of such
obligations or upon the power of municipalities to levy taxes.
Municipal Bond Fund may invest without percentage limitations in issues of
municipal securities which have similar characteristics, such as the location of
their issuers in the same geographic region or the derivation of interest
payments from revenues on similar projects (for example, electric utility
systems, hospitals, or housing finance agencies). Thus, Municipal Bond Fund may
invest more than 25% of its total assets in securities issued in a single state.
However, it may not invest more than 25% of its total assets in one industry.
Consequently, the Fund's portfolio of municipal securities may be more
susceptible to the risks of adverse economic, political, or regulatory
developments than would be the case with a portfolio of securities required to
be more diversified as to geographic region and/or source of revenue.
The Fund's investments in municipal securities are limited to securities of
"investment grade" quality, that is, securities rated within the four highest
rating categories of Moody's (Aaa, Aa, A, Baa), S&P (AAA, AA, A, BBB) or Fitch
(AAA, AA, A, BBB), except that the Fund may purchase unrated municipal
securities (i) where the securities are guaranteed as to principal and interest
by the full faith and credit of the U.S. Government or are short-term municipal
securities (those having a maturity of less than one year) of issuers having
outstanding at the time of purchase an issue of municipal bonds having one of
the four highest ratings, or (ii) where, in the opinion of the Sub-Adviser,
Salomon Brothers Asset Management Inc. ("Salomon Brothers"), the unrated
municipal securities are comparable in quality to those within the four highest
ratings. However, Municipal Bond Fund will not purchase an unrated municipal
security (other than a security described in (i) above) if, after such purchase,
more than 20 percent of the Fund's total assets would be invested in such
unrated municipal securities.
With respect to rated securities, there is no percentage limitation on the
amount of the Fund's assets which may be invested in securities within any
particular rating classification, but the Fund anticipates that it will invest
no more than 25 percent of its total assets in securities rated Baa by Moody's
or BBB by Standard & Poor's or Fitch. A description of the ratings is contained
in Appendix B to this Prospectus. Such securities have speculative
characteristics as discussed under "Investment Methods and Risk Factors."
If the Fund holds a security whose rating drops below Baa or BBB, Salomon
Brothers will reevaluate the credit risk presented by the security in light of
current market conditions and determine whether to retain or dispose of such
security. The Fund will not retain securities rated below Baa or BBB in an
amount that exceeds 5 percent of its net assets.
Municipal Bond Fund invests primarily in municipal bonds with maturities
greater than one year. It is expected that the Fund's average portfolio maturity
under normal circumstances will be in the 15- to 25-year range. Municipal Bond
Fund also will invest for various purposes in short-term (maturity equal to or
less than one year) securities which, to the extent practicable will be
short-term municipal securities. Short-term investments may be made, pending
investment of funds in municipal bonds, in order to maintain liquidity, to meet
redemption requests, or to maintain a temporary "defensive" investment position
when, in the opinion of the Investment Manager, it is advisable to do so on
account of current or anticipated market conditions. Except when in a temporary
defensive position, investments
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SECURITY FUNDS
PROSPECTUS
================================================================================
in short-term municipal securities will represent less than 20 percent of the
Fund's total assets.
From time to time, on a temporary basis, Municipal Bond Fund may invest in
fixed income obligations on which the interest is subject to federal income tax.
Except when the Fund is in a temporary "defensive" investment position, it will
not purchase a taxable security if, as a result, more than 20 percent of its
total assets would be invested in taxable securities. This limitation is a
fundamental policy of Municipal Bond Fund, and may not be changed without a
majority vote of the Fund's outstanding shares. Temporary taxable investments of
the Fund may consist of obligations issued or guaranteed by the U.S. Government
or its agencies or instrumentalities, commercial paper rated A-1 by S&P, Prime-1
by Moody's or F-1 by Fitch, corporate obligations rated AAA or AA by S&P or
Fitch or Aaa or Aa by Moody's, certificates of deposit or bankers' acceptances
of domestic banks or thrifts with at least $2 billion in assets, or repurchase
agreements with such banks or with broker-dealers.
The Fund may invest in zero coupon securities which are debt securities that
pay no cash income but are sold at substantial discounts from their face value.
Certain zero coupon securities also provide for the commencement of regular
interest payments at a deferred date. See "Investment Methods and Risk Factors"
for a discussion of zero coupon securities.
From time to time, Municipal Bond Fund may purchase municipal securities on a
when-issued or delayed delivery basis. The Fund does not believe that its net
asset value or income will be adversely affected by its purchase of municipal
securities on a when-issued or delayed delivery basis. For further information
regarding when-issued purchases, see "Investment Methods and Risk Factors" and
the Funds' Statement of Additional Information.
Municipal Bond Fund may also purchase from banks or broker/dealers, municipal
securities together with the right to resell the securities to the seller at an
agreed-upon price or yield within a specified period prior to the maturity date
of the securities. Such a right to resell is commonly known as a "put" and is
also referred to as a "stand-by commitment" on the part of the seller. The price
which Municipal Bond Fund pays for the municipal securities with puts generally
is higher than the price which otherwise would be paid for the municipal
securities alone. The Fund uses puts for liquidity purposes in order to permit
it to remain more fully invested in municipal securities than would otherwise be
the case by providing a ready market for certain municipal securities in its
portfolio at an acceptable price. The put generally is for a shorter term than
the maturity of the municipal security and does not restrict in any way the
Fund's ability to dispose of (or retain) the municipal security. In order to
ensure that the interest on municipal securities subject to puts is tax-exempt
to the Fund, it will limit its use of puts in accordance with current
interpretations or rulings of the Internal Revenue Service. Because it is
difficult to evaluate the likelihood of exercise or the potential benefit of a
put, puts will be determined to have a "value" of zero, regardless of whether
any direct or indirect consideration was paid. There is a risk that the seller
of the put may not be able to repurchase the security upon exercise of the put
by Tax-Exempt Fund. For further information regarding puts and stand-by
commitments, see the Funds' Statement of Additional Information.
The Municipal Bond Fund may purchase or sell futures contracts (a type of
derivative) on (a) debt securities that are backed by the full faith and credit
of the U.S. Government, such as long-term U.S. Treasury Bonds and Treasury Notes
and (b) municipal bond indices. The Fund may use futures contracts to hedge all
or a portion of its portfolio, as a hedge against changes in prevailing levels
of interest rates or as an efficient means of adjusting its exposure to the bond
market. The Fund will not use futures contracts for leveraging purposes.
Currently at least one exchange trades futures contracts on an index of
long-term municipal bonds, and the Fund reserves to right to conduct futures
transactions based on an index which may be developed in the future to correlate
with price movements in municipal obligations. It is not presently anticipated
that any of these strategies will be used to a significant degree by the Fund.
For further information regarding futures contracts, see "Investment Methods and
Risk Factors" and the Fund's Statement of Additional Infomration.
SECURITY CASH FUND
The investment objective of Cash Fund is to seek as high a level of current
income as is consistent with preservation of capital and liquidity. Cash Fund
will attempt to achieve its objective by investing at least 95 percent of its
total assets, measured at the time of investment, in a diversified portfolio of
highest quality money market instruments. Cash Fund may also invest up to 5
percent of its total assets, measured at the time of investment, in money market
instruments that are in the second-highest rating category for short-term debt
obligations. Money market instruments in which the Fund may invest consist of
the following:
U.S. Government Securities -- Obligations issued or guaranteed (as to
principal or interest) by the United States Government or its agencies (such as
the Small Business Administration and Government National Mortgage Association)
or instrumentalities (such as Federal Home Loan Banks and Federal Land Banks)
and instruments fully collateralized with such obligations.
Bank Obligations -- Obligations of banks or savings and loan associations
that are members of the Federal Deposit Insurance Corporation and instruments
fully collateralized with such obligations.
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SECURITY FUNDS
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Corporate Obligations -- Commercial paper issued by corporations and rated
Prime-1 or Prime-2 by Moody's or A-1 or A-2 by S&P, or other corporate debt
instruments rated Aaa or Aa or better by Moody's or AAA or AA or better by S&P,
subject to the limitations on investment in instruments in the second-highest
rating category, discussed below.
Cash Fund may invest only in U.S. dollar denominated money market instruments
that present minimal credit risk and, with respect to 95 percent of its total
assets, measured at the time of investment, that are of the highest quality. The
Investment Manager will determine whether a security presents minimal credit
risk under procedures adopted by Cash Fund's Board of Directors. A security will
be considered to be highest quality (1) if rated in the highest category, (e.g.,
Aaa or Prime-1 by Moody's or AAA or A-1 by S&P) by (i) any two nationally
recognized statistical rating organizations ("NRSROs") or, (ii) if rated by only
one NRSRO, by that NRSRO; (2) if issued by an issuer that has short-term debt
obligations of comparable maturity, priority, and security and that are rated in
the highest rating category by (i) any two NRSROs or, (ii) if rated by only one
NRSRO, by that NRSRO; or (3) an unrated security that is of comparable quality
to a security in the highest rating category as determined by the Investment
Manager and whose acquisition is approved or ratified by the Board of Directors.
With respect to 5 percent of its total assets, measured at the time of
investment, Cash Fund may also invest in money market instruments that are in
the second-highest rating category for short-term debt obligations (e.g., rated
Aa or Prime 2 by Moody's or AA or A-2 by S&P). A money market instrument will be
considered to be in the second-highest rating category under the criteria
described above with respect to investments considered highest quality, as
applied to instruments in the second-highest rating category. See Appendix A to
this Prospectus for a description of the principal types of securities and
instruments in which Cash Fund will invest as well as a description of the above
mentioned ratings.
Cash Fund may not invest more than 5 percent of its total assets, measured at
the time of investment, in the securities of any one issuer that are of the
highest quality or more than the greater of 1 percent of its total assets or
$1,000,000, measured at the time of investment, in securities of any one issuer
that are in the second-highest rating category, except that these limitations
shall not apply to U.S. Government securities. The Fund may exceed the 5 percent
limitation for up to three business days after the purchase of the securities of
any one issuer that are of the highest quality, provided that the Fund has
outstanding at any time not more than one such investment. In the event that an
instrument acquired by Cash Fund ceases to be of the quality that is eligible
for the Fund, the Fund shall promptly dispose of the instrument in an orderly
manner unless the Board of Directors determines that this would not be in the
best interests of the Fund.
Cash Fund will invest in money market instruments of varying maturities (but
no longer than thirteen months) in an effort to earn as high a level of current
income as is consistent with preservation of capital and liquidity. Cash Fund
intends to maintain a dollar-weighted average maturity in its portfolio of not
more than 90 days. The Fund seeks to maintain a stable net asset value of $1.00
per share, although there can be no assurance that it will be able to do so.
Cash Fund may acquire one or more of the types of securities listed above
subject to repurchase agreement. Not more than 10 percent of the Fund's total
assets may be invested in illiquid assets, which include repurchase agreements
with maturities of over seven days. Cash Fund may invest in instruments having
rates of interest that are adjusted periodically according to a specified market
rate for such investments ("Variable Rate Instruments"). The interest rate on a
Variable Rate Instrument is ordinarily determined by reference to, or is a
percentage of, an objective standard such as a bank's prime rate or the 91-day
U.S. Treasury Bill rate. Generally, the changes in the interest rate on Variable
Rate Instruments reduce the fluctuation in the market value of such securities.
Accordingly, as interest rates decrease or increase, the potential for capital
appreciation or depreciation is less than for fixed-rate obligations. Cash Fund
determines the maturity of Variable Rate Instruments in accordance with Rule
2a-7 under the Investment Company Act of 1940 which allows the Fund to consider
the maturity date of such instruments to be the period remaining until the next
readjustment of the interest rate rather than the maturity date on the face of
the instrument.
Cash Fund may acquire certain securities that are restricted as to
disposition under the federal securities laws, provided that such securities are
eligible for resale to qualified institutional investors pursuant to Rule 144A
under the Securities Act of 1933, and subject to the Fund's policy that not more
than 10 percent of the Fund's total assets will be invested in illiquid assets.
See "Investment Methods and Risk Factors" for a discussion of Rule 144A
Securities.
INVESTMENT METHODS AND RISK FACTORS
Some of the risk factors related to certain securities, instruments and
techniques that may be used by one or more of the Funds are described in the
"Investment Objective and Policies" section of this Prospectus and in the
"Investment Objectives and Policies" and "Investment Policy Limitations"
sections of the Funds' Statement of Additional Information. The following is a
description of certain additional risk factors related to various securities,
instruments and techniques. The risks so described only apply to those Funds
which may invest in such securities
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SECURITY FUNDS
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and instruments or use such techniques. Also included is a general description
of some of the investment instruments, techniques and methods which may be used
by one or more of the Funds. The methods described only apply to those Funds
which may use such methods.
INVESTMENT VEHICLES
BAA OR BBB SECURITIES -- Certain of the Funds may invest in medium grade debt
securities (debt securities rated Baa by Moody's or BBB by S&P and Fitch at the
time of purchase, or if unrated, of equivalent quality as determined by the
Investment Manager). Baa securities are considered to be "medium grade"
obligations by Moody's and BBB is the lowest classification which is still
considered an "investment grade" rating by S&P and Fitch. Bonds rated Baa by
Moody's or BBB by S&P and Fitch have speculative characteristics and may be more
susceptible than higher grade bonds to adverse economic conditions or other
adverse circumstances which may result in a weakened capacity to make principal
and interest payments. Corporate Bond, Limited Maturity Bond and High Yield
Funds may invest in higher yield debt securities in the lower rating (higher
risk) categories of the recognized rating services (commonly referred to as
"junk bonds"). See Appendix A to this Prospectus for a complete description of
corporate bond ratings and see "Risks Associated with Lower-Rated Debt
Securities (Junk Bonds)."
U.S. GOVERNMENT SECURITIES -- Each of the Funds may invest in U.S. Government
securities which include obligations issued or guaranteed (as to principal and
interest) by the United States Government or its agencies (such as the Small
Business Administration, the Federal Housing Administration, and Government
National Mortgage Association), or instrumentalities (such as Federal Home Loan
Banks and Federal Land Banks), and instruments fully collateralized with such
obligations such as repurchase agreements. Some U.S. Government securities, such
as Treasury bills and bonds, are supported by the full faith and credit of the
U.S. Treasury; others are supported by the right of the issuer to borrow from
the Treasury; others, such as those of the Federal National Mortgage
Association, are supported by the discretionary authority of the U.S. Government
to purchase the agency's obligations; still others, such as those of the Student
Loan Marketing Association, are supported only by the credit of the
instrumentality. Government National Mortgage Association (GNMA) certificates
are mortgage-backed securities representing part ownership of a pool of mortgage
loans on which timely payment of interest and principal is guaranteed by the
full faith and credit of the U.S. Government. Although U.S. Government
securities are guaranteed by the U.S. Government, its agencies or
instrumentalities, shares of the Funds are not so guaranteed in any way.
CONVERTIBLE SECURITIES AND WARRANTS -- Certain of the Funds may invest in
debt or preferred equity securities convertible into or exchangeable for equity
securities. Traditionally, convertible securities have paid dividends or
interest at rates higher than common stocks but lower than non-convertible
securities. They generally participate in the appreciation or depreciation of
the underlying stock into which they are convertible, but to a lesser degree. In
recent years, convertibles have been developed which combine higher or lower
current income with options and other features. Warrants are options to buy a
stated number of shares of common stock at a specified price any time during the
life of the warrants (generally two or more years).
MORTGAGE BACKED SECURITIES AND COLLATERALIZED MORTGAGE OBLIGATIONS -- Certain
of the Funds may invest in mortgage-backed securities (MBSs), including mortgage
pass through securities and collateralized mortgage obligations (CMOs). MBSs
include certain securities issued or guaranteed by the United States government
or one of its agencies or instrumentalities, such as the Government National
Mortgage Association (GNMA), Federal National Mortgage Association (FNMA), or
Federal Home Loan Mortgage Corporation (FHLMC); securities issued by private
issuers that represent an interest in or are collateralized by mortgage-backed
securities issued or guaranteed by the U.S. government or one of its agencies or
instrumentalities; and securities issued by private issuers that represent an
interest in or are collateralized by mortgage loans. A mortgage pass through
security is a pro rata interest in a pool of mortgages where the cash flow
generated from the mortgage collateral is passed through to the security holder.
CMOs are obligations fully collateralized by a portfolio of mortgages or
mortgage-related securities. Certain of the Funds may invest in securities known
as "inverse floating obligations," "residual interest bonds," and "interest
only" (IO) and "principal only" (PO) bonds, the market values of which will
generally be more volatile than the market values of most MBSs. An inverse
floating obligation is a derivative adjustable rate security with interest rates
that adjust or vary inversely to changes in market interest rates. The term
"residual interest" bond is used generally to describe those instruments in
collateral pools, such as CMOs, which receive any excess cash flow generated by
the pool once all other bondholders and expenses have been paid. IOs and POs are
created by separating the interest and principal payments generated by a pool of
mortgage-backed bonds to create two classes of securities. Generally, one class
receives interest only payments (IOs) and the other class principal only
payments (POs). MBSs have been referred to as "derivatives" because the
performance of MBSs is dependent upon and derived from underlying securities.
Investment in MBSs poses several risks, including prepayment, market and
credit risks. PREPAYMENT RISK reflects the chance that borrowers may prepay
their
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SECURITY FUNDS
PROSPECTUS
================================================================================
mortgages faster than expected, thereby affecting the investment's average life
and perhaps its yield. Borrowers are most likely to exercise their prepayment
options at a time when it is least advantageous to investors, generally
prepaying mortgages as interest rates fall, and slowing payments as interest
rates rise. Certain classes of CMOs may have priority over others with respect
to the receipt of prepayments on the mortgages and the Fund may invest in CMOs
which are subject to greater risk of prepayment. MARKET RISK reflects the chance
that the price of the security may fluctuate over time. The price of MBSs may be
particularly sensitive to prevailing interest rates, the length of time the
security is expected to be outstanding and the liquidity of the issue. In a
period of unstable interest rates, there may be decreased demand for certain
types of MBSs, and a fund invested in such securities wishing to sell them may
find it difficult to find a buyer, which may in turn decrease the price at which
they may be sold. CREDIT RISK reflects the chance that the Fund may not receive
all or part of its principal because the issuer or credit enhancer has defaulted
on its obligations. Obligations issued by U.S. Government-related entities are
guaranteed by the agency or instrumentality, and some, such as GNMA
certificates, are supported by the full faith and credit of the U.S. Treasury;
others are supported by the right of the issuer to borrow from the Treasury;
others, such as those of the FNMA, are supported by the discretionary authority
of the U.S. Government to purchase the agency's obligations; still others, are
supported only by the credit of the instrumentality. Although securities issued
by U.S. Government-related agencies are guaranteed by the U.S. Government, its
agencies or instrumentalities, shares of the Fund are not so guaranteed in any
way. The performance of private label MBSs, issued by private institutions, is
based on the financial health of those institutions.
ASSET-BACKED SECURITIES -- Certain of the Funds may also invest in
"asset-backed securities." These include secured debt instruments backed by
automobile loans, credit card loans, home equity loans, manufactured housing
loans and other types of secured loans providing the source of both principal
and interest. Asset-backed securities are subject to risks similar to those
discussed above with respect to MBSs.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES -- Certain of the Funds may
purchase securities on a "when-issued" basis and may purchase or sell securities
on a "forward commitment" basis in order to hedge against anticipated changes in
interest rates and prices. The price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery and payment for
the securities take place at a later date. When-issued securities and forward
commitments may be sold prior to the settlement date, but the Funds will enter
into when-issued and forward commitments only with the intention of actually
receiving or delivering the securities, as the case may be. No income accrues on
securities which have been purchased pursuant to a forward commitment or on a
when-issued basis prior to delivery of the securities. If a Fund disposes of the
right to acquire a when-issued security prior to its acquisition or disposes of
its right to deliver or receive against a forward commitment, it may incur a
gain or loss. At the time a Fund enters into a transaction on a when-issued or
forward commitment basis, a segregated account consisting of cash or liquid
securities equal to the value of the when-issued or forward commitment
securities will be established and maintained with its custodian and will be
marked to market daily. There is a risk that the securities may not be delivered
and that the Fund may incur a loss.
RESTRICTED SECURITIES (RULE 144A SECURITIES) -- Certain of the Funds may
invest in restricted securities which are securities that are restricted as to
disposition under the federal securities laws, provided that such securities are
eligible for resale to qualified institutional investors pursuant to Rule 144A
under the Securities Act of 1933.
The High Yield Fund may purchase restricted securities, including securities
that are not eligible for resale pursuant to Rule 144A. The Fund may acquire
such securities through private placement transactions, directly from the issuer
or from security holders, generally at higher yields or on terms more favorable
to investors than comparable publicly traded securities. However, the
restrictions on resale of such securities may make it difficult for the Fund to
dispose of such securities at the time considered most advantageous, and/or may
involve expenses that would not be incurred in the sale of securities that were
freely marketable. Risks associated with restricted securities include the
potential obligation to pay all or part of the registration expenses in order to
sell certain restricted securities. A considerable period of time may elapse
between the time of the decision to sell a security and the time the Fund may be
permitted to sell it under an effective registration statement. If, during a
period, adverse conditions were to develop, the Fund might obtain a less
favorable price than prevailing when it decided to sell.
The Fund's Board of Directors is responsible for developing and establishing
guidelines and procedures for determining the liquidity of Rule 144A securities.
As permitted by Rule 144A, the Board of Directors has delegated this
responsibility to the Investment Manager. In making the determination regarding
the liquidity of Rule 144A securities, the Investment Manager will consider
trading markets for the specific security taking into account the unregistered
nature of a Rule 144A security. In addition, the Investment Manager may
consider: (1) the frequency of trades and quotes; (2) the number of dealers and
potential purchasers; (3) dealer undertakings to make a market; and (4) the
nature of the security and of the market place trades (e.g., the time needed to
dispose of the security, the method
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of soliciting offers and the mechanics of transfer). Investing in Rule 144A
securities could have the effect of increasing the amount of a Fund's assets
invested in illiquid securities to the extent that qualified institutional
buyers become uninterested, for a time, in purchasing these securities.
SOVEREIGN DEBT. Certain of the Funds may invest in sovereign debt securities
of emerging market governments, including Brady Bonds, provided they are
denominated in U.S. dollars. Sovereign debt securities are those issued by
emerging market governments that are traded in the markets of developed
countries or groups of developed countries. Investments in such securities
involve special risks. The issuer of the debt or the governmental authorities
that control the repayment of the debt may be unable or unwilling to repay
principal or interest when due in accordance with the terms of such debt.
Periods of economic uncertainty may result in the volatility of market prices of
sovereign debt, and in turn the Fund's net asset value, to a greater extent than
the volatility inherent in domestic fixed income securities. A sovereign
debtor's willingness or ability to repay principal and pay interest in a timely
manner may be affected by, among other factors, its cash flow situation, the
extent of its foreign reserves, the availability of sufficient foreign exchange
on the date a payment is due, the relative size of the debt service burden to
the economy as a whole, the sovereign debtor's policy toward principal
international lenders and the political constraints to which a sovereign debtor
may be subject. Emerging market governments could default on their sovereign
debt. Such sovereign debtors also may be dependent on expected disbursements
from foreign governments, multilateral agencies and other entities abroad to
reduce principal and interest arrearages on their debt. The commitment on the
part of these governments, agencies and others to make such disbursements may be
conditioned on a sovereign debtor's implementation of economic reforms and/or
economic performance and the timely service of such debtor's obligations.
Failure to implement such reforms, achieve such levels of economic performance
or repay principal or interest when due, may result in the cancellation of such
third parties' commitments to lend funds to the sovereign debtor, which may
further impair such debtor's ability or willingness to timely service its debt.
The occurrence of political, social or diplomatic changes in one or more of
the countries issuing sovereign debt could adversely affect the Fund's
investments. Emerging markets are faced with social and political issues and
some of them have experienced high rates of inflation in recent years and have
extensive internal debt. Among other effects, high inflation and internal debt
service requirements may adversely affect the cost and availability of future
domestic sovereign borrowing to finance governmental programs, and may have
other adverse social, political and economic consequences. Political changes or
a deterioration of a country's domestic economy or balance of trade may affect
the willingness of countries to service their sovereign debt. Although the
Investment Manager intends to manage the Funds in a manner that will minimize
the exposure to such risks, there can be no assurance that adverse political
changes will not cause a Fund to suffer a loss of interest or principal on any
of its holdings.
In recent years, some of the emerging market countries have encountered
difficulties in servicing their sovereign debt obligations. Some of these
countries have withheld payments of interest and/or principal of sovereign debt.
These difficulties have also led to agreements to restructure external debt
obligations -- in particular, commercial bank loans, typically by rescheduling
principal payments, reducing interest rates and extending new credits to finance
interest payments on existing debt. In the future, holders of emerging market
sovereign debt securities may be requested to participate in similar
rescheduling of such debt. Certain emerging market countries are among the
largest debtors to commercial banks and foreign governments. At times certain
emerging market countries have declared a moratorium on the payment of principal
and interest on external debt; such a moratorium is currently in effect in
certain emerging market countries. There is no bankruptcy proceeding by which a
creditor may collect in whole or in part sovereign debt on which an emerging
market government has defaulted.
The ability of emerging market governments to make timely payments on their
sovereign debt securities is likely to be influenced strongly by a country's
balance of trade and its access to trade and other international credits. A
country whose exports are concentrated in a few commodities could be vulnerable
to a decline in the international prices of one or more of such commodities.
Increased protectionism on the part of a country's trading partners could also
adversely affect its exports. Such events could diminish a country's trade
account surplus, if any. To the extent that a country receives payment for its
exports in currencies other than hard currencies, its ability to make hard
currency payments could be affected.
Investors should also be aware that certain sovereign debt instruments in
which a Fund may invest involve great risk. As noted above, sovereign debt
obligations issued by emerging market governments generally are deemed to be the
equivalent in terms of quality to securities rated below investment grade by
Moody's and S&P. Such securities are regarded as predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligations and involve major risk exposure to
adverse conditions. Some of such securities, with respect to which the issuer
currently may not be paying interest or may be in payment default, may be
comparable to securities rated D by S&P or C by Moody's. The Fund may have
difficulty disposing of and valuing
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certain sovereign debt obligations because there may be a limited trading market
for such securities. Because there is no liquid secondary market for many of
these securities, the Fund anticipates that such securities could be sold only
to a limited number of dealers or institutional investors. Certain sovereign
debt securities may be illiquid.
BRADY BONDS. Certain of the Funds may invest in "Brady Bonds," which are debt
restructurings that provide for the exchange of cash and loans for newly issued
bonds. Brady Bonds are securities created through the exchange of existing
commercial bank loans to public and private entities in certain emerging markets
for new bonds in connection with debt restructuring under a debt restructuring
plan introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady.
Brady Bonds recently have been issued by the governments of Argentina, Brazil,
Bulgaria, Costa Rica, Dominican Republic, Jordan, Mexico, Nigeria, The
Philippines, Uruguay, Venezuela, Ecuador and Poland and are expected to be
issued by other emerging market countries. Approximately $150 billion in
principal amount of Brady Bonds has been issued to date. Fund investors should
recognize that Brady Bonds have been issued only recently and, accordingly, do
not have a long payment history. Brady Bonds may be collateralized or
uncollateralized, are issued in various currencies (primarily the U.S. dollar)
and are actively traded in the secondary market for Latin American debt. The
Salomon Brothers Brady Bond Index provides a benchmark that can be used to
compare returns of emerging market Brady Bonds with returns in other bond
markets, e.g., the U.S. bond market.
The High Yield Fund may invest only in collateralized Brady Bonds,
denominated in U.S. dollars. U.S. dollar-denominated, collateralized Brady
Bonds, which may be fixed rate par bonds or floating rate discount bonds, are
collateralized in full as to principal by U.S. Treasury zero coupon bonds having
the same maturity as the bonds. Interest payments on such bonds generally are
collateralized by cash or securities in an amount that, in the case of fixed
rate bonds, is equal to at least one year of rolling interest payments or, in
the case of floating rate bonds, initially is equal to at least one year's
rolling interest payments based on the applicable interest rate at the time and
is adjusted at regular intervals thereafter.
LOAN PARTICIPATIONS AND ASSIGNMENTS. The High Yield Fund may invest in fixed
and floating rate loans ("Loans") arranged through private negotiations between
a corporate or foreign entity and one or more financial institutions
("Lenders"). Certain of the Fund's investments in Loans in emerging markets are
expected to be in the form of participations in Loans ("Participations") and
assignments of portions of Loans from third parties ("Assignments").
Participations typically will result in the Fund having a contractual
relationship only with the Lender, not with the borrower. The Fund will have the
right to receive payments of principal, interest and any fees to which it is
entitled only from the Lender selling the Participation and only upon receipt by
the Lender of the payments from the borrower. In connection with purchasing
Participations, the Fund generally will have no right to enforce compliance by
the borrower with the terms of the loan agreement relating to the Loan ("Loan
Agreement"), nor any rights of set-off against the borrower, and the Fund may
not directly benefit from any collateral supporting the Loan in which it has
purchased the Participation. As a result, the Fund will assume the credit risk
of both the borrower and the Lender that is selling the Participation.
In the event of the insolvency of the Lender selling a Participation, the
Fund may be treated as a general creditor of the Lender and may not benefit from
any set-off between the Lender and the borrower. The Fund will acquire
Participations only if the Lender interpositioned between the Fund and the
borrower is determined by the Investment Manager to be creditworthy. When the
Fund purchases Assignments from Lenders, the Fund will acquire direct rights
against the borrower on the Loan. However, since Assignments are arranged
through private negotiations between potential assignees and assignors, the
rights and obligations acquired by the Fund as the purchaser of an Assignment
may differ from, and be more limited than, those held by the assigning Lender.
The Fund may have difficulty disposing of Assignments and Participations. The
liquidity of such securities is limited and the Fund anticipates that such
securities could be sold only to a limited number of institutional investors.
The lack of a liquid secondary market could have an adverse impact on the value
of such securities and on the Fund's ability to dispose of particular
Assignments or Participations when necessary to meet the Fund's liquidity needs
or in response to a specific economic event, such as a deterioration in the
creditworthiness of the borrower. The lack of a liquid secondary market for
Assignments and Participations also may make it more difficult for the fund to
assign a value to those securities for purposes of valuing the Fund's portfolio
and calculating its net asset value.
ZERO COUPON SECURITIES -- Certain of the Funds may invest in certain zero
coupon securities that are "stripped" U.S. Treasury notes and bonds. The Funds
also may invest in zero coupon and other deep discount securities issued by
foreign governments and domestic and foreign corporations, including certain
Brady Bonds and other foreign debt and payment-in-kind securities. Zero coupon
securities pay no interest to holders prior to maturity, and payment-in-kind
securities pay interest in the form of additional securities. However, a portion
of the original issue discount on zero coupon securities and the "interest" on
payment-in-kind securities will be included in the investing Fund's income.
Accordingly, for the Fund to qualify for tax treatment as a regulated investment
company and to avoid certain taxes
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(see "Taxes" in the Statement of Additional Information), the Fund may be
required to distribute an amount that is greater than the total amount of cash
it actually receives. These distributions must be made from the Fund's cash
assets or, if necessary, from the proceeds of sales of portfolio securities. The
Fund will not be able to purchase additional income-producing securities with
cash used to make such distributions and its current income ultimately may be
reduced as a result. Zero coupon and payment-in-kind securities usually trade at
a deep discount from their face or par value and will be subject to greater
fluctuations of market value in response to changing interest rates than debt
obligations of comparable maturities that make current distributions of interest
in cash.
REPURCHASE AGREEMENTS, REVERSE REPURCHASE AGREEMENTS AND ROLL TRANSACTIONS --
Each of the Funds may enter into repurchase agreements. Repurchase agreements
are transactions in which the purchaser buys a debt security from a bank or
recognized securities dealer and simultaneously commits to resell that security
to the bank or dealer at an agreed upon price, date and market rate of interest
unrelated to the coupon rate or maturity of the purchased security. Repurchase
agreements are considered to be loans which must be fully collateralized
including interest earned thereon during the entire term of the agreement. If
the institution defaults on the repurchase agreement, the Fund will retain
possession of the underlying securities. If bankruptcy proceedings are commenced
with respect to the seller, realization on the collateral by the Fund may be
delayed or limited and the Fund may incur additional costs. In such case, the
Fund will be subject to risks associated with changes in market value of the
collateral securities. The Fund intends to enter into repurchase agreements only
with banks and broker/dealers believed to present minimal credit risks.
The High Yield Fund may also enter into reverse repurchase agreements with
the same parties with whom it may enter into repurchase agreements. Under a
reverse repurchase agreement, the Fund would sell securities and agree to
repurchase them at a particular price at a future date. Reverse repurchase
agreements involve the risk that the market value of the securities retained in
lieu of sale by the Fund may decline below the price of the securities the Fund
has sold but is obligated to repurchase. In the event the buyer of securities
under a reverse repurchase agreement files for bankruptcy or becomes insolvent,
such buyer or its trustee or receiver may receive an extension of time to
determine whether to enforce the Fund's obligation to repurchase the securities,
and the Fund's use of the proceeds of the reverse repurchase agreement may
effectively be restricted pending such decision.
The High Yield Fund also may enter into "dollar rolls," in which the Fund
sells fixed income securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar (same type, coupon
and maturity) securities on a specified future date. During the roll period, the
Fund would forego principal and interest paid on such securities. The Fund would
be compensated by the difference between the current sales price and the forward
price for the future purchase, as well as by the interest earned on the cash
proceeds of the initial sale. See "Investment Objectives and Policies" in the
Statement of Additional Information.
INVESTMENT METHODS
BORROWING -- Each of the Funds may borrow money from banks as a temporary
measure for emergency purposes, or to facilitate redemption requests.
From time to time, it may be advantageous for the Funds to borrow money
rather than sell existing portfolio positions to meet redemption requests.
Accordingly, the Funds may borrow from banks and the High Yield Fund may borrow
through reverse repurchase agreements and "roll" transactions, in connection
with meeting requests for the redemption of Fund shares. High Yield Fund may
borrow up to 33 1/3 percent; Limited Maturity Bond, Municipal Bond and Cash
Funds may each borrow up to 10 percent; and Corporate Bond and U.S. Government
Fund may borrow up to 5 percent of total Fund assets. To the extent that a Fund
purchases securities while it has outstanding borrowings, it is using leverage,
i.e., using borrowed funds for investment. Leveraging will exaggerate the effect
on net asset value of any increase or decrease in the market value of a Fund's
portfolio. Money borrowed for leveraging will be subject to interest costs that
may or may not be recovered by appreciation of the securities purchased; in
certain cases, interest costs may exceed the return received on the securities
purchased. A Fund also may be required to maintain minimum average balances in
connection with such borrowing or to pay a commitment or other fee to maintain a
line of credit; either of these requirements would increase the cost of
borrowing over the stated interest rate. It is not expected that Cash Fund would
purchase securities while it had borrowings outstanding.
OPTIONS AND FUTURES TRANSACTIONS -- In seeking to protect against interest
rate changes that are adverse to its present or prospective positions, the High
Yield Fund may employ certain risk management practices involving the use of
options and futures contracts and options on futures contracts on U.S. and
foreign government securities. The Municipal Bond Fund may employ the use of
futures contracts on U.S. government securities and municipal bond indices. The
High Yield Fund also may enter into interest rate and index swaps and purchase
or sell related caps, floors and collars. Investment in derivative securities
will be utilized for hedging purposes and not for speculation. See "Swaps, Caps,
Floors and Collars" below. See also "Derivative Instruments: Options and Futures
Strategies" in
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the Statement of Additional Information. There can be no assurance that a Fund's
risk management practices will succeed.
Certain Funds 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 ("OTC") markets. The Fund will cause its custodian to
segregate cash or liquid securities having a value sufficient to meet the Fund's
obligations under the option. The Funds also may enter into interest rate
futures contracts and purchase and write options to buy and sell such futures
contracts, to the extent permitted under regulations of the Commodities Futures
Trading Commission ("CFTC"). The Funds will not employ these practices for
speculation; however, these practices may result in the loss of principal under
certain conditions. In addition, certain provisions of the Internal Revenue Code
of 1986, as amended ("Code"), limit the extent to which a Fund may enter into
forward contracts or futures contracts or engage in options transactions. See
"Taxes" in the Statement of Additional Information.
SWAPS, CAPS, FLOORS AND COLLARS -- High Yield Fund may enter into interest
rate and index swaps, and the purchase or sale of related caps, floors and
collars. The Fund expects to enter into these transactions primarily to preserve
a return or spread on a particular investment or portion of its portfolio as a
technique for managing the portfolio's duration (i.e., the price sensitivity to
changes in interest rates) or to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date. The Fund intends to
use these transactions as hedges and not as speculative investments, and will
not sell interest rate caps or floors if it does not own securities or other
instruments providing the income the Fund may be obligated to pay.
Interest rate swaps involve the exchange by the Fund with another party of
their respective commitments to pay or receive interest (for example, an
exchange of floating rate payments for fixed rate payments) with respect to a
notional amount of principal.
The purchase of a cap entitles the purchaser to receive payments on a
notional principal amount from the party selling the cap to the extent that a
specified index exceeds a predetermined interest rate. The purchase of an
interest rate floor entitles the purchaser to receive payments on a notional
principal amount from the party selling the floor to the extent that a specified
index falls below a predetermined interest rate or amount. A collar is a
combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
AMERICAN DEPOSITARY RECEIPTS (ADRS) -- The High Yield Fund may invest in
sponsored ADRs. ADRs are dollar-denominated receipts issued generally by U.S.
banks and which represent the deposit with the bank of a foreign company's
securities. ADRs are publicly traded on exchanges or over-the-counter in the
United States. Investors should consider carefully the substantial risks
involved in investing in securities issued by companies of foreign nations,
which are in addition to the usual risks inherent in domestic investments. See
"Foreign Investment Risks," below.
LENDING OF PORTFOLIO SECURITIES -- Certain Funds may lend securities to
broker-dealers, institutional investors, or other persons to earn income. The
principal risk is the potential insolvency of the broker-dealer or other
borrower. In this event, the Fund could experience delays in recovering its
securities and possibly capital losses. Any loan will be continuously secured by
collateral at least equal to the value of the security loaned. Such lending
could result in delays in receiving additional collateral or in the recovery of
the securities or possible loss of rights in the collateral should the borrower
fail financially.
RISK FACTORS
GENERAL RISK FACTORS -- Each Fund's net asset value will fluctuate,
reflecting fluctuations in the market value of its portfolio positions. The
value of fixed income securities held by the Funds generally fluctuates
inversely with interest rate movements. In other words, bond prices generally
fall as interest rates rise and generally rise as interest rates fall. Longer
term bonds held by the Funds are subject to greater interest rate risk. There is
no assurance that any Fund will achieve its investment objective.
FOREIGN INVESTMENT RISK -- Investment in foreign securities involves risks
and considerations not present in domestic investments. Foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards, practices and requirements comparable to those applicable
to U.S. companies. The securities of non-U.S. issuers generally are not
registered with the SEC, nor are the issuers thereof usually subject to the
SEC's reporting requirements. Accordingly, there may be less publicly available
information about foreign securities and issuers than is available with respect
to U.S. securities and issuers. A Fund's income and gains from foreign issuers
may be subject to non-U.S. withholding or other taxes, thereby reducing their
income and gains. In addition, with respect to some foreign countries, there is
the increased possibility of expropriation or confiscatory taxation, limitations
on the removal of funds or other assets of the Fund, political or social
instability, or diplomatic developments which could affect the investments of
the Fund in those countries. Moreover, individual foreign economies may differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross national product, rate of inflation, rate of savings and capital
reinvestment, resource self-sufficiency and balance of payments positions.
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RISKS ASSOCIATED WITH INVESTMENT IN EMERGING MARKETS -- Certain of the Funds
may invest in emerging markets. Because of the special risks associated with
investing in emerging markets, an investment in a Fund making such investments
should be considered speculative. Investors are strongly advised to consider
carefully the special risks involved in emerging markets, which are in addition
to the usual risks of investing in developed foreign markets around the world.
Investing in emerging markets involves risks relating to potential political
economic instability within such markets and the risks of expropriation,
nationalization, confiscation of assets and property or the imposition of
restrictions on foreign investment and on repatriation of capital invested. In
the event of such expropriation, nationalization or other confiscation in any
emerging market, the Fund could lose its entire investment in that market. Many
emerging market countries have experienced substantial, and in some periods
extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have negative
effects on the economies and securities markets of certain emerging market
countries. Economies in emerging markets generally are dependent heavily upon
international trade and, accordingly, have been and may continue to be affected
adversely by trade barriers, exchange controls, managed adjustments in relative
currency values and other protectionist measures imposed or negotiated by the
countries with which they trade. These economies also have been and may continue
to be affected adversely by economic conditions in the countries with which they
trade.
The securities markets of emerging countries are substantially smaller, less
developed, less liquid and more volatile than the securities markets of the
United States and other more developed countries. Disclosure and regulatory
standards in many respects are less stringent than in the United States and
other major markets. There also may be a lower level of monitoring and
regulation of emerging securities markets and the activities of investors in
such markets, and enforcement of existing regulations has been extremely
limited. Investments may also be made in former communist countries. There is a
possibility that these countries may revert to communism. In addition, brokerage
commissions, custodial services and other costs relating to investment in
foreign markets generally are more expensive than in the United States,
particularly with respect to emerging markets. Such markets have different
settlement and clearance procedures. In certain markets there have been times
when settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. The inability of
a Fund to make intended securities purchases due to settlement problems could
cause it to forego attractive investment opportunities. Inability to dispose of
a portfolio security caused by settlement problems could result either in losses
to a Fund due to subsequent declines in value of the portfolio security or, if a
Fund has entered into a contract to sell the security, could result in possible
liability to the purchaser.
The risk also exists that an emergency situation may arise in one or more
emerging markets as a result of which trading of securities may cease or may be
substantially curtailed and prices for a Fund's portfolio securities in such
markets may not be readily available. Section 22(e) of the 1940 Act permits a
registered investment company to suspend redemption of its shares for any period
during which an emergency exists, as determined by the SEC. Accordingly, when a
Fund believes that appropriate circumstances warrant, it will promptly apply to
the SEC for a determination that an emergency exists within the meaning of
Section 22(e) of the 1940 Act. During the period commencing from a Fund's
identification of such conditions until the date of SEC action, the portfolio
securities of a Fund in the affected markets will be valued at fair value as
determined in good faith by or under the direction of the Fund's Board of
Directors.
RISKS ASSOCIATED WITH LOWER-RATED DEBT SECURITIES (JUNK BONDS) -- Certain of
the Funds may invest in higher yielding debt securities in the lower rating
(higher risk) categories of the recognized rating services (commonly referred to
as "junk bonds"). Debt rated BB, B, CCC, CC and C by S&P and rated Ba, B, Caa,
Ca and C by Moody's, is regarded, on balance, as predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. For S&P, BB indicates the lowest
degree of speculation and C the highest degree of speculation. For Moody's, Ba
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions. Similarly, debt rated Ba or BB and below is
regarded by the relevant rating agency as speculative. Debt rated C by Moody's
or S&P is the lowest quality debt that is not in default as to principal or
interest and such issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing. Such securities are
also generally considered to be subject to greater risk than higher quality
securities with regard to a deterioration of general economic conditions.
Ratings of debt securities represent the rating agency's opinion regarding their
quality and are not a guarantee of quality. Rating agencies attempt to evaluate
the safety of principal and interest payments and do not evaluate the risks of
fluctuations in market value. Also, rating agencies may fail to make timely
changes in credit quality in response to subsequent events, so that an issuer's
current financial condition may be better or worse than a rating indicates.
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The market value of lower quality debt securities tend to reflect individual
developments of the issuer to a greater extent than do higher quality
securities, which react primarily to fluctuations in the general level of
interest rates. In addition, lower quality debt securities tend to be more
sensitive to economic conditions and generally have more volatile prices than
higher quality securities. Issuers of lower quality securities are often highly
leveraged and may not have available to them more traditional methods of
financing. For example, during an economic downturn or a sustained period of
rising interest rates, highly leveraged issuers of lower quality securities may
experience financial stress. During such periods, such issuers may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations may also be adversely affected by
specific developments affecting the issuer, such as the issuer's inability to
meet specific projected business forecasts or the unavailability of additional
financing. Similarly, certain emerging market governments that issue lower
quality debt securities are among the largest debtors to commercial banks,
foreign governments and supranational organizations such as the World Bank and
may not be able or willing to make principal and/or interest repayments as they
come due. The risk of loss due to default by the issuer is significantly greater
for the holders of lower quality securities because such securities are
generally unsecured and are often subordinated to other creditors of the issuer.
Lower quality debt securities of corporate issuers frequently have call or
buy-back features which would permit an issuer to call or repurchase the
security from the Fund. If an issuer exercises these provisions in a declining
interest rate market, the Fund may have to replace the security with a lower
yielding security, resulting in a decreased return for investors. In addition,
the Fund may have difficulty disposing of lower quality securities because there
may be a thin trading market for such securities. There may be no established
retail secondary market for many of these securities, and the Fund anticipates
that such securities could be sold only to a limited number of dealers or
institutional investors. The lack of a liquid secondary market also may have an
adverse impact on market prices of such instruments and may make it more
difficult for the Fund to obtain accurate market quotations for purposes of
valuing the securities in the portfolio of the Fund.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may also decrease the values and liquidity of lower
quality securities, especially in a thinly traded market. The High Yield Fund
also may acquire lower quality debt securities during an initial underwriting or
may acquire lower quality debt securities which are sold without registration
under applicable securities laws. Such securities involve special considerations
and risks.
Factors having an adverse effect on the market value of lower rated
securities or their equivalents purchased by the Fund will adversely impact net
asset value of the Fund. See "Risk Factors" in the Statement of Additional
Information. In addition to the foregoing, such factors may include: (i)
potential adverse publicity; (ii) heightened sensitivity to general economic or
political conditions; and (iii) the likely adverse impact of a major economic
recession. The Fund also may incur additional expenses to the extent it is
required to seek recovery upon a default in the payment of principal or interest
on its portfolio holdings, and the Fund may have limited legal recourse in the
event of a default. Debt securities issued by governments in emerging markets
can differ from debt obligations issued by private entities in that remedies
from defaults generally must be pursued in the courts of the defaulting
government, and legal recourse is therefore somewhat diminished. Political
conditions, in terms of a government's willingness to meet the terms of its debt
obligations, also are of considerable significance. There can be no assurance
that the holders of commercial bank debt may not contest payments to the holders
of debt securities issued by governments in emerging markets in the event of
default by the governments under commercial bank loan agreements.
The Investment Manager will attempt to minimize the speculative risks
associated with investments in lower quality securities through credit analyses
and by carefully monitoring current trends in interest rates, political
developments and other factors. Nonetheless, investors should carefully review
the investment objectives and policies of the Funds and consider their ability
to assume the investment risks involved before making an investment in the
Funds.
MANAGEMENT OF THE FUNDS
The management of the Funds' business and affairs is the responsibility of
the Board of Directors. Security Management Company, LLC (the "Investment
Manager"), 700 Harrison Street, Topeka, Kansas, is responsible for selection and
management of the Funds' portfolio investments. The Investment Manager is a
limited liability company which is ultimately controlled by Security Benefit
Life Insurance Company, a life insurance company with over $7.4 billion of
insurance in force. The Investment Manager also acts as investment adviser to
Security Equity, Growth and Income, and Ultra Funds and SBL Fund. The Investment
Manager currently manages approximately $____ billion in assets.
The Investment Manager has engaged Salomon Brothers Asset Management Inc.
("Salomon Brothers"), 7 World Trade Center, New York, NY 10048, to provide
investment advisory services to the Municipal Bond Fund. Salomon Brothers is a
wholly-owned subsidiary of
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Salomon Brothers Holding Company, Inc., which is wholly-owned by Salomon Smith
Barney Holdings, Inc., which is, in turn, wholly-owned by Travelers Group, Inc.
Salomon Brothers was incorporated in 1987 and together with Salomon Brothers
affiliates in London, Frankfurt, Tokyo and Hong Kong, provides a broad range of
investment advisory services to various individuals and institutional clients
located throughout the world and serves as investment adviser to various
investment companies. Currently Salomon Brothers and its affiliates manage
approximately $26.6 billion in assets.
Subject to the supervision and direction of the Funds' Board of Directors,
the Investment Manager manages the Fund portfolios in accordance with each
Fund's stated investment objective and policies and makes all investment
decisions. As to the Municipal Bond Fund, the Investment Manager supervises the
management of the Fund's portfolio by the Sub-Adviser, Salomon Brothers. The
Investment Manager has agreed that total annual expenses of the respective Funds
(including for any fiscal year, the management fee, but excluding interest,
taxes, brokerage commissions, extraordinary expenses and Class B distribution
fees) shall not for the Corporate Bond, Limited Maturity Bond, U.S. Government
and High Yield Funds exceed the level of expenses which the Funds are permitted
to bear under the most restrictive expense limitation imposed by any state in
which shares of the Fund are then qualified for sale and shall not for Cash Fund
exceed one percent of each Fund's average net assets for the year. (The
Investment Manager is not aware of any state that currently imposes limits on
the level of mutual fund expenses.) The Investment Manager has agreed that total
expenses of Municipal Bond Fund (including for any fiscal year, the management
fee, but excluding interest, taxes, extraordinary expenses and Class A and Class
B distribution fees) shall not exceed one percent of the Fund's average net
assets for the year. The Investment Manager will contribute such funds to the
Funds or waive such portion of its compensation as may be necessary to insure
that such total annual expenses do not exceed any such limitation. As
compensation for its management services, the Investment Manager receives on an
annual basis, .5 percent of the average daily net assets of Corporate Bond,
Limited Maturity Bond, U.S. Government, Municipal Bond and Cash Funds and .6
percent of the average daily net assets of the High Yield Fund, computed on a
daily basis and payable monthly.
The Investment Manager also acts as the administrative agent for the Funds,
and as such performs administrative functions, and the bookkeeping, accounting
and pricing functions for the Funds. For this service the Investment Manager
receives on an annual basis, a fee of .09 percent of the average daily net
assets of Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield and
Municipal Bond Funds and .045 percent of the average daily net assets of Cash
Fund, calculated daily and payable monthly. The Investment Manager also acts as
the transfer agent and dividend disbursing agent for the Funds. The Funds'
expenses include fees paid to the Investment Manager as well as expenses of
brokerage commissions, interest, taxes, Class B distribution fees and
extraordinary expenses approved by the Board of Directors of the Funds.
Like other mutual funds, as well as other financial and business
organizations around the world, the Funds could be adversely affected if the
computer systems used by the Investment Manager, and other service providers, in
performing its administrative functions do not properly process and calculate
date-related information and data before, during and after January 1, 2000. Some
computer software and hardware systems currently cannot distinguish between the
year 2000 and the year 1900 or some other date because for the way date fields
were encoded.
The Investment Manager has adopted a plan to be "Year 2000 Compliant" with
respect to both its internally built systems as well as systems provided by
external vendors. "Year 2000 Compliant" means that systems and programs which
require modification will have the date fields expanded to include the century
information and that for interfaces to external organizations as well as new
systems development the year portion of the date field will be expanded to four
digits using the format YYYYMMDD. The Investment Manager's overall approach to
addressing the Year 2000 issue is as follows: (1) to inventory its internal and
external hardware, software, telecommunications and data transmissions to
customers and conduct a risk assessment with respect to the impact that a
failure of any such system would have on its business operations; (2) to modify
or replace its internal systems and obtain vendor certifications of Year 2000
compliance for systems provided by vendors or replace such systems that are not
Year 2000 Compliant; and (3) to implement and test its systems for Year 2000
compliance. The Investment Manager has completed the inventory of its internal
and external systems and has made substantial progress toward completing the
modification/replacement of its internal systems as well as towards obtaining
Year 2000 Compliant certifications from its external vendors. Overall systems
testing is scheduled to commence in December 1998 and extend into the first six
months of 1999.
Although the Investment Manager has taken steps to ensure that its systems
will function properly before, during and after the Year 2000, its key operating
systems and information sources are provided by or through external vendors
which creates uncertainty to the extent the Investment Manager is relying on the
assurance of such vendors as to whether their systems will be Year 2000
Compliant. The costs or consequences of incomplete or untimely resolution of the
Year 2000 issue are unknown to the Investment Manager at this time but could
have a
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material adverse impact on the operations of the Funds and the Investment
Manager.
The Year 2000 problem is expected to impact companies, which may include
issuers of portfolio securities held by the Funds, to varying degrees based upon
various factors, including, but not limited to, the company's industry and
degree of technological sophistication. The Funds and the Investment Manager are
unable to predict what impact, if any, the Year 2000 Problem will have on
issuers of the portfolio securities held by the Funds.
For the year ended December 31, 1997, the total expenses, as a percentage of
average net assets, were ___ percent for Class A and ___ percent for Class B
shares of Corporate Bond Fund; ___ percent for Class A and ___ percent for Class
B shares of U.S. Government Fund; ___ percent for Class A and ___ percent for
Class B shares of Limited Maturity Bond Fund; ___ percent of Class A shares and
___ percent of Class B shares of High Yield Fund; ___ percent for Class A shares
and ___ percent for Class B shares of Municipal Bond Fund; and ___ percent for
Cash Fund.
PORTFOLIO MANAGEMENT
The Corporate Bond, Limited Maturity Bond, U.S. Government Bond, High Yield,
Municipal Bond and Cash Funds are managed by the Investment Manager's Fixed
Income Team with certain portfolio managers being responsible for the day-to-day
management of each particular Fund. Steve Bowser, Second Vice President and
Portfolio Manager, and David Eshnaur, Assistant Vice President and Portfolio
Manager of the Investment Manager, have day-to-day responsibility for managing
Corporate Bond and Limited Maturity Bond Funds. Mr. Bowser has managed the Funds
since June 1997 and Mr. Eshnaur has managed the Funds since January 1998. Mr.
Bowser also has day-to-day responsibility for managing U.S. Government Fund
since 1995. Tom Swank, Vice President and Portfolio Manager of the Investment
Manager, and David Eshnaur have day-to-day responsibility for managing the High
Yield Fund. Mr. Swank has managed the Fund since its inception in 1996 and Mr.
Eshnaur has managed the Fund since July 1997. Municipal Bond Fund is managed by
Marybeth Whyte of Salomon Brothers. Ms. Whyte has had day-to-day responsibility
for managing the Fund since May 1998.
Mr. Bowser joined the Investment Manager in 1992. Prior to joining the
Investment Manager, he was Assistant Vice President and Portfolio Manager with
the Federal Home Loan Bank of Topeka from 1989 to 1992. He was employed at the
Federal Reserve Bank of Kansas City in 1988 and began his career with the Farm
Credit System from 1982 to 1987, serving as a Senior Financial Analyst and
Assistant Controller. He graduated with a Bachelor of Science degree from Kansas
State University in 1982. He is a Chartered Financial Analyst.
David Eshnaur is Assistant Vice President and Portfolio Manager of the
Investment Manager. Mr. Eshnaur has 15 years of investment experience. Prior to
joining the Investment Manager in 1997, he worked at Waddell & Reed in the
positions of Assistant Vice President, Assistant Portfolio Manager, Senior
Analyst, Industry Analyst and Account Administrator. Mr. Eshnaur earned a
Bachelor of Arts degree in Business Administration from Coe College and an
M.B.A. degree in Finance from the University of Missouri - Kansas City.
Tom Swank has over ten years of experience in the investment field. He is a
Chartered Financial Analyst. Prior to joining the Investment Manager in 1992, he
was an Investment Underwriter and Portfolio Manager for U.S. West Financial
Services, Inc. from 1986 to 1992. From 1984 to 1986, he was a Commercial Credit
Officer for United Bank of Denver. From 1982 to 1984, he was employed as a Bank
Holding Company examiner for the Federal Reserve Bank of Kansas City - Denver
Branch. Mr. Swank graduated from Miami University in Ohio with a Bachelor of
Science degree in finance in 1982 and earned a Master of Business Administration
degree from the University of Colorado.
Marybeth Whyte is a Senior Portfolio Manager at Salomon Brothers. Prior to
joining Salomon Brothers in 1994, Ms. Whyte was a Senior Vice President and head
of the Municipal Bond Area at Fiduciary Trust Company International, where her
responsibilities included actively managing and advising portfolios with assets
of approximately $1.3 billion. Ms. Whyte was a member of the Fixed Income
Investment Policy Committee at Fiduciary Trust Company International. Ms.
Whyte's previous experience includes managing high net worth individual
portfolios, mutual funds and pension funds while employed by U.S. Trust Company
and Bernstein-Macaulay Inc. Ms. Whyte received a Bachelor of Arts in Psychology
from S.U.N.Y Oneonta and an M.B.A. in Finance from Bernard M. Baruch College.
HOW TO PURCHASE SHARES
As discussed below, shares of Corporate Bond, Limited Maturity Bond, U.S.
Government, High Yield and Municipal Bond Funds may be purchased with either a
front-end or contingent deferred sales charge. Shares of Cash Fund are offered
by the Fund without a sales charge. Each of the Funds reserves the right to
withdraw all or any part of the offering made by this prospectus and to reject
purchase orders.
As a convenience to investors and to save operating expenses, the Funds do
not issue certificates for Fund shares except upon written request by the
stockholder.
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CORPORATE BOND, LIMITED MATURITY BOND, U.S. GOVERNMENT, HIGH YIELD AND MUNICIPAL
BOND FUNDS
Security Distributors, Inc. (the "Distributor"), a wholly-owned subsidiary of
Security Benefit Group, Inc., is principal underwriter for Corporate Bond,
Limited Maturity Bond, U.S. Government, High Yield and Municipal Bond Funds.
Shares of these Funds may be purchased through authorized investment dealers. In
addition, banks and other financial institutions that have an agreement with the
Distributor may make shares of these Funds available to their customers. The
minimum initial purchase must be $100 and subsequent purchases must be $100
unless made through an Accumulation Plan which allows subsequent purchases of
$20.
Orders for the purchase of shares of Corporate Bond, Limited Maturity Bond,
U.S. Government, High Yield and Municipal Bond Funds will be confirmed at an
offering price equal to the net asset value per share next determined after
receipt of the order in proper form by the Distributor (generally as of the
close of the Exchange on that day) plus the sales charge in the case of Class A
shares. Orders received by dealers or other firms prior to the close of the
Exchange and received by the Distributor prior to the close of its business day
will be confirmed at the offering price effective as of the close of the
Exchange on that day.
Orders for shares received by broker/dealers prior to that day's close of
trading on the New York Stock Exchange and transmitted to the Fund prior to its
close of business that day will receive the offering price equal to the net
asset value per share computed at the close of trading on the Exchange on the
same day plus, in the case of Class A shares, the sales charge. Orders received
by broker/dealers after that day's close of trading on the Exchange and
transmitted to the Fund prior to the close of business on the next business day
will receive the next business day's offering price.
ALTERNATIVE PURCHASE OPTIONS
Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield and
Municipal Bond Funds offer two classes of shares:
CLASS A SHARES - FRONT-END LOAD OPTION. Class A shares are sold with a sales
charge at the time of purchase. Class A shares are not subject to a sales charge
when they are redeemed (except that shares sold in an amount of $1,000,000 or
more without a front-end sales charge will be subject to a contingent deferred
sales charge for one year.) See Appendix C on page 44 for a discussion of
possible reductions in the front-end sales charge.
CLASS B SHARES - BACK-END LOAD OPTION. Class B shares are sold without a
sales charge at the time of purchase, but are subject to a deferred sales charge
if they are redeemed within five years of the date of purchase. Class B shares
will automatically convert tax-free to Class A shares at the end of eight years
after purchase.
The decision as to which class is more beneficial to an investor depends on
the amount and intended length of the investment. Investors who would rather pay
the entire cost of distribution at the time of investment, rather than spreading
such cost over time, might consider Class A shares. Other investors might
consider Class B shares, in which case 100 percent of the purchase price is
invested immediately, depending on the amount of the purchase and the intended
length of investment. The Funds will not normally accept any purchase of Class B
shares in the amount of $250,000 or more.
Dealers or others receive different levels of compensation depending on which
class of shares they sell.
CLASS A SHARES
Class A shares of Corporate Bond, Limited Maturity Bond, U.S. Government,
High Yield and Municipal Bond Funds are offered at net asset value plus an
initial sales charge as follows:
SALES CHARGE
----------------------------------------------
AMOUNT OF APPLICABLE PERCENTAGE OF PERCENTAGE
PURCHASES AT PERCENTAGE OF NET AMOUNT REALLOWABLE
OFFERING PRICE OFFERING PRICE INVESTED TO DEALERS
- -------------- -------------- ------------- -----------
Less than $50,000................. 4.75% 4.99% 4.00%
$50,000 but less than $100,000.... 3.75% 3.90% 3.00%
$100,000 but less than $250,000... 2.75% 2.83% 2.20%
$250,000 but less than $1,000,000. 1.75% 1.78% 1.40%
$1,000,000 and over............... None None (See below)
Purchases of Class A shares of the Corporate Bond, Limited Maturity Bond,
U.S. Government, High Yield and Municipal Bond Funds in amounts of $1,000,000 or
more are made at net asset value (without a sales charge), but are subject to a
contingent deferred sales charge of one percent in the event of redemption
within one year following purchase. For a discussion of the contingent deferred
sales charge, see "Calculation and Waiver of Contingent Deferred Sales Charges"
on page 25.
The Distributor will pay a commission to dealers on such purchases of
$1,000,000 or more as follows: 1.00 percent on sales up to $5,000,000, plus .50
percent on sales of $5,000,000 or more up to $10,000,000 and .10 percent on any
amount of $10,000,000 or more.
The Investment Manager may, at its expense, pay a service fee to dealers who
satisfy certain criteria established by the Investment Manager from time to time
relating to the volume of their sales of Class A shares of Municipal Bond Fund
and certain other Security Funds during prior periods and certain other factors,
including providing certain services to their clients who are stockholders of
such Funds. Such services include assisting stockholders in changing account
options or enrolling in specific plans, and providing
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SECURITY FUNDS
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stockholders with information regarding the Funds and related developments.
Currently, service fees are paid on the aggregate value of accounts opened
after July 31, 1990, in Security Municipal Bond, Equity, Asset Allocation,
Global, Social Awareness, Value, Ultra and Growth and Income Funds at the
following annual rates: .25 percent of aggregate net asset value for amounts of
$100,000 but less than $5 million and .30 percent for amounts of $5,000,000 or
more.
SECURITY INCOME AND MUNICIPAL BOND FUNDS' CLASS A DISTRIBUTION PLANS
In addition to the sales charge deducted from Class A shares at the time of
purchase, each of Corporate Bond, Limited Maturity Bond, U.S. Government, High
Yield and Municipal Bond Funds is authorized, under a Distribution Plan pursuant
to Rule 12b-1 under the Investment Company Act of 1940 (the "Class A
Distribution Plan"), to use its assets to finance certain activities relating to
the distribution of its shares to investors. Each Fund's Plan permits payments
to be made by these Funds to the Distributor, to finance various activities
relating to the distribution of their Class A shares to investors, including,
but not limited to, the payment of compensation (including incentive
compensation to securities dealers and other financial institutions and
organizations) to obtain various distribution-related and/or administrative
services for the Funds.
Under each Fund's Class A Distribution Plan, a monthly payment is made to the
Distributor in an amount computed at an annual rate of .25 percent of the
average daily net asset value of Corporate Bond, Limited Maturity Bond, U.S.
Government, High Yield and Municipal Bond Funds' Class A shares. The
distribution fee is charged to each Fund in proportion to the relative net
assets of their Class A shares. The distribution fees collected may be used by
Corporate Bond, Limited Maturity Bond, U.S. Government and High Yield Funds to
finance joint distribution activities, for example joint advertisements, and the
costs of such joint activities will be allocated among the Funds on a fair and
equitable basis, including on the basis of the relative net assets of their
Class A shares.
Each Class A Distribution Plan authorizes payment by the Class A shares of
these Funds of the cost of preparing, printing and distributing prospectuses and
Statements of Additional Information to prospective investors and of
implementing and operating the Plan.
In addition, compensation to securities dealers and others is paid from
distribution fees at an annual rate of .25 percent of the average daily net
asset value of Class A shares sold by such dealers and remaining outstanding on
the Funds' books to obtain certain administrative services for the Funds' Class
A stockholders. The services include, among other things, processing new
stockholder account applications and serving as the primary source of
information to customers in answering questions concerning the Funds and their
transactions with the Funds. The Distributor is also authorized to engage in
advertising, the preparation and distribution of sales literature and other
promotional activities on behalf of Corporate Bond, Limited Maturity Bond, U.S.
Government, High Yield and Municipal Bond Funds. Other promotional activities
which may be financed pursuant to the Plans include (i) informational meetings
concerning these Funds for registered representatives interested in selling
shares of the Funds and (ii) bonuses or incentives offered to all or specified
dealers on the basis of sales of a specified minimum dollar amount of Class A
shares of these Funds by the registered representatives employed by such
dealer(s). The expenses associated with the foregoing activities will include
travel expenses, including lodging. Additional information may be obtained by
referring to the Funds' Statement of Additional Information.
Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield and
Municipal Bond Funds' Class A Distribution Plan may be terminated at any time by
vote of the directors of Income Fund or Municipal Bond Fund, who are not
interested persons of the Fund as defined in the 1940 Act or by vote of a
majority of the outstanding Class A shares. In the event the Class A
Distribution Plans are terminated by the Funds' Class A stockholders or the
Board of Directors, the payments made to the Distributor pursuant to the Plans
up to that time would be retained by the Distributor. Any expenses incurred by
the Distributor in excess of those payments would be absorbed by the
Distributor.
CLASS B SHARES
Class B shares of Corporate Bond, Limited Maturity Bond, U.S. Government,
High Yield and Municipal Bond Funds are offered at net asset value, without an
initial sales charge. With certain exceptions, these Funds may impose a deferred
sales charge on Class B shares redeemed within five years of the date of
purchase. No deferred sales charge is imposed on amounts redeemed thereafter. If
imposed, the deferred sales charge is deducted from the redemption proceeds
otherwise payable. The deferred sales charge is retained by the Distributor.
Whether a contingent deferred sales charge is imposed and the amount of the
charge will depend on the number of years since the stockholder made a purchase
payment from which an amount is being redeemed, according to the following
schedule:
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YEAR SINCE PURCHASE WAS MADE CONTINGENT DEFERRED SALES CHARGE
---------------------------- --------------------------------
First .................... 5%
Second ................... 4%
Third .................... 3%
Fourth ................... 3%
Fifth .................... 2%
Sixth and following ...... 0%
Class B shares (except shares purchased through the reinvestment of dividends
and other distributions paid with respect to Class B shares) will automatically
convert on the eighth anniversary of the date such shares were purchased to
Class A shares which are subject to a lower distribution fee. This automatic
conversion of Class B shares will take place without imposition of a front-end
sales charge or exchange fee. (Conversion of Class B shares represented by stock
certificates will require the return of the stock certificates to the Investment
Manager.) All shares purchased through reinvestment of dividends and other
distributions paid with respect to Class B shares ("reinvestment shares") will
be considered to be held in a separate subaccount. Each time any Class B shares
(other than those held in the subaccount) convert to Class A shares, a pro rata
portion of the reinvestment shares held in the subaccount will also convert to
Class A shares. Class B shares so converted will no longer be subject to the
higher expenses borne by Class B shares. Because the net asset value per share
of the Class A shares may be higher or lower than that of the Class B shares at
the time of conversion, although the dollar value will be the same, a
stockholder may receive more or less Class A shares than the number of Class B
shares converted. Under current law, it is the Funds' opinion that such a
conversion will not constitute a taxable event under federal income tax law. In
the event that this ceases to be the case, the Board of Directors will consider
what action, if any, is appropriate and in the best interests of the Class B
stockholders.
CLASS B DISTRIBUTION PLAN
Each of Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield
and Municipal Bond Funds bears some of the costs of selling its Class B shares
under a Distribution Plan adopted with respect to its Class B shares ("Class B
Distribution Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940 ("1940 Act"). Each Fund's Plan provides for payments at an annual rate of
1.00 percent of the average daily net asset value of its Class B shares. Amounts
paid by the Funds are currently used to pay dealers and other firms that make
Class B shares available to their customers (1) a commission at the time of
purchase normally equal to 4.00 percent of the value of each share sold and (2)
a service fee payable for the first year, initially, and for each year
thereafter, quarterly, in an amount equal to .25 percent annually of the average
daily net asset value of Class B shares sold by such dealers and other firms and
remaining outstanding on the books of the Funds.
NASD Rules limit the aggregate amount that each of the Funds may pay annually
in distribution costs for the sale of its Class B shares to 6.25 percent of
gross sales of Class B shares since the inception of the Distribution Plan, plus
interest at the prime rate plus one percent on such amount (less any contingent
deferred sales charges paid by Class B stockholders to the Distributor). The
Distributor intends, but is not obligated, to continue to apply or accrue
distribution charges incurred in connection with the Class B Distribution Plan
which exceed current annual payments permitted to be received by the Distributor
from the Funds. The Distributor intends to seek full payment of such charges
from the Fund (together with annual interest thereon at the prime rate plus one
percent) at such time in the future as, and to the extent that, payment thereof
by the Funds would be within permitted limits.
Each Fund's Class B Distribution Plan may be terminated at any time by vote
of its directors who are not interested persons of the Fund as defined in the
1940 Act or by vote of a majority of the outstanding Class B shares. In the
event the Class B Distribution Plan is terminated by the Class B stockholders or
the Funds' Board of Directors, the payments made to the Distributor pursuant to
the Plan up to that time would be retained by the Distributor. Any expenses
incurred by the Distributor in excess of those payments would be absorbed by the
Distributor. The Funds make no payments in connection with the sale of their
Class B shares other than the distribution fee paid to the Distributor.
CALCULATION AND WAIVER OF CONTINGENT DEFERRED SALES CHARGES
Any contingent deferred sales charge imposed upon redemption of Class A
shares (purchased in an amount of $1,000,000 or more) and Class B shares is a
percentage of the lesser of (1) the net asset value of the shares redeemed or
(2) the net cost of such shares. No contingent deferred sales charge is imposed
upon redemption of amounts derived from (1) increases in the value above the net
cost of such shares due to increases in the net asset value per share of the
Fund; (2) shares acquired through reinvestment of income dividends and capital
gain distributions; or (3) Class A shares (purchased in an amount of $1,000,000
or more) held for more than one year or Class B shares held for more than five
years. Upon request for redemption, shares not subject to the contingent
deferred sales charge will be redeemed first. Thereafter, shares held the
longest will be the first to be redeemed.
The contingent deferred sales charge is waived: (1) following the death of a
stockholder if redemption is made within one year after death; (2) upon the
disability (as
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defined in Section 72(m)(7) of the Internal Revenue Code) of a stockholder prior
to age 65 if redemption is made within one year after the disability, provided
such disability occurred after the stockholder opened the account; (3) in
connection with required minimum distributions in the case of an IRA, SAR-SEP or
Keogh or any other retirement plan qualified under section 401(a), 401(k) or
403(b) of the Code; and (4) in the case of distributions from retirement plans
qualified under section 401(a) or 401(k) of the Internal Revenue Code due to (i)
returns of excess contributions to the plan, (ii) retirement of a participant in
the plan, (iii) a loan from the plan (repayment of loans, however, will
constitute new sales for purposes of assessing the contingent deferred sales
charge, (iv) "financial hardship" of a participant in the plan, as that term is
defined in Treasury Regulation section 1.401(k)1(d)(2), as amended from time to
time, (v) termination of employment of a participant in the plan, (vi) any other
permissible withdrawal under the terms of the plan. The contingent deferred
sales charge will also be waived in the case of redemptions of Class B shares of
the Funds pursuant to a systematic withdrawal program. See "Systematic
Withdrawal Program," page 33 for details.
ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS
The Distributor, from time to time, will provide promotional incentives or
pay a bonus to certain dealers whose representatives have sold or are expected
to sell significant amounts of the Corporate Bond, Limited Maturity Bond, U.S.
Government, High Yield and Municipal Bond Funds and/or certain other Funds
managed by the Investment Manager. Such promotional incentives will include
payment for attendance (including travel and lodging expenses) by qualifying
registered representatives (and members of their families) at sales seminars at
luxury resorts within or outside the United States. Bonus compensation may
include reallowance of the entire sales charge and may also include, with
respect to Class A shares, an amount which exceeds the entire sales charge and,
with respect to Class B shares, an amount which exceeds the maximum commission.
The Distributor, or the Investment Manager, may also provide financial
assistance to certain dealers in connection with conferences, sales or training
programs for their employees, seminars for the public, advertising, sales
campaigns, and/or shareholder services and programs regarding one or more of the
funds managed by the Investment Manager. Certain of the promotional incentives
or bonuses may be financed by payments to the Distributor under a Rule 12b-1
Distribution Plan. The payment of promotional incentives and/or bonuses will not
change the price an investor will pay for shares or the amount that the Funds
will receive from such sale. No compensation will be offered to the extent it is
prohibited by the laws of any state or self-regulatory agency, such as the
National Association of Securities Dealers, Inc. ("NASD"). A Dealer to whom
substantially the entire sales charge on Class A shares is reallowed may be
deemed to be an "underwriter" under federal securities laws.
The Distributor also may pay banks and other financial services firms that
facilitate transactions in shares of the Funds for their clients a transaction
fee up to the level of the payments made allowable to dealers for the sale of
such shares as described above. Banks currently are prohibited under the
Glass-Steagall Act from providing certain underwriting or distribution services.
If banking firms were prohibited from acting in any capacity or providing any of
the described services, the Funds' Board of Directors would consider what
action, if any, would be appropriate.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
The Investment Manager or Distributor also may pay a marketing allowance to
dealers who meet certain eligibility criteria. This allowance is paid with
reference to new sales of shares of Corporate Bond, Limited Maturity Bond, U.S.
Government, High Yield and Municipal Bond Funds in a calendar year. To be
eligible for this allowance in any given year, the dealer must sell a minimum of
$2,000,000 of Class A and Class B shares during that year. The marketing
allowance ranges from .15 percent to .75 percent of aggregate new sales
depending upon the volume of shares sold. See the Funds' Statement of Additional
Information for more detailed information about the marketing allowance.
CASH FUND
Shares of Cash Fund are offered at net asset value next determined after an
order is accepted. There is no sales charge or load. The minimum initial
investment in Cash Fund is $100 for each account. Subsequent investments may be
made in any amount of $20 or more. Cash Fund purchases may be made in any of the
following ways:
1. BY MAIL
(a) A check or negotiable bank draft should be sent to:
Security Cash Fund
P.O. Box 2548
Topeka, Kansas 66601
(b) Make check or draft payable to "SECURITY CASH FUND."
(c) For initial investment include a completed investment application found
on page 42 of this prospectus.
2. BY WIRE
(a) Call the Fund to advise of the investment. The Fund will supply an
account number at the time of the initial investment and provide
instructions for having your bank wire federal funds.
(b) For an initial investment, you must also send a completed investment
application to the Fund.
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3. THROUGH BROKER/DEALERS
Investors may, if they wish, invest in Cash Fund by purchasing shares through
registered broker/dealers. Such broker/dealers who process orders on behalf of
their customers may charge a fee for their services. Investments made directly
without the assistance of a broker/dealer are without charge.
Since Cash Fund invests in money market securities which require immediate
payment in federal funds, monies received from the sales of its shares must be
monies held by a commercial bank and be on deposit at one of the Federal Reserve
Banks. A record date for each stockholder's investment is established each
business day and used to distribute the following day's dividend. If federal
funds are received prior to 2:00 p.m. (Central time) the investment will be made
on that day and the investor will receive the following day's dividend. Federal
funds received after 2:00 p.m. on any business day will not be invested until
the following business day. The Fund will not be responsible for any delays in
the wire transfer system. All checks are accepted subject to collection at full
face value in United States funds and must be drawn in United States dollars on
a United States bank.
The Investment Manager may, at its expense, pay a service fee to dealers who
satisfy certain criteria established by the Investment Manager from time to time
relating to the volume of their sales of Cash Fund during prior periods and
certain other factors, including providing certain services to their clients who
are stockholders of the Fund. Currently, service fees are paid on the aggregate
value of Cash Fund accounts opened after July 31, 1990, at the following annual
rate: .25 percent of aggregate net asset value for amounts of $1,000,000 or
more.
PURCHASES AT NET ASSET VALUE
Class A shares of Corporate Bond, Limited Maturity Bond Fund, U.S.
Government, High Yield and Municipal Bond Funds may be purchased at net asset
value by (1) directors, officers and employees of the Funds, the Funds'
Investment Manager or Distributor; directors, officers and employees of Security
Benefit Life Insurance Company and its subsidiaries; agents licensed with
Security Benefit Life Insurance Company; spouses or minor children of any such
agents; as well as the following relatives of any such directors, officers and
employees (and their spouses): spouses, grandparents, parents, children,
grandchildren, siblings, nieces and nephews; (2) any trust, pension, profit
sharing or other benefit plan established by any of the foregoing corporations
for persons described above; (3) retirement plans where third party
administrators of such plans have entered into certain arrangements with the
Distributor or its affiliates provided that no commission is paid to dealers;
and (4) officers, directors, partners or registered representatives (and their
spouses and minor children) of broker/dealers who have a selling agreement with
the Distributor. Such sales are made upon the written assurance of the purchaser
that the purchase is made for investment purposes and that the securities will
not be transferred or resold except through redemption or repurchase by or on
behalf of the Funds.
Class A shares of Corporate Bond, Limited Maturity Bond, U.S. Government,
High Yield and Municipal Bond Funds may also be purchased at net asset value
when the purchase is made on the recommendation of (i) a registered investment
adviser, trustee or financial intermediary who has authority to make investment
decisions on behalf of the investor; or (ii) a certified financial planner or
registered broker-dealer who either charges periodic fees to its customers for
financial planning, investment advisory or asset management services, or
provides such services in connection with the establishment of an investment
account for which a comprehensive "wrap fee" is imposed. The Distributor must be
notified when a purchase is made that qualifies under this provision.
TRADING PRACTICES AND BROKERAGE
The portfolio turnover rate for the Corporate Bond, U.S. Government and
Municipal Bond Funds, respectively, for the fiscal year ended December 31, 1997,
was as follows: Corporate Bond Fund - ___ percent; U.S. Government fund - ___
percent; Limited Maturity Bond Fund - ___ percent; High Yield Fund - ___
percent; Municipal Bond Fund - ___ percent. The Corporate Bond and Limited
Maturity Bond Funds' portfolio turnover rate generally is expected to be less
than 100 percent, and that of the U.S. Government Fund may exceed 100 percent,
but is not expected to do so. The portfolio turnover rate for the High Yield
Fund may exceed 100 percent but it is generally not expected to exceed 150
percent. Higher portfolio turnover subjects a fund to increased brokerage costs
and may, in some cases, have adverse tax effects on a fund or its stockholders.
Cash Fund is expected to have a high portfolio turnover rate due to the short
maturities of its portfolio securities; this should not, however, affect the
Fund's income or net asset value since brokerage commissions are not normally
paid in connection with the purchase or sale of money market instruments.
Transactions in portfolio securities are effected in the manner deemed to be
in the best interests of each Fund. In selecting a broker or dealer to execute a
specific transaction, all relevant factors will be considered. Portfolio
transactions may be directed to brokers who furnish investment information or
research services to the Investment Manager or who sell shares of the Funds. The
Investment Manager may, consistent with the NASD Rules of Fair Practice,
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consider sales of shares of the Fund in the selection of a broker.
Securities held by the Funds may also be held by other investment advisory
clients of the Investment Manager, including other investment companies, and by
the Investment Manager's parent company, Security Benefit Life Insurance Company
("SBL"). Purchases or sales of the same security occurring on the same day
(which may include orders from SBL) may be aggregated and executed as a single
transaction, subject to the Investment Manager's obligation to seek best
execution. Aggregated purchases or sales are generally effected at an average
price and on a pro rata basis (transaction costs will also be shared on a pro
rata basis) in proportion to the amounts desired to be purchased or sold. See
the Funds' Statement of Additional Information for a more detailed description
of aggregated transactions.
HOW TO REDEEM SHARES
A stockholder may redeem shares at the net asset value next determined after
the time when such shares are tendered for redemption.
Shares will be redeemed on request of the stockholder in proper order to the
Funds' Investment Manager, Security Management Company, LLC, which serves as the
Funds' transfer agent. A request is made in proper order by submitting the
following items to the Investment Manager: (1) a written request for redemption
signed by all registered owners exactly as the account is registered, including
fiduciary titles, if any, and specifying the account number and the dollar
amount or number of shares to be redeemed; (2) a guarantee of all signatures on
the written request or on the share certificate or accompanying stock power; (3)
any share certificates issued for any of the shares to be redeemed; and (4) any
additional documents which may be required by the Investment Manager for
redemption by corporations or other organizations, executors, administrators,
trustees, custodians or the like. Transfers of shares are subject to the same
requirements. The signature guarantee must be provided by an eligible guarantor
institution, such as a bank, broker, credit union, national securities exchange
or savings association. A signature guarantee is not required for redemptions of
$10,000 or less, requested by and payable to all stockholders of record for an
account, to be sent to the address of record. The Investment Manager reserves
the right to reject any signature guarantee pursuant to its written procedures
which may be revised in the future. To avoid delay in redemption or transfer,
stockholders having questions should contact the Investment Manager by calling
1-800-888-2461, extension 3127.
The redemption price will be the net asset value of the shares next computed
after the redemption request in proper order is received by the Investment
Manager. In addition, stockholders of Cash Fund will receive any undistributed
dividends, including any dividend declared on the day of the redemption. Payment
of the amount due on redemption, less any applicable deferred sales charge, will
be made by check, or by wire at the sole discretion of the Investment Manager,
within seven days after receipt of the redemption request in proper order. If a
wire transfer is requested, the Investment Manager must be provided with the
name and address of the stockholder's bank as well as the account number to
which payment is to be wired. Checks will be mailed to the stockholder's
registered address (or as otherwise directed). Remittance by wire (to a
commercial bank account in the same name(s) as the shares are registered), by
certified or cashier's check, or by express mail, if requested, will be at a
charge of $15, which will be deducted from the redemption proceeds.
Cash Fund offers redemption by check. If blank checks are requested on the
Checking Privilege Request Form, the Fund will make a supply available. Such
checks may be drawn in any amount of $100 or more. When a check is presented to
Cash Fund for payment, it will redeem sufficient full and fractional shares to
cover the check. Such shares will be redeemed at the price next calculated
following receipt of any check which does not exceed the value of the account.
The price of Cash Fund shares may fluctuate from day-to-day and the price at the
time of redemption, by check or otherwise, may be less than the amount invested.
Redemption by check is not available if any shares are held in certificate form
or if shares being redeemed have not been on the Fund's books for at least 15
days. The availability of checkwriting privileges may encourage multiple
redemptions on an account. Whenever multiple redemptions occur, the difficulty
of monitoring the shareholder's cost basis in his or her investment increases.
In addition to the foregoing redemption procedures, the Funds repurchase
shares from broker/dealers at the price determined as of the close of business
on the day such offer is confirmed. Dealers may charge a commission on the
repurchase of shares.
At various times, requests may be made to redeem shares for which good
payment has not yet been received. Accordingly, payment of redemption proceeds
may be delayed until such time as good payment has been collected for the
purchase of the shares in question, which may take up to 15 days from the
purchase date.
Requests may also be made to redeem shares in an account for which the
stockholder's tax identification number has not been provided. To the extent
permitted by law, the redemption proceeds from such an account will be reduced
by $50 to reimburse for the penalty imposed by the Internal Revenue Service for
failure to report the tax identification number.
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TELEPHONE REDEMPTIONS
Stockholders may redeem uncertificated shares in amounts up to $10,000 by
telephone request, provided that the stockholder has completed the Telephone
Redemption section of the application or a Telephone Redemption form which may
be obtained from the Investment Manager. The proceeds of a telephone redemption
will be sent to the stockholder at his or her address as set forth in the
application or in a subsequent written authorization with a signature guarantee.
Once authorization has been received by the Investment Manager, a stockholder
may redeem shares by calling the Funds at (800) 888-2461, extension 3127, on
weekdays (except holidays) between the hours of 7:00 a.m. and 6:00 p.m. Central
time. Redemption requests received by telephone after the close of the New York
Stock Exchange (normally 3 p.m. Central time) will be treated as if received on
the next business day. Telephone redemptions are not accepted for IRA and
403(b)(7) accounts. A stockholder who authorizes telephone redemptions
authorizes the Investment Manager to act upon the instructions of any person
identifying themselves as the owner of the account or the owner's broker. The
Investment Manager has established procedures to confirm that instructions
communicated by telephone are genuine and will be liable for any losses due to
fraudulent or unauthorized instructions if it fails to comply with its
procedures. The Investment Manager's procedures require that any person
requesting a telephone redemption provide the account registration and number
and the owner's tax identification number, and such instructions must be
received on a recorded line. Neither the Fund, the Investment Manager, nor the
Distributor shall be liable for any loss, liability, cost or expense arising out
of any telephone redemption request, provided the Investment Manager complied
with its procedures. Thus, a stockholder who authorizes telephone redemptions
may bear the risk of loss from a fraudulent or unauthorized request. The
telephone redemption privilege may be changed or discontinued at any time by the
Investment Manager or the Funds.
During periods of severe market or economic conditions, telephone redemptions
may be difficult to implement and stockholders should make redemptions by mail
as described in "How to Redeem Shares" on page 28.
DIVIDENDS AND TAXES
It is the policy of Corporate Bond, Limited Maturity Bond, U.S. Government,
High Yield and Municipal Bond Funds to pay dividends from net investment income
monthly. It is the policy of Corporate Bond, Limited Maturity Bond, U.S.
Government, High Yield and Municipal Bond Funds to distribute realized capital
gains (if any) in excess of any capital losses and capital loss carryovers, at
least once a year. Because Class A shares of Corporate Bond, Limited Maturity
Bond, U.S. Government, High Yield and Municipal Bond Funds bear most of the
costs of distribution of such shares through payment of a front-end sales
charge, while Class B shares of these Funds bear such costs through a higher
distribution fee, expenses attributable to Class B shares, generally, will be
higher and as a result, income distributions paid by these Funds with respect to
Class B shares generally will be lower than those paid with respect to Class A
shares. Any such dividend payment or capital gains distribution will result in a
decrease of the net asset value of the shares in an amount equal to the payment
or distribution. All dividends and distributions are automatically reinvested on
the payable date in shares of the Funds at net asset value as of the record date
(reduced by an amount equal to the amount of the dividend or distribution)
unless the Investment Manager is previously notified in writing by the
stockholder that such dividends or distributions are to be received in cash. A
stockholder may also request that such dividends or distributions be directly
deposited to the stockholder's bank account. Dividends or distributions paid
with respect to Class A shares and received in cash may, within 30 days of the
payment date, be reinvested without a sales charge.
Each of Corporate Bond, Limited Maturity Bond, U.S. Government and High Yield
Funds (series of Income Fund), is to be treated separately in determining the
amounts of income and capital gains distributions. For this purpose, each series
will reflect only the income and gains, net of losses, of that series.
The following summarizes certain federal income tax considerations generally
affecting the Funds and their stockholders. See the "Statement of Additional
Information" for further details. No attempt is made to present a detailed
explanation of the tax treatment of the Funds or their stockholders, and the
discussion here and in the Statement of Additional Information is not intended
as a substitute for careful tax planning. The discussion is based upon present
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), the
regulations promulgated thereunder, and judicial and administrative ruling
authorities, all of which are subject to change, which change may be
retroactive. Prospective investors should consult their own tax advisors with
regard to the federal tax consequences of the purchase ownership, and
disposition of Fund shares, as well as the tax consequences arising under the
laws of any state, foreign country, or other taxing jurisdiction.
Certain requirements relating to the qualification of a Fund as a regulated
investment company may limit the extent to which a Fund will be able to engage
in certain investment practices, including transactions in options, futures
contracts, forwards, swaps and other types of derivative securities
transactions. In addition, if a Fund were
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unable to dispose of portfolio securities due to settlement problems relating to
foreign investments or due to the holding of illiquid securities, the Fund's
ability to qualify as a regulated investment company might be affected.
Cash Fund's policy is to declare daily dividends of all of its net income
each day the Fund is open for business, increased or decreased by any realized
capital gains or losses. Such dividends are automatically credited to
stockholder accounts. Unless stockholders elect to receive cash, they will
receive such dividends in additional shares on the last business day of each
month at the net asset value on that date. If cash payment of dividends is
desired, investors may so indicate in the appropriate section of the Cash Fund
application and checks will be mailed within five business days after the
beginning of the month. Confirmation of Cash Fund dividends will be sent
quarterly, and confirmations of purchases and redemptions will be sent monthly.
The amount of dividends may fluctuate from day to day. If on any day net
realized or unrealized losses on portfolio securities exceed Cash Fund's income
for that day and results in a decline of net asset value per share below $1.00,
the dividend for that day will be omitted until the net asset value per share
subsequently returns to $1.00 per share.
The Funds will not pay dividends or distributions of less than $25 in cash
but will automatically reinvest them.
Each of the Funds intends to qualify as a "regulated investment company"
under the Internal Revenue Code. Such qualification generally removes the
liability for federal income taxes from the Fund, and makes federal income tax
upon income and capital gains generated by a Fund's investments, the sole
responsibility of its stockholders provided the Fund continues to so qualify and
distributes all of its net investment income and net realized capital gain to
its stockholders. Furthermore, the Funds generally will not be subject to excise
taxes imposed on certain regulated investment companies provided that each Fund
distributes 98 percent of its ordinary income and 98 percent of its net capital
gain income each year.
Municipal Bond Fund intends to qualify to pay "exempt interest dividends" to
its stockholders. Municipal Bond Fund will be so qualified if, at the close of
each quarter of its taxable year, at least 50 percent of the value of its total
assets consists of securities on which the interest payments are exempt from
federal tax. To the extent that Municipal Bond Fund's dividends distributed to
stockholders are derived from earnings on interest income exempt from federal
tax and are designated as "exempt-interest dividends" by the Fund, they will be
excludable from a stockholder's gross income for federal income tax purposes.
The Fund will inform stockholders annually as to the portion of that year's
distributions from the Fund which constituted "exempt-interest dividends."
Although exempt-interest dividends paid by the Municipal Bond Fund will be
excluded by shareholders of the Fund from their gross income for regular federal
income tax purposes, under the Code all or a portion of such dividends may be
(i) a preference item for purposes of the alternative minimum tax, (ii) a
component of the "ACE" adjustment for purposes of determining the amount of
corporate alternative minimum tax or (iii) a factor in determining the extent to
which a shareholder's Social Security or railroad retirement benefits are
taxable. Moreover, the receipt of exempt-interest dividends from the Fund affect
the federal tax liability of certain foreign corporations, S Corporations and
insurance companies. Furthermore, under the Code, interest on indebtedness
incurred or continued to purchase or carry portfolio shares, which interest is
deemed to relate to exempt-interest dividends, will not be deductible by
shareholders of the Fund for federal income tax purposes.
The exemption of exempt-interest dividend income from regular federal income
taxation does not necessarily result in similar exemptions for such income under
tax laws of state or local taxing authorities. In general, states exempt from
state income tax only that portion of any exempt-interest dividend that is
derived from interest received by a regulated investment company on its holdings
of obligations issued by that state or its political subdivisions and
instrumentalities.
To the extent that Municipal Bond Fund's dividends are derived from interest
on its temporary taxable investments or from an excess of net short-term capital
gain over net long-term capital loss, they are considered taxable ordinary
income for federal income tax purposes. Such dividends do not qualify for the
dividends-received deduction for corporations. Distributions by Municipal Bond
Fund, if any, of net long-term capital gains in excess of net short-term capital
losses from the sale of securities are taxable to stockholders as long-term
capital gain regardless of the length of time the stockholder has owned Fund
shares. Furthermore, a loss realized by a stockholder on the redemption, sale or
exchange of shares of Municipal Bond Fund with respect to which exempt-interest
dividends have been paid will be disallowed to the extent of the amount of such
exempt-interest dividends if such shares have been held by the stockholder for
six months or less.
Distributions of net investment income and realized net short-term capital
gain by Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield and
Cash Funds are taxable to stockholders as ordinary income whether received in
cash or reinvested in additional shares. Distributions of net capital gain,
whether received in cash or reinvested in Fund shares, will generally be taxable
to shareholders as either "20% Gain" or "28% Gain", depending upon the Fund's
holding period for the assets sold. "20% Gains" arise from sales of assets held
by a Fund for more than 18 months and are subject to a maximum tax
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rate of 20%; "28% Gains" arise from sales of assets held by a Fund for more than
one year but no more than 18 months and are subject to a maximum tax rate of
28%. Net capital gains from assets held for one year or less will be taxed as
ordinary income. Distributions will be subject to these capital gains rates
regardless of how long shareholder has held Fund shares. Since Cash Fund
normally will not invest in securities having a maturity of more than one year,
it should not realize any long-term capital gains or losses.
At December 31, 1997, Corporate Bond, Limited Maturity Bond, U.S. Government,
High Yield and Municipal Bond Funds, respectively, had accumulated net realized
losses on sales of investments in the following amounts: $__________, $_______,
$________, $______ and $__________.
Certain dividends declared in October, November or December of a calendar
year are taxable to stockholders as though received on December 31 of that year
if paid to stockholders during January of the following calendar year.
Advice as to each year's taxable dividends and distributions, if applicable,
will be mailed on or before January 31 of the following year. Stockholders
should consult their tax adviser to determine the effect of federal, state and
local tax consequences to them from an investment in the Funds.
The Funds are required by law to withhold 31 percent of taxable dividends and
distributions (including redemption proceeds) to stockholders who do not furnish
their correct taxpayer identification numbers, or are otherwise subject to the
backup withholding provisions of the Internal Revenue Code.
FOREIGN TAXES
Investment income and gains received from sources within foreign countries
may be subject to foreign income and other taxes. In this regard, withholding
tax rates in countries with which the United States does not have a tax treaty
are often as high as 30 percent or more. The United States has entered into tax
treaties with many foreign countries which entitle certain investors to a
reduced tax rate (generally ten to fifteen percent) or to exemptions from tax.
If applicable, the Funds will operate so as to qualify for such reduced tax
rates or tax exemptions whenever possible. The payment of such taxes will reduce
the amount of dividends and distributions paid to the Funds' stockholders. So
long as a Fund qualifies as a regulated investment company, certain distribution
requirements are satisfied, and more than 50% of such Fund's assets at the close
of the taxable year consists of securities of foreign corporation, the Fund may
elect, subject to limitation, to pass through its foreign tax credits to its
stockholders.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Fund is determined as of the close of
regular trading hours on the New York Stock Exchange (normally 3 p.m. Central
time) on each day that the Exchange is open for trading. The determination is
made by dividing the value of the portfolio securities of each Fund plus any
cash or other assets, less all liabilities, by the number of shares outstanding
of the Fund.
Securities which are listed or traded on a national securities exchange are
valued at the last sale price. If there are no sales on a particular day, then
the securities are valued at the last bid price. All other securities for which
market quotations are readily available are valued on the basis of the last
current bid price. If there is no bid price or if the bid price is deemed to be
unsatisfactory by the Board of Directors or by the Investment Manager, then the
securities are valued in good faith by such method as the Board of Directors
determines will reflect the fair market value.
Valuations of Municipal Bond Fund's municipal securities are supplied by a
pricing service approved by the Board of Directors. Valuations furnished by the
pricing service are based upon appraisals from recognized municipal securities
dealers derived from information concerning market transactions and quotations.
Securities for which market quotations are not readily available (which are
expected to constitute the majority of Municipal Bond Fund's portfolio
securities) are valued by the pricing service considering such factors as yields
or prices of municipal bonds of comparable quality, type of issue, coupon,
maturity and rating, indications as to value from dealers, and general market
conditions. The Fund's officers, under the general supervision of its Board of
Directors, will regularly review procedures used by, and valuations provided by,
the pricing service.
U.S. Government Fund values U.S. Government securities at market value, if
available. If market quotations are not available, the Fund will value
securities, other than securities with 60 days or less to maturity as discussed
below, at fair prices based on market quotations for securities of similar type,
yield, quality and duration.
The securities held by Cash Fund are valued on the basis of the amortized
cost valuation technique which does not take into account unrealized gains or
losses. The amortized cost valuation technique involves valuing an instrument at
its cost and thereafter assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the instrument. A similar procedure may be used for valuing
securities held by the U.S. Government and Municipal Bond Funds having 60 days
or less remaining to maturity, with the value of the security on the 61st day
being used rather than cost.
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Because the expenses of distribution are borne by Class A shares of Corporate
Bond, Limited Maturity Bond, U.S. Government, High Yield and Municipal Bond
Funds through a front-end sales charge and by Class B shares of such Funds
through an ongoing distribution fee, the expenses attributable to each class of
shares will differ, resulting in different net asset values. The net asset value
of Class B shares will generally be lower than the net asset value of Class A
shares as a result of the distribution fee charged to Class B shares. It is
expected, however, that the net asset value per share will tend to converge
immediately after the payment of dividends which will differ in amount for Class
A and B shares by approximately the amount of the different distribution
expenses attributable to Class A and B shares.
PERFORMANCE
The Funds may, from time to time, include performance data in advertisements
or reports to stockholders or prospective investors. Such performance data may
include quotations of "yield" for each of the Funds, "effective yield" for Cash
Fund, "taxable-equivalent yield" for Municipal Bond Fund and "average annual
total return" and "aggregate total return" for Corporate Bond, Limited Maturity
Bond, U.S. Government, High Yield and Municipal Bond Funds.
For Cash Fund, yield is calculated by measuring the income generated by a
hypothetical investment in the Fund over a seven-day period. This income is then
annualized by assuming that the amount of income generated over the seven-day
period is generated each week over a 52-week period and is shown as a percentage
of the investment.
Cash Fund's effective yield will be calculated similarly but, when
annualized, income earned by an investment in the Fund is assumed to be
reinvested. The effective yield will be slightly higher than the yield because
of the compounding effect of this assumed reinvestment.
With respect to Corporate Bond, Limited Maturity Bond, U.S. Government, High
Yield and Municipal Bond Funds, yield is based on the investment income per
share earned during a particular 30-day period (including dividends and
interest), less expenses accrued during the period ("net investment income"),
and will be computed by dividing net investment income per share by the maximum
public offering price per share on the last day of the period.
Municipal Bond Fund's taxable-equivalent yield begins with that portion of
the Fund's yield which is tax-exempt (determined using the same general formula
used to calculate yield), which is then adjusted by an amount necessary to give
the taxable yield equivalent to the tax-exempt yield at a stated income tax
rate, and added to that portion of the Fund's yield, if any, which is not
tax-exempt.
Average annual total return will be expressed in terms of the average annual
compounded rate of return of a hypothetical investment in Corporate Bond,
Limited Maturity Bond, U.S. Government, High Yield or Municipal Bond Fund over
periods of one, five and ten years (up to the life of the Fund). Such average
annual total return figures will reflect the deduction of the maximum sales
charge and a proportional share of Fund expenses on an annual basis, and will
assume that all dividends and distributions are reinvested when paid.
Aggregate total return will be calculated for any specified period by
assuming a hypothetical investment in Corporate Bond, Limited Maturity Bond,
U.S. Government, High Yield or Municipal Bond Fund on the date of the
commencement of the period and assuming that all dividends and distributions are
reinvested when paid. The net increase or decrease in the value of the
investment over the period will be divided by its beginning value to arrive at
aggregate total return.
In addition, total return may also be calculated for several consecutive
one-year periods, expressing the total return as a percentage increase or
decrease in the value of the investment for each year relative to the ending
value for the previous year. Corporate Bond, Limited Maturity Bond, U.S.
Government, High Yield and Municipal Bond Funds may from time to time quote
total return that does not reflect deduction of any applicable sales charge,
which charges, if reflected, would reduce the total return quoted.
Quotations of performance reflect only the performance of a hypothetical
investment in a Fund during the particular time period on which the calculations
are based. Such quotations for the Funds will vary based on changes in market
conditions and the level of the Fund's expenses, and no reported performance
figure should be considered an indication of performance which may be expected
in the future.
In connection with communicating performance to current or prospective
stockholders, the Funds also may compare these figures to the performance of
other mutual funds tracked by mutual fund rating services or other unmanaged
indexes which may assume reinvestment of dividends but generally do not reflect
deductions for administrative and management costs and expenses. Corporate Bond,
Limited Maturity Bond, U.S. Government, High Yield and Municipal Bond Funds will
include performance data for both Class A and Class B shares of the Funds in any
advertisement or report including performance data of the Fund.
For a more detailed description of the methods used to calculate performance,
see the Funds' Statement of Additional Information.
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SECURITY FUNDS
PROSPECTUS
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STOCKHOLDER SERVICES
ACCUMULATION PLAN
An investor in Corporate Bond, Limited Maturity Bond, U.S. Government, High
Yield or Municipal Bond Fund may choose to begin a voluntary Accumulation Plan.
This allows for an initial investment of $100 minimum and subsequent investments
of $20 minimum at any time. An Accumulation Plan involves no obligation to make
periodic investments and is terminable at will.
Payments are made by sending a check to the Distributor who (acting as an
agent for the dealer) will purchase whole and fractional Fund shares as of the
close of business on such day as the payment is received. The investor will
receive a confirmation and statement after each investment. Investors may choose
to use "Secur-O-Matic" (automatic bank draft) to make their Fund purchases.
There is no additional charge for choosing to use Secur-O-Matic. An application
may be obtained by writing Security Distributors, Inc., 700 SW Harrison Street,
Topeka, Kansas 66636-0001 or by calling (785) 431-3127 or (800) 888-2461,
extension 3127.
SYSTEMATIC WITHDRAWAL PROGRAM
Stockholders who wish to receive regular payments of $25 or more may
establish a Systematic Withdrawal Program. Liquidation in this manner will only
be allowed if shares with a current offering price of $5,000 or more are
deposited with the Investment Manager, which will act as agent for the
stockholder under the program. Payments are available on a monthly, quarterly,
semiannual or annual basis. Shares are liquidated at net asset value. The
stockholder will receive a confirmation following each transaction. The program
may be terminated on written notice, or it will terminate automatically if all
shares are liquidated or withdrawn from the account.
A stockholder may establish a Systematic Withdrawal Program with respect to
Class B shares without the imposition of any applicable contingent deferred
sales charge, provided that such withdrawals do not in any 12-month period,
beginning on the date the Program is established, exceed 10 percent of the value
of the account on that date ("Free Systematic Withdrawals"). Free Systematic
Withdrawals are not available if a Program established with respect to Class B
shares provides for withdrawals in excess of 10 percent of the value of the
account in any Program year and, as a result, all withdrawals under such a
Program would be subject to any applicable contingent deferred sales charge.
Free Systematic Withdrawals will be made first by redeeming those shares that
are not subject to the contingent deferred sales charge and then by redeeming
shares held the longest. The contingent deferred sales charge applicable to a
redemption of Class B shares requested while Free Systematic Withdrawals are
being made will be calculated as described under "Calculation and Waiver of
Contingent Deferred Sales Charges," page 25. A Systematic Withdrawal form may be
obtained from the Funds.
EXCHANGE PRIVILEGE
Stockholders who own shares of the Funds may exchange those shares for shares
of another of the Funds, or for shares of the other mutual funds distributed by
the Distributor, which currently include Security Growth and Income, Equity,
Global, Asset Allocation, Social Awareness, Value, Ultra, Emerging Markets Total
Return, Global Asset Allocation and Global High Yield Funds. Exchanges may be
made only in those states where shares of the fund into which an exchange is to
be made are qualified for sale. No service fee is presently imposed on such an
exchange. Class A and Class B shares of the Funds may be exchanged for Class A
and Class B shares, respectively, of another fund distributed by the Distributor
or for shares of Cash Fund, which offers a single class of shares. Any
applicable contingent deferred sales charge will be calculated from the date of
the initial purchase without regard to the time shares were held in Cash Fund.
For tax purposes, an exchange is a sale of shares which may result in a
taxable gain or loss. Special rules may apply to determine the amount of gain or
loss on an exchange occurring within ninety days after the exchanged shares were
acquired.
Exchanges of Class A shares from Corporate Bond, Limited Maturity Bond, U.S.
Government, High Yield, Municipal Bond, Emerging Markets Total Return, Global
Asset Allocation and Global High Yield Funds are made at net asset value without
a front-end sales charge if (1) the shares have been owned for not less than 90
consecutive days prior to the exchange, (2) the shares were acquired pursuant to
a prior exchange from a Security Fund which assessed a sales charge on the
original purchase, or (3) the shares were acquired as a result of the
reinvestment of dividends or capital gains distributions. Exchanges of Class A
shares from Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield,
Municipal Bond, Emerging Markets Total Return, Global Asset Allocation and
Global High Yield Funds, other than those described above, are made at net asset
value plus the sales charge described in the prospectus of the other Security
Fund being acquired, less the sales charge paid on the shares of these Funds at
the time of original purchase.
Because Cash Fund does not impose a sales charge or commission in connection
with sales of its shares, any exchange of Cash Fund shares acquired through
direct purchase or reinvestment of dividends will be based on the respective net
asset values of the shares involved and a sales charge will be imposed equal to
the sales charge that would
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SECURITY FUNDS
PROSPECTUS
================================================================================
be charged such stockholder if he or she were purchasing for cash.
Stockholders should contact the Fund before requesting an exchange in order
to ascertain whether any sales charges are applicable to the shares to be
exchanged. In effecting the exchanges of Fund shares, the Investment Manager
will first cause to be exchanged those shares which would not be subject to any
sales charges.
Exchanges are made upon receipt of a properly completed Exchange
Authorization form. This privilege may be changed or discontinued at any time at
the discretion of the management of the Funds upon 60 days' notice to
stockholders. A current prospectus of the fund into which an exchange is made
will be given to each stockholder exercising this privilege.
EXCHANGE BY TELEPHONE
To exchange shares by telephone, a stockholder must hold shares in
non-certificate form and must either have completed the Telephone Exchange
section of the application or a Telephone Transfer Authorization form which may
be obtained from the Investment Manager. Once authorization has been received by
the Investment Manager, a stockholder may exchange shares by telephone by
calling the Funds at (800) 888-2461, extension 3127, on weekdays (except
holidays) between the hours of 7:00 a.m. and 6:00 p.m. Central time. Exchange
requests received by telephone after the close of the New York Stock Exchange
(normally 3 p.m. Central time) will be treated as if received on the next
business day.
A stockholder who authorizes telephone exchanges authorizes the Investment
Manager to act upon the instructions of any person by telephone to exchange
shares between any identically registered accounts with the Funds listed above.
The Investment Manager has established procedures to confirm that instructions
communicated by telephone are genuine and will be liable for any losses due to
fraudulent or unauthorized instructions if it fails to comply with its
procedures. The Investment Manager's procedures require that any person
requesting an exchange by telephone provide the account registration and number
and the owner's tax identification number and such instructions must be received
on a recorded line. Neither the Fund, the Investment Manager nor the Distributor
will be liable for any loss, liability, cost or expense arising out of any
request, including any fraudulent request, provided the Investment Manager
complied with its procedures. Thus, a stockholder who authorizes telephone
exchanges may bear the risk of loss from a fraudulent or unauthorized request.
In periods of severe market or economic conditions, the telephone exchange of
shares may be difficult to implement and stockholders should make exchanges by
writing to Security Distributors, Inc., 700 Harrison Street, Topeka, Kansas
66636-0001. The telephone exchange privilege may be changed or discontinued at
any time at the discretion of the management of the Funds.
RETIREMENT PLANS
The Funds have available tax-qualified retirement plans for individuals,
prototype plans for the self-employed, pension and profit sharing plans for
corporations and custodial accounts for employees of public school systems and
organizations meeting the requirements of Section 501(c)(3) of the Internal
Revenue Code. Further information concerning these plans is contained in the
Funds' Statement of Additional Information.
GENERAL INFORMATION
ORGANIZATION
The Articles of Incorporation of Income and Municipal Bond Funds provide for
the issuance of an indefinite number of shares of capital stock in one or more
classes or series, and the Articles of Incorporation of Cash Fund provide for
the issuance of an indefinite number of shares of capital stock in one or more
series.
Income Fund has authorized capital stock of $1.00 par value. Its shares are
currently issued in seven series, Corporate Bond Fund, Limited Maturity Bond
Fund, U.S. Government Fund, High Yield Fund, Emerging Markets Total Return Fund,
Global Asset Allocation Fund and Global High Yield Fund. The shares of each
series represent a pro rata beneficial interest in that series' net assets and
in the earnings and profits or losses derived from the investment of such
assets.
Municipal Bond and Cash Funds have authorized capital stock of $0.10 par
value per share.
Each of the Funds (except Cash Fund) currently issues two classes of shares
which participate proportionately based on their relative net asset values in
dividends and distributions and have equal voting, liquidation and other rights
except that (i) expenses related to the distribution of each class of shares or
other expenses that the Board of Directors may designate as class expenses from
time to time, are borne solely by each class; (ii) each class of shares has
exclusive voting rights with respect to any Distribution Plan adopted for that
class; (iii) each class has different exchange privileges; and (iv) each class
has a different designation.
When issued and paid for, each Fund's shares will be fully paid and
nonassessable by the Funds. Shares may be exchanged as described above under
"Exchange Privilege," but will have no other preference, conversion, exchange or
preemptive rights. Shares are transferable, redeemable and assignable and have
cumulative voting privileges for the election of directors.
On certain matters, such as the election of directors, all shares of each
series of Income Fund vote together, with each share having one vote. On other
matters affecting a
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SECURITY FUNDS
PROSPECTUS
================================================================================
particular series, such as the Investment Advisory Contract or the fundamental
investment policies, only shares of that series are entitled to vote, and a
majority vote of the shares of that series is required for approval of the
proposal.
The Funds do not generally hold annual meetings of stockholders and will do
so only when required by law. Stockholders may remove directors from office by
votes cast in person or by proxy at a meeting of stockholders. Such a meeting
will be called at the written request of the holders of 10 percent of a Fund's
outstanding shares.
Although each Fund offers only its own shares, it is possible one Fund might
become liable for any misstatement, inaccuracy or incomplete disclosure in this
prospectus relating to another of the Funds. The Board of Directors of the Funds
has considered this risk and has approved the use of a combined prospectus.
STOCKHOLDER INQUIRIES
Stockholders who have questions concerning their account or wish to obtain
additional information may write to the Security Funds at 700 SW Harrison
Street, Topeka, Kansas 66636-0001, or call (785) 431-3127 or 1-800-888-2461,
extension 3127.
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<PAGE>
SECURITY FUNDS
PROSPECTUS APPENDIX A
================================================================================
APPENDIX A
DESCRIPTION OF SHORT-TERM INSTRUMENTS
The types of instruments that will form the major part of Cash Fund's
investments are described below:
U.S. GOVERNMENT SECURITIES. Federal agency securities are debt obligations
which principally result from lending programs of the U.S. Government. Housing
and agriculture have traditionally been the principal beneficiaries of federal
credit programs, and agencies involved in providing credit to agriculture and
housing account for the bulk of the outstanding agency securities.
Some U.S. Government securities, such as Treasury bills and bonds, are
supported by the full faith and credit of the U.S. Treasury; others are
supported by the right of the issuer to borrow from the Treasury; others, such
as those of the Federal National Mortgage Association, are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; still others such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality.
U.S. Treasury bills are issued with maturities of any period up to one year.
Three-month bills are currently offered by the Treasury on a 13-week cycle and
are auctioned each week by the Treasury. Bills are issued in bearer form only
and are sold only on a discount basis, and the difference between the purchase
price and the maturity value (or the resale price if they are sold before
maturity) constitutes the interest income for the investor.
CERTIFICATES OF DEPOSIT. A certificate of deposit is a negotiable receipt
issued by a bank or savings and loan association in exchange for the deposit of
funds. The issuer agrees to pay the amount deposited plus interest to the bearer
of the receipt on the date specified on the certificate.
COMMERCIAL PAPER. Commercial paper is generally defined as unsecured
short-term notes issued in bearer form by large well-known corporations and
finance companies. Maturities on commercial paper range from a few days to nine
months. Commercial paper is also sold on a discount basis.
BANKER'S ACCEPTANCES. A banker's acceptance generally arises from a
short-term credit arrangement designed to enable businesses to obtain funds to
finance commercial transactions. Generally, an acceptance is a time draft drawn
on a bank by an exporter or an importer to obtain a stated amount of funds to
pay for specific merchandise. The draft is then "accepted" by a bank that, in
effect, unconditionally guarantees to pay the face value of the instrument on
its maturity date.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
A Prime rating is the highest commercial paper rating assigned by Moody's
Investors Service, Inc. ("Moody's"). Issuers rated Prime are further referred to
by use of numbers 1, 2 and 3 to denote relative strength within this highest
classification. Among the factors considered by Moody's in assigning ratings are
the following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by management of
obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations.
Commercial paper rated "A" by Standard & Poor's Corporation ("S&P") has the
highest rating and is regarded as having the greatest capacity for timely
payment. Commercial paper rated A-1 by S&P has the following characteristics:
(1) liquidity ratios are adequate to meet cash requirements; (2) long-term
senior debt is rated "A" or better; (3) the issuer has access to at least two
additional channels of borrowing; (4) basic earnings and cash flow have an
upward trend with allowance made for unusual circumstances; (5) typically, the
issuer's industry is well established and the issuer has a strong position
within the industry; and (6) the reliability and quality of management are
unquestioned. Relative strength or weakness of the above factors determine
whether the issuer's commercial paper is rated A-1, A-2 or A-3.
DESCRIPTION OF CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
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SECURITY FUNDS
PROSPECTUS APPENDIX A (CONTINUED)
================================================================================
which make the long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other market
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category. The modifier 2 indicates
a mid-range ranking, and modifier 3 indicates that the issue ranks in the lower
end of its generic rating category.
STANDARD & POOR'S CORPORATION
AAA -- Bonds rated AAA have the highest rating assigned by Standard & Poor's
to a debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA -- Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
BB, B, CCC, CC -- Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of obligations. BB indicates
the lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C -- The rating C is reserved for income bonds in which no interest is being
paid.
D -- Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
NOTE: Standard & Poor's ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
categories.
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SECURITY FUNDS
PROSPECTUS APPENDIX B
================================================================================
APPENDIX B
DESCRIPTION OF MUNICIPAL BOND RATINGS
The following are summaries of the ratings used by Moody's, Standard & Poor's
and Fitch's applicable to permitted investments of Municipal Bond Fund:
MOODY'S INVESTORS SERVICE, INC.*
Aaa -- Municipal bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa -- Municipal bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Municipal bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa -- Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. Although
Industrial Revenue Bonds and Environmental Control Revenue Bonds are tax-exempt
issues, they are included in the corporate bond rating system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category. The modifier 2 indicates a mid-range ranking, and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category. Moody's
does not apply numerical modifiers other than Aa1, A1 and Baa1 in its municipal
bond rating system, which offer the maximum security within the Aa, A and Baa
groups, respectively.
STANDARD & POOR'S CORPORATION**
AAA -- Municipal bonds rated AAA are highest grade obligations. They possess
the ultimate degree of protection as to principal and interest.
AA -- Municipal bonds rated AA also qualify as high grade obligations, and in
the majority of instances differ from AAA issues only in small degree.
A -- Municipal bonds rated A are regarded as upper medium grade. They have
considerable investment strength but are not entirely free from adverse effects
of changes in economic and trade conditions. Interest and principal are regarded
as safe.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
NOTE: Standard & Poor's ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
categories.
FITCH INVESTORS SERVICE, INC.
AAA -- Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA -- Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-1+".
A -- Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB -- Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
NOTE: Plus and minus signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the "AAA" category.
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SECURITY FUNDS
PROSPECTUS APPENDIX B (CONTINUED)
================================================================================
RATINGS OF SHORT-TERM SECURITIES
MOODY'S INVESTORS SERVICE
The following ratings apply to short-term municipal notes and loans:
MIG 1 -- Loans bearing this designation are of the best quality, enjoying
strong protection from established cash flows for their servicing or from
established and broadbased access to the market for refinancing, or both.
MIG 2 -- Loans bearing this designation are of high quality with margins of
protection ample although not so large as in the preceding group.
The following ratings apply to both commercial paper and municipal paper:
PRIME-1 -- Issuers receiving this rating have a superior capacity for
repayment of short-term promissory obligations.
PRIME-2 -- Issuers receiving this rating have a strong capacity for repayment
of short-term promissory obligations.
STANDARD & POOR'S CORPORATION
The following ratings apply to short-term municipal notes:
AAA -- This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to repay principal and pay interest.
AA -- Notes rated AA have a very strong capacity to repay principal and pay
interest and differ from AAA issues only in small degree.
The following ratings apply both to commercial paper and municipal paper:
A-1 -- This designation indicates that the degree of safety regarding timely
payment is very strong.
A-2 -- Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
FITCH INVESTORS SERVICE
The following ratings apply to commercial paper:
F-1+ -- Exceptionally strong credit quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1 -- Very strong credit quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
"F-1+".
F-2 -- Issues assigned this rating have a satisfactory degree of assurance
for timely payment but the margin of safety is not as great as for issues
assigned "F-1+" or "F-1".
*Moody's Investors Service, Inc. rates bonds of issuers which have $600,000 or
more of debt, except bonds of educational institutions, projects under
construction, enterprises without established earnings records and situations
where current financial data is unavailable.
**Standard & Poor's Corporation rates all governmental bodies having $1,000,000
or more of debt outstanding unless adequate information is not available.
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<PAGE>
SECURITY FUNDS
PROSPECTUS APPENDIX C
================================================================================
APPENDIX C
REDUCED SALES CHARGES
CLASS A SHARES
Initial sales charges may be reduced or eliminated for persons or
organizations purchasing Class A shares of the Corporate Bond, Limited Maturity
Bond, U.S. Government, High Yield and Municipal Bond Funds alone or in
combination with Class A shares of certain other Security Funds.
For purposes of qualifying for reduced sales charges on purchases made
pursuant to Rights of Accumulation or a Statement of Intention (also referred to
as a "Letter of Intent"), the term "Purchaser" includes the following persons:
an individual; an individual, his or her spouse and children under the age of
21; a trustee or other fiduciary of a single trust estate or single fiduciary
account established for their benefit; an organization exempt from federal
income tax under Section 501(c)(3) or (13) of the Internal Revenue Code; or a
pension, profit-sharing or other employee benefit plan whether or not qualified
under Section 401 of the Internal Revenue Code.
RIGHTS OF ACCUMULATION
To reduce sales charges on purchases of Class A shares of Corporate Bond,
Limited Maturity Bond, U.S. Government, High Yield or Municipal Bond Fund, a
Purchaser may combine all previous purchases of the Fund with a contemplated
current purchase and receive the reduced applicable front end sales charge. The
Distributor must be notified when a sale takes place which might qualify for the
reduced charge on the basis of previous purchases.
Rights of accumulation also apply to purchases representing a combination of
the Class A shares of Corporate Bond, Limited Maturity Bond, U.S. Government,
High Yield, Municipal Bond, Growth and Income, Equity, Global, Asset Allocation,
Social Awareness, Value or Ultra Fund in those states where shares of the Fund
being purchased are qualified for sale.
STATEMENT OF INTENTION
A Purchaser of Corporate Bond, Limited Maturity Bond, U.S. Government, High
Yield or Municipal Bond Fund may choose to sign a Statement of Intention within
90 days after the first purchase to be included thereunder, which will cover
future purchases of Class A shares of those Funds, Security Equity, Global,
Asset Allocation, Social Awareness, Value, Growth and Income or Ultra Fund. The
amount of these future purchases shall be specified and must be made within a
13-month period (or 36-month period for purchases of $1 million or more) to
become eligible for the reduced front-end sales charge applicable to the actual
amount purchased under the statement. Five percent (5%) of the amount specified
in the Statement of Intention will be held in escrow shares until the Statement
is completed or terminated. These shares may be redeemed by the Fund if the
Purchaser is required to pay additional sales charges. Any dividends paid by the
Fund will be payable with respect to escrow shares. The Purchaser bears the risk
that the escrow shares may decrease in value.
A Statement of Intention may be revised during the 13-month (or, if
applicable, 36-month) period. Additional shares received from reinvestment of
income dividends and capital gains distributions are included in the total
amount used to determine reduced sales charges.
REINSTATEMENT PRIVILEGE
Stockholders who redeem their Class A shares of Corporate Bond, Limited
Maturity Bond, U.S. Government, High Yield or Municipal Bond Fund have a
one-time privilege (1) to reinstate their accounts by purchasing shares without
a sales charge up to the dollar amount of the redemption proceeds; or (2) to the
extent the redeemed shares would have been eligible for the exchange privilege,
to purchase shares of another of the Funds, Security Growth and Income, Equity,
Global, Asset Allocation, or Ultra Fund, without a sales charge up to the dollar
amount of the redemption proceeds. To exercise this privilege, a stockholder
must provide written notice and the amount to be reinvested to the Fund within
30 days after the redemption request.
The reinstatement or exchange will be made at the net asset value next
determined after the reinvestment is received by the Fund.
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SECURITY INCOME FUND
o CORPORATE BOND SERIES
o LIMITED MATURITY BOND SERIES
o U.S. GOVERNMENT SERIES
o HIGH YIELD SERIES
SECURITY MUNICIPAL BOND FUND
(formerly Security Tax-Exempt Fund)
SECURITY CASH FUND
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1998
RELATING TO THE PROSPECTUS DATED MAY 1, 1998,
AS IT MAY BE SUPPLEMENTED FROM TIME TO TIME
(785) 431-3127
(800) 888-2461
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INVESTMENT MANAGER
Security Management Company, LLC
700 SW Harrison Street
Topeka, Kansas 66636-0001
DISTRIBUTOR
Security Distributors, Inc.
700 SW Harrison Street
Topeka, Kansas 66636-0001
CUSTODIAN
UMB Bank, N.A.
928 Grand Avenue
Kansas City, Missouri 64106
INDEPENDENT AUDITORS
Ernst & Young LLP
One Kansas City Place
1200 Main Street
Kansas City, Missouri 64105-2143
<PAGE>
SECURITY INCOME FUND
SECURITY MUNICIPAL BOND FUND
(formerly Security Tax-Exempt Fund)
SECURITY CASH FUND
Members of The Security Benefit Group of Companies
700 SW Harrison, Topeka, Kansas 66636-0001
STATEMENT OF
ADDITIONAL INFORMATION
May 1, 1998
(RELATING TO THE PROSPECTUS DATED MAY 1, 1998,
AS IT MAY BE SUPPLEMENTED FROM TIME TO TIME)
This Statement of Additional Information is not a Prospectus. It should be
read in conjunction with the Prospectus dated May 1, 1998, as it may be
supplemented from time to time. A Prospectus may be obtained by writing or
calling Security Distributors, Inc., 700 SW Harrison, Topeka, Kansas 66636-0001,
or by calling (785) 431-3127 or (800) 888-2461, ext. 3127.
TABLE OF CONTENTS
Page
General Information....................................................... 1
Investment Objectives and Policies of the Funds........................... 2
Security Income Fund.................................................... 2
Corporate Bond Fund................................................... 2
Limited Maturity Bond Fund............................................ 3
U.S. Government Fund.................................................. 5
High Yield Fund....................................................... 6
Security Municipal Bond Fund............................................ 8
Security Cash Fund...................................................... 12
Investment Methods and Risk Factors....................................... 14
Investment Policy Limitations............................................. 26
Income Fund's Fundamental Policies...................................... 26
Municipal Bond Fund's Fundamental Policies.............................. 27
Cash Fund's Fundamental Policies........................................ 28
Officers and Directors.................................................... 29
Remuneration of Directors and Others...................................... 31
How to Purchase Shares.................................................... 32
Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield and
Municipal Bond Funds.................................................. 32
Alternative Purchase Options............................................ 32
Class A Shares.......................................................... 33
Security Income Fund's and Municipal Bond Funds'
Class A Distribution Plans............................................ 33
Class B Shares.......................................................... 34
Class B Distribution Plan............................................... 35
Calculation and Waiver of Contingent Deferred Sales Charges............. 35
Arrangements With Broker/Dealers and Others........................... 36
Cash Fund............................................................. 37
Purchases at Net Asset Value.............................................. 37
Accumulation Plan......................................................... 38
Systematic Withdrawal Program............................................. 38
Investment Management..................................................... 39
Portfolio Management.................................................... 41
Code of Ethics.......................................................... 42
Distributor............................................................... 42
Allocation of Portfolio Brokerage......................................... 43
Determination of Net Asset Value.......................................... 44
How to Redeem Shares...................................................... 45
Telephone Redemptions................................................... 47
How to Exchange Shares.................................................... 47
Exchange by Telephone................................................... 48
Dividends and Taxes....................................................... 48
Organization.............................................................. 53
Custodian, Transfer Agent and Dividend-Paying Agent....................... 54
Independent Auditors...................................................... 54
Performance Information................................................... 54
Retirement Plans.......................................................... 56
Individual Retirement Accounts (IRAs)..................................... 57
Roth IRAs................................................................. 57
SIMPLE IRAs............................................................... 58
Pension and Profit-Sharing Plans.......................................... 58
403(b) Retirement Plans................................................... 58
Simplified Employee Pension Plans (SEPPs)................................. 58
Financial Statements...................................................... 58
Tax-Exempt vs. Taxable Income............................................. 59
Appendix A................................................................ 60
<PAGE>
GENERAL INFORMATION
Security Income Fund, Security Municipal Bond Fund (formerly Security
Tax-Exempt Fund) and Security Cash Fund, which were organized as Kansas
corporations on April 20, 1965, July 14, 1981 and March 21, 1980, respectively,
are registered with the Securities and Exchange Commission as investment
companies. The name of Security Municipal Bond Fund (formerly Security
Tax-Exempt Fund) was changed effective May 1, 1998. Such registration does not
involve supervision by the Securities and Exchange Commission of the management
or policies of the Funds. The Funds are diversified, open-end management
investment companies that, upon the demand of the investor, must redeem their
shares and pay the investor the current net asset value thereof. ( See "How to
Redeem Shares," page 45.)
Each of the Corporate Bond Series ("Corporate Bond Fund"), Limited Maturity
Bond Series ("Limited Maturity Bond Fund"), U.S. Government Series ("U.S.
Government Fund") and High Yield Series ("High Yield Fund") of Security Income
Fund, Municipal Bond Fund ("Municipal Bond Fund"), and Security Cash Fund ("Cash
Fund") (the "Funds") has its own investment objective and policies which are
described below. While there is no present intention to do so, the investment
objective and policies of each Fund, unless otherwise noted, may be changed by
its Board of Directors without the approval of stockholders. Each of the Funds
is also required to operate within limitations imposed by its fundamental
investment policies which may not be changed without stockholder approval. These
limitations are set forth below under "Investment Policy Limitations," page 26.
An investment in one of the Funds does not constitute a complete investment
program.
The value of the shares of each Fund fluctuates with the value of the
portfolio securities. Each Fund may realize losses or gains when it sells
portfolio securities and will earn income to the extent that it receives
dividends or interest from its investments. (See "Dividends and Taxes," page
51.)
The shares of Corporate Bond, Limited Maturity Bond, U.S. Government, High
Yield and Municipal Bond Funds are sold to the public at net asset value, plus a
sales commission which is divided between the principal distributor and dealers
who sell the shares ("Class A shares"), or at net asset value with a contingent
deferred sales charge ("Class B shares"). The shares of Cash Fund are sold to
the public at net asset value. There is no sales charge or load when purchasing
shares of Cash Fund. (See "How to Purchase Shares," page 33.)
The Funds receive investment advisory, administrative, accounting, and
transfer agency services from Security Management Company, LLC (the "Investment
Manager") for a fee. The Investment Manager has guaranteed that the aggregate
annual expenses (including the management compensation but excluding brokerage
commissions, interest, taxes, extraordinary expenses and Class B distribution
fees) shall not for Corporate Bond, Limited Maturity Bond, U.S. Government and
High Yield Funds exceed any expense limitation imposed by any state and shall
not for Cash Fund exceed 1% of the average net assets of the Fund for the year.
The Investment Manager has also guaranteed that the aggregate annual expenses
(including the management compensation but excluding interest, taxes,
extraordinary expenses and Class A and Class B distribution fees) shall not for
Municipal Bond Fund exceed 1% of the net assets of the Fund for the year. (See
page 40 for a discussion of the Investment Manager and the Investment Advisory
Contract.)
Each Fund will pay all its expenses not assumed by the Investment Manager or
Security Distributors, Inc. (the "Distributor") including organization expenses;
directors' fees; fees of custodian; taxes and governmental fees; interest
charges; any membership dues; brokerage commissions; expenses of preparing and
distributing reports to stockholders; costs of stockholder and other meetings;
and legal, auditing and accounting expenses. Each Fund will also pay for the
preparation and distribution of the prospectus to its stockholders and all
expenses in connection with its registration under the Investment Company Act of
1940 and the registration of its capital stock under federal and state
securities laws. Each Fund will pay nonrecurring expenses as may arise,
including litigation expenses affecting it.
Under a Distribution Plan adopted with respect to the Class A shares of
Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield and Municipal
Bond Funds pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the
"1940 Act"), these Funds are authorized to pay to the Distributor, an annual fee
of .25% of the average daily net assets of the Class A shares of the Corporate
Bond, Limited Maturity Bond, U.S. Government, High Yield and Municipal Bond
Funds to finance various distribution-related activities. (See "Security Income
and Municipal Bond Funds' Class A Distribution Plans," page 36.)
Under Distribution Plans adopted with respect to the Class B shares of
Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield and Municipal
Bond Funds pursuant to Rule 12b-1 under the 1940 Act,
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each Fund is authorized to pay to the Distributor, an annual fee of 1.00% of the
average daily net assets of the Class B Shares of the respective Funds to
finance various distribution-related activities. (See "Class B Distribution
Plan," page 35.)
The Funds may utilize short-term trading to a limited extent in order to take
advantage of differentials in bond yields consistent with their respective
investment objectives. The portfolio turnover rate for the Funds' Class A and B
shares for the fiscal year ended December 31, 1997 was: Corporate Bond - ___ ;
U.S. Government - ___ %; Limited Maturity Bond - ___ %; High Yield Bond - ___ ;
and Municipal Bond - ___ . The portfolio turnover rate for the Funds' Class A
and B shares of Corporate Bond, U.S. Government, Limited Maturity Bond and
Municipal Bond Funds for the fiscal year ended December 31, 1996, was: Corporate
Bond - 292%; U.S. Government - 75%; Limited Maturity Bond -105%; and Municipal
Bond - 54%. The annualized portfolio turnover rate for the Class A and B shares
of High Yield Fund for the period August 5, 1996 (date of inception) to December
31, 1996 was 168%. Portfolio turnover is the percentage of the lower of security
sales or purchases to the average portfolio value and would be 100% if all
securities in the Fund were replaced within a period of one year.
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
SECURITY INCOME FUND
Security Income Fund ("Income Fund") consists of seven diversified Series
(Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield, MFR
Emerging Markets Total Return, MFR Global Asset Allocation and MFR Global High
Yield (formerly Global Aggressive Bond) Funds), each of which represents a
different investment objective and which has its own identified assets and net
asset values. The investment objectives of Corporate Bond, Limited Maturity
Bond, U.S. Government and High Yield Funds are each described below. There are
risks inherent in the ownership of any security and there can be no assurance
that such investment objectives will be achieved. Some of the risks are
described below.
Corporate Bond, Limited Maturity Bond and U.S. Government Funds will purchase
solely debt securities and will not invest in securities which are not publicly
traded or marketable. Short-term obligations may be purchased in any amount as
the Investment Manager deems appropriate for defensive or liquidity purposes.
Each Fund's portfolio may include a significant amount of debt securities which
sell at discounts from their face amount as a result of current market
conditions. For example, debt securities with fixed-rate coupons are generally
sold at a discount from their face amount during periods of rising interest
rates.
Income Fund makes no representation that the stated investment objective of
any Series will be achieved. Although there is no present intention to do so,
the investment objective of any Series of the Fund may be altered by the Board
of Directors without the approval of stockholders of the Series.
CORPORATE BOND FUND
The investment objective of the Corporate Bond Fund is to conserve capital
while generating interest income. In pursuing its investment objective, the Fund
will invest in a broad range of debt securities, including (i) securities issued
by U.S. and Canadian corporations; (ii) securities issued or guaranteed by the
U.S. Government or any of its agencies or instrumentalities, including Treasury
bills, certificates of indebtedness, notes and bonds; (iii) securities issued or
guaranteed by the Dominion of Canada or provinces thereof; (iv) securities
issued by foreign governments, their agencies and instrumentalities, and foreign
corporations, provided that such securities are denominated in U.S. dollars; (v)
higher yielding, high risk debt securities (commonly referred to as "junk
bonds"); (vi) certificates of deposit issued by a U.S. branch of a foreign bank
("Yankee CDs"); (vii) investment grade mortgage-backed securities ("MBSs"); and
(viii) zero coupon securities. Under normal circumstances, at least 65% of the
Fund's total assets will be invested in corporate debt securities which at the
time of issuance have a maturity greater than one year.
Corporate Bond Fund will invest primarily in corporate debt securities rated
Baa or higher by Moody's Investors Service, Inc. ("Moody's") or BBB or higher by
Standard & Poor's Corporation ("S&P") at the time of purchase, or if unrated, of
equivalent quality as determined by the Investment Manager. See Appendix A to
the Prospectus for a description of corporate bond ratings. Included in such
securities may be convertible bonds or bonds with warrants attached which are
rated at least Baa or BBB at the time of purchase, or if unrated, of equivalent
quality as determined by the Investment Manager. A "convertible bond" is a bond,
debenture or
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<PAGE>
preferred share which may be exchanged by the owner for common stock or another
security, usually of the same company, in accordance with the terms of the
issue. A "warrant" confers upon its holder the right to purchase an amount of
securities at a particular time and price. Securities rated Baa by Moody's or
BBB by S&P have speculative characteristics. See "Investment Methods and Risk
Factors" for a discussion of the risks associated with such securities.
Corporate Bond Fund may invest up to 25% of its net assets in higher yielding
debt securities in the lower rating (higher risk) categories of the recognized
rating services (commonly referred to as "junk bonds"). Such securities include
securities rated Ba or lower by Moody's or BB or lower by S&P and are regarded
as predominantly speculative with respect to the ability of the issuer to meet
principal and interest payments. The Fund will not invest in junk bonds which
are rated in default at the time of purchase. See "Investment Methods and Risk
Factors" for a discussion of the risks associated with investing in such
securities.
The Fund may purchase securities which are obligations of, or guaranteed by,
the Dominion of Canada or provinces thereof and debt securities issued by
Canadian corporations. Canadian securities will not be purchased if subject to
the foreign interest equalization tax and unless payable in U.S. dollars.
The Fund may invest in Yankee CDs which are certificates of deposit issued by
a U.S. branch of a foreign bank denominated in U.S. dollars and held in the U.S.
Yankee CDs are subject to somewhat different risks than are the obligations of
domestic banks. The Fund also may invest in debt securities issued by foreign
governments, their agencies and instrumentalities and foreign corporations,
provided that such securities are denominated in U.S. dollars. The Fund's
investment in foreign securities, including Canadian securities, will not exceed
25% of the Fund's net assets. See "Investment Methods and Risk Factors" for a
discussion of the risks associated with investing in foreign securities. The
Fund may also invest in zero coupon securities which are debt securities that
pay no cash income but are sold at substantial discounts from their face value.
Certain zero coupon securities also provide for the commencement of regular
interest payments at a deferred date.
The Fund may invest in investment grade mortgage-backed securities (MBSs),
including mortgage pass-through securities and collateralized mortgage
obligations (CMOs). The Fund may invest up to 10% of its net assets in
securities known as "inverse floating obligations," "residual interest bonds,"
or "interest-only" (IO) or "principal-only" (PO) bonds, the market values of
which generally will be more volatile than the market values of most MBSs. The
Fund will hold less than 25% of its net assets in MBSs. For a discussion of MBSs
and the risks associated with such securities, see "Investment Methods and Risk
Factors."
Corporate Bond Fund may purchase securities on a "when issued" or "delayed
delivery" basis in excess of customary settlement periods for the types of
security involved. For a discussion of such securities, see "Investment Methods
and Risk Factors." It is anticipated that securities invested in by this Fund
will be held by the Fund on an average from one and a half to three years and
that the average weighted maturity of the Fund's portfolio will range from 5 to
15 years under normal circumstances.
Corporate Bond Fund may invest in repurchase agreements on an overnight
basis. See the discussion of repurchase agreements under "Investment Methods and
Risk Factors." The Fund may borrow money from banks as a temporary measure for
emergency purposes or to facilitate redemption requests. Borrowing is discussed
in more detail under "Investment Methods and Risk Factors." Pending investment
in securities or to meet potential redemptions, the Fund may invest in
certificates of deposit, bank demand accounts and high quality money market
instruments.
LIMITED MATURITY BOND FUND
The investment objective of the Limited Maturity Bond Fund is to seek a high
level of income consistent with moderate price fluctuation by investing
primarily in short- and intermediate-term bonds. As used herein the term "short-
and intermediate-term bonds" is used to describe any debt security with a
maturity of 15 years or less. In pursuing its investment objective, the Fund
will invest in a broad range of debt securities, including (i) securities issued
by U.S. and Canadian corporations; (ii) securities issued or guaranteed by the
U.S. Government or any of its agencies or instrumentalities, including Treasury
bills, certificates of indebtedness, notes and bonds; (iii) securities issued or
guaranteed by, the Dominion of Canada or provinces thereof; (iv) securities
issued by foreign governments, their agencies, and instrumentalities, and
foreign corporations, provided that such securities are denominated in U.S.
dollars; (v) higher yielding, high risk debt securities (commonly referred to as
"junk bonds"); (vi) certificates of deposit issued by a U.S. branch of a foreign
bank ("Yankee CDs"); (vii) mortgage-backed securities ("MBSs"); (viii)
investment grade asset-backed securities; and (ix) zero coupon securities. High
3
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yield debt securities, Yankee CDs, MBSs and asset-backed securities are
described in further detail under "Investment Methods and Risk Factors." Under
normal circumstances, the Fund will invest at least 65% of the value of its
total assets in short- and intermediate-term bonds. It is anticipated that the
Fund's dollar weighted average maturity will range from 2 to 10 years. It will
never exceed 10 years.
Limited Maturity Bond Fund will invest primarily in debt securities rated Baa
or higher by Moody's or BBB or higher by S&P at the time of purchase, or if
unrated, of equivalent quality as determined by the Investment Manager. Baa
securities are considered to be "medium grade" obligations by Moody's and BBB is
the lowest classification which is still considered an "investment grade" rating
by S&P. Included in such securities may be convertible bonds or bonds with
warrants attached which are rated at least Baa or BBB at the time of purchase,
or if unrated, of equivalent quality as determined by the Investment Manager. A
"convertible bond" is a bond, debenture or preferred share which may be
exchanged, by the owner, for common stock or another security, usually of the
same company, in accordance with the terms of the issue. A "warrant" confers
upon its holder the right to purchase an amount of securities at a particular
time and price. Bonds rated Baa by Moody's or BBB by S&P have speculative
characteristics and may be more susceptible than higher grade bonds to adverse
economic conditions or other adverse circumstances which may result in a
weakened capacity to make principal and interest payments. See Appendix A to the
Prospectus for a description of corporate bond ratings.
The Fund may invest in higher yielding debt securities in the lower rating
(higher risk) categories of the recognized rating services (commonly referred to
as "junk bonds"); however, the Fund will never hold more than 25% of its net
assets in junk bonds. This includes securities rated Ba or lower by Moody's or
BB or lower by S&P and are regarded as predominantly speculative with respect to
the ability of the issuer to meet principal and interest payments. The Fund will
not invest in junk bonds which are in default at the time of purchase. However,
the Investment Manager will not rely principally on the ratings assigned by the
rating services. Because the Fund may invest in lower rated or unrated
securities of comparable quality, the achievement of the Fund's investment
objective may be more dependent on the Investment Manager's own credit analysis
than would be true if investing in higher rated securities.
The Fund may purchase securities which are obligations of, or guaranteed by,
the Dominion of Canada or provinces thereof and debt securities issued by
Canadian corporations. Canadian securities will not be purchased if subject to
the foreign interest equalization tax and unless payable in U.S. currency.
The Fund may invest in Yankee CDs which are Certificates of Deposit issued by
a U.S. branch of a foreign bank denominated in U.S. dollars and held in the
United States. Yankee CDs are subject to somewhat different risks than are the
obligations of domestic banks. The Fund may also invest up to 25% of its net
assets in debt securities issued by foreign governments, their agencies and
instrumentalities, and foreign corporations, provided that such securities are
denominated in U.S. dollars. The Fund's investment in foreign securities,
including Canadian securities will not exceed 25% of the Fund's net assets.
Investment in securities of foreign issuers presents certain risks, including
future political and economic developments and the possible imposition of
foreign governmental laws and restrictions, reduced availability of public
information concerning issuers, and the fact that foreign issuers are not
generally subject to uniform accounting, auditing and financial reporting
standards or to other regulatory practices and requirements comparable to those
applicable to domestic issuers.
The Fund may invest in U.S. Government securities. Some U.S. Government
securities, such as Treasury bills and bonds, are supported by the full faith
and credit of the U.S. Treasury; others, such as those of the Federal National
Mortgage Association, are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; still others such as those of
the Student Loan Marketing Association, are supported only by the credit of the
instrumentality. U.S. Government securities include bills, certificates of
indebtedness, notes and bonds issued by the Treasury or by agencies or
instrumentalities of the U.S. Government. The Fund may also invest in zero
coupon securities which are debt securities that pay no cash income but are sold
at substantial discounts from their face value. Certain zero coupon securities
also provide for the commencement of regular interest payments at a deferred
date.
Limited Maturity Bond Fund may acquire certain securities that are restricted
as to disposition under the federal securities laws, provided that such
securities are eligible for resale to qualified institutional investors pursuant
to Rule 144A under the Securities Act of 1933, and subject to the Fund's policy
that not more than 15% of the Fund's total assets will be invested in illiquid
assets. See "Investment Methods and Risk Factors" for a discussion of Rule 144A
Securities.
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The Fund may invest in investment grade mortgage-backed securities (MBSs),
including mortgage pass-through securities and collateralized mortgage
obligations (CMOs). The Fund may invest up to 10% of its net assets in
securities known as "inverse floating obligations," "residual interest bonds,"
or "interest-only" (IO) and "principal-only" (PO) bonds, the market values of
which will generally be more volatile than the market values of most MBSs. The
Fund will hold less than 25% of its net assets in MBSs, including CMOs and
mortgage pass-through securities.
The Fund may also invest in investment grade "asset-backed securities." These
include secured debt instruments backed by automobile loans, credit card loans,
home equity loans, manufactured housing loans and other types of secured loans
providing the source of both principal and interest.
Limited Maturity Bond Fund may purchase securities on a "when issued" or
"delayed delivery" basis in excess of customary settlement periods for the type
of security involved. Securities purchased on a when issued basis are subject to
market fluctuations and no interest or dividends accrue to the Fund prior to the
settlement date. The Fund will establish a segregated account with its custodian
bank in which it will maintain cash or liquid securities equal in value to
commitments for such when issued securities.
Limited Maturity Bond Fund may invest in repurchase agreements on an
overnight basis. See the discussion of repurchase agreements under "Investment
Methods and Risk Factors." The Fund may borrow money from banks as a temporary
measure for emergency purposes or to facilitate redemption requests. Borrowing
is discussed in more detail under "Investment Methods and Risk Factors." Pending
investment in securities or to meet potential redemptions, the Fund may invest
in certificates of deposit, bank demand accounts and high quality money market
instruments.
From time to time, Limited Maturity Bond Fund may invest part or all of its
assets in commercial notes or money market instruments.
U.S. GOVERNMENT FUND
The investment objective of the U.S. Government Fund is to provide a high
level of interest income with security of principal by investing primarily in
U.S. Government securities. U.S. Government securities are obligations of, or
guaranteed (as to principal and interest) by, the U.S. Government, its agencies
(such as the Federal Housing Administration and Government National Mortgage
Association) or instrumentalities (such as Federal Home Loan Banks and Federal
Land Banks), and instruments fully collateralized with such obligations such as
repurchase agreements. U.S. Government securities include bills, Certificates of
Indebtedness, notes and bonds issued by the Treasury or by agencies or
instrumentalities of the U.S. Government. The Fund may, for defensive purposes,
temporarily invest part or all of its assets in money market instruments
including deposits and bankers acceptances in depository institutions insured by
the FDIC, and short-term U.S. Government and agency securities.
Some U.S. Government securities, such as treasury bills and bonds, are
supported by the full faith and credit of the U.S. Treasury, others are
supported by the right of the issuer to borrow from the Treasury, others, such
as those of the Federal National Mortgage Association, are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; still others such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. Under
normal circumstances, the Fund will invest at least 80% of the value of its
total assets in U.S. Government securities.
U.S. Government Fund may invest in repurchase agreements on an overnight
basis. See the discussion of repurchase agreements under "Investment Methods and
Risk Factors." The Fund may borrow money from banks as a temporary measure for
emergency purposes or to facilitate redemption requests. Borrowing is discussed
in more detail under "Investment Methods and Risk Factors." Pending investment
in securities or to meet potential redemptions, the Fund may invest in
certificates of deposit, bank demand accounts and high quality money market
instruments.
From time to time the portfolio of the U.S. Government Fund may consist
primarily of Government National Mortgage Association (GNMA) certificates. GNMA
certificates are mortgage-backed securities representing part ownership of a
pool of mortgage loans. These loans, issued by lenders such as mortgage bankers,
commercial banks and savings and loan associations, are either issued by the
Federal Housing Administration or guaranteed by the Veterans Administration. A
"pool" or group of such mortgages is assembled and, after being approved by
GNMA, is offered to investors through securities dealers. Once approved by GNMA,
the timely payment of interest and principal on each mortgage is guaranteed by
GNMA and backed by the full faith and credit of the U.S.
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<PAGE>
Government. GNMA certificates differ from bonds in that principal is paid back
monthly by the borrower over the term of the loan rather than returned in a lump
sum at maturity. GNMA certificates are called "pass through" securities because
both interest and principal payments (including prepayments) are passed through
to the holder of the certificate.
The Fund may invest in other mortgage-backed securities (MBSs) as discussed
under "Investment Methods and Risk Factors - Mortgage-Backed Securities and
Collateralized Mortgage Obligations" in the Prospectus. MBSs include certain
securities issued by the United States government or one of its agencies or
instrumentalities, such as GNMAs, or securities issued by private issuers. The
Fund may not invest more than 20% of the value of its total assets in MBSs
issued by private issuers. The Fund may also invest in zero coupon securities
which are debt securities that pay no cash income but are sold at substantial
discounts from their face value. Certain zero coupon securities also provide for
the commencement of regular interest payments at a deferred date.
The Fund will attempt to maximize the return on its portfolio by taking
advantage of market developments and yield disparities, which may include use of
the following strategies:
1. Shortening the average maturity of its portfolio in anticipation of a rise
in interest rates so as to minimize depreciation of principal;
2. Lengthening the average maturity of its portfolio in anticipation of a
decline in interest rates so as to maximize appreciation of principal;
3. Selling one type of U.S. Government obligation and buying another when
disparities arise in the relative values of each; and
4. Changing from one U.S. Government obligation to an essentially similar U.S.
Government obligation when their respective yields are distorted due to
market factors.
These strategies may result in increases or decreases in the Fund's current
income available for distribution to Fund shareholders, and the Fund may hold
obligations which sell at moderate to substantial premiums or discounts from
face value. Moreover, if the Fund's expectations of changes in interest rates or
its evaluation of the normal yield relationship between two obligations proves
to be incorrect, the Fund's income, net asset value per share and potential
capital gain may be decreased or its potential capital loss may be increased. It
is anticipated that securities invested in by this Fund will be held by the Fund
on an average from three to five years.
While there is minimal credit risk involved in the purchase of U.S.
Government securities, as with any fixed income security the market value is
generally affected by changes in the level of interest rates. An increase in
interest rates will tend to reduce the market value of fixed income investments,
and a decline in interest rates will tend to increase their value. In addition,
while debt securities with longer maturities normally produce higher yields,
they are subject to potentially greater capital changes in market value than
obligations with shorter maturities.
The potential for appreciation in GNMAs and other MBSs, which might otherwise
be expected to occur as a result of a decline in interest rates, may be limited
or negated by increased principal prepayments of the underlying mortgages.
Prepayments of MBSs occur with increasing frequency when mortgage rates decline
because, among other reasons, mortgagors may be able to refinance their
outstanding mortgages at lower interest rates or prepay their existing
mortgages. Such prepayments would then be reinvested by the Fund at the lower
current interest rates.
While mortgages underlying GNMA certificates have a stated maturity of up to
30 years, it has been the experience of the mortgage industry that the average
life of comparable mortgages, owing to prepayments, refinancings and payments
from foreclosures, is considerably less. Yield tables, published in 1981,
utilize a 12-year average life assumption for GNMA pools of 26-30 year
mortgages, and GNMA certificates continue to be traded based on this assumption.
Recently it has been observed that mortgage pools issued at high interest rates
have experienced accelerated prepayment rates as interest rates decline, which
would result in a shorter average life than 12 years.
HIGH YIELD FUND
The investment objective of High Yield Fund is to seek high current income.
Capital appreciation is a secondary objective. Under normal circumstances, the
Fund will seek its investment objective by investing primarily in a broad range
of income producing securities, including (i) higher yielding, higher risk, debt
securities (commonly referred to as "junk bonds"); (ii) preferred stock; (iii)
securities issued by foreign governments, their
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agencies and instrumentalities, and foreign corporations, provided that such
securities are denominated in U.S. dollars; (iv) mortgage-backed securities
("MBSs"); (v) asset-backed securities; (vi) securities issued or guaranteed by
the U.S. Government or any of its agencies or instrumentalities, including
Treasury bills, certificates of indebtedness, notes and bonds; (vii) securities
issued or guaranteed by, the Dominion of Canada or provinces thereof; and (viii)
zero coupon securities. The Fund may also invest up to 35% of its assets in
common stock (which may include ADRs), warrants and rights. Under normal
circumstances, at least 65% of the Fund's total assets will be invested in
high-yielding, high risk debt securities.
High Yield Fund may invest up to 100% of its assets in debt securities that,
at the time of purchase, are rated below investment grade ("high yield
securities" or "junk bonds"), which involve a high degree of risk and are
predominantly speculative. For a description of debt ratings and a discussion of
the risks associated with investing in junk bonds, see "Investment Methods and
Risk Factors." Included in the debt securities which the Fund may purchase are
convertible bonds, or bonds with warrants attached. A "convertible bond" is a
bond, debenture, or preferred share which may be exchanged by the owner for
common stock or another security, usually of the same company, in accordance
with the terms of the issue. A "warrant" confers upon the holder the right to
purchase an amount of securities at a particular time and price. See "Investment
Methods and Risk Factors" for a discussion of the risks associated with such
securities.
High Yield Fund may purchase securities which are obligations of, or
guaranteed by, the Dominion of Canada or provinces thereof and debt securities
issued by Canadian corporations. Canadian securities will not be purchased if
subject to the foreign interest equalization tax and unless payable in U.S.
dollars. The Fund may also invest in debt securities issued by foreign
governments (including Brady Bonds), their agencies and instrumentalities and
foreign corporations (including those in emerging markets), provided such
securities are denominated in U.S. dollars. The Fund's investment in foreign
securities, excluding Canadian securities, will not exceed 25% of the Fund's net
assets. See "Investment Method and Risk Factors" for a discussion of the risks
associated with investing in foreign securities and emerging markets.
High Yield Fund may invest in MBSs, including mortgage pass-through
securities and collateralized mortgage obligations (CMO's). The Fund may invest
in securities known as "inverse floating obligations," "residual interest
bonds," and "interest only" (IO) and "principal only" (PO) bonds, the market
values of which generally will be more volatile than the market values of most
MBSs. This is due to the fact that such instruments are more sensitive to
interest rate changes and to the rate of principal prepayments than are most
other MBSs. See the discussion of such instruments under "Investment Methods and
Risk Factors." The Fund will hold less than 25% of its net assets in MBSs. For a
discussion of MBSs and the risks associated with such securities, see
"Investment Methods and Risk Factors."
The Fund may also invest in "asset-backed securities." These include secured
debt instruments backed by automobile loans, credit card loans, home equity
loans, manufactured housing loans and other types of secured loans providing the
source of both principal and interest. Asset-backed securities are subject to
risks similar to those discussed with respect to MBSs. See "Investment Methods
and Risk Factors."
The Fund may invest in U.S. Government securities. U.S. Government securities
include bills, certificates of indebtedness, notes and bonds issued by the
Treasury or by agencies or instrumentalities of the U.S. Government. High Yield
Fund may also invest in zero coupon securities which are debt securities that
pay no cash income but are sold at substantial discounts from their face value.
Certain zero coupon securities also provide for the commencement of regular
interest payments at a deferred date.
High Yield Fund may acquire certain securities that are restricted as to
disposition under federal securities laws, including securities eligible for
resale to qualified institutional investors pursuant to Rule 144A under the
Securities Act of 1933, subject to the Fund's policy that not more than 10% of
the Fund's net assets will be invested in illiquid assets. See "Investment
Methods and Risk Factors" for a discussion of restricted securities.
The Fund may purchase securities on "when issued" or "delayed delivery" basis
in excess of customary settlement periods for the type of security involved. The
Fund may also purchase or sell securities on a "forward commitment" basis and
may enter into "repurchase agreements", "reverse repurchase agreements" and
"roll transactions." The Fund may lend securities to broker-dealers, other
institutions or other persons to earn additional income. The value of loaned
securities may not exceed 33 1/3% of the Fund's total assets. In addition, the
Fund may purchase loans, loan participations and other types of direct
indebtedness.
High Yield Fund may enter into futures contracts (a type of derivative) (or
options thereon) to hedge all or a portion of its portfolio, as a hedge against
changes in prevailing levels of interest rates or as an efficient means of
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adjusting its exposure to the bond market. The Fund will not use futures
contracts for leveraging purposes. The Fund will limit its use of futures
contracts so that initial margin deposits or premiums on such contracts used for
non-hedging purposes will not equal more than 5% of the Fund's net asset value.
The Fund may purchase call and put options and write such options on a "covered"
basis. The Fund may also enter into interest rate and index swaps and purchase
or sell related caps, floors and collars. The aggregate market value of the
Fund's portfolio securities covering call or put options will not exceed 25% of
the Fund's net assets. See "Investment Methods and Risk Factors" for a
discussion of the risks associated with these types of investments.
As an operating policy, the Fund will not purchase securities on margin. The
Fund may, however, obtain such short-term credits as are necessary for the
clearance of purchases and sales of securities. In addition, the Fund may enter
into certain derivative transactions, consistent with its investment program,
which require the deposit of "margin" or a premium to initiate such a
transaction. As an operating policy, the Fund will not loan its assets to any
person or individual, except by the purchase of bonds or other debt obligations
customarily sold to institutional investors. The Fund may, however, lend
portfolio securities as described in the prospectus and this statement of
additional information. In addition, the Fund does not interpret this
restriction as prohibiting investment in loan participations and assignments as
described in the prospectus. As an operating policy, the Fund will not engage in
short sales.
The Fund's investment in warrants, valued at the lower of cost or market,
will not exceed 5% of the Fund's net assets. Included within this amount, but
not to exceed 2% of the Fund's net assets, may be warrants which are not listed
on the New York or American Stock Exchange. Warrants acquired by the Fund in
units or attached to securities may be deemed to be without value.
From time to time, High Yield Fund may invest part or all of its assets in
U.S. Government securities, commercial notes or money market instruments. It is
anticipated that the dollar weighted average maturity of the Fund will range
from 5 to 15 years under normal circumstances.
SECURITY MUNICIPAL BOND FUND
The investment objective of Municipal Bond Fund is to obtain as high a level
of interest income exempt from regular federal income taxes as is consistent
with preservation of stockholders' capital. Municipal Bond Fund attempts to
achieve its objective by investing primarily in debt securities, the interest on
which is exempt from regular federal income taxes under the Internal Revenue
Code. The Fund may invest in securities which generate income that is subject to
the federal alternative minimum tax. There is no assurance that Municipal Bond
Fund's objective will be achieved. Although there is no present intention to do
so, the Fund's investment objective may be changed by the Board of Directors
without stockholder approval.
The tax-exempt securities in which Municipal Bond Fund invests include debt
obligations issued by or on behalf of the states, territories and possessions of
the United States, the District of Columbia, and their political subdivisions,
agencies, authorities and instrumentalities, including multi-state agencies or
authorities. These securities are referred to as "municipal securities" and are
described in more detail below.
Municipal Bond Fund's investments in municipal securities are limited to
securities of "investment grade" quality, that is securities rated within the
four highest rating categories of Moody's (Aaa, Aa, A, Baa), S&P (AAA, AA, A,
BBB) or Fitch (AAA, AA, A, BBB), except that the Fund may purchase unrated
municipal securities (i) where the securities are guaranteed as to principal and
interest by the full faith and credit of the U.S. government or are short-term
municipal securities (those having a maturity of less than one year) of issuers
having outstanding at the time of purchase an issue of municipal bonds having
one of the four highest ratings, or (ii) where, in the opinion of the Investment
Manager, the unrated municipal securities are comparable in quality to those
within the four highest ratings. However, Municipal Bond Fund will not purchase
an unrated municipal security (other than a security described in (i) above) if,
after such purchase, more than 20% of the Fund's total assets would be invested
in such unrated municipal securities.
With respect to rated securities, there is no percentage limitation on the
amount of Municipal Bond Fund's assets which may be invested in securities
within any particular rating classification. A description of the ratings is
contained in Appendix B to the Prospectus. Baa securities are considered "medium
grade" obligations by Moody's, and BBB is the lowest classification which is
still considered an "investment grade" rating by S&P and Fitch. Baa securities
are described by Moody's as obligations on which "interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time." According to Moody's, "such bonds lack outstanding investment
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characteristics and in fact have speculative characteristics as well." According
to Fitch, "adverse changes in economic conditions and circumstances are more
likely to have adverse impact on these bonds, and therefore impair timely
payment." The ratings of Moody's, S&P and Fitch represent their respective
opinions of the quality of the securities they undertake to rate and such
ratings are general and are not absolute standards of quality.
Although Municipal Bond Fund invests primarily in municipal bonds with
maturities greater than one year, it also will invest for various purposes in
short-term (maturity equal to or less than one year) securities which, to the
extent practicable, will be short-term municipal securities. (See "Municipal
Securities," below.) Short-term investments may be made, pending investment of
funds in municipal bonds, in order to maintain liquidity to meet redemption
requests, or to maintain a temporary "defensive" investment position when, in
the opinion of the Investment Manager, it is advisable to do so on account of
current or anticipated market conditions. Except when in a temporary "defensive"
position, investments in short-term municipal securities will represent less
than 20% of the Fund's total assets.
From time to time, on a temporary basis, Municipal Bond Fund may invest in
fixed-income obligations on which the interest is subject to federal income tax.
Except when the Fund is in a temporary "defensive" investment position, it will
not purchase a taxable security if, as a result, more than 20% of its total
assets would be invested in taxable securities. This limitation is a fundamental
policy of Municipal Bond Fund, and may not be changed without a majority vote of
the Fund's outstanding securities. Temporary taxable investments of the Fund may
consist of obligations issued or guaranteed by the U.S. government or its
agencies or instrumentalities, commercial paper rated A-1 by S&P, Prime-1 by
Moody's or F-1 by Fitch, corporate obligations rated AAA or AA by S&P and Fitch
or Aaa or Aa by Moody's, certificates of deposit or bankers' acceptances of
domestic banks or thrifts with at least $2 billion in assets, or repurchase
agreements with such banks or with broker/dealers. Municipal Bond Fund may
invest its assets in bank demand accounts, pending investment in other
securities or to meet potential redemptions or expenses. Repurchase agreements
may be entered into with respect to any securities eligible for investment by
the Fund, including municipal securities. The Fund may also invest in zero
coupon securities which are debt securities that pay no cash income but are sold
at substantial discounts from their face value. Certain zero coupon securities
also provide for the commencement of regular interest payments at a deferred
date.
Municipal Bond Fund may invest in repurchase agreements which are agreements
by which a purchaser (e.g., Municipal Bond Fund) acquires a security and
simultaneously commits to resell that security to the seller (a bank or
broker/dealer) at an agreed upon price on an agreed upon date within a number of
days (usually not more than seven) from the date of purchase. Income earned by
the Fund on repurchase agreements is not exempt from federal income tax even if
the transaction involves municipal securities. Municipal Bond Fund may not enter
into a repurchase agreement having more than seven days remaining to maturity
if, as a result, such agreements, together with any other securities which are
illiquid or not readily marketable, would exceed 10% of the net assets of the
Fund. See the discussion of repurchase agreements under "Investment Methods and
Risk Factors."
Municipal Bond Fund may borrow money from banks as a temporary measure for
emergency purposes or to facilitate redemption requests. Borrowing is discussed
in more detail under "Investment Methods and Risk Factors." Pending investment
in securities or to meet potential redemptions, the Fund may invest in
certificates of deposit, bank demand accounts and high quality money market
instruments.
Municipal Bond Fund may purchase or sell futures contracts on (a) debt
securities that are backed by the full faith and credit of the U.S. Government,
such as long-term U.S. Treasury Bonds and Treasury Notes and (b) municipal bond
indices. Currently at least one exchange trades futures contracts on an index of
long-term municipal bonds, and the Fund reserves to right to conduct futures
transactions based on an index which may be developed in the future to correlate
with price movements in municipal obligations. It is not presently anticipated
that any of these strategies will be used to a significant degree by the Fund.
For further information regarding futures contracts, see "Investment Methods and
Risk Factors".
See Appendix B to the prospectus for a further description of Moody's, S&P
and Fitch ratings relating to municipal securities. As noted earlier, when
Municipal Bond Fund is in a temporary "defensive" position, there is no limit on
its investments in short-term municipal securities and taxable securities.
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MUNICIPAL SECURITIES
MUNICIPAL BONDS. Municipal bonds are debt obligations which generally have a
maturity at the time of issue in excess of one year. They are issued to obtain
funds for various public purposes, including construction of a wide range of
public facilities such as bridges, highways, housing, hospitals, mass
transportation, schools, streets, and water and sewer works. Other public
purposes for which municipal bonds may be issued include the refunding of
outstanding obligations, obtaining funds for general operating expenses and
obtaining funds to loan to other public institutions and facilities. In
addition, certain types of industrial development bonds and other private
activity bonds are issued by or on behalf of public authorities to obtain funds
to provide for privately-operated housing facilities, and certain facilities for
water supply, gas, electricity or sewage or solid waste disposal.
The two principal classifications of municipal bonds are "general obligation"
and "revenue" bonds. General obligation bonds are secured by the issuer's pledge
of its full faith, credit and taxing power for the payment of principal and
interest. Revenue bonds are payable only from the revenues derived from a
particular facility or class of facilities, or, in some cases, from the proceeds
of a special excise or specific revenue source. Revenue securities may include
private activity bonds. Such bonds may be issued by or on behalf of public
authorities to finance various privately operated facilities and are not payable
from the unrestricted revenues of the issuer. As a result, the credit quality of
private activity bonds is frequently related directly to the credit standing of
private corporations or other entities. In addition, the interest on private
activity bonds issued after August 7, 1986 is subject to the federal alternative
minimum tax. The Fund will not be restricted with respect to the proportion of
its assets that may be invested in such obligations. Accordingly, the Fund may
not be a suitable investment vehicle for individuals or corporations that are
subject to the federal alternative minimum tax. Municipal Bond Fund will not
invest more than 5% of its net assets in securities where the principal and
interest are the responsibility of a private corporation or other entity which
has, including predecessors, less than three years' operational history.
There are, depending on numerous factors, variations in the risks involved in
holding municipal securities, both within a particular rating classification and
between classifications. The market values of outstanding municipal bonds will
vary as a result of the rating of the issue and changing evaluations of the
ability of the issuer to meet interest and principal payments. Such market
values will also change in response to changes in the interest rates payable on
new issues of municipal bonds. Should such interest rates rise, the values of
outstanding bonds, including those held in Municipal Bond Fund's portfolio,
would decline; should such interest rates decline, the values of outstanding
bonds would increase.
As a result of litigation or other factors, the power or ability of issuers
of municipal securities to pay principal and/or interest might be adversely
affected. Municipal securities are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Code, and laws, if any, which may be enacted by
Congress or state legislatures extending the time for payment of principal or
interest or both, or imposing other constraints upon enforcement of such
obligations or upon the power of municipalities to levy taxes.
Municipal Bond Fund may invest without percentage limitations in issues of
municipal securities which have similar characteristics, such as the location of
their issuers in the same geographic region or the derivation of interest
payments from revenues on similar projects (for example, electric utility
systems, hospitals, or housing finance agencies). Thus, Municipal Bond Fund may
invest more than 25% of its total assets in securities issued in a single state.
However, it may not invest more than 25% of its total assets in one industry.
(See "Investment Policy Limitations," page 26.) Consequently, the Fund's
portfolio of municipal securities may be more susceptible to the risks of
adverse economic, political, or regulatory developments than would be the case
with a portfolio of securities required to be more diversified as to geographic
region and/or source of revenue.
Interest on certain types of private activity bonds (for example, obligations
to finance certain exempt facilities which may be leased to or used by persons
other than the issuer) will not be exempt from federal income tax when received
by "substantial users" or persons related to "substantial users" as defined in
the Internal Revenue Code. The term "substantial user" generally includes any
"non-exempt person" who regularly uses in trade or business a part of a facility
financed from the proceeds of private activity bonds. Municipal Bond Fund may
invest periodically in private activity bonds and, therefore, may not be an
appropriate investment for entities which are substantial users of facilities
financed by those bonds or "related persons" of substantial users. Generally, an
individual will not be a related person of a substantial user under the Code
unless the person or his immediate
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family (spouse, brothers, sisters and lineal descendants) directly or indirectly
owns in the aggregate more than 50% in value of the equity of the substantial
user.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on future issues of municipal securities. It can be expected that
similar proposals may be introduced in the future. If such a proposal were
enacted, the availability of municipal securities for investment by Municipal
Bond Fund and the value of the Fund's portfolio would be affected. In that
event, the Directors would reevaluate the Fund's investment objective and
policies.
WHEN-ISSUED PURCHASES. From time to time, in the ordinary course of business,
Municipal Bond Fund may purchase municipal securities on a when-issued or
delayed delivery basis--i.e., delivery and payment can take place a month or
more after the date of the transactions. Securities so purchased are subject to
market fluctuation and no interest accrues to the purchaser during this period.
At the time the Fund makes the commitment to purchase a municipal security on a
when-issued or delayed delivery basis, it will record the transaction and
thereafter reflect the value, each day, of the security in determining its net
asset value. Municipal Bond Fund will also establish a segregated account with
its custodian bank in which it will maintain cash or liquid securities equal in
value to commitments for such when-issued or delayed delivery securities.
Municipal Bond Fund does not believe that its net asset value or income will be
adversely affected by its purchase of municipal securities on a when-issued or
delayed delivery basis. Upon the settlement date of the when-issued securities,
the Fund ordinarily will meet its obligation to purchase the securities from
available cash flow, use of the cash (or liquidation of securities) held in the
segregated account or sale of other securities. Although it would not normally
expect to do so, the Fund also may meet its obligation from the sale of the
when-issued securities themselves (which may have a current market value greater
or less than the Fund's payment obligation). Sale of securities to meet such
obligations carries with it a greater potential for the realization of net
capital gains, which are not exempt from federal income tax.
PUTS OR STAND-BY COMMITMENTS. Municipal Bond Fund may purchase, from banks or
broker/dealers, municipal securities together with the right to resell the
securities to the seller at an agreed-upon price or yield within a specified
period prior to the maturity date of the securities. Such a right to resell is
commonly known as a "put" and is also referred to as a "stand-by commitment" on
the part of the seller. The price which the Fund pays for the municipal
securities with puts generally is higher than the price which otherwise would be
paid for the municipal securities alone. Municipal Bond Fund uses puts for
liquidity purposes in order to permit it to remain more fully invested in
municipal securities than would otherwise be the case by providing a ready
market for certain municipal securities in its portfolio at an acceptable price.
The put generally is for a shorter term than the maturity of the municipal
security and does not restrict in any way the Fund's ability to dispose of (or
retain) the municipal security.
In order to ensure that the interest on municipal securities subject to puts
is tax-exempt to the Fund, it will limit its use of puts in accordance with
current interpretations or rulings of the Internal Revenue Service (IRS). The
IRS has issued a ruling (Rev. Rul. 82-144) in which it determined that a
regulated investment company was the owner, for tax purposes, of municipal
securities subject to puts (with the result that interest on those securities
would not lose its tax-exempt status when paid to the company). The IRS position
in Rev. Rul. 82-144 relates to a particular factual situation, in which (i) the
price paid for the puts was in addition to the price of the municipal securities
subject to the puts, (ii) the puts established the price at which the seller
must repurchase the securities, (iii) the puts were nonassignable and terminated
upon disposal of the underlying securities by the Fund, (iv) the puts were for
periods substantially less than the terms of the underlying securities, (v) the
puts did not include call arrangements or restrict the disposal of the
underlying securities by the Fund and gave the seller no rights in the
underlying securities, and (vi) the securities were acquired by the Fund for its
own account and not as security for a loan from the seller.
Because it is difficult to evaluate the likelihood of exercise or the
potential benefit of a put, puts will be determined to have a "value" of zero,
regardless of whether any direct or indirect consideration was paid. Amounts
paid by Municipal Bond Fund for a put will be reflected as unrealized
depreciation in the underlying security for the period during which the
commitment is held, and therefore will reduce any potential gains on the sale of
the underlying security by the cost of the put. There is a risk that the seller
of the put may not be able to repurchase the security upon exercise of the put
by the Fund.
SHORT-TERM MUNICIPAL SECURITIES. Although Municipal Bond Fund's portfolio
generally will consist primarily of municipal bonds, for liquidity purposes, and
from time to time for defensive purposes, a portion of its
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assets may be invested in short-term municipal securities (i.e., those with less
than one year remaining to maturity).
Short-term municipal securities consist of short-term municipal notes and
short-term municipal loans and obligations, including municipal paper, master
demand notes and variable-rate demand notes. Short-term municipal notes include
tax anticipation notes (notes issued in anticipation of the receipt of tax
funds), bond anticipation notes (notes issued in anticipation of receipt of the
proceeds of bond placements), revenue anticipation notes (notes issued in
anticipation of the receipt of revenues other than taxes or bond placements),
and project notes (obligations of municipal housing agencies on which the
payment of principal and interest ordinarily is backed by the full faith and
credit of the U.S. government). Municipal paper typically consists of the very
short-term unsecured negotiable promissory notes of municipal issuers.
The Fund may invest in tax-exempt master demand notes. A municipal master
demand note is an arrangement under which the Fund participates in a note
agreement between a bank acting on behalf of its clients and a municipal
borrower, whereby amounts maintained by the Fund in an account with the bank are
provided to the municipal borrower and payments of interest and principal on the
note are credited to the Fund's account. Interest rates on master demand notes
typically are tied to market interest rates, and therefore may fluctuate daily.
The amounts borrowed under these notes may be repaid at any time by the borrower
without penalty, and must be repaid upon the demand of Municipal Bond Fund.
Municipal Bond Fund may also invest in variable-rate demand notes.
Variable-rate demand notes are tax-exempt obligations which are payable by the
municipal issuer at par value plus accrued interest on demand by the Fund
(generally with three to ten days' notice). If no demand is made, the note will
mature on a specified date from one to thirty years from its issuance. Payment
on the note may be backed by a stand-by letter of credit. The yield on a
variable rate demand note is adjusted automatically to reflect a particular
market rate (which may not be the same market rate as that applicable to a
master demand note). Variable-rate demand notes typically are callable by the
issuer prior to maturity.
Where short-term municipal securities are rated, the Municipal Bond Fund will
limit its investments to "high quality" short-term securities. For short-term
municipal notes this includes ratings of SP-2 or better by S&P, MIG 2 or better
(or VMIG-2 or better, in the case of variable rate demand notes) by Moody's or
F-2 or better by Fitch; for municipal paper this includes A-2 or better by S&P,
Prime-2 or better by Moody's or F-2 or better by Fitch. Unrated short-term
municipal securities will be included within the Fund's overall limitation on
investments in unrated municipal securities. This limitation provides that not
more than 20% of Municipal Bond Fund's total assets may be invested in unrated
municipal securities, exclusive of unrated securities which are guaranteed as to
principal and interest by the full faith and credit of the U.S. government or
are issued by an issuer having outstanding an issue of municipal bonds within
one of the four highest ratings classifications.
Municial Bond Fund also may engage to a limited extent in portfolio trading
consistent with its investment objective. Securities may be sold in anticipation
of a market decline (a rise in interest rates) or purchased in anticipation of a
market rise (a decline in interest rates) and later sold. In addition, a
security may be sold and another of comparable quality purchased at
approximately the same time to take advantage of what the Fund believes to be a
temporary disparity in the normal yield relationship between the two securities.
These yield disparities may occur for reasons not directly related to the
investment quality of a particular issue or the general movement of interest
rates, such as changes in the overall demand for, or supply of, various types of
municipal securities.
SECURITY CASH FUND
The investment objective of Cash Fund is to seek as high a level of current
income as is consistent with preservation of capital and liquidity. No
assurances can be given that Cash Fund will achieve its objective. The Fund will
attempt to achieve its objective by investing at least 95% of its total assets,
measured at the time of investment, in a diversified portfolio of highest
quality money market instruments. Cash Fund may also invest up to 5% of its
total assets, measured at the time of investment, in money market instruments
that are in the second-highest rating category for short-term debt obligations.
Money market instruments in which Cash Fund may invest consist of the following:
U.S. GOVERNMENT SECURITIES. Obligations issued or guaranteed (as to principal
or interest) by the United States Government or its agencies (such as the Small
Business Administration, the Federal Housing
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Administration and Government National Mortgage Association) or
instrumentalities (such as Federal Home Loan Banks and Federal Land Banks) and
instruments fully collateralized with such obligations.
BANK OBLIGATIONS. Obligations of banks or savings and loan associations that
are members of the Federal Deposit Insurance Corporation and instruments fully
collateralized with such obligations.
CORPORATE OBLIGATIONS. Commercial paper issued by corporations and rated
Prime-1 or Prime-2 by Moody's, or A-1 or A-2 by S&P, or other corporate debt
instruments rated Aaa or Aa or better by Moody's or AAA or AA or better by S&P,
subject to the limitations on investment in instruments in the second-highest
rating category, discussed below.
Cash Fund may invest in certificates of deposit issued by banks or other bank
demand accounts, pending investment in other securities or to meet potential
redemptions or expenses.
Cash Fund may invest only in U.S. dollar denominated money market instruments
that present minimal credit risk and, with respect to 95% of its total assets,
measured at the time of investment, that are of the highest quality. The
Investment Manager will determine whether a security presents minimal credit
risk under procedures adopted by the Fund's Board of Directors. A security will
be considered to be highest quality (1) if rated in the highest rating category,
(e.g., Aaa or Prime-1 by Moody's or AAA or A-1 by S&P) by (i) any two nationally
recognized statistical rating organizations ("NRSRO's") or, (ii) if rated by
only one NRSRO, by that NRSRO; (2) if issued by an issuer that has short-term
debt obligations of comparable maturity, priority, and security and that are
rated in the highest rating category by (i) any two NRSRO's or, (ii) if rated by
only one NRSRO, by that NRSRO; or (3) an unrated security that is of comparable
quality to a security in the highest rating category as determined by the
Investment Manager and whose acquisition is approved or ratified by the Board of
Directors. With respect to 5% of its total assets, measured at the time of
investment, Cash Fund may also invest in money market instruments that are in
the second-highest rating category for short-term debt obligations (e.g., rated
Aa or Prime-2 by Moody's or AA or A-2 by S&P). A money market instrument will be
considered to be in the second-highest rating category under the criteria
described above with respect to instruments considered highest quality, as
applied to instruments in the second-highest rating category. See Appendix A to
the Prospectus for a description of the principal types of securities and
instruments in which the Fund will invest as well as a description of the above
mentioned ratings.
Cash Fund may not invest more than 5% of its total assets, measured at the
time of investment, in the securities of any one issuer that are of the highest
quality or more than the greater of 1% of its total assets or $1,000,000,
measured at the time of investment, in securities of any one issuer that are in
the second-highest rating category, except that these limitations shall not
apply to U.S. Government securities. The Fund may exceed the 5% limitation for
up to three business days after the purchase of the securities of any one issuer
that are of the highest quality, provided that the Fund does not have
outstanding at any time more than one such investment. In the event that an
instrument acquired by Cash Fund is downgraded, the Investment Manager, under
procedures approved by the Board of Directors, (or the Board of Directors itself
if the Investment Manager becomes aware that a security has been downgraded
below the second-highest rating category and the Investment Manager does not
dispose of the security within five business days) shall promptly reassess
whether such security presents minimal credit risk and determine whether or not
to retain the instrument. In the event that an instrument acquired by Cash Fund
ceases to be of the quality that is eligible for the Fund, the Fund shall
promptly dispose of the instrument in an orderly manner unless the Board of
Directors determines that this would not be in the best interests of the Fund.
Cash Fund may acquire one or more of the above types of securities subject to
repurchase agreements. A repurchase transaction involves a purchase by the Fund
of a security from a selling financial institution, such as a bank, savings and
loan association or broker/dealer, which agrees to repurchase such security at a
specified price and at a fixed time in the future, usually not more than seven
days from the date of purchase. Not more than 10% of Cash Fund's total assets
will be invested in illiquid assets, which include repurchase agreements with
maturities of over seven days. See the discussion of repurchase agreements under
"Investment Methods and Risk Factors."
Cash Fund may borrow money from banks as a temporary measure for emergency
purposes or to facilitate redemption requests. Borrowing is discussed in more
detail under "Investment Methods and Risk Factors." Pending investment in
securities or to meet potential redemptions, the Fund may invest in certificates
of deposit, bank demand accounts and high quality money market instruments.
RULE 144A SECURITIES. Certain of the securities acquired by Cash Fund may be
restricted as to disposition under federal securities laws, provided that such
restricted securities are eligible for resale to qualified institutional
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investors pursuant to Rule 144A under the Securities Act of 1933. Rule 144A was
adopted by the Securities and Exchange Commission (the "SEC") under the
Securities Act of 1933, as amended (the "Securities Act") in 1990. It provides a
nonexclusive safe harbor exemption from the registration requirements of the
Securities Act for the resale of certain securities to certain qualified buyers.
One of the primary purposes of the Rule is to create some resale liquidity for
certain securities that would otherwise be treated as illiquid investments. In
accordance with Cash Fund's policies, the Fund is not permitted to invest more
than 10% of its total net assets in illiquid securities. See the discussion of
Rule 144A Securities under "Investment Methods and Risk Factors."
VARIABLE RATE INSTRUMENTS. Cash Fund may invest in instruments having rates
of interest that are adjusted periodically according to a specified market rate
for such investments ("Variable Rate Instruments"). The interest rate on a
Variable Rate Instrument is ordinarily determined by reference to, or is a
percentage of, an objective standard such as a bank's prime rate or the 91-day
U.S. Treasury Bill rate. Cash Fund does not purchase certain Variable Rate
Instruments that have a preset cap above which the rate of interest may not
rise. Generally, the changes in the interest rate on Variable Rate Instruments
reduce the fluctuation in the market value of such securities. Accordingly, as
interest rates decrease or increase, the potential for capital appreciation or
depreciation is less than for fixed-rate obligations. Cash Fund determines the
maturity of Variable Rate Instruments in accordance with Rule 2a-7 under the
Investment Company Act of 1940 which allows the Fund to consider the maturity
date of such instruments to be the period remaining until the next readjustment
of the interest rate rather than the maturity date on the face of the
instrument.
While Cash Fund does not intend to engage in short-term trading, portfolio
securities may be sold without regard to the length of time that they have been
held. A portfolio security could be sold prior to maturity to take advantage of
new investment opportunities or yield differentials, or to preserve gains or
limit losses due to changing economic conditions or the financial condition of
the issuer, or for other reasons. While Cash Fund is expected to have a high
portfolio turnover due to the short maturities of its portfolio securities, this
should not affect the Fund's income or net asset value since brokerage
commissions are not normally paid in connection with the purchase or sale of
money market instruments.
Cash Fund will invest in money market instruments of varying maturities (but
no longer than 13 months) in an effort to earn as high a level of current income
as is consistent with preservation of capital and liquidity. The Fund intends to
maintain a weighted average maturity in its portfolio of not more than 90 days.
In addition to general market risks, Fund investments in nongovernment
obligations are subject to the ability of the issuer to satisfy its obligations.
Cash Fund also intends to maintain a net asset value per share of $1.00,
although there can be no assurance it will be able to do so. It is the Fund's
policy to declare dividends on a daily basis of an amount equal to the net
income plus or minus any realized capital gains or losses. (See "Dividends and
Taxes," page 51.)
INVESTMENT METHODS AND RISK FACTORS
Some of the risk factors related to certain securities, instruments and
techniques that may be used by one or more of the Funds are described in the
"Investment Objectives and Policies" and "Investment Methods and Risk Factors"
sections of the Prospectus and in this Statement of Additional Information. The
following is a description of certain additional risk factors related to various
securities, instruments and techniques. The risks so described only apply to
those Funds which may invest in such securities and instruments or which use
such techniques. Also included is a general description of some of the
investment instruments, techniques and methods which may be used by one or more
of the Funds. The methods described only apply to those Funds which may use such
methods. Although a Fund may employ the techniques, instruments and methods
described below, consistent with its investment objective and policies and any
applicable law, no Fund will be required to do so.
GENERAL RISK FACTORS. Each Fund's net asset value will fluctuate, reflecting
fluctuations in the market value of its portfolio positions and, if applicable,
its net currency exposure. The value of fixed income securities held by the
Funds generally fluctuates inversely with interest rate movements. In other
words, bond prices generally fall as interest rates rise and generally rise as
interest rates fall. Longer term bonds held by the Funds are subject to greater
interest rate risk. There is no assurance that any Fund will achieve its
investment objective.
REPURCHASE AGREEMENTS, REVERSE REPURCHASE AGREEMENTS AND ROLL TRANSACTIONS.
Each of the Funds may enter into repurchase agreements. Repurchase agreements
are transactions in which the purchaser buys a debt security from a bank or
recognized securities dealer and simultaneously commits to resell that security
to the bank or dealer at an agreed upon price, date and market rate of interest
unrelated to the coupon rate or maturity of
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the purchased security. Repurchase agreements are considered to be loans which
must be fully collateralized including interest earned thereon during the entire
term of the agreement. If the institution defaults on the repurchase agreement,
the Fund will retain possession of the underlying securities. If bankruptcy
proceedings are commenced with respect to the seller, realization on the
collateral by the Fund may be delayed or limited and the Fund may incur
additional costs. In such case, the Fund will be subject to risks associated
with changes in market value of the collateral securities. The Fund intends to
enter into repurchase agreements only with banks and broker/dealers believed to
present minimal credit risks. Accordingly, the Funds will enter into repurchase
agreements only with (a) brokers having total capitalization of at least $40
million and a ratio of aggregate indebtedness to net capital of no more than 4
to 1, or, alternatively, net capital equal to 6% of aggregate debit balances, or
(b) banks having at least $1 billion in assets and a net worth of at least $100
million as of its most recent annual report. In addition, the aggregate
repurchase price of all repurchase agreements held by the Fund with any broker
shall not exceed 15% of the total assets of the Fund or $5 million, whichever is
greater.
The High Yield Fund may also enter into reverse repurchase agreements with
the same parties with whom it may enter into repurchase agreements. Under a
reverse repurchase agreement, the Fund would sell securities and agree to
repurchase them at a particular price at a future date. Reverse repurchase
agreements involve the risk that the market value of the securities retained in
lieu of sale by a Fund may decline below the price of the securities the Fund
has sold but is obligated to repurchase. In the event the buyer of securities
under a reverse repurchase agreement files for bankruptcy or becomes insolvent,
such buyer or its trustee or receiver may receive an extension of time to
determine whether to enforce the Fund's obligation to repurchase the securities,
and the Fund's use of the proceeds of the reverse repurchase agreement may
effectively be restricted pending such decision.
The High Yield Fund also may enter into "dollar rolls," in which the Fund
sells fixed income securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar (same type, coupon
and maturity) securities on a specified future date. During the roll period, the
Fund would forego principal and interest paid on such securities. The Fund would
be compensated by the difference between the current sales price and the forward
price for the future purchase, as well as by the interest earned on the cash
proceeds of the initial sale.
BORROWING. Each of the Funds may borrow money from banks as a temporary
measure for emergency purposes, or to facilitate redemption requests.
From time to time, it may be advantageous for the Funds to borrow money
rather than sell existing portfolio positions to meet redemption requests.
Accordingly, the Funds may borrow from banks and High Yield Fund may borrow
through reverse repurchase agreements and "roll" transactions, in connection
with meeting requests for the redemption of Fund shares. High Yield Fund may
borrow up to 33 1/3%, Limited Maturity Bond, Municipal Bond and Cash Funds may
each borrow up to 10% and Corporate Bond and U.S. Government Funds may each
borrow up to 5% of total Fund assets. To the extent that a Fund purchases
securities while it has outstanding borrowings, it is using leverage, i.e. using
borrowed funds for investment. Leveraging will exaggerate the effect on net
asset value of any increase or decrease in the market value of a Fund's
portfolio. Money borrowed for leveraging will be subject to interest costs that
may or may not be recovered by appreciation of the securities purchased; in
certain cases, interest costs may exceed the return received on the securities
purchased. A Fund also may be required to maintain minimum average balances in
connection with such borrowing or to pay a commitment or other fee to maintain a
line of credit; either of these requirements would increase the cost of
borrowing over the stated interest rate. It is not expected that Cash Fund would
purchase securities while it had borrowings outstanding.
LENDING OF PORTFOLIO SECURITIES. For the purpose of generating income,
certain of the Funds may make secured loans of Fund securities amounting to not
more than 33 1/3% of its total assets. Securities loans are made to
broker/dealers, institutional investors, or other persons pursuant to agreements
requiring that the loans be continuously secured by collateral at least equal at
all times to the value of the securities lent marked to market on a daily basis.
The collateral received will consist of cash, U.S. Government securities,
letters of credit or such other collateral as may be permitted under its
investment program. While the securities are being lent, the Fund will continue
to receive the equivalent of the interest or dividends paid by the issuer on the
securities, as well as interest on the investment of the collateral or a fee
from the borrower. The Fund has a right to call each loan and obtain the
securities on five business days' notice or, in connection with securities
trading on foreign markets, within such longer period of time which coincides
with the normal settlement period for purchases and sales of
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such securities in such foreign markets. The Fund will not have the right to
vote securities while they are being lent, but it will call a loan in
anticipation of any important vote. The risks in lending portfolio securities,
as with other extensions of secured credit, consist of possible delay in
receiving additional collateral or in the recovery of the securities or possible
loss of rights in the collateral should the borrower fail financially. Loans
will only be made to persons deemed by the Investment Manager to be of good
standing and will not be made unless, in the judgment of the Investment Manager,
the consideration to be earned from such loans would justify the risk.
RESTRICTED SECURITIES (RULE 144A SECURITIES). Certain of the Funds may invest
in restricted securities which are securities that are restricted as to
disposition under the federal securities laws, provided that such securities are
eligible for resale to qualified institutional investors pursuant to Rule 144A
under the Securities Act of 1933. Rule 144A permits the resale to "qualified
institutional buyers" of "restricted securities" that, when issued, were not of
the same class as securities listed on a U.S. securities exchange or quoted in
the National Association of Securities Dealers Automated Quotation System (the
"Rule 144A Securities"). A "qualified institutional buyer" is defined by Rule
144A generally as an institution, acting for its own account or for the accounts
of other qualified institutional buyers, that in the aggregate owns and invests
on a discretionary basis at least $100 million in securities of issuers not
affiliated with the institution. A dealer registered under the Securities
Exchange Act of 1934 (the "Exchange Act"), acting for its own account or the
accounts of other qualified institutional buyers, that in the aggregate owns and
invests on a discretionary basis at least $10 million in securities of issuers
not affiliated with the dealer may also qualify as a qualified institutional
buyer, as well as an Exchange Act registered dealer acting in a riskless
principal transaction on behalf of a qualified institutional buyer.
The Funds' Board of Directors is responsible for developing and establishing
guidelines and procedures for determining the liquidity of Rule 144A Securities.
As permitted by Rule 144A, the Board of Directors has delegated this
responsibility to the Investment Manager. In making the determination regarding
the liquidity of Rule 144A Securities, the Investment Manager will consider
trading markets for the specific security taking into account the unregistered
nature of a Rule 144A security. In addition, the Investment Manager may
consider: (1) the frequency of trades and quotes; (2) the number of dealers and
potential purchasers; (3) dealer undertakings to make a market; and (4) the
nature of the security and of the market place trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
transfer). Investing in Rule 144A Securities could have the effect of increasing
the amount of a Fund's assets invested in illiquid securities to the extent that
qualified institutional buyers become uninterested, for a time, in purchasing
these securities.
The High Yield Fund also may purchase restricted securities that are not
eligible for resale pursuant to Rule 144A. The Fund may acquire such securities
through private placement transactions, directly from the issuer or from
security holders, generally at higher yields or on terms more favorable to
investors than comparable publicly traded securities. However, the restrictions
on resale of such securities may make it difficult for the Fund to dispose of
such securities at the time considered most advantageous, and/or may involve
expenses that would not be incurred in the sale of securities that were freely
marketable. Risks associated with restricted securities include the potential
obligation to pay all or part of the registration expenses in order to sell
certain restricted securities. A considerable period of time may elapse between
the time of the decision to sell a security and the time the Fund may be
permitted to sell it under an effective registration statement. If, during a
period, adverse conditions were to develop, the Fund might obtain a less
favorable price than prevailing when it decided to sell.
RISKS ASSOCIATED WITH LOWER-RATED DEBT SECURITIES (JUNK BONDS). Certain of
the Funds may invest in higher yielding debt securities in the lower rating
(higher risk) categories of the recognized rating services (commonly referred to
as "junk bonds"). Debt rated BB, B, CCC, CC and C by S&P and rated Ba, B, Caa,
Ca and C by Moody's, is regarded, on balance, as predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. For S&P, BB indicates the lowest
degree of speculation and C the highest degree of speculation. For Moody's, Ba
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions. Similarly, debt rated Ba or BB and below is
regarded by the relevant rating agency as speculative. Debt rated C by Moody's
or S&P is the lowest quality debt that is not in default as to principal or
interest and such issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing. Such securities are
also generally considered to be subject to greater risk than higher quality
securities with regard to a deterioration of general economic conditions.
Ratings of debt securities represent the rating agency's opinion
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regarding their quality and are not a guarantee of quality. Rating agencies
attempt to evaluate the safety of principal and interest payments and do not
evaluate the risks of fluctuations in market value. Also, rating agencies may
fail to make timely changes in credit quality in response to subsequent events,
so that an issuer's current financial condition may be better or worse than a
rating indicates.
The market value of lower quality debt securities tend to reflect individual
developments of the issuer to a greater extent than do higher quality
securities, which react primarily to fluctuations in the general level of
interest rates. In addition, lower quality debt securities tend to be more
sensitive to economic conditions and generally have more volatile prices than
higher quality securities. Issuers of lower quality securities are often highly
leveraged and may not have available to them more traditional methods of
financing. For example, during an economic downturn or a sustained period of
rising interest rates, highly leveraged issuers of lower quality securities may
experience financial stress. During such periods, such issuers may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations may also be adversely affected by
specific developments affecting the issuer, such as the issuer's inability to
meet specific projected business forecasts or the unavailability of additional
financing. Similarly, certain emerging market governments that issue lower
quality debt securities are among the largest debtors to commercial banks,
foreign governments and supranational organizations such as the World Bank and
may not be able or willing to make principal and/or interest repayments as they
come due. The risk of loss due to default by the issuer is significantly greater
for the holders of lower quality securities because such securities are
generally unsecured and are often subordinated to other creditors of the issuer.
Lower quality debt securities of corporate issuers frequently have call or
buy-back features which would permit an issuer to call or repurchase the
security from the Fund. If an issuer exercises these provisions in a declining
interest rate market, the Fund may have to replace the security with a lower
yielding security, resulting in a decreased return for investors. In addition,
the Fund may have difficulty disposing of lower quality securities because there
may be a thin trading market for such securities. There may be no established
retail secondary market for many of these securities, and the Fund anticipates
that such securities could be sold only to a limited number of dealers or
institutional investors. The lack of a liquid secondary market also may have an
adverse impact on market prices of such instruments and may make it more
difficult for the Fund to obtain accurate market quotations for purposes of
valuing the securities in the portfolio of the Fund.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may also decrease the values and liquidity of lower
quality securities, especially in a thinly traded market. The High Yield Fund
also may acquire lower quality debt securities during an initial underwriting or
may acquire lower quality debt securities which are sold without registration
under applicable securities laws. Such securities involve special considerations
and risks.
Factors having an adverse effect on the market value of lower rated
securities or their equivalents purchased by the Fund will adversely impact net
asset value of the Fund. See "Risk Factors" in the Prospectus. In addition to
the foregoing, such factors may include: (i) potential adverse publicity; (ii)
heightened sensitivity to general economic or political conditions; and (iii)
the likely adverse impact of a major economic recession. The Fund also may incur
additional expenses to the extent it is required to seek recovery upon a default
in the payment of principal or interest on its portfolio holdings, and the Fund
may have limited legal recourse in the event of a default. Debt securities
issued by governments in emerging markets can differ from debt obligations
issued by private entities in that remedies from defaults generally must be
pursued in the courts of the defaulting government, and legal recourse is
therefore somewhat diminished. Political conditions, in terms of a government's
willingness to meet the terms of its debt obligations, also are of considerable
significance. There can be no assurance that the holders of commercial bank debt
may not contest payments to the holders of debt securities issued by governments
in emerging markets in the event of default by the governments under commercial
bank loan agreements.
The Investment Manager will attempt to minimize the speculative risks
associated with investments in lower quality securities through credit analyses
and by carefully monitoring current trends in interest rates, political
developments and other factors. Nonetheless, investors should carefully review
the investment objectives and policies of the Funds and consider their ability
to assume the investment risks involved before making an investment in the
Funds.
CONVERTIBLE SECURITIES AND WARRANTS. Certain of the Funds may invest in debt
or preferred equity securities convertible into or exchangeable for equity
securities. Traditionally, convertible securities have paid dividends or
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interest at rates higher than common stocks but lower than nonconvertible
securities. They generally participate in the appreciation or depreciation of
the underlying stock into which they are convertible, but to a lesser degree. In
recent years, convertibles have been developed which combine higher or lower
current income with options and other features. Warrants are options to buy a
stated number of shares of common stock at a specified price any time during the
life of the warrants (generally two or more years).
MORTGAGE-BACKED SECURITIES AND COLLATERALIZED MORTGAGE OBLIGATIONS. Certain
of the Funds may invest in mortgage-backed securities (MBSs), including mortgage
pass-through securities and collateralized mortgage obligations (CMOs). MBSs
include certain securities issued or guaranteed by the United States Government
or one of its agencies or instrumentalities, such as the Government National
Mortgage Association (GNMA), Federal National Mortgage Association (FNMA), or
Federal Home Loan Mortgage Corporation (FHLMC); securities issued by private
issuers that represent an interest in or are collateralized by mortgage-backed
securities issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities; and securities issued by private issuers that represent an
interest in or are collateralized by mortgage loans. A mortgage pass-through
security is a pro rata interest in a pool of mortgages where the cash flow
generated from the mortgage collateral is passed through to the security holder.
CMOs are obligations fully collateralized by a portfolio of mortgages or
mortgage-related securities. Certain of the Funds may invest in securities known
as "inverse floating obligations," "residual interest bonds," or "interest-only"
(IO) and "principal-only" (PO) bonds, the market values of which will generally
be more volatile than the market values of most MBSs. An inverse floating
obligation is a derivative adjustable rate security with interest rates that
adjust or vary inversely to changes in market interest rates. The term "residual
interest" bond is used generally to describe those instruments in collateral
pools, such as CMOs, which receive any excess cash flow generated by the pool
once all other bondholders and expenses have been paid. IOs and POs are created
by separating the interest and principal payments generated by a pool of
mortgage-backed bonds to create two classes of securities. Generally, one class
receives interest only payments (IOs) and the other class principal only
payments (POs). MBSs have been referred to as "derivatives" because the
performance of MBSs is dependent upon and derived from underlying securities.
CMOs may be issued in a variety of classes and the Funds may invest in
several CMO classes, including, but not limited to Floaters, Planned
Amortization Classes (PACs), Scheduled Classes (SCHs), Sequential Pay Classes
(SEQs), Support Classes (SUPs), Target Amortization Classes (TACs) and Accrual
Classes (Z Classes). CMO classes vary in the rate and time at which they receive
principal and interest payments. SEQs, also called plain vanilla, clean pay, or
current pay classes, sequentially receive principal payments from underlying
mortgage securities when the principal on a previous class has been completely
paid off. During the months prior to their receipt of principal payments, SEQs
receive interest payments at the coupon rate on their principal. PACs are
designed to produce a stable cash flow of principal payments over a
predetermined period of time. PACs guard against a certain level of prepayment
risk by distributing prepayments to SUPs, also called companion classes. TACs
pay a targeted principal payment schedule, as long as prepayments are not made
at a rate slower than an expected constant prepayment speed. If prepayments
increase, the excess over the target is paid to SUPs. SEQs may have a less
stable cash flow than PACs and TACs and, consequently, have a greater potential
yield. PACs generally pay a lower yield than TACs because of PACs' lower risk.
Because SUPs are directly affected by the rate of prepayment of underlying
mortgages, SUPs may experience volatile cash flow behavior. When prepayment
speeds fluctuate, the average life of a SUP will vary. SUPs, therefore, are
priced at a higher yield than less volatile classes of CMOs. Z Classes do not
receive payments, including interest payments, until certain other classes are
paid off. At that time, the Z Class begins to receive the accumulated interest
and principal payments. A Floater has a coupon rate that adjusts periodically
(usually monthly) by adding a spread to a benchmark index subject to a lifetime
maximum cap. The yield of a Floater is sensitive to prepayment rates and the
level of the benchmark index.
Investment in MBSs poses several risks, including prepayment, market and
credit risks. Prepayment risk reflects the chance that borrowers may prepay
their mortgages faster than expected, thereby affecting the investment's average
life and perhaps its yield. Borrowers are most likely to exercise their
prepayment options at a time when it is least advantageous to investors,
generally prepaying mortgages as interest rates fall, and slowing payments as
interest rates rise. Certain classes of CMOs may have priority over others with
respect to the receipt of prepayments on the mortgages and the Fund may invest
in CMOs which are subject to greater risk of prepayment as discussed above.
Market risk reflects the chance that the price of the security may fluctuate
over time. The price of MBSs may be particularly sensitive to prevailing
interest rates, the length of time the security is
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expected to be outstanding and the liquidity of the issue. In a period of
unstable interest rates, there may be decreased demand for certain types of
MBSs, and a Fund invested in such securities wishing to sell them may find it
difficult to find a buyer, which may in turn decrease the price at which they
may be sold. Credit risk reflects the chance that the Fund may not receive all
or part of its principal because the issuer or credit enhancer has defaulted on
its obligations. Obligations issued by U.S. Government-related entities are
guaranteed by the agency or instrumentality, and some, such as GNMA
certificates, are supported by the full faith and credit of the U.S. Treasury;
others are supported by the right of the issuer to borrow from the Treasury;
others, such as those of the FNMA, are supported by the discretionary authority
of the U.S. Government to purchase the agency's obligations; still others, are
supported only by the credit of the instrumentality. Although securities issued
by U.S. Government-related agencies are guaranteed by the U.S. Government, its
agencies or instrumentalities, shares of the Fund are not so guaranteed in any
way. The performance of private label MBSs, issued by private institutions, is
based on the financial health of those institutions.
ASSET-BACKED SECURITIES. Certain of the Funds may also invest in
"asset-backed securities." These include secured debt instruments backed by
automobile loans, credit card loans, home equity loans, manufactured housing
loans and other types of secured loans providing the source of both principal
and interest. Asset-backed securities are subject to risks similar to those
discussed above with respect to MBSs.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES. Certain of the Funds may
purchase securities on a "when-issued" basis and may purchase or sell securities
on a "forward commitment" basis in order to hedge against anticipated changes in
interest rates and prices. The price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery and payment for
the securities take place at a later date. When-issued securities and forward
commitments may be sold prior to the settlement date, but the Funds will enter
into when-issued and forward commitments only with the intention of actually
receiving or delivering the securities, as the case may be. No income accrues on
securities which have been purchased pursuant to a forward commitment or on a
when-issued basis prior to delivery of the securities. If a Fund disposes of the
right to acquire a when-issued security prior to its acquisition or disposes of
its right to deliver or receive against a forward commitment, it may incur a
gain or loss. At the time a Fund enters into a transaction on a when-issued or
forward commitment basis, a segregated account consisting of cash or liquid
securities equal to the value of the when-issued or forward commitment
securities will be established and maintained with its custodian and will be
marked to market daily. There is a risk that the securities may not be delivered
and that the Fund may incur a loss.
DERIVATIVE INSTRUMENTS: OPTIONS AND FUTURES STRATEGIES
WRITING COVERED CALL OPTIONS. Certain of the Funds may write (sell) covered
call options. Covered call options generally will be written on securities and
currencies which, in the opinion of the Investment Manager are not expected to
make any major price moves in the near future but which, over the long term, are
deemed to be attractive investments.
A call option gives the holder (buyer) the right to purchase a security or
currency at a specified price (the exercise price) at any time until a certain
date (the expiration date). So long as the obligation of the writer of a call
option continues, he may be assigned an exercise notice by the broker/dealer
through whom such option was sold, requiring him to deliver the underlying
security or currency against payment of the exercise price. This obligation
terminates upon the expiration of the call option, or such earlier time at which
the writer effects a closing purchase transaction by purchasing an option
identical to that previously sold. The Investment Manager believes that writing
covered call options is less risky than writing uncovered or "naked" options,
which the Funds will not do.
Portfolio securities on which call options may be written will be purchased
solely on the basis of investment considerations consistent with that Fund's
investment objectives. When writing a covered call option, the Fund in return
for the premium gives up the opportunity for profit from a price increase in the
underlying security above the exercise price, and retains the risk of loss
should the price of the security decline. Unlike one who owns securities not
subject to an option, a Fund has no control over when it may be required to sell
the underlying securities, since the option may be exercised at any time prior
to the option's expiration. If a call option which a Fund has written expires,
the Fund will realize a gain in the amount of the premium; however, such gain
may be offset by a decline in the market value of the underlying security during
the option period. If the call option is exercised, a Fund will realize a gain
or loss from the sale of the underlying security.
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The premium which a Fund receives for writing a call option is deemed to
constitute the market value of an option. The premium the Fund will receive from
writing a call option will reflect, among other things, the current market price
of the underlying security, the relationship of the exercise price to such
market price, the historical price volatility of the underlying security, and
the length of the option period. In determining whether a particular call option
should be written on a particular security, the Investment Manager will consider
the reasonableness of the anticipated premium and the likelihood that a liquid
secondary market will exist for those options. The premium received by a Fund
for writing covered call options will be recorded as a liability in the Fund's
statement of assets and liabilities. This liability will be adjusted daily to
the option's current market value, which will be the latest sales price at the
time which the net asset value per share of the Fund is computed at the close of
regular trading on the NYSE (currently, 3:00 p.m. Central time, unless weather,
equipment failure or other factors contribute to an earlier closing time), or,
in the absence of such sale, the latest asked price. The liability will be
extinguished upon expiration of the option, the purchase of an identical option
in a closing transaction, or delivery of the underlying security upon the
exercise of the option.
Closing transactions will be effected in order to realize a profit on an
outstanding call option, to prevent an underlying security from being called, or
to permit the sale of the underlying security. Furthermore, effecting a closing
transaction will permit a Fund to write another call option on the underlying
security with either a different exercise price, expiration date or both. If the
Fund desires to sell a particular security from its portfolio on which it has
written a call option, or purchased a put option, it will seek to effect a
closing transaction prior to, or concurrently with, the sale of the security.
There is no assurance that the Fund will be able to effect such closing
transactions at favorable prices. If the Fund cannot enter into such a
transaction, it may be required to hold a security that it might otherwise have
sold, in which case it would continue to be at market risk with respect to the
security.
The Fund will pay transaction costs in connection with the writing of options
and in entering into closing purchase contracts. Transaction costs relating to
options activity normally are higher than those applicable to purchases and
sales of portfolio securities.
Call options written by the Fund normally will have expiration dates of less
than nine months from the date written. The exercise price of the options may be
below, equal to or above the current market values of the underlying securities
at the time the options are written. From time to time, the Fund may purchase an
underlying security for delivery in accordance with the exercise of an option,
rather than delivering such security from its portfolio. In such cases,
additional costs will be incurred.
The Fund will realize a profit or loss from a closing purchase transaction if
the cost of the transaction is less or more, respectively, than the premium
received from the writing of the option. Because increases in the market price
of a call option generally will reflect increases in the market price of the
underlying security, any loss resulting from the repurchase of a call option is
likely to be offset in whole or in part by appreciation of the underlying
security owned by the Fund.
WRITING COVERED PUT OPTIONS. Certain of the Funds may write covered put
options. A put option gives the purchaser of the option the right to sell, and
the writer (seller) the obligation to buy, the underlying security at the
exercise price during the option period. The option may be exercised at any time
prior to its expiration date. The operation of put options in other respects,
including their related risks and rewards, is substantially identical to that of
call options.
The Fund would write put options only on a covered basis, which means that
the Fund would either (i) set aside cash or liquid securities in an amount not
less than the exercise price at all times while the put option is outstanding
(the rules of the Options Clearing Corporation currently require that such
assets be deposited in escrow to secure payment of the exercise price), (ii)
sell short the security underlying the put option at the same or higher price
than the exercise price of the put option, or (iii) purchase a put option, if
the exercise price of the purchased put option is the same or higher than the
exercise price of the put option sold by the Fund. The Fund generally would
write covered put options in circumstances where the Investment Manager wishes
to purchase the underlying security for the Fund's portfolio at a price lower
than the current market price of the security. In such event, the Fund would
write a put option at an exercise price which, reduced by the premium received
on the option, reflects the lower price it is willing to pay. Since the Fund
also would receive interest on debt securities maintained to cover the exercise
price of the option, this technique could be used to enhance current return
during periods of market uncertainty. The risk in such a transaction would be
that the market price of the underlying security would decline below the
exercise price less the premiums received.
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PURCHASING PUT OPTIONS. Certain of the Funds may purchase put options. As the
holder of a put option, the Fund would have the right to sell the underlying
security at the exercise price at any time during the option period. The Fund
may enter into closing sale transactions with respect to such options, exercise
them or permit them to expire.
The Fund may purchase a put option on an underlying security ("protective
put") owned by the Fund as a hedging technique in order to protect against an
anticipated decline in the value of the security. Such hedge protection is
provided only during the life of the put option when the Fund, as the holder of
the put option, is able to sell the underlying security at the put exercise
price regardless of any decline in the underlying security's market price. For
example, a put option may be purchased in order to protect unrealized
appreciation of a security when the Investment Manager deems it desirable to
continue to hold the security because of tax considerations. The premium paid
for the put option and any transaction costs would reduce any capital gain
otherwise available for distribution when the security eventually is sold.
Certain Funds also may purchase put options at a time when the Fund does not
own the underlying security. By purchasing put options on a security it does not
own, the Fund seeks to benefit from a decline in the market price of the
underlying security. If the put option is not sold when it has remaining value,
and if the market price of the underlying security remains equal to or greater
than the exercise price during the life of the put option, the Fund will lose
its entire investment in the put option. In order for the purchase of a put
option to be profitable, the market price of the underlying security must
decline sufficiently below the exercise price to cover the premium and
transaction cost, unless the put option is sold in a closing sale transaction.
The premium paid by the Fund when purchasing a put option will be recorded as
an asset in the Fund's statement of assets and liabilities. This asset will be
adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the net asset value per share of the Fund is
computed (at the close of regular trading on the NYSE), or, in the absence of
such sale, the latest bid price. The asset will be extinguished upon expiration
of the option, the writing of an identical option in a closing transaction, or
the delivery of the underlying security upon the exercise of the option.
PURCHASING CALL OPTIONS. Certain Funds may purchase call options. As the
holder of a call option, the Fund would have the right to purchase the
underlying security at the exercise price at any time during the option period.
The Fund may enter into closing sale transactions with respect to such options,
exercise them or permit them to expire. Call options may be purchased by the
Fund for the purpose of acquiring the underlying security for its portfolio.
Utilized in this fashion, the purchase of call options would enable the Fund to
acquire the security at the exercise price of the call option plus the premium
paid. At times, the net cost of acquiring the security in this manner may be
less than the cost of acquiring the security directly. This technique also may
be useful to a Fund in purchasing a large block of securities that would be more
difficult to acquire by direct market purchases. So long as it holds such a call
option rather than the underlying security itself, the Fund is partially
protected from any unexpected decline in the market price of the underlying
security and in such event could allow the call option to expire, incurring a
loss only to the extent of the premium paid for the option.
The Fund also may purchase call options on underlying securities it owns in
order to protect unrealized gains on call options previously written by it. A
call option would be purchased for this purpose where tax considerations make it
inadvisable to realize such gains through a closing purchase transaction. Call
options also may be purchased at times to avoid realizing losses that would
result in a reduction of the Fund's current return. For example, the Fund has
written a call option on an underlying security having a current market value
below the price at which such security was purchased by the Fund, an increase in
the market price could result in the exercise of the call option written by the
Fund and the realization of a loss on the underlying security with the same
exercise price and expiration date as the option previously written.
Aggregate premiums paid for put and call options will not exceed 5% of the
Fund's total assets at the time of purchase.
INTEREST RATE FUTURES CONTRACTS. Certain Funds may enter into interest rate
futures contracts ("Futures" or "Futures Contracts") as a hedge against changes
in prevailing levels of interest rates. A Fund's hedging may include sales of
Futures as an offset against the effect of expected increases in interest rates,
and purchases of Futures as an offset against the effect of expected declines in
interest rates.
The Funds will not enter into Futures Contracts for speculation and will only
enter into Futures Contracts which are traded on national futures exchanges and
are standardized as to maturity date and underlying financial instrument. The
principal interest rate exchanges in the United States are the Board of Trade of
the City of
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Chicago and the Chicago Mercantile Exchange. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC"). Futures are exchanged in London at the London International
Financial Futures Exchange.
Although techniques other than sales and purchases of Futures Contracts could
be used to reduce a Fund's exposure to interest rate fluctuations, the Fund may
be able to hedge exposure more effectively and at a lower cost through using
Futures Contracts.
The Fund will not enter into a Futures Contract if, as a result thereof, more
than 5% of the Fund's total assets (taken at market value at the time of
entering into the contract) would be committed to "margin" (down payment)
deposits on such Futures Contracts.
A Futures Contract provides for the future sale by one party and purchase by
another party of a specified amount of a specific financial instrument (debt
security) for a specified price at a designated date, time and place. Brokerage
fees are incurred when a Futures Contract is bought or sold, and margin deposits
must be maintained at all times the Futures Contract is outstanding.
Although Futures Contracts typically require future delivery of and payment
for financial instruments, Futures Contracts usually are closed out before the
delivery date. Closing out an open Futures Contract sale or purchase is effected
by entering into an offsetting Futures Contract purchase or sale, respectively,
for the same aggregate amount of the identical financial instrument and the same
delivery date. If the offsetting purchase price is less than the original sale
price, the Fund realizes a gain; if it is more, the Fund realizes a loss.
Conversely, if the offsetting sale price is more than the original purchase
price, the Fund realizes a gain; if it is less, the Fund realizes a loss. The
transaction costs also must be included in these calculations. There can be no
assurance, however, that the Fund will be able to enter into an offsetting
transaction with respect to a particular Futures Contract at a particular time.
If the Fund is not able to enter into an offsetting transaction, the Fund will
continue to be required to maintain the margin deposits on the Futures Contract.
Persons who trade in Futures Contracts may be broadly classified as "hedgers"
and "speculators." Hedgers, such as the Funds, whose business activity involves
investment or other commitment in securities or other obligations, use the
Futures markets primarily to offset unfavorable changes in value that may occur
because of fluctuations in the value of the securities and obligations held or
expected to be acquired by them. Debtors and other obligors also may hedge the
interest cost of their obligations. The speculator, like the hedger, generally
expects neither to deliver nor to receive the financial instrument underlying
the Futures Contract, but, unlike the hedger, hopes to profit from fluctuations
in prevailing interest rates.
The Fund's Futures transactions will be entered into for traditional hedging
purposes; that is, Futures Contracts will be sold to protect against a decline
in the price of securities that the Fund owns, or Futures Contracts will be
purchased to protect the Fund against an increase in the price of securities it
has committed to purchase or expects to purchase.
"Margin" with respect to Futures Contracts is the amount of funds that must
be deposited by the Fund, in a segregated account with the Fund's custodian, in
order to initiate Futures trading and to maintain the Fund's open positions in
Futures Contracts. A margin deposit made when the Futures Contract is entered
into ("initial margin") is intended to assure the Fund's performance of the
Futures Contract. The margin required for a particular Futures Contract is set
by the exchange on which the Futures Contract is traded, and may be modified
significantly from time to time by the exchange during the term of the Futures
Contract. Futures Contracts customarily are purchased and sold on margins that
may range upward from less than 5% of the value of the Futures Contract being
traded.
If the price of an open Futures Contract changes (by increase in the case of
a sale or by decrease in the case of a purchase) so that the loss on the Futures
Contract reaches a point at which the margin on deposit does not satisfy margin
requirements, the broker will require an increase in the margin deposit ("margin
variation"). If the value of a position increases because of favorable price
changes in the Futures Contract so that the margin deposit exceeds the required
margin, however, the broker will pay the excess to the Fund. In computing daily
net asset values, the Fund will mark to market the current value of its open
Futures Contracts. The Fund expects to earn interest income on its margin
deposits.
MUNICIPAL BOND INDEX FUTURES CONTRACTS. The Municipal Bond Fund may enter
into municipal bond index futures contracts. A municipal bond index futures
contract is an agreement to take or make delivery of an amount of cash equal to
the difference between the value of the index at the beginning and at the end of
the contract period. In a substantial majority of these transactions, the Fund
will purchase such securities upon
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termination of the futures position but, under unusual market conditions, a
futures position may be terminated without the corresponding purchase of
securities.
RISKS OF USING FUTURES CONTRACTS. The prices of Futures Contracts are
volatile and are influenced, among other things, by actual and anticipated
changes in interest rates, which in turn are affected by fiscal and monetary
policies and national and international political and economic events.
There is a risk of imperfect correlation between changes in prices of Futures
Contracts and prices of the securities in the Fund's portfolio being hedged. The
degree of imperfection of correlation depends upon circumstances such as:
variations in speculative market demand for Futures and for debt securities,
including technical influences in Futures trading; and differences between the
financial instruments being hedged and the instruments underlying the standard
Futures Contracts available for trading, with respect to interest rate levels,
maturities, and creditworthiness of issuers. A decision of whether, when, and
how to hedge involves skill and judgment, and even a well-conceived hedge may be
unsuccessful to some degree because of unexpected market behavior or interest
rate trends.
Because of the low margin deposits required, Futures trading involves an
extremely high degree of leverage. As a result, a relatively small price
movement in a Futures Contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10% of
the value of the Futures Contract is deposited as margin, a subsequent 10%
decrease in the value of the Futures Contract would result in a total loss of
the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss of 150% of
the original margin deposit, if the Contract were closed out. Thus, a purchase
or sale of a Futures Contract may result in losses in excess of the amount
invested in the Futures Contract. However, the Fund presumably would have
sustained comparable losses if, instead of the Futures Contract, it had invested
in the underlying financial instrument and sold it after the decline.
Furthermore, in the case of a Futures Contract purchase, in order to be
certain that the Fund has sufficient assets to satisfy its obligations under a
Futures Contract, the Fund sets aside and commits to back the Futures Contract
an amount of cash and liquid securities equal in value to the current value of
the underlying instrument less margin deposit.
In the case of a Futures contract sale, the Fund either will set aside
amounts, as in the case of a Futures Contract purchase, own the security
underlying the contract or hold a call option permitting the Fund to purchase
the same Futures Contract at a price no higher than the contract price. Assets
used as cover cannot be sold while the position in the corresponding Futures
Contract is open, unless they are replaced with similar assets. As a result, the
commitment of a significant portion of the Fund's assets to cover could impede
portfolio management or the Fund's ability to meet redemption requests or other
current obligations.
Most U.S. Futures exchanges limit the amount of fluctuation permitted in
Futures Contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a Futures Contract may vary either up or
down from the previous day's settlement price at the end of a trading session.
Once the daily limit has been reached in a particular type of Futures Contract,
no trades may be made on that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and therefore does
not limit potential losses, because the limit may prevent the liquidation of
unfavorable positions. Futures Contract prices occasionally have moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of Futures positions and subjecting some
Futures traders to substantial losses.
OPTIONS ON FUTURES CONTRACTS. Options on Futures Contracts are similar to
options on securities except that options on Futures Contracts give the
purchaser the right, in return for the premium paid, to assume a position in a
Futures Contract (a long position if the option is a call and a short position
if the option is a put), rather than to purchase or sell the Futures Contract,
at a specified exercise price at any time during the period of the option. Upon
exercise of the option, the delivery of the Futures position by the writer of
the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's Futures margin account which represents the
amount by which the market price of the Futures Contract, at exercise, exceeds
(in the case of a call) or is less than (in the case of a put) the exercise
price of the option on the Futures Contract. If an option is exercised on the
last trading day prior to the expiration date of the option, the settlement will
be made entirely in cash equal to the difference between the exercise price of
the option and the closing level of the securities or index upon which the
Futures Contracts are based on the expiration date. Purchasers of options who
fail to exercise their options prior to the exercise date suffer a loss of the
premium paid.
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As an alternative to purchasing call and put options on Futures, the Fund may
purchase call and put options on the underlying securities themselves. Such
options would be used in a manner identical to the use of options on Futures
Contracts.
To reduce or eliminate the leverage then employed by the Fund, or to reduce
or eliminate the hedge position then currently held by the Fund, the Fund may
seek to close out an option position by selling an option covering the same
securities or contract and having the same exercise price and expiration date.
Trading in options on Futures Contracts began relatively recently. The ability
to establish and close out positions on such options will be subject to the
development and maintenance of a liquid secondary market. It is not certain that
this market will develop.
INTEREST RATE AND CURRENCY SWAPS. The High Yield Fund may enter into interest
rate and index swaps and the purchase or sale of related caps, floors and
collars. The Fund usually will enter into interest rate swaps on a net basis if
the contract so provides, that is, the two payment streams are netted out in a
cash settlement on the payment date or dates specified in the instrument, with
the Fund receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as swaps, caps, floors and collars are entered into for good
faith hedging purposes, the Fund and the Investment Manager, believe that they
do not constitute senior securities under the 1940 Act if appropriately covered
and, thus, will not treat them as being subject to the Fund's borrowing
restrictions. The Fund will not enter into any swap, cap, floor, collar or other
derivative transaction unless, at the time of entering into the transaction, the
unsecured long-term debt rating of the counterparty combined with any credit
enhancements is rated at least A by Moody's or S&P or has an equivalent rating
from a nationally recognized statistical rating organization or is determined to
be of equivalent credit quality by the Investment Manager. If a counterparty
defaults, the Fund may have contractual remedies pursuant to the agreements
related to the transactions. The swap market has grown substantially in recent
years, with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid. Caps, floors and collars are more
recent innovations for which standardized documentation has not yet been fully
developed and, for that reason, they are less liquid than swaps.
EMERGING COUNTRIES. Certain of the Funds may invest in debt securities in
emerging markets. Investing in securities in emerging countries may entail
greater risks than investing in debt securities in developed countries. These
risks include (i) less social, political and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict the
Fund's investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (iv) foreign taxation; and
(v) the absence of developed structures governing private or foreign investment
or allowing for judicial redress for injury to private property.
FOREIGN INVESTMENT RESTRICTIONS. Certain countries prohibit or impose
substantial restrictions on investments in their capital markets, particularly
their equity markets, by foreign entities such as the Funds. As illustrations,
certain countries require governmental approval prior to investments by foreign
persons, or limit the amount of investment by foreign persons in a particular
company, or limit the investments by foreign persons to only a specific class of
securities of a company that may have less advantageous terms than securities of
the company available for purchase by nationals. Moreover, the national policies
of certain countries may restrict investment opportunities in issuers or
industries deemed sensitive to national interests. In addition, some countries
require governmental approval for the repatriation of investment income, capital
or the proceeds of securities sales by foreign investors. A Fund could be
adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation, as well as by the application to it of
other restrictions on investments.
POLITICAL AND ECONOMIC RISKS. Investing in securities of non-U.S. companies
may entail additional risks due to the potential political and economic
instability of certain countries and the risks of expropriation,
nationalization, confiscation or the imposition of restrictions on foreign
investment and on repatriation of capital invested. In the event of such
expropriation, nationalization or other confiscation by any country, a Fund
could lose its entire investment in any such country.
An investment in a Fund which invests in non-U.S. companies is subject to the
political and economic risks associated with investments in foreign markets.
Even though opportunities for investment may exist in emerging markets, any
change in the leadership or policies of the governments of those countries or in
the leadership or
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policies of any other government which exercises a significant influence over
those countries, may halt the expansion of or reverse the liberalization of
foreign investment policies now occurring and thereby eliminate any investment
opportunities which may currently exist.
Investors should note that upon the accession to power of authoritarian
regimes, the governments of a number of emerging market countries previously
expropriated large quantities of real and personal property similar to the
property which will be represented by the securities purchased by a Fund. The
claims of property owners against those governments were never finally settled.
There can be no assurance that any property represented by securities purchased
by a Fund will not also be expropriated, nationalized, or otherwise confiscated.
If such confiscation were to occur, the Fund could lose a substantial portion of
its investments in such countries. The Fund's investments would similarly be
adversely affected by exchange control regulation in any of those countries.
RELIGIOUS AND ETHNIC INSTABILITY. Certain countries in which a Fund may
invest may have vocal minorities that advocate radical religious or
revolutionary philosophies or support ethnic independence. Any disturbance on
the part of such individuals could carry the potential for wide-spread
destruction or confiscation of property owned by individuals and entities
foreign to such country and could cause the loss of the Fund's investment in
those countries.
NON-UNIFORM CORPORATE DISCLOSURE STANDARDS AND GOVERNMENTAL REGULATION.
Foreign companies are subject to accounting, auditing and financial standards
and requirements that differ, in some cases significantly, from those applicable
to U.S. companies. In particular, the assets, liabilities and profits appearing
on the financial statements of such a company may not reflect its financial
position or results of operations in the way they would be reflected had such
financial statements been prepared in accordance with U.S. generally accepted
accounting principles. Most of the foreign securities held by a Fund will not be
registered with the SEC or regulators of any foreign country, nor will the
issuers thereof be subject to the SEC's reporting requirements. Thus, there will
be less available information concerning foreign issuers of securities held by
the Fund than is available concerning U.S. issuers. In instances where the
financial statements of an issuer are not deemed to reflect accurately the
financial situation of the issuer, the Investment Manager and relevant
Sub-Adviser will take appropriate steps to evaluate the proposed investment,
which may include on-site inspection of the issuer, interviews with its
management and consultations with accountants, bankers and other specialists.
There is substantially less publicly available information about foreign
companies than there are reports and ratings published about U.S. companies and
the U.S. Government. In addition, where public information is available, it may
be less reliable than such information regarding U.S. issuers.
ADVERSE MARKET CHARACTERISTICS. Securities of many foreign issuers may be
less liquid and their prices more volatile than securities of comparable U.S.
issuers. In addition, foreign securities exchanges and brokers generally are
subject to less governmental supervision and regulation than in the U.S., and
foreign securities exchange transactions usually are subject to fixed
commissions, which generally are higher than negotiated commissions on U.S.
transactions. In addition, foreign securities exchange transactions may be
subject to difficulties associated with the settlement of such transactions.
Delays in settlement could result in temporary periods when assets of the Fund
are uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause it to
miss attractive opportunities. Inability to dispose of a portfolio security due
to settlement problems either could result in losses to the Fund due to
subsequent declines in value of the portfolio security or, if the Fund has
entered into a contract to sell the security, could result in possible liability
to the purchaser. The Investment Manager will consider such difficulties when
determining the allocation of the Fund's assets.
NON-U.S. WITHHOLDING TAXES. A Fund's investment income and gains from foreign
issuers may be subject to non-U.S. withholding and other taxes, thereby reducing
the Fund's investment income and gains.
COSTS. Investors should understand that the expense ratio of the Funds that
invest in foreign securities can be expected to be higher than investment
companies investing in domestic securities since the cost of maintaining the
custody of foreign securities and the rate of advisory fees paid by the Funds
are higher.
EASTERN EUROPE. Changes occurring in Eastern Europe and Russia today could
have long-term potential consequences. As restrictions fail, this could result
in rising standards of living, lower manufacturing costs, growing consumer
spending, and substantial economic growth. However, investment in the countries
of Eastern Europe and Russia is highly speculative at this time. Political and
economic reforms are too recent to establish a definite trend away from
centrally-planned economies and state owned industries. In many of the countries
of Eastern Europe and Russia, there is no stock exchange or formal market for
securities. Such countries may also
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have government exchange controls, currencies with no recognizable market value
relative to the established currencies of western market economies, little or no
experience in trading in securities, no financial reporting standards, a lack of
a banking and securities infrastructure to handle such trading, and a legal
tradition which does not recognize rights in private property. In addition,
these countries may have national policies which restrict investments in
companies deemed sensitive to the country's national interest. Further, the
governments in such countries may require governmental or quasi-governmental
authorities to act as custodian of the Fund's assets invested in such countries
and these authorities may not qualify as a foreign custodian under the
Investment Company Act of 1940 and exemptive relief from such Act may be
required. All of these considerations are among the factors which could cause
significant risks and uncertainties to investment in Eastern Europe and Russia.
AMERICAN DEPOSITARY RECEIPTS (ADRS). The High Yield Fund may invest in ADRs.
ADRs are dollar-denominated receipts issued generally by U.S. banks and which
represent the deposit with the bank of a foreign company's securities. ADRs are
publicly traded on exchanges or over-the-counter in the United States. Investors
should consider carefully the substantial risks involved in investing in
securities issued by companies of foreign nations, which are in addition to the
usual risks inherent in domestic investments. See "Foreign Investment
Restrictions," above.
INVESTMENT POLICY LIMITATIONS
Each of the Funds operate within certain fundamental investment policy
limitations. These limitations may not be changed for the Funds without approval
of the lesser of (i) 67% or more of the voting securities present at a meeting
if the holders of more than 50% of the outstanding voting securities of that
Fund are present or represented by proxy, or (ii) more than 50% of the
outstanding voting securities of that Fund.
INCOME FUND'S FUNDAMENTAL POLICIES
The fundamental investment policies of the Income Fund, which are applicable
to each of the Corporate Bond, Limited Maturity Bond, U.S. Government and High
Yield Funds are:
1. Not to invest in companies having a record of less than three years'
continuous operation, which may include the operations of predecessor
companies; provided, however, that this investment policy does not apply to
the High Yield Fund.
2. Not to invest in the securities of an issuer if the officers and directors
of the Fund, Underwriter or Manager own more than 1/2 of 1% of such
securities or if all such persons together own more than 5% of such
securities.
3. Not to invest more than 5% of its assets in the securities of any one
issuer (other than securities of the U.S. Government, its agencies or
instrumentalities); provided, however, that for the High Yield Fund, this
limitation applies only with respect to 75% of the value of its total
assets.
4. Not to purchase more than 10% of the outstanding voting securities (or of
any class of outstanding securities) of any one issuer (other than
securities of the U.S. Government, its agencies or instrumentalities).
5. Not to invest in companies for the purpose of exercising control of
management.
6. Not to act as underwriter of securities of other issuers.
7. Not to invest in an amount equal to, or in excess of, 25% of its total
assets in any particular industry (other than securities of the U.S.
Government, its agencies or instrumentalities).
8. Not to purchase or sell real estate. (This policy shall not prevent the
Fund from investing in securities or other instruments backed by real
estate or in securities of companies engaged in the real estate business.)
9. Not to buy or sell commodities or commodity contracts; provided, however,
that the Funds may, to the extent appropriate under their investment
programs, purchase securities of companies engaged in such activities, may
enter into transactions in financial futures contracts and related options
for hedging purposes, may engage in transactions on a when-issued or
forward commitment basis and may enter into forward currency contracts.
10. Not to make loans to other persons other than for the purchase of publicly
distributed debt securities and U.S. Government obligations or by entry
into repurchase agreements; provided, however, that this investment
limitation does not apply to the High Yield Fund.
11. Not to invest its assets in puts, calls, straddles, spreads, or any
combination thereof; provided, however, that this investment policy does
not apply to High Yield Fund.
26
<PAGE>
12. Not to invest in limited partnerships or similar interests in oil, gas,
mineral lease, mineral exploration or development programs; provided,
however, that the Fund may invest in the securities of other corporations
whose activities include such exploration and development.
13. With respect to each of the Corporate Bond and U.S. Government Funds, not
to borrow money except for emergency purposes, and then not in excess of 5%
of its total assets at the time the loan is made. (Any such borrowings will
be made on a temporary basis from banks and will not be made for investment
purposes.) With respect to the Limited Maturity Bond Fund, not to borrow
money in excess of 10% of its total assets at the time the loan is made,
and then only as a temporary measure for emergency purposes, to facilitate
redemption requests, or for other purposes consistent with the Fund's
investment objectives and policies. With respect to High Yield Fund, not to
borrow money, except that (a) the Fund may enter into certain futures
contracts and options related thereto; (b) the Fund may enter into
commitments to purchase securities in accordance with the Fund's investment
program, including delayed delivery and when-issued securities and reverse
repurchase agreements, and (c) for temporary emergency purposes, High Yield
Fund may borrow in amounts not exceeding 33 1/3% of the value of its total
assets at the time when the loan is made.
14. Not to purchase securities of any other investment company; provided,
however that Limited Maturity Bond Fund and the High Yield Fund may
purchase securities of any investment company if in compliance with the
Investment Company Act of 1940.
15. With respect to each of the Corporate Bond and U.S. Government Funds, not
to issue senior securities; provided, however, that Limited Maturity Bond
Fund and the High Yield Fund may issue senior securities if in compliance
with the Investment Company Act of 1940.
16. With respect to Corporate Bond and U.S. Government Funds, not to invest in
restricted securities (restricted securities are securities for which an
active and substantial market does not exist at the time of purchase or
upon subsequent valuation, or for which there are legal or contractual
restrictions as to disposition); provided, however that Limited Maturity
Bond Fund may invest in restricted securities if those securities are
eligible for resale to qualified institutional investors pursuant to Rule
144A under the Securities Act of 1933; and High Yield Fund may not invest
more than 15% of its total assets in illiquid securities.
With respect to Fundamental Policy (1), the High Yield Fund has entered into
undertakings with the Arizona Securities Department, pursuant to which the Fund
has agreed to limit the purchase of securities of issuers in operation for less
than three years ("unseasoned issuers") to 5% of total Fund assets. The Fund may
exceed the 5% limit if, in the future, such Department permits a larger
percentage of assets to be invested in unseasoned issuers. With respect to
Fundamental Policy (16), the High Yield Fund has agreed with the Arkansas
Securities Department to limit its investment in securities which it is
restricted from selling to the public without registration under the Securities
Act of 1933 to 10% of Fund assets. The Fund may invest up to 15% of Fund assets
in such securities if the Arkansas Department changes its position on this
matter in the future or if the Fund's investment policies, at some time in the
future, are no longer subject to the jurisdiction of such Department.
The above limitations, other than those relating to borrowing, are applicable
at the time of investment, and later increases or decreases in percentages
resulting from changes in value of net assets will not result in violation of
such limitations. The Fund interprets Fundamental Policy (8) to prohibit the
purchase of real estate limited partnerships.
MUNICIPAL BOND FUND'S FUNDAMENTAL POLICIES
Municipal Bond Fund's fundamental investment policies are:
1. Not to invest more than 20% of its assets in securities which are not
tax-exempt securities, except for temporary defensive purposes;
2. Not to borrow money, except that borrowings from banks for temporary or
emergency purposes may be made in an amount up to 10% of the Fund's total
assets at the time the loan is made;
3. Not to issue senior securities as defined in the Investment Company Act of
1940 except insofar as the Fund may be deemed to have issued senior
securities by reason of borrowing money for temporary or emergency purposes
or purchasing securities on a when-issued or delayed delivery basis;
4. Not to purchase any securities on margin (except for such short-term
credits as are necessary for the clearance of purchases and sales of
portfolio securities) or sell any securities short;
27
<PAGE>
5. Not to make loans, except that this does not prohibit the purchase of a
portion of an issue of publicly distributed bonds, debentures, notes or
other debt securities, or entry into a repurchase agreement;
6. Not to engage in the business of underwriting securities issued by other
persons except to the extent that the Fund may technically be deemed to be
an underwriter under the Securities Act of 1933 in purchasing and selling
portfolio securities;
7. Not to invest in real estate, real estate mortgage loans, commodities,
commodity futures contracts or interests in oil, gas or other mineral
exploration or development programs, provided that this limitation shall
not prohibit the purchase of securities issued by companies, including real
estate investment trusts, which invest in real estate or interests therein
nor transactions in financial futures contracts;
8. Not to purchase a security if, as a result, with respect to 75% of the
value of the Fund's total assets, more than 5% of the value of its total
assets would be invested in securities of any one issuer (other than
obligations issued by the U.S. government, its agencies or
instrumentalities);
9. Not to purchase securities of other investment companies, or acquire voting
securities, except in connection with a merger, consolidation, acquisition
or reorganization;
10. Not to invest more than 25% of its total assets in securities the issuers
of which are in the same industry. For purposes of this limitation, the
U.S. government, its agencies or instrumentalities, and state or municipal
governments and their political subdivisions are not considered members of
any industry;
11. Not to pledge, mortgage or hypothecate its assets, except to secure
borrowings permitted by fundamental investment policy number (2) above;
12. Not to write, purchase or sell put or call options or combinations thereof,
except that it may purchase and hold puts or "stand-by commitments"
relating to municipal securities, as described in this prospectus;
13. Not to invest in securities which are not readily marketable, securities
the disposition of which is restricted under federal securities laws or
repurchase agreements maturing in more than seven days (collectively
"illiquid securities") if, as a result, more than 10% of the Fund's net
assets would be invested in illiquid securities.
For purposes of restrictions (8) and (10) above, each governmental
subdivision, i.e., state, territory, possession of the United States or any
political subdivision of any of the foregoing, including agencies, authorities,
instrumentalities, or similar entities, or of the District of Columbia shall be
considered a separate issuer if its assets and revenues are separate from those
of the governmental body creating it and the security is backed only by its own
assets and revenues. Further, in the case of an industrial development bond, if
the security is backed only by the assets and revenues of a non-governmental
user, then such non-governmental user will be deemed to be the sole issuer. If
an industrial development bond or government issued security is guaranteed by a
governmental or other entity, such guarantee would be considered a separate
security issued by the guarantor.
The above limitations are applicable at the time of investment, and later
increases or decreases in percentages resulting from changes in value or net
assets will not result in violation of such limitations.
CASH FUND'S FUNDAMENTAL POLICIES
Cash Fund's fundamental investment policies are:
1. Not to purchase any securities other than those referred to under "Security
Cash Fund," page 13;
2. Not to borrow money, except that the Fund may borrow for temporary purposes
or to meet redemption requests which might otherwise require the untimely
disposition of a security (not for leveraging) in amounts not exceeding 10%
of the current value of its total assets (including the amount borrowed)
less liabilities (not including the amount borrowed) at the time the
borrowing is made. It is intended that any such borrowing will be
liquidated before additional portfolio securities are purchased;
3. Not to pledge its assets or otherwise encumber them in excess of 10% of its
net assets (taken at market value at the time of pledging) and then only to
secure borrowings effected within the limitations set forth in restriction
2;
4. Not to make loans of money or securities, except (a) by the purchase of
debt obligations in which the Fund may invest consistent with its
investment objectives and policies or (b) by investment in repurchase
agreements, subject to limitations described under "Security Cash Fund,"
page 13;
5. Not to invest in the securities of an issuer if the officers and directors
of the Fund or Manager own more than 1/2 of 1% of such securities, or if
all such persons together own more than 5% of such securities;
28
<PAGE>
6. Not to purchase a security if, as a result, with respect to 75% of the
value of the Fund's total assets, more than 5% of the value of its total
assets would be invested in the securities of any one issuer (other than
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities);
7. Not to purchase more than 10% of any class of securities of any issuer.
(For purposes of this restriction, all outstanding debt securities of any
issuer are considered one class.)
8. Not to invest more than 25% of the market or other fair value of its total
assets in the securities of issuers, all of which conduct their principal
business activities in the same industry. (For purposes of this
restriction, utilities will be divided according to their services; for
example, gas, gas transmission, electric, water and telephone utilities
will each be treated as being a separate industry. This restriction does
not apply to investment in bank obligations or obligations issued or
guaranteed by the United States Government or its agencies or
instrumentalities.)
9. Not to purchase securities on margin, except for such short-term credits as
are necessary for the clearance of purchases and sales of portfolio
securities;
10. Not to invest more than 5% of the market or other fair value of its total
assets in securities of companies having a record, together with
predecessors, of less than three years of continuous operation. (This
restriction shall not apply to banks or any obligation of the United States
Government, its agencies or instrumentalities.)
11. Not to engage in the underwriting of securities except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in disposing
of a portfolio security;
12. Not to make short sales of securities;
13. Not to purchase or sell real estate, although it may purchase securities of
issuers which engage in real estate operations, securities which are
secured by interests in real estate, or securities representing interests
in real estate;
14. Not to invest for the purpose of exercising control of management of
another company;
15. Not to purchase oil, gas or other mineral leases, rights, or royalty
contracts or exploration or development programs, except that the Fund may
invest in the securities of companies which invest in or sponsor such
programs;
16. Not to purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets;
17. Not to write, purchase or sell puts, calls, or combinations thereof;
18. Not to purchase or sell commodities or commodity futures contracts;
19. Not to issue senior securities as defined in the Investment Company Act of
1940.
In order to permit the sale of shares of Cash Fund in certain states, the
Fund may make commitments more restrictive than the fundamental restrictions
described above. Should the Fund determine that any such commitment is no longer
in the best interest of the Fund and its stockholders, it will revoke the
commitment by terminating sales of its shares in the state(s) involved.
Any investment restriction except restriction 2, which involves a maximum or
minimum percentage of securities or assets shall not be considered to be
violated unless an excess over or a deficiency under the percentage occurs
immediately after, and is caused by, an acquisition or disposition of securities
or utilization of assets by Cash Fund.
OFFICERS AND DIRECTORS
The officers and directors of the Funds and their principal occupations for
at least the last five years are as follows. Unless otherwise noted, the address
of each officer and director is 700 Harrison Street, Topeka, Kansas 66636-0001.
<TABLE>
<CAPTION>
- --------------------------------------------------------------- -------------------------------------------------------------
NAME, ADDRESS AND POSITIONS HELD WITH THE FUNDS PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- --------------------------------------------------------------- -------------------------------------------------------------
<S> <C>
JOHN D. CLELAND,* President and Director Senior Vice President and Managing Member Representative,
Security Management Company, LLC; Senior Vice President,
Security Benefit Group, Inc. and Security Benefit Life
Insurance Company.
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------- -------------------------------------------------------------
NAME, ADDRESS AND POSITIONS HELD WITH THE FUNDS PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- --------------------------------------------------------------- -------------------------------------------------------------
<S> <C>
DONALD A. CHUBB, JR.,** Director Business broker, Griffith & Blair Realtors. Prior to 1997,
2222 SW 29th Street President, Neon Tube Light Company, Inc.
Topeka, Kansas 66611
DONALD L. HARDESTY, Director President, Central Research Corporation.
900 NationsBank Tower
Topeka, Kansas 66603
PENNY A. LUMPKIN,** Director Vice President, Palmer News, Inc. Prior to October 1991,
3616 Canterbury Town Road Secretary and Director, Palmer Companies, Inc. (Wholesale
Topeka, Kansas 66610 Periodicals).
MARK L. MORRIS, JR.,** Director President, Mark Morris Associates (Veterinary Research and
5500 SW 7th Street Education).
Topeka, Kansas 66606
MAYNARD OLIVERIUS, Director
JAMES R. SCHMANK, Vice President and Director President and Managing Member Representative, Security
Management Company, LLC; Senior Vice President, Security
Benefit Group, Inc. and Security Benefit Life Insurance
Company.
MARIA FIORINI RAMIREZ,* Director President and Chief Executive Officer, Maria Fiorini
One Liberty Plaza, 46th Floor Ramirez, Inc.
New York, New York 10006
MARK E. YOUNG, Vice President Vice President, Security Management Company, LLC; Assistant
Vice President, Security Benefit Group, Inc. and Security
Benefit Life Insurance Company.
JANE A. TEDDER, Vice President Vice President and Senior Economist, Security Management Company,
LLC; Vice President, Security Benefit Group, Inc.
AMY J. LEE, Secretary Secretary, Security Management Company, LLC; Vice
President, Associate General Counsel and Assistant
Secretary, Security Benefit Group, Inc. and Security
Benefit Life Insurance Company.
BRENDA M. HARWOOD, Treasurer Assistant Vice President and Treasurer, Security Management
Company, LLC; Assistant Vice President, Security Benefit
Group, Inc. and Security Benefit Life Insurance Company.
STEVEN M. BOWSER, Vice President Second Vice President and Portfolio Manager, Security
(Income Fund) Management Company, LLC; Second Vice President, Security
Benefit Group, Inc. and Security Benefit Life Insurance
Company. Prior to October 1992, Assistant Vice President
and Portfolio Manager, Federal Home Loan Bank.
THOMAS A. SWANK, Vice President Vice President and Portfolio Manager, Security Management
(Income Fund) Company, LLC; Vice President and Chief Investment Officer,
Security Benefit Group, Inc. and Security Benefit Life
Insurance Company.
BARBARA J. DAVISON, Vice President Compliance Officer, Assistant Vice President and Portfolio
(Cash Fund) Manager, Security Management Company, LLC; Assistant Vice
President, Security Benefit Group, Inc. and Security
Benefit Life Insurance Company. Prior to 1996, Assistant
Vice President-Operations, Security Benefit Life Insurance
Company.
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------- -------------------------------------------------------------
NAME, ADDRESS AND POSITIONS HELD WITH THE FUNDS PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- --------------------------------------------------------------- -------------------------------------------------------------
<S> <C>
DAVID ESHNAUR, Vice President Assistant Vice President and Portfolio Manager, Security
Management Company, LLC. Prior to July 1997, Assistant
Vice President and Assistant Portfolio Manager, Waddell &
Reed.
CHRISTOPHER D. SWICKARD, Assistant Secretary Assistant Secretary, Security Management Company, LLC;
Assistant Vice President and Assistant Counsel, Security
Benefit Group, Inc. and Security Benefit Life Insurance
Company. Prior to June 1992, student at Washburn
University School of Law.
- -----------------------------------------------------------------------------------------------------------------------------
*These directors are deemed to be "interested persons" of the Funds under the Investment Company Act of 1940, as amended.
**These directors serve on the Funds' audit committee, the purpose of which is to meet with the independent auditors, to
review the work of the auditors, and to oversee the handling by Security Management Company, LLC of the accounting
functions for the Funds.
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The officers of the Funds hold identical offices with each of the other Funds
managed by the Investment Manager, except Ms. Tedder who is also Vice President
of SBL Fund and Security Equity Fund; Mr. Schier who is also Assistant Vice
President of SBL Fund and Security Equity Fund; and Mr. Eshnaur, who is also
Assistant Vice President of SBL Fund. The directors of the Funds also serve as
directors of each of the other Funds managed by the Investment Manager. See the
table under "Investment Management," page 40, for positions held by such persons
with the Investment Manager. Mr. Young and Ms. Lee hold identical offices for
the Distributor (Security Distributors, Inc.). Messrs. Cleland and Schmank are
also directors and Vice Presidents of the Distributor and Ms. Harwood is
Treasurer of the Distributor.
REMUNERATION OF DIRECTORS AND OTHERS
The Funds' directors, except those directors who are "interested persons" of
the Funds, receive from each Fund an annual retainer of $1,667 and a fee of
$1,000 per meeting, plus reasonable travel costs, for each meeting of the board
attended. In addition, certain directors who are members of the Funds' joint
audit committee receive a fee of $1,000 and reasonable travel costs for each
meeting of the Funds' audit committee attended.
The Funds do not pay any fees to, or reimburse expenses of, their directors
who are considered "interested persons" of the Fund. The aggregate compensation
paid by the Fund to each of the directors during the fiscal year ended December
31, 1997, and the aggregate compensation paid to each of the directors during
calendar year 1997 by all seven of the registered investment companies to which
the Adviser provides investment advisory services (collectively, the "Security
Fund Complex"), are set forth in the accompanying chart. Each of the directors
is a director of each of the other registered investment companies in the
Security Fund Complex.
<TABLE>
<CAPTION>
PENSION OR RETIREMENT TOTAL
BENEFITS ACCRUED AS ESTIMATED COMPENSATION
AGGREGATE COMPENSATION PART OF FUND EXPENSES ANNUAL FROM THE SECURITY
NAME OF ---------------------------- ------------------------------- BENEFITS FUND COMPLEX,
DIRECTOR OF INCOME MUNICIPAL CASH INCOME MUNICIPAL CASH UPON INCLUDING THE
THE FUND FUND BOND FUND FUND FUND BOND FUND FUND RETIREMENT FUNDS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Willis A. Anton, Jr. $ $ $ $ 0 $ 0 $ 0 $ 0 $
Donald A. Chubb, Jr. 0 0 0 0
John D. Cleland 0 0 0 0 0 0 0 0
Donald L. Hardesty 0 0 0 0
Penny A. Lumpkin 0 0 0 0
Mark L. Morris, Jr. 0 0 0 0
Jeffrey B. Pantages 0 0 0 0 0 0 0 0
Harold G. Worswick* 0 0 0 0 0 0 0
Hugh L. Thompson 0 0 0 0
- ----------------------------------------------------------------------------------------------------------------------
*Each of the Security Income, Tax-Exempt and Cash Funds have accrued deferred compensation in the amount of $537 for
Mr. Worswick as of December 31, 1996.
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
On ____________________, 1998, the Funds' officers and directors (as a group)
beneficially owned _________; _________; _________; _________ and _________ of
Class A shares of Corporate Bond, Limited
31
<PAGE>
Maturity Bond, U.S. Government, High Yield and Municipal Bond Funds,
respectively, which represented approximately ______%, ______%, ______%, ______%
and ______% of the total outstanding Class A shares on that date. Cash Fund's
officers and directors (as a group) beneficially owned _________ shares which
represented approximately ______% of the total outstanding shares on
____________________, 1998.
HOW TO PURCHASE SHARES
As discussed below, shares of Corporate Bond, Limited Maturity Bond, U.S.
Government, High Yield and Municipal Bond Funds may be purchased with either a
front-end or contingent deferred sales charge. Shares of Cash Fund are offered
by the Fund without a sales charge. Each of the Funds reserves the right to
withdraw all or any part of the offering made by this prospectus and to reject
purchase orders.
As a convenience to investors and to save operating expenses, the Funds do
not issue certificates for Fund shares except upon written request by the
stockholder.
CORPORATE BOND, LIMITED MATURITY BOND, U.S. GOVERNMENT, HIGH YIELD AND MUNICIPAL
BOND FUNDS
Security Distributors, Inc. (the "Distributor"), 700 SW Harrison, Topeka,
Kansas, a wholly-owned subsidiary of Security Benefit Group, Inc., is principal
underwriter for Corporate Bond, Limited Maturity Bond, U.S. Government, High
Yield and Municipal Bond Funds. Investors may purchase shares of these Funds
through authorized dealers who are members of the National Association of
Securities Dealers, Inc. In addition, banks and other financial institutions may
make shares of the Funds available to their customers. (Banks and other
financial institutions that make shares of the Funds available to their
customers in Texas must be registered with that state as securities dealers.)
The minimum initial purchase must be $100 and subsequent purchases must be $100
unless made through an Accumulation Plan which allows a minimum initial purchase
of $100 and subsequent purchases of $20. (See "Accumulation Plan," page 38.) An
application may be obtained from the Distributor.
Orders for the purchase of shares of the Funds will be confirmed at an
offering price equal to the net asset value per share next determined after
receipt of the order in proper form by the Distributor (generally as of the
close of the Exchange on that day) plus the sales charge in the case of Class A
shares of the Funds. Orders received by dealers or other firms prior to the
close of the Exchange and received by the Distributor prior to the close of its
business day will be confirmed at the offering price effective as of the close
of the Exchange on that day. Dealers and other financial services firms are
obligated to transmit orders promptly.
ALTERNATIVE PURCHASE OPTIONS
Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield and
Municipal Bond Funds offer two classes of shares:
CLASS A SHARES - FRONT-END LOAD OPTION. Class A shares are sold with a sales
charge at the time of purchase. Class A shares are not subject to a sales charge
when they are redeemed (except that shares sold in an amount of $1,000,000 or
more without a front-end sales charge will be subject to a contingent deferred
sales charge of 1% for one year). See Appendix A for a discussion of "Rights of
Accumulation" and "Statement of Intention," which options may serve to reduce
the front-end sales charge.
CLASS B SHARES - BACK-END LOAD OPTION. Class B shares are sold without a
sales charge at the time of purchase, but are subject to a deferred sales charge
if they are redeemed within five years of the date of purchase. Class B shares
will automatically convert tax-free to Class A shares at the end of eight years
after purchase.
The decision as to which class is more beneficial to an investor depends on
the amount and intended length of the investment. Investors who would rather pay
the entire cost of distribution at the time of investment, rather than spreading
such cost over time, might consider Class A shares. Other investors might
consider Class B shares, in which case 100% of the purchase price is invested
immediately, depending on the amount of the purchase and the intended length of
investment. The Funds will not normally accept any purchase of Class B shares in
the amount of $250,000 or more.
Dealers or others may receive different levels of compensation depending on
which class of shares they sell.
32
<PAGE>
CLASS A SHARES
Class A shares of Corporate Bond, Limited Maturity Bond, U.S. Government,
High Yield and Municipal Bond Funds are offered at net asset value plus an
initial sales charge as follows:
- --------------------------------------------------------------------------------
SALES CHARGE
----------------------------------------------
APPLICABLE PERCENTAGE PERCENTAGE
AMOUNT OF PURCHASE PERCENTAGE OF OF NET AMOUNT REALLOWABLE
AT OFFERING PRICE OFFERING PRICE INVESTED TO DEALERS
- --------------------------------------------------------------------------------
Less than $50,000................. 4.75% 4.99% 4.00%
$50,000 but less than $100,000.... 3.75 3.90 3.00
$100,000 but less than $250,000... 2.75 2.83 2.20
$250,000 but less than $1,000,000. 1.75 1.78 1.40
$1,000,000 or more................ None None (See below)
- --------------------------------------------------------------------------------
Purchases of Class A shares of these Funds in amounts of $1,000,000 or more
are at net asset value (without a sales charge), but are subject to a contingent
deferred sales charge of 1% in the event of redemption within one year following
purchase. For a discussion of the contingent deferred sales charge, see
"Calculation and Waiver of Contingent Deferred Sales Charges" page 37. The
Distributor will pay a commission to dealers on purchases of $1,000,000 or more
as follows: 1.00% on sales up to $5,000,000, plus .50% on sales of $5,000,000 or
more up to $10,000,000, and .10% on any amount of $10,000,000 or more.
The Investment Manager may, at its expense, pay a service fee to dealers who
satisfy certain criteria established by the Investment Manager from time to time
relating to the volume of their sales of Class A shares of Municipal Bond Fund
and certain other Security Funds during prior periods and certain other factors,
including providing to their clients who are stockholders of the Funds certain
services, which include assisting in maintaining records, processing purchase
and redemption requests and establishing shareholder accounts, assisting
shareholders in changing account options or enrolling in specific plans, and
providing shareholders with information regarding the Funds and related
developments. Service fees are paid quarterly and may be discontinued at any
time.
SECURITY INCOME AND MUNICIPAL BOND FUNDS' CLASS A DISTRIBUTION PLANS
As discussed in the prospectus, each of Corporate Bond, Limited Maturity
Bond, U.S. Government, High Yield and Municipal Bond Funds has a Distribution
Plan for its Class A shares pursuant to Rule 12b-1 under the Investment Company
Act of 1940. Each Plan authorizes these Funds to pay an annual fee to the
Distributor of .25% of the average daily net asset value of the Class A shares
of each Fund to finance various activities relating to the distribution of such
shares of the Funds to investors. These expenses include, but are not limited
to, the payment of compensation (including compensation to securities dealers
and other financial institutions and organizations) to obtain various
administrative services for each Fund. These services include, among other
things, processing new shareholder account applications and serving as the
primary source of information to customers in answering questions concerning
each Fund and their transactions with the Fund. The Distributor is also
authorized to engage in advertising, the preparation and distribution of sales
literature and other promotional activities on behalf of each Fund. The
Distributor is required to report in writing to the Board of Directors of Income
Fund and the board will review at least quarterly the amounts and purpose of any
payments made under the Plan. The Distributor is also required to furnish the
board with such other information as may reasonably be requested in order to
enable the board to make an informed determination of whether the Plan should be
continued.
For Income Fund, the Plan became effective on August 15, 1985, and was
renewed by the directors of Income Fund on February 6, 1998, as to each of
Corporate Bond and U.S. Government Funds. The Plan was adopted with respect to
Limited Maturity Bond on October 21, 1994 and was renewed by the directors of
Income Fund on February 6, 1998. The Plan was adopted with respect to the High
Yield Fund on May 3, 1996, and renewed by the directors of Income Fund on
February 6, 1998. For Municipal Bond Fund, the Plan became effective on May 1,
1998. Each Plan will continue from year to year, provided that such continuance
is approved at least annually by a vote of a majority of the Board of Directors
of each Fund, including a majority of the independent directors cast in person
at a meeting called for the purpose of voting on such continuance. The Plan can
also be terminated at any time on 60 days' written notice, without penalty, if a
majority of the disinterested directors or the
33
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Class A shareholders vote to terminate the Plan. Any agreement relating to the
implementation of the Plan terminates automatically if it is assigned. The Plans
may not be amended to increase materially the amount of payments thereunder
without approval of the Class A shareholders of the Funds.
Because all amounts paid pursuant to the Distribution Plan are paid to the
Distributor, the Investment Manager and its officers, directors and employees,
including Messrs. Cleland and Schmank (directors of the Fund), Messrs. Young,
Schmank and Swickard, Ms. Tedder, Ms. Lee and Ms. Harwood (officers of the
Fund), all may be deemed to have a direct or indirect financial interest in the
operation of the Distribution Plan. None of the independent directors have a
direct or indirect financial interest in the operation of the Distribution Plan.
Benefits from the Distribution Plan may accrue to the Funds and their
stockholders from the growth in assets due to sales of shares to the public
pursuant to the Distribution Agreement with the Distributor. Increases in the
Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield and Municipal
Bond Funds' net assets from sales pursuant to its Distribution Plan and
Agreement may benefit shareholders by reducing per share expenses, permitting
increased investment flexibility and diversification of Corporate Bond, Limited
Maturity Bond, U.S. Government and High Yield Funds' assets, and facilitating
economies of scale (e.g., block purchases) in the Funds' securities
transactions.
Distribution fees paid by Class A stockholders of Corporate Bond, Limited
Maturity Bond, U.S. Government and High Yield Funds to the Distributor under the
Plan for the year ended December 31, 1997, totaled $________. In addition,
$_______ was carried forward from the previous plan year. Approximately
$________ of this amount was paid as a service fee to broker/dealers and
$_______ was spent on promotions, resulting in a deficit of $______ going into
the 1998 plan year. The amount spent on promotions consists primarily of amounts
reimbursed to dealers for expenses (primarily travel, meals and lodging)
incurred in connection with attendance by their representatives at educational
meetings concerning Corporate Bond and U.S. Government Funds. The Distributor
may engage the services of an affiliated advertising agency for advertising,
preparation of sales literature and other distribution-related activities.
CLASS B SHARES
Class B shares of Corporate Bond, Limited Maturity Bond, U.S. Government,
High Yield and Municipal Bond Funds are offered at net asset value, without an
initial sales charge. With certain exceptions, these Funds may impose a deferred
sales charge on shares redeemed within five years of the date of purchase. No
deferred sales charge is imposed on amounts redeemed thereafter. If imposed, the
deferred sales charge is deducted from the redemption proceeds otherwise payable
to the stockholder. The deferred sales charge is retained by the Distributor.
Whether a contingent deferred sales charge is imposed and the amount of the
charge will depend on the number of years since the stockholder made a purchase
payment from which an amount is being redeemed, according to the following
schedule:
YEAR SINCE PURCHASE PAYMENT WAS MADE CONTINGENT DEFERRED SALES CHARGE
------------------------------------ --------------------------------
First 5%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth and Following 0%
Class B shares (except shares purchased through the reinvestment of dividends
and other distributions with respect to Class B shares) will automatically
convert on the eighth anniversary of the date such shares were purchased to
Class A shares which are subject to a lower, or in the case of Municipal Bond
Fund, no distribution fee. This automatic conversion of Class B shares will take
place without imposition of a front-end sales charge or exchange fee.
(Conversion of Class B shares represented by stock certificates will require the
return of the stock certificates to the Investment Manager.) All shares
purchased through reinvestment of dividends and other distributions with respect
to Class B shares ("reinvestment shares") will be considered to be held in a
separate subaccount. Each time any Class B shares (other than those held in the
subaccount) convert to Class A shares, a pro rata portion of the reinvestment
shares held in the subaccount will also convert to Class A shares.
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<PAGE>
Class B shares so converted will no longer be subject to the higher expenses
borne by Class B shares. Because the net asset value per share of the Class A
shares may be higher or lower than that of the Class B shares at the time of
conversion, although the dollar value will be the same, a shareholder may
receive more or less Class A shares than the number of Class B shares converted.
Under current law, it is the Funds' opinion that such a conversion will not
constitute a taxable event under federal income tax law. In the event that this
ceases to be the case, the Board of Directors will consider what action, if any,
is appropriate and in the best interests of the Class B stockholders.
CLASS B DISTRIBUTION PLAN
Each of Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield
and Municipal Bond Funds bear some of the costs of selling its Class B shares
under a Distribution Plan adopted with respect to its Class B shares ("Class B
Distribution Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940 ("1940 Act"). This Plan was adopted by the Board of Directors of Corporate
Bond, U.S. Government and Municipal Bond Funds on July 23, 1993 and was renewed
on February 6, 1998. The Plan was adopted with respect to Limited Maturity Bond
Fund on October 21, 1994 and was renewed on February 6, 1998. The Plan was
adopted with respect to the High Yield Fund on May 3, 1996, and renewed by the
directors of Income Fund on February 6, 1998. The Plan provides for payments at
an annual rate of 1.00% of the average daily net asset value of Class B shares.
Amounts paid by the Funds are currently used to pay dealers and other firms that
make Class B shares available to their customers (1) a commission at the time of
purchase normally equal to 4.00% of the value of each share sold and (2) a
service fee payable for the first year, initially, and for each year thereafter,
quarterly, in an amount equal to .25% annually of the average daily net asset
value of Class B shares sold by such dealers and other firms and remaining
outstanding on the books of the Funds.
Rules of the National Association of Securities Dealers, Inc. ("NASD") limit
the aggregate amount that each Fund may pay annually in distribution costs for
the sale of its Class B shares to 6.25% of gross sales of Class B shares since
the inception of the Distribution Plan, plus interest at the prime rate plus 1%
on such amount (less any contingent deferred sales charges paid by Class B
shareholders to the Distributor). The Distributor intends, but is not obligated,
to continue to pay or accrue distribution charges incurred in connection with
the Class B Distribution Plan which exceed current annual payments permitted to
be received by the Distributor from the Funds. The Distributor intends to seek
full payment of such charges from the Fund (together with annual interest
thereon at the prime rate plus 1%) at such time in the future as, and to the
extent that, payment thereof by the Funds would be within permitted limits.
Each Fund's Class B Distribution Plan may be terminated at any time by vote
of its directors who are not interested persons of the Fund as defined in the
1940 Act or by vote of a majority of the outstanding Class B shares. In the
event the Class B Distribution Plan is terminated by the Class B stockholders or
the Funds' Board of Directors, the payments made to the Distributor pursuant to
the Plan up to that time would be retained by the Distributor. Any expenses
incurred by the Distributor in excess of those payments would be absorbed by the
Distributor. Distribution fees paid by Class B stockholders of Corporate Bond,
Limited Maturity Bond, U.S. Government, High Yield and Municipal Bond Funds to
the Distributor under the Plan for the year ended December 31, 1997, totaled
$_______. The Funds make no payments in connection with the sales of their Class
B shares other than the distribution fee paid to the Distributor.
CALCULATION AND WAIVER OF CONTINGENT DEFERRED SALES CHARGES
Any contingent deferred sales charge imposed upon redemption of Class A
shares (purchased in an amount of $1,000,000 or more) and Class B shares is a
percentage of the lesser of (1) the net asset value of the shares redeemed or
(2) the net cost of such shares. No contingent deferred sales charge is imposed
upon redemption of amounts derived from (1) increases in the value above the net
cost of such shares due to increases in the net asset value per share of the
Fund; (2) shares acquired through reinvestment of income dividends and capital
gain distributions; or (3) Class A shares (purchased in an amount of $1,000,000
or more) held for more than one year or Class B shares held for more than five
years. Upon request for redemption, shares not subject to the contingent
deferred sales charge will be redeemed first. Thereafter, shares held the
longest will be the first to be redeemed.
The contingent deferred sales charge is waived: (1) following the death of a
stockholder if redemption is made within one year after death, (2) upon the
disability (as defined in Section 72(m)(7) of the Internal Revenue Code) of
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<PAGE>
a stockholder prior to age 65 if redemption is made within one year after the
disability, provided such disability occurred after the stockholder opened the
account; (3) in connection with required minimum distributions in the case of an
IRA, SAR-SEP or Keogh or any other retirement plan qualified under Section
401(a), 401(k) or 403(b) of the Code; and (4) in the case of distributions from
retirement plans qualified under Section 401(a) or 401(k) of the Internal
Revenue Code due to (i) returns of excess contributions to the plan, (ii)
retirement of a participant in the plan, (iii) a loan from the plan (repayment
of loans, however, will constitute new sales for purposes of assessing the
CDSC), (iv) "financial hardship" of a participant in the plan, as that term is
defined in Treasury Regulation Section 1.401(k)-1(d)(2), as amended from time to
time, (v) termination of employment of a participant in the plan, (vi) any other
permissible withdrawal under the terms of the plan. The contingent deferred
sales charge will also be waived in the case of redemptions of shares of the
Funds pursuant to a Systematic Withdrawal Program (refer to page 38 for
details).
ARRANGEMENTS WITH BROKER/DEALERS AND OTHERS
The Investment Manager or Distributor, from time to time, will provide
promotional incentives or pay a bonus to certain dealers whose representatives
have sold or are expected to sell significant amounts of the Funds and/or
certain other Funds managed by the Investment Manager. Such promotional
incentives will include payment for attendance (including travel and lodging
expenses) by qualifying registered representatives (and members of their
families) to sales seminars at luxury resorts within or without the United
States. Bonus compensation may include reallowance of the entire sales charge
and may also include, with respect to Class A shares, an amount which exceeds
the entire sales charge and, with respect to Class B shares, an amount which
exceeds the maximum commission. The Distributor, or the Investment Manager, may
also provide financial assistance to certain dealers in connection with
conferences, sales or training programs for their employees, seminars for the
public, advertising, sales campaigns, and/or shareholder services and programs
regarding one or more of the funds managed by the Investment Manager. Certain of
the promotional incentives or bonuses may be financed by payments to the
Distributor under a Rule 12b-1 Distribution Plan. The payment of promotional
incentives and/or bonuses will not change the price an investor will pay for
shares or the amount that the Funds will receive from such sale. No compensation
will be offered to the extent it is prohibited by the laws of any state or
self-regulatory agency, such as the National Association of Securities Dealers,
Inc. ("NASD"). A Dealer to whom substantially the entire sales charge of Class A
shares is reallowed may be deemed to be an "underwriter" under federal
securities laws.
The Distributor also may pay banks and other financial services firms that
facilitate transactions in shares of the funds for their clients a transaction
fee up to the level of the payments made allowable to dealers for the sale of
such shares as described above. Banks currently are prohibited under the
Glass-Steagall Act from providing certain underwriting or distribution services.
If banking firms were prohibited from acting in any capacity or providing any of
the described services, the Fund's Board of Directors would consider what
action, if any, would be appropriate.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
The Investment Manager or Distributor also may pay a marketing allowance to
dealers who meet certain eligibility criteria. This allowance is paid with
reference to new sales of Fund shares (except shares of Cash Fund) in a calendar
year and may be discontinued at any time. To be eligible for this allowance in
any given year, the dealer must sell a minimum of $2,000,000 of Class A and
Class B shares during that year. The applicable marketing allowance factors are
set forth below.
- --------------------------------------------------------------------------------
APPLICABLE MARKETING
AGGREGATE NEW SALES ALLOWANCE FACTOR*
- --------------------------------------------------------------------------------
Less than $2 million................................... .00%
$2 million but less than $5 million.................... .15%
$5 million but less than $10 million................... .25%
$10 million but less than $15 million.................. .35%
$15 million but less than $20 million.................. .50%
$20 million or more.................................... .75%
- --------------------------------------------------------------------------------
*The maximum marketing allowance factor applicable per this schedule will be
applied to all new sales in the calendar year to determine the marketing
allowance payable for such year.
- --------------------------------------------------------------------------------
36
<PAGE>
For the calendar year ended December 31, 1996, the following dealers received
a marketing allowance:
----------------------------------------------------------------------
DEALER AMOUNT
----------------------------------------------------------------------
Legend Equities Corp.................................... $ 45,205
Investment Advisors & Consultants, Inc.................. 15,177
Financial Network Investment Corp....................... 13,538
VSR Financial Services, Inc............................. 6,281
Berthel Fisher & Company Financial Services, Inc........ 6,038
Hepfner Securities Corp................................. 5,827
OFG Financial Services, Inc............................. 4,086
Lincoln Investment Planning, Inc........................ 3,827
George K. Baum & Co., Inc............................... 3,799
---------
$103,779
----------------------------------------------------------------------
CASH FUND
Cash fund offers a single class of shares which is offered at net asset value
next determined after an order is accepted. There is no sales charge or load.
The minimum initial investment in Cash Fund is $100 for each account. Subsequent
investments may be made in any amount of $20 or more. Cash Fund purchases may be
made in any of the following ways:
1. BY MAIL.
(a) A check or negotiable bank draft should be sent to:
Security Cash Fund
P.O. Box 2548
Topeka, Kansas 66601-2548
(b) Make check or draft payable to "Security Cash Fund."
(c) For initial investment include a completed investment application found
at the back of the prospectus.
2. BY WIRE.
(a) Call the Fund to advise of the investment. The Fund will supply an
account number at the time of the initial investment and provide
instructions for having your bank wire federal funds.
(b) For an initial investment, you must also send a completed investment
application to the Fund.
3. THROUGH BROKER/DEALERS. Investors may, if they wish, invest in Cash Fund by
purchasing shares through registered broker/dealers. Such broker/dealers who
process orders on behalf of their customers may charge a fee for their
services. Investments made directly without the assistance of a
broker/dealer are without charge.
Since Cash Fund invests in money market securities which require immediate
payment in federal funds, monies received from the sales of its shares must be
monies held by a commercial bank and be on deposit at one of the Federal Reserve
Banks. A record date for each stockholder's investment is established each
business day and used to distribute the following day's dividend. If federal
funds are received prior to 2:00 p.m. (Central time) the investment will be made
on that day and the investor will receive the following day's dividend. Federal
funds received after 2:00 p.m. on any business day will not be invested until
the following business day. Cash Fund will not be responsible for any delays in
the wire transfer system. All checks are accepted subject to collection at full
face value in United States funds and must be drawn in United States dollars on
a United States bank.
PURCHASES AT NET ASSET VALUE
Class A shares of Corporate Bond, Limited Maturity Bond, U.S. Government,
High Yield and Municipal Bond Funds may be purchased at net asset value by (1)
directors, officers and employees of the Funds, the Funds' Investment Manager or
Distributor; directors, officers and employees of Security Benefit Life
Insurance Company and its subsidiaries; agents licensed with Security Benefit
Life Insurance Company; spouses or minor children of any such agents; as well as
the following relatives of any such directors, officers and employees (and their
spouses): spouses, grandparents, parents, children, grandchildren, siblings,
nieces and nephews; (2) any trust, pension, profit sharing or other benefit plan
established by any of the foregoing corporations for persons described above;
(3) retirement plans where third party administrators of such plans have entered
into certain arrangements with the Distributor or its affiliates provided that
no commission is paid to dealers; and (4) officers,
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<PAGE>
directors, partners or registered representatives (and their spouses and minor
children) of broker/dealers who have a selling agreement with the Distributor.
Such sales are made upon the written assurance of the purchaser that the
purchase is made for investment purposes and that the securities will not be
transferred or resold except through redemption or repurchase by or on behalf of
the Funds.
Life agents and associated personnel of broker/dealers must obtain a special
application from their employer or from the Distributor, in order to qualify for
such purchases.
Class A shares of Corporate Bond, Limited Maturity Bond, U.S. Government,
High Yield and Municipal Bond Funds may also be purchased at net asset value
when the purchase is made on the recommendation of (i) a registered investment
adviser, trustee or financial intermediary who has authority to make investment
decisions on behalf of the investor; or (ii) a certified financial planner or
registered broker-dealer who either charges periodic fees to its customers for
financial planning, investment advisory or asset management services, or
provides such services in connection with the establishment of an investment
account for which a comprehensive "wrap fee" is imposed. The Distributor must be
notified when a purchase is made that qualifies under this provision.
ACCUMULATION PLAN
Investors in Corporate Bond, Limited Maturity Bond, U.S. Government, High
Yield or Municipal Bond Fund may purchase shares on a periodic basis under an
Accumulation Plan which provides for an initial investment of $100 minimum, and
subsequent investments of $20 minimum at any time. An Accumulation Plan is a
voluntary program, involving no obligation to make periodic investments, and is
terminable at will. Payments are made by sending a check to the Distributor who
(acting as an agent for the dealer) will purchase whole and fractional shares of
the Funds as of the close of business on the day such payment is received. A
confirmation and statement of account will be sent to the investor following
each investment. Certificates for whole shares will be issued upon request. No
certificates will be issued for fractional shares which may be withdrawn only by
redemption for cash.
Investors may choose to use "Secur-O-Matic" (automatic bank draft) to make
their Fund purchases. There is no additional charge for using Secur-O-Matic. An
application may be obtained from the Funds.
SYSTEMATIC WITHDRAWAL PROGRAM
A Systematic Withdrawal Program may be established by stockholders who wish
to receive regular monthly, quarterly, semiannual or annual payments of $25 or
more. A Program may also be based upon the liquidation of a fixed or variable
number of shares provided that the minimum amount is withdrawn. However, the
Funds do not recommend this (or any other amount) as an appropriate withdrawal.
Shares with a current offering price of $5,000 or more must be deposited with
the Investment Manager acting as agent for the stockholder under the Program.
There is no service charge on the Program as the Investment Manager pays the
costs involved.
Sufficient shares will be liquidated at net asset value to meet the specified
withdrawals. Liquidation of shares may deplete or possibly use up the
investment, particularly in the event of a market decline. Payments cannot be
considered as actual yield or income since part of such payments is a return of
capital and may constitute a taxable event to the stockholder. The maintenance
of a Withdrawal Program concurrently with purchases of additional shares of
Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield or Municipal
Bond Fund would be disadvantageous because of the sales commission payable in
respect to such purchases. During the withdrawal period, no payments will be
accepted under an Accumulation Plan. Income dividends and capital gains
distributions are automatically reinvested at net asset value. If an investor
has an Accumulation Plan in effect, it must be terminated before a Systematic
Withdrawal Program may be initiated.
The stockholder receives confirmation of each transaction showing the source
of the payment and the share balance remaining in the Program. A Program may be
terminated on written notice by the stockholder or the Funds, and it will
terminate automatically if all shares are liquidated or withdrawn from the
account.
A stockholder may establish a Systematic Withdrawal Program with respect to
Class B shares without the imposition of any applicable contingent deferred
sales charge, provided that such withdrawals do not in any 12-month period,
beginning on the date the Program is established, exceed 10% of the value of the
account on that date ("Free Systematic Withdrawals"). Free Systematic
Withdrawals are not available if a Program established with respect to Class B
shares provides for withdrawals in excess of 10% of the value of the account in
any Program year and, as a result, all withdrawals under such a Program are
subject to any applicable contingent deferred sales charge. Free Systematic
Withdrawals will be made first by redeeming those shares that
38
<PAGE>
are not subject to the contingent deferred sales charge and then by redeeming
shares held the longest. The contingent deferred sales charge applicable to a
redemption of Class B shares requested while Free Systematic Withdrawals are
being made will be calculated as described under "Calculation and Waiver of
Contingent Deferred Sales Charges," page 35. A Systematic Withdrawal form may be
obtained from the Funds.
INVESTMENT MANAGEMENT
Security Management Company, LLC (the "Investment Manager"), 700 Harrison
Street, Topeka, Kansas, has served as investment adviser to Income Fund,
Municipal Bond Fund and Cash Fund, respectively, since September 14, 1970,
October 7, 1983 and June 23, 1980. The current Investment Advisory Contracts for
Income Fund, Municipal Bond Fund and Cash Fund, respectively, are dated March
27, 1987, October 7, 1983 and June 23, 1980, and were renewed by the Funds'
Board of Directors at a regular meeting held February 6, 1998. The Investment
Manager also acts as investment adviser to Security Equity Fund, Security Growth
and Income Fund, Security Ultra Fund and SBL Fund. The Investment Manager is a
limited liability company controlled by its members, Security Benefit Life
Insurance Company and Security Benefit Group, Inc. ("SBG"). SBG is an insurance
and financial services holding company wholly-owned by Security Benefit Life
Insurance Company, 700 Harrison Street, Topeka, Kansas 66636-0001. Security
Benefit Life, a life insurance company with over $7.4 billion of insurance in
force, is incorporated under the laws of Kansas.
Pursuant to the Investment Advisory Contracts, the Investment Manager
furnishes investment advisory, statistical and research services to the Funds,
supervises and arranges for the purchase and sale of securities on behalf of the
Funds, provides for the maintenance and compilation of records pertaining to the
investment advisory functions, and also makes certain guarantees with respect to
the Funds' annual expenses. The Investment Manager guarantees that the aggregate
annual expenses of the respective Funds (including for any fiscal year, the
management fee, but excluding interest, taxes, brokerage commissions,
extraordinary expenses and Class B distribution fees) shall not for Corporate
Bond, Limited Maturity Bond, U.S. Government and High Yield Funds exceed the
level of expenses which the 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 and shall not for Cash Fund exceed 1% of the Fund's average
net assets for the year. (The Investment Manager is not aware of any state that
currently imposes limits on the level of mutual fund expenses.) For Municipal
Bond Fund, the Investment Manager guarantees that the aggregate annual expenses
of the Fund (including for any fiscal year, the management fee, but excluding
interest, taxes extraordinary expenses, and Class A and Class B distribution
fees) shall not exceed 1% of the Fund's average net assets for the year. The
Investment Manager will contribute such funds or waive such portion of its
management fee as may be necessary to insure that the aggregate expenses of the
Funds will not exceed the guaranteed maximum.
The Investment Manager has engaged Salomon Brothers Asset Management Inc.
("Salomon Brothers"), 7 World Trade Center, New York, NY 10048, to provide
investment advisory services to the Municipal Bond Fund pursuant to a
Sub-Advisory Agreement, dated ___________. Pursuant to this agreement, Salomon
Brothers furnishes investment advisory, statistical and research facilities,
supervises and arranges for the purchase and sale of securities on behalf of
Municipal Bond Fund and provides for the compilation and maintenance of records
pertaining to such investment advisory services, subject to the control and
supervision of the Fund's Board of Directors and the Investment Manager. For
such services, the Investment Manager pays Salomon Brothers and amount equal to
.22% of the average net assets of Municipal Bond Fund, computed on a daily basis
and payable monthly. The Sub-Advisory Agreement may be terminated without
penalty at any time by either party on 60 days' written notice and is
automatically terminated in the event of its assignment or in the event that the
Investment Advisory Contract between the Investment Manager and the Fund is
terminated, assigned or not renewed.
Salomon Brothers is a wholly-owned subsidiary of Salomon Brothers Holding
Company, Inc., which is wholly-owned by Salomon Smith Barney Holdings, Inc.,
which is, in turn, wholly-owned by Travelers Group, Inc. Salomon Brothers was
incorporated in 1987 and together with Salomon Brothers affiliates in London,
Frankfurt, Tokyo and Hong Kong, provides a broad range of investment advisory
services to various individuals and institutional clients located throughout the
world and serves as investment adviser to various investment companies.
Currently Salomon Brothers and its affiliates manage approximately $26.6 billion
in assets.
For services provided to the Funds, the Investment Manager is entitled to
receive compensation on an annual basis equal to .5% of the average daily
closing value of the Corporate Bond, Limited Maturity Bond, U.S.
39
<PAGE>
Government, Municipal Bond and Cash Fund's net assets and .60% of the average
daily closing value of the High Yield Fund, each computed on a daily basis and
payable monthly. During the fiscal years ended December 31, 1997, 1996 and 1995,
the Funds paid the following amounts to the Investment Manager for its services:
1997 - $______; 1996 - $534,366; and 1995 - $549,076 for Income Fund; 1997 -
$______; 1996 - $120,946; and 1995 - $128,492 for Municipal Bond Fund; and 1997
- - $______; 1996 - $247,304; and 1995 - $254,139 for Cash Fund. For the years
ended December 31, 1997, 1996, 1995 , the Investment Manager agreed to limit the
total expenses (including its compensation, but excluding interest, taxes and
extraordinary expenses and Class B distribution fees) of Corporate Bond and U.S.
Government Funds to 1.1% of the average daily net assets of the respective
Funds. Accordingly, the Investment Manager reimbursed the U.S. Government Fund
in the following amounts: 1997 - $______; 1996 - $60,974; and 1995 - $16,803;
and Corporate Bond Fund: 1997 - $______; 1996 - $10,663; and 1995 - $15,121. For
the year ended December 31, 1997, the Investment Manager also agreed to limit
the total expenses (including its compensation, but excluding interest, taxes
and extraordinary expenses and Class B distribution fees) of High Yield Fund to
1.0% of the average daily net assets of the Fund. Accordingly, the Investment
Manager reimbursed the High Yield Fund the amount of $________. For the year
ended December 31, 1995, expenses incurred by Cash Fund exceeded 1% of the
average net assets and accordingly, the Investment Manager reimbursed Cash Fund
in the amount of $12,968. For the years ended December 31, 1997, 1996, and 1995,
expenses incurred by Municipal Bond Fund exceeded 1% of the average net assets
and accordingly, the Investment Manager reimbursed Municipal Bond Fund the
following amounts: 1997 - $______; 1996 - $2,358; and 1995 - $4,504. The
Investment Manager agreed to waive all of the management fees for the Limited
Maturity Bond Fund through July 1, 1995. In addition, the Investment Manager
agreed to waive the investment advisory fees of Limited Maturity Bond, U.S.
Government and High Yield Funds for the fiscal year ended December 31, 1997 and
1996.
Each Fund will pay all of its expenses not assumed by the Investment Manager
or the Distributor including organization expenses; directors' fees; fees and
expenses of custodian; taxes and governmental fees; interest charges; membership
dues; brokerage commissions; reports; proxy statements; costs of stockholder and
other meetings; Class B distribution fees; and legal, auditing and accounting
expenses. Each Fund will also pay for the preparation and distribution of the
prospectus to its stockholders and all expenses in connection with its
registration under federal and state securities laws. Each Fund will pay
nonrecurring expenses as may arise, including litigation affecting it.
The Investment Advisory Contracts between Security Management Company, LLC
and Income Fund, Municipal Bond Fund and Cash Fund, dated March 27, 1987,
October 7, 1983 and June 23, 1980, respectively, expire on April 1, 1999, May 1,
1999 and June 1, 1999. The contracts are renewable annually by the Funds' Board
of Directors or by a vote of a majority of a Fund's outstanding securities and,
in either event, by a majority of the board who are not parties to the contract
or interested persons of any such party. The contracts provide that they may be
terminated without penalty at any time by either party on 60 days' notice and
are automatically terminated in the event of assignment.
Pursuant to Administrative Services Agreements with the Funds dated April 1,
1987, the Investment Manager also acts as the administrative agent for the Funds
and as such performs administrative functions and the bookkeeping, accounting
and pricing functions for the Funds. For these services the Investment Manager
receives, on an annual basis, a fee of .09% of the average net assets of
Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield and Municipal
Bond Funds and .045% of the average net assets of Cash Fund, calculated daily
and payable monthly. During the fiscal years ended December 31, 1997, 1996, and
1995 , the Funds paid the following amounts for administrative services: 1997 -
$______; 1996 - $95,487; and 1995 - $98,667; for Income Fund; 1997 - $______;
1996 - $22,530; and 1995 - $23,129 for Municipal Bond Fund; and 1997 - $______;
1996 - $21,721; and 1995 - $22,898 for Cash Fund.
Under the Administrative Services Agreements identified above, the Investment
Manager also acts as the transfer agent for the Funds. As such, the Investment
Manager performs all shareholder servicing functions, including transferring
record ownership, processing purchase and redemption transactions, answering
inquiries, mailing stockholder communications and acting as the dividend
disbursing agent. For these services, the Investment Manager receives an annual
maintenance fee of $8.00 per account, a fee of $1.00 per shareholder
transaction, and a fee of $1.00 ($.50 for Cash Fund) per dividend transaction.
During the fiscal years ended December 31, 1997, 1996, and 1995, the Funds paid
the following amounts for transfer agency services: 1997 -
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$______; 1996 - $128,776; and 1995 - $127,227 for Income Fund; 1997 - $______;
1996 - $16,538; and 1995 - $16,716 for Municipal Bond Fund; and 1997 - $______;
1996 - $130,682; and 1995 - $152,798 for Cash Fund.
The total expenses of the Corporate Bond, Limited Maturity Bond, U.S.
Government, High Yield, Municipal Bond and Cash Funds for the fiscal year ended
December 31, 1997 were $_______; $_______; $_______; $_______; $_______; and
$_______; respectively. The expense ratio for fiscal year 1997 was ___% and
___%, respectively of the average net assets of Class A and B shares of the
Corporate Bond Fund and ___% and ___%, respectively, of the average net assets
of Class A and Class B shares of Limited Maturity Bond Fund. The expense ratio
for the fiscal year 1997 was ___% and ___%, respectively, of the net assets of
Class A and Class B shares of U.S. Government Fund; ___% and ___%, respectively,
of the net assets of Class A and Class B shares of High Yield Fund; ___% and
___%, respectively, of the net assets of Class A and Class B shares of Municipal
Bond Fund; and ___% of Cash Fund. The expense figures quoted are net of expense
reimbursements and by fees paid indirectly as a result of earnings credits
earned on overnight cash balances.
The following persons are affiliated with the Funds and also with the
Investment Manager in these capacities:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
NAME POSITIONS WITH THE FUNDS POSITIONS WITH SECURITY MANAGEMENT COMPANY, LLC
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
James R. Schmank Vice President and Director President and Managing Member Representative
John D. Cleland President and Director Senior Vice President and Managing Member Representative
Jane A. Tedder Vice President Vice President and Senior Economist
Mark E. Young Vice President Vice President
Amy J. Lee Secretary Secretary
Brenda M. Harwood Treasurer Assistant Vice President and Treasurer
Steven M. Bowser Vice President (Income Fund only) Second Vice President and Portfolio Manager
Thomas A. Swank Vice President (Income Fund only) Vice President and Portfolio Manager
Barbara J. Davison Vice President (Cash Fund only) Compliance Officer, Assistant Vice President and Portfolio Manager
David Eshnaur Vice President (Income Fund only) Assistant Vice President and Portfolio Manager
Christopher D. Swickard Assistant Secretary Assistant Secretary
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
PORTFOLIO MANAGEMENT
The Corporate Bond, Limited Maturity Bond, U.S. Government Bond, High Yield,
Municipal Bond and Cash Funds are managed by the Investment Manager's Fixed
Income Team with portfolio managers being responsible for the day-to-day
management of each particular Fund. Steve Bowser, Second Vice President and
Portfolio Manager of the Investment Manager, and David Eshnaur, Assistant Vice
President and Portfolio Manager of the Investment Manager, have day-to-day
responsibility for managing Corporate Bond and Limited Maturity Bond Funds. Mr.
Bowser has managed the Funds since June 1997 and Mr. Eshnaur has managed the
Funds since January 1998. Mr. Bowser also has had day-to-day responsibility for
managing U.S. Government Fund since 1995. Tom Swank and David Eshnaur have
day-to-day responsibility for managing the High Yield Fund. Mr. Swank has
managed the Fund since its inception in 1996 and Mr. Eshnaur has managed the
Fund since July 1997. Municipal Bond Fund is managed by Marybeth Whyte of
Salomon Brothers. She has had day-to-day responsibility for managing the Fund
since May 1998.
Mr. Bowser joined the Investment Manager in 1992 and has managed the U.S.
Government Fund since 1995. Prior to joining the Investment Manager, he was
Assistant Vice President and Portfolio Manager with the Federal Home Loan Bank
of Topeka from 1989 to 1992. He was employed at the Federal Reserve Bank of
Kansas City in 1988 and began his career with the Farm Credit System from 1982
to 1987, serving as a Senior Financial Analyst and Assistant Controller. He
graduated with a Bachelor of Science degree from Kansas State University in
1982.
David Eshnaur is Assistant Vice President and Portfolio Manager of the
Investment Manager. Mr. Eshnaur has 15 years of investment experience. Prior to
joining the Investment Manager in 1997, he worked at Waddell & Reed in the
positions of Assistant Vice President, Assistant Portfolio Manager, Senior
Analyst, Industry Analyst and Account Administrator. Mr. Eshnaur earned a
Bachelor of Arts degree in Business Administration from Coe College and an
M.B.A. degree in Finance from the University of Missouri - Kansas City.
Tom Swank, Portfolio Manager of the Investment Manager, has over ten years of
experience in the investment field. He is a Chartered Financial Analyst. Prior
to joining the Investment Manager in 1992, he was an Investment Underwriter and
Portfolio Manager for U.S. West Financial Services, Inc. from 1986 to 1992. From
1984 to 1986, he was a Commercial Credit Officer for United Bank of Denver. From
1982 to 1984, he was employed as a Bank Holding Company examiner for the Federal
Reserve Bank of Kansas City - Denver Branch. Mr. Swank graduated
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from Miami University in Ohio with a Bachelor of Science degree in finance in
1982 and earned a Master of Business Administration degree from the University
of Colorado.
Marybeth Whyte is a Senior Portfolio Manager at Salomon Brothers. Prior to
joining Salomon Brothers in 1994, Ms. Whyte was a Senior Vice President and head
of the Municipal Bond Area at Fiduciary Trust Company International, where her
responsibilities included actively managing and advising portfolios with assets
of approximately $1.3 billion. Ms. Whyte was a member of the Fixed Income
Investment Policy Committee at Fiduciary Trust Company International. Ms.
Whyte's previous experience includes managing high net worth individual
portfolios, mutual funds and pension funds while employed by U.S. Trust Company
and Bernstein-Macaulay Inc. Ms. Whyte received a Bachelor of Arts in Psychology
from S.U.N.Y Oneonta and an M.B.A. in Finance from Bernard M. Baruch College.
CODE OF ETHICS
The Funds, the Investment Manager and the Distributor have a written Code of
Ethics which requires all access persons to obtain prior clearance before
engaging in any personal securities transactions. Access persons include
officers and directors of the Funds and Investment Manager and employees that
participate in, or obtain information regarding, the purchase or sale of
securities by the Funds or whose job relates to the making of any
recommendations with respect to such purchases or sales. All access persons must
report their personal securities transactions within ten days of the end of each
calendar quarter. Access persons will not be permitted to effect transactions in
a security if it: (a) is being considered for purchase or sale by one or more of
the Funds; (b) is being purchased or sold by one or more of the Funds; or (c) is
being offered in an initial public offering. In addition, portfolio managers are
prohibited from purchasing or selling a security within seven calendar days
before or after a Fund that he or she manages trades in that security. Any
material violation of the Code of Ethics is reported to the Board of the Funds.
The Board also reviews the administration of the Code of Ethics on an annual
basis.
DISTRIBUTOR
Security Distributors, Inc. (the "Distributor"), a Kansas corporation and
wholly-owned subsidiary of Security Benefit Group, Inc., serves as the principal
underwriter for shares of Corporate Bond, Limited Maturity Bond, U.S.
Government, High Yield and Municipal Bond Funds pursuant to Distribution
Agreements dated March 27, 1984, as amended, and October 7, 1983, respectively.
The Distributor also acts as principal underwriter for the following investment
companies: Security Equity Fund, Security Growth and Income Fund, Security Ultra
Fund, Variflex Variable Annuity Account (Variflex), Variflex Variable Annuity
Account (Variflex Educator Series), SBL Variable Annuity Account VIII (Variflex
LS), SBL Variable Annuity Account VIII (Variflex Signature), the Parkstone
Variable Annuity Account and Security Varilife Separate Account.
The Distributor receives a maximum commission on Class A Shares of 4.75% and
allows a maximum discount of 4.0% from the offering price to authorized dealers
on Fund shares sold. The discount is alike for all dealers, but the Distributor
may increase it for specific periods at its discretion. Salespersons employed by
dealers may also be licensed to sell insurance with Security Benefit Life.
For the fiscal year ended December 31, 1997, the gross underwriting
commissions (Class A and B shares) received and the net underwriting commission
retained by the Distributor were as follows:
- -------------------------------------- --------------------------------------
GROSS NET
UNDERWRITING UNDERWRITING
FUND COMMISSIONS COMMISSIONS
- -------------------------------------- --------------------------------------
Corporate Bond Fund.................. $ $
Limited Maturity Bond Fund...........
U.S. Government Bond Fund............
High Yield Fund......................
Municipal Bond Fund..................
- -------------------------------------- --------------------------------------
The Distributor received gross underwriting commissions on sales of Class A
shares and contingent deferred sales charges on redemptions for Class B shares
of $132,788 for Income Fund and $42,066 for Municipal Bond Fund and retained net
underwriting commissions of $39,452 for Income Fund and $13,059 for Municipal
Bond Fund for the fiscal year ended December 31, 1996. The Distributor received
gross underwriting
42
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commissions on sales of Class A shares of $80,868 and $244,043 for Income Fund
and $20,691 and $64,008 for Municipal Bond Fund and retained net underwriting
commissions of $9,910 and $48,307 for Income Fund and $4,103 and $13,009 for
Municipal Bond Fund for the fiscal years ended December 31, 1995 and 1994,
respectively.
The Distributor, on behalf of the Funds, may act as a broker in the purchase
and sale of securities not effected on a securities exchange, provided that any
such transactions and any commissions shall comply with requirements of the
Investment Company Act of 1940 and all rules and regulations of the Securities
and Exchange Commission. The Distributor has not acted as a broker.
Each Fund's Distribution Agreement is renewable annually either by the Funds'
Board of Directors or by a vote of a majority of the Fund's outstanding
securities, and, in either event, by a majority of the board who are not parties
to the agreement or interested persons of any such party. The agreements may be
terminated by either party upon 60 days' written notice.
ALLOCATION OF PORTFOLIO BROKERAGE
Transactions in portfolio securities shall be effected in such manner as
deemed to be in the best interest of each respective Fund. In reaching a
judgment relative to the qualifications of a broker or dealer to obtain the best
execution of a particular transaction, all relevant factors and circumstances
will be taken into account by the Investment Manager, including consideration of
the overall reasonableness of commissions paid to a broker, the firm's general
execution and operational capabilities, and its reliability and financial
condition. The Funds do not anticipate that they will incur a significant amount
of brokerage commissions because fixed income securities are generally traded on
a "net" basis--that is, in principal amount without the addition or deduction of
a stated brokerage commission, although the net price usually includes a profit
to the dealer. The Funds will deal directly with the selling or purchasing
principal without incurring charges for the services of a broker on its behalf
unless it is determined that a better price or execution may be obtained by
utilizing the services of a broker. The Funds also may purchase portfolio
securities in underwritings where the price includes a fixed underwriter's
concession or discount. Money market instruments may be purchased directly from
the issuer at no commission or discount.
Portfolio transactions that require a broker may be directed to brokers who
furnish investment information or research services to the Investment Manager.
Such investment information and research services include advice as to the value
of securities, the advisability of investing in, purchasing or selling
securities and the availability of securities and purchasers or sellers of
securities, and furnishing analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy, and performance of
accounts. Such investment information and research services may be furnished by
brokers in many ways, including: (1) on-line data base systems, the equipment
for which is provided by the broker, that enable registrant to have real-time
access to market information, including quotations; (2) economic research
services, such as publications, chart services and advice from economists
concerning macroeconomic information; and (3) analytical investment information
concerning particular corporations. If a transaction is directed to a broker
supplying such information or services, the commission paid for such transaction
may be in excess of the commission another broker would have charged for
effecting that transaction, provided that the Investment Manager shall have
determined in good faith that the commission is reasonable in relation to the
value of the investment information or the research services provided, viewed in
terms of either that particular transaction or the overall responsibilities of
the Investment Manager with respect to all accounts as to which it exercises
investment discretion. The Investment Manager may use all, none, or some of such
information and services in providing investment advisory services to each of
the mutual funds under its management, including the Funds.
In addition, brokerage transactions may be placed with broker/dealers who
sell shares of the Funds managed by the Investment Manager who may or may not
also provide investment information and research services. The Investment
Manager may, consistent with the NASD Rules of Fair Practice, consider sales of
Fund shares in the selection of a broker/dealer.
Securities held by the Funds may also be held by other investment advisory
clients of the Investment Manager, including other investment companies. In
addition, the Investment Manager's parent company, Security Benefit Life
Insurance Company ("SBL"), may also hold some of the same securities as the
Funds. When selecting securities for purchase or sale for a Fund, the Investment
Manager may at the same time be purchasing or selling the same securities for
one or more of such other accounts. Subject to the Investment Manager's
obligation to seek best execution, such purchases or sales may be executed
simultaneously or "bunched." It is
43
<PAGE>
the policy of the Investment Manager not to favor one account over the other.
Any purchase or sale orders executed simultaneously (which may also include
orders from SBL) are allocated at the average price and as nearly as practicable
on a pro rata basis (transaction costs will also generally be shared on a pro
rata basis) in proportion to the amounts desired to be purchased or sold by each
account. In those instances where it is not practical to allocate purchase or
sale orders on a pro rata basis, then the allocation will be made on a rotating
or other equitable basis. While it is conceivable that in certain instances this
procedure could adversely affect the price or number of shares involved in the
Fund's transaction, it is believed that the procedure generally contributes to
better overall execution of the Funds' portfolio transactions. The Board of
Directors of the Funds has adopted guidelines governing this procedure and will
monitor the procedure to determine that the guidelines are being followed and
that the procedure continues to be in the best interest of the Fund and its
stockholders. With respect to the allocation of initial public offerings
("IPOs"), the Investment Manager may determine not to purchase such offerings
for certain of its clients (including investment company clients) due to the
limited number of shares typically available to the Investment Manager in an
IPO. No brokerage commissions were paid by the Funds for the years ended
December 31, 1997, 1996, and 1995.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Fund is determined as of the close of
regular trading hours on the New York Stock Exchange (normally 3:00 p.m. Central
time) on each day that the Exchange is open for trading, which is Monday through
Friday except for the following dates when the Exchange is closed in observance
of Federal holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, July Fourth, Labor Day, Thanksgiving Day and
Christmas Day. The determination is made by dividing the total value of the
portfolio securities of each Fund, plus any cash or other assets (including
dividends accrued but not collected), less all liabilities, by the number of
shares outstanding of the Fund.
Securities listed or traded on a national securities exchange are valued at
the last sale price. If there are no sales on a particular day, then the
securities are valued at the last bid price. All other securities, held by
Corporate Bond, Limited Maturity Bond, U.S. Government and High Yield Funds, for
which market quotations are readily available, are valued on the basis of the
last current bid price. If there is no bid price, or if the bid price is deemed
to be unsatisfactory by the Board of Directors, then the securities shall be
valued in good faith by such method as the Board of Directors determines will
reflect fair market value. Valuations of the Funds' securities are supplied by a
pricing service approved by the Board of Directors.
U.S. Government Fund will generally value securities at market value, if
available. If market value is not available, the Fund will value securities,
other than securities with 60 days or less to maturity as discussed below, at
prices based on market quotations for securities of similar type, yield, quality
and duration.
Valuations furnished by the pricing service with respect to Municipal Bond
Fund's municipal securities are based upon appraisals from recognized municipal
securities dealers derived from information concerning market transactions and
quotations. Securities for which market quotations are readily available are
valued at the last reported sale price, or, if no sales are reported on that
day, at the mean between the latest available bid and asked prices. Securities
for which market quotations are not readily available (which are expected to
constitute the majority of Municipal Bond Fund's portfolio securities) are
valued at the best available current bid price by the pricing service,
considering such factors as yields or prices of municipal bonds of comparable
quality, type of issue, coupon, maturity and rating, indications as to value
from dealers, and general market conditions. The Fund's officers, under the
general supervision of the Board of Directors, will regularly review procedures
used by, and valuations provided by, the pricing service. Municipal Bond Fund's
taxable short-term securities for which market quotations are readily available
will be valued at market value, which is the last reported sale price or, if no
sales are reported on that day, at the mean between the latest available bid and
asked prices except that securities having 60 days or less remaining to maturity
may be valued at their amortized cost as discussed below.
Cash Fund's securities are valued by the amortized cost valuation technique
which does not take into consideration unrealized gains or losses. The amortized
cost valuation technique involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price Cash Fund would receive if it sold the
instrument.
44
<PAGE>
During periods of declining interest rates, the daily yield on shares of Cash
Fund computed as described above may tend to be higher than a like computation
made by a fund with identical investments utilizing a method of valuation based
upon market prices and estimates of market prices for all of its portfolio
instruments. Thus, if the use of amortized cost by Cash Fund resulted in lower
aggregate portfolio value on a particular day, a prospective investor in the
Fund would be able to obtain a somewhat higher yield than would result from
investment in a fund utilizing solely market values and existing investors in
Cash Fund would receive less investment income. The converse would apply in a
period of rising interest rates.
The use of amortized cost and the maintenance of Cash Fund's per share net
asset value at $1.00 is based on its election to operate under the provisions of
Rule 2a-7 under the Investment Company Act of 1940. As a condition of operating
under that rule, the Fund must maintain a dollar-weighted average portfolio
maturity of 90 days or less, purchase only instruments having remaining
maturities of thirteen months or less, and invest only in securities which are
determined by the Board of Directors to present minimal credit risks and which
are of high quality as determined by any major rating service, or in the case of
any instrument not so rated, considered by the Board of Directors to be of
comparable quality.
The Board of Directors has established procedures designed to maintain Cash
Fund's price per share, as computed for the purpose of sales and redemptions, at
$1.00. These procedures include a review of the Fund's holdings by the Board of
Directors at such intervals as they deem appropriate to determine whether the
Fund's net asset value calculated by using available market quotations deviates
from $1.00 per share based on amortized cost. If any deviation exceeds 1/2 of
1%, the Board of Directors will promptly consider what action, if any, will be
initiated. In the event the Board of Directors determines that a deviation
exists which may result in material dilution or other unfair results to
investors or existing shareholders, they have agreed to take such corrective
action as they regard as necessary and appropriate, including the sale of Cash
Fund instruments prior to maturity to shorten average Fund maturity or
withholding dividends. Cash Fund will use its best efforts to maintain a
constant net asset value per share of $1.00. See "Security Cash Fund," page 12,
and "Dividends and Taxes," page 48. Since dividends from net investment income
will be accrued daily and paid monthly, the net asset value per share of Cash
Fund will ordinarily remain at $1.00, but the Fund's daily dividends will vary
in amount.
U.S. Government Fund and Municipal Bond Fund may use the amortized cost
valuation technique utilized by Cash Fund for securities with maturities of 60
days or less. In addition, U.S. Government and Municipal Bond Funds may use a
similar procedure for securities having 60 days or less remaining to maturity
with the value of the security on the 61st day being used rather than the cost.
The Funds will accept orders from dealers on each business day up to 4:30
p.m. (Central time).
HOW TO REDEEM SHARES
A stockholder may redeem shares at the net asset value next determined after
such shares are tendered for redemption. The amount received may be more or less
than the investor's cost, depending upon the market value of the portfolio
securities at the time of redemption.
Shares will be redeemed on request of the stockholder in proper order to the
Investment Manager, which serves as the Funds' transfer agent. A request is made
in proper order by submitting the following items to the Investment Manager: (1)
a written request for redemption signed by all registered owners exactly as the
account is registered, including fiduciary titles, if any, and specifying the
account number and the dollar amount or number of shares to be redeemed; (2) a
guarantee of all signatures on the written request or on the share certificate
or accompanying stock power; (3) any share certificates issued for any of the
shares to be redeemed; and (4) any additional documents which may be required by
the Investment Manager for redemption by corporations or other organizations,
executors, administrators, trustees, custodians or the like. Transfers of share
ownership are subject to the same requirements. A signature guarantee is not
required for redemptions of $10,000 or less, requested by and payable to all
stockholders of record for an account, to be sent to the address of record. The
signature guarantee must be provided by an eligible guarantor institution, such
as a bank, broker, credit union, national securities exchange or savings
association. The Investment Manager reserves the right to reject any signature
guarantee pursuant to its written procedures which may be revised in the future.
To avoid delay in redemption or transfer, stockholders having questions should
contact the Investment Manager.
The amount due on redemption, will be the net asset value of the shares next
computed after the redemption request in proper order is received by the
Investment Manager less any applicable deferred sales charge. In addition,
stockholders of Cash Fund will receive any undistributed dividends, including
any dividend declared on
45
<PAGE>
the day of the redemption. Payment of the redemption price will be made by check
(or by wire at the sole discretion of the Investment Manager if wire transfer is
requested, including name and address of the bank and the stockholder's account
number to which payment is to be wired) within seven days after receipt of the
redemption request in proper order. The check will be mailed to the
stockholder's registered address (or as otherwise directed). Remittance by wire
(to a commercial bank account in the same name(s) as the shares are registered)
or by express mail, if requested, will be at a charge of $15, which will be
deducted from the redemption proceeds.
Cash Fund offers redemption by check. If blank checks are requested on the
Check Writing Request form, the Fund will make a supply available. Checks for
the Cash Fund may be drawn payable to the order of any payee (not to cash) in
any amount of $100 or more. Checks may be cashed or deposited like any other
check drawn on a bank. When a check is presented to the Fund for payment, it
will redeem sufficient full and fractional shares to cover the check. Such
shares will be redeemed at the price next calculated following receipt of any
check which does not exceed the value of the account. The price of Cash Fund
shares may fluctuate from day-to-day and the price at the time of redemption, by
check or otherwise, may be less than the amount invested. Any check presented
for payment which is more than the value of the account will be returned without
payment, marked "Insufficient Funds." Each new stockholder will initially
receive twelve checks free of charge and such additional checks as may be
required. Since the amount available for withdrawal fluctuates daily, it is not
practical for a stockholder to attempt to withdraw the entire investment by
check. The Fund reserves the right to terminate this service at any time with
respect to existing as well as future stockholders. Redemption by check is not
available if any shares are held in certificate form or if shares being redeemed
have not been on the Fund's books for at least 15 days.
When investing in the Funds, stockholders are required to furnish their tax
identification number and to state whether or not they are subject to
withholding for prior underreporting, certified under penalties of perjury as
prescribed by the Internal Revenue Code. To the extent permitted by law, the
redemption proceeds of stockholders who fail to furnish this information will be
reduced by $50 to reimburse for the IRS penalty imposed for failure to report
the tax identification number on information reports.
Payment in cash of the amount due on redemption, less any applicable deferred
sales charge, for shares redeemed will be made within seven days after tender,
except that the Funds may suspend the right of redemption during any period when
trading on the New York Stock Exchange is restricted or such Exchange is closed
for other than weekends or holidays, or any emergency is deemed to exist by the
Securities and Exchange Commission. When a redemption request is received, the
redemption proceeds are deposited into a redemption account established by the
Distributor and the Distributor sends a check in the amount of redemption
proceeds to the stockholder. The Distributor earns interest on the amounts
maintained in the redemption account. Conversely, the Distributor causes
payments to be made to the Funds in the case of orders for purchase of Fund
shares before it actually receives federal funds.
In addition to the foregoing redemption procedure, the Funds repurchase
shares from broker/dealers at the price determined as of the close of business
on the day such offer is confirmed. Dealers may charge a commission on the
repurchase of shares.
The repurchase or redemption of shares held in a tax-qualified retirement
plan must be effected through the trustee of the plan and may result in adverse
tax consequences. (See "Retirement Plans," page 59.)
At various times the Funds may be requested to redeem shares for which they
have not yet received good payment. Accordingly, the Funds may delay the mailing
of a redemption check until such time as they have assured themselves that good
payment (e.g., cash or certified check on a U.S. bank) has been collected for
the purchase of such shares, which may take up to 15 days from the purchase
date.
Municipal Bond Fund's Articles of Incorporation provide that, in order to
minimize expenses, the Fund may, pursuant to a resolution of the Board of
Directors, adopt a procedure whereby it would redeem stockholder accounts in
which there are fewer than 50 shares (or such lesser amount as the board
determines) after having given the stockholders at least 60 days' written notice
and an opportunity to increase the account to at least 50 shares. This procedure
can be implemented only after six months' prior notice to all stockholders that
the procedure will be put into effect. The Board of Directors has no present
plan to implement an involuntary redemption procedure.
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TELEPHONE REDEMPTIONS
Stockholders of the Funds may redeem uncertificated shares in amounts up to
$10,000 by telephone request, provided that the stockholder has completed the
Telephone Redemption section of the application or a Telephone Redemption form
which may be obtained from the Investment Manager. The proceeds of a telephone
redemption will be sent to the stockholder at his or her address as set forth in
the application or in a subsequent written authorization. Once authorization has
been received by the Investment Manager, a stockholder may redeem shares by
calling the Funds at (800) 888-2461, extension 3127, on weekdays (except
holidays) between the hours of 7:00 a.m. and 6:00 p.m. Central time. Redemption
requests received by telephone after the close of the New York Stock Exchange
(normally 3:00 p.m. Central time) will be treated as if received on the next
business day. Telephone redemptions are not accepted for IRA and 403(b)(7)
accounts. A stockholder who authorizes telephone redemptions authorizes the
Investment Manager to act upon the instructions of any person identifying
themselves as the owner of the account or the owner's broker. The Investment
Manager has established procedures to confirm that instructions communicated by
telephone are genuine and will be liable for any losses due to fraudulent or
unauthorized instructions if it fails to comply with its procedures. The
Investment Manager's procedures require that any person requesting a redemption
by telephone provide the account registration and number, the owner's tax
identification number, and the dollar amount or number of shares to be redeemed,
and such instructions must be received on a recorded line. Neither the Fund, the
Investment Manager, nor the Distributor will be liable for any loss, liability,
cost or expense arising out of any redemption request provided that the
Investment Manager complied with its procedures. Thus, a stockholder who
authorizes telephone redemptions may bear the risk of loss from a fraudulent or
unauthorized request. The telephone redemption privilege may be changed or
discontinued at any time by the Investment Manager or the Funds.
During periods of severe market or economic conditions, telephone redemptions
may be difficult to implement and stockholders should make redemptions by mail
as described under "How to Redeem Shares," page 45.
HOW TO EXCHANGE SHARES
Pursuant to arrangements with the Distributor, stockholders of the Funds may
exchange their shares for shares of another of the Funds, or for shares of the
other mutual funds distributed by the Distributor, which currently include
Security Equity, Growth and Income, Global, Ultra, Asset Allocation, Social
Awareness, Emerging Markets Total Return, Global Asset Allocation and Global
High Yield Funds. Such transactions generally have the same tax consequences as
ordinary sales and purchases and are not tax-free exchanges.
Class A and Class B shares of the Funds may be exchanged for Class A and
Class B shares, respectively, of another of the funds distributed by the
Distributor or for shares of Cash Fund, which offers a single class of shares.
Any applicable contingent deferred sales charge will be calculated from the date
of the initial purchase without regard to the time shares were held in Cash
Fund.
Because Cash Fund does not impose a sales charge in connection with sales of
its shares, any exchange of Cash Fund shares acquired through direct purchase or
reinvestment of dividends will be based upon the respective net asset values of
the shares involved next determined after the exchange is accepted, and a sales
charge will be imposed equal to the sales charge that would be applicable if the
stockholder were purchasing shares of the other Fund involved for cash. The
amount of such sales charge will be paid by Cash Fund on behalf of the
exchanging stockholder directly to the Distributor and the net asset value of
the shares being exchanged will be reduced by a like amount.
Stockholders making such exchanges must provide the Investment Manager with
sufficient information to permit verification of their prior ownership of shares
of one of the other Security Funds. Shares of Cash Fund begin earning dividends
on the day after the date an exchange into such shares is effected. Any such
exchange is subject to the minimum investment and eligibility requirements of
each Fund. No service fee is presently imposed on such an exchange.
Exchanges may be accomplished by submitting a written request to the
Investment Manager, 700 Harrison Street, Topeka, Kansas 66636-0001.
Broker/dealers who process exchange orders on behalf of their customers may
charge a fee for their services. Such fee would be in addition to any of the
sales or other charges referred to above but may be avoided by making exchange
requests directly to the Investment Manager. Due to the high cost of exchange
activity and the maintenance of accounts having a net value of less than $100,
Cash Fund reserves
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the right to totally convert the account if at any time an exchange request
results in an account being lowered below the $100 minimum.
An exchange of shares, as described above, may result in the realization of a
capital gain or loss for federal income tax purposes, depending on the cost or
other value of the shares exchanged. No representation is made as to whether
gain or loss would result from any particular exchange or as to the manner of
determining the amount of gain or loss. (See "Dividends and Taxes," page 48.)
Before effecting any exchange described herein, the investor may wish to seek
the advice of a financial or tax adviser.
Exchanges of shares of the Funds may be made only in jurisdictions where
shares of the fund being acquired may lawfully be sold. More complete
information about the other Security Funds, including charges and expenses, are
contained in the current prospectus describing each Fund. Stockholders are
advised to obtain and review carefully, the applicable prospectus prior to
effecting any exchange. A copy of such prospectus will be given any requesting
stockholder by the Distributor.
The exchange privilege may be changed or discontinued any time at the
discretion of the management of the Funds upon 60 days' notice to stockholders.
It is contemplated, however, that this privilege will be extended in the absence
of objection by regulatory authorities and provided that shares of the various
funds are available and may be lawfully sold in the jurisdiction in which the
stockholder resides.
EXCHANGE BY TELEPHONE
To exchange shares by telephone, a stockholder must have completed either the
Telephone Exchange section of the application or a Telephone Transfer
Authorization form which may be obtained from the Investment Manager.
Authorization must be on file with the Investment Manager before exchanges may
be made by telephone. Once authorization has been received by the Investment
Manager, a stockholder may exchange shares by telephone by calling the Funds at
(800) 888-2461, extension 3127, on weekdays (except holidays) between the hours
of 7:00 a.m. and 6:00 p.m. Central time. Exchange requests received by telephone
after the close of the New York Stock Exchange (normally 3:00 p.m. Central time)
will be treated as if received on the next business day. Shares which are held
in certificate form may not be exchanged by telephone. The telephone exchange
privilege is only permitted between accounts with identical registration. The
Investment Manager has established procedures to confirm that instructions
communicated by telephone are genuine and will be liable for any losses due to
fraudulent or unauthorized instructions, if it fails to comply with its
procedures. The Investment Manager's procedures require that any person
requesting an exchange by telephone provide the account registration and number,
the tax identification number, the dollar amount or number of shares to be
exchanged, and the names of the Security Funds from which and into which the
exchange is to be made, and such instructions must be received on a recorded
line. Neither the Funds, the Investment Manager, nor the Distributor will be
liable for any loss, liability, cost or expense arising out of any request,
including any fraudulent request provided the Investment Manager complied with
its procedures. Thus, a stockholder who authorizes telephone exchanges may bear
the risk of loss from a fraudulent or unauthorized request. This telephone
exchange privilege may be changed or discontinued at any time at the discretion
of the management of the Funds. In particular, the Funds may set limits on the
amount and frequency of such exchanges, in general or as to any individual who
abuses such privilege.
DIVIDENDS AND TAXES
The following summarizes certain federal income tax considerations generally
affecting the Funds and their stockholders. No attempt is made to present a
detailed explanation of the tax treatment of the Funds or their stockholders,
and the discussion here is not intended as a substitute for careful tax
planning. The discussion is based upon present provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the regulations promulgated
thereunder, and judicial and administrative ruling authorities, all of which are
subject to change, which change may be retroactive. Prospective investors should
consult their own tax advisors with regard to the federal tax consequences of
the purchase ownership, and disposition of Fund shares, as well as the tax
consequences arising under the laws of any state, foreign country, or other
taxing jurisdiction.
Each Fund intends to qualify annually and to elect to be treated as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"). To qualify as a regulated investment company, each Fund must,
among other things: (i) derive in each taxable year at least 90% of its gross
income from dividends, interest, payments with respect to certain securities
loans, and gains from the sale or other disposition of stock,
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securities or foreign currencies, or other income derived with respect to its
business of investing in such stock, securities, or currencies ("Qualifying
Income Test"); (ii) diversify its holdings so that, at the end of each quarter
of the taxable year, (a) at least 50% of the market value of the Fund's assets
is represented by cash, cash items, U.S. Government securities, the securities
of other regulated investment companies, and other securities, with such other
securities of any one issuer limited for the purposes of this calculation to an
amount not greater than 5% of the value of the Fund's total assets and 10% of
the outstanding voting securities of such issuer, and (b) not more than 25% of
the value of its total assets is invested in the securities of any one issuer
(other than U.S. Government securities or the securities of other regulated
investment companies), or of two or more issuers which the Fund controls (as
that term is defined in the relevant provisions of the Code) and which are
determined to be engaged in the same or similar trades or businesses or related
trades or businesses; and (iii) distribute at least 90% of the sum of its
investment company taxable income (which includes, among other items, dividends,
interest, and net short-term capital gains in excess of any net long-term
capital losses) and its net tax-exempt interest each taxable year. The Treasury
Department is authorized to promulgate regulations under which foreign currency
gains would constitute qualifying income for purposes of the Qualifying Income
Test only if such gains are directly related to investing in securities (or
options and futures with respect to securities). To date, no such regulations
have been issued.
A Fund qualifying as a regulated investment company generally will not be
subject to U.S. federal income tax on its investment company taxable income and
net capital gains (any net long-term capital gains in excess of the net
short-term capital losses), if any, that it distributes to shareholders. Each
Fund intends to distribute to its stockholders, at least annually, substantially
all of its investment company taxable income and any net capital gains.
Generally, regulated investment companies, like the Funds, must distribute
amounts on a timely basis in accordance with a calendar year distribution
requirement in order to avoid a nondeductible 4% excise tax. Generally, to avoid
the tax, a regulated investment company must distribute during each calendar
year, (i) at least 98% of its ordinary income (not taking into account any
capital gains or losses) for the calendar year, (ii) at least 98% of its capital
gains in excess of its capital losses (adjusted for certain ordinary losses) for
the 12-month period ending on October 31 of the calendar year, and (iii) all
ordinary income and capital gains for previous years that were not distributed
during such years. To avoid application of the excise tax, each Fund intends to
make its distributions in accordance with the calendar year distribution
requirement. A distribution, including an "exempt-interest dividend," will be
treated as paid on December 31 of the calendar year if it is declared by a Fund
in October, November or December of that year to shareholders of record on a
date in such a month and paid by the Fund during January of the following
calendar year. Such distributions are taxable to shareholders in the calendar
year in which the distributions are declared, rather than the calendar year in
which the distributions are received.
If, as a result of exchange controls or other foreign laws or restrictions
regarding repatriation of capital, a Fund were unable to distribute an amount
equal to substantially all of its investment company taxable income (as
determined for U.S. tax purposes) within applicable time periods, the Fund would
not qualify for the favorable federal income tax treatment afforded regulated
investment companies, or, even if it did so qualify, it might become liable for
federal taxes on undistributed income. In addition, the ability of a Fund to
obtain timely and accurate information relating to its investments is a
significant factor in complying with the requirements applicable to regulated
investment companies in making tax-related computations. Thus, if a Fund were
unable to obtain accurate information on a timely basis, it might be unable to
qualify as a regulated investment company, or its tax computations might be
subject to revisions (which could result in the imposition of taxes, interest
and penalties).
It is the policy of Corporate Bond, Limited Maturity Bond, U.S. Government,
High Yield and Municipal Bond Funds to pay dividends from net investment income
monthly. It is the policy of the Funds to make distributions of realized capital
gains (if any) in excess of any capital losses and capital loss carryovers at
least once a year. Because Class A shares of the Funds bear most of the costs of
distribution of such shares through payment of a front-end sales charge, while
Class B shares of the Funds bear such costs through a higher distribution fee,
expenses attributable to Class B shares, generally will be higher and as a
result, income distributions paid by the Funds with respect to Class B shares
generally will be lower than those paid with respect to Class A shares. All
dividends and distributions are automatically reinvested on the payable date in
shares of the Fund at net asset value, as of the record date (reduced by an
amount equal to the amount of the dividend or distribution), unless the
Investment Manager is previously notified in writing by the stockholder that
such dividends or distributions are to be received in cash. A stockholder may
request that such dividends or distributions be
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directly deposited to the stockholder's bank account. A stockholder who elected
not to reinvest dividends or distributions paid with respect to Class A shares
may, at any time within thirty days after the payment date, reinvest the
dividend check without imposition of a sales charge.
Cash Fund's policy is to declare daily dividends of all of its net investment
income each day the Fund is open for business, increased or decreased by any
realized capital gains or losses. Such dividends are automatically credited to
stockholder accounts. Unless stockholders elect to receive cash, they will
receive such dividends in additional shares on the first business day of each
month at the net asset value on that date. If cash is desired, investors may
indicate so in the appropriate section of the application and checks will be
mailed within five business days after the beginning of the month. The amount of
dividend may fluctuate from day to day. If on any day net realized or unrealized
losses on portfolio securities exceed Cash Fund's income for that day and
results in a decline of net asset value per share below $1.00, the dividend for
that day will be omitted until the net asset value per share subsequently
returns to $1.00 per share.
The Funds will not pay dividends or distributions of less than $25 in cash
but will automatically reinvest them. Distributions of net investment income and
any short-term capital gains by Income Fund or Cash Fund are taxable as ordinary
income whether received in cash or reinvested in additional shares. To the
extent that Municipal Bond Fund's dividends are derived from interest on its
temporary taxable investments or from an excess of net short-term capital gain
over net long-term capital loss, its dividends are taxable as ordinary income
whether received in cash or reinvested in additional shares. Such dividends do
not qualify for the dividends-received deduction for corporations.
Distributions of net capital gain, whether received in cash or reinvested in
Fund shares, will generally be taxable to shareholders as either "20% Gain" or
"28% Gain", depending upon the Fund's holding period for the assets sold. "20%
Gains" arise from sales of assets held by a Fund for more than 18 months and are
subject to a maximum tax rate of 20%; "28% Gains" arise from sales of assets
held by a Fund for more than one year but no more than 18 months and are subject
to a maximum tax rate of 28%. Net capital gains from assets held for one year or
less will be taxed as ordinary income. Distributions will be subject to these
capital gains rates regardless of how long a shareholder has held Fund shares.
Because Cash Fund normally will not invest in securities having a maturity of
more than one year, it should not realize any long-term capital gains or losses.
Advice as to the tax status of each year's dividends and distributions will be
mailed annually.
Municipal Bond Fund intends to qualify to pay "exempt-interest dividends" to
its stockholders. The Fund will be so qualified if, at the close of each quarter
of its taxable year, at least 50% of the value of its total assets consists of
securities on which the interest payments are exempt from federal tax. To the
extent that Municipal Bond Fund's dividends distributed to stockholders are
derived from earnings on interest income exempt from federal tax and are
designated as "exempt-interest dividends" by the Fund, they will be excludable
from a stockholder's gross income for federal income tax purposes. Municipal
Bond Fund will inform stockholders annually as to the portion of that year's
distributions from the Fund which constituted "exempt-interest dividends."
Federal tax law imposes an alternative minimum tax with respect to both
corporations and individuals based on certain items of tax preference. Interest
on certain municipal obligations, such as bonds issued to make loans for housing
purposes or to private entities (but not to certain tax-exempt organizations
such as universities and non-profit hospitals) is included as an item of tax
preference in determining the amount of a taxpayer's alternative minimum taxable
income. To the extent that the Fund receives income from municipal obligations
treated as a tax preference item for purposes of the alternative minimum tax, a
portion of the dividends paid by it, although otherwise exempt from federal
income tax, will be taxable to shareholders to the extent that their tax
liability will be determined under the alternative minimum tax. The Fund will
annually supply shareholders with a report indicating the percentage of Fund
income attributable to municipal obligations subject to the alternative minimum
tax. Additionally, taxpayers must disclose to the Internal Revenue Service on
their tax returns the entire amount of tax-exempt interest (including
exempt-interest dividends on shares of the Fund) received or accrued during the
year.
In addition, for corporations, the alternative minimum taxable income is
increased by a percentage of the amount by which an alternative measure of
income ("adjusted current earnings", referred to as "ACE") exceeds the amount
otherwise determined to be the alternative minimum taxable income. Interest on
all municipal obligations, and therefore all exempt-interest dividends paid by
the Fund, is included in calculating ACE. Taxpayers that may be subject to the
alternative minimum tax should consult their tax advisers before investing in
the Municipal Bond Fund.
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To the extent that Municipal Bond Fund's interest income is attributable to
private activity bonds, dividends allocable to such income, while exempt from
the regular federal income tax, may constitute an item of tax preference for
purposes of the alternative minimum tax. In addition, for corporate stockholders
of Municipal Bond Fund, exempt interest may comprise part or all of an
adjustment to alternative minimum taxable income.
Stockholders of the Funds who redeem their shares generally will realize gain
or loss upon the sale or redemption (including the exchange of shares for shares
of another fund) which will be capital gain or loss if the shares are capital
assets in the stockholder's hands, and will be taxable to stockholders as "20%
Gains" if the shares had been held for more than 18 months or as "28% Gains" if
the shares had been held for more than one year but no more than 18 months.
Investors should be aware that any loss realized upon the sale or redemption of
shares held for six months or less will be treated as a long-term capital loss
to the extent of any distribution of long-term capital gain to the stockholder
with respect to such shares. In addition, any loss realized on a sale or
exchange of shares will be disallowed to the extent the shares disposed of are
replaced within a period of 61 days, beginning 30 days before and ending 30 days
after the date the shares are disposed of, such as pursuant to the reinvestment
of dividends. In such case, the basis of the shares acquired will be adjusted to
reflect the disallowed loss.
Under certain circumstances, the sales charge incurred in acquiring Class A
shares of a Fund may not be taken into account in determining the gain or loss
on the disposition of those shares. This rule applies in circumstances when
shares of the Fund are exchanged within 90 days after the date they were
purchased and new shares in a regulated investment company are acquired without
a sales charge or at a reduced sales charge. In that case, the gain or loss
recognized on the exchange will be determined by excluding from the tax basis of
the shares exchanged all or a portion of the sales charge incurred in acquiring
those shares. This exclusion applies to the extent that the otherwise applicable
sales charge with respect to the newly acquired shares is reduced as a result of
having incurred the sales charge initially. Instead, the portion of the sales
charge affected by this rule will be treated as an amount paid for the new
shares.
Up to 85% of an individual's Social Security benefits and certain railroad
retirement benefits may be subject to federal income tax. Along with other
factors, total tax-exempt income, including any exempt-interest dividends
received from Municipal Bond Fund, is used to calculate the portion of Social
Security benefits that is taxed.
Under the Internal Revenue Code, a stockholder may not deduct all or a
portion of interest on indebtedness incurred or continued to purchase or carry
shares of an investment company paying exempt-interest dividends. In addition,
under rules issued by the Internal Revenue Service for determining when borrowed
funds are considered used for the purposes of purchasing or carrying particular
assets, the purchase of shares may be considered to have been made with borrowed
funds even though the borrowed funds are not directly traceable to the purchase
of shares.
A deductible "environmental tax" of 0.12% is imposed on a corporation's
modified alternative minimum taxable income in excess of $2 million. The
environmental tax will be imposed even if the corporation is not required to pay
an alternative minimum tax because the corporation's regular income tax
liability exceeds its minimum tax liability. To the extent that exempt-interest
dividends paid by Municipal Bond Fund are included in alternative minimum
taxable income, corporate stockholders may be subject to the environmental tax.
Opinions relating to the validity of municipal securities and the exemption
of interest thereon from federal income tax are rendered by bond counsel to the
issuer. Neither the Investment Manager nor Municipal Bond Fund's counsel makes
any review of proceedings relating to the issuance of municipal securities or
the bases of such opinions.
The Funds are required by law to withhold 31% of taxable dividends and
distributions to stockholders who do not furnish their correct taxpayer
identification numbers, or are otherwise subject to the backup withholding
provisions of the Internal Revenue Code.
Each of Corporate Bond Fund, Limited Maturity Bond Fund, U.S. Government Fund
and High Yield Fund (the Series of Income Fund) will be treated separately in
determining the amounts of income and capital gains distributions. For this
purpose, each Fund will reflect only the income and gains, net of losses of that
Fund.
A purchase of shares shortly before payment of a dividend or distribution
would be disadvantageous because the dividend or distribution to the purchaser
would have the effect of reducing the per share net asset value of his or her
shares by the amount of the dividends or distributions. In addition all or a
portion of such dividends or distributions, although in effect a return of
capital, are subject to taxes, which may be at ordinary income tax rates.
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OPTIONS, FUTURES AND FORWARD CONTRACTS AND SWAP AGREEMENTS. Certain options,
futures contracts, and forward contracts in which a Fund may invest may be
"Section 1256 contracts." Gains or losses on Section 1256 contracts generally
are considered 60% long-term and 40% short-term capital gains or losses;
however, foreign currency gains or losses arising from certain Section 1256
contracts may be treated as ordinary income or loss. Also, Section 1256
contracts held by a Fund at the end of each taxable year (and at certain other
times as prescribed pursuant to the Code) are "marked to market" with the result
that unrealized gains or losses are treated as though they were realized.
Generally, the hedging transactions undertaken by a Fund may result in
"straddles" for U.S. federal income tax purposes. The straddle rules may affect
the character of gains (or losses) realized by a Fund. In addition, losses
realized by a Fund on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which such losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences of transactions in options, futures, forward
contracts, swap agreements and other financial contracts to a Fund are not
entirely clear. The transactions may increase the amount of short-term capital
gain realized by a Fund which is taxed as ordinary income when distributed to
shareholders.
A Fund may make one or more of the elections available under the Code which
are applicable to straddles. If a Fund makes any of the elections, the amount,
character and timing of the recognition of gains or losses from the affected
straddle positions will be determined under rules that vary according to the
election(s) made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of gains
or losses, defer losses and/or accelerate the recognition of gains or losses
from the affected straddle positions, the amount which must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased as compared to a fund that
did not engage in such hedging transactions.
Because only a few regulations regarding the treatment of swap agreements,
and related caps, floors and collars, have been implemented, the tax
consequences of such transactions are not entirely clear. The Funds intend to
account for such transactions in a manner deemed by them to be appropriate, but
the Internal Revenue Service might not necessarily accept such treatment. If it
did not, the status of a Fund as a regulated investment company might be
affected.
The requirements applicable to a Fund's qualification as a regulated
investment company may limit the extent to which a Fund will be able to engage
in transactions in options, futures contracts, forward contracts, swap
agreements and other financial contracts.
MARKET DISCOUNT. If a Fund purchases a debt security at a price lower than
the stated redemption price of such debt security, the excess of the stated
redemption price over the purchase price is "market discount". If the amount of
market discount is more than a DE MINIMIS amount, a portion of such market
discount must be included as ordinary income (not capital gain) by the Fund in
each taxable year in which the Fund owns an interest in such debt security and
receives a principal payment on it. In particular, the Fund will be required to
allocate that principal payment first to the portion of the market discount on
the debt security that has accrued but has not previously been includable in
income. In general, the amount of market discount that must be included for each
period is equal to the lesser of (i) the amount of market discount accruing
during such period (plus any accrued market discount for prior periods not
previously taken into account) or (ii) the amount of the principal payment with
respect to such period. Generally, market discount accrues on a daily basis for
each day the debt security is held by a Fund at a constant rate over the time
remaining to the debt security's maturity or, at the election of the Fund, at a
constant yield to maturity which takes into account the semi-annual compounding
of interest. Gain realized on the disposition of a market discount obligation
must be recognized as ordinary interest income (not capital gain) to the extent
of the "accrued market discount."
ORIGINAL ISSUE DISCOUNT. Certain debt securities acquired by the Funds may be
treated as debt securities that were originally issued at a discount. Very
generally, original issue discount is defined as the difference between the
price at which a security was issued and its stated redemption price at
maturity. Although no cash income on account of such discount is actually
received by a Fund, original issue discount that accrues on a debt security in a
given year generally is treated for federal income tax purposes as interest and,
therefore, such income would be subject to the distribution requirements
applicable to regulated investment companies.
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Some debt securities may be purchased by the Funds at a discount that exceeds
the original issue discount on such debt securities, if any. This additional
discount represents market discount for federal income tax purposes (see above).
CONSTRUCTIVE SALES. Recently enacted rules may affect the timing and
character of gain if a Fund engages in transactions that reduce or eliminate its
risk of loss with respect to appreciated financial positions. If the Fund enters
into certain transactions in property while holding substantially identical
property, the Fund would be treated as if it had sold and immediately
repurchased the property and would be taxed on any gain (but no loss) from the
constructive sale. The character of gain from a constructive sale would depend
upon the Fund's holding period in the property. Loss from a constructive sale
would be recognized when the property was subsequently disposed of, and its
character would depend on the Fund's holding period and the application of
various loss deferral provisions of the Code.
FOREIGN TAXATION. Income received by a Fund from sources within a foreign
country may be subject to withholding and other taxes imposed by that country.
Tax conventions between certain countries and the U.S. may reduce or eliminate
such taxes.
The payment of such taxes will reduce the amount of dividends and
distributions paid to the Funds' stockholders. So long as a Fund qualifies as a
regulated investment company, certain distribution requirements are satisfied,
and more than 50% of such Fund's assets at the close of the taxable year
consists of securities of foreign corporation, the fund may elect, subject to
limitation, to pass through its foreign tax credits to its stockholders.
OTHER TAXES. The foregoing discussion is general in nature and is not
intended to provide an exhaustive presentation of the tax consequences of
investing in a Fund. Distributions may also be subject to additional state,
local and foreign taxes, depending on each shareholder's particular situation.
Depending upon the nature and extent of a Fund's contacts with a state or local
jurisdiction, the Fund may be subject to the tax laws of such jurisdiction if it
is regarded under applicable law as doing business in, or as having income
derived from, the jurisdiction. Persons who may be "substantial users" (or
"related persons" of substantial users) of facilities financed by private
activity bonds should consult their tax adviser before purchasing Municipal Bond
Fund shares. (See "Municipal Securities," page 10.) Shareholders are advised to
consult their own tax advisers with respect to the particular tax consequences
to them of an investment in a Fund.
ORGANIZATION
The Articles of Incorporation of Income and Municipal Bond Funds provide for
the issuance of shares of common stock in one or more classes or series and the
Articles of Cash Fund provide for the issuance of stock in one or more series.
Income Fund has authorized the issuance of an indefinite number of shares of
capital stock of $1.00 par value and currently issues its shares in seven
series, Corporate Bond Fund, Limited Maturity Bond Fund, U.S. Government Fund,
High Yield Fund, MFR Emerging Markets Total Return Fund, MFR Global Asset
Allocation Fund and MFR Global High Yield Fund (formerly Global Aggressive Bond
Fund). The shares of each Series of Income Fund represent a pro rata beneficial
interest in that Series' net assets and in the earnings and profits or losses
derived from the investment of such assets. Municipal Bond and Cash Funds have
not issued shares in any additional series at the present time. Municipal Bond
and Cash Funds have authorized the issuance of an indefinite number of shares of
capital stock of $0.10 par value.
Each of Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield
and Municipal Bond Funds currently issues two classes of shares which
participate proportionately based on their relative net asset values in
dividends and distributions and have equal voting, liquidation and other rights
except that (i) expenses related to the distribution of each class of shares or
other expenses that the Board of Directors may designate as class expenses from
time to time, are borne solely by each class; (ii) each class of shares has
exclusive voting rights with respect to any Distribution Plan adopted for that
class; (iii) each class has different exchange privileges; and (iv) each class
has a different designation. When issued and paid for, the shares of Corporate
Bond, Limited Maturity Bond, U.S. Government, High Yield, Municipal Bond and
Cash Funds will be fully paid and nonassessable by the Funds. Shares may be
exchanged as described above under "Exchange Privilege," but will have no other
preference, conversion, exchange or preemptive rights. Shares are transferable,
redeemable and assignable and have cumulative voting privileges for the election
of directors.
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On certain matters, such as the election of directors, all shares of the
Series of Income Fund vote together with each share having one vote. On other
matters affecting a particular Series, such as the investment advisory contract
or the fundamental policies, only shares of that Series are entitled to vote,
and a majority vote of the shares of that Series is required for approval of the
proposal.
The Funds do not generally hold annual meetings of stockholders and will do
so only when required by law. Stockholders may remove directors from office by
vote cast in person or by proxy at a meeting of stockholders. Such a meeting
will be called at the written request of 10% of a Fund's outstanding shares.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND-PAYING AGENT
UMB Bank, N.A., 928 Grand Avenue, Kansas City, Missouri 64106 acts as the
custodian for the portfolio securities of Corporate Bond Fund, Limited Maturity
Bond Fund, U.S. Government Fund, High Yield, Municipal Bond Fund and Cash Fund.
Security Management Company, LLC acts as the Funds' transfer and dividend-paying
agent.
INDEPENDENT AUDITORS
The firm of Ernst & Young LLP, One Kansas City Place, 1200 Main Street,
Kansas City, Missouri, has been selected by a majority of the independent
directors of each Fund to serve as the independent auditors of the Funds, and as
such, the firm will perform the annual audit of each Fund's financial
statements.
PERFORMANCE INFORMATION
The Funds may, from time to time, include performance information in
advertisements, sales literature or reports to stockholders or prospective
investors. Performance information in advertisements or sales literature may be
expressed as yield for each of the Funds, effective yield for Cash Fund, taxable
equivalent yield for Municipal Bond Fund and average annual total return and
aggregate total return for Municipal Bond and Income Funds.
For Cash Fund, the current yield will be based upon the seven calendar days
ending on the date of calculation ("the base period"). The total net investment
income earned, exclusive of realized capital gains and losses or unrealized
appreciation and depreciation, during the base period, on a hypothetical
pre-existing account having a balance of one share will be divided by the value
of the account at the beginning of that period. The resulting figure ("the base
period return") will then be multiplied by 365/7 to obtain the current yield.
Cash Fund's current yield for the seven-day period ended December 31, 1997 was
___%.
Cash Fund's effective (or compound) yield for the same period was ___%. The
effective yield reflects the compounding of the current yield by reinvesting all
dividends and will be computed by compounding the base period return by adding 1
to the base period return, raising the sum to a power equal to 365 divided by 7,
and subtracting 1 from the result. The yield of the Fund may be obtained by
calling the Fund.
Investors should recognize that investment in Cash Fund is not guaranteed or
insured by any state, federal or government agency or by any other person.
With respect to Income Fund and Municipal Bond Fund, quotations of yield will
be based on the investment income per share earned during a particular 30-day
period, less expenses per share accrued during the period ("net investment
income") and will be computed by dividing net investment income by the maximum
offering price per share on the last day of the period, according to the
following formula:
A-B ^6
YIELD=2((--- + 1) -1)
CD
where A = dividends and interest earned during the period, B = expenses accrued
for the period (net of any reimbursements), C = the average daily number of
shares outstanding during the period that were entitled to receive dividends,
and D = the maximum offering price per share on the last day of the period.
Municipal Bond Fund's tax-equivalent yield, like yield, is based on a 30-day
period and is computed by dividing that portion of the Fund's yield (computed as
described above) which is tax-exempt by one minus a stated income tax rate and
adding the resulting figure to that portion of the Fund's yield, if any, that is
not tax-exempt.
For the 30-day period ended December 31, 1997, the yield for the Class A
shares of the following Funds was ___% for Corporate Bond Fund, ___% for Limited
Maturity Bond Fund, ___% for the U.S. Government Fund, ___% for High Yield Fund,
and ___% for Municipal Bond Fund. For the same period, the tax equivalent yield
54
<PAGE>
for the Class A shares of Municipal Bond Fund assuming a 15% income tax rate and
a 28% income tax rate, respectively, was ___% and ___%.
For the 30-day period ended December 31, 1997, the yield for the Class B
shares of the following Funds was ___% for the Corporate Bond Fund, ___% for
Limited Maturity Bond Fund, ___% for the U.S. Government Fund, ___% for High
Yield Fund, and ___% for Municipal Bond Fund. For the same period, the tax
equivalent yield for the Class B shares of Municipal Bond Fund assuming a 15%
income tax rate and a 28% income tax rate, respectively, was ___% and ___%.
There is no assurance that a yield quoted will remain in effect for any
period of time. Inasmuch as certain estimates must be made in computing average
daily yield, actual yields may vary and will depend upon such factors as the
type of instruments in the Fund's portfolio, the portfolio quality and average
maturity of such instruments, changes in interest rates and the actual Fund
expenses. Yield computations will reflect the expense limitations described in
this Prospectus under "Investment Manager."
Quotations of average annual total return will be expressed in terms of the
average annual compounded rate of return of a hypothetical investment in Income
Fund or Municipal Bond Fund over periods of 1, 5 and 10 years (up to the life of
the Fund), calculated pursuant to the following formula:
^n
P(1+T) =ERV
(where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years, and ERV = the ending redeemable value of
a hypothetical $1,000 payment made at the beginning of the period). All average
annual total return figures will reflect the deduction of the maximum initial
sales load in the case of quotations of performance of Class A shares or the
applicable contingent deferred sales charge in the case of quotations of
performance of Class B shares and a proportional share of Fund expenses on an
annual basis, and assume that all dividends and distributions are reinvested
when paid.
For the 1-, 5- and 10-year periods ended December 31, 1996, the average
annual total return for Class A shares of the Corporate Bond Fund was -5.69%,
4.96% and 6.74%, respectively. For the 1-year period ended December 31, 1996,
the average annual total return for Class B shares of Corporate Bond Fund was
- -6.29%. For the period October 19, 1993 (date of inception) to December 31,
1996, the average annual total return for Class B shares of the Corporate Bond
Fund was -0.28%.
For the 1-, 5- and 10-year periods ended December 31, 1997, the average
annual total return for Class A shares of the U.S. Government Fund was ___%,
___% and ___%, respectively. For the 1-year period ended December 31, 1997, the
average annual total return for Class B shares of U.S. Government Fund was ___%.
For the period October 19, 1993 (date of inception) to December 31, 1997, the
average annual total return for Class B shares of the U.S. Government Fund was
___%.
For the 1-, 5- and 10-year periods ended December 31, 1997, the average
annual total return for Class A shares of Municipal Bond Fund was ___%, ___% and
___%, respectively. For the 1-year period ended December 31, 1997, the average
annual total return for Class B shares of Municipal Bond Fund was ___%. For the
period October 19, 1993 (date of inception) to December 31, 1997, the average
annual total return for Class B shares of Municipal Bond Fund was ___%.
For the 1-year period ended December 31, 1997, the average annual total
return for Class A and B shares of Limited Maturity Bond Fund was ___% and ___%,
respectively. For the period January 17, 1995 (date of inception) to December
31, 1997, the average annual total return for Class A and B shares of Limited
Maturity Bond Fund was ___% and ___%, respectively.
For the 1-year period ended December 31, 1997, the average annual total
return for Class A and B shares of High Yield Fund was ___% and ___%,
respectively. For the period August 5, 1996 (date of inception) to December 31,
1997, the average annual total return for Class A and B shares of High Yield
Fund was ___% and ___%, respectively.
The aggregate total return for Income and Municipal Bond Funds is calculated
for any specified period of time pursuant to the following formula:
^n
P(1+T) =ERV
(where P = a hypothetical initial payment of $1,000, T = the total return, and
ERV = the ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the period). All aggregate total return figures will
55
<PAGE>
assume that all dividends and distributions are reinvested when paid. The Funds
may, from time to time, include quotations of total return that do not reflect
deduction of the sales load which, if reflected, would reduce the total return
data quoted.
The aggregate total return on an investment made in Class A shares of the
Corporate Bond Fund, the U.S. Government Fund and Municipal Bond Fund calculated
as described above for the period from December 31, 1987, for the Corporate Bond
Fund, U.S. Government Fund and Municipal Bond Fund, through December 31, 1997
was ___%, ___% and ___%, respectively. These figures reflect deduction of the
maximum initial sales load.
The aggregate total return on an investment made in Class B shares of the
Corporate Bond Fund, the U.S. Government Fund and Municipal Bond Fund calculated
as described above for the period October 19, 1993 through December 31, 1997 was
___%, ___% and ___%, respectively. These figures reflect deduction of the
maximum contingent deferred sales charge.
The aggregate total return on an investment made in Class A and B shares of
the Limited Maturity Bond Fund for the period January 17, 1995 through December
31, 1997 was ___% and ___%, respectively. These figures reflect deduction of the
maximum initial sales load and deduction of the maximum contingent deferred
sales charge.
The aggregate total return on an investment made in Class A and B shares of
the High Yield Fund for the period August 5, 1996 (date of inception) through
December 31, 1997, was ___% and ___%, respectively. These figures reflect
deduction of the maximum initial sales load and deduction of the maximum
contingent deferred sales charge.
In addition, quotations of aggregate total return will also be calculated for
several consecutive one-year periods expressing the total return as a percentage
increase or decrease in the value of the investment for each year relative to
the ending value for the previous year.
Quotations of yield, tax-equivalent yield, average annual total return and
aggregate total return will reflect only the performance of a hypothetical
investment during the particular time period shown. Such quotations will vary
based on changes in market conditions and the level of the Fund's expenses, and
no reported performance figure should be considered an indication of performance
which may be expected in the future.
In connection with communicating its yield, tax-equivalent yield, average
annual total return or aggregate total return to current or prospective
stockholders, each Fund also may compare these figures to the performance of
other mutual funds tracked by mutual fund rating services or to other unmanaged
indexes which may assume reinvestment of dividends but generally do not reflect
deductions for administrative and management costs. Each Fund will include
performance data for both Class A and Class B shares of the Fund in any
advertisement or report including performance data of the Fund. Such mutual fund
rating services include the following: Lipper Analytical Services; Morningstar,
Inc.; Investment Company Data; Schabacker Investment Management; Wiesenberger
Investment Companies Service; Computer Directions Advisory (CDA); and Johnson
Charts.
RETIREMENT PLANS
Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield and Cash
Funds offer tax-qualified retirement plans for individuals (Individual
Retirement Accounts, known as IRAs), several prototype retirement plans for the
self-employed (Keogh plans), pension and profit-sharing plans for corporations,
and custodial account plans for employees of public school systems and
organizations meeting the requirements of Section 501(c)(3) of the Internal
Revenue Code. Actual documents and detailed materials about the plans will be
provided upon request to the Distributor.
Purchases of Corporate Bond, Limited Maturity Bond, U.S. Government, High
Yield and Cash Fund shares under any of these plans are made at the public
offering price next determined after contributions are received by the
Distributor. Shares owned under any of the plans have full dividend, voting and
redemption privileges. Depending upon the terms of the particular plan,
retirement benefits may be paid in a lump sum or in installment payments over a
specified period. There are possible penalties for premature distributions from
such plans.
Security Management Company, LLC is available to act as custodian for the
plans on a fee basis. For IRAs, SIMPLE IRAs, Section 403(b) Retirement Plans,
and Simplified Employee Pension Plans (SEPPs), service fees for such custodial
services currently are: (1) $10 for annual maintenance of the account, and (2)
benefit distribution fee of $5 per distribution. Service fees for other types of
plans will vary. These fees will be deducted from the plan assets. Optional
supplemental services are available from Security Benefit Life Insurance Company
for additional charges.
56
<PAGE>
Retirement investment programs involve commitments covering future years. It
is important that the investment objective and structure of Corporate Bond,
Limited Maturity Bond, U.S. Government, High Yield and Cash Funds be considered
by the investors for such plans. Investments in insurance and annuity contracts
also may be purchased in addition to shares of the Funds.
A brief description of the available tax-qualified retirement plans is
provided below. However, the tax rules applicable to such qualified plans vary
according to the type of plan and the terms and conditions of the plan itself.
Therefore, no attempt is made to provide more than general information about the
various types of qualified plans. Because Municipal Bond Fund's investment
objective is to obtain a high level of interest income exempt from federal
taxes, Municipal Bond Fund is not an appropriate investment for retirement
plans.
Investors are urged to consult their own attorneys or tax advisers when
considering the establishment and maintenance of any such plans.
INDIVIDUAL RETIREMENT ACCOUNTS (IRAS)
Individual Retirement Account Custodial Agreements are available to provide
investment in shares of Corporate Bond, Limited Maturity Bond, U.S. Government,
High Yield or Cash Fund, or in other Funds in the Security Group. An individual
may initiate an IRA through the Distributor by executing the custodial agreement
and making a minimum initial investment of at least $100. A $10 annual fee is
charged for maintaining the account.
An individual may make a contribution to a traditional IRA each year of up to
the lesser of $2,000 or 100% of earned income under current tax law. The IRAs
described in this paragraph are called "traditional IRAs" to distinguish them
from the new "Roth IRAs" which become available in 1998. Roth IRAs are described
below. Spousal IRAs allow an individual and his or her spouse to contribute up
to $2,000 to their respective IRAs so long as a joint tax return is filed and
joint income is $4,000 or more. The maximum amount the higher compensated spouse
may contribute for the year is the lesser of $2,000 or 100% of that spouse's
compensation. The maximum the lower compensated spouse may contribute is the
lesser of (i) $2,000 or (ii) 100% of that spouse's compensation plus the amount
by which the higher compensated spouse's compensation exceeds the amount the
higher compensated spouse contributes to his or her IRA.
Deductions for IRA contributions are limited for taxpayers who are covered by
an employer-sponsored retirement plan. However, these limitations do not apply
to a single taxpayer with adjusted gross income of $25,000 or less or married
taxpayers with adjusted gross income of $40,000 or less (if they file a joint
tax return). Taxpayers with adjusted gross income less than $10,000 in excess of
these amounts may deduct a portion of their IRA contributions. The nondeductible
portion is calculated by reference to the amount of the taxpayer's income above
$25,000 (single) or $40,000 (married) as a percentage of $10,000.
Contributions must be made in cash no later than April 15 following the close
of the tax year. No annual contribution is permitted for the year in which the
investor reaches age 70 1/2 or any year thereafter.
In addition to annual contributions, total distributions and certain partial
distributions from certain employer-sponsored retirement plans may be eligible
to be reinvested into a traditional IRA if the reinvestment is made within 60
days of receipt of the distribution by the taxpayer. Such rollover contributions
are not subject to the limitations on annual IRA contributions described above.
ROTH IRAS
Section 408A of the code permits eligible individuals to establish a Roth
IRA, a new type of IRA which becomes available in 1998. Contributions to a Roth
IRAs are not deductible, but withdrawals that meet certain requirements are not
subject to federal income tax. In general, Roth IRAs are subject to certain
required distribution requirements. Unlike a traditional IRA, Roth IRAs are not
subject to minimum required distribution rules during the owner's life time.
Generally, however, the amount in a remaining Roth IRA must be distributed by
the end of the fifth year after the death of the owner.
Beginning in 1998 the owner of a traditional IRA may convert the traditional
IRA into a Roth IRA under certain circumstances. The conversion of a traditional
IRA to a Roth IRA will subject the amount of the converted traditional IRA to
federal income tax. If a traditional IRA is converted to a Roth IRA, the taxable
amount in the owner's traditional IRA will be considered taxable income for
federal income tax purposes for the year of the conversion. Generally, all
amounts in a traditional IRA are taxable except for the owner's prior
non-deductible contributions to the traditional IRA.
57
<PAGE>
SIMPLE IRAS
The Small Business Job Protection Act of 1996 created a new retirement plan,
the Savings Incentive Match Plan for Employees of Small Employers (SIMPLE
Plans). SIMPLE Plan participants must establish a SIMPLE IRA into which plan
contributions will be deposited.
The Investment Manager makes available SIMPLE IRAs to provide investment in
shares of the Funds. Contributions to a SIMPLE IRA may be either salary deferral
contributions or employer contributions. Contributions must be made in cash and
cannot exceed the maximum amount allowed under the Internal Revenue Code. On a
pre-tax basis, up to $6,000 of compensation (through salary deferrals) may be
contributed to a SIMPLE IRA. In addition, employers are required to make either
(1) a dollar-for-dollar matching contribution or (2) a nonelective contribution
to each participant's account each year. In general, matching contributions must
equal up to 3% of compensation, but under certain circumstances, employers may
make lower matching contributions. Instead of the match, employers may make a
nonelective contribution equal to 2% of compensation (compensation for purposes
of any nonelective contribution is limited to $160,000, as indexed).
Distributions from a SIMPLE IRA are (1) taxed as ordinary income; (2)
includable in gross income; and (3) subject to applicable state tax laws.
Distributions prior to age 59 1/2 may be subject to a 10% penalty tax which
increases to 25% for distributions made before a participant has participated in
the SIMPLE Plan for at least two years. An annual fee of $10 is charged for
maintaining the SIMPLE IRA.
PENSION AND PROFIT-SHARING PLANS
Prototype corporate pension or profit-sharing prototype plans meeting the
requirements of Internal Revenue Code Section 401(a) are available. Information
concerning these plans may be obtained from Security Distributors, Inc.
403(B) RETIREMENT PLANS
Employees of public school systems and tax-exempt organizations meeting the
requirements of Internal Revenue Code Section 501(c)(3) may purchase custodial
account plans funded by their employers with shares of Corporate Bond, Limited
Maturity Bond, U.S. Government, High Yield or Cash Fund or other Funds in the
Security Group in accordance with Code Section 403(b). Section 403(b) plans are
subject to numerous restrictions on the amount that may be contributed, the
persons who are eligible to participate and on the time when distributions may
commence.
SIMPLIFIED EMPLOYEE PENSION PLANS (SEPPS)
A prototype SEPP is available for corporations, partnerships or sole
proprietors desiring to adopt such a plan for purchases of IRAs for their
employees. Employers establishing a SEPP may contribute a maximum of $30,000 a
year to an IRA for each employee. This maximum is subject to a number of
limitations.
FINANCIAL STATEMENTS
The audited financial statements of the Funds, which are contained in the
Funds' Annual Report dated December 31, 1996, are incorporated herein by
reference. Copies of the Annual Report are provided to every person requesting
the Statement of Additional Information.
58
<PAGE>
TAX-EXEMPT VS. TAXABLE INCOME
The following table shows the approximate taxable yields for individuals that
are equivalent to tax-exempt yields using the 1997 tax rates contained in the
Internal Revenue Code as modified by the Tax Reform Act of 1986. Beginning in
1989, federal income brackets will be indexed each year to reflect changes in
the Consumer Price Index. The table illustrates what you would have to earn on
taxable investments to equal a given tax-exempt yield in your income tax
bracket. Locate your income (after deductions and exemptions), then locate your
tax bracket based on joint or single tax filing. Read across to the equivalent
taxable yield you would need to match a given tax-free yield. There is, of
course, no assurance that an investment in Tax-Exempt Fund will result in the
realization of any particular return.
<TABLE>
<CAPTION>
- ------- ----------------------------------------- ---------- --------------------------------------------------------------
Your
income
tax
If your taxable income is: bracket And a tax-free yield of:
Joint Return Single Return is: 5% 6% 7% 8% 9% 10% 11% 12%
- ------- -------------------- -------------------- ---------- ------- ------- ------- ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997
0 - 41,200 0 - 24,650 15.0% 5.88 7.06 8.24 9.41 10.59 11.76 12.94 14.12
41,200 - 99,600 24,650 - 59,750 28.0 6.94 8.33 9.72 11.11 12.50 13.89 15.28 16.67
99,600 - 151,750 59,750 - 124,650 31.0 7.25 8.70 10.14 11.59 13.04 14.49 15.94 17.39
151,750 - 271,050 124,650 - 271,050 36.0 7.81 9.38 10.94 12.50 14.06 15.63 17.19 18.75
271,050 and over 271,050 and over 39.6 8.28 9.93 11.59 13.25 14.90 16.56 18.21 19.87
- ------- -------------------- -------------------- ---------- ------- ------- ------- ------ ------- ------- ------- -------
</TABLE>
59
<PAGE>
APPENDIX A
CLASS A SHARES OF CORPORATE BOND, LIMITED MATURITY BOND, U.S. GOVERNMENT, HIGH
YIELD AND MUNICIPAL BOND FUNDS
REDUCED SALES CHARGES
Initial sales charges may be reduced or eliminated for persons or
organizations purchasing Class A shares of Corporate Bond, Limited Maturity
Bond, U.S. Government, High Yield and Municipal Bond Funds alone or in
combination with Class A shares of other Security Funds.
For purposes of qualifying for reduced sales charges on purchases made
pursuant to Rights of Accumulation, a Statement of Intention or Letters of
Intent, the term "Purchaser" includes the following persons: an individual; his
or her spouse and children under the age 21; a trustee or other fiduciary of a
single trust estate or single fiduciary account established for their benefit;
an organization exempt from federal income tax under Section 501(c)(3) or (13)
of the Internal Revenue Code; or a pension, profit-sharing or other employee
benefit plan whether or not qualified under Section 401 of the Internal Revenue
Code.
RIGHTS OF ACCUMULATION
To reduce sales charges on purchases of Corporate Bond Fund, Limited Maturity
Bond Fund, U.S. Government Fund, High Yield or Municipal Bond Fund, a Purchaser
may combine all previous purchases with a contemplated current purchase of Class
A shares of a Fund for the purpose of determining the sales charge applicable to
the current purchase. For example, an investor who already owns Class A shares
of a Fund either worth $30,000 at the applicable current offering price or
purchased for $30,000 and who invests an additional $25,000, is entitled to a
reduced sales charge of 3.75% on the latter purchase. The Distributor must be
notified when a sale takes place which would qualify for the reduced charge on
the basis of previous purchases subject to confirmation of the investor's
holdings through the Fund's records. Rights of accumulation apply also to
purchases representing a combination of the Class A shares of Corporate Bond
Fund, Limited Maturity Bond Fund, U.S. Government Fund, High Yield, Municipal
Bond Fund, Security Growth and Income, Security Ultra Fund, or Security Equity
Fund in those states where shares of the Funds being purchased are qualified for
sale.
STATEMENT OF INTENTION
A Purchaser in Corporate Bond, Limited Maturity Bond, U.S. Government, High
Yield or Municipal Bond Funds may sign a Statement of Intention, which may be
signed within 90 days after the first purchase to be included thereunder, in the
form provided by the Distributor covering purchases of Corporate Bond Fund,
Limited Maturity Bond Fund, U.S. Government Fund, High Yield, Municipal Bond
Fund, Security Equity Fund, Security Growth and Income Fund, or Security Ultra
Fund to be made within a period of 13 months (or a 36-month period for purchases
of $1 million or more) and thereby become eligible for the reduced front-end
sales charge applicable to the actual amount purchased under the Statement. Five
percent of the amount specified in the Statement of Intention will be held in
escrow shares until the Statement is completed or terminated. The shares so held
may be redeemed by the Fund if the investor is required to pay additional sales
charge which may be due if the amount of purchases made by the investor during
the period the Statement is effective is less than the total specified in the
Statement of Intention.
A Statement of Intention may be revised during the 13-month period (or, if
applicable, 36-month period). Additional Class A shares received from
reinvestment of income dividends and capital gains distributions (if any are
realized) are included in the total amount used to determine reduced sales
charges. The Statement is not a binding obligation upon the investor to purchase
or any Fund to sell the full indicated amount. An investor considering signing
such an agreement should read the Statement of Intention carefully. A Statement
of Intention form may be obtained from the Investment Manager.
60
<PAGE>
REINSTATEMENT PRIVILEGE
Stockholders who redeem their Class A shares of Corporate Bond Fund, Limited
Maturity Bond Fund, U.S. Government Fund, High Yield Fund or Municipal Bond Fund
have a one-time privilege (1) to reinstate their accounts by purchasing shares
of the Fund without a sales charge up to the dollar amount of the redemption
proceeds, or (2) to the extent the redeemed shares would have been eligible for
the exchange privilege, to purchase Class A shares of another of the Funds,
Security Equity Fund, Security Ultra Fund, or Security Growth and Income Fund up
to the dollar amount of the redemption proceeds at a sales charge equal to the
additional sales charge, if any, which would have been applicable had the
redeemed shares been exchanged pursuant to the exchange privilege. Written
notice and a check in the amount of the reinvestment from eligible stockholders
wishing to exercise this reinstatement privilege must be received by the Fund
within thirty days after the redemption request was received (or such longer
period as may be permitted by rules and regulations promulgated under the
Investment Company Act of 1940). The net asset value used in computing the
amount of shares to be issued upon reinstatement or exchange will be the net
asset value on the day that notice of the exercise of the privilege is received.
Stockholders making use of the reinstatement privilege should note that any
gains realized upon the redemption will be taxable while any losses may be
deferred under the "wash sale" provision of the Internal Revenue Code.
<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]
<PAGE>
PRESIDENT'S LETTER
- --------------------------------------------------------------------------------
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
1
<PAGE>
MANAGERS' COMMENTARY
- --------------------------------------------------------------------------------
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
<PAGE>
MANAGERS' COMMENTARY
- --------------------------------------------------------------------------------
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
<PAGE>
MANAGERS' COMMENTARY
- --------------------------------------------------------------------------------
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
<PAGE>
MANAGERS' COMMENTARY
- --------------------------------------------------------------------------------
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
<PAGE>
MANAGERS' COMMENTARY
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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
[SDI LOGO]
<PAGE>
SECURITY FUNDS
================================================================================
SEMI-ANNUAL REPORT
JUNE 30, 1997
*SECURITY INCOME FUND
- CORPORATE BOND SERIES
- U.S. GOVERNMENT SERIES
- LIMITED MATURITY BOND SERIES
- HIGH YIELD SERIES
*SECURITY TAX-EXEMPT FUND
*SECURITY CASH FUND
[SDI LOGO]
SECURITY DISTRIBUTORS, INC.
A Member of The Security Benefit
Group of Companies
<PAGE>
PRESIDENT'S LETTER
AUGUST 15, 1997
To Our Shareholders:
The first six months of 1997 have been a roller-coaster ride for fixed income
investors. At the beginning of the year the bellwether thirty-year Treasury bond
yielded 6.64%. By late April the yield had risen to 7.14% before it began its
descent to 6.78% at the end of June. As you know, bond prices move inversely to
yields, staging a "mirror" roller coaster ride which produced a 2.3% total
return on the long Treasury bond for the period.
THE INFLATION STORY IN 1997
Contrary to what this volatility might indicate, the compelling story for the
six-month period was the absence of reacceleration of inflation pressures. In
fact, evidence suggests that inflation is actually declining. This is true
particularly when one takes into account the overstatement of structural
inflation revealed by the Boskin report, the study commissioned by the Senate
Finance Committee to review the calculation of the Consumer Price Index (CPI).
This report found that the CPI probably overstates true increases in the cost of
living by approximately 1.1% per year.
This leaves us with the understanding that real interest rates on the long
Treasury bond are 300 to 400 basis points higher than might be expected given
today's actual annualized inflation rate of around 2%. We therefore conclude
that there is opportunity for further declines in long-term rates with their
commensurate increase in bond prices as we move through the second half of 1997.
CAN THE GOOD NEWS CONTINUE?
The good news on the inflation front should continue to be a positive influence
on fixed income markets for some time as the economy continues to slow its
growth rate from the torrid pace of 1997's first quarter. We believe that due to
the continuation of productivity improvements in U.S. businesses, economic
growth rates of around 3% may be sustainable without reigniting inflation. This
is in contrast to the 2% to 2.5% rates of growth that have been historically
viewed by the Federal Reserve Board as a "speed bump." Therefore, for fixed
income investors the climate should remain favorable for returns of at least the
portfolio coupon rate, with the possibility of some capital appreciation if long
term interest rates decline as we believe they will, in recognition of the
pattern of slowing global inflation pressures.
As always, we appreciate your continuing investment in the Security Funds. We
invite your questions and comments at any time.
John Cleland, President
The Security Funds
1
<PAGE>
MANAGER'S COMMENTARY
AUGUST 15, 1997
SECURITY INCOME FUND
CORPORATE BOND SERIES
Volatility was the key word for fixed income market behavior in the first half
of 1997. The thirty-year Treasury bond began the year yielding 6.64% and
finished June at 6.78%. In the intervening months it rose as high as 7.14%,
managing to gain only 2.3% in total return over the six months. Corporate issues
fared slightly better, as the Lehman Corporate Bond Index rose 3.07%. The
Corporate Bond Series of Security Income Fund generated a positive total return
for the six-month period of 2.35%, slightly lagging its peer group average of
2.68%.(1)
CONTRIBUTORS TO PERFORMANCE IN THE FIRST HALF
The Series underperformed in the first quarter of 1997 primarily because of its
position in property and casualty insurer Home Holdings. This company, which was
beset with problems among some of its insured risks, continued to lose value and
was ultimately sold from the portfolio.
While the first quarter's total return was negative, the second quarter was much
improved. Steps were taken to upgrade the overall credit quality of the
holdings. The high yield portion of the portfolio is now concentrated in issues
rated BB and B, the upper tiers of the high yield rating universe. Some of these
issues have the potential to be upgraded to investment grade ratings in the
not-too-distant future, which should add a capital gain return element to their
attractive coupon rates.
HOW THE PORTFOLIO LOOKS NOW
The sector composition of the portfolio at the end of June was about 53.5% high
grade corporate bonds, 20% high yield issues, 17% Yankee bonds (U.S.
dollar-denominated securities issued by foreign corporations), and 9.5%
mortgage-backed bonds issued primarily by agencies of the U.S. Government. This
sector diversification gives the portfolio some downside protection because the
various sectors will not always move up or down in value in tandem.
The average rating of the portfolio is a strong BBB, and the average coupon of
the portfolio holdings is 7.92%. Average duration of the securities is about 6.6
years, slightly longer than that of the benchmark Lehman Corporate Bond Index
duration of 5.88 years. We are working to reduce the block size of issues in the
portfolio so that each issuer will represent 2.5% or less of total assets, in
order to achieve further diversification.
LOOKING TO THE SECOND HALF
The Corporate Bond Series' portfolio is well positioned for the coming months.
Our emphasis on upgrading credit quality should help bring total returns more in
line with those of the benchmark index. Diversification among sectors and rating
classes can add a further element of safety. The mortgage-backed securities and
Yankee bonds provide cash flow through their generally higher coupon interest
rates than other classes. Finally, fundamentally improving stories among our
high yield credits provide the potential for additional return through capital
gains.
Thomas A. Swank
Portfolio Manager
Steven M. Bowser
Portfolio Manager
(1) Performance figures are based on Class A shares and do not reflect
deduction of the sales charge.
CORPORATE BOND SERIES
6-30-97
Credit Quality Rating
Average Maturity 16.8 years
AAA ................. 14.1%
AA .................. 14.6%
A ................... 32.6%
BBB ................. 18.8%
BB .................. 19.9%
CORPORATE BOND SERIES
AVERAGE ANNUAL TOTAL RETURN
AS OF JUNE 30, 1997
CLASS A SHARES CLASS B SHARES
1 Year 0.7% 1 Year -0.3%
5 Years 4.7% Since Inception 0.3%
10 Years 6.8% (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 figures reflect deduction
of the maximum contingent deferred sales charge, ranging from 5% in the first
year to 0% in the sixth and following years. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
2
<PAGE>
MANAGER'S COMMENTARY
AUGUST 15, 1997
U.S. GOVERNMENT SERIES
The U.S. Government Series of Security Income Fund returned 2.46% in the first
half of 1997, right in line with its peer group average return of 2.47%.1 The
benchmark Lehman Government Bond Index returned a slightly higher 2.63% over the
same period.
CONTRIBUTORS TO PERFORMANCE
The portfolio had a large weighting in longer-duration Federal agency bonds,
with moderate positions in shorter Treasury issues and mortgage-backed
securities throughout the first six months. During the first quarter the
Treasuries and mortgage-backed bonds provided downside protection and allowed
the total return to be higher (actually, less negative) than that of the peer
group of funds. In March, April and May, however, the bond markets recovered and
these same defensive issues dampened returns somewhat, holding back overall
performance.
PORTFOLIO COMPOSITION AT THE END OF THE FIRST HALF
The sector weighting in the Series consisted of 41% federal agency securities,
36% GNMA mortgage-backed bonds secured by home mortgages, and 23% U.S. Treasury
issues. In general, mortgage-backed bonds and federal agency issues carry
slightly higher coupon rates than comparable Treasury bonds. This adds a small
extra increment to total return.
The duration of the portfolio at the end of June was 4.85 years, close to that
of the benchmark index's duration of 4.78 years. The average coupon, however,
was considerably higher than that of the index at 8.15%, compared with the
benchmark's 6.95% average.
PLANS FOR THE NEXT SIX MONTHS
The U.S. Government Series is designed for conservative investors, with a strong
emphasis on credit quality of the securities held in the portfolio. Because
shareholders in the Series tend to be cautious, we don't try to outguess the
markets by dramatically lengthening or shortening the duration of portfolio
holdings.
In the coming months, we anticipate maintaining our sector allocations close to
their present levels. We expect portfolio durations to also remain close to
current lengths. As always, we keep an eye on the markets to watch for sharp
movements in either direction, and retain the ability to make stronger moves
than usual if it becomes necessary.
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
6-30-97
Sectors Represented
Treasuries ................. 23%
Agencies ................... 41%
Mortgage Backed ............ 36%
U.S. GOVERNMENT SERIES
AVERAGE ANNUAL TOTAL RETURN
AS OF JUNE 30, 1997
CLASS A SHARES CLASS B SHARES
1 Year 2.2% 1 Year 1.1%
5 Years 5.4% Since Inception 2.3%
10 Years 7.2% (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 figures reflect deduction
of the maximum contingent deferred sales charge, ranging from 5% in the first
year to 0% in the sixth and following years. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
3
<PAGE>
MANAGER'S COMMENTARY
AUGUST 15, 1997
LIMITED MATURITY BOND SERIES
Throughout a period of volatility in the bond markets, the Limited Maturity Bond
Series performed very well in the first half of 1997. The Series produced a
total return of 3.20%, comparing favorably with its peer group average of 2.74%,
and outperforming its benchmark Lehman Brothers Intermediate Corporate Bond
Index return of 3.05%.(1) The ten-year Treasury bond, representative of the
maturity structure of this portfolio, began the year yielding 6.42%, touched
6.90% in late March and early April, and fell back to close the first half at
6.50%.
CONTRIBUTORS TOWARD STRONG PERFORMANCE
Several of the high yield holdings in the portfolio experienced strong earnings
and strengthened balance sheets through debt reduction over the first six
months. These include PanAmerican Beverages, Inc., a Latin American producer and
bottler of Coca Cola and other soft drinks. Valassis Communications Corporation,
a company that produces special coupon inserts for Sunday newspapers, is
generally expected to be upgraded to investment grade in the near future after
reducing expenses and benefiting from lower paper costs.
Seagull Energy Corporation, an oil and gas explorer and developer, has lowered
overall company costs, realizing benefits of a recent acquisition. It is now on
Standard & Poor's ratings watch list for an upgrade. Comcast Corporation, a
cable television and telecommunications company, was upgraded to BB just after
the close of the first half.
COMPOSITION OF THE PORTFOLIO
The Limited Maturity Bond Series is currently comprised of about 46% high grade
bonds, 23% high yield issues (the maximum high yield allocation permitted in the
portfolio is 25%), 22% mortage-backed securities issued primarily by Federal
government agencies, and 9% Yankee bonds (dollar denominated securities issued
by foreign corporations).
The portfolio duration is approximately 4.3 years, just slightly longer than the
benchmark index's 4.21 years. The average coupon is a relatively high 8.1%,
lifted by the high yield and mortgage-backed securities holdings. The average
rating of securities remains well within the investment grade classification at
a mid-A level.
WHAT'S AHEAD FOR THE LIMITED MATURITY PORTFOLIO
We plan to maintain the overall portfolio quality at its present level, and to
keep the duration close to that of the benchmark intermediate corporate bond
index. The broad diversification of asset classes should help keep volatility at
lower levels, since the various sectors will not always move up or down in value
in tandem with each other. The intermediate-maturity bond portfolios tend to
outperform their longer counterparts in periods of rising interest rates, and so
make an attractive investment medium for a portion of shareholders' fixed income
allocations.
Thomas A. Swank
Portfolio Manager
Steven M. Bowser
Portfolio Manager
(1) Performance figures are based on Class A shares and do not reflect
deduction of the sales charge.
LIMITED MATURITY BOND SERIES
6-30-97
Credit Quality Rating
Average Maturity 6.5 Years
AAA ................ 31.6%
AA ................. 7.7%
A .................. 27.0%
BBB ................ 9.8%
BB ................. 19.5%
B .................. 0.9%
NR ................. 3.5%
LIMITED MATURITY BOND SERIES
AVERAGE ANNUAL TOTAL RETURN
AS OF JUNE 30, 1997
CLASS A SHARES CLASS B SHARES
1 Year 0.6% 1 Year -0.6%
Since Inception 5.3% Since Inception 4.8%
(1-17-95) (1-17-95)
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 figures reflect deduction
of the maximum contingent deferred sales charge, ranging from 5% in the first
year to 0% in the sixth and following years. The investment return and principal
value of an investment will fluctuate so tht an investor's shares, when
redeemed, may be worth more or less than their original cost.
4
<PAGE>
MANAGER'S COMMENTARY
AUGUST 15, 1997
HIGH YIELD SERIES
The high yield segment of the fixed income markets was the best-performing
domestic bond sector during the first half of 1997. The High Yield Series ranked
above median in its peer group, returning 5.79% for the period.(1) The peer
group average return was 5.92%, while the benchmark Lehman Brothers High Yield
Index posted a return of 5.82%.
COMPOSITION OF THE PORTFOLIO
At the end of June the High Yield Series portfolio was skewed toward the BB
rating category, the highest level on the high yield bond rating scale. With
approximately 70% of the issues in this category and the remaining ones rated B,
we feel that there is less concern about credit risk and more ability to
liquidate easily should selling become necessary. Our analysts seek out issues
which are currently rated BB, but whose financial statements show improvement
that could lead to an upgrade to investment grade in the near future.
Throughout the six months the portfolio has been underweight in basic industries
such as mining, metals, and chemicals, which have for the most part
underperformed other sectors. We were overweight in consumer cyclicals (cable
television companies, retail stores, gaming, and home construction) and
financials, including banks and insurance companies. Our underweight position in
utility bonds hurt, as this sector did very well during the period.
CONTRIBUTORS TO STRONG PERFORMANCE
Some issues in the portfolio were upgraded by the major rating agencies
recently. Knoll, Inc., which manufactures and distributes office systems and
business furniture, brought an initial public offering (IPO) to market and used
the proceeds to pay down more expensive debt. The company's securities were
subsequently upgraded from a low B to a high B level. Comcast Corporation, a
cable television and telecommunications company, was upgraded to BB just after
the close of the first half of 1997.
Other strong performers included AGCO Corporation, a worldwide manufacturer and
distributor of agricultural equipment and related replacement parts. AGCO has
benefited from the strong farm economy, both in the U.S. and abroad. Four
Seasons Hotels, Inc. offered to repurchase its 9.125% notes at a price which was
very attractive relative to their cost in our portfolio.
PLANS FOR THE REST OF 1997
We intend to continue our strategy of staying cognizant of credit quality and
looking for bonds which have a potential of being upgraded from BB to investment
grade. The high yield bond markets are similar to the equity markets in that
they have risen a good deal, but investment funds continue to pour in, driving
them up further. We plan to structure the portfolio to be sound from a credit
standpoint so that it can better withstand any unforseen shocks to the market.
Thomas A. 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.
HIGH YIELD SERIES
6-30-97
Quality Credit Rating
Average Maturity 4.81 years
BBB ............ 1%
BB ............. 57%
B .............. 42%
HIGH YIELD SERIES
AVERAGE ANNUAL TOTAL RETURN
AS OF JUNE 30, 1997
CLASS A SHARES CLASS B SHARES
Since Inception 6.0% Since Inception 5.4%
(8-05-96) (8-05-96)
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 figures reflect deduction
of the maximum contingent deferred sales charge, ranging from 5% in the first
year to 0% in the sixth and following years. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
5
<PAGE>
MANAGER'S COMMENTARY
AUGUST 15, 1997
SECURITY TAX-EXEMPT FUND
The municipal market in the first half of the year outperformed its taxable
counterparts in the domestic fixed income markets. The Lehman Brothers Municipal
Bond Index rose 3.20% during the period, outpacing the Lehman Brothers Aggregate
Fixed Income Index return of 3.09%. The corporate and government components of
the aggregate index also showed lower returns than those of the municipal index.
PORTFOLIO PERFORMANCE IN THE FIRST HALF
The Security Tax-Exempt Fund produced a positive total return of 2.58%, modestly
underperforming its peer group average of 2.95% for the six months.(1) Our
somewhat shorter duration of 6.9 years, compared with the benchmark index
duration of 7.42 years, held back performance in the latter part of the
six-month period when interest rates were falling. Longer maturities tend to
outperform shorter bonds in such an interest rate environment.
The average credit quality of the bonds in the portfolio, currently at a mid-AA
level, while providing comfort to investors because of its strength, also holds
back performance when interest rates are declining. We generally maintain a
higher-than-average portfolio rating since financial information on many
municipal issuers is difficult to obtain, and sometimes not timely enough to
protect investors when finances deteriorate. In addition, if municipalities
experience strains on their budgets when Congress "pushes down" budget items to
the state and local levels, those bonds with higher credit quality should hold
their value better.
THE COMPOSITION OF THE PORTFOLIO CURRENTLY
The Security Tax-Exempt Fund seeks to add a measure of safety through
diversification. In municipal portfolios, this means including a large number of
geographic locations as well as diversifying by industry. At June 30, the
holdings represented 17 states plus the District of Columbia. The largest
represented, in terms of market value of the bonds, was Washington State,
followed by Illinois and California.
In terms of industry classification, the largest grouping of bonds is in the
Education Revenue sector. Education issues are viewed favorably by most
municipal bond holders, since municipalities are highly likely to support their
school systems and avoid bond defaults in this area. Second largest is Electric
Utility Revenue, another area where cash inflows to retire bonds are considered
relatively stable.
OUTLOOK FOR MUNICIPAL BONDS
A constant threat to the value of tax exempt bonds is talk of tax bracket
reductions. While various tax "breaks" are under discussion in Congress as they
try to agree on a balanced budget package, a lowering of tax brackets for those
individuals most likely to invest in municipal bonds seems unlikely at this
time. We believe that tax exempt bonds continue to be an attractive investment
for taxpayers in the upper brackets, and should be for some time to come.
Thomas A. Swank
Portfolio Manager
Steven M. Bowser
Portfolio Manager
(1) Performance figures are based on Class A shares and do not reflect
deduction of the sales charge.
TAX-EXEMPT FUND
6-30-97
Credit Quality Rating
AAA ................ 49.6%
AA ................. 25.2%
A .................. 13.6%
BBB ................ 11.6%
TAX-EXEMPT FUND
AVERAGE ANNUAL TOTAL RETURN
AS OF JUNE 30, 1997
CLASS A SHARES CLASS B SHARES
1 Year 2.3% 1 Year 1.1%
5 Years 4.3% Since Inception 0.8%
10 Years 5.8% (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 figures reflect deduction
of the maximum contingent deferred sales charge, ranging from 5% in the first
year to 0% in the sixth and following years. The investment return and principal
value of an investment will fluctuate so tht an investor's shares, when
redeemed, may be worth more or less than their original cost.
6
<PAGE>
MANAGER'S COMMENTARY
AUGUST 15, 1997
SECURITY CASH FUND
The total return on money market funds in the first half of 1997 was near that
of its close relatives, the fixed income funds, as interest rates on thirty-year
Treasury bonds fluctuated in a range roughly between 6.50% and 7.25%. Security
Cash Fund posted a gain of 2.36% for the period, very near the 2.38% peer group
average yield. Money market funds, unlike longer-term fixed income securities,
generally benefit from increases in short-term interest rates such as the one
executed by the Federal Reserve Open Market Committee in March.
AVERAGE MATURITY TARGETS FOR THE FUND
At June 30, the Cash Fund had a 61-day average maturity, seven days longer than
that of the benchmark IBC Donoghue Money Fund Report. Our goal is to stay within
ten days more or less than the Donoghue average and avoid trying to outguess the
markets by moving maturities sharply shorter or longer. Because of the
short-maturity nature of money market assets we can quickly adjust to interest
rate changes when they occur, without taking unnecessary maturity risk in this
conservative portfolio.
ASSET SECTORS REPRESENTED IN THE PORTFOLIO
The assets in Security Cash Fund at the end of the six-month period consisted of
76% commercial paper, 15% federal agency securities, and 11% Small Business
Administration issues. The commercial paper we purchase is entirely in the "top
tier" of rating agency classifications, rated at least A1 by Standard and Poor's
rating agency or P1 by Moody's. Federal agency holdings may from time to time
include short-term securities issued by the Federal National Mortgage
Association, the Federal Home Loan Bank, and Federal Farm Credit Banks.
The Small Business Association (SBA) holdings are fully guaranteed by the
federal government as to timely payment of principal and interest. These issues,
while bearing stated maturities in the twenty- to thirty-year range, are
considered to be short-maturity paper because their interest rate resets
periodically (usually monthly or quarterly). This enables the issues to carry
coupons representing recent market levels, staying competitive with other
short-term investment instruments.
OUTLOOK FOR THE NEXT SIX MONTHS
Interest rates have recently been declining on long-term bonds. Although this
movement has some effect on short-term rates, until the Federal Reserve decides
to lower their short rate targets, commercial paper and short-maturity agency
interest rates should not drop substantially. We expect the Fed to maintain
their cautious stance toward a rekindling of inflationary pressures, and
therefore believe that money fund returns will not vary substantially in the
near future.
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.
7
<PAGE>
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SECURITY INCOME FUND
CORPORATE BOND SERIES
PRINCIPAL MARKET
CORPORATE BONDS AMOUNT VALUE
- --------------------------------------------------------------------------------
AIR TRANSPORTATION - 5.6%
Southwest Airlines Company, 7.875% - 2007.......... $2,000,000 $ 2,097,500
United Airlines, 11.21% - 2014..................... 1,200,000 1,570,500
----------
3,668,000
BANKS - 11.2%
ABN AMRO Bank NV, 7.55% - 2006..................... 1,000,000 1,030,000
Abbey National PLC, 6.69% - 2005................... 1,250,000 1,225,000
BCH Cayman Islands, Ltd., 7.70% - 2006............. 1,000,000 1,025,000
Bank of New York, Inc., 6.50% - 2003............... 1,500,000 1,464,375
Malayan Bank of New York, 7.125% - 2005............ 1,250,000 1,235,937
Santander Financial Issuances, Ltd., 7.00% - 2006.. 1,400,000 1,382,500
----------
7,362,812
BROKERS, DEALERS & SERVICES - 2.2%
Lehman Brothers, Inc., 7.25% - 2003................ 1,450,000 1,455,438
COMMUNICATIONS - 12.5%
Comcast Corporation, 9.125% - 2006................. 1,000,000 1,047,500
New Jersey Bell, 6.625% - 2008..................... 3,000,000 2,872,500
Paramount Communications, 7.50% - 2023............. 1,000,000 878,750
Rogers Cablesystems, Ltd., 9.625% - 2002........... 750,000 792,188
Rogers Communication, Inc., 9.125% - 2006.......... 550,000 556,875
Valassis Communications, Inc., 9.55% - 2003........ 1,250,000 1,348,437
Westinghouse Electric Company, 8.375% - 2002....... 700,000 726,250
----------
8,222,500
CONSUMER GOODS & SERVICES - 2.2%
Nike, Inc., 6.375% - 2003.......................... 1,500,000 1,460,625
DEPARTMENT STORES - 1.5%
J.C. Penney, 7.625% - 2097......................... 1,000,000 975,000
ELECTRONICS - 1.6%
Pioneer Standard Electronics, Inc., 8.50% - 2006... 1,000,000 1,042,500
FINANCE - 3.1%
Countrywide Capital Industries, Inc., 8.00% - 2026. 1,000,000 997,500
PRINCIPAL MARKET
CORPORATE BONDS (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
FINANCE (CONTINUED)
Washington Mutual Capital, 8.375% - 2002........... $1,000,000 $ 1,016,250
----------
2,013,750
FOOD & BEVERAGES - 7.5%
Chiquita Brands International, Inc., 10.25% - 2006. 1,125,000 1,198,125
Coca-Cola Enterprises, Inc., 6.70% - 2036(3)....... 2,000,000 2,000,000
Panamerican Beverage, Inc., 8.125% - 2003.......... 1,750,000 1,780,625
----------
4,978,750
FUNERAL HOMES - 2.7%
Loewen Group International, Inc., 8.25% - 2003..... 1,750,000 1,778,438
HOSPITAL MANAGEMENT - 1.3%
Tenet Healthcare, 10.125% - 2005................... 800,000 874,000
INSURANCE - 1.5%
Travelers Capital Trust, 7.75% - 2036.............. 1,050,000 1,018,500
MEDIA - 5.0%
Time Warner Entertainment, 10.15% - 2012........... 1,250,000 1,510,937
Turner Broadcasting, 8.375% - 2013................. 1,750,000 1,811,250
----------
3,322,187
MEDICAL AND HEALTH SERVICES - 1.5%
Columbia\HCA, 7.50% - 2095......................... 1,000,000 967,500
MANUFACTURING - 1.5%
Caterpillar, Inc., 7.375% - 2097................... 1,000,000 966,250
MOTOR VEHICLES & EQUIPMENT - 3.0%
Chrysler Corporation, 7.45% - 2027................. 2,000,000 1,972,500
OIL & GAS COMPANIES - 7.4%
Petroleum Geo-Services, 7.50% - 2007............... 1,142,226 1,157,188
Petroleum Nasional Berhad, 7.125% - 2006........... 1,650,000 1,645,875
Seagull Energy Corporation, 8.625% - 2005.......... 1,000,000 1,017,500
Transocean Offshore, Inc., 8.00% - 2027............ 1,000,000 1,033,750
----------
4,854,313
PAPER & LUMBER PRODUCTS - 1.9%
Domtar, Inc., 9.50% - 2016......................... 1,250,000 1,262,500
See accompanying notes.
8
<PAGE>
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SECURITY INCOME FUND
CORPORATE BOND SERIES (CONTINUED)
PRINCIPAL
AMOUNT OR
NUMBER OF MARKET
CORPORATE BONDS (CONTINUED) SHARES VALUE
- --------------------------------------------------------------------------------
PUBLISHING & PRINTING - 1.2%
K-III Communications Corporation, 10.25% - 2004.... $ 300,000 $ 316,500
Quebecor Printing Capital, 7.25% - 2007............ $ 500,000 503,750
----------
820,250
STEEL & METAL PRODUCTS - 1.2%
AK Steel, 10.75% - 2004............................ $ 750,000 808,125
UTILITIES - 2.0%
Tennessee Gas Pipeline, 7.50% - 2017............... $1,300,000 1,298,375
TRANSPORTATION - 1.5%
Union Pacific Resources Group, 7.50% - 2026........ $1,000,000 986,250
----------
Total corporate bonds - 79.1% ................... 52,108,563
TRUST PREFERRED SECURITIES(4)
- -----------------------------
FINANCE - 5.6%
Chase Capital Trust, 6.1047% - 2027(2)............. $2,500,000 2,450,725
SI Financing Inc., 9.50% - 2026.................... 48,000 1,269,000
----------
Total trust preferred securities - 5.6%.......... 3,719,725
MORTGAGE BACKED SECURITIES
- --------------------------
U.S. GOVERNMENT AGENCIES - 6.4%
Federal Home Loan Mortgage Corporation,
#1311 J, 7.50%-2021 CMO.......................... $1,050,000 1,059,595
#1930 AB, 7.50%-2023 CMO......................... $1,661,212 1,682,102
#112 H, 8.80%-2020 CMO........................... $ 646,027 659,087
Federal National Mortgage Association,
#1990-52D, 9.30%-2019 CMO........................ $ 820,825 840,941
----------
4,241,725
U.S. GOVERNMENT SECURITIES - 0.9%
Government National Mortgage Association, #2445,
8% - 2027........................................ $ 575,000 585,601
NON-AGENCY SECURITIES - 4.2%
Chase Capital Mortgage Securities Company, 1997-1B,
7.37% - 2007 CMO................................. $1,500,000 1,526,250
General Electric Capital Mortgage Securities,
1992-7A, 8.30% - 2023 CMO........................ $1,213,754 1,234,854
----------
2,761,104
----------
Total mortgage backed securities - 11.5%......... 7,588,430
----------
Total investments - 96.2%........................ 63,416,718
PRINCIPAL MARKET
AMOUNT VALUE
- --------------------------------------------------------------------------------
Cash and other assets, less liabilities - 3.8% .. $ 2,473,213
----------
Total net assets - 100.0%........................ $65,889,931
==========
SECURITY INCOME FUND
U.S. GOVERNMENT SERIES
U.S. GOVERNMENT & GOVERNMENT AGENCY SECURITIES
- ----------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION - 8.5%
7.125% - 2001.................................... $ 700,000 $ 708,526
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 18.6%
7.40% - 2004..................................... 600,000 624,450
7.875% - 2005.................................... 340,000 363,130
8.28% - 2025..................................... 500,000 566,950
----------
1,554,530
FEDERAL HOME LOAN BANK - 2.0%
8.29% - 2015..................................... 150,000 166,904
FINANCING CORPORATION - 6.1%
9.65% - 2018..................................... 400,000 507,000
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 35.2%
#365608 8.50% - 2024............................. 615,934 642,216
#411643 7.75% - 2025............................. 690,973 699,811
#1849 8.00% - 2026............................. 794,565 809,154
#2270 8.25% - 2026............................. 265,666 274,140
#9365 7.50% - 2034............................. 521,743 520,767
----------
2,946,088
STUDENT LOAN MARKETING ASSOCIATION - 5.7%
9.25% - 2004..................................... 420,000 479,695
U.S. TREASURY NOTES - 14.6%
7.25% - 1998..................................... 135,000 136,228
8.00% - 1999..................................... 460,000 476,785
8.50% - 2000..................................... 580,000 611,268
----------
1,224,281
U.S. TREASURY BONDS - 8.0%
8.75% - 2008..................................... 600,000 665,394
----------
Total investments- 98.7%......................... 8,252,418
Cash and other assets, less liabilities - 1.3%... 113,618
----------
Total net assets - 100%.......................... $ 8,366,036
==========
See accompanying notes.
9
<PAGE>
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SECURITY INCOME FUND
LIMITED MATURITY BOND SERIES
PRINCIPAL MARKET
CORPORATE BONDS AMOUNT VALUE
- --------------------------------------------------------------------------------
AIR TRANSPORTATION - 1.8%
Atlas Air, 12.25% - 2002........................... $ 100,000 $ 111,000
ALUMINUM - 2.4%
Alcan Aluminum, Ltd., 9.20% - 2001................. 148,000 151,145
BANKS - 8.2%
Bangkok Bank Public Company, 7.25% - 2005.......... 150,000 144,188
Bank Austria, 7.25% - 2017......................... 160,000 157,200
First Union Corporation, 8.125% - 2002............. 110,000 115,500
Santander Financial Issuances, Ltd., 7.00% - 2006.. 100,000 98,750
----------
515,638
COMMUNICATIONS - 9.2%
Comcast Corporation, 9.125% - 2006................. 100,000 104,750
Heritage Media Corporation, 8.75% - 2006........... 50,000 51,875
K-III Communications Corporation, 10.25% - 2004.... 75,000 79,125
Rogers Communication, Inc., 9.125% - 2006.......... 100,000 101,250
Valassis Communications, Inc., 9.55% - 2003........ 125,000 134,844
Westinghouse Electric Company, 8.37% - 2002........ 100,000 103,750
----------
575,594
ELECTRIC COMPANIES - 2.4%
Consolidated Edison Company of New York, -
6.625% - 2002.................................... 150,000 148,687
ELECTRIC & GAS COMPANIES - 2.5%
Public Service Electric & Gas Company, 8.75% - 1999 150,000 156,187
ELECTRONICS - 1.7%
Pioneer Standard Electronics, Inc., 8.50% - 2006... 100,000 104,250
FINANCE - 9.9%
Ford Motor Credit Company, 8.375% - 2000 .......... 150,000 156,375
Household Finance Corporation, 8.00% - 2004........ 150,000 157,875
International Lease Finance Corporation 8.25% -
2000............................................. 150,000 155,813
MCN Investment Corporation, 6.32% - 2003........... 150,000 146,250
----------
616,313
PRINCIPAL MARKET
CORPORATE BONDS (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
FOOD & BEVERAGE TRADE - 4.1%
Cott Corporation, 9.375% - 2005.................... $ 100,000 $ 104,750
FEMSA Fomento Economico Mexicano SA, 9.50% - 1997.. 100,000 100,125
Panamerican Beverage, Inc., 8.125% - 2003.......... 50,000 50,875
----------
255,750
HOSPITAL MANAGEMENT - 1.7%
Tenet Healthcare, 10.125% - 2005................... 100,000 109,250
INSURANCE - 2.3%
Travelers Capital Trust, 7.75% - 2036.............. 150,000 145,500
MANUFACTURING - 1.7%
Shop Vac Corporation, 10.625% - 2003............... 100,000 106,250
NATURAL GAS COMPANIES - 2.6%
Vastar Resources, Inc., 8.75% - 2005............... 150,000 161,437
OIL & GAS COMPANIES - 4.8%
Petroleum Nasional Berhad, 7.125% - 2006........... 150,000 149,625
Seagull Energy Corporation, 8.625% - 2005.......... 150,000 152,625
----------
302,250
RETAIL TRADE - 2.5%
Walmart Stores, Inc., 7.50% - 2004................. 150,000 155,063
SANITARY SERVICES - 2.5%
WMX Technologies, Inc., 8.25% - 1999............... 150,000 155,812
TOBACCO PRODUCTS - 2.5%
Dimon, Inc., 8.875% - 2006......................... 150,000 156,375
----------
Total corporate bonds - 62.8%.................... 3,926,501
TRUST PREFERRED SECURITIES(4)
- -----------------------------
FINANCE - 1.9%
SI Financing Inc., 9.50% - 2026.................... 4,560 120,555
MORTGAGE BACKED SECURITIES
- --------------------------
U.S. GOVERNMENT AGENCIES - 21.4%
Federal Home Loan Mortgage Corporation,
#1311 J, 7.50%-2021 CMO.......................... 100,000 100,914
#1930 AB, 7.50%-2023 CMO......................... 195,437 197,894
#1102 G, 8.00%-2020 CMO.......................... 171,084 173,339
#1104 K, 8.50%-2020 CMO.......................... 44,000 45,188
#42 K, 8.00% - 2024 CMO.......................... 186,000 190,775
See accompanying notes.
10
<PAGE>
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SECURITY INCOME FUND
LIMITED MATURITY BOND SERIES (CONTINUED)
PRINCIPAL MARKET
MORTGAGE BACKED SECURITIES (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCIES, CONTINUED
Federal National Mortgage Association
#1992-98 PJ, 7.50% - 2019 CMO ................... $ 118,000 $ 118,993
#1992-143 J, 7.00% - 2020 CMO.................... 100,000 98,110
#1993-160 ZB, 6.50%- 2023 CMO.................... 165,774 146,866
#1993-194 E, 5.70% - 2008 CMO.................... 120,265 115,102
Government National Mortgage Association,
#2445, 8.00% - 2027 ............................. 150,000 152,766
----------
1,339,947
NON AGENCY SECURITIES - 3.5%
General Electric Capital Mortgage Securities
#1992-7A, 8.30% - 2023 CMO....................... 112,753 114,713
Sears Mortgage Securities
#1994-14 T3, 8.50% - 2022 CMO.................... 100,000 103,078
----------
217,791
----------
Total mortgage backed securities - 24.9%......... 1,557,738
GOVERNMENT & GOVERNMENT AGENCY SECURITIES
- -----------------------------------------
CANADIAN GOVERNMENT AGENCIES - 2.6%
Province of Quebec, 8.625% - 2005 ................. 150,000 163,313
U.S. GOVERNMENT AGENCY SECURITIES - 2.5%
Federal National Mortgage Association, 8.50% - 2005 150,000 156,185
----------
Total government & government agency
securities - 5.1%.............................. 319,498
----------
Total investments - 94.7%........................ 5,924,292
Cash and other assets, less liabilities - 5.3%... 334,346
----------
Total net assets - 100.0%........................ $ 6,258,638
==========
SECURITY INCOME FUND
HIGH YIELD SERIES
CORPORATE BONDS
- ---------------
APPAREL - 2.3%
Tultex Corporation, 10.625% - 2005................. $ 150,000 $ 164,625
BANKS & CREDIT - 1.5%
B.F. Saul Reit, 11.625% - 2002..................... 100,000 107,500
SECURITY INCOME FUND
HIGH YIELD SERIES (CONTINUED)
PRINCIPAL MARKET
CORPORATE BONDS (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
BEVERAGES - 2.9%
Cott Corporation, 9.375% - 2005.................... $ 100,000 $ 104,750
Delta Beverage Group, 9.75% - 2003................. 100,000 104,375
----------
209,125
BROADCAST MEDIA - 2.8%
Allbritton Communications Company, 9.75% - 2004.... 135,000 99,250
Heritage Media Corporation, 8.75% - 2006........... 100,000 103,750
----------
203,000
CABLE SYSTEMS - 1.5%
Rogers Cablesystems, 9.625% - 2002................. 100,000 105,625
CHEMICALS - 2.6%
Envirodyne Industries, Inc., 12.00% - 2000......... 170,000 185,938
COMMUNICATIONS - 3.2%
K-III Communications, 10.25% - 2004................ 50,000 52,750
Rogers Communications, Inc., 9.125% - 2006......... 70,000 70,875
Valassis Communications, Inc., 9.55% - 2003........ 100,000 107,875
----------
231,500
COMMUNICATION SERVICES - 7.4%
CF Cable TV, Inc., 11.625% - 2005.................. 125,000 143,125
Cablevision Systems Corporation, 10.75% - 2004..... 100,000 103,625
Century Communications Corporation, 9.50% - 2005... 125,000 128,437
Comcast Corporation, 9.125% - 2006................. 150,000 157,125
----------
532,312
ELECTRIC UTILITIES - 4.3%
AES Corporation, 10.25% - 2006..................... 135,000 160,500
Cal Energy Company, Inc. 9.50% - 2006.............. 150,000 147,150
----------
307,650
ENTERTAINMENT - 4.2%
Harrahs Operating, Inc., 8.75% - 2000 ............. 100,000 102,375
Showboat, Inc., 9.25% - 2008....................... 100,000 102,500
Station Casinos, Inc., 9.625% - 2003............... 100,000 99,500
----------
304,375
See accompanying notes.
11
<PAGE>
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SECURITY INCOME FUND
HIGH YIELD SERIES (CONTINUED)
PRINCIPAL MARKET
CORPORATE BONDS (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
FINANCIAL SERVICES - 3.5%
Dollar Financial Group, Inc., 10.875% - 2006....... $ 100,000 $ 107,000
Homeside Inc., 11.25% - 2003....................... 125,000 145,156
----------
252,156
FOOD AND BEVERAGES - 1.5%
Chiquita Brands International Inc., 10.25% - 2006 . 100,000 106,500
FOOD PROCESSING - 1.6%
TLC Beatrice International Holdings, Inc.,
11.50% - 2005.................................... 100,000 112,375
FOOD WHOLESALERS - 1.1%
Southland Corporation, 4.50% - 2004................ 100,000 78,750
HEALTH CARE SERVICES - 3.7%
Regency Health Services, Inc., 9.875% - 2002....... 100,000 103,250
Tenet Healthcare Corporation, 10.125% - 2005....... 150,000 163,875
----------
267,125
HOTEL/MOTEL - 1.9%
Four Seasons Hotel, Inc., 9.125% - 2000............ 125,000 134,688
MANUFACTURING - 8.7%
AAF-McQuay Inc., 8.875% - 2003..................... 100,000 100,250
AGCO Corporation, 8.50% - 2006..................... 100,000 102,625
Johns Manville International Group, Inc.,
10.875% - 2004................................... 100,000 111,250
Sequa Corporation, 9.375% - 2003................... 100,000 102,125
Shop Vac Corporation, 10.625% - 2003............... 100,000 106,250
Titan Wheel International, Inc. 8.75% - 2007....... 100,000 101,750
----------
624,250
MISCELLANEOUS - 0.8%
Packard Bioscience Company, 9.375% - 2007.......... 60,000 60,900
OIL - 4.1%
Maxus Energy Corporation, 9.50% - 2003............. 135,000 141,581
Seagull Energy Corporation, 8.625% - 2005.......... 150,000 152,625
----------
294,206
OFFICE EQUIPMENT AND SUPPLIES - 1.5%
Knoll, Inc., 10.875% - 2006........................ 100,000 110,750
PRINCIPAL MARKET
CORPORATE BONDS (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
PACKAGING & CONTAINERS - 1.8%
Plastic Containers, Inc., 10.00% - 2006............ $ 125,000 $ 129,688
PETROLEUM - 1.4%
Crown Central Petroleum, 10.875% - 2005............ 100,000 104,750
PUBLISHING - 3.6%
Golden Books Publishing, Inc., 7.65% - 2002........ 170,000 160,225
Hollinger International Publishing, 8.625% - 2005.. 100,000 101,750
----------
261,975
RECREATION - 1.5%
AMF Group, Inc., 10.875% - 2006.................... 100,000 108,000
RESTAURANTS - 2.0%
Carrols Corporation, 11.50% - 2003................. 135,000 144,618
RETAIL - 1.4%
Central Tractor, 10.625% - 2007.................... 100,000 103,750
RETAIL - GENERAL MERCHANDISING - 1.5%
Cole National Group, 9.875% - 2006................. 100,000 105,250
STEEL - 1.1%
AK Steel Corporation, 9.125% - 2006................ 75,000 77,063
TELECOMMUNICATIONS - 2.1%
Centennial Cellular, 8.875% - 2001................. 150,000 150,000
TEXTILES - 3.4%
Pillowtex Corporation, 10.00% - 2006............... 100,000 105,875
Westpoint Stevens,Inc. 9.375% - 2005............... 135,000 141,581
----------
247,456
TOBACCO - 2.0%
Dimon, Inc. 8.875% - 2006.......................... 135,000 140,738
TRANSPORTATION - 4.6%
Atlas Air, Inc., 12.25% - 2002..................... 175,000 194,250
Teekay Shipping Corporation, 8.32% - 2003.......... 135,000 136,350
----------
330,600
----------
Total corporate bonds - 87.5% ................... 6,297,238
See accompanying notes.
12
<PAGE>
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SECURITY INCOME FUND
HIGH YIELD SERIES (CONTINUED)
PRINCIPAL
AMOUNT OR
NUMBER OF MARKET
PREFERRED STOCKS SHARES VALUE
- --------------------------------------------------------------------------------
BANKS AND CREDIT - 2.7%
California Federal Bank............................ 1,750 $ 194,250
COMMUNICATIONS - 1.7%
Cablevision Systems................................ 514 52,411
K-III Communications............................... 65,100 71,225
----------
123,636
----------
Total preferred stocks - 4.4%.................... 317,886
TRUST PREFERRED SECURITIES(4)
- -----------------------------
FINANCE - 1.5%
Salomon Brothers Financing, 9.50% -2026............ 4,000 105,750
----------
Total investments - 93.4%........................ 6,720,874
Cash and other assets, less liabilities - 6.6%... 473,573
----------
Total net assets -100.0%......................... $ 7,194,447
==========
SECURITY TAX-EXEMPT FUND
MUNICIPAL BONDS
- ---------------
CIVIC CENTER DEVELOPMENT REVENUE - 1.1%
District of Columbia Redevelopment Washington D.C.
Sports Arena 5.40% - 2000 ....................... $ 250,000 $ 250,938
EDUCATION REVENUE - 29.7%
Illinois Chicago School, Series A, 4.90% - 2005.... $1,000,000 990,000
Iowa Higher Education, St. Ambrose, 5.75% - 2011... $ 480,000 466,200
Island County Washington School District South
Whidbey, 6.75% - 2007 ........................... $1,000,000 1,153,460
Federal Way, Washington School District,
4.80% - 2007..................................... $1,000,000 977,500
Mukwanago, Wisconsin School District, 5.00% - 2004. $ 500,000 506,250
North Brunswick Township, New Jersey Board of
Education, 6.30% - 2013.......................... $1,000,000 1,071,250
Northfield, Minnesota School District #659,
4.80% - 2007 .................................... $ 500,000 493,125
Vigo County Indiana Middle School Building
Corporation, 5.80% - 2013 ....................... $1,000,000 1,012,500
----------
6,670,285
SECURITY TAX-EXEMPT FUND (CONTINUED)
PRINCIPAL MARKET
MUNICIPAL BONDS (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
ELECTRIC UTILITY REVENUE - 19.4%
Georgia Municipal Electric Authority, 5.25% - 2025. $1,000,000 $ 947,500
Massachusetts Municipal Wholesale Electric Company
Power Supply System, Series B, 6.625% - 2004....... 1,200,000 1,296,000
Nebraska Public Power District Revenue, Series A,
6.25% - 2022..................................... 1,000,000 1,038,750
Washington Public Power Supply System Revenue
Nuclear Project #2, 6.30% - 2012................. 1,000,000 1,075,000
----------
4,357,250
GENERAL OBLIGATION - 12.7%
Clark County, Nevada School District, Series A,
5.50% - 2016..................................... 1,000,000 1,000,000
Dade County Florida, 5.75% - 2001.................. 1,000,000 1,048,750
State of Illinois, 6.10% - 2003.................... 750,000 802,500
----------
2,851,250
POLLUTION CONTROL - 4.5%
Kansas City, Kansas General Motors Corporation
Project, 5.45% - 2006............................ 1,000,000 1,015,000
PORTS & HARBORS - 2.3%
Kansas City, Missouri Port Authority Riverfront
Park, 5.75% - 2005............................... 500,000 516,250
SALES TAX REVENUE - 4.4%
Los Angeles, California, 5.625% - 2018............. 1,000,000 996,250
SEWER REVENUE - 19.0%
DuPage County, Illinois Stormwater Project
Refunding, 5.60% - 2021.......................... 1,000,000 1,016,250
Houston, Texas Water & Sewer System Revenue,
Series A, 6.20% - 2020........................... 1,000,000 1,048,750
King County Washington Sewer Revenue, Series A,
6.25% - 2034..................................... 1,000,000 1,053,750
Los Angeles, CA Wastewater System Revenue,
6.00% - 2014..................................... 1,100,000 1,138,500
----------
4,257,250
See accompanying notes.
13
<PAGE>
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SECURITY TAX-EXEMPT FUND (CONTINUED)
PRINCIPAL MARKET
MUNICIPAL BONDS (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
VARIOUS PURPOSE REVENUE - 4.5%
Denver Metropolitan Major League Baseball Stadium
Project, 4.00% - 1999............................ $1,000,000 $ 996,250
----------
Total investments - 97.6%........................ 21,910,723
Cash and other assets, less liabilities - 2.4%... 538,848
----------
Total net assets - 100.0%........................ $22,449,571
==========
SECURITY CASH FUND
COMMERCIAL PAPER
- ----------------
BEVERAGES - 1.0%
PepsiCo, Inc., 5.48%, 7-7-97....................... $ 500,000 $ 499,543
BROKERAGE - 9.9%
Bear Stearns Companies, Inc., 5.57%, 7-8-97........ 2,300,000 2,297,509
Merrill Lynch & Company, Inc.,..................... 2,252,000
5.53%, 7-3-97.................................... 1,421,563
5.56%, 7-7-97.................................... 99,907
5.55%, 7-10-97................................... 414,424
5.58%, 8-8-97.................................... 102,394
5.59%, 9-29-97................................... 209,037
----------
4,544,834
BUSINESS SERVICES - 6.5%
A1 Credit Corporation, 5.48%, 7-7-97............... 1,000,000 999,087
General Electric Capital Corporation, 5.54%, 8-8-97 2,000,000 1,988,304
----------
2,987,391
COMBINATION GAS & ELECTRIC - 9.6%
Dayton Power & Light Company, 5.56%, 7-15-97....... 2,200,000 2,195,243
Pacific Gas & Electric Company 5.56%, 7-21-97...... 2,000,000 1,993,822
South Carolina Electric & Gas Company,
5.52%, 7-18-97................................... 250,000 249,348
----------
4,438,413
COMPUTER SYSTEMS - 2.6%
International Business Machines Corporation,
5.50%, 7-14-97................................... 1,200,000 1,197,617
SECURITY CASH FUND (CONTINUED)
PRINCIPAL MARKET
COMMERCIAL PAPER (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
ELECTRIC UTILITIES - 15.6%
Alabama Power Company, 5.55%, 7-11-97.............. $ 100,000 $ 99,846
Carolina Power & Light Company, 5.53%, 7-29-97..... 1,380,000 1,374,064
Idaho Power Company, 5.53%, 7-21-97................ 915,000 912,189
Interstate Power Company,.......................... 2,037,000
5.53%, 7-9-97.................................... 998,771
5.55%, 7-9-97.................................... 99,877
5.55%, 7-9-97.................................... 236,708
5.55%, 8-19-97................................... 694,712
New England Power Company, 5.57%, 7-14-97.......... 638,000 636,717
Progress Capital Holdings, Inc.,................... 2,150,000
5.54%, 7-11-97................................... 698,923
5.5%, 7-11-97.................................... 199,691
5.55%, 7-17-97................................... 1,246,917
----------
7,198,415
ELECTRONICS - 3.7%
AVNET, Inc., 5.57%, 8-11-97........................ 1,700,000 1,689,217
ENGINEERING - 4.8%
Fluor Corporation, 5.54%, 7-31-97.................. 2,200,000 2,189,843
INSURANCE - 2.7%
AIG Funding, Inc., 5.48%, 7-3-97................... 1,240,000 1,239,622
MANUFACTURING - 4.3%
Eaton Corporation, 5.55%, 7-25-97.................. 2,000,000 1,992,600
NATURAL GAS - 2.8%
LaClede Gas Company, 5.52%, 7-10-97................ 1,300,000 1,298,206
PHARMACEUTICALS - 3.6%
Allergan, Inc.,.................................... 1,685,000
5.56%, 7-22-97................................... 598,054
5.55%, 8-5-97.................................... 1,079,146
----------
1,677,200
PHOTOGRAPH/IMAGING - 4.7%
Eastman Kodak Company,............................. 2,170,000
5.50%, 7-18-97................................... 668,260
5.50%, 7-30-97................................... 1,493,354
----------
2,161,614
TELECOMMUNICATIONS - 4.5%
Pacific Bell, 5.60%, 7-11-97....................... 2,100,000 2,096,733
----------
Total commercial paper - 76.3%................... 35,211,248
See accompanying notes.
14
<PAGE>
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITES)
SECURITY CASH FUND (CONTINUED)
PRINCIPAL MARKET
U.S. GOVERNMENT & AGENCIES AMOUNT VALUE
- --------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGES - 15.2%
5.90%, 7-8-98.................................... $2,000,000 $ 2,000,000
6.13%, 4-17-98................................... 1,000,000 1,000,000
5.87%, 1-30-98................................... 2,000,000 2,000,000
5.63%, 3-30-98................................... 2,000,000 2,000,000
----------
7,000,000
SMALL BUSINESS ASSOCIATION POOLS - 11.7%
#501927, 6.75%, 20171............................ 1,832,168 1,849,477
#501398, 6.125%, 20182........................... 929,169 932,654
#503152, 6.125%, 20202........................... 919,524 919,524
#503295, 6.00%, 20212............................ 813,286 813,794
#503303, 6.00%, 20212............................ 861,133 861,671
----------
5,377,120
Total U.S. government & agencies - 26.9%......... 12,377,120
----------
Total investments - 103.2%....................... 47,588,368
Liabilities in excess of cash & other
assets - (3.2%)............................... (1,496,109)
----------
Total net assets - 100%.......................... $46,092,259
==========
The identified cost of investments owned at June 30, 1997, was the same for
federal income tax and book purposes.
CMO - (Collateralized Mortgage Obligation)
(1) Varible 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) Put bond - a type of specialty bond that gives the holder the right to
redeem to the issuer at certain specified times before maturity.
(4) Trust preferred securities - securities issued by financial institutions to
augment their Tier 1 capital base. Issued on a subordinate basis relative
to senior notes or debentures. Institutions may defer cash payments for up
to 10 pay periods.
See accompanying notes.
15
<PAGE>
BALANCE SHEETS
JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SECURITY INCOME FUND
--------------------------------------------------------
U.S. LIMITED SECURITY
CORPORATE GOVERNMENT MATURITY HIGH YIELD TAX-EXEMPT SECURITY
BOND SERIES SERIES BOND SERIES SERIES FUND CASH FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments, at value (identified cost
$63,108,877, $8,188,786, $5,862,720,
$6,495,108, $21,466,535 and
$12,377,120, respectively)............. $63,416,718 $8,252,418 $5,924,292 $6,720,874 $21,910,723 $12,377,120
Commercial paper, at amortized cost which
approximates market value.............. 35,211,248
Cash..................................... 662,349 24,189 95,820 346,845 152,424 246,222
Receivables:
Fund shares sold....................... 249,653 10,694 8,339 476 286 174,044
Securities sold........................ 539,076 --- 107,815 --- --- 163,954
Interest............................... 1,127,654 137,735 120,483 136,937 398,814 218,399
Prepaid expenses....................... 15,350 16,047 16,129 823 12,300 44,888
---------- --------- --------- --------- ---------- ----------
Total assets......................... $66,010,800 $8,441,083 $6,272,878 $7,205,955 $22,474,547 $48,435,875
========== ========= ========= ========= ========== ==========
LIABILITIES AND NET ASSETS
Liabilities:
Payable for:
Securities purchased ................ $ --- $ --- $ --- $ --- $ --- $ 2,000,000
Fund shares redeemed................. 50,865 65,955 5,000 --- 4,801 89,882
Dividends payable to shareholders.... --- --- --- --- --- 197,852
Other Liabilities:
Management fees...................... 28,063 --- --- --- 9,543 26,214
Custodian fees....................... --- 3,173 3,041 --- --- 2,488
Transfer and administration fees..... 13,713 2,184 919 841 2,972 11,775
Professional fees.................... 5,668 --- 2,299 1,771 1,411 4,979
12b-1 distribution plan fees......... 18,702 2,263 1,882 3,479 1,067 ---
Miscellaneous fees................... 3,858 1,472 1,099 5,417 5,182 10,426
---------- --------- --------- --------- ---------- ----------
Total liabilities.................. 120,869 75,047 14,240 11,508 24,976 2,343,616
Net Assets:
Paid in capital........................ 79,186,608 9,253,172 6,269,515 6,971,265 23,419,310 46,092,259
Undistributed net investment income
(loss)............................... 54,741 11,328 9,795 1,076 7,394 ---
Accumulated undistributed net realized
gain (loss)on sale of investments.... (13,659,259) (962,096) (82,244) (3,660) (1,421,321) ---
Net unrealized appreciation
(depreciation)in value of investments 307,841 63,632 61,572 225,766 444,188 ---
---------- --------- --------- --------- ---------- ----------
Net assets......................... 65,889,931 8,366,036 6,258,638 7,194,447 22,449,571 46,092,259
---------- --------- --------- --------- ---------- ----------
Total liabilities and net assets. $66,010,800 $8,441,083 $6,272,878 $7,205,955 $22,474,547 $48,435,875
========== ========= ========= ========= ========== ==========
CLASS "A" SHARES
Capital shares outstanding............. 8,605,563 1,633,517 530,358 261,532 2,174,152 46,092,259
Net assets............................. $58,539,150 $7,636,561 $5,366,418 $4,071,017 $21,191,750 $46,092,259
Net asset value per share (net assets
divided by shares outstanding)....... $6.80 $4.67 $10.12 $15.57 $9.75 $1.00
Add: Selling commission (4.75% of the
offering price)...................... 0.34 0.23 0.50 0.78 0.49 ---
---------- ---------- ---------- ---------- ---------- ----------
Offering price per share (net asset
value divided by 95.25%)............. $7.14 $4.90 $10.62 $16.35 $10.24 $1.00
========== ========== ========== ========== ========== ==========
CLASS "B" SHARES
Capital shares outstanding............. 1,074,782 156,272 88,394 200,907 128,842 ---
Net assets............................. $ 7,350,781 $ 729,475 $ 892,220 $3,123,430 $ 1,257,821 ---
Net asset value per share (net assets
divided by shares outstanding)....... $6.84 $4.67 $10.09 $15.55 $9.76 ---
========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
16
<PAGE>
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED
JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SECURITY INCOME FUND
--------------------------------------------------------
U.S. LIMITED SECURITY
CORPORATE GOVERNMENT MATURITY HIGH YIELD TAX-EXEMPT SECURITY
BOND SERIES SERIES BOND SERIES SERIES FUND CASH FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends.............................. $ --- $ --- $ --- $ 14,812 $ --- $ ---
Interest............................... 2,740,937 316,292 227,482 270,997 604,384 1,363,485
---------- ------- ------- ------- ------- ---------
Total investment income.............. 2,740,937 316,292 227,482 285,809 604,384 1,363,485
EXPENSES:
Management fees........................ 175,787 21,048 14,800 16,877 57,082 122,068
Custodian fees......................... 11,666 1,475 1,172 545 641 3,796
Transfer/maintenance fees.............. 53,657 9,072 2,482 1,153 7,780 59,549
Administration fees.................... 31,641 3,788 2,664 2,826 10,275 10,986
Directors' fees........................ 3,719 477 222 145 4,873 4,751
Professional fees...................... 3,320 2,315 2,801 3,571 2,881 2,976
Reports to shareholders................ 2,889 528 254 29 1,157 4,462
Registration fees...................... 12,490 261 1,633 12,827 12,102 1,493
Other expenses......................... 4,809 743 670 851 1,404 4,699
12b-1 distribution plan fees........... 114,982 13,054 10,684 18,645 6,289 ---
---------- ------- ------- ------- ------- ---------
414,960 52,761 37,382 57,469 104,484 214,780
Less: Earnings credits applied.......... --- --- (922) --- (641) ---
Reimbursement of expenses......... (8,429) (21,048) (14,800) (16,877) (1,279) ---
---------- ------- ------- ------- ------- ---------
Total expenses.................. 406,531 31,713 21,660 40,592 102,564 214,780
---------- ------- ------- ------- ------- ---------
Net investment income......... 2,334,406 284,579 205,822 245,217 501,820 1,148,705
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) during the
period on:
Investments........................ (1,302,331) 16,281 (12,680) 32,925 56,566 ---
Net change in unrealized appreciation
(depreciation) during the period on:
Investments........................ 510,568 (97,957) (1,978) 78,699 (7,665) ---
---------- ------- ------- ------- ------- ---------
Net gain (loss).................. (791,763) (81,676) (14,658) 111,624 48,901 ---
---------- ------- ------- ------- ------- ---------
Net increase in net assets
resulting from operations...... $ 1,542,643 $202,903 $191,164 $356,841 $550,721 $1,148,705
========== ======= ======= ======= ======= =========
</TABLE>
See accompanying notes.
17
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED
JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SECURITY INCOME FUND
--------------------------------------------------------
U.S. LIMITED SECURITY
CORPORATE GOVERNMENT MATURITY HIGH YIELD TAX-EXEMPT SECURITY
BOND SERIES SERIES BOND SERIES SERIES FUND CASH FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income.................... $ 2,334,406 $ 284,579 $ 205,822 $ 245,217 $ 501,820 $ 1,148,705
Net realized gain (loss)................. (1,302,331) 16,281 (12,680) 32,925 56,566 ---
Unrealized appreciation (depreciation)
during the period...................... 510,568 (97,957) (1,978) 78,699 (7,665) ---
---------- ---------- --------- --------- ---------- ----------
Net increase in net assets
resulting from operations.......... 1,542,643 202,903 191,164 356,841 550,721 1,148,705
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A ............................... (2,065,526) (253,835) (169,955) (139,147) (480,210) (1,148,705)
Class B................................ (214,139) (19,574) (26,072) (105,715) (19,775) ---
Net realized gain
Class A ............................... --- --- --- --- --- ---
Class B ............................... --- --- --- --- --- ---
---------- ---------- --------- --------- ---------- ----------
Total distributions to
shareholders....................... (2,279,665) (273,409) (196,027) (244,862) (499,985) (1,148,705)
CAPITAL SHARE TRANSACTIONS (A):
Proceeds from sale of shares
Class A................................ 2,847,618 488,692 1,049,826 1,196,616 292,969 126,053,217
Class B................................ 2,095,075 116,369 186,411 255,623 43,996 ---
Dividends reinvested
Class A................................ 1,557,138 210,311 151,594 139,098 276,810 1,096,379
Class B................................ 196,736 16,786 26,072 105,715 13,490 ---
Shares redeemed
Class A................................ (18,556,565) (1,033,432) (770,958) (112,283) (2,729,189) (126,388,061)
Class B................................ (2,176,694) (59,583) (78,353) (1,407) (313,744) ---
---------- ---------- --------- --------- ---------- ----------
Net increase (decrease)from
capital share transactions......... (14,036,692) (260,857) 564,592 1,583,362 (2,415,668) 761,535
---------- ---------- --------- --------- ---------- ----------
Total increase (decrease)
in net assets.................. (14,773,714) (331,363) 559,729 1,695,341 (2,364,932) 761,535
NET ASSETS:
Beginning of period...................... 80,663,645 8,697,399 5,698,909 5,499,106 24,814,503 45,330,724
---------- ---------- --------- --------- ---------- ----------
End of period............................ $65,889,931 $ 8,366,036 $6,258,638 $7,194,447 $22,449,571 $46,092,259
========== ========== ========= ========= ========== ==========
Undistributed net investment income at
end of period ......................... $54,741 $11,328 $9,795 $1,076 $7,394 $---
========== ========== ========= ========= ========== ==========
(a) Shares issued and redeemed
Shares sold
Class A............................ 418,427 104,439 104,775 78,338 30,148 126,053,217
Class B............................ 307,492 25,092 18,521 16,649 4,522 ---
Dividends reinvested
Class A............................ 230,231 45,284 15,099 9,033 28,713 1,096,379
Class B............................ 167,775 3,617 2,602 6,871 1,397 ---
Shares redeemed
Class A ........................... (2,724,117) (221,050) (76,428) (7,307) (282,449) (126,388,061)
Class B............................ (319,394) (12,765) (7,820) (92) (32,347) ---
---------- ---------- --------- --------- ---------- ----------
Net increase (decrease).......... (1,919,586) (55,383) 56,749 103,492 (250,016) 761,535
========== ========== ========= ========= ========== ==========
</TABLE>
See accompanying notes.
18
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SECURITY INCOME FUND
--------------------------------------------------------
U.S. LIMITED SECURITY
CORPORATE GOVERNMENT MATURITY HIGH YIELD TAX-EXEMPT SECURITY
BOND SERIES SERIES BOND SERIES SERIES FUND CASH FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS:
Net investment income.................... $ 5,712,167 $ 685,751 $ 351,230 $ 151,652 $ 1,153,538 $ 2,158,130
Net realized gain (loss)................. (1,347,012) 182,946 (46,509) (36,585) 56,324 ---
Unrealized appreciation (depreciation)
during the period...................... (5,522,985) (735,463) (186,260) 147,067 (671,331) ---
---------- ---------- --------- --------- ---------- ----------
Net increase (decrease) in net assets
resulting from operations.............. (1,157,830) 133,234 118,461 262,134 538,531 2,158,130
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A................................ (5,393,982) (655,579) (304,962) (79,996) (1,107,445) (2,158,130)
Class B................................ (343,417) (32,686) (47,156) (70,935) (44,319) ---
Tax return of capital
Class A................................ --- --- (5,684) --- --- ---
Class A................................ --- --- (879) --- --- ---
---------- ---------- --------- --------- ---------- ----------
Total distributions to shareholders.. (5,737,399) (688,265) (358,681) (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 2,644,208 1,613,431 310,586,017
Class B................................ 3,464,361 375,419 269,401 2,611,381 579,929 ---
Dividends Reinvested
Class A................................ 4,241,649 543,532 284,749 79,998 626,193 1,969,086
Class B................................ 304,987 26,151 47,452 70,935 31,495 ---
Cost of shares redeemed
Class A................................ (26,834,054) (3,998,800) (913,142) (48) (3,379,177) (305,382,279)
Class B................................ (1,793,517) (286,899) (267,281) (18,571) (260,053) ---
---------- ---------- --------- --------- ---------- ----------
Net increase (decrease) from capital
share transactions................. (11,885,465) (1,409,815) 1,865,325 5,387,903 (788,182) 7,172,824
---------- ---------- --------- --------- ---------- ----------
Total increase (decrease) in net
assets........................... (18,780,694) (1,964,846) 1,625,105 5,499,106 (1,401,415) 7,172,824
NET ASSETS:
Beginning of period...................... 99,444,339 10,662,245 4,073,804 --- 26,215,918 38,157,900
---------- ---------- --------- --------- ---------- ----------
End of period............................ $80,663,645 $ 8,697,399 $5,698,909 $5,499,106 $24,814,503 $45,330,724
========== ========== ========= ========= ========== ==========
Undistributed net investment income at
end of period.......................... $ --- $ 158 $ --- $ 721 $ 5,559 $ ---
========== ========== ========= ========= ========== ==========
(a) Shares issued and redeemed
Shares sold
Class A ........................... 1,257,439 408,653 236,285 176,201 167,132 310,586,017
Class B............................ 497,238 79,022 25,885 174,028 59,521 ---
Dividends reinvested
Class A............................ 608,432 115,124 27,590 5,270 65,031 1,969,086
Class B............................ 43,584 5,533 4,593 4,677 3,268 ---
Shares redeemed
Class A............................ (3,860,010) (845,356) (88,496) (3) (350,952) (305,382,279)
Class B............................ (256,329) (61,304) (25,864) (1,226) (27,117) ---
---------- ---------- --------- --------- ---------- ----------
Net increase (decrease).......... (1,709,646) (298,328) 179,993 358,947 (83,117) 7,172,824
========== ========== ========= ========= ========== ==========
</TABLE>
See accompanying notes.
19
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each period
<TABLE>
<CAPTION>
CORPORATE BOND SERIES (CLASS A) FISCAL PERIOD ENDED DECEMBER 31
---------------------------------------------------------------------------------------------
1997(D)(H) 1996(D)(F) 1995(D)(F) 1994 1993 1992
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD. $ 6.87 $7.39 $6.68 $7.81 $7.72 $7.68
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income............... 0.233 0.470 0.470 0.490 0.520 0.610
Net Gain (Loss) on Securities
(realized & unrealized)........... (0.076) (0.517) 0.708 (1.127) 0.521 0.044
------------- ------------- ------------- ------------- ------------- -------------
Total from Investment Operations.. 0.157 (0.047) 1.178 (0.637) 1.041 0.654
LESS DISTRIBUTIONS
Dividends (from Net Investment
Income)........................... (0.227) (0.473) (0.468) (0.493) (0.527) (0.614)
Distributions (from Capital Gains).. --- --- --- --- (0.424) ---
------------- ------------- ------------- ------------- ------------- -------------
Total Distributions............... (0.227) (0.473) (0.468) (0.493) (0.951) (0.614)
------------- ------------- ------------- ------------- ------------- -------------
NET ASSET VALUE END OF PERIOD....... $6.80 $6.87 $7.39 $6.68 $7.81 $7.72
============= ============= ============= ============= ============= =============
TOTAL RETURN (A).................... 2.35% (0.50%) 18.20% (8.30%) 13.40% 9.00%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) $58,539 $73,360 $93,701 $90,593 $118,433 $104,492
Ratio of Expenses to Average Net
Assets............................ 1.08% 1.01% 1.02% 1.01% 1.02% 1.01%
Ratio of Net Income (Loss) to
Average Net Assets................ 6.72% 6.54% 6.62% 6.91% 6.46% 7.97%
Portfolio Turnover Rate............. 165% 292% 200% 204% 157% 61%
</TABLE>
<TABLE>
<CAPTION>
CORPORATE BOND SERIES (CLASS B) FISCAL PERIOD ENDED DECEMBER 31
-----------------------------------------------------------------------------
1997(C)(D)(H) 1996(C)(D)(F) 1995(C)(D)(F) 1994(C) 1993(B)
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD. $ 6.90 $ 7.43 $ 6.71 $ 7.84 $8.59
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income............... 0.195 0.400 0.400 0.430 0.110
Net Gain (Loss) on Securities
(realized & unrealized)........... (0.053) (0.517) 0.725 (1.129) (0.324)
------------- ------------- ------------- ------------- -------------
Total from Investment Operations.. 0.142 (0.117) 1.125 (0.699) (0.214)
LESS DISTRIBUTIONS
Dividends (from Net Investment
Income)........................... (0.202) (0.413) (0.405) (0.431) (0.112)
Distributions (from Capital Gains).. --- --- --- --- (0.424)
------------- ------------- ------------- ------------- -------------
Total Distributions .............. (0.202) (0.413) (0.405) (0.431) (0.536)
------------- ------------- ------------- ------------- -------------
NET ASSET VALUE END OF PERIOD....... $6.84 $6.90 $7.43 $6.71 $7.84
============= ============= ============= ============= =============
TOTAL RETURN(A)..................... 2.12% (1.40%) 17.30% (9.00%) (2.50%)
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) $7,351 $7,303 $5,743 $3,878 $1,022
Ratio of Expenses to Average Net
Assets............................ 1.85% 1.85% 1.85% 1.85% 1.88%
Ratio of Net Income (Loss) to
Average Net Assets................ 5.94% 5.70% 5.80% 6.08% 5.16%
Portfolio Turnover Rate............. 165% 292% 200% 204% 164%
</TABLE>
See Accompanying Notes.
20
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each period
<TABLE>
<CAPTION>
U.S. GOVERNMENT SERIES (CLASS A) FISCAL PERIOD ENDED DECEMBER 31
---------------------------------------------------------------------------------------------
1997(C)(D)(H) 1996(C)(D)(F) 1995(C)(D)(F) 1994(C) 1993(C) 1992(C)
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD. $4.71 $4.97 $4.35 $4.97 $5.04 $5.17
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income............... 0.160 0.310 0.300 0.300 0.310 0.370
Net Gain (Loss) on Securities
(realized & unrealized)........... (0.047) (0.256) 0.620 (0.621) 0.274 (0.126)
------------- ------------- ------------- ------------- ------------- -------------
Total from Investment Operations.. 0.113 0.054 0.920 (0.321) 0.584 0.244
LESS DISTRIBUTIONS
Dividends (from Net Investment
Income)........................... (0.153) (0.314) (0.300) (0.299) (0.310) (0.366)
Distributions (from Capital Gains).. --- --- --- --- (0.344) ---
Return of Capital................... --- --- --- --- --- (0.008)
------------- ------------- ------------- ------------- ------------- -------------
Total Distributions............... (0.153) (0.314) (0.300) (0.299) (0.654) (0.374)
------------- ------------- ------------- ------------- ------------- -------------
NET ASSET VALUE END OF PERIOD....... $4.67 $4.71 $4.97 $4.35 $4.97 $5.04
============= ============= ============= ============= ============= =============
TOTAL RETURN (A).................... 2.47% 1.30% 21.90% (6.50%) 10.90% 5.00%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) $7,637 $8,036 $10,080 $8,309 $10,098 $9,364
Ratio of Expenses to Average Net
Assets............................ 0.55% 0.65% 1.11% 1.10% 1.10% 1.11%
Ratio of Net Income (Loss) to
Average Net Assets................ 5.67% 6.44% 6.41% 6.47% 5.90% 7.22%
Portfolio Turnover Rate............. 25% 75% 81% 220% 153% 157%
</TABLE>
<TABLE>
<CAPTION>
U.S. GOVERNMENT SERIES (CLASS A) FISCAL PERIOD ENDED DECEMBER 31
-----------------------------------------------------------------------------
1997(C)(D)(H) 1996(C)(D)(F) 1995(C)(D)(F) 1994(C) 1993(B)(C)
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD. $4.71 $4.97 $4.35 $4.97 $5.51
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income............... 0.120 0.250 0.260 0.260 0.040
Net Gain (Loss) on Securities
(realized & unrealized)........... (0.027) (0.254) 0.625 (0.624) (0.193)
------------- ------------- ------------- ------------- -------------
Total from Investment Operations.. 0.093 (0.004) 0.885 (0.364) (0.153)
LESS DISTRIBUTIONS
Dividends (from Net Investment
Income)........................... (0.133) (0.256) (0.265) (0.256) (0.043)
Distributions (from Capital Gains).. --- --- --- --- (0.344)
Return of Capital................... --- --- --- --- ---
------------- ------------- ------------- ------------- -------------
Total Distributions............... (0.133) (0.2560) (0.265) (0.256) (0.387)
------------- ------------- ------------- ------------- -------------
NET ASSET VALUE END OF PERIOD....... $4.67 $4.71 $4.97 $4.35 $4.97
============= ============= ============= ============= =============
TOTAL RETURN (A).................... 2.03% (0.02%) 20.90% (7.40%) (1.40%)
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) $729 $661 $582 $321 $140
Ratio of Expenses to Average Net
Assets............................ 1.52% 1.86% 1.87% 1.85% 1.61%
Ratio of Net Income (Loss) to
Average Net Assets................ 4.70% 5.23% 5.69% 5.76% 5.54%
Portfolio Turnover Rate............. 25% 75% 81% 220% 114%
</TABLE>
See accompanying notes.
21
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each period
<TABLE>
<CAPTION>
LIMITED MATURITY BOND SERIES (CLASS A) FISCAL PERIOD ENDED DECEMBER 31
---------------------------------------------------
1997(C)(D)(F)(H) 1996(C)(D)(F) 1995(C)(D)(E)(F)
---------------- ------------- ----------------
<S> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD. $10.14 $ 10.66 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income............... 0.354 0.720 0.620
Net Gain (Loss) on Securities
(realized & unrealized)........... (0.037) (0.507) 0.652
------------- ------------- -------------
Total from Investment Operations.. 0.317 0.213 1.272
LESS DISTRIBUTIONS
Dividends (from Net Investment
Income)........................... (0.337) (0.720) (0.612)
Distributions (from Capital Gains).. --- --- ---
Return of Capital................... --- (0.013) ---
------------- ------------- -------------
Total Distributions............... (0.337) (0.733) (0.612)
------------- ------------- -------------
NET ASSET VALUE END OF PERIOD....... $10.12 $10.14 $10.66
============= ============= =============
TOTAL RETURN (A).................... 3.20% 2.10% 13.00%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) $5,366 $4,938 $3,322
Ratio of Expenses to Average Net
Assets............................ 0.63% 0.90% 0.84%
Ratio of Net Income (Loss) to
Average Net Assets ............... 7.08% 6.97% 5.97%
Portfolio Turnover Rate............. 79% 105% 4%
</TABLE>
<TABLE>
<CAPTION>
LIMITED MATURITY BOND SERIES (CLASS B) FISCAL PERIOD ENDED DECEMBER 31
---------------------------------------------------
1997(C)(D)(F)(H) 1996(C)(D)(F) 1995(C)(D)(E)(F)
---------------- ------------- ----------------
<S> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD. $ 10.14 $ 10.67 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income............... 0.290 0.630 0.530
Net Gain (Loss) on Securities
(realized & unrealized)........... (0.044) (0.524) 0.664
------------- ------------- -------------
Total from Investment Operations.. 0.246 0.106 1.194
LESS DISTRIBUTIONS
Dividends (from Net Investment
Income)........................... (0.296) (0.624) (0.524)
Distributions (from Capital Gains).. --- --- ---
Return of Capital................... --- (0.012) ---
------------- ------------- -------------
Total Distributions............... (0.296) (0.636) (0.524)
------------- ------------- -------------
NET ASSET VALUE END OF PERIOD....... $10.09 $10.14 $10.67
============= ============= =============
TOTAL RETURN (A).................... 2.49% 1.10% 12.20%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) $892 $761 $752
Ratio of Expenses to Average Net
Assets............................ 1.53% 1.88% 1.71%
Ratio of Net Income (Loss) to
Average Net Assets................ 6.23% 5.99% 5.12%
Portfolio Turnover Rate ............ 79% 105% 4%
</TABLE>
See accompanying notes.
22
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each period
<TABLE>
<CAPTION>
HIGH YIELD SERIES (CLASS A) FISCAL PERIOD ENDED DECEMBER 31
-------------------------------
1997(C)(D)(H) 1996(C)(D)(G)
------------- -------------
<S> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD. $15.32 $15.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income............... 0.610 0.450
Net Gain (Loss) on Securities
(realized & unrealized)........... 0.259 0.320
------------- -------------
Total from Investment Operations.. 0.869 0.770
LESS DISTRIBUTIONS
Dividends (from Net Investment
Income)........................... (0.619) (0.450)
Distributions (from Capital Gains).. --- ---
------------- -------------
Total Distributions............... (0.619) (0.450)
------------- -------------
NET ASSET VALUE END OF PERIOD....... $15.57 $15.32
============= =============
TOTAL RETURN (A).................... 5.79% 5.20%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) $4,701 $2,780
Ratio of Expenses to Average Net
Assets............................ 0.90% 1.54%
Ratio of Net Income (Loss) to Average
Net Assets........................ 8.21% 7.47%
Portfolio Turnover Rate............. 58% 168%
</TABLE>
<TABLE>
<CAPTION>
HIGH YIELD SERIES (CLASS B) FISCAL PERIOD ENDED DECEMBER 31
-------------------------------
1997(C)(D)(H) 1996(C)(D)(G)
------------- -------------
<S> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD. $15.32 $15.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income............... 0.550 0.410
Net Gain (Loss) on Securities
(realized & unrealized)........... 0.237 0.320
------------- -------------
Total from Investment Operations.. 0.787 0.730
LESS DISTRIBUTIONS
Dividends (from Net Investment
Income)........................... (0.557) (0.410)
Distributions (from Capital Gains).. --- ---
------------- -------------
Total Distributions............... (0.557) (0.410)
------------- -------------
NET ASSET VALUE END OF PERIOD....... $15.55 $15.32
============= =============
TOTAL RETURN (A).................... 5.24% 4.90%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) $3,123 $2,719
Ratio of Expenses to Average Net
Assets............................ 0.88% 2.26%
Ratio of Net Income (Loss) to
Average Net Assets................ 3.63% 6.74%
Portfolio Turnover Rate............. 58% 168%
</TABLE>
See accompanying notes.
23
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each period
<TABLE>
<CAPTION>
SECURITY TAX-EXEMPT FUND (CLASS A) FISCAL PERIOD ENDED DECEMBER 31
---------------------------------------------------------------------------------------------
1997(C)(D)(F)(H) 1996(C)(D)(F) 1995(C)(D)(F) 1994 1993 1992
---------------- ------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD. $9.72 $9.94 $9.05 $10.37 $10.06 $9.97
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income............... 0.220 0.450 0.480 0.470 0.510 0.610
Net Gain (Loss) on Securities
(realized & unrealized)........... 0.026 (0.215) 0.891 (1.317) 0.702 0.092
------------- ------------- ------------- ------------ ------------ ------------
Total from Investment Operations.... 0.246 0.235 1.371 (0.847) 1.212 0.702
LESS DISTRIBUTIONS
Dividends (from Net Investment
Income)........................... (0.216) (0.455) (0.481) (0.473) (0.514) (0.612)
Distributions (from Capital Gains).. --- --- --- --- (0.388) ---
------------- ------------- ------------- ------------ ------------ ------------
Total Distributions............... (0.216) (0.455) (0.481) (0.473) (0.902) (0.612)
------------- ------------- ------------- ------------ ------------ ------------
NET ASSET VALUE END OF PERIOD....... $9.75 $9.72 $9.94 $9.05 $10.37 $10.06
============= ============= ============= ============ ============ ============
TOTAL RETURN (A).................... 2.58% 2.50% 15.50% (8.30%) 11.60% 7.30%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) $21,192 $23,304 $25,026 $24,092 $32,115 $28,608
Ratio of Expenses to Average
Net Assets........................ 0.84% 0.78% 0.86% 0.82% 0.82% 0.84%
Ratio of Net Income (Loss) to
Average Net Assets................ 4.46% 4.67% 5.02% 4.74% 4.92% 6.07%
Portfolio Turnover Rate............. 4% 54% 103% 88% 118% 90%
</TABLE>
<TABLE>
<CAPTION>
SECURITY TAX-EXEMPT FUND (CLASS B) FISCAL PERIOD ENDED DECEMBER 31
------------------------------------------------------------------------------
1997(C)(D)(F)(H) 1996(C)(D)(F) 1995(C)(D)(F) 1994(C) 1993(B)
---------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD. $9.73 $9.95 $9.05 $10.37 $10.88
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income............... 0.160 0.330 0.370 0.350 0.100
Net Gain (Loss) on Securities
(realized & unrealized)........... 0.023 (0.215) 0.902 (1.321) (0.128)
------------- ------------- ------------- ------------ ------------
Total from Investment Operations.. 0.183 0.115 1.272 (0.971) (0.028)
LESS DISTRIBUTIONS
Dividends (from Net Investment
Income)........................... (0.153) (0.335) (0.372) (0.349) (0.094)
Distributions (from Capital
Gains)............................ --- --- --- --- (0.388)
------------- ------------- ------------- ------------ ------------
Total Distributions............. (0.153) (0.335) (0.372) (0.349) (0.482)
------------- ------------- ------------- ------------ ------------
NET ASSET VALUE END OF PERIOD....... $9.76 $9.73 $9.95 $9.05 $10.37
============= ============= ============= ============ ============
TOTAL RETURN (A).................... 1.91% 1.20% 14.3% (9.50%) (0.20%)
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) $1,258 $1,510 $1,190 $760 $106
Ratio of Expenses to Average Net
Assets............................ 2.01% 2.01% 2.00% 2.00% 2.89%
Ratio of Net Income (Loss) to
Average Net Assets................ 3.29% 3.44% 3.90% 3.50% 2.71%
Portfolio Turnover Rate............. 4% 54% 103% 88% 90%
</TABLE>
See accompanying notes.
24
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each period
<TABLE>
<CAPTION>
SECURITY CASH FUND FISCAL PERIOD ENDED DECEMBER 31
---------------------------------------------------------------------------------------------
1997(D)(F)(H) 1996(C)(D)(F) 1995(C)(D)(F) 1994 1993(C) 1992(C)
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income............... 0.023 0.450 0.049 0.033 0.023 0.028
Net Gain (Loss) on Securities
(realized & unrealized)........... --- --- --- --- --- ---
------------- ------------- ------------- ------------- ------------- -------------
Total from Investment Operations.... 0.023 0.045 0.049 0.033 0.023 0.028
LESS DISTRIBUTIONS
Dividends (from Net Investment
Income............................ (0.023) (0.045) (0.049) (0.033) (0.023) (0.028)
Distributions (from Capital Gains).. --- --- --- --- --- ---
------------- ------------- ------------- ------------- ------------- -------------
Total Distributions............... (0.023) (0.045) (0.049) (0.033) (0.023) (0.028)
------------- ------------- ------------- ------------- ------------- -------------
NET ASSET VALUE END OF PERIOD....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
============= ============= ============= ============= ============= =============
TOTAL RETURN (A).................... 2.36% 4.60% 5.00% 3.40% 2.40% 2.80%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) $46,092 $45,331 $38,158 $58,102 $71,870 $56,694
Ratio of Expenses to Average Net
Assets............................ 0.88% 1.01% 1.00% 0.96% 1.00% 1.00%
Ratio of Net Income (Loss) to
Average Net Assets................ 2.30% 4.47% 5.00% 3.24% 2.28% 2.75%
Portfolio Turnover Rate............. --- --- --- --- --- ---
</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:
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Corporate Bond Class B --- --- 2.00% 2.19% 2.05% 2.08%
U.S. Government Class A 1.20% 1.20% 1.20% 1.22% 1.17% 0.96%
Class B --- 1.75% 2.91% 3.70% 3.26% 1.93%
Limited Maturity Class A --- --- --- 1.04% 1.40% 1.13%
Bond Class B --- --- --- 2.12% 2.60% 2.03%
High Yield Class A --- --- --- --- 2.11% 1.43%
Class B --- --- --- --- 2.83% 2.30%
Tax-Exempt Class A --- --- --- 0.86% 0.78% 0.84%
Class B --- --- 2.32% 2.45% 2.19% 2.01%
Cash 1.03% 1.03% --- 1.04% 1.01% ---
</TABLE>
(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 maounts for
period have been annualized, except for total return.
(f) 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:
<TABLE>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
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 Class A 0.81% 0.87% 0.60%
Bond Class B 1.65% 1.85% 1.50%
Tax-Exempt Class A 0.85% 0.77% 0.83%
Class B 2.00% 2.00% 2.00%
Cash Fund 1.00% 1.00% 0.88%
</TABLE>
(g) Security High Yield Bond Series was initially capitalized on August 15,
1996, with a net asset value of $15 per share. Percentage amounts for the
period have been annualized, except for total return.
(h) Unaudited figures for the six months ended June 30, 1997. Percentage
amounts for the period have been annualized, except for total return.
See accompanying notes.
25
<PAGE>
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
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 multiple 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 Funds' 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 Funds' 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.
B. OPTIONS - The 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 d
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.
C. 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.
D. 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.
E. 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.
F. 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 the High Yield Bond Series whose fees are .60 of
1% of the average net assets of the Series. The investment advisory contract for
Income Fund provides that the total annual expenses 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 June30,
1997, 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
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 and the High Yield Bond Series
until December 31, 1997. 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,
26
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
accounting and pricing functions for the Funds. For this service SMC receives on
an annual basis, a fee of .09% 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% of the average daily net assets of Cash
Fund calculated daily and payable monthly.
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. (SDl), a wholly-owned subsidiary of Security
Benefit Group, Inc., a financial services holding company, is national
distributor for Income and Tax-Exempt Funds. SDI received net underwriting
commissions on sales of Class A shares and contingent deferred sales charges
(CDSC) 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 June30,
1997, in the amounts presented below:
<TABLE>
<CAPTION>
CORPORATE U.S. LIMITED HIGH TAX-
BOND GOVERNMENT MATURITY YIELD EXEMPT
SERIES SERIES SERIES SERIES FUND
--------- ---------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
SDI underwriting (Class A) $ 3,171 $1,992 $1,258 $ 252 $1,318
CDSC (Class B) $ 7,418 $1,365 $ 168 $ 25 $ 267
Broker/Dealer (Class A) $ 7,618 $8,315 $5,337 $1,327 $5,666
Broker/Dealer (Class B) $29,092 $4,298 $6,698 $9,970 $1,870
</TABLE>
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 June 30, 1997, (excluding
overnight investments and short-term debt securities) were as follows:
CORPORATE U.S. LIMITED HIGH TAX-
BOND GOVERNMENT MATURITY YIELD EXEMPT
SERIES SERIES SERIES SERIES FUND
--------- ---------- -------- ------ ------
Purchases $55,179,626 $2,115,282 $2,951,143 $3,241,098 $1,003,130
Proceeds from
sales $66,779,015 $2,310,448 $2,137,828 $1,683,875 $3,009,341
4. FEDERAL INCOME TAX MATTERS
The amounts of unrealized appreciation (depreciation)as of June 30, 1997,
were as follows:
CORPORATE U.S. LIMITED HIGH TAX-
BOND GOVERNMENT MATURITY YIELD EXEMPT
SERIES SERIES SERIES SERIES FUND
--------- ---------- -------- ------ ------
Gross unrealized
appreciation $ 685,094 $ 93,423 $ 84,357 $229,047 $493,541
Gross unrealized
depreciation (377,253) (29,791) (22,785) (3,281) (49,353)
-------- ------- ------- ------- -------
Net unrealized
appreciation $ 307,841 $ 63,632 $ 61,572 $225,766 $444,188
5.SHAREHOLDER'S MEETING.
The Board of Directors of Security Income Fund approved a change in the
name of one of the existing series of the Fund from Global Aggressive Bond
Series to Global High Yield Series to more fully reflect the investment
objectives of the Series. The name change was effective May 1, 1997. The Global
High Yield Series, formerly Global Aggressive Bond Series, is now offered by a
separate prospectus. In addition, its annual and semi-annual reports are also
presented as part of a separate document from the report for the rest of the
Income Fund Series.
A special meeting of the stockholders of the Global Aggressive Bond Series
of Security Income Fund was held on April 28, 1997. At this meeting,
shareholders voted to approve a new investment advisory contract which replaced
Security Management Company, LLC as investment manager to the Fund with MFR
Advisors, Inc.. In addition, shareholders also voted to approve a new
sub-advisory contract between MFR Advisors, Inc. and Lexington Management
Corporation. The total number of eligible votes were 489,633. The results of the
votes are as follows: 463,099 in favor, 0 votes against and 1,508 votes
abstained.
27
<PAGE>
THIS PAGE LEFT BLANK INTENTIONALLY
<PAGE>
THE SECURITY GROUP OF MUTUAL FUNDS
Security Growth and Income Fund
Security Equity Fund
* Equity Series
* Global Series
* Asset Allocation Series
* Social Awareness Series
* Value Series
Security Ultra Fund
Security Income Fund
* Corporate Bond Series
* U.S. Government Series
* Limited Maturity Bond Series
* High Yield 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
- ---------
Donald A. Chubb, Jr.
John D. Cleland
Donald L. Hardesty
Bruce Jensen (Income Fund only)
Penny A. Lumpkin
Mark L. Morris, Jr., D.V.M.
Jeffrey B. Pantages
Maria Fiorini Ramirez (Income Fund only)
Hugh L. Thompson, Ph.D.
OFFICERS
- --------
John D. Cleland, President
James R. Schmank, Vice President and Treasurer
Mark E. Young, Vice President
Steven M. Bowser, Vice President
Jane A. Tedder, Vice President
Barbara J. Davison, Assistant Vice President
Thomas A. Swank, Vice President
Amy J. Lee, Secretary
Christopher D. Swickard, Assistant Secretary
Brenda M. Harwood, Assistant Treasurer and Assistant Secretary
[SDI LOGO]
SECURITY DISTRIBUTORS, INC. BULK RATE
700 SW Harrison St. U.S. POSTAGE
Topeka, KS 66636-0001 PAID
(785) 431-3112 SECURITY BENEFIT
(800) 888-2461
<PAGE>
SECURITY TAX-EXEMPT FUND
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
a. Financial Statements
Included in Part A of this Registration Statement:
Per Share Income and Capital Changes
Included in Part B of this Registration Statement:
The audited financial statements contained in the most recent
Annual Report to Stockholders of Security Tax-Exempt Fund for
the year ended December 31, 1996 and the unaudited
Semi-Annual Report to stockholders of Security Tax-Exempt
Fund for the six-month period ended June 30, 1997, are
incorporated by reference in Part B of this Registration
Statement.
b. Exhibits:
(1) Articles of Incorporation.(b)
(2) Corporate Bylaws.(a)
(3) Not applicable.
(4) Specimen copy of share certificate for Registrant's shares
of capital stock.(a)
(5) (a) Investment Advisory Contract.
(b) Sub-Advisory Agreement.
(6) (a) Distribution Agreement.
(b) Class B Distribution Agreement
(7) Form of Non-Qualified Deferred Compensation Plan.(d)
(8) Custodian Agreement.(d)
(9) Administrative Services and Transfer Agency Agreement.(d)
(10) Opinion of counsel as to the legality of securities
offered.(b)
(11) Consent of Independent Auditors.
(12) Not applicable.
(13) Not applicable.
(14) Not applicable.
(15) (a) Class A Distribution Plan.
(b) Class B Distribution Plan.(d)
(16) Schedule of Computation of Performance.(d)
(17) Financial Data Schedules.
(18) Multiple Class Plan.(c)
(a) Incorporated herein by reference to the Exhibits filed with the
Registrant's Post-Effective Amendment No. 9 to Registration
Statement No. 2-73223 (April 30, 1992).
(b) Incorporated herein by reference to the Exhibits filed with the
Registrant's Post-Effective Amendment No. 13 to Registration
Statement No. 2-73223 (May 1, 1995).
(c) Incorporated herein by reference to the Exhibits filed with the
Registrant's Post-Effective Amendment No. 14 to Registration
Statement No. 2-73223 (April 29, 1996).
(d) Incorporated herein by reference to the Exhibits filed with the
Registrant's Post-Effective Amendment No. 16 to Registration
Statement No. 2-73223 (April 30, 1997).
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES AS OF JANUARY 31, 1998
(1) (2)
NUMBER OF RECORD
TITLE OF CLASS SHAREHOLDERS
Shares of Common Stock, Class A 798
Shares of Common Stock, Class B 54
ITEM 27. INDEMNIFICATION.
A policy of insurance covering Security Management Company, LLC, its
affiliates, including Security Distributors, Inc., and all of the
registered investment companies advised by Security Management
Company, LLC insures the Registrant's directors and officers and
others against liability arising by reason of an alleged breach of
duty caused by any negligent act, error or accidental omission in the
scope of their duties.
Paragraph 30 of Registrant's Bylaws, dated February 3, 1995, provides
as follows:
30. INDEMNIFICATION AND LIABILITY OF DIRECTORS AND OFFICERS. Each
person who is or was a Director or officer of the Corporation or
is or was serving at the request of the Corporation as a Director
or officer of another corporation (including the heirs,
executors, administrators and estate of such person) shall be
indemnified by the Corporation as of right to the full extent
permitted or authorized by the laws of the State of Kansas, as
now in effect and as hereafter amended, against any liability,
judgment, fine, amount paid in settlement, cost and expense
(including attorneys' fees) asserted or threatened against and
incurred by such person in his/her capacity as or arising out of
his/her status as a Director or officer of the Corporation or, if
serving at the request of the Corporation, as a Director or
officer of another corporation. The indemnification provided by
this bylaw provision shall not be exclusive of any other rights
to which those indemnified may be entitled under the Articles of
Incorporation, under any other bylaw or under any agreement, vote
of stockholders or disinterested directors or otherwise, and
shall not limit in any way any right which the Corporation may
have to make different or further indemnification with respect to
the same or different persons or classes of persons.
No person shall be liable to the Corporation for any loss,
damage, liability or expense suffered by it on account of any
action taken or omitted to be taken by him/her as a director or
officer of the Corporation or of any other corporation which he
serves as a Director or officer at the request of the
Corporation, if such
<PAGE>
person (a) exercised the same degree of care and skill as a
prudent man would have exercised under the circumstances in the
conduct of his/her own affairs, or (b) took or omitted to take
such action in reliance upon advice of counsel for the
Corporation, or for such other corporation, or upon statement
made or information furnished by Directors, officers, employees
or agents of the Corporation, or of such other corporation, which
he/she had no reasonable grounds to disbelieve.
In the event any provision of this Section 30 shall be in violation of
the Investment Company Act of 1940, as amended, or of the rules and
regulations promulgated thereunder, such provisions shall be void to
the extent of such violations.
On April 22, 1988, the shareholders approved the Board of Directors'
recommendation that the Articles of Incorporation be amended by
adopting the following Article Fifteenth:
"A director shall not be personally liable to the corporation or
to its stockholders for monetary damages for breach of fiduciary
duty as a director, provided that this sentence shall not
eliminate nor limit the liability of a director:
A. for any breach of his or her duty of loyalty to the
corporation or to its stockholders;
B. for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
C. for any unlawful dividend, stock purchase or redemption under
the provisions of Kansas Statutes Annotated (K.S.A.) 17-6424
and amendments thereto; or
D. for any transaction from which the director derived an
improper personal benefit."
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
<PAGE>
ITEM 28. BUSINESS OR OTHER CONNECTIONS OF INVESTMENT ADVISER
Security Management Company, LLC also acts as investment adviser to
Security Equity Fund, Security Growth and Income Fund, Security Ultra
Fund, Security Cash Fund, SBL Fund, and Corporate Bond, Limited
Maturity Bond, U.S. Government and High Yield Series of Security
Income Fund and also acts as sub-investment adviser to Emerging
Markets Total Return, Global Asset Allocation and Global High Yield
(formerly Global Aggressive Bond) Series of Security Income Fund.
<TABLE>
<CAPTION>
Name Business* and Other Connections of the Executive Officers and Directors of Registrant's Adviser
-------------------- -----------------------------------------------------------------------------------------------
<S> <C>
James R. Schmank President and Managing Member Representative
Security Management Company, LLC
Vice President and Director
Security Distributors, Inc.
Senior Vice President
Security Benefit Life Insurance Company, Security Benefit Group, Inc.
Vice President and Director
Security Growth and Income Fund, Security Cash Fund, Security Tax-Exempt Fund, Security Ultra
Fund, Security Equity Fund, SBL Fund
Vice President
Security Income Fund
Director
MFR Advisors, Inc.
One Liberty Plaza, 46th Floor
New York, New York 10006
<PAGE>
John D. Cleland Senior Vice President and Managing Member Representative
Security Management Company, LLC
President and Director
Security Cash Fund, Security Income Fund, Security Tax-Exempt Fund, SBL Fund, Security Growth
and Income Fund, Security Equity Fund, Security Ultra Fund
Senior Vice President
Security Benefit Life Insurance Company, Security Benefit Group, Inc.
Vice President and Director
Security Distributors, Inc.
Trustee and Treasurer
Mount Hope Cemetery Corporation
4700 SW 17th
Topeka, Kansas
Trustee and Investment Committee Chairman
Topeka Community Foundation
5100 SW 10th
Topeka, Kansas
Donald E. Caum Director (until November 1996)
Security Management Company
Senior Vice President
Security Benefit Life Insurance Company, Security Benefit Group, Inc.
Director
Security Distributors, Inc.
Director
YMCA Metro, Topeka, Kansas
Executive Director
Jayhawk Area Council Boy Scouts of America, Topeka, Kansas
Metropolitan Ballet, Topeka, Kansas
<PAGE>
Mark E. Young Vice President
Security Growth and Income Fund, Security Income Fund, Security Cash Fund, Security Tax-Exempt
Fund, Security Ultra Fund, Security Equity Fund, SBL Fund, Security Management Company, LLC
Assistant Vice President
Security Benefit Life Insurance Company, First Security Benefit Life Insurance and Annuity
Company of New York, Security Benefit Group, Inc.
Vice President and Director
Security Distributors, Inc.
Trustee
Topeka Zoological Foundation, Topeka, Kansas
Terry A. Milberger Senior Vice President and Senior Portfolio Manager
Security Management Company, LLC
Senior Vice President
Security Benefit Life Insurance Company, Security Benefit Group, Inc.
Vice President
Security Equity Fund, SBL Fund
Michael A. Petersen Vice President and Senior Portfolio Manager
Security Management Company, LLC
Vice President
Security Benefit Life Insurance Company, Security Benefit Group, Inc., SBL Fund, Security
Growth and Income Fund
Jane A. Tedder Vice President and Senior Economist
Security Management Company, LLC
Vice President
Security Benefit Life Insurance Company, Security Benefit Group, Inc., Security Income Fund,
SBL Fund, Security Equity Fund
<PAGE>
Amy J. Lee Vice President and Associate General Counsel
Security Benefit Life Insurance Company, Security Benefit Group, Inc.
Secretary
Security Management Company, LLC, Security Distributors, Inc., Security Cash Fund, Security
Equity Fund, Security Tax-Exempt Fund, Security Ultra Fund, SBL Fund, Security Growth and
Income Fund, Security Income Fund
Brenda M. Harwood Assistant Vice President and Treasurer
Security Management Company, LLC
Treasurer
Security Equity Fund, Security Ultra Fund, Security Growth and Income Fund, Security Income
Fund, Security Cash Fund, SBL Fund, Security Tax-Exempt Fund, Security Distributors, Inc.
Assistant Vice President
Security Benefit Life Insurance Company, Security Benefit Group, Inc.
Steven M. Bowser Second Vice President and Portfolio Manager
Security Management Company, LLC
Second Vice President
Security Benefit Life Insurance Company, Security Benefit Group, Inc.
Vice President
Security Income Fund, Security Equity Fund
Thomas A. Swank Vice President and Portfolio Manager
Security Management Company, LLC
Vice President and Chief Investment Officer
Security Benefit Life Insurance Company, Security Benefit Group, Inc.
Vice President
SBL Fund, Security Growth and Income Fund
<PAGE>
Barbara J. Davison Assistant Vice President, Compliance Officer and Portfolio Manager
Security Management Company, LLC
Assistant Vice President
Security Benefit Life Insurance Company, Security Benefit Group, Inc.
Vice President
SBL Fund, Security Cash Fund
Vice-Chairman
Topeka Chapter American Red Cross, Topeka, Kansas
Cindy L. Shields Assistant Vice President and Portfolio Manager
Security Management Company, LLC
Assistant Vice President
Security Benefit Life Insurance Company, Security Benefit Group, Inc.
Vice President
Security Ultra Fund, SBL Fund, Security Equity Fund
Larry L. Valencia Assistant Vice President and Senior Research Analyst
Security Management Company, LLC
James P. Schier Assistant Vice President and Portfolio Manager
Security Management Company, LLC
Assistant Vice President
Security Benefit Life Insurance Company, Security Benefit Group, Inc. Vice President SBL Fund,
Security Equity Fund, Security Growth and Income Fund, Security Ultra Fund
David Eshnaur Assistant Vice President and Portfolio Manager
Security Management Company, LLC
Assistant Vice President
Security Benefit Life Insurance Company, Security Benefit Group, Inc.,
Vice President
SBL Fund, Security Income Fund, Security Growth and Income Fund
<PAGE>
Martha L. Sutherland Second Vice President
Security Management Company, LLC
Vice President
Security Benefit Life Insurance Company, Security Benefit Group, Inc.
Chris Swickard Assistant Secretary
Security Management Company, LLC, Security Cash Fund, Security Equity Fund, Security Tax-Exempt
Fund, Security Ultra Fund, SBL Fund, Security Growth and Income Fund, Security Income Fund
Assistant Vice President and Assistant Counsel
Security Benefit Life Insurance Company, Security Benefit Group, Inc.
</TABLE>
*Located at 700 Harrison, Topeka, Kansas 66636-0001
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Security Growth and Income Fund
Security Ultra Fund
Security Income Fund
Security Equity Fund
Variflex Variable Separate Account (Variflex)
Variflex Variable Separate Account (Variflex Educator Series)
Varilife Variable Annuity Account
Parkstone Variable Annuity
Security Varilife Separate Account
Variable Annuity Account VIII (Variflex LS)
Variable Annuity Account VIII (Variflex Signature)
<PAGE>
(b)
<TABLE>
<CAPTION>
(1) (2) (3)
NAME AND PRINCIPAL POSITION AND OFFICES POSITION AND OFFICES
BUSINESS ADDRESS* WITH UNDERWRITER WITH REGISTRANT
<S> <C> <C>
Richard K Ryan President and Director None
John D. Cleland Vice President and Director President and Director
James R. Schmank Vice President and Director Vice President
Mark E. Young Vice President and Director Vice President
Donald E. Caum Director None
Amy J. Lee Secretary Secretary
Brenda M. Harwood Treasurer Treasurer
William G. Mancuso Regional Vice President None
Susan L. Tully Regional Vice President None
</TABLE>
*700 Harrison, Topeka, Kansas 66636-0001
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
Certain accounts, books and other documents required to be maintained
by Section 31(a) of the 1940 Act and the rules promulgated thereunder
are maintained by Security Management Company, LLC, 700 Harrison,
Topeka, Kansas 66636-0001. Records relating to the duties of the
Registrant's custodian are maintained by UMB Bank, n.a., 928 Grand
Avenue, Kansas City, Missouri 64106.
ITEM 31. MANAGEMENT SERVICES.
Not applicable.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) Registrant hereby undertakes to furnish each person, to whom a
prospectus is delivered, a copy of the Registrant's latest report
to shareholders upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Topeka, and State of Kansas on the 20th day of February, 1998.
SECURITY TAX-EXEMPT FUND
(The Registrant)
By: JOHN D. CLELAND
----------------------------
John D. Cleland, President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the date indicated:
Date: February 20, 1998
--------------------------
DONALD A. CHUBB, JR. Director
- ------------------------------
Donald A. Chubb, Jr.
JOHN D. CLELAND President and Director
- ------------------------------
John D. Cleland
DONALD L. HARDESTY Director
- ------------------------------
Donald L. Hardesty
PENNY A. LUMPKIN Director
- ------------------------------
Penny A. Lumpkin
MARK L. MORRIS, JR. Director
- ------------------------------
Mark L. Morris, Jr.
JAMES R. SCHMANK Director
- ------------------------------
James R. Schmank
HUGH L. THOMPSON Director
- ------------------------------
Hugh L. Thompson
<PAGE>
EXHIBIT INDEX
(1) None
(2) None
(3) None
(4) None
(5) (a) Investment Advisory Contract
(b) Form of Sub-Advisory Agreement
(6) (a) Distribution Agreement
(b) Class B Distribution Agreement
(7) None
(8) None
(9) None
(10) None
(11) Consent of Independent Auditors
(12) None
(13) None
(14) None
(15) (a) Class A Distribution Plan
(b) None
(16) None
(17) Financial Data Schedules
(18) None
<PAGE>
INVESTMENT ADVISORY CONTRACT
THIS AGREEMENT, made this 7th day of October, 1983, between SECURITY TAX-EXEMPT
FUND, a Kansas corporation (hereinafter referred to as the "Fund"), and SECURITY
MANAGEMENT COMPANY, a Kansas corporation (hereinafter referred to as the
"Management Company");
WITNESSETH:
WHEREAS, the Fund is engaged in business as an open-end, management investment
company registered under the Federal Investment Company Act of 1940 (the "1940
Act"); and
WHEREAS, the Company is authorized to issue shares of capital stock in separate
Series, with each such Series representing interests in a separate portfolio of
securities and other assets; and
WHEREAS, the Company intends initially to offer shares in one series to be
designated Security Tax-Exempt Fund (the "Initial Series"), such series together
with all other series subsequently established by the Company with respect to
which the Company desires to retain the Management Company to render investment
advisory services hereunder and with respect to which the Management Company is
willing so to do, being herein collectively referred to as the "Series", and
WHEREAS, the Management Company is willing to provide investment research and
advice to the Fund on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and mutual agreements made
herein, the parties hereto agree as follows:
1. EMPLOYMENT OF MANAGEMENT COMPANY. The Fund hereby employs the Management
Company to act as investment adviser to the Initial Series with respect to
the investment of its assets, and to supervise and arrange the purchase of
securities for the Initial Series and the sale of securities held in the
portfolio of the Initial Series, subject always to the supervision of the
board of directors of the Fund (or a duly appointed committee thereof),
during the period and upon and subject to the terms and conditions herein
set forth. The Management Company hereby accepts such employment and agrees
to perform the services required by this Agreement for the compensation
herein provided.
In the event the Company establishes one or more series other than the
Initial Series with respect to which it desires to retain the Management
Company to render investment advisory services hereunder, it shall notify
the Management Company in writing. If the Management Company is willing to
render such services it shall notify the Company in writing, whereupon such
series shall become a Series subject to the terms and conditions hereunder,
and to such amended or additional provisions as shall be specifically agreed
to by the Company and the Management Company in accordance with applicable
law.
<PAGE>
2. INVESTMENT ADVISORY DUTIES. The Management Company shall regularly provide
each Series with investment research, advice and supervision, continuously
furnish an investment program and recommend which securities shall be
purchased and sold and what portion of the assets of each series shall be
held uninvested and arrange for the purchase of securities and other
investments held in the portfolio of each Series. All investment advice
furnished by the Management Company to each Series under this Section 2
shall at all times conform to any requirements imposed by the provisions of
the Fund's Articles of Incorporation and Bylaws, the 1940 Act, the
Investment Advisors Act of 1940 and the rules and regulations promulgated
thereunder, any other applicable provisions of law, and the terms of the
registration statements of the Fund under the Securities Act of 1933 ("1933
Act") and the 1940 Act, all as from time to time amended. The Management
Company shall advise and assist the officers or other agents of the Fund in
taking such steps as are necessary or appropriate to carry out the decisions
of the board of directors of the Fund (and any duly appointed committee
thereof) with regard to the foregoing matters and the general conduct of the
Fund's business.
3. PORTFOLIO TRANSACTIONS AND BROKERAGE.
(a) Transactions in portfolio securities shall be effected by the
Management Company, through brokers or otherwise, in the manner
permitted in this Section 3 and in such manner as the Management
Company shall deem to be in the best interests of the Fund after
consideration is given to all relevant factors.
(b) In reaching a judgment relative to the qualification of a broker to
obtain the best execution of a particular transaction, the Management
Company may take into account all relevant factors and circumstances,
including the size of any contemporaneous market in such securities;
the importance to the Fund of speed and efficiency of execution;
whether the particular transaction is part of a larger intended change
in portfolio position in the same securities; the execution
capabilities required by the circumstances of the particular
transaction; the capital required by the transaction; the overall
capital strength of the broker; the broker's apparent knowledge of or
familiarity with sources from or to whom such securities may be
purchased or sold; as well as the efficiency, reliability and
confidentiality with which the broker has handled the execution of
prior similar transactions.
(c) Subject to any statements concerning the allocation of brokerage
contained in the Fund's prospectus, the Management Company is
authorized to direct the execution of portfolio transactions for the
Fund to brokers who furnish investment information or research services
to the Management Company. Such allocation shall be in such amounts and
proportions as the Management Company may determine. If a transaction
is directed to a broker providing brokerage and research services to
the Management Company, the commission paid for such transaction may be
in excess of the commission another broker would have charged for
effecting that transaction, if the Management Company shall have
determined in good faith that the commission is reasonable in relation
to the value of the brokerage and research services provided,
<PAGE>
viewed in terms of either that particular transaction or the overall
responsibilities of the Management Company with respect to all accounts
as to which it now or hereafter exercises investment discretion. For
purposes of the immediately preceding sentence, "providing brokerage
and research services" shall have the meaning generally given such
terms or similar terms under Section 28(e)(3) of the Securities
Exchange Act of 1934, as amended.
(d) In the selection of a broker for the execution of any transaction not
subject to fixed commission rates, the Management Company shall have no
duty or obligation to seek advance competitive bidding for the most
favorable negotiated commission rate to be applicable to such
transaction, or to select any broker solely on the basis of its
purported or "posted" commission rates.
(e) In connection with transactions on markets other than national or
regional securities exchanges, the Fund will deal directly with the
selling principal or market maker without incurring charges for the
services of a broker on its behalf unless, in the best judgment of the
Management Company, better price or execution can be obtained in
utilizing the services of a broker.
4. ALLOCATION OF EXPENSES AND CHARGES. The Management Company shall provide
investment advisory, statistical and research facilities and all clerical
services relating to research, statistical and investment work, and shall
provide for the compilation and maintenance of such records relating to
these functions as shall be required under applicable law and the rules and
regulations of the Securities and Exchange Commission. Other than as
specifically indicated in the preceding sentence, the Management Company
shall not be required to pay any expenses of the Fund, and in particular,
but without limiting the generality of the foregoing, the Management Company
shall not be required to pay office rental or general administrative
expenses; board of directors' fees; legal, auditing and accounting expenses;
insurance premiums; broker's commissions; taxes and governmental fees;
membership dues; fees of custodian, transfer agent, registrar and dividend
disbursing agent (if any); expenses of obtaining quotations on the Series'
portfolio securities and pricing of the Series' shares; expenses (including
clerical expenses) of issue, sale or redemption of shares of the Fund's
capital stock; costs and expenses in connection with the registration of
such capital stock under the 1933 Act and qualification of the Fund's
capital stock under the Blue Sky laws of the states where such stock is
offered; costs and expenses in connection with the registration of the Fund
under the 1940 Act and all periodic and other reports required thereunder;
expenses of preparing reports, proxy statements, prospectuses and notices to
stockholders and of printing and distributing reports, proxies, prospectuses
and notices to existing stockholders; costs of stationery; costs of
stockholder and other meetings; expenses of maintaining the Fund's corporate
existence; and such nonrecurring expenses as may arise including litigation
affecting the Fund and the legal obligations the Fund may have to indemnify
its officers and directors.
<PAGE>
5. COMPENSATION OF MANAGEMENT COMPANY.
(a) As compensation for the services rendered by the Management Company as
provided herein, for each of the years this agreement is in effect, the
Fund shall pay the Management Company an annual fee equal to 0.5 of 1%
of the average daily closing value of the net assets of the Initial
Series computed on a daily basis. Such fee shall be adjusted and
payable monthly. If this Agreement shall be effective for only a
portion of a year, then the Management Company's compensation for said
year shall be prorated for such portion. For purposes of this Section
5, the value of the net assets of the Initial Series shall be computed
in the same manner on each business day as of the normal close of the
New York Stock Exchange as the value of such net assets is computed in
connection with the determination of the net asset value of the shares
of the Initial Series as described in the Fund's prospectus.
(b) For each of the Fund's full fiscal years during the term of this
Agreement, the Management Company guarantees that the aggregate annual
expenses of every character, exclusive of interest and taxes and
extraordinary expenses (such as litigation), but inclusive of the
Management Company's compensation, incurred by the Series shall not
exceed an amount equal to one percent of the average net assets of the
Series for the year, such net assets to be calculated on a daily basis.
The Management Company agrees, on a monthly basis, to contribute to the
Fund such funds or to waive such portion of its fee as may be necessary
to insure that such aggregate annual expenses will not exceed said
amount. If this Agreement shall be effective for only a portion of one
of the Fund's fiscal years, then the maximum annual expenses shall be
prorated for such portion. Brokerage fees and commissions incurred in
connection with the purchase or sale of any securities by the Fund
shall not be deemed to be expenses within the meaning of this Paragraph
(b).
6. MANAGEMENT COMPANY NOT TO RECEIVE COMMISSIONS. In connection with the
purchase or sale of portfolio securities for the account of the Fund,
neither the Management Company nor any officer or director of the Management
Company shall act as principal or receive any compensation from the Fund
other than its compensation as provided for in Section 5 above. If the
Management Company, or any "affiliated person" (as defined in the Investment
Company Act of 1940) receives any cash credits, commissions or tender fees
from any person in connection with transactions in the portfolio securities
of the Fund (including but not limited to the tender or delivery of any
securities held in such portfolio), the Management Company shall immediately
pay such amount to the Fund in cash or as a credit against any then earned
but unpaid management fees due by the Fund to the Management Company.
<PAGE>
7. LIMITATION OF LIABILITY OF MANAGEMENT COMPANY. So long as the Management
Company shall give the Fund the benefit of its best judgment and effort in
rendering services hereunder, the Management Company shall not be liable for
any errors of judgment or mistake of law, or for any loss sustained by
reason of the adoption of any investment policy or the purchase, sale or
retention of any security on its recommendation, whether or not such
recommendation shall have been based upon its own investigation and research
or upon investigation and research made by any other individual, firm or
corporation, if such recommendation shall have been made and such other
individual, firm or corporation shall have been selected with due care and
in good faith. Nothing herein contained shall, however, be construed to
protect the Management Company against any liability to the Fund or its
contract owners by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of its reckless
disregard of its obligations and duties under this Agreement. As used in
this Section 7, "Management Company" shall include directors, officers and
employees of the Management Company, as well as that corporation itself.
8. OTHER ACTIVITIES NOT RESTRICTED. Nothing in this Agreement shall prevent the
Management Company or any officer thereof from acting as investment adviser
for any other person, firm, or corporation, nor shall it in any way limit or
restrict the Management Company or any of its directors, officers,
stockholders or employees from buying, selling, or trading any securities
for its own accounts or for the accounts of others for whom it may be
acting; provided, however, that the Management Company expressly represents
that it will undertake no activities which, in its judgment, will conflict
with the performance of its obligations to the Fund under this Agreement.
The Fund acknowledges that the Management Company acts as investment adviser
to other investment companies, and it expressly consents to the Management
Company acting as such; provided, however, that if in the opinion of the
Management Company, particular securities are consistent with the investment
objectives of, and desirable purchases or sales for the portfolios of, one
or more Series and one or more of such other investment companies or series
of such companies at approximately the same time, such purchases or sales
will be made on a proportionate basis if feasible, and if not feasible, then
on a rotating or other equitable basis.
9. DURATION AND TERMINATION OF AGREEMENT. This Agreement shall become effective
on the date hereof, provided that on or before that date it has been
approved by a majority of the holders of the outstanding voting securities
of the Fund, and shall remain in force, unless sooner terminated as provided
herein, until the first regular or special meeting of the Fund stockholders
following the date shares of capital stock of the Fund are first offered to
the public. This Agreement shall be presented to each Series of the Fund's
stockholders at such meeting for their approval and shall continue in effect
for successive 12-month periods, unless terminated, provided that each such
continuance is specifically approved at such meeting and at least annually
thereafter by (a) the vote of a majority of the entire board of directors of
the Fund, or, with respect to each Series, by the vote of a majority of the
outstanding voting securities of such Series (as defined in the 1940 Act,
and (b) the vote of a majority of those directors who are not parties to
this Agreement or interested persons (as such term is defined in the 1940
Act) of any such party cast in person at a meeting
<PAGE>
called for the purpose of voting on such approval. In the event that this
Agreement is approved by such vote of the outstanding voting securities of
one or more Series but not of one or more others, this Agreement shall
continue in effect with respect to the former Series and, with respect to
the latter may continue in effect until such approval by the latter Series
of this Agreement or of a new agreement with the Management Company or with
another party is obtained, provided that compensation paid with respect to
such Series pending such approval is no greater than the lesser of the
Management Company's actual costs incurred hereunder or the amount due
pursuant to Section 5 hereof. This Agreement may be terminated at any time
without payment of any penalty, by the Fund upon the vote of a majority of
the Fund's board of directors or, with respect to any Series, by a majority
of the outstanding voting securities of such Series, or by the Management
Company, .in each case on sixty (60) days' written notice to the other
party. This Agreement shall automatically terminate in the event of its
assignment (as such term is defined in the 1940 Act).
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their respective corporate officers thereto duly authorized on the
day, month and year first above written.
SECURITY TAX-EXEMPT FUND
(Corporate Seal)
By: EVERETT S. GILLE
--------------------------------------
ATTEST: Everett S. Gille, President
LARRY D. ARMEL
- -----------------------------------
Larry D. Armel, Secretary
SECURITY MANAGEMENT COMPANY
(Corporate Seal)
By: EVERETT S. GILLE
--------------------------------------
ATTEST: Everett S. Gille, President
LARRY D. ARMEL
- -----------------------------------
Larry D. Armel, Secretary
<PAGE>
AMENDMENT TO INVESTMENT ADVISORY CONTRACT
WHEREAS, Security Tax-Exempt Fund (the "Fund") and Security Management Company
(the "Management Company") are parties to an Investment Advisory Contract dated
October 7, 1983 (the "Agreement"), under which the Management Company agrees to
provide investment research and advice to the Fund in return for the
compensation specified in the Agreement;
WHEREAS, effective October 19, 1993, the Fund will offer its shares in two
Classes, Class A shares, which are currently being offered, and a new class,
Class B shares;
WHEREAS, the Fund has adopted a Distribution Plan with respect to its Class B
shares and, as a result, such shares are subject to distribution fees to which
Class A shares are not subject;
WHEREAS, the distribution fees associated with Class B shares require the
amendment of the Agreement relative to that class of shares;
WHEREAS, on October 1, 1993, the initial Class B shareholder of the Fund
approved such amendment to this Agreement; and
WHEREAS, the changes to the Agreement which are contemplated by this Amendment
do not affect the interests of Class A shareholders of the Fund;
NOW, THEREFORE, the Fund and the Management Company hereby amend the Investment
Advisory Contract, dated October 7, 1983, effective October 1, 1993, as follows:
A. The Management Company agrees to provide investment research and advice, to
the Fund pursuant to the terms and conditions set forth in the Agreement, as
amended in section B below.
B. Section 5(b) of the Agreement shall be amended by deleting it in its
entirety and replacing it with the following:
(b) For each of the Fund's full fiscal years during the term of this
Agreement, the Management Company guarantees that the aggregate annual
expenses of every character, exclusive of interest and taxes,
extraordinary expenses (such as litigation), and distribution fees paid
under the Fund's Class B Distribution Plan, but inclusive of the
Management Company's compensation, incurred by the Fund shall not
exceed an amount equal to one percent of the average net assets of the
Fund for the year, such net assets to be calculated on a daily basis.
The Management Company agrees, on a monthly basis, to contribute to the
Fund such funds or to waive such portion of its fee as may be necessary
to insure that such aggregate annual expenses will not exceed said
amount. If this Agreement shall be effective for only a portion of one
of the Fund's fiscal years, then the maximum annual expenses shall be
prorated for such portion. Brokerage fees and commissions incurred in
connection with the purchase or
<PAGE>
sale of any securities by the Fund shall not be deemed to be expenses
within the meaning of this paragraph (b).
IN WITNESS WHEREOF, the parties hereto have made this Amendment to the
Investment Advisory Contract this 1st day of October 1993.
ATTEST: SECURITY INCOME FUND
Amy J. Lee By: Michael J. Provines
- ------------------------------------ ------------------------------------
Amy J. Lee, Secretary
ATTEST: SECURITY MANAGEMENT COMPANY
Amy J. Lee By: Michael J. Provines
- ------------------------------------ ------------------------------------
Amy J. Lee, Secretary
<PAGE>
AMENDMENT TO INVESTMENT ADVISORY CONTRACT
WHEREAS, Security Tax-Exempt Fund (the "Fund") and Security Management Company
(the "Management Company") are parties to an Investment Advisory Contract, dated
October 7, 1983, as amended (the "Agreement"), under which the Management
Company agrees to provide investment research and advice to the Fund in return
for the compensation specified in the Agreement;
WHEREAS, on October 31, 1996, the operations of the Management Company, a Kansas
corporation, will be transferred to Security Management Company, LLC ("SMC,
LLC"), a Kansas limited liability company; and
WHEREAS, SMC, LLC desires to assume all rights, duties and obligations of the
Management Company under the Agreement.
NOW THEREFORE, in consideration of the premises and mutual agreements made
herein, the parties hereto agree as follows:
1. The Agreement is hereby amended to substitute SMC, LLC for Security
Management Company, with the same effect as though SMC, LLC were the
originally named management company, effective November 1, 1996;
2. SMC, LLC agrees to assume the rights, duties and obligations of Security
Management Company pursuant to the terms of the Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to the
Investment Advisory Contract this 1st day of November 1996.
SECURITY TAX-EXEMPT FUND SECURITY MANAGEMENT COMPANY, LLC
By: John D. Cleland By: James R. Schmank
--------------------------------- --------------------------------------
John D. Cleland, President James R. Schmank, President
ATTEST: ATTEST:
Amy J. Lee Amy J. Lee
--------------------------------- --------------------------------------
Amy J. Lee, Secretary Amy J. Lee, Secretary
<PAGE>
AMENDMENT TO INVESTMENT ADVISORY CONTRACT
WHEREAS, Security Tax-Exempt Fund (the "Fund") and Security Management Company,
LLC (the "Management Company") are parties to an Investment Advisory Contract,
dated October 7, 1983, as amended (the "Agreement"), under which the Management
Company agrees to provide investment research and advice to the Fund in return
for the compensation specified in the Agreement; and
WHEREAS, on February 6, 1998, in connection with adopting a Class A Distribution
Plan for the Fund, the Board of Directors of the Fund approved amendment of the
Agreement to exclude the Class A distribution fee from aggregate annual expenses
for the purpose of calculating the one percent limit on of annual expenses.
NOW, THEREFORE BE IT RESOLVED, that the Fund and the Management Company hereby
amend the Agreement, effective May 1, 1998, by deleting Paragraph 5(b) in its
entirety and replacing it with the following:
(b) For each of the Fund's full fiscal years during the term of this
Agreement, the Management Company guarantees that the aggregate
annual expenses of every character, exclusive of interest and taxes,
extraordinary expenses (such as litigation), and distribution fees
paid under the Fund's Class A and Class B Distribution Plans, but
inclusive of the Management Company's compensation, incurred by the
Fund shall not exceed an amount equal to one percent of the average
net assets of the Fund for the year, such net assets to be calculated
on a daily basis. The Management Company agrees, on a monthly basis,
to contribute to the Fund such funds or to waive such portion of its
fee as may be necessary to insure that such aggregate annual expenses
will not exceed said amount. If this Agreement shall be effective for
only a portion of one of the Fund's fiscal years, then the maximum
annual expenses shall be prorated for such portion. Brokerage fees
and commissions incurred in connection with the purchase or sale of
any securities by the Fund shall not be deemed to be expenses within
the meaning of this paragraph (b).
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to
Investment Advisory Contract this ______ day of __________________, 1998.
SECURITY TAX-EXEMPT FUND SECURITY MANAGEMENT COMPANY, LLC
By: By:
------------------------------------- ---------------------------------
John D. Cleland, President James R. Schmank, President
ATTEST: ATTEST:
- ---------------------------------------- ------------------------------------
<PAGE>
SUB-ADVISORY AGREEMENT
THIS AGREEMENT is made and entered into on this ____ day of February, 1998
between SECURITY MANAGEMENT COMPANY, LLC (the "Adviser"), a Kansas limited
liability company, registered under the Investment Advisers Act of 1940, as
amended (the "Investment Advisers Act"), and SALOMON BROTHERS ASSET MANAGEMENT
INC. (the "Subadviser"), a New York corporation registered under the Investment
Advisers Act.
WITNESSETH:
WHEREAS, Security Tax-Exempt Fund (the "Fund"), a Kansas corporation, is
registered with the Securities and Exchange Commission (the "Commission") as an
open-end management investment company under the Investment Company Act of 1940,
as amended (the "Investment Company Act");
WHEREAS, the Fund has, pursuant to an Advisory Agreement with the Adviser
(the "Advisory Agreement"), retained the Adviser to act as investment adviser
for and to manage its assets;
WHEREAS, the Advisory Agreement permits the Adviser to delegate certain of
its duties under the Advisory Agreement to other investment advisers, subject to
the requirements of the Investment Company Act; and
WHEREAS, the Adviser desires to retain the Subadviser as subadviser for the
Fund to act as investment adviser for and to manage the Fund's Investments (as
defined below) and the Subadviser desires to render such services.
NOW, THEREFORE, the Adviser and Subadviser do mutually agree and promise as
follows:
1. APPOINTMENT AS SUBADVISER. The Adviser hereby retains the Subadviser to
act as investment adviser for and to manage certain assets of the Fund subject
to the supervision of the Adviser and the Board of Directors of the Fund and
subject to the terms of this Agreement; and the Subadviser hereby accepts such
employment. In such capacity, the Subadviser shall be responsible for the Fund's
Investments.
2. DUTIES OF SUBADVISER.
(a) INVESTMENTS. The Subadviser is hereby authorized and directed and
hereby agrees, subject to the stated investment policies and restrictions of
the Fund as set forth in its prospectus and statement of additional
information as currently in effect and as supplemented or amended from time
to time (collectively referred to hereinafter as the "Prospectus") and
subject to the directions of the Adviser and the Fund's Board to purchase,
hold and sell investments for the account of the Fund (hereinafter
<PAGE>
"Investments") and to monitor on a continuous basis the performance of such
Investments. The Subadviser shall give the Fund the benefit of its best
efforts in rendering its services as Subadviser. The Subadviser may contract
with or consult with such banks, other securities firms, brokers or other
parties, without additional expense to the Fund, as it may deem appropriate
regarding investment advice, research and statistical data, clerical
assistance or otherwise.
(b) BROKERAGE. The Subadviser is authorized, subject to the supervision of
the Adviser and the Fund's Board to establish and maintain accounts on behalf
of the Fund with, and place orders for the purchase and sale of the Fund's
Investments with or through, such persons, brokers or dealers as Subadviser
may select and negotiate commissions to be paid on such transactions. The
Subadviser agrees that in placing such orders it shall attempt to obtain best
execution, provided that, the Subadviser may, on behalf of the Fund, pay
brokerage commissions to a broker which provides brokerage and research
services to the Subadviser in excess of the amount another broker would have
charged for effecting the transaction, provided (i) the Subadviser determines
in good faith that the amount is reasonable in relation to the value of the
brokerage and research services provided by the executing broker in terms of
the particular transaction or in terms of the Subadviser's overall
responsibilities with respect to the Fund and the accounts as to which the
Subadviser exercises investment discretion, (ii) such payment is made in
compliance with Section 28(e) of the Securities Exchange Act of 1934, as
amended, and any other applicable laws and regulations, and (iii) in the
opinion of the Subadviser, the total commissions paid by the Fund will be
reasonable in relation to the benefits to the Fund over the long term. It is
recognized that the services provided by such brokers may be useful to the
Subadviser in connection with the Subadviser's services to other clients. On
occasions when the Subadviser deems the purchase or sale of a security to be
in the best interests of a Fund as well as other clients of the Subadviser,
the Subadviser, to the extent permitted by applicable laws and regulations,
may, but shall be under no obligation to, aggregate the securities to be sold
or purchased in order to obtain the most favorable price or lower brokerage
commissions and efficient execution. In such event, allocation of securities
so sold or purchased, as well as the expenses incurred in the transaction,
will be made by the Subadviser in the manner the Subadviser considers to be
the most equitable and consistent with its fiduciary obligations to the Fund
and to such other clients. The Subadviser will report on such allocations at
the request of the Adviser, the Fund or the Fund's Board providing such
information as the number of aggregated trades to which the Fund was a party,
the broker(s) to whom such trades were directed and the basis of the
allocation for the aggregated trades.
(c) SECURITIES TRANSACTIONS. The Subadviser and any affiliated person of
the Subadviser will not purchase securities or other instruments from or sell
securities or other instruments to a Fund ("Principal Transactions");
PROVIDED, HOWEVER, the Subadviser may enter into a Principal Transaction with
a Fund if (i) the transaction is permissible under applicable laws and
regulations, including, without limitation, the Investment Company Act and
the Investment Advisers Act and the rules and regulations
2
<PAGE>
promulgated thereunder, and (ii) the transaction receives the express written
approval of the Adviser.
The Subadviser agrees to observe and comply with Rule 17j-1 under the
Investment Company Act and its Code of Ethics, as the same may be amended
from time to time. The Subadviser agrees to provide the Adviser and the Fund
with a copy of such Code of Ethics.
(d) BOOKS AND RECORDS. The Subadviser will maintain all books and records
required to be maintained pursuant to the Investment Company Act and the
rules and regulations promulgated thereunder with respect to transactions
made by it on behalf of the Fund including, without limitation, the books and
records required by Subsections (b)(1), (5), (6), (7), (9), (10) and (11) and
Subsection (f) of Rule 31a-1 under the Investment Company Act and shall
timely furnish to the Adviser all information relating to the Subadviser's
services hereunder needed by the Adviser to keep such other books and records
of the Fund required by Rule 31a-1 under the Investment Company Act. The
Subadviser will also preserve all such books and records for the periods
prescribed in Rule 31a-2 under the Investment Company Act, and agrees that
such books and records shall remain the sole property of the Fund and shall
be immediately surrendered to the Fund upon request. The Subadviser further
agrees that all books and records maintained hereunder shall be made
available to the Fund or the Adviser at any time upon reasonable request,
including telecopy, during any business day.
(e) INFORMATION CONCERNING INVESTMENTS AND SUBADVISER. From time to time
as the Adviser or the Fund may request, the Subadviser will furnish the
requesting party reports on portfolio transactions and reports on Investments
held in the portfolio, all in such detail as the Adviser or the Fund may
reasonably request. The Subadviser will make available its officers and
employees to meet with the Fund's Board of Directors at the Fund's principal
place of business on due notice to review the Investments of the Fund.
The Subadviser will also provide such information or perform such
additional acts as are customarily performed by a subadviser and may be
required for the Fund or the Adviser to comply with their respective
obligations under applicable laws, including, without limitation, the
Internal Revenue Code of 1986, as amended (the "Code"), the Investment
Company Act, the Investment Advisers Act, the Securities Act of 1933, as
amended (the "Securities Act") and any state securities laws, and any rule or
regulation thereunder.
(f) CUSTODY ARRANGEMENTS. The Subadviser shall provide the Fund's
custodian, on each business day with information relating to all transactions
concerning the Fund's assets.
(g) COMPLIANCE WITH APPLICABLE LAWS AND GOVERNING DOCUMENTS. In all
matters relating to the performance of this Agreement, the Subadviser and its
directors, officers, partners, employees and interested persons shall act in
conformity with the
3
<PAGE>
Fund's Articles of Incorporation, By-Laws, and currently effective
registration statement and with the written instructions and directions of
the Fund's Board and the Adviser, and shall comply with the requirements of
the Investment Company Act, the Investment Advisers Act, the Commodity
Exchange Act, the rules thereunder, and all other applicable federal and
state laws and regulations.
In carrying out its obligations under this Agreement, the Subadviser
shall ensure that the Fund complies with all applicable statutes and
regulations necessary to qualify the Fund as a Regulated Investment Company
under Subchapter M of the Code (or any successor provision), and shall notify
the Adviser immediately upon having a reasonable basis for believing that the
Fund has ceased to so qualify or that it might not so qualify in the future.
The Adviser has furnished the Subadviser with copies of each of the
following documents and will furnish the Subadviser at its principal office
all future amendments and supplements to such documents, if any, as soon as
practicable after such documents become available: (i) the Articles of
Incorporation of the Fund, (ii) the By-Laws of the Fund and (iii) the Fund's
registration statement under the Investment Company Act and the Securities
Act of 1933, as amended, as filed with the Commission.
(h) VOTING OF PROXIES. The Subadviser shall direct the custodian as to how
to vote such proxies as may be necessary or advisable in connection with any
matters submitted to a vote of shareholders of securities held by the Fund.
3. INDEPENDENT CONTRACTOR. In the performance of its duties hereunder, the
Subadviser is and shall be an independent contractor and unless otherwise
expressly provided herein or otherwise authorized in writing, shall have no
authority to act for or represent the Fund or the Adviser in any way or
otherwise be deemed an agent of the Fund or the Adviser.
4. COMPENSATION. The Adviser shall pay to the Subadviser, for the services
rendered hereunder, an annual fee equal to 0.22 percent of the average daily
closing value of the net assets of the Fund, computed on a daily basis and
payable monthly. If this Agreement shall be effective for only a portion of a
year, then the Subadviser's compensation for said year shall be prorated for
such portion. For purposes of this paragraph 4, the value of the net assets of
the Fund shall be computed in the same manner at the end of the business day as
the value of such net assets is computed in connection with the determination of
the net asset value of the Fund's shares as described in the Fund's Prospectus.
Payment of the Subadviser's compensation for the preceding month shall be made
as promptly as possible after the end of each month.
5. EXPENSES. The Subadviser shall bear all expenses incurred by it in
connection with its services under this Agreement and will, from time to time,
at its sole expense employ or associate itself with such persons as it believes
to be particularly fitted to assist it in the execution of its duties hereunder.
However, the Subadviser shall not assign or delegate any of its duties under
this Agreement without the approval of the Adviser and the Fund's Board.
4
<PAGE>
6. REPRESENTATIONS AND WARRANTIES OF SUBADVISER. The Subadviser represents
and warrants to the Adviser and the Fund as follows:
(a) The Subadviser is registered as an investment adviser under the
Investment Advisers Act;
(b) The Subadviser will immediately notify the Adviser of the occurrence
of any event that would disqualify the Subadviser from serving as an
investment adviser of an investment company pursuant to Section 9(a) of the
Investment Company Act;
(c) The Subadviser has filed a notice of exemption pursuant to Rule 4.14
under the CEA with the Commodity Futures Trading Commission (the "CFTC") and
the National Futures Association;
(d) The Subadviser is a corporation duly organized and validly existing
under the laws of the State of New York with the power to own and possess its
assets and carry on its business as it is now being conducted;
(e) The execution, delivery and performance by the Subadviser of this
Agreement are within the Subadviser's powers and have been duly authorized by
all necessary action on the part of its shareholders, and no action by or in
respect of, or filing with, any governmental body, agency or official is
required on the part of the Subadviser for the execution, delivery and
performance by the Subadviser of this Agreement, and the execution, delivery
and performance by the Subadviser of this Agreement do not contravene or
constitute a default under (i) any provision of applicable law, rule or
regulation, (ii) the Subadviser's governing instruments, or (iii) any
agreement, judgment, injunction, order, decree or other instrument binding
upon the Subadviser;
(f) This Agreement is a valid and binding agreement of the Subadviser;
(g) The Form ADV of the Subadviser previously provided to the Adviser is a
true and complete copy of the form filed with the Commission and the
information contained therein is accurate and complete in all material
respects and does not omit to state any material fact necessary in order to
make the statements made, in light of the circumstances under which they were
made, not misleading;
7. REPRESENTATIONS AND WARRANTIES OF ADVISER. The Adviser represents and
warrants to the Subadviser as follows:
(a) The Adviser is registered as an investment adviser under the
Investment Advisers Act;
(b) The Adviser has filed a notice of exemption pursuant to Rule 4.14
under the CEA with the Commodity Futures Trading Commission (the "CFTC") and
the National Futures Association;
5
<PAGE>
(c) The Adviser is a limited liability company duly organized and validly
existing under the laws of the State of Kansas with the power to own and
possess its assets and carry on its business as it is now being conducted;
(d) The execution, delivery and performance by the Adviser of this
Agreement are within the Adviser's powers and have been duly authorized by
all necessary action on the part of its members, and no action by or in
respect of, or filing with, any governmental body, agency or official is
required on the part of the Adviser for the execution, delivery and
performance by the Adviser of this Agreement, and the execution, delivery and
performance by the Adviser of this Agreement do not contravene or constitute
a default under (i) any provision of applicable law, rule or regulation, (ii)
the Adviser's governing instruments, or (iii) any agreement, judgment,
injunction, order, decree or other instrument binding upon the Adviser;
(e) This Agreement is a valid and binding agreement of the Adviser;
(f) The Form ADV of the Adviser previously provided to the Subadviser is a
true and complete copy of the form filed with the Commission and the
information contained therein is accurate and complete in all material
respects and does not omit to state any material fact necessary in order to
make the statements made, in light of the circumstances under which they were
made, not misleading;
(g) The Adviser acknowledges that it received a copy of the Subadviser's
Form ADV at least 48 hours prior to the execution of this Agreement.
8. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; DUTY TO UPDATE INFORMATION.
All representations and warranties made by the Subadviser and the Adviser
pursuant to Sections 6 and 7 hereof shall survive for the duration of this
Agreement and the parties hereto shall promptly notify each other in writing
upon becoming aware that any of the foregoing representations and warranties are
no longer true.
9. LIABILITY AND INDEMNIFICATION.
(a) LIABILITY. In the absence of willful misfeasance, bad faith or gross
negligence on the part of the Subadviser or a breach of its duties hereunder,
the Subadviser shall not be subject to any liability to the Adviser or the
Fund or any of the Fund's shareholders, and, in the absence of willful
misfeasance, bad faith or gross negligence on the part of the Adviser or a
breach of its duties hereunder, the Adviser shall not be subject to any
liability to the Subadviser, for any act or omission in the case of, or
connected with, rendering services hereunder or for any losses that may be
sustained in the purchase, holding or sale of Investments; PROVIDED, HOWEVER,
that nothing herein shall relieve the Adviser and the Subadviser from any of
their obligations under applicable law, including, without limitation, the
federal and state securities laws and the CEA.
6
<PAGE>
(b) INDEMNIFICATION. The Subadviser shall indemnify the Adviser and the
Fund, and their respective officers and directors, for any liability and
expenses, including attorneys' fees, which may be sustained as a result of
the Subadviser's willful misfeasance, bad faith, gross negligence, breach of
its duties hereunder or violation of applicable law, including, without
limitation, the federal and state securities laws or the CEA. The Adviser
shall indemnify the Subadviser and its officers and directors, for any
liability and expenses, including attorneys' fees, which may be sustained as
a result of the Adviser's willful misfeasance, bad faith, gross negligence,
breach of its duties hereunder or violation of applicable law, including,
without limitation, the federal and state securities laws or the CEA.
10. DURATION AND TERMINATION.
(a) DURATION. This Agreement shall become effective upon the date first
above written, provided that this Agreement shall not take effect with
respect to the Fund unless it has first been approved (i) by a vote of a
majority of those directors of the Fund who are not parties to this Agreement
or interested persons of any such party, cast in person at a meeting called
for the purpose of voting on such approval, and (ii) by vote of a majority of
the Fund's outstanding voting securities. This Agreement shall continue in
effect for a period of two years from the date hereof, subject thereafter to
being continued in force and effect from year to year with respect to the
Fund if specifically approved each year by either (i) the Board of Directors
of the Fund, or (ii) by the affirmative vote of a majority of the Fund's
outstanding voting securities. In addition to the foregoing, each renewal of
this Agreement with respect to the Fund must be approved by the vote of a
majority of the Fund's directors who are not parties to this Agreement or
interested persons of any such party, cast in person at a meeting called for
the purpose of voting on such approval. Prior to voting on the renewal of
this Agreement, the Board of Directors of the Fund may request and evaluate,
and the Subadviser shall furnish, such information as may reasonably be
necessary to enable the Fund's Board of Directors to evaluate the terms of
this Agreement.
(b) TERMINATION. Notwithstanding whatever may be provided herein to the
contrary, this Agreement may be terminated at any time, without payment of
any penalty:
(i) By vote of a majority of the Board of Directors of the Fund, or by
vote of a majority of the outstanding voting securities of the Fund, or by
the Adviser, in each case, upon sixty (60) days' written notice to the
Subadviser;
(ii) By the Adviser upon breach by the Subadviser of any
representation or warranty contained in Section 6 hereof, which shall not
have been cured during the notice period, upon twenty (20) days written
notice;
(iii) By the Adviser immediately upon written notice to the Subadviser
if the Subadviser becomes unable to discharge its duties and obligations
under this Agreement; or
7
<PAGE>
(iv) By the Subadviser upon 180 days written notice to the Adviser and
the Fund.
This Agreement shall not be assigned (as such term is defined in the
Investment Company Act) without the prior written consent of the parties
hereto. This Agreement shall terminate automatically in the event of its
assignment without such consent or upon the termination of the Advisory
Agreement.
11. DUTIES OF THE ADVISER. The Adviser shall continue to have responsibility
for all services to be provided to the Fund pursuant to the Advisory Agreement
and shall oversee and review the Subadviser's performance of its duties under
this Agreement.
12. AMENDMENT. This Agreement may be amended by mutual consent of the
parties, provided that the terms of each such amendment with respect to the Fund
shall be approved by the Board of Directors of the Fund or by a vote of a
majority of the outstanding voting securities of the Fund.
13. CONFIDENTIALITY. Subject to the duties of the Adviser, the Fund and the
Subadviser to comply with applicable law, including any demand of any regulatory
or taxing authority having jurisdiction, the parties hereto shall treat as
confidential all information pertaining to the Fund and the actions of the
Subadviser, the Adviser and the Fund in respect thereof.
14. NOTICE. Any notice that is required to be given by the parties to each
other (or to the Fund) under the terms of this Agreement shall be in writing,
delivered, or mailed postpaid to the other party, or transmitted by facsimile
with acknowledgment of receipt, to the parties at the following addresses or
facsimile numbers, which may from time to time be changed by the parties by
notice to the other party:
(a) If to the Subadviser:
Salomon Brothers Asset Management Inc.
7 World Trade Center
New York, New York 10048
Attention: _________________________
Facsimile: (212) 783-3601
(b) If to the Adviser:
James R. Schmank
President
Security Management Company, LLC
700 SW Harrison
Topeka, Kansas 66636-0001
Attention: James R. Schmank
Facsimile: (785) 431-3080
8
<PAGE>
(c) If to Security Tax-Exempt Fund:
Amy J. Lee
Secretary
Security Tax-Exempt Fund
700 SW Harrison
Topeka, Kansas 66636-0001
Attention: Amy J. Lee, Secretary
Facsimile: (785) 431-3080
15. GOVERNING LAW; JURISDICTION. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Kansas.
16. COUNTERPARTS. This Agreement may be executed in one or more counterparts,
all of which shall together constitute one and the same instrument.
17. CAPTIONS. The captions herein are included for convenience of reference
only and shall be ignored in the construction or interpretation hereof.
18. SEVERABILITY. If any provision of this Agreement shall be held or made
invalid by a court decision or applicable law, the remainder of the Agreement
shall not be affected adversely and shall remain in full force and effect.
19. CERTAIN DEFINITIONS.
(a) "BUSINESS DAY." As used herein, business day means any customary
business day in the United States on which the New York Stock Exchange is
open.
(b) MISCELLANEOUS. Any question of interpretation of any term or provision
of this Agreement having a counterpart in or otherwise derived from a term or
provision of the Investment Company Act shall be resolved by reference to
such term or provision of the Investment Company Act and to interpretations
thereof, if any, by the U.S. courts or, in the absence of any controlling
decisions of any such court, by rules, regulation or order of the Commission
validly issued pursuant to the Investment Company Act. Specifically, as used
herein, "investment company," "affiliated person," "interested person,"
"assignment," "broker," "dealer" and "affirmative vote of the majority of the
Fund's outstanding voting securities" shall all have such meaning as such
terms have in the Investment Company Act. The term "investment adviser" shall
have such meaning as such term has in the Investment Advisers Act and the
Investment Company Act, and in the event of a conflict between such Acts, the
most expansive definition shall control. In addition, where the effect of a
requirement of the Investment Company Act reflected in any provision of this
Agreement is relaxed by a rule, regulation or order of the Commission,
whether of special or general application, such provision shall be deemed to
incorporate the effect of such rule, regulation or order.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first written above.
SECURITY MANAGEMENT COMPANY, LLC
By:
----------------------------------
Name: James R. Schmank
Title: President
Attest:
------------------------------
Name: Amy J. Lee
Title: Secretary
SALOMON BROTHERS ASSET MANAGEMENT INC.
By:
----------------------------------
Name:
Title:
Attest:
------------------------------
Name:
Title:
10
<PAGE>
DISTRIBUTION AGREEMENT
THIS AGREEMENT, made this 7th day of October, 1983, between SECURITY
TAX-EXEMPT FUND, a Kansas corporation (hereinafter referred to as the
"Company"), and SECURITY DISTRIBUTORS, INC., a Kansas corporation (hereinafter
referred to as the "Distributor"),
WITNESSETH:
WHEREAS, the Company is engaged in business as an open-end, management
investment company registered under the Investment Company Act of 1940 (the
"1940 Act"); and
WHEREAS, the Company is authorized to issue shares of capital stock in
separate series, with each such series representing interests in a separate
portfolio of securities and other assets; and
WHEREAS, the Company intends initially to offer shares in one series to be
designated Security Tax-Exempt Fund, such series together with all other series
subsequently established by the Company with respect to which the Company
desires to retain the Distributor to render services hereunder and with respect
to which the Distributor is willing so to do, being herein collectively referred
to as the "Series"; and
WHEREAS, the Distributor is willing to act as principal underwriter for the
Company to offer for sale, sell and deliver after sale shares of the Company's
$.10 par value common stock (hereinafter referred to as the "Shares") on the
terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein set forth, the parties hereto agree as follows:
1. EMPLOYMENT OF DISTRIBUTOR. The Company hereby employs the Distributor to
act as principal underwriter for the Company and hereby agrees that during the
term of this Agreement, and any renewal or extension thereof, or until any prior
termination thereof, the Distributor shall have the exclusive right to offer for
sale and to distribute any and all Shares of each Series issued or to be issued
by the Company. The Distributor hereby accepts such employment and agrees to act
as the distributor of the Shares of each Series issued or to be issues by the
Company during the period this Agreement is in effect and agrees during such
period to offer for sale such Shares as long as such Shares remain available for
sale, unless the Distributor is unable legally to make such offer for sale as
the result of any law or governmental regulation.
2. OFFERING PRICE AND COMMISSIONS. Prior to the issuance of any Shares by the
Company pursuant to any subscription tendered by or through the Distributor and
confirmed for sale to or through the Distributor, the Distributor shall pay or
cause to be paid to the Custodian of the Company in cash, an amount equal to the
net asset value of such Shares at the time of
<PAGE>
acceptance of each such subscription and confirmation by the Company of the sale
of such Shares. The Distributor shall be entitled to charge a commission on each
such sale of Shares in the amount set forth in the Company's prospectus, such
commission to be an amount equal to the difference between the net asset value
and the offering price of the Shares, as such offering price may from time to
time be determined by the board of directors of the Company. All Shares shall be
sold to the public only at their public offering price at the time of such sale,
and the Company shall receive not less than the full net asset value thereof.
3. ALLOCATION OF EXPENSES AND CHARGES. During the period this Agreement is in
effect, the Company shall pay all costs and expenses in connection with its
registration under the 1940 Act and the registration of its Shares under the
Securities Act of 1933 ("1933 Act"), including all expenses in connection with
the preparation and printing of any registration statements and prospectuses
necessary for registration thereunder but excluding any additional costs and
expenses incurred in furnishing the Distributor with prospectuses. The Company
shall also pay all costs, expenses and fees incurred in connection with the
qualification of the Shares under the applicable Blue Sky laws of the states in
which the Shares are offered.
During the period this Agreement is in effect the Distributor will pay or
reimburse the Company for:
(a) All costs and expenses of printing and mailing prospectuses (other than
for existing shareholders) and confirmations (except for reinvested dividends),
and all costs and expenses of preparing, printing and mailing advertising
material, sales literature, circulars, applications, and other materials used or
to be used in connection with the offering for sale and the sale of Shares; and
(b) All clerical and administrative costs in processing the applications for
and in connection with the sale of Shares.
The Distributor agrees to submit to the Company for its prior approval all
advertising material, sales literature, circulars and any other material which
the Distributor proposes to use in connection with the offering for sale of
Shares.
4. DISTRIBUTOR MAY ACT AS BROKER AND RECEIVE COMMISSIONS. Notwithstanding any
other provisions of this Agreement, it is understood and agreed that the
Distributor may act as a broker, on behalf of the Company, in the purchase and
sale of securities not effected on a securities exchange, provided that any such
transactions and any commission paid in connection therewith shall comply in
every respect with the requirements of the 1940 Act and in particular with
Section 17(e) of that Act and the Rules and Regulations of the Securities and
Exchange Commission promulgated thereunder.
5. AGREEMENTS SUBJECT TO APPLICABLE LAW AND REGULATIONS. The parties hereto
agree that all provisions of this Agreement will be performed in strict
accordance with the requirements of the 1940 Act, the 1933 Act and the
Securities Exchange Act of 1934, and the rules and regulations of the Securities
and Exchange Commission under said statutes, in strict accordance
-2-
<PAGE>
with all applicable state Blue Sky laws and the rules and regulations
thereunder, and in strict accordance with the provisions of the Articles of
Incorporation and Bylaws of the Company.
6. DURATION AND TERMINATION OF AGREEMENT. This Agreement shall become
effective at the date and time that the Company's prospectus, reflecting the
underwriting arrangements provided by this Agreement, shall become effective
under the 1933 Act, and shall, unless terminated as provided herein, continue in
force for two years from that date, and from year to year thereafter, provided
that such continuance for each successive year is specifically approved in
advance at least annually by either the board of directors or by the vote of a
majority (as defined in the 1940 Act) of the outstanding voting securities of
the Company and, in either event, by the vote of a majority of the directors of
the Company who are not parties to this Agreement or interested persons of any
such party, cast in person at a meeting called for the purpose of voting upon
such approval. As used in the preceding sentence, the words "interested persons"
shall have the meaning set forth in Section 2(a)(19) of the 1940 Act. Written
notice of any such approval by the board of directors or by the holders of a
majority of the outstanding voting securities of the Company and the directors
who are not such interested persons shall be given promptly to the Distributor.
This Agreement may be terminated at any time without the payment of any
penalty by the Company by giving the Distributor at least sixty (60) days
previous written notice of such intention to terminate. This Agreement may be
terminated by the Distributor at any time by giving the Company at least sixty
(60) days previous written notice of such intention to terminate.
This Agreement shall terminate automatically in the event of its assignment.
As used in the preceding sentence, the word "assignment" shall have the meaning
set forth in Section 2(a)(4) of the 1940 Act.
7. CONSTRUCTION OF AGREEMENT. No provision of this Agreement is intended to
or shall be construed as protecting the Distributor against any liability to the
Company or to the Company's security holders to which the Distributor would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties under this Agreement.
Terms or words used in this Agreement, which also occur in the Articles of
Incorporation or Bylaws of the Company, shall have the same meaning herein as
given to such terms or words in the Articles of Incorporation or Bylaws of the
Company.
8. DISTRIBUTOR AN INDEPENDENT CONTRACTOR. The Distributor shall be deemed to
be an independent contractor and, except as expressly provided or authorized by
the Company, shall have no authority to act for or represent the Company.
9. NOTICE. Any notice required or permitted to be given hereunder to either
of the parties hereto shall be deemed to have been given if mailed by certified
mail in a postage prepaid envelope addressed to the respective party as follows,
unless any such party has notified the other
-3-
<PAGE>
party hereto that notices thereafter intended for such party shall be mailed to
some other address, in which event notices thereafter shall be addressed to such
party at the address designated in such request:
Security Tax-Exempt Fund
Security Benefit Life Building
700 Harrison
Topeka, Kansas
Security Distributors, Inc.
Security Benefit Life Building
700 Harrison
Topeka, Kansas
10. AMENDMENT OF AGREEMENT. No amendment to this Agreement shall be effective
until approved by (a) a majority of the board of directors of the Company and a
majority of the board of directors of the Company who are not parties to this
Agreement or affiliated persons of any such party, or (b) a vote of the holders
of a majority of the outstanding voting securities of the Company.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed by their respective corporate officers thereto duly authorized on the
day, month and year first above written.
SECURITY TAX-EXEMPT FUND
By EVERETT S. GILLE
-------------------------------------
President
ATTEST:
LARRY D. ARMEL
- -------------------------------------
Secretary
(SEAL)
SECURITY DISTRIBUTORS, INC.
By GORDON EVANS
-------------------------------------
President
ATTEST:
LARRY D. ARMEL
- -------------------------------------
Secretary
(SEAL)
-4-
<PAGE>
AMENDMENT TO DISTRIBUTION AGREEMENT
WHEREAS, Security Tax-Exempt Fund (the "Company") and Security Distributors,
Inc. (the "Distributor") are parties to a Distribution Agreement dated October
7, 1983 (the "Distribution Agreement"), under which the Distributor agreed to
act as principal underwriter in connection with sales of the shares of the
Company's capital stock; and
WHEREAS, the Company expects to receive an exemptive order from the Securities
and Exchange Commission allowing the Company to issue and offer for sale two or
more classes of the Company's capital stock; and
WHEREAS, the Company and the Distributor wish to amend the Distribution
Agreement to clarify that the Distribution Agreement applies only to the sale of
shares of the single class of capital stock existing at the time the
Distribution Agreement was initially entered into:
NOW THEREFORE, the Company and Distributor hereby amend the Distribution
Agreement, effective immediately, as follows:
1. The term "Shares" as referred to in the Distribution Agreement shall refer
to the Class A Shares of the Company's $.10 par value stock.
IN WITNESS WHEREOF, the parties hereto have made this Amendment to the
Distribution Agreement this 1st day of October 1993.
SECURITY TAX-EXEMPT FUND
By M. J. PROVINES
-------------------------------------
President
ATTEST:
AMY J. LEE
- -------------------------------------
Secretary
(SEAL)
SECURITY DISTRIBUTORS, INC.
By HOWARD R. FRICKE
-------------------------------------
President
ATTEST:
AMY J. LEE
- -------------------------------------
Secretary
(SEAL)
<PAGE>
AMENDMENT TO DISTRIBUTION AGREEMENT
WHEREAS, Security Tax-Exempt Fund (the "Fund") and Security Distributors, Inc.
(the "Distributor") are parties to a Distribution Agreement dated October 7,
1983, as amended (the "Distribution Agreement"), under which the Distributor has
agreed to act as principal underwriter in connection with sales of the shares of
the Fund's Class A common stock;
WHEREAS, on _____________________________, the Fund was granted exemptive relief
from the Securities and Exchange Commission allowing the Fund to issue and offer
for sale two or more classes of the Fund's capital stock; and
WHEREAS, on February 6, 1998, the Board of Directors of the Fund approved a
Class A Distribution Plan (the "Class A Plan") pursuant to Rule 12b-1 under the
Investment Company Act of 1940, the provisions of which have an effect upon the
relationship between the Fund and the Distributor, and the Distribution
Agreement; and
WHEREAS, the Fund and Distributor wish to amend the Distribution Agreement to
incorporate the necessary provisions of the Class A Plan into the Agreement.
NOW, THEREFORE, the Fund and Distributor hereby amend the Distribution
Agreement, effective May 1, 1998, by adding new Section 5A, which provides as
follows:
5A. (a) Pursuant to a Class A Distribution Plan adopted by the Fund,
the Fund agrees to make monthly payments to the Distributor in an
amount computed at an annual rate of .25 of 1% of the Fund's average
daily net assets, to finance activities undertaken by the Distributor
for the purpose of distributing the Fund's shares to investors. The
Distributor is obligated to and hereby agrees to use the entire amount
of said fee to finance the following distribution-related activities:
(i) Preparation, printing and distribution of the Prospectus
and Statement of Additional Information and any supplement
thereto used in connection with the offering of the Fund's
shares to the public;
(ii) Printing of additional copies for use by the Distributor
as sales literature, of reports and other communications
which were prepared by the Fund for distribution to
existing shareholders;
(iii) Preparation, printing and distribution of any other sales
literature used in connection with the offering of the
Fund's shares to the public;
(iv) Expenses incurred in advertising, promoting and selling
shares of the Fund to the public;
<PAGE>
(v) Any fees paid by the Distributor to securities dealers who
have executed a Dealer's Distribution Agreement with the
Distributor for account maintenance and personal service
to shareholders of the Fund (a "Service Fee");
(vi) Commissions to sales personnel for selling shares of the
Fund and interest expenses related thereto; and
(vii) Expenses incurred in promoting sales of shares of the Fund
by securities dealers, including the costs of preparation
of materials for presentations, travel expenses, costs of
entertainment, and other expenses incurred in connection
with promoting sales of the Fund shares by dealers.
(b) All payments to the Distributor pursuant to this paragraph are
subject to the following conditions being met by the Distributor.
The Distributor shall furnish the Fund with quarterly written
reports of its expenditures and such other information relating
to expenditures or to the other distribution-related activities
undertaken or proposed to be undertaken by the Distributor during
such fiscal year under its Distribution Agreement with the Fund
as the Fund may reasonably request;
(c) The Dealer's Distribution Agreement (the "Agreement")
contemplated by paragraph 5A(a)(v) above shall permit payments to
securities dealers by the Distributor only in accordance with the
provisions of this paragraph and shall have the approval of the
majority of the Board of Directors of the Fund, including a
majority of the directors who are not interested persons of the
Fund, as required by the Rule. The Distributor may pay to the
other party to any Dealer's Distribution Agreement a quarterly
fee for distribution and marketing services provided by such
other party. Such quarterly fee shall be payable in arrears in an
amount equal to such percentage (not in excess of .000685% per
day) of the aggregate net asset value of the Fund's shares held
by such other party's customers or clients at the close of
business each day as determined from time to time by the
Distributor. The distribution and marketing services contemplated
hereby shall include, but are not limited to, answering inquiries
regarding the Fund, account designations and addresses,
maintaining the investment of such other party's customers or
clients in the Fund and similar services. In determining the
extent of such other party's assistance in maintaining such
investment by its customers or clients, the Distributor may take
into account the possibility that the shares held by such
customer or client would be redeemed in the absence of such
quarterly fee.
<PAGE>
(d) The provisions of the Distribution Plan approved by the Board of
Directors of the Fund on February 6, 1998, are fully incorporated
herein by reference. In the event the Class A Distribution Plan
is not approved by a majority vote of Class A shareholders of the
Fund at the Fund's special meeting to be held April 24, 1998, or
is terminated by the Board of Directors or Class A shareholders
of the Fund as provided therein, this paragraph shall no longer
be effective.
The Fund and Distributor hereby further amend the Distribution Agreement,
effective May 1, 1998, by deleting the second paragraph of Section 6 and
replacing it with the following.
This Agreement may be terminated at any time, without the payment of
any penalty, by vote of a majority of the board of directors of the
Company who are not interested persons of the Company and have no
direct or indirect financial interest in the operation of the Class A
Distribution Plan or in this Distribution Agreement or by vote of a
majority of the outstanding Class A voting securities of the Company
on sixty (60) day's written notice to the Distributor. This Agreement
may be terminated by the Distributor at any time by giving the Company
sixty (60) days' previous written notice of such intention to
terminate.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to the
Distribution Agreement this _____ day of ____________________, 1998.
SECURITY TAX-EXEMPT FUND
By
-------------------------------------
James R. Schmank, Vice President
ATTEST:
By
------------------------------------
Amy J. Lee, Secretary
SECURITY DISTRIBUTORS, INC.
By
-------------------------------------
Richard K Ryan, President
ATTEST:
By
-----------------------------------
Amy J. Lee, Secretary
<PAGE>
CLASS B
DISTRIBUTION AGREEMENT
THIS AGREEMENT, made this 1st day of October 1993, between Security Tax-Exempt
Fund, a Kansas corporation (hereinafter referred to as the "Company"), and
Security Distributors, Inc., a Kansas corporation (hereinafter referred to as
the "Distributor").
WITNESSETH:
WHEREAS, the Company is engaged in business as an open-end, management
investment company registered under the federal Investment Company Act of 1940
(the "1940 Act"); and
WHEREAS, the Distributor is willing to act as principal underwriter for the
Company to offer for sale, sell and deliver after sale, the Class B Shares of
the Company's $.10 par value common stock (hereinafter referred to as the
"Shares") on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements herein
set forth, the parties hereto agree as follows:
1. EMPLOYMENT OF DISTRIBUTOR. The Company hereby employs the Distributor to
act as principal underwriter for the Company with respect to its Class B
Shares and hereby agrees that during the term of this Agreement, and any
renewal or extension thereof, or until any prior termination thereof, the
Distributor shall have the exclusive right to offer for sale and to
distribute any and all of its Class B Shares issued or to be issued by the
Company. The Distributor hereby accepts such employment and agrees to act
as the distributor of the Class B Shares issued or to be issued by the
Company during the period this Agreement is in effect and agrees during
such period to offer for sale such Shares as long as such Shares remain
available for sale, unless the Distributor is unable legally to make such
offer for sale as the result of any law or governmental regulation.
2. OFFERING PRICE AND COMMISSIONS. Prior to the issuance of any Shares by the
Company pursuant to any subscription tendered by or through the Distributor
and confirmed for sale to or through the Distributor, the Distributor shall
pay or cause to be paid to the custodian of the Company in cash, an amount
equal to the net asset value of such Shares at the time of acceptance of
each such subscription and confirmation by the Company of the sale of such
Shares. All Shares shall be sold to the public only at their public
offering price at the time of such sale, and the Company shall receive not
less than the full net asset value thereof.
3. ALLOCATION OF EXPENSES AND CHARGES. During the period this Agreement is in
effect, the Company shall pay all costs and expenses in connection with the
registration of Shares under the Securities Act of 1933 (the "1933 Act"),
including all expenses in connection with the preparation and printing of
any registration statements and prospectuses necessary for registration
thereunder but excluding any additional costs and expenses incurred in
furnishing the Distributor with prospectuses.
-1-
<PAGE>
The Company will also pay all costs, expenses and fees incurred in connection
with the qualification of the Shares under the applicable Blue Sky laws of the
states in which the Shares are offered.
During the period this Agreement is in effect, the Distributor will pay or
reimburse the Company for:
(a) All costs and expenses of printing and mailing prospectuses (other
than to existing shareholders) and confirmations, and all costs and
expenses of preparing, printing and mailing advertising material,
sales literature, circulars, applications, and other materials used or
to be used in connection with the offering for sale and the sale of
Shares; and
(b) All clerical and administrative costs in processing the applications
for and in connection with the sale of Shares.
The Distributor agrees to submit to the Company for its prior approval all
advertising material, sales literature, circulars and any other material which
the Distributor proposes to use in connection with the offering for sale of
Shares.
4. REDEMPTION OF SHARES. The Distributor, as agent of and for the account of
the Fund, may redeem Shares of the Fund offered for resale to it at the net
asset value of such Shares (determined as provided in the Articles of
Incorporation or Bylaws) and not in excess of such maximum amounts as may
be fixed from time to time by an officer of the Fund. Whenever the officers
of the Fund deem it advisable for the protection of the shareholders of the
Fund, they may suspend or cancel such authority.
5. SALES CHARGES. A contingent deferred sales charge shall be retained by the
Distributor from the net asset value of Shares of the Fund that it has
redeemed, it being understood that such amounts will not be in excess of
that set forth in the then-current registration statement of the Fund.
Furthermore, the Distributor may retain any amounts authorized for payment
to it under the Fund's Distribution Plan.
6. DISTRIBUTOR MAY ACT AS BROKER AND RECEIVE COMMISSIONS. Notwithstanding any
other provisions of this Agreement, it is understood and agreed that the
Distributor may act as a broker, on behalf of the Company, in the purchase
and sale of securities not effected on a securities exchange, provided that
any such transactions and any commission paid in connection therewith shall
comply in every respect with the requirements of the 1940 Act and in
particular with Section 17(e) of that Act and the rules and regulations of
the Securities and Exchange Commission promulgated thereunder.
7. AGREEMENTS SUBJECT TO APPLICABLE LAW AND REGULATIONS. The parties hereto
agree that all provisions of this Agreement will be performed in strict
accordance with the requirements of: the 1940 Act, the 1933 Act, the
Securities Exchange Act of 1934, the rules and regulations of the
Securities and Exchange Commission under said statutes, all applicable
state Blue Sky laws and the rules and regulations thereunder, the rules of
the National
-2-
<PAGE>
Association of Securities Dealers, Inc., and, in strict accordance with,
the provisions of the Articles of Incorporation and Bylaws of the Company.
8. DURATION AND TERMINATION OF AGREEMENT. This Agreement shall become
effective at the date and time that the Company's prospectus, reflecting
the underwriting arrangements provided by this Agreement, shall become
effective under the 1933 Act, and shall, unless terminated as provided
herein, continue in force for two years from that date, and from year to
year thereafter, provided that such continuance for each successive year is
specifically approved in advance at least annually by either the Board of
Directors or by the vote of a majority (as defined in the 1940 Act) of the
outstanding voting securities of the Company and, in either event, by the
vote of a majority of the directors of the Company who are not parties to
this Agreement or interested persons of any such party, cast in person at a
meeting called for the purpose of voting upon such approval. As used in the
preceding sentence, the words "interested persons" shall have the meaning
set forth in Section 2(a)(19) of the 1940 Act. Written notice of any such
approval by the Board of Directors or by the holders of a majority of the
outstanding voting securities of the Company and by the directors who are
not such interested persons shall be given promptly to the Distributor.
This Agreement may be terminated at any time without the payment of any penalty
by the Company by giving the Distributor at least sixty (60) days' previous
written notice of such intention to terminate. This Agreement may be terminated
by the Distributor at any time by giving the Company at least sixty (60) days'
previous written notice of such intention to terminate.
This Agreement shall terminate automatically in the event of its assignment. As
used in the preceding sentence, the word "assignment" shall have the meaning set
forth in Section 2(a)(4) of the 1940 Act.
9. CONSTRUCTION OF AGREEMENT. No provision of this Agreement is intended to or
shall be construed as protecting the Distributor against any liability to
the Company or to the Company's security holders to which the Distributor
would otherwise be subject by reason of willful misfeasance, bad faith or
gross negligence in the performance of its duties under this Agreement.
Terms or words used in the Agreement, which also occur in the Articles of
Incorporation or Bylaws of the Company, shall have the same meaning herein as
given to such terms or words in the Articles of Incorporation or Bylaws of the
Company.
10. DISTRIBUTOR AN INDEPENDENT CONTRACTOR. The Distributor shall be deemed to
be an independent contractor and, except as expressly provided or
authorized by the Company, shall have no authority to act for or represent
the Company.
11. NOTICE. Any notice required or permitted to be given hereunder to either of
the parties hereto shall be deemed to have been given if mailed by
certified mail in a postage-prepaid envelope addressed to the respective
party as follows, unless any such party has notified the
-3-
<PAGE>
other party hereto that notices thereafter intended for such party shall be
mailed to some other address, in which event notices thereafter shall be
addressed to such party at the address designated in such request:
Security Tax-Exempt Fund
Security Benefit Group Building
700 Harrison
Topeka, Kansas
Security Distributors, Inc.
Security Benefit Group Building
700 Harrison
Topeka, Kansas
12. AMENDMENT OF AGREEMENT. No amendment to this Agreement shall be effective
until approved by (a) a majority of the Board of Directors of the Company
and a majority of the directors of the Company who are not parties to this
Agreement or affiliated persons of any such party, or (b) a vote of the
holders of a majority of the outstanding voting securities of the Company.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed
by their respective corporate officers thereto duly authorized on the day, month
and year first above written.
SECURITY TAX-EXEMPT FUND
BY: MICHAEL J. PROVINES
------------------------------------
President
ATTEST:
AMY J. LEE
- -------------------------------------
Secretary
(SEAL)
SECURITY DISTRIBUTORS, INC.
BY: HOWARD R. FRICKE
------------------------------------
President
ATTEST:
AMY J. LEE
- -------------------------------------
Secretary
(SEAL)
-4-
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" and "Independent Auditors" and to the incorporation by reference of
our report dated February 6, 1998 in Post-Effective Amendment No. 17 to the
Registration Statement (Form N-1A) and related Prospectus of Security Tax-Exempt
Fund filed with the Securities and Exchange Commission under the Securities Act
of 1933 (Registration No. 2-73223) and under the Investment Company Act of 1940
(Registration No. 811-3225).
Ernst & Young LLP
Kansas City, Missouri
February 27, 1998
<PAGE>
SECURITY TAX-EXEMPT FUND
CLASS A
DISTRIBUTION PLAN
1. THE PLAN. This Distribution Plan (the "Plan"), provides for the financing by
Security Tax-Exempt Fund (the "Fund") of activities which are, or may be
deemed to be, primarily intended to result in the sale of class A shares of
the Fund (hereinafter called "distribution-related activities"). The
principal purpose of this Plan is to enable the Fund to supplement
expenditures by Security Distributors, Inc., the Distributor of its shares
(the "Distributor") for distribution-related activities. This Plan is
intended to comply with the requirements of Rule 12b-1 (the "Rule") under
the Investment Company Act of 1940 (the "1940 Act").
The Board of Directors, in considering whether the Fund should implement the
Plan, has requested and evaluated such information as it deemed necessary to
make an informed determination as to whether the Plan should be implemented
and has considered such pertinent factors as it deemed necessary to form the
basis for a decision to use assets of the Fund for such purposes.
In voting to approve the implementation of the Plan, the Directors have
concluded, in the exercise of their reasonable business judgment and in
light of their respective fiduciary duties, that there is a reasonable
likelihood that the Plan will benefit the Fund and its shareholders.
2. COVERED EXPENSES.
(a) The Fund may make payments under this Plan, or any agreement relating
to the implementation of this Plan, in connection with any activities
or expenses primarily intended to result in the sale of class A shares
of the Fund, including, but not limited to, the following
distribution-related activities:
(i) Preparation, printing and distribution of the Prospectus and
Statement of Additional Information and any supplement thereto
used in connection with the offering of the Fund's shares to the
public;
(ii) Printing of additional copies for use by the Distributor as
sales literature, of reports and other communications which were
prepared by the Fund for distribution to existing shareholders;
(iii) Preparation, printing and distribution of any other sales
literature used in connection with the offering of the Fund's
shares to the public;
(iv) Expenses incurred in advertising, promoting and selling shares
of the Fund to the public;
<PAGE>
(v) Any fees paid by the Distributor to securities dealers who have
executed a Dealer's Distribution Agreement with the Distributor
for account maintenance and personal service to shareholders of
the Fund (a "Service Fee");
(vi) Commissions to sales personnel for selling shares of the Fund
and interest expenses related thereto; and
(vii) Expenses incurred in promoting sales of shares of the Fund by
securities dealers, including the costs of preparation of
materials for presentations, travel expenses, costs of
entertainment, and other expenses incurred in connection with
promoting sales of Fund shares by dealers.
(b) Any payments for distribution-related activities shall be made pursuant
to an agreement. As required by the Rule, each agreement relating to
the implementation of this Plan shall be in writing and subject to
approval and termination pursuant to the provisions of Section 7 of
this Plan. However, this Plan shall not obligate the Fund or any other
party to enter into such agreement.
3. AGREEMENT WITH DISTRIBUTOR. All payments to the Distributor pursuant to this
Plan shall be subject to and be made in compliance with a written agreement
between the Fund and the Distributor containing a provision that the
Distributor shall furnish the Fund with quarterly written reports of the
amounts expended and the purposes for which such expenditures were made, and
such other information relating to such expenditures or to the other
distribution-related activities undertaken or proposed to be undertaken by
the Distributor during such fiscal year under its Distribution Agreement
with the Fund as the Fund may reasonably request.
4. DEALER'S DISTRIBUTION AGREEMENT. The Dealer's Distribution Agreement (the
"Agreement") contemplated by Section 2(a)(v) above shall permit payment of
Service Fees to securities dealers by the Distributor only in accordance
with the provisions of this paragraph and shall have the approval of the
majority of the Board of Directors of the Fund, including the affirmative
vote of a majority of those Directors who are not interested persons of the
Fund and who have no direct or indirect financial interest in the operation
of the Plan or any agreement related to the Plan ("Independent Directors"),
as required by the Rule. The Distributor may pay to the other party to any
such Agreement a Service Fee for distribution and marketing services
provided by such other party. Such Service Fee shall be payable (a) for the
first year, initially, in an amount equal to .25 percent annually of the
aggregate net asset value of the shares purchased by such other party's
customers or clients, and (b) for each year thereafter, quarterly, in
arrears in an amount equal to such percentage (not in excess of .000685
percent per day or .25 percent annually) of the aggregate net asset value of
the shares held by such other party's customers or clients at the close of
business each day as determined from time to time by the Distributor. The
distribution and marketing services contemplated hereby shall include, but
are not limited to, answering inquiries regarding the Fund, account
designations and addresses, maintaining the investment of such other party's
customers or clients in the Fund and similar services. In
<PAGE>
determining the extent of such other party's assistance in maintaining such
investment by its customers or clients, the Distributor may take into
account the possibility that the shares held by such customer or client
would be redeemed in the absence of such fee.
5. LIMITATIONS ON COVERED EXPENSES. The basic limitation on the expenses
incurred by the Fund under Section 2 of this Plan (including Service Fees)
in any fiscal year of the Fund shall be one-quarter of one percent (.25%) of
the Fund's average daily net assets for such fiscal year. The payments to be
paid pursuant to this Plan shall be calculated and accrued daily and paid
monthly or at such other intervals as the Directors shall determine, subject
to any applicable restriction imposed by rules of the National Association
of Securities Dealers, Inc.
6. INDEPENDENT DIRECTORS. While this Plan is in effect, the selection and
nomination of Independent Directors of the Fund shall be committed to the
discretion of the Independent Directors. Nothing herein shall prevent the
involvement of others in such selection and nomination if the final decision
on any such selection and nomination is approved by a majority of the
Independent Directors.
7. EFFECTIVENESS, CONTINUATION, TERMINATION AND AMENDMENT. This Plan and each
Agreement relating to the implementation of this Plan shall go into effect
when approved.
(a) By vote of the Fund's Directors, including the affirmative vote of a
majority of the Independent Directors, cast in person at a meeting
called for the purpose of voting on the Plan or the Agreement;
(b) By a vote of holders of at least a majority of the outstanding voting
securities of the Class A shares of the Fund; and
(c) Upon the effectiveness of an amendment to the Fund's registration
statement, reflecting this Plan, filed with the Securities and Exchange
Commission under the Securities Act of 1933.
This Plan and any Agreements relating to the implementation of this Plan
shall, unless terminated as hereinafter provided, continue in effect from
year to year only so long as such continuance is specifically approved at
least annually by vote of the Fund's Directors, including the affirmative
vote of a majority of its Independent Directors, cast in person at a meeting
called for the purpose of voting on such continuance. This Plan and any
Agreements relating to the implementation of this Plan may be terminated, in
the case of the Plan, at any time or, in the case of any agreements upon not
more than sixty (60) days' written notice to any other party to the
Agreement by vote of a majority of the Independent Directors or by the vote
of the holders of a majority of the outstanding voting securities of the
Class A shares of the Fund. Any Agreement relating to the implementation of
this Plan shall terminate automatically in the event it is assigned. Any
material amendment to this Plan shall require approval by vote of the Fund's
Directors, including the affirmative vote of a majority of the Independent
Directors, cast in person at a meeting called for the
<PAGE>
purpose of voting on such amendment and, if such amendment materially
increases the limitations on expenses payable under the Plan, it shall also
require approval by a vote of holders of at least a majority of the
outstanding voting securities of the Class A shares of the Fund. As applied
to the Class A shares of the Fund the phrase "majority of the outstanding
voting securities" shall have the meaning specified in Section 2(a) of the
1940 Act.
In the event this Plan should be terminated by the shareholders or Directors
of the Fund, the payments paid to the Distributor pursuant to the Plan up to
the date of termination shall be retained by the Distributor. Any expenses
incurred by the Distributor in excess of those payments will be the sole
responsibility of the Distributor.
8. RECORDS. The Fund shall preserve copies of this Plan and any related
Agreements and all reports made pursuant to Section 3 hereof, for a period
of not less than six (6) years from the date of this Plan, the first two
years in an easily accessible place.
SECURITY TAX-EXEMPT FUND
Date: By:
--------------------------------- ---------------------------------
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<NAME> SECURITY TAX-EXEMPT FUND
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<PERIOD-TYPE> YEAR
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<NAME> SECURITY TAX-EXEMPT FUND
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