<PAGE> 1
Registration No. 811-2120
Registration No. 2-38414
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / /
Post-Effective Amendment No. 51 /X/
----
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / /
Post-Effective Amendment No. 51 /X/
----
(Check appropriate box or boxes)
SECURITY INCOME 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:
(913) 295-3127
Copies To:
John D. Cleland, President Amy J. Lee, Secretary
Security Income Fund Security Income 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)
/X/ on July 17, 1995, pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(i)
/ / on July 17, 1995, pursuant to paragraph (a)(i)
/ / 75 days after filing pursuant to paragraph (a)(ii)
/ / on July 17, 1995, pursuant to paragraph (a)(ii) 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
-------------------
Pursuant to regulation 270.24f-2 under the Investment Company Act of 1940, the
Registrant has elected to register an indefinite number of its shares of Common
Stock. The Registrant filed the Notice required by 24f-2 on February 24, 1995.
<PAGE> 2
SECURITY INCOME FUND
FORM N-1A
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Form N-1A
Item Number Caption
----------- -------
<S> <C>
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; Capitalization; Stockholder Inquiries; Dividends and
Taxes
7. How to Purchase Shares; Alternative Purchase Options; Class A Shares;
Security Income Fund's 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 Plan
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; Security Income 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. Capital Stock
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Part B (Continued) STATEMENT OF ADDITIONAL INFORMATION
------ -----------------------------------
<S> <C>
19. How to Purchase Shares; Alternative Purchase Options; Class A Shares;
Security Income Fund's 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; Telephone Redemptions; How to Exchange
Shares; Purchases at Net Asset Value; Accumulation Plan; Systematic
Withdrawal Program; Exchange by Telephone; Retirement Plans; Individual
Retirement Accounts (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
23. Financial Statements; Independent Auditors
</TABLE>
<PAGE> 4
SECURITY
FUNDS
PROSPECTUS
JULY 17, 1995
-Security Income Fund
-Corporate Bond Series
-Limited Maturity
Bond Series
-U.S. Government Series
-Global Aggressive
Bond Series
-Security Tax-
Exempt Fund
-Security Cash
Fund
[SECURITY DISTRIBUTORS, INC., LOGO]
<PAGE> 5
SECURITY FUNDS
PROSPECTUS
SECURITY INCOME FUND
- -Corporate Bond Series
- -Limited Maturity Bond Series
- -U.S. Government Series
- -Global Aggressive Bond Series
SECURITY TAX-EXEMPT FUND
SECURITY CASH FUND
MEMBERS OF THE SECURITY BENEFIT GROUP OF COMPANIES, 700 S.W. HARRISON, TOPEKA,
KANSAS 66636-0001
PROSPECTUS
July 17, 1995
Security Income Fund, Security Tax-Exempt Fund and Security Cash Fund are
diversified, open-end management investment companies, each of which represents
a different investment objective.
Security Income Fund consists of four diversified series, each of which has
its own identified assets, net asset values and investment objective. The
investment objective of the CORPORATE BOND SERIES ("Corporate Bond Fund") is
conservation of principal while generating interest income. The Corporate Bond
Fund seeks to achieve its objective by investing in a diversified portfolio of
upper medium to high-grade debt securities, primarily those issued by U.S. and
Canadian corporations and securities which are obligations of or guaranteed by
the U.S. Government or any of its agencies. 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. This Fund seeks to
achieve its objective by investing in short- and intermediate-term debt
securities, including those issued by U.S. and Canadian corporations and those
guaranteed or issued by the U.S. Government or any of its agencies. 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. This
Fund seeks to achieve its objective by investing in securities which are
guaranteed or issued by the U.S. Government, its agencies or instrumentalities.
From time to time the assets of this Fund may be invested primarily in
obligations of the Government National Mortgage Association ("Ginnie Maes").
The investment objective of the GLOBAL AGGRESSIVE BOND SERIES ("Global
Aggressive Bond Fund") is to seek high current income. Capital appreciation is
a secondary objective. The Fund seeks this objective through investment in a
combination of foreign and domestic high-yield, lower rated debt securities.
THE FUND INVESTS PRIMARILY (AND MAY INVEST UP TO 100% OF ITS ASSETS) IN LOWER
RATED AND UNRATED FOREIGN DEBT SECURITIES WHOSE CREDIT QUALITY IS GENERALLY
CONSIDERED THE EQUIVALENT OF U.S. CORPORATE DEBT SECURITIES COMMONLY KNOWN AS
"JUNK BONDS." INVESTMENTS OF THIS TYPE ARE SUBJECT TO A GREATER RISK OF A LOSS
OF PRINCIPAL AND INTEREST, INCLUDING THE RISK OF DEFAULT, AND THEREFORE SHOULD
BE CONSIDERED SPECULATIVE. SEE "INVESTMENT METHODS AND RISK FACTORS" ON PAGE
15. PURCHASERS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH INVESTING IN
THE FUND.
The investment objective of SECURITY TAX-EXEMPT FUND ("Tax-Exempt Fund") is
to obtain as high a level of interest income exempt from federal income taxes
as is consistent with preservation of stockholders' capital. Tax-Exempt Fund
seeks to achieve its objective 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, including 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. This objective is sought through investments in money market
instruments with maturities of not longer than thirteen months, consisting of
U.S. Government securities, bank obligations, high-grade corporate obligations
and certain investments secured by such securities. 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. A Statement of Additional Information about the Funds, dated July
17, 1995, which is incorporated by reference in this Prospectus, has been filed
with the Securities and Exchange Commission. It is available at no charge by
writing Security Distributors, Inc., 700 Harrison Street, Topeka, Kansas
66636-0001, or by calling (913) 295-3127 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.
SDI 607 (R5-95) 46-06070-00
- -------------------------------------------------------------------------------
<PAGE> 6
SECURITY FUNDS
CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Transaction and Operating Expense Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Investment Objectives and Policies of the Funds . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Security Income Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Corporate Bond Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Limited Maturity Bond Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
U.S. Government Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Global Aggressive Bond Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Security Tax-Exempt Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Security Cash Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Investment Methods and Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Management of the Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Portfolio Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
How to Purchase Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Corporate Bond, Limited Maturity Bond, U.S. Government, Global Aggressive Bond
and Tax-Exempt Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Alternative Purchase Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Class A Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Security Income Fund's Class A Distribution Plan . . . . . . . . . . . . . . . . . . . . . . . 27
Class B Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Class B Distribution Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Calculation and Waiver of Contingent Deferred Sales Charges . . . . . . . . . . . . . . . . . 29
Arrangements with Broker-Dealers and Others . . . . . . . . . . . . . . . . . . . . . . . . . 29
Cash Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Purchases at Net Asset Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Trading Practices and Brokerage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
How to Redeem Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Telephone Redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Dividends and Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Determination of Net Asset Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Stockholder Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Accumulation Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Systematic Withdrawal Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Exchange Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Exchange by Telephone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Retirement Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Stockholder Inquiries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Appendix B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Appendix C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Security Cash Fund Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 7
SECURITY FUNDS
PROSPECTUS
TRANSACTION AND OPERATING EXPENSE TABLE
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
- -------------------------------- CORPORATE BOND, LIMITED MATURITY BOND,
U.S. GOVERNMENT, GLOBAL AGGRESSIVE BOND
AND TAX-EXEMPT
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 None
first year,
decreasing to
0% in the
sixth and
following years
</TABLE>
<TABLE>
<CAPTION> CORPORATE LIMITED U.S. GLOBAL
BOND FUND MATURITY GOVERNMENT FUND AGGRESSIVE TAX-EXEMPT CASH
BOND FUND BOND FUND FUND FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES Class A Class B Class A Class B Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Management Fees 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.75% 0.75% 0.50% 0.50% 0.50%
12b-1 Fees (3) 0.25% 1.00% 0.25% 1.00% 0.25% 1.00% 0.25% 1.00% None 1.00% None
Other Expenses
(after expense
reimbursements)(4) 0.26% 0.35% 0.35% 0.35% 0.35% 0.35% 1.00% 1.00% 1.32% 1.50% 0.46%
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total Fund Operating Expenses (5)1.01% 1.85% 1.10% 1.85% 1.10% 1.85% 2.00% 2.75% 0.82% 2.00% 0.96%
==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ====
EXAMPLE
You would pay
the following 1 Year $ 57 $ 69 $ 58 $ 69 $ 58 $ 66 $ 67 $ 78 $ 55 $ 70 $ 10
expenses on a 3 Years 78 88 81 88 81 86 107 115 72 93 31
$1,000 invest- 5 Years 101 120 105 120 105 120 91 128 53
ment, assuming 10 Years 166 217 175 217 175 217 144 233 118
(1) 5 percent
annual return
and (2)
redemption
at the end of
each time period(6)
EXAMPLE
You would pay the
following 1 Year $ 57 $ 19 $ 58 $ 19 $ 58 $ 19 $ 67 $28 $ 55 $ 20 $ 10
expenses on a 3 Years 78 58 81 58 81 58 107 85 72 63 31
$1,000 invest- 5 Years 101 100 105 100 105 100 91 108 53
ment, assuming 10 Years 165 217 175 217 175 217 144 233 118
(1) 5 percent
annual return and
(2) no redemption
</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 26.
(3) 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.
(4) The amount of "Other Expenses" of each of the Limited Maturity Bond and
Global Aggressive Bond Funds is based on estimated amounts for the fiscal
year ending December 31, 1995.
(5) During the year ended December 31, 1994, the Investment Manager reimbursed
certain expenses of the Corporate Bond, U.S. Government and Tax-Exempt
Funds; absent such reimbursement, "Total Fund Operating Expenses" would
have been 2.00% for the Class B shares of Corporate Bond Fund, 1.20% and
2.91% for the Class A and B shares, respectively, of U.S. Government Fund,
and 2.32% for the Class B shares of Tax-Exempt Fund.
(6) This example does not reflect deduction of the contingent deferred sales
charge which is imposed only upon redemption of Class A shares purchased in
amounts of $1,000,000 or more.
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, Global Aggressive Bond,
Tax-Exempt 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 23. Information on the Funds' 12b-1 Plans may
be found under the headings "Security Income Fund's Class A Distribution Plan"
on page 27 and "Class B Distribution Plan" on page 28. See "How to Purchase
Shares," page 25, 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> 8
SECURITY FUNDS
FINANCIAL HIGHLIGHTS
The following financial highlights for each of the years in the period ended
December 31, 1994, have been audited by Ernst & Young LLP. Such information for
each of the five years in the period ended December 31, 1994, 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,
1994 Annual Report to Stockholders which is incorporated by reference in this
prospectus. The Fund's Annual Report to Stockholders 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 years in the period ended December 31, 1989 for
Security Income Fund and January 31, 1989 and February 28, 1989, respectively
for Security Tax-Exempt and Cash Funds, is not covered by the report of Ernst &
Young LLP. The financial highlights information for Limited Maturity Bond
Series, including total returns, for the period January 17, 1995 (date of
inception) to June 30, 1995, has been derived from the unaudited financial
statements of the Series.
<TABLE>
<CAPTION>
Net gains Divid- Ratio
Net (losses) Total ends Net Ratio of of net
asset on from (from Distribu- Net assets expenses income Port-
value Net securities invest- net tions asset end of to to folio
Fiscal beginn- invest- (realized ment invest- (from Return Total value period average average turn-
year ing of ment & un- opera- ment in- capital of distri- end of Total (thou- net net over
end period income realized) tions come) gains) capital butions period return(a) sands) assets assets rate
- ------------------------------------------------------------------------------------------------------------------------------------
SECURITY INCOME FUND
CORPORATE BOND SERIES (CLASS A)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1985 $7.80 $.91 $.64 $1.55 $ (.95) $--- $--- $ (.95) $8.40 21.5% $ 38,212 1.01% 11.36% 79%
1986 8.40 .82 .05 .87 (.95) --- --- (.95) 8.32 11.0% 49,025 1.04% 10.09% 77%
1987 8.32 .79 (.48) .31 (.85) --- --- (.85) 7.78 4.0% 44,093 1.00% 9.73% 127%
1988 7.78 .77 (.292) .478 (.778) --- --- (.778) 7.48 6.5% 52,296 1.02% 10.04% 83%
1989 7.48 .74 (.031) .709 (.739) --- --- (.739) 7.45 9.9% 56,184 1.04% 9.83% 57%
1990 7.45 .69 (.232) .458 (.688) --- --- (.688) 7.22 6.6% 65,962 1.10% 9.42% 87%
1991 7.22 .65 .458 1.108 (.648) --- --- (.648) 7.68 16.1% 85,824 1.03% 8.75% 32%
1992 7.68 .61 .044 .654 (.614) --- --- (.614) 7.72 9.0% 104,492 1.01% 7.97% 61%
1993 7.72 .52 .521 1.041 (.527) (.424) --- (.951) 7.81 13.4% 118,433 1.02% 6.46% 157%
1994(f) 7.81 .49 (1.127) (.637) (.493) --- --- (.493) 6.68 (8.3%) 90,593 1.01% 6.91% 204%
CORPORATE BOND SERIES (CLASS B)
1993(b) $8.59 $0.11 $(.324) $ (.214) $ (.112) $(.424) $ --- $ (.536) $ 7.84 (2.5%) $ 1,022 1.88%* 5.16%* 164%*
1994(f)(e) 7.84 0.43 (1.129) (.699) (.431) --- --- (.431) 6.71 (9.0%) 3,878 1.85%* 6.08%* 204%*
LIMITED MATURITY BOND SERIES (CLASS A)
1995 $10.00 $0.29 $ .578 $ .868 $ (.278) $ --- $ --- $ (.278) $10.59 8.8% $ 3,062 0.53%* 6.24%* 4%*
LIMITED MATURITY BOND SERIES (CLASS B)
1995 $10.00 $0.25 $ .576 $ .826 $ (.246) $ --- $ --- $ (.246) $10.58 8.3% $ 691 1.33%* 5.52%* 4%*
U.S. GOVERNMENT SERIES (CLASS A)
1985(c)(e)$5.00 $ .22 $ .22 $ .44 $ (.12) $ --- $ --- $ (.12) $ 5.32 8.8% $ 1,219 0.16%* 11.31%* 3%*
1986(e) 5.32 .47 --- .47 (.50) --- --- (.50) 5.29 9.1% 2,716 1.00% 9.23% 48%
1987(e) 5.29 .45 (.265) .185 (.475) --- --- (.475) 5.00 3.7% 4,467 1.00% 8.78% 166%
1988(e) 5.00 .48 (.18) .30 (.49) --- --- (.49) 4.81 6.2% 4,229 1.00% 9.83% 107%
1989(e) 4.81 .46 .078 .538 (.458) --- --- (.458) 4.89 11.8% 4,551 1.11% 9.46% 52%
1990(e) 4.89 .42 .032 .452 (.412) --- --- (.412) 4.93 9.8% 6,017 1.11% 8.60% 22%
1991(e) 4.93 .40 .248 .648 (.404) --- (.004) (.408) 5.17 13.8% 7,319 1.11% 7.94% 41%
1992(e) 5.17 .37 (.126) .244 (.366) --- (.008) (.374) 5.04 5.0% 9,364 1.11% 7.22% 157%
1993(e) 5.04 .31 .273 .583 (.310) (.344) --- (.654) 4.97 10.9% 10,098 1.10% 5.90% 153%
1994(e)(f) 4.97 .30 (.621) (.321) (.299) --- --- (.299) 4.35 (6.5%) 8,309 1.10% 6.47% 220%
U.S. GOVERNMENT SERIES (CLASS B)
1993(b)(e)$5.51 $ .04 $ (.193) $ (.153) $ (.043) $(.344) $ --- $ (.387) $4.97 (1.4%) $ 140 1.61%* 5.54%* 114%*
1994(e)(f) 4.97 .26 (.624) (.364) (.256) --- --- (.256) 4.35 (7.4%) 321 1.85%* 5.76%* 220%*
</TABLE>
See accompanying notes.
2
<PAGE> 9
SECURITY FUNDS
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
Net gains Divid- Ratio
Net (losses) Total ends Net Ratio of of net
asset on from (from Distribu- Net assets expenses income Port-
value Net securities invest- net tions asset end of to to folio
Fiscal beginn- invest- (realized ment invest- (from Return Total value period average average turn-
year ing of ment & un- opera- ment in- capital of distri- end of Total (thou- net net over
end period income realized) tions come) gains) capital butions period return(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>
1985(e) $ 9.83 $ .77 $ (.33) $ .44 $ (.80) $ --- $ --- $ (.80) $ 9.47 5.1% $ 4,767 1.00% 9.74% 80%
1986(e) 9.47 .85 .55 1.40 (.87) --- --- (.87) 10.00 15.6% 8,901 1.00% 8.83% 35%
1987(e) 10.00 .82 .78 1.60 (.82) (.02) --- (.84) 10.76 15.5% 16,297 1.00% 7.79% 23%
1988(e) 10.76 .76 (.656) .104 (.774) (.12) --- (.894) 9.97 1.3% 17,814 1.00% 7.60% 83%
1989 9.97 .73 (.257) .473 (.723) --- --- (.723) 9.72 4.9% 19,898 .98% 7.47% 33%
1989(d) 9.72 .61 (.106) .504 (.624) --- --- (.624) 9.60 4.1% 20,426 .97%* 6.97%* 75%*
1990 9.60 .64 (.072) .568 (.638) --- --- (.638) 9.53 6.2% 20,566 .96% 6.75% 74%
1991 9.53 .63 .446 1.076 (.636) --- --- (.636) 9.97 11.7% 23,218 .89% 6.55% 38%
1992 9.97 .61 .092 .702 (.612) --- --- (.612) 10.06 7.3% 28,608 .84% 6.07% 91%
1993 10.06 .51 .702 1.212 (.514) (.388) --- (.902) 10.37 11.6% 32,115 .82% 4.92% 118%
1994(d) 10.37 .47 (1.317) (.847) (.473) --- --- (.473) 9.05 (8.3%) 24,092 .82% 4.74% 88%
SECURITY TAX-EXEMPT FUND (CLASS B)
1993(b) $10.88 $ .10 $ (.128) $(.028) $(.094) $ (.388) $--- $ (.482) $10.37 (.2%) $ 106 2.89%* 2.71%* 90%*
1994(e) 10.37 .35 (1.321) (.971) (.349) --- --- (.349) 9.05 (9.5%) 760 2.00%* 3.50%* 88%*
SECURITY CASH FUND
1985(e) $ 1.00 $ .094 $--- $.094 $(.094) $--- $--- $(.094) $1.00 9.8% $54,770 1.00% 9.43% ---
1986(e) 1.00 .073 --- .073 (.073) --- --- (.073) 1.00 7.5% 47,292 1.00% 7.26% ---
1987(e) 1.00 .057 --- .057 (.057) --- --- (.057) 1.00 5.8% 37,773 1.00% 5.68% ---
1988(e) 1.00 .061 --- .061 (.061) --- --- (.061) 1.00 6.3% 43,038 1.00% 6.10% ---
1989(e) 1.00 .070 --- .070 (.070) --- --- (.070) 1.00 7.3% 46,625 1.00% 7.09% ---
1989(d)(e) 1.00 .069 --- .069 (.069) --- --- (.069) 1.00 7.1% 54,388 1.00%* 8.26%* ---
1990(e) 1.00 .073 --- .073 (.073) --- --- (.073) 1.00 7.6% 65,018 1.00% 7.31% ---
1991 1.00 .051 --- .051 (.051) --- --- (.051) 1.00 5.2% 48,843 .96% 5.21% ---
1992(e) 1.00 .028 --- .028 (.028) --- --- (.028) 1.00 2.8% 56,694 1.00% 2.75% ---
1993(e) 1.00 .023 --- .023 (.023) --- --- (.023) 1.00 2.4% 71,870 1.00% 2.28% ---
1994 1.00 .033 --- .033 (.033) --- --- (.033) 1.00 3.4% 58,102 .96% 3.24% ---
</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) U.S. Government Fund became effective on August 15, 1985. Net investment
income per share has been calculated using the weighted monthly average
number of capital shares outstanding of 158,269 during the period August
15, 1985 through December 31, 1985.
(d) Effective December 31, 1989, the fiscal year ends of Tax-Exempt 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 Tax-Exempt
Fund and 10 months of performance for Cash Fund. The data for years 1985
through 1989, are for the fiscal year ended January 31 for Tax-Exempt Fund
and for the fiscal year ended February 28 for Cash Fund.
(e) Fund expenses were reduced by the Investment Manager during the fiscal
year, and expense ratios would have been higher absent such reimbursement.
The ratio of expenses to average net assets, absent expense reimbursement
by the Investment Manager, would have been as follows for Corporate Bond,
U.S. Government, Tax-Exempt and Cash Funds:
<TABLE>
<CAPTION>
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
<S> <C> <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 N/A
Class B N/A N/A N/A N/A N/A N/A N/A N/A N/A 2.00%
U.S. Government Class A 0.91% 1.60% 1.80% 1.31% 1.37% 1.34% 1.24% 1.20% 1.20% 1.20%
Class B N/A N/A N/A N/A N/A N/A N/A N/A 1.75% 2.91%
Tax-Exempt Class A 3.23% 1.62% 1.16% 1.03% 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 N/A N/A N/A 2.32%
Cash 1.10% 1.17% 1.07% 1.04% 1.13%** 1.01% N/A 1.03% 1.03% N/A
1.03%***
</TABLE>
(f) Portfolio turnover rates increased in 1994 because, as interest rates
increased, the Fund shifted from investing in lower coupon bonds to bonds
with higher coupons.
*Percentage amounts for 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> 10
SECURITY FUNDS
PROSPECTUS
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
Security Income, Tax-Exempt and Cash Funds are diversified open-end
management investment companies, which were organized as Kansas corporations on
April 20, 1965, July 14, 1981, and March 21, 1980, respectively. 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 Global Aggressive Bond Series ("Global Aggressive Bond Fund") of Security
Income Fund, and Security Tax-Exempt ("Tax-Exempt Fund") and Cash Funds ("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 and Global Aggressive Bond 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 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") consists of four diversified series,
each of which represents a different investment objective and has its own
identified assets and net asset values. The investment objective of each series
is described below.
CORPORATE BOND FUND
The investment objective of Corporate Bond Fund is to preserve capital
while generating interest income. The Fund seeks to achieve this investment
objective by investing primarily in a diversified portfolio of upper medium to
high-grade debt securities, primarily those issued by U.S. and Canadian
corporations. In addition, the Fund may invest in securities which are
obligations of or guaranteed by the U.S. Government or any of its agencies.
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.
Other than securities issued by Canadian corporations, the Fund will not
invest in securities of foreign corporations. The Fund will not invest in
securities issued by foreign governments except that it reserves the right
to purchase securities which are obligations of, or guaranteed by, the
Dominion of Canada or provinces thereof, in an amount which is less than 25
percent of the portfolio (exclusive of U.S. Government and government agency
issues) at time of purchase. Canadian securities will not be purchased if
subject to the foreign interest equalization tax and unless payable in U.S.
currency.
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 adviser, or the distributor.
<PAGE> 11
SECURITY FUNDS
PROSPECTUS
At least 90 percent of the Corporate Bond Fund's portfolio at time of
purchase will consist of U.S. Government and government agency issues; U.S. or
Canadian corporations' debt securities which have a rating at the time of
purchase of A or higher as determined by Moody's Investors Service, Inc.
("Moody's"), or Standard & Poor's Corporation ("S&P"); and subject to the 25
percent limitation above, securities which are obligations of (or guaranteed
by) the Dominion of Canada or provinces thereof. Included in such 90 percent
may be convertible bonds or bonds with warrants attached which may be purchased
by the Fund if such bond issues are rated A or higher at the time of purchase.
Moody's Bond Record indicates that bonds which are rated A possess many
favorable investment attributes and are to be considered as upper medium grade
obligations. Standard & Poor's Bond Guide states that A rated bonds have a
strong capacity to pay principal and interest, although they are somewhat more
susceptible to adverse effects of changes in circumstances and economic
conditions. (See Appendix A to the Prospectus for a description of corporate
bond ratings.) Corporate Bond Fund may invest up to 10 percent of its assets in
fixed income securities rated Baa by Moody's or BBB by S&P's. Such securities
may have speculative characteristics. See "Investment Methods and Risk Factors"
for a discussion of the risks associated with such securities. If the Fund
holds a security whose rating drops below Baa or BBB, the Investment Manager
will reevaluate the credit risk of the security in light of then current market
conditions and determine whether to retain or dispose of the security. 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 10 to 25 years.
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 those (i) issued by
U.S. and Canadian corporations, (ii) issued or guaranteed by the U.S.
Government or any of its agencies, including Treasury bills, certificates of
indebtedness, notes and bonds, (iii) issued or guaranteed by, the Dominion of
Canada or provinces thereof, (iv) higher yielding, high risk debt securities
(commonly referred to as "junk bonds"), (v) certificates of deposit issued by a
U.S. branch of a foreign bank ("Yankee CDs"), (vi) mortgage backed securities
("MBSs") and (vii) asset-backed securities. High yield debt securities, Yankee
CDs, MBSs and asset-backed securities are described in further detail in
"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 5 to 7 years; however, the
dollar weighted average maturity of the Fund's portfolio 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. 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."
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 percent of
its net assets in junk bonds. This includes securities rated Ba
5
<PAGE> 12
SECURITY FUNDS
PROSPECTUS
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.
Other than Yankee CD's and securities issued by Canadian corporations, the
Fund will not invest in securities of foreign corporations. The Fund will
not invest in securities issued by foreign governments except that it reserves
the right to purchase securities which are obligations of, or guaranteed by,
the Dominion of Canada or provinces thereof, in an amount which is less than 25
percent of the portfolio (exclusive of U.S. Government and government agency
issues) at the time of purchase. 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. 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."
The Fund may invest in investment grade mortgage backed securities (MBSs),
including mortgage pass-through securities and collateralized mortgage
obligations (CMOs). The Fund will not invest in securities known as "inverse
floating obligations," "residual interest bonds," or "interest-only" (IO) and
"principal-only" (PO) bonds, as the market values of these obligations will
generally be more volatile than the market values of most MBSs. MBSs have been
referred to as "derivatives" because the performance of MBSs is dependent upon
and derived from underlying securities. 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."
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. 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.f
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
6
<PAGE> 13
SECURITY FUNDS
PROSPECTUS
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 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. If the deposits in a depository institution
are not fully insured by the FDIC, the Fund will analyze the credit quality of
the issuing institution prior to making any such deposit and will retain a
record of that analysis.
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. Yield tables
utilize a 12 year average life assumption for GNMA pools of 26-30 year
mortgages, and GNMAs 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 declined, which would
result in a shorter average life than 12 years.
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. It is anticipated that securities invested in by this Fund will
be held by the Fund on the average from one to three years.
GLOBAL AGGRESSIVE BOND FUND
The Global Aggressive Bond Fund seeks to provide high current income.
Capital appreciation is a secondary objective. As used herein the term "bond"
is used to describe any type of debt security. Under normal circumstances the
Fund will invest at least 65 percent of its total assets in bonds as defined
herein. The Fund under normal circumstances seeks its investment objective of
providing a high level of current income by investing substantially all of its
assets in a portfolio of debt securities of issuers in three separate
investment areas: (i) the United
7
<PAGE> 14
SECURITY FUNDS
PROSPECTUS
States; (ii) developed foreign countries; and (iii) emerging markets. The Fund
may also invest up to 50% of its assets in certain derivative instruments. See
"Investment Methods and Risk Factors" for a discussion of the risks associated
with investing in derivative instruments. The Fund selects particular debt
securities in each sector based on their relative investment merits. Within
each area, the Fund selects debt securities from those issued by governments,
their agencies and instrumentalities; central banks; commercial banks and other
corporate entities. Debt securities in which the Fund may invest consist of
bonds, notes, debentures and other similar instruments. The Fund may invest up
to 100% of its total assets in U.S. and foreign debt securities and other fixed
income 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. The Fund may also invest in securities
that are in default as to payment of principal and/or interest. 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. Many emerging market debt securities are not rated by
United States rating agencies such as Moody's and S&P. The Fund's ability to
achieve its investment objectives is thus more dependent on the manager's
credit analysis than would be the case if the Fund were to invest in higher
quality bonds. INVESTORS SHOULD PURCHASE SHARES ONLY AS A SUPPLEMENT TO AN
OVERALL INVESTMENT PROGRAM AND ONLY IF WILLING TO UNDERTAKE THE RISKS INVOLVED.
EMERGING MARKETS. "Emerging markets" will consist of all countries determined
by the World Bank or the United Nations to have developing or emerging
economies and markets. Currently, investing in many of the emerging countries
and emerging markets is not feasible or may involve political risks.
Accordingly, Lexington Management Corporation, the Sub-Adviser to the Global
Aggressive Bond Fund (the "Sub-Adviser"), currently intends to consider
investments only in those countries in which it believes investing is feasible.
The list of acceptable countries will be reviewed by the Sub-Adviser and MFR
Advisers, Inc. ("MFR") and approved by the Board of Directors on a periodic
basis and any additions or deletions with respect to such list will be made in
accordance with changing economic and political circumstances involving such
countries. An issuer in an emerging market is an entity: (i) for which the
principal securities trading market is an emerging market, as defined above;
(ii) that (alone or on a consolidated basis) derives 50% or more of its total
revenue from either goods produced, sales made or services performed in
emerging markets; or (iii) organized under the laws of, and with a principal
office in, an emerging market.
The Fund's investments in emerging market securities consist substantially
of high yield, lower-rated debt securities of foreign corporations, "Brady
Bonds" and other sovereign debt securities issued by emerging market
governments. The Sub-Adviser and MFR may invest in debt securities of emerging
market issuers without regard to ratings. Currently, the substantial majority
of emerging market debt securities are considered to have a credit quality
below investment grade. The Fund may invest in bank loan participations and
assignments, which are fixed and floating rate loans arranged through private
negotiations between foreign entities. See the discussion of sovereign debt
securities, Brady Bonds, and loan participations and assignments below.
TEMPORARY INVESTMENTS. The Fund intends to retain the flexibility to respond
promptly to changes in market and economic conditions. Accordingly, in the
interest of preserving shareholders' capital and consistent with the Fund's
investment objectives, the Sub-Adviser and MFR may employ a temporary defensive
investment strategy if they determine such a strategy to be warranted.
Pursuant to such a defensive strategy, the Fund temporarily may hold cash (U.S.
dollars, foreign currencies or multinational currency units) and/or invest up
to 100% of its assets in high quality debt securities or money market
instruments of U.S. or foreign issuers, and most or all of the Fund's
investments may be made in the United States and denominated in U.S. dollars.
For debt obligations other than commercial paper, this includes securities
rated, at the time of purchase, at least AA by S&P or Aa by Moody's, or if
unrated, determined to be of comparable quality by the
8
<PAGE> 15
SECURITY FUNDS
PROSPECTUS
Sub-Adviser or MFR. For commercial paper, this includes securities rated, at
the time of purchase, at least A-2 by S&P or Prime-2 by Moody's, or if unrated,
determined to be of comparable quality by the Sub-Adviser or MFR. It is
impossible to predict whether, when or for how long the Fund will employ
defensive strategies. To the extent the Fund adopts a temporary defensive
investment posture, it will not be invested so as to achieve directly its
investment objectives. In addition, pending investment of proceeds from new
sales of Fund shares or to meet ordinary daily cash needs, the Fund temporarily
may hold cash (U.S. dollars, foreign currencies or multinational currency
units) and may invest any portion of its assets in high quality foreign or
domestic money market instruments.
INVESTMENT TECHNIQUE. The Fund invests in debt obliga-tions allocated among
diverse markets and denominated in various currencies, including U.S. dollars,
or in multinational currency units such as European Currency Units. The Fund
may purchase securities that are issued by the government or a company or
financial institution of one country but denominated in the currency of another
country (or a multinational currency unit). The Fund is designed for investors
who wish to accept the risks entailed in such investments, which are different
from those associated with a portfolio consisting entirely of securities of
U.S. issuers denominated in U.S. dollars. See "Investment Methods and Risk
Factors" for a discussion of the risks associated with securities denominated
in foreign currencies.
The Sub-Adviser and MFR will seek to allocate the assets of the Fund in
securities of issuers in countries and in currency denominations where the
combination of fixed income market returns, the price appreciation potential of
fixed income securities and currency exchange rate movements will present
opportunities primarily for high current income and secondarily for capital
appreciation. In so doing, the Sub-Adviser and MFR intend to take full
advantage of the different yield, risk and return characteristics that
investment in the fixed income markets of different countries can provide for
U.S. investors. Fundamental economic strength, credit quality and currency and
interest rate trends will be the principal determinants of the emphasis given
to various country, geographic and industry sectors within the Fund.
Securities held by the Fund may be invested in without limitation as to
maturity. The Sub-Adviser and MFR evaluate currencies on the basis of
fundamental economic criteria (e.g., relative inflation and interest rate
levels and trends, growth rate forecasts, balance of payments status and
economic policies) as well as technical and political data. If the currency in
which a security is denominated appreciates against the U.S. dollar, the dollar
value of the security will increase. Conversely, if the exchange rate of the
foreign currency declines, the dollar value of the security will decrease. The
Fund may seek to protect itself against such negative currency movements
through the use of sophisticated investment techniques although the Fund is not
committed to using such techniques and may be fully exposed to changes in
currency exchange rates. See "Investment Methods and Risk Factors" for a
discussion of such techniques.
SOVEREIGN DEBT. The Global Aggressive Bond Fund may invest in sovereign debt
securities of emerging market governments, including Brady Bonds. 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
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SECURITY FUNDS
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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
Sub-Adviser and MFR intend to manage the Fund in a manner that will minimize
the exposure to such risks, there can be no assurance that adverse political
changes will not cause the Fund to suffer a loss of interest or principal on
any of its holdings.
In recent years, some of the emerging market countries in which the Fund
expects to invest 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 payment could be affected.
Investors should also be aware that certain sovereign debt instruments
in which the 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 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
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PROSPECTUS
debt securities may be illiquid. The investment of the Fund in illiquid
securities, including soverign debt, is limited to 15% of total net assets.
BRADY BONDS. Global Aggressive Bond Fund 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, the largest
proportion having been issued by Mexico and Venezuela. 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 Global Aggressive Bond Fund may invest in either collateralized or
uncollateralized Brady Bonds in various currencies. 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 Global Aggressive Bond Fund may invest
in fixed and floating rate loans ("Loans") arranged through private
negotiations between a foreign entity and one or more financial institutions
("Lenders"). The majority of the Fund's investments in Loans in emerging
markets is 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
government. The Global Aggressive Bond 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 Sub-Adviser and MFR 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
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PROSPECTUS
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. The investment of the Fund in illiquid
securities, including Assignments and Participations, is limited to 15% of
total net assets.
SECURITY TAX-EXEMPT FUND
The investment objective of Tax-Exempt Fund is to obtain as high a level of
interest income exempt from federal income taxes as is consistent with
preservation of stockholders' capital. Tax-Exempt Fund attempts to achieve its
objective by investing primarily in debt securities, the interest on which is
exempt from federal income taxes, including the alternative minimum tax. Under
normal circumstances, at least 80 percent of the Fund's net assets will be
invested in such tax-exempt securities.
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" and are described in more detail in the Funds'
Statement of Additional Information.
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) or S&P (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, Tax-Exempt 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. 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, the
Investment Manager 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.
Tax-Exempt Fund invests primarily in municipal bonds with maturities
greater than one year. It is expected that the Fund's average portfolio
maturity will be in the 15- to 25-year range. Tax-Exempt 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 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, Tax-Exempt 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
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SECURITY FUNDS
PROSPECTUS
securities. This limitation is a fundamental policy of Tax-Exempt 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 or Prime-1 by Moody's, corporate obligations
rated AAA or AA by S&P 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.
Tax-exempt interest on private activity bonds and exempt-interest dividends
attributable to private activity bonds generally are treated as tax preference
items for purposes of the alternative minimum tax. The Fund may purchase
private activity bonds, such as industrial development bonds, when other bonds
are not available and when the yield differential between private activity
bonds and other municipal bonds justifies their purchase.
From time to time, Tax-Exempt 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.
Tax-Exempt 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 Tax-Exempt 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.
SECURITY CASH FUND
The 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.
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.
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SECURITY FUNDS
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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, and whose acquisition is approved or
ratified by the Board of Directors; (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, and whose acquisition is approved or
ratified by the Board of Directors; 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
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SECURITY FUNDS
PROSPECTUS
the Securities Act of 1933, and subject 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 Objectives 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 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 -- Corporate Bond, Limited Maturity Bond, Global
Aggressive Bond and Tax-Exempt Funds may invest in medium grade debt securities
(debt securities rated Baa by Moody's or BBB 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. 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. Limited Maturity
Bond and Global Aggressive Bond 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 High Yield Investments."
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 -- Corporate Bond, Limited Maturity Bond,
and Global Aggressive Bond 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).
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MORTGAGE BACKED SECURITIES AND COLLATERALIZED MORTGAGE OBLIGATIONS -- Limited
Maturity Bond Fund may invest in investment grade 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.
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. 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 as to the payment of principal and
interest, but are not backed by the full faith and credit of the U.S.
Government. The performance of private label MBSs, issued by private
institutions, is based on the financial health of those institutions.
ASSET-BACKED SECURITIES -- Limited Maturity Bond 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 above with respect to MBSs.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES -- The Limited Maturity Bond,
Global Aggressive Bond and Tax-Exempt 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 high grade liquid debt 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.
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SECURITY FUNDS
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There is a risk that the securities may not be delivered and that the Fund may
incur a loss.
RESTRICTED SECURITIES (RULE 144A SECURITIES) -- Cash Fund 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, 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.
The Global Aggressive Bond Fund may purchase restricted securities,
including securities that are not eligible for resale pursuant to Rule 144A.
Global Aggressive Bond 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 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 Board of Directors of Cash Fund and Global Aggressive Bond Fund is
responsible for developing and establishing guidelines and procedures for
determining the liquidity of Rule 144A securities. As permitted by Rule 144A,
the Boards of Directors have 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 Cash Fund's
and Global Aggressive Bond Fund's assets invested in illiquid securities to the
extent that qualified institutional buyers become uninterested, for a time, in
purchasing these securities.
ZERO COUPON SECURITIES -- The Global Aggressive Bond Fund may invest in certain
zero coupon securities that are "stripped" U.S. Treasury notes and bonds. The
Fund 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 (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. The
Fund will not invest more than 5% of its total assets in zero coupon
securities.
REPURCHASE AGREEMENTS, REVERSE REPURCHASE AGREEMENTS AND ROLL TRANSACTIONS --
Each of the Funds may enter into
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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 Global Aggressive Bond 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, a 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 Global Aggressive Bond 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 Global Aggressive Bond 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 Global Aggressive Bond Fund
may borrow through reverse repurchase agreements and "roll" transactions, in
connection with meeting requests for the redemption of Fund shares. Limited
Maturity Bond, Tax-Exempt and Cash Funds may each borrow up to 10%; Corporate
Bond, U.S. Government and Global Aggresive Bond 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.
OPTIONS, FUTURES AND FORWARD CURRENCY TRANSACTIONS -- The Global Aggressive
Bond Fund may invest in Options, Futures and Forward Currency Transactions.
In seeking to protect against currency exchange rate or interest rate changes
that are adverse to their present or prospective positions, the Fund may
employ certain risk management practices involving the use of forward currency
contracts and options contracts, futures contracts and options on
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futures contracts on U.S. and foreign government securities and currencies. The
Global Aggressive Bond Fund also may enter into interest rate, currency and
index swaps and purchase or sell related caps, floors and collars. No more than
50% of the Fund's assets will be invested in derivative securities. The Fund's
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, Futures and Forward Currency Strategies" on
page 9 of the Statement of Additional Information. There can be no assurance
that the Fund's risk management practices will succeed. Only a limited market,
if any, currently exists for forward currency contracts and options and futures
instruments relating to currencies of most emerging markets, to securities
denominated in such currencies or to securities of issuers domiciled or
principally engaged in business in such emerging markets. To the extent that
such a market does not exist, the Sub-Adviser or MFR may not be able to
effectively hedge its investment in such emerging markets.
To attempt to hedge against adverse movements in exchange rates between
currencies, the Fund may enter into forward currency contracts for the purchase
or sale of a specified currency at a specified future date. Such contracts may
involve the purchase or sale of a foreign currency against the U.S. dollar or
may involve two foreign currencies. The Fund may enter into forward currency
contracts either with respect to specific transactions or with respect to the
respective Fund's portfolio positions. For example, when the Fund anticipates
making a purchase or sale of a security, it may enter into a forward currency
contract in order to set the rate (either relative to the U.S. dollar or
another currency) at which a currency exchange transaction related to the
purchase or sale will be made. Further, when the Sub-Adviser or MFR believes
that a particular currency may decline compared to the U.S. dollar or another
currency, the Fund may enter into a forward contract to sell the currency the
Sub-Adviser or MFR expects to decline in an amount up to the value of the
portfolio securities held by the Fund denominated in a foreign currency
In addition, the Global Aggressive Bond Fund may write and purchase put and
call options on securities that are traded on recognized securities exchanges
and over-the-counter ("OTC") markets. The Fund will cause its custodian to
segregate cash, U.S. Government securities or other high grade liquid debt
obligations having a value sufficient to meet the Fund's obligations under the
call option. They 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 Fund 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 the Fund may enter into
forward contracts or futures contracts or engage in options transactions. See
"Taxes" in the Statement of Additional Information. The Fund also may purchase
put or call options or futures contracts on currencies for the same purposes as
it may use forward currency contracts.
The Global Aggressive Bond Fund's use of forward currency contracts or
options and futures transactions would involve certain investment risks and
transaction costs to which it might not otherwise be subject. These risks
include: dependence on the Sub-Adviser and MFR's ability to predict movements in
exchange rates; imperfect correlation between movements in exchange rates and
movements in the currency hedged; and the fact that the skills needed to
effectively hedge against the Fund's currency risks are different from those
needed to select the securities in which a Fund invests. The Fund also may
conduct its foreign currency exchange transactions on a spot (i.e., cash) basis
at the spot rate prevailing in the foreign currency exchange market.
SWAPS, CAPS, FLOORS AND COLLARS -- The Global Aggressive Bond Fund may enter
into interest rate, currency and index swaps, 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, to protect against currency fluctuations, 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
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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. A currency swap is an agreement to exchange cash
flows on a notional amount based on changes in the values of the reference
indices.
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.
RISK FACTORS
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.
FOREIGN INVESTMENT RISK -- Investment in foreign securities involve 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.
CURRENCY RISK -- Since the Global Aggressive Bond Fund normally invests
substantially in securities denominated in currencies other than the U.S.
dollar, and since it may hold foreign currencies, the value of such securities
will be affected favorably or unfavorably by exchange control regulations or
changes in the exchange rates between such currencies and the U.S. dollar.
Changes in currency exchange rates will influence the value of the Fund's
shares, and also may affect the value of dividends and interest earned by the
Fund and gains and losses realized by the Fund. Currencies generally are
evaluated on the basis of fundamental economic criteria (e.g., relative
inflation and interest rate levels and trends, growth rate forecasts, balance
of payments status and economic policies) as well as technical and political
data. The exchange rates between the U.S. dollar and other currencies are
determined by supply and demand in the currency exchange markets, the
international balance of payments, governmental intervention, speculation and
other economic and political conditions.
If the currency in which a security is denominated appreciates against
the U.S. dollar, the dollar value of the security will increase. Conversely, a
decline in the exchange rate of the currency would adversely affect the value of
the security expressed in U.S. dollars.
RISKS ASSOCIATED WITH INVESTMENT IN EMERGING MARKETS -- Global Aggressive Bond
Fund may invest in emerging markets. Because of the special risks associated
with
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investing in emerging markets, an investment in the Global Aggressive Bond Fund
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. The Fund may invest 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
the Fund to make intended securities purchases due to settlement problems could
cause the Fund to forego attractive investment opportunities. Inability to
dispose of a portfolio security caused by settlement problems could result
either 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 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 the 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 the 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 the Fund's identification of such conditions until the date of
SEC action, the portfolio securities of the 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) -- Limited
Maturity Bond and Global Aggressive Bond 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 and debt rated Ba, B, Caa, Ca and C is regarded by S&P and
Moody's, respectively, 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
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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. As noted above, the Global
Aggressive Bond Fund may invest in debt securities rated below C, which are in
default as to principal and/or interest. 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.
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 Global Aggressive
Bond 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
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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 and, with respect to the Global Aggressive Bond
Fund, the Sub-Adviser and MFR, 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 (the "Investment Manager"),
700 Harrison Street, Topeka, Kansas, is responsible for selection and
management of the Funds' portfolio investments. The Investment Manager is a
wholly-owned subsidiary of Security Benefit Life Insurance Company, a mutual
life insurance company with over $13 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 $2.1 billion in assets.
The Investment Manager has engaged Lexington Management Corporation (the
"Sub-Adviser"), Park 80 West, Plaza Two, Saddle Brook, New Jersey 07663, to
provide certain investment advisory services to Global Aggressive Bond Fund.
The Sub-Adviser is a wholly-owned subsidiary of Piedmont Management Company
Inc., a diversified financial services holding company which is organized as a
Delaware corporation, the majority of the common stock of which is owned by
descendants of Lunsford Richardson, Sr., their spouses, trusts and other
related entities. The Sub-Adviser was established in 1938 and currently manages
over $3.8 billion in assets.
The Sub-Adviser has entered into a sub-advisory contract with MFR Advisors,
Inc., ("MFR"), One World Financial Center, 200 Liberty Street, New York, New
York 10281, under which MFR will provide the Global Aggressive Bond Fund with
investment and economic research services. MFR currently acts as Sub-Adviser to
the Lexington Ramirez Global Income Fund and also serves as an institutional
manager for private clients. MFR is a subsidiary of Maria Fiorini Ramirez, Inc.
("Ramirez"), which was established in August of 1992 to provide global economic
consulting, investment advisory and broker-dealer services. Ramirez is the
successor firm to Maria Ramirez Capital Consultants, Inc. ("MRCC"). MRCC was
formed in April 1990 as a subsidiary of John Hancock Freedom Securities
Corporation and offered in-depth economic consulting services to clients.
Subject to the supervision and direction of the Funds' Board of Directors,
the Investment Manager, and, with respect to Global Aggressive Bond Fund, the
Sub-Adviser, manage the Fund portfolios in accordance with each Fund's stated
investment objective and policies and makes all investment decisions. 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 Global Aggressive Bond 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 Tax-Exempt and Cash Funds exceed one percent of each
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
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an annual basis, .5 percent of the average daily net assets of Corporate Bond,
Limited Maturity Bond, U.S. Government, Tax-Exempt and Cash Funds and .75
percent of the average daily net assets of Global Aggressive Bond Fund,
computed on a daily basis and payable monthly. As compensation for the services
provided to the Global Aggressive Bond Fund, the Investment Manager pays the
Sub-Adviser, on annual basis, a fee equal to .35 percent of the average daily
net assets of such fund, calculated daily and payable monthly. For the service
provided by MFR, MFR receives from the Sub-Adviser, on an annual basis, a fee
equal to .15 percent of the average daily net assets of the Global Aggressive
Bond Fund, calculated daily 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, and
Tax-Exempt Funds and .045 percent of the average daily net assets of Cash and
Global Aggressive Bond Funds, calculated daily and payable monthly. For the
identified administrative services the Investment Manager also receives, with
respect to the Global Aggressive Bond Fund, an annual fee equal to the greater
of .10 percent of its average net assets or (i) $30,000 in the year ending
April 29, 1996; (ii) $45,000 in the year ending April 29, 1997; and (iii)
$60,000 thereafter. The Investment Manager also acts as the transfer agent and
dividend disbursing agent for the Funds. The Investment Manager has arranged
for the Sub-Adviser to provide certain administrative services to Global
Aggressive Bond Fund including performing certain accounting and pricing
functions. 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.
For the year ended December 31, 1994, the total expenses, as a percentage
of average net assets, were 1.01 percent for Class A and 1.85 percent for Class
B shares of Corporate Bond Fund; 1.10 percent for Class A and 1.85 percent for
Class B shares of U.S. Government Fund; .82 percent for Class A shares and 2.00
percent for Class B shares of Tax-Exempt Fund; and .96 percent for Cash Fund.
Expense figures for the Limited Maturity Bond and Global Aggressive Bond Funds
are not yet available as these Funds did not begin operations until January 17,
1995 and June 1, 1995, respectively.
PORTFOLIO MANAGEMENT
Corporate Bond, Limited Maturity Bond, U.S. Government, Tax-Exempt and Cash
Funds will be managed by the Fixed Income Team of the Investment Manager
consisting of John Cleland, Chief Investment Strategist, Jane Tedder, Tom
Swank, Steve Bowser and Elaine Miller. Jane A. Tedder, Vice President and
Senior Portfolio Manager of the Investment Manager has day-to-day
responsibility for managing Corporate Bond, Limited Maturity Bond and
Tax-Exempt Funds. Steve Bowser, Assistant Vice President and Portfolio Manager
of the Investment Manager, has day-to-day responsibility for managing U.S.
Government Fund.
Ms. Tedder has 20 years of experience in the investment field and has
managed the Corporate Bond and Tax-Exempt Funds since 1983 and the Limited
Maturity Bond Fund since its inception in 1995. Prior to joining the Investment
Manager in 1983, she served as Vice President and Trust Officer of Douglas
County Bank in Kansas. Ms. Tedder earned a bachelor's degree in education from
Oklahoma State University and advanced diplomas from National Graduate Trust
School, Northwestern University, and Stonier Graduate School of Banking,
Rutgers University. She is a Chartered Financial Analyst. Her investment
strategy is to manage portfolios to provide attractive long-term total return,
the greatest part of which will be provided by a consistent income stream.
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
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<PAGE> 31
SECURITY FUNDS
PROSPECTUS
controller. He graduated with a Bachelor of Science degree from Kansas State
University in 1982.
Global Aggressive Bond Fund is managed by an investment management team of
the Sub-Adviser and MFR. Denis P. Jamison and Maria Fiorini Ramirez are the
lead managers.
Denis P. Jamison, C.F.A., Senior Vice President, Director Fixed Income
Strategy of the Sub-Adviser is responsible for fixed-income portfolio
management. He is a member of the New York Society of Security Analysts. Mr.
Jamison has more than 20 years investment experience. Prior to joining the
Sub-Adviser in 1981, Mr. Jamison spent nine years at Arnold Bernhard & Company,
an investment counseling and financial services organization. At Bernhard, he
was a Vice President supervising the security analyst staff and managing
investment portfolios. He is a specialist in government, corporate and
municipal bonds. Mr. Jamison is a graduate of the City College of New York with
a B.A. in Economics.
Maria Fiorini Ramirez, President and Chief Executive Officer of MFR, began
her career as a credit analyst with American Express International Banking
Corporation in 1968. In 1972, she moved to Banco Nazionale De Lavoro in New
York. The following year, she started a ten year association with Merrill
Lynch, serving as Vice President and Senior Money Market Economist. She joined
Becker Paribas in 1984 as Vice President and Senior Money Market Economist
before joining Drexel Burnham Lambert that same year as First Vice President
and Money Market Economist. She was promoted to Managing Director of Drexel in
1986. Ms. Ramirez established MFR in August, 1992. She is known in
international financial, banking and economic circles for her assessment of the
interaction between global economic policy and political trends and their
effect on investments. Ms. Ramirez holds a B.A. in Business
Administration/Economics from Pace University.
From April 1990 to August 1992, Ms. Ramirez was the President and Chief
Executive Officer of Maria Ramirez Capital Consultants, Inc., a subsidiary of
John Hancock Freedom Securities Corporation.
HOW TO PURCHASE SHARES
As discussed below, shares of Corporate Bond, Limited Maturity Bond, U.S.
Government, Global Aggressive Bond and Tax-Exempt 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, GLOBAL AGGRESSIVE BOND
AND TAX-EXEMPT FUNDS
Security Distributors, Inc. (the "Distributor"), a wholly-owned subsidiary
of the Investment Manager, is principal underwriter for Corporate Bond, Limited
Maturity Bond, U.S. Government, Global Aggressive Bond and Tax-Exempt 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, Global Aggressive Bond and Tax-Exempt 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
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SECURITY FUNDS
PROSPECTUS
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, Global Aggressive
Bond and Tax-Exempt 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 may 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,
Global Aggressive Bond and Tax-Exempt Funds are offered at net asset value plus
an initial sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE
AMOUNT OF APPLICABLE PERCENTAGE OF PERCENTAGE
PURCHASE AT PERCENTAGE OF NET AMOUNT REALLOWABLE
OFFERING PRICE OFFERING PRICE INVESTED TO DEALER
<S> <C> <C> <C>
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)
</TABLE>
Purchases of Class A shares of the Corporate Bond, Limited Maturity Bond,
U.S. Government, Global Aggressive Bond and Tax-Exempt 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 29.
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 Tax-Exempt 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
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 Tax-Exempt, Equity, 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.
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<PAGE> 33
SECURITY FUNDS
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SECURITY INCOME FUND'S
CLASS A DISTRIBUTION PLAN
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 and
Global Aggressive 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. This 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 the 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 and Global Aggressive 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 Global Aggressive Bond Funds to
finance joint distribution activities, for example joint advertisements, and
the costs of such joint activities will be allocated between the Funds based on
the relative net assets of their Class A shares.
The 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 Fund's 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 and Global Aggressive Bond Funds. Other promotional activities which
may be financed pursuant to the Plan 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 and Global
Aggressive Bond Funds' Class A Distribution Plan may be terminated at any time
by vote of the directors of Income 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 Plan is terminated by the
Funds' Class A stockholders or the 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.
CLASS B SHARES
Class B shares of Corporate Bond, Limited Maturity Bond, U.S. Government,
Global Aggressive Bond and Tax-Exempt 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
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<PAGE> 34
SECURITY FUNDS
PROSPECTUS
years since the stockholder made a purchase payment from which an amount is
being redeemed, according to the following schedule:
<TABLE>
<CAPTION>
YEAR SINCE CONTINGENT DEFERRED
PURCHASE WAS MADE SALES CHARGE
<S> <C>
First 5%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth and following 0%
</TABLE>
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, Global
Aggressive Bond and Tax-Exempt 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 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.
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SECURITY FUNDS
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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 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 Class B
shares of the Funds pursuant to a systematic withdrawal program. See
"Systematic Withdrawal Program," page 37 for details.
ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS
The Distributor, from time to time, will provide promotional incentives or
pay a bonus, including reallowance of up to the entire sales charge, to certain
dealers whose representatives have sold or are expected to sell significant
amounts of the Corporate Bond, Limited Maturity Bond, U.S. Government, Global
Aggressive Bond and Tax-Exempt 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 without the United States. The Distributor may also provide
financial assistance to dealers in connection with advertising. 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, Global Aggressive Bond and Tax-Exempt Funds in a calendar year. To
be eligible for this allowance in any given year, the dealer must sell a
minimum of $5,000,000 of such shares during that year. The marketing allowance
ranges from .15 percent to .60 percent of
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<PAGE> 36
SECURITY FUNDS
PROSPECTUS
aggregate new sales depending upon the volume of shares sold and the level of
services provided by the Distributor to the dealer.
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 45 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)Wire federal funds to:
Bank IV of Topeka
Security Distributors, Inc.
Topeka, Kansas 66603
Include investor's name and the Cash Fund account number.
(c)For initial investment, send a completed investment application to the
Fund at the above address.
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, Global Aggressive Bond and Tax-Exempt 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
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SECURITY FUNDS
PROSPECTUS
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.
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,
Global Aggressive Bond and Tax-Exempt Funds may also be purchased at net asset
value when the purchase is made on the recommendation of a (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
Tax-Exempt Funds, respectively, for the fiscal year ended December 31,1994, was
as follows: Corporate Bond, Class A-204 percent, Class B-204 percent; U.S.
Government, Class A-220 percent, Class B-220 percent; and Tax-Exempt, Class
A-88 percent, Class B-88 percent. The Corporate Bond and Limited Maturity Bond
Funds' portfolio turnover rates generally are expected to be less than 100
percent, and that of the U.S. Government and Global Aggressive Bond Funds may
exceed 100 percent, but is not expected to do so. 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. Portfolio turnover rates for
the Limited Maturity Bond and Global Aggressive Bond Funds are not yet
available as these Funds did not begin operations until January 17, 1995 and
June 1, 1995, respectively.
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, 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. Aggregated purchases or sales are generally effected at an
average price and 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, 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
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SECURITY FUNDS
PROSPECTUS
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 and Corporate Bond, Limited Maturity
Bond, U.S. Government and Tax-Exempt Funds offer redemption by check on Class A
shares only. Global Aggressive Bond Fund does not offer checkwriting
privileges. If blank checks are requested on the Checking Privilege Request
Form, the Fund will make a supply available. Such checks for Corporate Bond,
Limited Maturity Bond, U.S. Government and Tax-Exempt Funds may be drawn
payable to the order of any payee (not to cash) in any amount of $250 or more,
if the account value is $1,000 or more. Such checks for Cash Fund may be drawn
in any amount of $100 or more. 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 Fund shares fluctuates 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 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.
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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SECURITY FUNDS
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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 8:00 a.m. and 5:00
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. A stockholder who authorizes telephone
redemptions authorizes the Investment Manager to act upon the instructions of
any person identifying themselves as the owner of an 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 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 31.
DIVIDENDS AND TAXES
It is the policy of Corporate Bond, Limited Maturity Bond, U.S. Government,
Global Aggressive Bond and Tax-Exempt Funds to pay dividends from net
investment income monthly and 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, Global Aggressive Bond and Tax-Exempt 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 Global
Aggressive Bond 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.
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 unable to dispose of portfolio
securities due to settlement
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SECURITY FUNDS
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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.
Tax-Exempt Fund intends to qualify to pay "exempt interest dividends" to
its stockholders. Tax-Exempt 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 Tax-Exempt 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."
To the extent that Tax-Exempt 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 Tax-Exempt
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 Tax-Exempt 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, Global
Aggressive Bond and Cash Funds are taxable to stockholders as ordinary income
whether received in cash or reinvested in additional shares. Distributions
(designated by Corporate Bond, Limited Maturity Bond, U.S. Government and
Global Aggressive Bond Funds as "capital gain dividends") of the excess, if
any, of net long-term capital gains over net short-term capital losses are
taxable to stockholders as long-term capital gain regardless of how long a
stockholder has held the Fund's shares and regardless of whether received in
cash or reinvested in additional 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, 1994, Corporate Bond, U.S. Government and Tax-Exempt Funds,
respectively, had
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SECURITY FUNDS
PROSPECTUS
accumulated net realized losses on sales of investments in the following
amounts: $13,842,177, $1,181,780 and $1,836,112.
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. While stockholders of the Funds will
indirectly bear the cost of any foreign tax withholding, they will not be able
to claim foreign tax credit or deduction for taxes paid by the Funds.
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 or, if there has been no sale that day, at the
mean between the bid and the asked prices. If a mean cannot be determined, then
the securities are valued at the best available current 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 Tax-Exempt 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 Tax-Exempt 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
35
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SECURITY FUNDS
PROSPECTUS
securities held by the U.S. Government and Tax-Exempt Funds having 60 days or
less remaining to maturity, with the value of the security on the 61st day
being used rather than cost.
Because the expenses of distribution are borne by Class A shares of
Corporate Bond, Limited Maturity Bond, U.S. Government, Global Aggressive Bond
and Tax-Exempt 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 Tax-Exempt Fund
and "average annual total return" and "aggregate total return" for Corporate
Bond, Limited Maturity Bond, U.S. Government, Global Aggressive Bond and
Tax-Exempt 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,
Global Aggressive Bond and Tax-Exempt 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.
Tax-Exempt 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, Global Aggressive Bond or
Tax-Exempt Fund over periods of 1, 5 and 10 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, Global Aggressive Bond or Tax-Exempt Funds 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, Global Aggressive Bond and Tax-Exempt 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
36
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SECURITY FUNDS
PROSPECTUS
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, Global Aggressive Bond and
Tax-Exempt 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.
STOCKHOLDER SERVICES
ACCUMULATION PLAN
An investor in Corporate Bond, Limited Maturity Bond, U.S. Government,
Global Aggressive Bond or Tax-Exempt 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 (913) 295-3127 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 29. 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, Security Growth and Income, Equity or Ultra
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
or for shares of Cash Fund, which offers a single class of shares. Any
applicable contingent deferred sales charge will
37
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SECURITY FUNDS
PROSPECTUS
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, Global Aggressive Bond and Tax-Exempt 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, Global Aggressive Bond and Tax-Exempt 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 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 8:00 a.m. and 5:00 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
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SECURITY FUNDS
PROSPECTUS
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 Tax-Exempt Funds provide for
the issuance of shares of common stock in one or more classes or series, and
the Articles of Incorporation of Cash Fund provide for the issuance of common
stock in one or more series.
Income Fund has authorized capital stock of 1,000,000,000 shares of $1.00
par value. Its shares are currently issued in four series, Corporate Bond Fund,
Limited Maturity Bond Fund, Global Aggressive Bond Fund, and U.S. Government
Fund, each of which has authority to issue such shares as follows: Corporate
Bond Fund-400,000,000 shares, Limited Maturity Bond Fund-200,000,000 shares,
U.S. Government Fund-200,000,000 shares and Global Aggressive Bond
Fund-200,000,000 shares. 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.
Tax-Exempt and Cash Funds have authorized capital stock of 1,000,000,000
shares and 5,000,000,000 shares, respectively, of $0.10 par value per share.
Each of the Corporate Bond, Limited Maturity Bond, U.S. Government, Global
Aggressive Bond and Tax-Exempt 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, 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 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%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,
Topeka, Kansas 66636-0001, or call (913) 295-3127 or 1-800-888-2461,
extension 3127.
39
<PAGE> 46
SECURITY FUNDS APPENDIX A
PROSPECTUS
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.
40
<PAGE> 47
SECURITY FUNDS APPENDIX A
PROSPECTUS (CONTINUED)
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 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 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
41
<PAGE> 48
SECURITY FUNDS APPENDIX A
PROSPECTUS (CONTINUED)
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.
APPENDIX B
DESCRIPTION OF MUNICIPAL BOND RATINGS
The following are summaries of the ratings used by Moody's and Standard &
Poor's applicable to permitted investments of Tax-Exempt 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.
42
<PAGE> 49
SECURITY FUNDS APPENDIX B
PROSPECTUS
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.
* 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.
43
<PAGE> 50
SECURITY FUNDS APPENDIX C
PROSPECTUS
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, Global Aggressive Bond and Tax-Exempt 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, a Statement of Intention or Letters 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, Global Aggressive Bond or Tax-Exempt
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, Global Aggressive Bond, Tax-Exempt, Growth and Income, Equity 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,
Global Aggressive Bond or Tax-Exempt 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, 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 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, Global Aggressive Bond or Tax-Exempt 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, 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 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 written notice is received by the Fund.
44
<PAGE> 51
SECURITY FUNDS
SECURITY CASH FUND APPLICATION
For IRA/KEOGH/Corporate Plans, complete this Application along with other plan
documents.
MAIL APPLICATION TO: Security Cash Fund, P.O. Box 2548, Topeka, KS 66601
<TABLE>
__________________________________________________________________________________________________________
<S> <C>
INITIAL INVESTMENT / / Enclosed is my check for $ ___________________ made payable to Security Cash Fund.
(CHECK ONE BOX) / / On ____________________I/we wired $ _______________through _______________________
Date Name of Bank
MINIMUM
$100 ____________________________________________for Fund account number___________________
SUBSEQUENT City State
INVESTMENTS OF $20 When investing by wire, call the Fund to advise of the investment. The Fund will supply
CAN BE MADE a control number for initial investment. Wire federal funds to Bank IV of Topeka, Trust
AT ANY TIME Department, Topeka, Kansas.
Attn:_________________________________________________________________________
(Include investor's name and account number)
__________________________________________________________________________________________________________
DIVIDENDS / / Reinvest automatically all daily dividends and other distributions.
(CHECK ONE / / Cash payment of all dividends each month and send proceeds to investor.
BOX)
__________________________________________________________________________________________________________
CHECKING / / Please send a supply of checks permitting me/us to redeem shares in this account
ACCOUNT PRIVILEGE by writing checks for $100 or more made payable to any person. COMPLETE SIGNATURE
CARD ON REVERSE SIDE. Allow three weeks for delivery of check supply.
__________________________________________________________________________________________________________
SPECIAL / / Telephone By checking the applicable boxes and signing this Application,
OPTIONS Exchange Applicant authorizes the Investment Manager to honor any telephone request for
(CHECK APPLICABLE / / Telephone the exchange and/or redemption of Fund shares (maximum telephone
BOX) Redemption redemption is $10,000), subject to the terms of the Fund's prospectus.
The Investment Manager has established reasonable procedures to
confirm that instructions communicated by telephone are genuine and
may be liable for any losses due to fraudulent or unauthorized
instructions if it fails to comply with its procedures. The procedures
require that any person requesting a telephone redemption or exchange
provide the account registration and number and owner's tax
identification number and such request must be received on a recorded
line.
THE AUTHORIZATION ON REVERSE SIDE FOR CORPORATION, PARTNERSHIP, TRUST, ETC., MUST BE
COMPLETED AND RETURNED WITH THIS FORM.
/ / Systematic Withdrawal Program (Minimum account $5,000)
Beginning _______________________ , 19 ______ , you are hereby authorized and
instructed to send a check for $ _____________________ (minimum $25) drawn on
approximately / / 11th day / / 26th day of the month. Draw payment
/ / monthly / / quarterly
/ / semiannually / / annually
___________________________________________________________________________________________________________
/ / Individual _______________________________ ___________________________________
/ / Corporate First Middle Last Owner's Taxpayer Identification No.
/ / Non-Profit Social Security No.
/ / Profit-
Sharing _______________________________
First Middle Last
ACCOUNT _______________________________ Industry Type ____________________
REGISTRATION Name of Corporation, Trust, (Farming, Mfg., Sales,
(PLEASE PRINT) Partnership, etc. etc.)
_______________________________ Telephone
Street Address Business ( ) __________________
_______________________________ Home ( ) __________________
City State Zip
If address is outside U.S. please indicate if
U.S. Citizen / / Yes / / No
TAXPAYER IDENTIFICATION CERTIFICATION: Under the penalties of perjury, I (1) certify that
the number provided on this form is my correct taxpayer identification number and (2),*
that I am not subject to backup withholding either because I have not been notified that
I am subject to backup withholding as a result of a failure to report all interest or
dividends, or the Internal Revenue Service has notified me that I am no longer subject
to backup withholding.
TAX
WITHHOLDING *The owner must strike out the language certifying that they are not subject to backup
withholding due to notified underreporting IF THE INTERNAL REVENUE SERVICE NOTIFIED THEM
THAT THEY ARE SUBJECT TO BACKUP WITHHOLDING, and they have not received notice from the
service advising that backup withholding has terminated.
___________________________________________________________________________________________________________
SIGNATURE(S) _______________________________________ ______________________________________
OF APPLICANTS Owner Joint Owner
_______________________________________ ______________________________________
Corporate Officer, Trustee, etc. Title
Date __________________________________ In case of joint ownership, both must
sign. If no form of ownership is
designated, then it will be assumed the
ownership is ''as joint tenants, with
right of survivorship, and not as tenants
in common.''
INVESTMENT
DEALER _______________________________________
Name of Firm
_______________________________________ ___________________________
Street Dealer Authorized
_______________________________________ ___________________________
City State Zip Account Representative
</TABLE>
45
<PAGE> 52
SECURITY FUNDS
SECURITY CASH FUND APPLICATION (Continued)
Checking Account Privilege - If you have elected this option, the following
card must be completed. This card is similar to one which must be signed when
opening any checking account. All joint owners named in the account
registration must sign this card. Names must be signed exactly as they appear
in the account registration. All persons eligible to sign checks for corporate
accounts, partnerships, trusts, etc. must sign this card.
______________________________________________________________________________
The payment of funds on the conditions set forth below and on the reverse side
is authorized by the signature(s) appearing on the signature card. Security
Management Company, the Fund's Transfer Agent, is hereby appointed agent by the
person(s) signing this card and will cause the Fund to redeem a sufficient
number of shares from the account to cover checks presented for payment without
requiring signature guarantees. The Fund and its agents will not be liable for
any loss, expense or cost arising out of check redemptions or checks returned
without payment. SHARES OUTSTANDING IN THE ACCOUNT FOR LESS THAN 15 DAYS WILL
NOT BE LIQUIDATED TO PAY CHECKS PRESENTED UNLESS THE TRANSFER AGENT IS ASSURED
THAT GOOD PAYMENT HAS BEEN COLLECTED THROUGH NORMAL BANKING CHANNELS. The
Transfer Agent has the right not to honor checks that are for less than $100 or
checks in an amount exceeding the value of the account at the time the check is
presented for payment. This privilege is subject to the provisions of the
current prospectus of the Fund as amended from time to time. This agreement may
be modified or terminated at any time by the Fund or the Transfer Agent upon
notification mailed to the shareholder's address of record.
______________________________________________________________________________
SECURITY CASH FUND SIGNATURE CARD
______________________________________________
___________________________________
Account Number
Authorized Signatures:
______________________________________________
______________________________________________
______________________________________________
______________________________________________
______________________________________________
/ / Check here if two signatures are required on checks
/ / Check here if only one signature required on checks.
In signing this card each signatory agrees to be subject to the customary rules
and regulations governing checking accounts and to the conditions set forth on
the reverse side. If the Checking Account Privilege is established after the
opening of the account, or if any change is made in the above information, all
signatures will have to be guaranteed.
______________________________________________________________________________
AUTHORIZATION FOR REDEMPTION
CORPORATE RESOLUTION
I, _____________________, duly elected and acting Secretary of _______________
______________________, a corporation organized and existing under the laws of
_______________________________________, certify that the following resolution
is a true and correct copy of the resolution adopted by the Board of Directors
at its regular meeting held on ________________________________________, which
resolution is currently in full force and effect:
RESOLVED, That the below named individual(s) of this corporation are hereby
authorized to give notice, instructions, complete necessary forms, execute
withdrawals, and to transact any other business necessary on this corporation's
account invested in shares of Security Cash Fund. FURTHER RESOLVED, That this
corporation assumes entire responsibility for, and agrees to indemnify and hold
harmless Security Cash Fund and/or its agents against any and all claims,
liabilities, damages, actions, charges and expense sustained by action of the
below name individual(s).
______________________________________ ________________________________
(PRINT OR TYPE) NAME AND TITLE SIGNATURE(S)
______________________________________ ________________________________
_______________________________________________________________________________
IN WITNESS WHEREOF, I hereunto set my hand and the seal of this
corporation this __________ day of ____________________ , 19 _____ .
(CORPORATE SEAL) SECRETARY ______________________
_______________________________________________________________________________
AUTHORIZATION FOR PARTNERSHIP, TRUST, OR RETIREMENT PLAN
We, the undersigned, being the principal partners or the trustees
of the_________________________________________________
(Partnership or Trust/Plan)
hereby state that we are authorized to invest the assets of the
partnership or trust/plan in Security Cash Fund. We also agree
that_____________________________or_______________________________________have
individual authority to purchase, sell, assign, and transfer securities and to
sign checks issuable by the partnership or the trust/plan redeeming shares of
the Fund. We further state that this individual authority shall continue to be
honored until revoked by written notice from either of us and is received by
the Transfer Agent (Security Management Company). By signing this
authorization, we agree that Security Cash Fund, Security Management Company,
and Security Distributors, Inc., shall be indemnified and held harmless from
any loss, damage, cost or claim that may arise from any authorized or
unauthorized use of the assets or checks of the partnership or trust/plan in
connection with the holdings of the Fund.
______________________________________ ___________________________________
Print or type name Signature(s)
_______________________________________________________________________________
SIGNATURE GUARANTEED BY
46
<PAGE> 53
THIS PAGE LEFT BLANK INTENTIONALLY
<PAGE> 54
- --------------------------------------
[LOGO] SECURITY DISTRIBUTORS, INC.
- --------------------------------------
700 SW Harrison St.
Topeka, Kansas 66636-0001
(913) 295-3127
(800) 888-2461
<PAGE> 55
SECURITY FUNDS
APPLICATION
- -------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION (SIGNATURE MUST APPEAR BELOW TO ESTABLISH AN ACCOUNT.)
I hereby authorize the establishment of the account marked below and
acknowledge receipt of the Fund's current prospectus. Check is enclosed for
$_____________________ (minimum $100) payable to SECURITY DISTRIBUTORS, INC. as
an initial investment. I am of legal age in the state of my residence and wish
to purchase shares of the Fund indicated below. By the execution of this
application, the undersigned represents and warrants that the investor has full
right, power and authority to make this investment and the undersigned is duly
authorized to sign this application and to purchase or redeem shares of the
Fund on behalf of the investor. No stock certificate is to be issued unless I
so request. See the prospectus for information about an Accumulation Plan
which allows a minimum investment of $100 and subsequent investments of $20.
<TABLE>
<S> <C>
______________________________________________________________ _______________________________________________
Owner/Custodian/Trustee Name (Print) Social Security Number Date of Birth
______________________________________________________________ _______________________________________________
Joint Owner/minor Name (Print) / / CHECK if UGMA/UTMA Account Social Security Number Date of Birth
2. ADDRESS AND TELEPHONE NUMBER
______________________________________________________________ _______________________________________________
Street Address (for first individual) Daytime Telephone
______________________________________________________________ Citizenship / / U.S. / / Other
City, State, Zip Code Indicate
Country
3. INITIAL INVESTMENT
CLASS OF SHARES (MUST SELECT ONE ONLY) ( ) A SHARES ( ) B SHARES (IF NO CLASS IS SELECTED, PURCHASE(S) WILL BE MADE OF A SHARES)
SECURITY EQUITY FUND $ __________ SECURITY CORPORATE BOND FUND $ __________
SECURITY GLOBAL FUND $ __________ SECURITY LIMITED MATURITY BOND FUND $ __________
SECURITY ASSET ALLOCATION FUND $ __________ SECURITY U.S. GOVERNMENT FUND $ __________
SECURITY GROWTH & INCOME FUND $ __________ SECURITY GLOBAL AGGRESSIVE BOND FUND $ __________
SECURITY ULTRA FUND $ __________ SECURITY TAX-EXEMPT FUND $ __________
SECURITY CASH FUND $ __________
4. DIVIDEND OPTION (CHECK ONLY ONE)
(If no option is selected, distributions will be reinvested into the Fund that pays them.)
/ / Reinvest all dividends and capital gains / / Send distributions to third party below
/ / Reinvest only capital gains and pay dividends in cash Account No. (if applicable) _______________________________
/ / Cash payment of dividends and capital gains Name ______________________________________________________
/ / Invest dividends and capital gains into another Address ___________________________________________________
Security Fund account
(must be same class of shares; if new account, number will
be assigned)
Fund Name _______________________ Account Number __________
5. SYSTEMATIC WITHDRAWAL PROGRAM (FOR ACCOUNTS OF $5,000 OR MORE)
You are hereby authorized to send a check(s) beginning: Month ____________ Day / / 11th or / / 26th 19_____
(if no date is selected withdrawal will be made on the 26th)
Payable: / / monthly / / quarterly / / semi-annually / / annually
Fund Name _____________________________________________ Fund Name _____________________________________________
Account No. (if known) ________________________________ Account No. (if known) ________________________________
(if 3 or more funds, please send written instructions)
Level Payment $ ____________ ($25 minimum) Level Payment $ ____________ ($25 minimum)
Variable Payment based on fixed number of shares or a Variable Payment based on fixed number of shares or a
percentage of account value ($25 minimum) percentage of account value ($25 minimum)
Number of shares: __________ or Number of shares: __________ or
Percentage of account value: __________ Percentage of account value: __________
Note: For Class B shares, annual withdrawals in excess of 10% of value of account at time program is established may be subject to a
contingent deferred sales charge.
Complete this section only if you want check payable and sent to another address (Please print):
Name _________________________________________________________ Signature(s) of all Registered Owners Required
Address ______________________________________________________ Individual Signature __________________________________________
City, State, Zip Code ________________________________________ Joint Owner Signature _________________________________________
6. SECUR-O-MATIC(R) BANK DRAFT PLAN
I wish to make investments directly from my checking account. (Please attach a oided check to this application.)
Fund Name ______________________________ Account Number (if known) _________________ Amount $ ______________
Fund Name ______________________________ Account Number (if known) _________________ Amount $ ______________
Dated: / / 7th Day of Month / / 14th Day of Month / / 21st Day of Month / / 28th Day of Month
(if no date is selected investment will be made on the 21st)
Mode: / / Monthly ($20 minimum) / / Bi-Montly ($40 minimum) / / Quarterly ($50 minimum)
/ / Semiannually ($100 minimum) / / Annually ($200 minimum)
You should notify your bank that you are going to use this service to ensure they accept preauthorized electronic drafts.
(continued on back)
SDI 125 (R3-95) 48-01257-00
</TABLE>
<PAGE> 56
<TABLE>
<S><C>
7. RIGHTS OF ACCUMULATION
I own shares in other Security Funds which may entitle this purchase to have a reduced sales charge under the provisions in the
Fund Prospectus.
______________________________________________________________ ____________________________ ____________________________
Current Account Registration Fund Name Account Number(s)
______________________________________________________________ ____________________________ ____________________________
______________________________________________________________ ____________________________ ____________________________
8. STATEMENT OF INTENTION
/ / Please check here if you wish to receive a Statement of Intention. This form allows you to purchase shares at reduced sales
charges if you plan to invest more than: (Please check one) / / $50,000 / / $100,000 / / $250,000 / / $500,000
/ / $1,000,000 in installments during the next 13 months (36 months for purchases of $1 million or more). See the current
prospectus for more information.
9. TELEPHONE EXCHANGE AND REDEMPTION PRIVILEGE
If you would like to have telephone exchange and/or redemption privileges, please mark one or more of the boxes below:
Yes, I want / / telephone exchange / / telephone redemption privileges.
By checking the applicable box(es) and signing this Application, you authorize the Investment Manager to honor any telephone request
for the exchange and/or redemption of Fund shares (maximum telephone redemption is $10,000), subject to the terms of the Fund
prospectus. The Investment Manager has established reasonable procedures to confirm that instructions communicated by telephone are
genuine and may be liable for any losses due to fraudulent or unauthorized instructions if it fails to comply with its procedures.
The procedures require that any person requesting a telephone redemption or exchange provide the account registration and number and
owner's tax identification number and such request must be received on a recorded line. Neither the Fund, the Investment Manager
nor the Underwriter will be liable for any loss, liability, cost or expense arising out of any telephone request, provided that the
Investment Manager complied with its procedures. Thus, a stockholder may bear the risk of loss from a fraudulent or unauthorized
request.
10. CERTIFICATION AND SIGNATURE
- ------------------------------------------------------------------------------------------------------------------------------------
TAX IDENTIFICATION NUMBER CERTIFICATION
UNDER PENALTIES OF PERJURY I CERTIFY THAT: _______________________________________________________________
1. The number shown on this form is my correct taxpayer Signature of Owner Date
identification number (or I am waiting for a number to be
issued to me); and
2. I am not subject to backup withholding because: (a) I am _______________________________________________________________
exempt from backup withholding, or (b) I have not been Signature of Joint Owner Date
notified by the Internal Revenue Service (IRS) that I am
subject to backup withholding as a result of a failure to report In case of joint ownership, both must sign. If no form of
all interest or dividends, or (c) the IRS has notified me that ownership is indicated then it will be assumed the ownership is
I am no longer subject to backup withholding. as "joint tenants, with right of survivorship" and not as
"tenants in common."
CERTIFICATION INSTRUCTIONS - You must cross out item (2) to the
left if you have been notified by IRS that you are
currently subject to backup withholding because of
underreporting interest or dividends on your tax return.
- ------------------------------------------------------------------------------------------------------------------------------------
11. INVESTMENT DEALER
I (we) agree to act as dealer under this account in accordance with the provisions of the Dealer Agreement and appoint Security
Distributors, Inc. to act as my (our) agent pursuant thereto. I (we) represent that the appropriate prospectus was delivered to the
above indicated owner(s).
- ------------------------------------------------------------------------------------------------------------------------------------
Name of Firm (Print)
- ------------------------------------------------------------------------------------------------------------------------------------
Business Address
- ------------------------------------------------------------------------------------------------------------------------------------
City, State, Zip Code
- ------------------------------------------------------------------------------------------------------------------------------------
Signature of Authorized Dealer
- --------------------------------------------------------------------------------- ------------------------------------------------
Representative's Name Account Executive Number
- ------------------------------------------------------------------------------------------------------------------------------------
Business Address
- ------------------------------------------------------------------------------------------------------------------------------------
City, State, Zip Code
- ------------------------------------------------------------------------------------------------------------------------------------
Representative's Telephone Number
SEND COMPLETED APPLICATION TO SECURITY DISTRIBUTORS, INC., 700 SW HARRISON ST., TOPEKA, KS 66636-0001
1-800-888-2461, EXT. 3127
Attach Voided Check Here
(Check must be preprinted with the bank account registration)
</TABLE>
<PAGE> 57
SECURITY INCOME FUND
- CORPORATE BOND SERIES
- LIMITED MATURITY BOND SERIES
- U.S. GOVERNMENT SERIES
- GLOBAL AGGRESSIVE BOND SERIES
SECURITY TAX-EXEMPT FUND
SECURITY CASH FUND
STATEMENT OF ADDITIONAL INFORMATION
JULY 17, 1995
RELATING TO THE PROSPECTUS DATED JULY 17, 1995
(913) 295-3127
(800) 888-2461
INVESTMENT MANAGER
Security Management Company
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
Chase Manhattan Bank, N.A.
1211 Avenue of the Americas
New York, New York 10036
INDEPENDENT AUDITORS
Ernst & Young LLP
One Kansas City Place
1200 Main Street
Kansas City, Missouri 64105-2143
<PAGE> 58
SECURITY INCOME FUND
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
July 17, 1995
(RELATING TO THE PROSPECTUS DATED JULY 17, 1995)
This Statement of Additional Information is not a Prospectus. It should be
read in conjunction with the Prospectus dated July 17, 1995. A Prospectus may
be obtained by writing or calling Security Distributors, Inc., 700 SW Harrison,
Topeka, Kansas 66636-0001, or by calling (913) 295-3127 or (800) 888-2461, ext.
3127.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
General Information . . . . . . . . . . . . . . . . . 1
Investment Objectives and Policies of the Funds . . . 2
Security Income Fund . . . . . . . . . . . . . . . 2
Corporate Bond Fund . . . . . . . . . . . . . . 3
Limited Maturity Bond Fund . . . . . . . . . . . 3
U.S. Government Fund . . . . . . . . . . . . . . 5
Global Aggressive Bond Fund . . . . . . . . . . 6
Security Tax-Exempt Fund . . . . . . . . . . . . . 18
Security Cash Fund . . . . . . . . . . . . . . . . 22
Investment Policy Limitations . . . . . . . . . . . . 24
Income Fund's Fundamental Policies . . . . . . . . 24
Tax-Exempt Fund's Fundamental Policies . . . . . . 26
Cash Fund's Fundamental Policies . . . . . . . . . 27
Officers and Directors . . . . . . . . . . . . . . . 28
Remuneration of Directors and Others . . . . . . . . 29
How to Purchase Shares . . . . . . . . . . . . . . . 30
Corporate Bond, Limited Maturity Bond,
U.S. Government, Global Aggressive Bond and
Tax-Exempt Funds . . . . . . . . . . . . . . . . 30
Alternative Purchase Options . . . . . . . . . . . 30
Class A Shares . . . . . . . . . . . . . . . . . . 31
Security Income Fund's Class A Distribution Plan . 31
Class B Shares . . . . . . . . . . . . . . . . . . 32
Class B Distribution Plan . . . . . . . . . . . . 33
Calculation and Waiver of Contingent Deferred
Sales Charges . . . . . . . . . . . . . . . . . 34
Arrangements With Broker/Dealers and Others . . 34
Cash Fund . . . . . . . . . . . . . . . . . . . 35
Purchases at Net Asset Value . . . . . . . . . . . . 35
Accumulation Plan . . . . . . . . . . . . . . . . . . 36
Systematic Withdrawal Program . . . . . . . . . . . . 36
Investment Management . . . . . . . . . . . . . . . . 37
Portfolio Management . . . . . . . . . . . . . . . 40
Code of Ethics . . . . . . . . . . . . . . . . . . 41
Distributor . . . . . . . . . . . . . . . . . . . . . 41
Allocation of Portfolio Brokerage . . . . . . . . . . 41
Determination of Net Asset Value . . . . . . . . . . 42
How to Redeem Shares . . . . . . . . . . . . . . . . 44
Telephone Redemptions . . . . . . . . . . . . . . 45
How to Exchange Shares . . . . . . . . . . . . . . . 46
Exchange by Telephone . . . . . . . . . . . . . . 46
Dividends and Taxes . . . . . . . . . . . . . . . . . 47
Organization . . . . . . . . . . . . . . . . . . . . 51
Custodian, Transfer Agent and Dividend-Paying
Agent . . . . . . . . . . . . . . . . . . . . . . . 52
Independent Auditors . . . . . . . . . . . . . . . . 52
Performance Information . . . . . . . . . . . . . . . 52
Retirement Plans . . . . . . . . . . . . . . . . . . 54
Individual Retirement Accounts (IRAs) . . . . . . . . 55
Pension and Profit-Sharing Plans . . . . . . . . . . 55
403(b) Retirement Plans . . . . . . . . . . . . . . . 56
Simplified Employee Pension Plans (SEPPs) . . . . . . 56
Financial Statements . . . . . . . . . . . . . . . . 56
Tax-Exempt vs. Taxable Income . . . . . . . . . . . . 56
Appendix A . . . . . . . . . . . . . . . . . . . . . 57
</TABLE>
<PAGE> 59
GENERAL INFORMATION
Security Income Fund, 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. 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 44.)
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 Global Aggressive Bond Series ("Global Aggressive Bond
Fund") of Security Income Fund, Security Tax-Exempt Fund ("Tax-Exempt 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 24. 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
47.)
The shares of Corporate Bond, Limited Maturity Bond, U.S. Government,
Global Aggressive Bond and Tax-Exempt 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 30.)
The Funds receive investment advisory, administrative, accounting, and
transfer agency services from Security Management Company (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
Global Aggressive Bond Funds exceed any expense limitation imposed by any state
and shall not for Tax-Exempt and Cash Funds exceed 1% of the average net assets
of the Fund for the year. (See page 37 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 and Global Aggressive
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 and Global Aggressive
Bond Funds to finance various distribution-related activities. (See "Security
Income Fund's Class A Distribution Plan, " page 31.)
Under Distribution Plans adopted with respect to the Class B shares of
Corporate Bond, Limited Maturity Bond, U.S. Government, Global Aggressive Bond
and Tax-Exempt Funds pursuant to Rule 12b-1 under the 1940 Act, 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 33.)
1
<PAGE> 60
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
SECURITY INCOME FUND
Security Income Fund ("Income Fund") consists of four diversified Series
(Corporate Bond, Limited Maturity Bond, U.S. Government and 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
objective of each Series is 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.
Each of the Corporate Bond, Limited Maturity Bond and U.S. Government Funds
may utilize repurchase agreements on an overnight basis wherein a Fund may
acquire a debt instrument for a short period, subject to the obligation of the
seller to repurchase and the Fund to resell such debt instrument at a fixed
price. These Funds will enter into repurchase agreements only with (i) banks
which are members of the Federal Reserve System and insured by the FDIC, or
(ii) securities dealers (if permitted to do so under the Investment Company Act
of 1940) who are members of a national securities exchange or market makers in
governmental securities--in either case, only where the debt instrument subject
to the repurchase agreement is a U.S. Treasury or agency obligation. For a
discussion of Global Aggressive Bond Fund's investment in repurchase
agreements, see page . If the other party to the repurchase agreement is not a
bank as described above, the Fund, in order to protect its interest in the
collateral, will either take physical possession of the security through its
custodian bank, or receive written confirmation of the purchase and a custodial
or safekeeping receipt from a third party, or will be recorded as the owner of
the collateral on the Federal Reserve book-entry system. In all such
repurchase agreements, the purchase price for the security will be at or below
the market price at the time of purchase. Such repurchase agreements may
subject a Fund to the risk that it may not be able to liquidate the securities
immediately upon the insolvency of the other party. To the extent that the
proceeds from any sale upon a default in the obligation to repurchase were less
than the repurchase price, the Fund would suffer a loss. In addition, the law
is unsettled regarding the rights of Corporate Bond, Limited Maturity Bond,
U.S. Government and Global Aggressive Bond Funds if the financial institution
which is a party to the repurchase agreement petitions for bankruptcy or
otherwise becomes subject to the United States Bankruptcy Code. As a result,
under these circumstances, there may be restrictions on a Fund's ability to
sell the collateral and the Fund could suffer a loss. In the opinion of the
Investment Manager, such risks are not material. Corporate Bond, Limited
Maturity Bond and U.S. Government Funds will not purchase securities on margin
or engage in short sales of securities. These are not fundamental policies and
may be changed without stockholder approval.
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 of the Funds expects that it 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. 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.
Corporate Bond, Limited Maturity Bond, U.S. Government and Global
Aggressive Bond 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 of Class A
shares of Corporate Bond Fund for the last three fiscal years was as follows:
1994 - 204%; 1993 - 157%; and 1992 - 61%. The portfolio turnover rate of Class
A shares of U.S. Government Fund for the last three fiscal years was as
follows: 1994 - 220%; 1993 - 153%; and 1992 - 157%. The portfolio turnover
rate of Class B shares of the Corporate Bond Fund and U.S. Government Fund for
the period October 19, 1993 (date of inception) to December 30, 1993 is 164%
and 114%, respectively, and for the fiscal year 1994 was 204% and 220%,
respectively. Portfolio turnover rates for the Limited Maturity Bond and
Global Aggressive Bond Funds are not yet available as these Funds did not begin
operations until January 17, 1995 and June 1, 1995, respectively. 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 each of the
Funds were replaced within a period of one year.
2
<PAGE> 61
Each of the Funds may borrow money from banks as a temporary measure for
emergency purposes, or to facilitate redemption requests. Such borrowings may
be collateralized with Fund assets, subject to restrictions.
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. The Fund will attempt to achieve this
investment objective by investing primarily in a diversified portfolio of upper
medium to high-grade debt securities, primarily those issued by U.S. and
Canadian corporations. In addition, the Fund may invest in securities which
are obligations of or guaranteed by the U.S. Government or any of its agencies.
Other than securities issued by Canadian corporations, the Fund will not
invest in securities of foreign corporations. The Fund will also not invest in
securities issued by foreign governments except that it reserves the right to
purchase securities which are obligations of, or guaranteed by, the Dominion of
Canada or provinces thereof, in an amount not to exceed 25% of the portfolio
(exclusive of U.S. Government and government agency issues) at the time of
purchase. Canadian securities would not be purchased if subject to the foreign
interest equalization tax and unless payable in U.S. currency.
At least 90% of the Fund portfolio at time of purchase will consist of U.S.
Government and government agency issues; U.S. or Canadian corporations' debt
securities which have a rating at the time of purchase of A or higher as
determined by Moody's Investors Service, Inc. or Standard & Poor's Corporation;
and, subject to the 25% limitation above, securities which are obligations of
(or guaranteed by) the Dominion of Canada or provinces thereof. Included in
such 90% may be convertible bonds or bonds with warrants attached which may be
purchased by the Fund if such bond issues are rated A or higher at the time of
purchase. Moody's Bond Record indicates that bonds which are rated A possess
many favorable investment attributes and are to be considered as upper medium
grade obligations. Standard & Poor's Bond Guide states that A rated bonds have
a strong capacity to pay principal and interest, although they are somewhat
more susceptible to adverse effects of changes in circumstances and economic
conditions. The Fund may invest up to 10% of its assets in fixed income
securities rated Baa by Moody's or BBB by Standard & Poor's, and the Fund may
continue to hold such a security whose rating drops below Baa or BBB, although
such holdings shall at no time exceed 5% of the net assets of this Fund. 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.
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 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. 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 fall
within the 5-7 year range; however, the Fund's dollar weighted average maturity
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 Standard & Poor's 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 Standard & Poor's. 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 Standard & Poor's 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.
3
<PAGE> 62
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 Standard & Poor's 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.
Other than Yankee CD's and securities issued by Canadian corporations, the
Fund will not invest in securities of foreign corporations. The Fund will not
invest in securities issued by foreign governments except that it reserves the
right to purchase securities which are obligations of, or guaranteed by, the
Dominion of Canada or provinces thereof, in an amount which is less than 25% of
the portfolio (exclusive of U.S. Government and government agency issues) at
the time of purchase. 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. 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, certificate of
indebtedness, notes and bonds issued by the Treasury or by agencies or
instrumentalities of the U.S. Government.
The Fund may invest in investment grade 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.
MBSs have been referred to as "derivatives" because the performance of MBSs is
dependent upon and derived from underlying securities. The Fund will hold less
than 25% of its net assets in MBSs, including CMOs and mortgage pass-through
securities.
CMOs may be issued in a variety of classes. The Fund 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.
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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.
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, U.S. Government securities, or
other appropriate high grade liquid debt obligations equal in value to
commitments for such when issued securities.
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. If the deposits of the Fund in a depository institution are not
fully insured by the FDIC, the Fund will analyze the credit quality of the
issuing institution prior to making any such deposit and will retain a record
of that analysis.
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.
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. 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. Upon receipt, principal payments
will be used by the Fund to purchase additional GNMA certificates or other U.S.
Government securities. The Fund will not invest in any stripped mortgage
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backed securities or in any collateralized mortgage obligations ("CMO") or real
estate mortgage investment conduits ("REMIC").
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 GNMA funds, 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. 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.
GLOBAL AGGRESSIVE BOND FUND
The investment objective of the Global Aggressive Bond Fund is to seek high
current income. Capital appreciation is a secondary objective. The Fund,
under normal circumstances, invests substantially all of its assets in debt
securities of issuers in the United States, developed foreign countries and
emerging markets. For purposes of its investment objective, Global Aggressive
Bond Fund considers an emerging country to be any country whose economy and
market the World Bank or United Nations considers to be emerging or developing.
The Fund may also invest in debt securities traded in any market, of companies
that derive 50% or more of their total revenue from either goods or services
produced in such emerging countries and emerging markets or sales made in such
countries. Determinations as to eligibility will be made by Lexington
Management Corporation, (the "Sub-Adviser") and MFR Advisors, Inc. ("MFR"),
based on publicly available information and inquiries made to the companies.
It is possible in the future that sufficient numbers of emerging country or
emerging market debt securities would be traded on securities markets in
industrialized countries so that a major portion, if not all, of the
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Fund's assets would be invested in securities traded on such markets, although
such a situation is unlikely at present.
Currently, investing in many of the emerging countries and emerging
markets is not feasible or may involve political risks. Accordingly, the
Sub-Adviser currently intends to consider investments only in those countries
in which it believes investing is feasible. The list of acceptable countries
will be reviewed by the Sub-Adviser and MFR and approved by the Board of
Directors of Income Fund on a periodic basis and any additions or deletions
with respect to such list will be made in accordance with changing economic and
political circumstances involving such countries.
SELECTION OF DEBT INVESTMENTS. In determining the appropriate distribution
of investments among various countries and geographic regions for the Global
Aggressive Bond Fund, the Sub-Adviser and MFR ordinarily consider the following
factors: prospects for relative economic growth among the different countries
in which the Fund may invest; expected levels of inflation; government policies
influencing business conditions; the outlook for currency relationships; and
the range of the individual investment opportunities available to international
investors.
Although Global Aggressive Bond Fund values assets daily in terms of U.S.
dollars, the Fund does not intend to convert holdings of foreign currencies
into U.S. dollars on a daily basis. Global Aggressive Bond Fund will do so
from time to time, and investors should be aware of the costs of currency
conversion. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference ("spread") between
the prices at which they are buying and selling various currencies. Thus, a
dealer may offer to sell a foreign currency to the Global Aggressive Bond Fund
at one rate, while offering a lesser rate of exchange should the Fund desire to
sell that currency to the dealer.
Global Aggressive Bond Fund may invest in the following types of money
market instruments (i.e., debt instruments with less than 12 months remaining
until maturity) denominated in U.S. dollars or other currencies: (a)
obligations issued or guaranteed by the U.S. or foreign governments, their
agencies, instrumentalities or municipalities; (b) obligations of international
organizations designed or supported by multiple foreign governmental entities
to promote economic reconstruction or development; (c) finance company
obligations, corporate commercial paper and other short-term commercial
obligations; (d) bank obligations (including certificates of deposit, time
deposits, demand deposits and bankers' acceptances), subject to the restriction
that the Fund may not invest 25% or more of its total assets in bank
securities; (e) repurchase agreements with respect to the foregoing; and (f)
other substantially similar short-term debt securities with comparable
characteristics.
SAMURAI AND YANKEE BONDS. Subject to its respective fundamental investment
restrictions, Global Aggressive Bond Fund may invest in yen-denominated bonds
sold in Japan by non-Japanese issuers ("Samurai bonds"), and may invest in
dollar-denominated bonds sold in the United States by non-U.S. issuers ("Yankee
bonds"). It is the policy of Global Aggressive Bond Fund to invest in Samurai
or Yankee bond issues only after taking into account considerations of quality
and liquidity, as well as yield.
COMMERCIAL BANK OBLIGATIONS. For the purposes of Global Aggressive Bond
Fund's investment policies with respect to bank obligations, obligations of
foreign branches of U.S. banks and of foreign banks are obligations of the
issuing bank and may be general obligations of the parent bank. Such
obligations, however, may be limited by the terms of a specific obligation and
by government regulation. As with investment in non-U.S. securities in
general, investments in the obligations of foreign branches of U.S. banks and
of foreign banks may subject Global Aggressive Bond Fund to investment risks
that are different in some respect from those of investments in obligations of
domestic issuers. Although Global Aggressive Bond Fund typically will acquire
obligations issued and supported by the credit of U.S. or foreign banks having
total assets at the time of purchase in excess of $1 billion, this $1 billion
figure is not a fundamental investment policy or restriction of the Fund. For
the purposes of calculation with respect to the $1 billion figure, the assets
of a bank will be deemed to include the assets of its U.S. and non-U.S.
branches.
REPURCHASE AGREEMENTS, REVERSE REPURCHASE AGREEMENTS AND ROLL TRANSACTIONS.
Although repurchase agreements carry certain risks not associated with direct
investments in securities, Global Aggressive Bond Fund intends to enter into
repurchase agreements only with banks and broker/dealers believed by the
Sub-Adviser and MFR to present minimal credit risks in accordance with
guidelines approved by Income Fund's Board of Directors. The Sub-Adviser and
MFR will review and monitor the creditworthiness of such institutions,
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and will consider the capitalization of the institution, the Sub-Adviser and
MFR's prior dealings with the institution, any rating of the institution's
senior long-term debt by independent rating agencies and other relevant
factors.
Global Aggressive Bond Fund will invest only in repurchase agreements
collateralized at all times in an amount at least equal to the repurchase price
plus accrued interest. To the extent that the proceeds from any sale of such
collateral upon a default in the obligation to repurchase were less than the
repurchase price, the Global Aggressive Bond Fund would suffer a loss. If the
financial institution which is party to the repurchase agreement petitions for
bankruptcy or otherwise becomes subject to bankruptcy or other liquidation
proceedings there may be restrictions on Global Aggressive Bond Fund's ability
to sell the collateral and the Fund could suffer a loss. However, with respect
to financial institutions whose bankruptcy or liquidation proceedings are
subject to the U.S. Bankruptcy Code, the Fund intends to comply with provisions
under such Code that would allow the immediate resale of such collateral.
Global Aggressive Bond Fund will not enter into a repurchase agreement with a
maturity of more than seven days if, as a result, more than 15% of the value of
its total net assets would be invested in such repurchase agreements and other
illiquid investments and securities for which no readily available market
exists.
Global Aggressive Bond Fund may enter into reverse repurchase agreements.
A reverse repurchase agreement is a borrowing transaction in which the Fund
transfers possession of a security to another party, such as a bank or
broker/dealer, in return for cash, and agrees to repurchase the security in the
future at an agreed upon price, which includes an interest component. Global
Aggressive Bond Fund also may engage in "roll" borrowing transactions which
involve the Fund's sale of fixed income securities together with a commitment
(for which the Fund may receive a fee) to purchase similar, but not identical,
securities at a future date. Global Aggressive Bond Fund will maintain, in a
segregated account with a custodian, cash, U.S. government securities or other
liquid, high grade debt securities in an amount sufficient to cover its
obligation under "roll" transactions and reverse repurchase agreements.
BORROWING. Global Aggressive Bond Fund is prohibited from borrowing money
in order to purchase securities. Global Aggressive Bond Fund may borrow up to
5% of its total assets for temporary or emergency purposes other than to meet
redemptions. Any borrowing by Global Aggressive Bond Fund may cause greater
fluctuation in the value of its shares than would be the case if the Fund did
not borrow.
SHORT SALES. Global Aggressive Bond Fund is authorized to make short sales
of securities, although it has no current intention of doing so. A short sale
is a transaction in which the Fund sells a security in anticipation that the
market price of that security will decline. Global Aggressive Bond Fund may
make short sales as a form of hedging to offset potential declines in long
positions in securities it owns and in order to maintain portfolio flexibility.
Global Aggressive Bond Fund only may make short sales "against the box." In
this type of short sale, at the time of the sale, Global Aggressive Bond Fund
owns the security it has sold short or has the immediate and unconditional
right to acquire the identical security at no additional cost.
In a short sale, the seller does not immediately deliver the securities
sold and does not receive the proceeds from the sale. To make delivery to the
purchaser, the executing broker borrows the securities being sold short on
behalf of the seller. The seller is said to have a short position in the
securities sold until it delivers the securities sold, at which time it
receives the proceeds of the sale. To secure its obligation to deliver
securities sold short, Global Aggressive Bond Fund will deposit in a separate
account with its custodian an equal amount of the securities sold short or
securities convertible into or exchangeable for such securities at no cost.
Global Aggressive Bond Fund could close out a short position by purchasing and
delivering an equal amount of the securities sold short, rather than by
delivering securities already held by the Fund, because the Fund might want to
continue to receive interest and dividend payments on securities in its
portfolio that are convertible into the securities sold short.
Global Aggressive Bond Fund might make a short sale "against the box" in
order to hedge against market risks when the Sub-Adviser and MFR believes that
the price of a security may decline, causing a decline in the value of a
security owned by the Fund or a security convertible into or exchangeable for
such security, or when the Sub-Adviser and MFR want to sell the security the
Fund owns at a current attractive price, but also wishes to defer recognition
or gain or loss for federal income tax purposes and for purposes of satisfying
certain tests applicable to regulated investment companies under the Internal
Revenue Code of 1986, as amended (the "Code"). In such case, any future losses
in Global Aggressive Bond Fund's long position should be reduced by a gain in
the short position. Conversely, any gain in the long position should be
reduced by a loss in the short
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position. The extent to which such gains or losses in the long position are
reduced will depend upon the amount of the securities sold short relative to
the amount of the securities Global Aggressive Bond Fund owns, either directly
or indirectly, and, in the case where a Fund owns convertible securities,
changes in the investment values or conversion premiums of such securities.
There will be certain additional transaction costs associated with short sales
"against the box," but Global Aggressive Bond Fund will endeavor to offset
these costs with income from the investment of the cash proceeds of short
sales.
ILLIQUID SECURITIES. Global Aggressive Bond Fund may invest up to 15% of
total net assets in illiquid securities. Securities may be considered illiquid
if Global Aggressive Bond Fund cannot reasonably expect to receive
approximately the amount at which the Fund values such securities within seven
days. The sale of illiquid securities, if they can be sold at all, generally
will require more time and result in higher brokerage charges or dealer
discounts and other selling expenses than will the sale of liquid securities,
such as securities eligible for trading on U.S. securities exchanges or in the
over-the-counter markets. Moreover, restricted securities, which may be
illiquid for purposes of this limitation often sell, if at all, at a price
lower than similar securities that are not subject to restrictions on resale.
With respect to liquidity determinations generally, Income Fund's Board of
Directors has the ultimate responsibility for determining whether specific
securities, including restricted securities pursuant to Rule 144A under the
Securities Act of 1933, are liquid or illiquid. Income Fund's Board has
delegated the function of making day-to-day determinations of liquidity to the
Investment Manager in accordance with procedures approved by Income Fund's
Board of Directors. The Investment Manager takes into account a number of
factors in reaching liquidity decisions, including, but not limited to: (i)
the frequency of trades and quotes; (ii) the number of dealers and potential
purchasers; (iii) the number of dealers that have undertaken to make a market
in the security; and (iv) the nature of the security and how trading is
effected (e.g., the time needed to sell the security, how offers are solicited
and the mechanics of transfer). The Investment Manager will monitor the
liquidity of securities held by the Fund and report periodically on such
decisions to the Board of Directors.
DERIVATIVE INSTRUMENTS: OPTIONS, FUTURES AND FORWARD CURRENCY STRATEGIES
WRITING COVERED CALL OPTIONS. Global Aggressive Bond Fund may write (sell)
covered call options. Covered call options generally will be written on
securities and currencies which, in the opinion of the Sub-Adviser and MFR 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 for Global Aggressive
Bond Fund.
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 Sub-Adviser, MFR and Global Aggressive
Bond Fund believe that writing of covered call options is less risky than
writing uncovered or "naked" options, which the Fund will not do.
Portfolio securities or currencies on which call options may be written
will be purchased solely on the basis of investment considerations consistent
with the Fund's investment objectives. When writing a covered call option,
Global Aggressive Bond Fund in return for the premium gives up the opportunity
for profit from a price increase in the underlying security or currency above
the exercise price, and retains the risk of loss should the price of the
security or currency decline. Unlike one who owns securities or currencies not
subject to an option, Global Aggressive Bond Fund has no control over when it
may be required to sell the underlying securities or currencies, since the
option may be exercised at any time prior to the option's expiration. If a
call option which Global Aggressive Bond 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 or currency
during the option period. If the call option is exercised, Global Aggressive
Bond Fund will realize a gain or loss from the sale of the underlying security
or currency. Global Aggressive Bond Fund does not consider a security or
currency covered by a call option to be "pledged" as that term is used in the
Fund's fundamental investment policy which limits the pledging or mortgaging of
its assets.
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The premium which Global Aggressive Bond 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 or currency, the
relationship of the exercise price to such market price, the historical price
volatility of the underlying security or currency, and the length of the option
period. In determining whether a particular call option should be written on a
particular security or currency, the Sub-Adviser and MFR 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 Global
Aggressive Bond 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 Global
Aggressive Bond 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 or currency 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 or currency from
being called, or to permit the sale of the underlying security or currency.
Furthermore, effecting a closing transaction will permit Global Aggressive Bond
Fund to write another call option on the underlying security or currency with
either a different exercise price, expiration date or both. If Global
Aggressive Bond Fund desires to sell a particular security or currency 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 or currency. There is no assurance that Global Aggressive
Bond Fund will be able to effect such closing transactions at favorable prices.
If Global Aggressive Bond Fund cannot enter into such a transaction, it may be
required to hold a security or currency that it might otherwise have sold, in
which case it would continue to be at market risk with respect to the security
or currency.
Global Aggressive Bond 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 Global Aggressive Bond 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 or currencies at the time the options are written.
From time to time, Global Aggressive Bond Fund may purchase an underlying
security or currency for delivery in accordance with the exercise of an option,
rather than delivering such security or currency from its portfolio. In such
cases, additional costs will be incurred.
Global Aggressive Bond 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 or currency, 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 or currency owned by the
Fund.
WRITING COVERED PUT OPTIONS. Global Aggressive Bond Fund 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 or
currency 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.
Global Aggressive Bond Fund would write put options only on a covered
basis, which means that the Fund would either (i) set aside cash, U.S.
government securities or other liquid, high-grade debt 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 or currency 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.
Global Aggressive Bond Fund generally would write covered put options in
circumstances where the Sub-Adviser and MFR wish to purchase the underlying
security or currency for the Fund's portfolio at a price lower than the current
market price of the security or
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currency. In such event, Global Aggressive Bond 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 Global Aggressive Bond
Fund also would receive interest on debt securities or currencies 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 or
currency would decline below the exercise price less the premiums received.
PURCHASING PUT OPTIONS. Global Aggressive Bond Fund may purchase put
options. As the holder of a put option, Global Aggressive Bond Fund would have
the right to sell the underlying security or currency at the exercise price at
any time during the option period. Global Aggressive Bond Fund may enter into
closing sale transactions with respect to such options, exercise them or permit
them to expire.
Global Aggressive Bond Fund may purchase a put option on an underlying
security or currency ("protective put") owned by the Fund as a hedging
technique in order to protect against an anticipated decline in the value of
the security or currency. Such hedge protection is provided only during the
life of the put option when Global Aggressive Bond Fund, as the holder of the
put option, is able to sell the underlying security or currency at the put
exercise price regardless of any decline in the underlying security's market
price or currency's exchange value. For example, a put option may be purchased
in order to protect unrealized appreciation of a security or currency when the
Sub-Adviser and MFR deem it desirable to continue to hold the security or
currency 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 or currency eventually is sold.
Global Aggressive Bond Fund also may purchase put options at a time when
the Fund does not own the underlying security or currency. By purchasing put
options on a security or currency it does not own, Global Aggressive Bond Fund
seeks to benefit from a decline in the market price of the underlying security
or currency. If the put option is not sold when it has remaining value, and if
the market price of the underlying security or currency remains equal to or
greater than the exercise price during the life of the put option, Global
Aggressive Bond 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 or currency 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 Global Aggressive Bond Fund when purchasing a put
option will be recorded as an asset in the Fund' 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 Global Aggressive Bond 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 or currency upon the exercise of the option.
PURCHASING CALL OPTIONS. Global Aggressive Bond Fund may purchase call
options. As the holder of a call option, Global Aggressive Bond Fund would
have the right to purchase the underlying security or currency at the exercise
price at any time during the option period. Global Aggressive Bond 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 Global
Aggressive Bond Fund for the purpose of acquiring the underlying security or
currency for its portfolio. Utilized in this fashion, the purchase of call
options would enable Global Aggressive Bond Fund to acquire the security or
currency at the exercise price of the call option plus the premium paid. At
times, the net cost of acquiring the security or currency in this manner may be
less than the cost of acquiring the security or currency directly. This
technique also may be useful to Global Aggressive Bond 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 or currency itself, Global Aggressive Bond Fund is
partially protected from any unexpected decline in the market price of the
underlying security or currency 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.
Global Aggressive Bond Fund also may purchase call options on underlying
securities or currencies 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 Global
Aggressive Bond Fund's current return. For example, where Global Aggressive
Bond Fund has written a call option on an underlying security or currency
having a current market value below the price at which such
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security or currency 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 or currency 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
Global Aggressive Bond Fund's total assets at the time of purchase.
Global Aggressive Bond Fund may attempt to accomplish objectives
similar to those involved in using Forward Contracts (defined below), as
described in the Prospectus, by purchasing put or call options on currencies. A
put option gives Global Aggressive Bond Fund as purchaser the right (but not
the obligation) to sell a specified amount of currency at the exercise price
until the expiration of the option. A call option gives Global Aggressive Bond
Fund as purchaser the right (but not the obligation) to purchase a specified
amount of currency at the exercise price until its expiration. The Fund might
purchase a currency put option, for example, to protect itself during the
contract period against a decline in the dollar value of a currency in which it
holds or anticipates holding securities. If the currency's value should
decline against the dollar, the loss in currency value should be offset, in
whole or in part, by an increase in the value of the put. If the value of the
currency instead should rise against the dollar, any gain to Global Aggressive
Bond Fund would be reduced by the premium it had paid for the put option. A
currency call option might be purchased, for example, in anticipation of, or to
protect against, a rise in the value against the dollar of a currency in which
the Fund anticipates purchasing securities.
Currency options may be either listed on an exchange or traded
over-the-counter ("OTC options"). Listed options are third-party contracts
(i.e., performance of the obligations of the purchaser and seller is guaranteed
by the exchange or clearing corporation), and have standardized strike prices
and expiration dates. OTC options are two-party contracts with negotiated
strike prices and expiration dates. The Securities and Exchange Commission
("SEC") staff considers OTC options and their cover to be illiquid securities.
Global Aggressive Bond Fund will not purchase an OTC option unless the Fund
believes that daily valuations for such options are readily obtainable. OTC
options differ from exchange-traded options in that OTC options are transacted
with dealers directly and not through a clearing corporation (which guarantees
performance). Consequently, there is a risk of non-performance by the dealer.
Since no exchange is involved, OTC options are valued on the basis of a quote
provided by the dealer. In the case of OTC options, there can be no assurance
that a liquid secondary market will exist for any particular option at any
specific time.
INTEREST RATE AND CURRENCY FUTURES CONTRACTS. Global Aggressive Bond Fund
may enter into interest rate or currency futures contracts ("Futures" or
"Futures Contracts") as a hedge against changes in prevailing levels of
interest rates or currency exchange rates in order to establish more definitely
the effective return on securities or currencies held or intended to be
acquired by the Fund. Global Aggressive Bond Fund's hedging may include sales
of Futures as an offset against the effect of expected increases in interest
rates or currency exchange rates, and purchases of Futures as an offset against
the effect of expected declines in interest rates or currency exchange rates.
Global Aggressive Bond Fund will not enter into Futures Contracts for
speculation and the Fund only will 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 and currency
Futures exchanges in the United States are the Board of Trade of the City of
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 Global Aggressive Bond Fund's exposure to interest rate
and currency exchange rate fluctuations, the Fund may be able to hedge exposure
more effectively and at a lower cost through using Futures Contracts.
Global Aggressive Bond 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.
An interest rate 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 or currency) 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.
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Although Futures Contracts typically require future delivery of and payment
for financial instruments or currencies, 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 or currency and the same delivery date. If the offsetting purchase
price is less than the original sale price, Global Aggressive Bond 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, Global
Aggressive Bond 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 Global Aggressive Bond Fund will be able to
enter into an offsetting transaction with respect to a particular Futures
Contract at a particular time. If Global Aggressive Bond 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.
As an example of an offsetting transaction, the contractual obligations
arising from the sale of one Futures Contract of October Deutschemarks on an
exchange may be fulfilled at any time before delivery under the Futures
Contract is required (i.e., on a specified date in October, the "delivery
month") by the purchase of another Futures Contract of October Deutschemarks on
the same exchange, in such instance, the difference between the price at which
the Futures Contract was sold and the price paid for the offsetting purchase,
after allowance for transaction costs, represents the profit or loss to Global
Aggressive Bond Fund.
Persons who trade in Futures Contracts may be broadly classified as
"hedgers" and "speculators." Hedgers, such as Global Aggressive Bond Fund,
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 or
fluctuations in the value of the currency in which the securities or
obligations are denominated. 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 or currency exchange rates.
Global Aggressive Bond 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 or currencies that the
Fund owns, or Futures Contracts will be purchased to protect the Fund against
an increase in the price of securities or currencies 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 Global Aggressive Bond Fund, in a segregated account with the
Fund' custodian, in order to initiate Futures trading and to maintain the Fund'
open positions in Futures Contracts. A margin deposit made when the Futures
Contract is entered into ("initial margin") is intended to assure Global
Aggressive Bond 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 Global
Aggressive Bond Fund. In computing daily net asset values, the Fund will mark
to market the current value of its open Futures Contracts. Global Aggressive
Bond Fund expects to earn interest income on its margin deposits.
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 or currencies in Global
Aggressive Bond 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 or currencies, including
technical influences in Futures trading; and differences between the financial
instruments being hedged and the instruments underlying the standard Futures
Contracts available for
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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, Global Aggressive Bond 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 Global Aggressive Bond 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, U.S. government securities and other
liquid, high grade debt securities equal in value to the current value of the
underlying instrument less margin deposit.
In the case of a Futures contract sale, Global Aggressive Bond 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 Global
Aggressive Bond 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 or currencies 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, currencies 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.
As an alternative to purchasing call and put options on Futures, Global
Aggressive Bond Fund may purchase call and put options on the underlying
securities or currencies 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 Global Aggressive Bond
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
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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.
FORWARD CURRENCY CONTRACTS AND OPTIONS ON CURRENCY. A forward currency
contract ("Forward Contract") is an obligation, generally arranged with a
commercial bank or other currency dealer, to purchase or sell a currency
against another currency at a future date and price as agreed upon by the
parties. Global Aggressive Bond Fund may accept or make delivery of the
currency at the maturity of the Forward Contract or, prior to maturity, enter
into a closing transaction involving the purchase or sale of an offsetting
contract. Global Aggressive Bond Fund will utilize Forward Contracts only on a
covered basis. Global Aggressive Bond Fund engages in forward currency
transactions in anticipation of, or to protect itself against, fluctuations in
exchange rates. Global Aggressive Bond Fund might sell a particular foreign
currency forward, for example, when it holds bonds denominated in a foreign
currency but anticipates, and seeks to be protected against, a decline in the
currency against the U.S. dollar. Similarly, Global Aggressive Bond Fund might
sell the U.S. dollar forward when it holds bonds denominated in U.S. dollars
but anticipates, and seeks to be protected against, a decline in the U.S.
dollar relative to other currencies. Further, Global Aggressive Bond Fund
might purchase a currency forward to "lock in" the price of securities
denominated in that currency which it anticipates purchasing.
Forward Contracts are transferable in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A Forward Contract generally has no deposit requirement, and no
commissions are charged at any stage for trades. Global Aggressive Bond Fund
will enter into such Forward Contracts with major U.S. or foreign banks and
securities or currency dealers in accordance with guidelines approved by Income
Fund's Board of Directors.
Global Aggressive Bond Fund may enter into Forward Contracts either with
respect to specific transactions or with respect to the Fund's portfolio
positions. The precise matching of the Forward Contract amounts and the value
of specific securities generally will not be possible because the future value
of such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the Forward
Contract is entered into and the date it matures. Accordingly, it may be
necessary for Global Aggressive Bond Fund to purchase additional foreign
currency on the spot (i.e., cash) market (and bear the expense of such
purchase) if the market value of the security is less than the amount of
foreign currency the Fund is obligated to deliver and if a decision is made to
sell the security and make delivery of the foreign currency. Conversely, it
may be necessary to sell on the spot market some of the foreign currency Global
Aggressive Bond Fund is obligated to deliver. The projection of short-term
currency market movements is extremely difficult, and the successful execution
of a short-term hedging strategy is highly uncertain. Forward Contracts
involve the risk that anticipated currency movements will not be predicted
accurately, causing Global Aggressive Bond Fund to sustain losses on these
Contracts and transaction costs. Forward Contracts may be considered illiquid
investments.
At or before the maturity of a Forward Contract requiring the Fund to sell
a currency, Global Aggressive Bond Fund either may sell a portfolio security
and use the sale proceeds to make delivery of the currency or retain the
security and offset its contractual obligation to deliver the currency by
purchasing a second contract pursuant to which the Fund will obtain, on the
same maturity date, the same amount of the currency which it is obligated to
deliver. Similarly, Global Aggressive Bond Fund may close out a Forward
Contract requiring it to purchase a specified currency by entering into a
second Contract entitling it to sell the same amount of the same currency on
the maturity date of the first Contract. Global Aggressive Bond Fund would
realize a gain or loss as a result of entering into such an offsetting Forward
Contract under either circumstance to the extent the exchange rate or rates
between the currencies involved moved between the execution dates of the first
Contract and the offsetting Contract.
The cost to Global Aggressive Bond Fund of engaging in Forward Contracts
varies with factors such as the currencies involved, the length of the contract
period and the market conditions then prevailing. Because Forward Contracts
usually are entered into on a principal basis, no fees or commissions are
involved. The use of Forward Contracts does not eliminate fluctuations in the
prices of the underlying securities the Fund owns or intends to acquire, but it
does establish a rate of exchange in advance. In addition, while Forward
Contracts limit the risk of loss due to a decline in the value of the hedged
currencies, they also limit any potential gain that might result should the
value of the currencies increase. Although Forward Contracts presently are not
regulated by the
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CFTC, the CFTC, in the future, may assert authority to regulate Forward
Contracts. In that event, Global Aggressive Bond Fund's ability to utilize
Forward Contracts in the manner set forth above may be restricted.
INTEREST RATE AND CURRENCY SWAPS. Global Aggressive Bond 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 Sub-Adviser, MFR and Global Aggressive Bond Fund 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. Global Aggressive Bond 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 Investors
Service, Inc. ("Moody's") or Standard & Poor's Ratings Group ("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 Sub-Adviser and MFR.
If a counterparty defaults, Global Aggressive Bond 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.
RISK FACTORS
EMERGING COUNTRIES. Global Aggressive Bond Fund 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.
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, the Fund
could lose its entire investment in any such country.
An investment in Global Aggressive Bond Fund is subject to the political
and economic risks associated with investments in emerging 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 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 Global
Aggressive Bond 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 Global Aggressive Bond 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. Global Aggressive Bond 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 Global
Aggressive Bond 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
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confiscation of property owned by individuals and entities foreign to such
country and could cause the loss of Global Aggressive Bond Fund's investment in
those countries.
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 Global Aggressive Bond Fund.
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. Global Aggressive Bond 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.
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 securities held by
Global Aggressive Bond 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 Global Aggressive Bond 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 Sub-Adviser and MFR 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.
CURRENCY FLUCTUATIONS. Because Global Aggressive Bond Fund, under normal
circumstances, may invest substantial portions of its total assets in the
securities of foreign issuers which are denominated in foreign currencies, the
strength or weakness of the U.S. dollar against such foreign currencies will
account for part of the Fund' investment performance. A decline in the value
of any particular currency against the U.S. dollar will cause a decline in the
U.S. dollar value of Global Aggressive Bond Fund's holdings of securities
denominated in such currency and, therefore, will cause an overall decline in
the Fund's net asset value and any net investment income and capital gains to
be distributed in U.S. dollars to shareholders of the Fund.
The rate of exchange between the U.S. dollar and other currencies is
determined by several factors including the supply and demand for particular
currencies, central bank efforts to support particular currencies, the movement
of interest rates, the pace of business activity in certain other countries and
the U.S., and other economic and financial conditions affecting the world
economy.
Although Global Aggressive Bond Fund values its assets daily in terms of
U.S. dollars, the Fund does not intend to convert holdings of foreign
currencies into U.S. dollars on a daily basis. Global Aggressive Bond Fund
will do so from time to time, and investors should be aware of the costs of
currency conversion. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference ("spread") between
the prices at which they are buying and selling various currencies. Thus, a
dealer may offer to sell a foreign currency to Global Aggressive Bond Fund at
one rate, while offering a lesser rate of exchange should the Fund desire to
sell that currency to the dealer.
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
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periods when assets of Global Aggressive Bond Fund are uninvested and no return
is earned thereon. The inability of Global Aggressive Bond 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 Global Aggressive Bond
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 Sub-Adviser and MFR will consider such
difficulties when determining the allocation of the Fund's assets, although the
Sub-Adviser and MFR do not believe that such difficulties will have a material
adverse effect on the Fund's portfolio trading activities.
NON-U.S. WITHHOLDING TAXES. Global Aggressive Bond Fund's income and gains
from foreign issuers may be subject to non-U.S. withholding or other taxes,
thereby reducing the Fund's income and gains.
SECURITY TAX-EXEMPT FUND
The investment objective of Tax-Exempt Fund is to obtain as high a level of
interest income exempt from federal income taxes as is consistent with
preservation of stockholders' capital. Tax-Exempt Fund attempts to achieve its
objective by investing primarily in debt securities, the interest on which is
exempt from federal income taxes under the Internal Revenue Code including the
alternative minimum tax. There is no assurance that Tax-Exempt 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 Tax-Exempt 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.
Tax-Exempt 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 Investors Service (Aaa, Aa, A, Baa)
or Standard & Poor's Corporation (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,
Tax-Exempt 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 Tax-Exempt 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 dated June 1, 1995. 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
Standard & Poor's. 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 characteristics and in fact have speculative
characteristics as well." The ratings of Moody's and Standard & Poor's
represent their respective opinions of the qualities of the securities they
undertake to rate and such ratings are general and are not absolute standards
of quality.
Although Tax-Exempt 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, Tax-Exempt 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
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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 Tax-Exempt 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 Standard & Poor's or Prime-1 by Moody's, corporate obligations
rated AAA or AA by Standard & Poor's 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. Tax-Exempt 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.
Repurchase agreements are agreements by which a purchaser (e.g., Tax-Exempt
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. The resale price reflects the purchase price plus an agreed upon
market rate of interest which is unrelated to the coupon rate or maturity of
the purchased security. Under the Investment Company Act of 1940, repurchase
agreements may be considered loans by the Tax-Exempt Fund. Income earned by
the Fund on repurchase agreements is not exempt from federal income tax even if
the transaction involves municipal securities. If the seller should default on
its obligation to repurchase the securities, the Fund may experience delay or
difficulties in exercising its rights to realize upon the securities held as
collateral and might incur a loss if the value of the securities should
decline. Tax-Exempt Fund also might incur disposition costs in connection with
liquidating the securities. Tax-Exempt 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
Appendix B to the prospectus for a further description of Moody's and Standard
& Poor's ratings relating to municipal securities. As noted earlier, when
Tax-Exempt Fund is in a temporary "defensive" position, there is no limit on
its investments in short-term municipal securities and taxable securities.
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. Industrial
development bonds which pay tax-exempt interest are in most cases revenue bonds
and do not generally carry the pledge of the full faith and credit of the
issuer of such bonds. The payment of the principal and interest on such
industrial development bonds depends solely on the ability of the user of the
facilities financed by the bonds to meet its financial obligations and the
pledge, if any, of real and personal property so financed as security for such
payment. Tax-Exempt Fund will not invest more than 5% of its net assets in
securities where the principal and interest are the responsibility of an
industrial user 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
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interest rates payable on new issues of municipal bonds. Should such interest
rates rise, the values of outstanding bonds, including those held in Tax-Exempt
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.
Tax-Exempt 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, Tax-Exempt 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 24.) 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. Tax-Exempt
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 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 Tax-Exempt
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, Tax-Exempt 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. Tax-Exempt Fund will also establish a
segregated account with its custodian bank in which it will maintain cash, U.S.
Government securities or other appropriate high grade liquid debt securities
equal in value to commitments for such when-issued or delayed delivery
securities. Tax-Exempt 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. Tax-Exempt 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
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for the municipal securities with puts generally is higher than the price which
otherwise would be paid for the municipal securities alone. Tax-Exempt 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 Tax-Exempt 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 Tax-Exempt 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 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
Tax-Exempt Fund.
Tax-Exempt 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 Tax-Exempt Fund will
limit its investments to "high quality" short-term securities. For short-term
municipal notes this includes ratings of AA or better by Standard & Poor's or
MIG 2 or better by Moody's; for municipal paper this includes A-2 or better by
Standard & Poor's or
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Prime-2 or better by Moody's. 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
Tax-Exempt 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.
Tax-Exempt 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 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 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 Investors Service, Inc., or A-1 or A-2 by
Standard & Poor's Corporation, or other corporate debt instruments rated Aaa or
Aa or better by Moody's or AAA or AA or better by Standard & Poor's, 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 Standard &
Poor's) by (i) any two nationally recognized statistical rating organizations
("NRSRO's") or, (ii) if rated by only one NRSRO, by that NRSRO, and whose
acquisition is approved or ratified by the Board of Directors; (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, and whose
acquisition is approved or ratified by the Board of Directors; 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.
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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.
REPURCHASE AGREEMENTS. 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.
The resale price is in excess of the purchase price and reflects an agreed upon
yield effective for the period of time the Fund's money is invested in the
security.
Repurchase transactions subject Cash Fund to the risks that if the seller
defaults, (i) the Fund may incur a loss if the value of the collateral securing
the repurchase agreement declines, or (ii) the Fund may incur disposition costs
in connection with liquidating the collateral. Additionally, there is the risk
that realization on the collateral may be delayed or limited in the event that
the bankruptcy proceedings are commenced by the seller. In the opinion of
management, the risk of loss is minimal, since the underlying security is, in
effect, collateral for the seller's obligation to pay under the repurchase
agreement. However, in the event of default, if the proceeds from the sale of
the underlying security were less than the amount of the repurchase obligation,
the Fund would suffer a loss to that extent. 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. Engaging in any repurchase
transaction will be subject to any rules or regulations of the Securities and
Exchange Commission or other applicable regulatory authorities. Repurchase
agreements are considered to be loans by the Fund under the Investment Company
Act of 1940.
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
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.
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.
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Procedures have been adopted by Cash Fund's Board of Directors to govern
the purchase and resale of Rule 144A Securities and the determination of the
liquidity of Rule 144A Securities purchased by the Fund for purposes of
compliance with Cash Fund's investment policies regarding illiquid securities.
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.
It is anticipated such value will remain constant due to the Fund's policy of
declaring 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 47.)
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 Global Aggressive Bond 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 Global Aggressive Bond 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).
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.
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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 Global Aggressive Bond Fund may, to the extent appropriate under its
investment program, purchase securities of companies engaged in such
activities, may enter into transactions in financial and index 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.
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 Global Aggressive Bond Fund.
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 Global
Aggressive Bond 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, the Fund may borrow money in amounts not exceeding 5%
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 may purchase securities of any
investment company if in compliance with the Investment Company Act of
1940; and Global Aggressive Bond Fund may purchase securities of another
investment company or investment trust, if purchased in the open market
and then only if no profit, other than the customary broker's commission,
results to a sponsor or dealer, or by merger or other reorganization.
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 may issue senior securities if in compliance with the Investment
Company Act of 1940; and Global Aggressive Bond Fund may issue senior
securities (as defined in the 1940 Act), if (a) the Fund may enter into
commitments to purchase securities in accordance with the Fund's
investment program, including reverse repurchase agreements, delayed
delivery and when-issued securities, which may be considered the issuance
of senior securities to the extent permitted under applicable regulations;
(b) the Fund may engage in transactions that may result in the issuance of
a senior security to the extent permitted under applicable regulations,
the interpretation of the 1940 Act or an exemptive order; (c) the Fund may
engage in short sales of securities to the extent permitted in its
investment program and other restrictions; (d) the purchase or sale of
futures contracts and related options shall not be considered to involve
the issuance of senior securities; and (e) subject to fundamental
restrictions, the Fund may borrow money as authorized by the 1940 Act.
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 Global Aggressive Bond Fund,
may not invest more than 15% of its total assets in illiquid securities.
25
<PAGE> 84
The Global Aggressive Bond Fund will not purchase securities on margin
except as provided below. The following investment policy of Global Aggressive
Bond Fund is not a fundamental policy and may be changed by a vote of a
majority of the Fund's Board of Directors without shareholder approval. Global
Aggressive Bond Fund may purchase and sell futures contracts and related
options under the following conditions: (a) the then current aggregate futures
market prices of financial instruments required to be delivered and purchased
under open futures contracts shall not exceed 30% of the Fund's total assets,
at market value; and (b) no more than 5% of the Fund's total assets, at market
value at the time of entering into a contract, shall be committed to margin
deposits in relation to futures contracts.
With respect to Fundamental Policy (1), the Global Aggressive Bond Fund has
entered into an undertaking with the Arkansas 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, the Arkansas
Securities Department permits a larger percentage of assets to be invested in
unseasoned issuers.
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.
TAX-EXEMPT FUND'S FUNDAMENTAL POLICIES
Tax-Exempt 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;
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;
8. Not to invest more than 5% of its total assets in securities of any one
issuer, except securities issued or guaranteed 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
26
<PAGE> 85
"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 22;
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 22;
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;
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;
27
<PAGE> 86
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 Director, Security Management
Company
WILLIS A. ANTON, JR., Director Partner, Classic Awning & Design. Prior to October 1991,
3616 Yorkway President, Classic Awning & Design. Prior to July 1989,
Topeka, Kansas 66604 Vice President, Kansas Canvas Products.
DONALD A. CHUBB, JR., Director President, Neon Tube Light Company, Inc.
605 SE 8th Street
Topeka, Kansas 66607
DONALD L. HARDESTY, Director President, Central Research Corporation
900 Bank IV 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
5500 SW 7th Street and Education)
Topeka, Kansas 66606
JEFFREY B. PANTAGES,* Director Senior Vice President and Chief Investment Officer,
Security Benefit Life Insurance Company, and President,
Chief Investment Officer and Director, Security
Management Company. Prior to April 1992, Managing
Director, Prudential Life.
</TABLE>
28
<PAGE> 87
<TABLE>
<CAPTION>
NAME, ADDRESS AND POSITIONS HELD WITH THE FUNDS PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
-------------------------------------------------------------------------------------------------------------------
<S> <C>
HAROLD G. WORSWICK,** Director Chairman of the Board, Emeritus, Wolfe's Camera Shops,
3101 Burlingame Road Inc. Prior to October 1991, Chairman of the Board,
Topeka, Kansas 66611 Wolfe's Camera Shops, Inc.
JAMES R. SCHMANK, Vice President and Treasurer Senior Vice President, Treasurer, Chief Fiscal Officer
and Director, Security Management Company; Vice
President, Security Benefit Group, Inc. Prior to
September 1988, Certified Public Accountant, Arthur Young
& Company, Kansas City, Missouri.
JANE A. TEDDER, Vice President Vice President and Senior Portfolio Manager, Security
Management Company
MARK E. YOUNG, Vice President Vice President - Operations, Security Management Company.
Prior to December 1987, Vice President of Audit, Security
Benefit Group, Inc. Prior to June 1987, Certified Public
Accountant, Touche Ross and Co.
AMY J. LEE, Secretary Assistant Counsel, Security Benefit Group, Inc. Prior to
June 1987, Staff Attorney, Security Benefit Group, Inc.
BRENDA M. LUTHI, Assistant Treasurer and Assistant Assistant Vice President, Assistant Treasurer and
Secretary Assistant Secretary, Security Management Company. Prior
to August 1988, Senior Accountant, Security Management
Company.
</TABLE>
*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 of the accounting
functions for the Funds.
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. 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 , for positions held by such persons with the
Investment Manager. Messrs. Cleland and Young and Ms. Lee hold identical
offices for the Distributor (Security Distributors, Inc.) of Corporate Bond,
Limited Maturity Bond, U.S. Government, Global Aggressive Bond and Tax-Exempt
Funds. Mr. Schmank is Vice President of the Distributor and Ms. Luthi is
Treasurer of the Distributor. Messrs. Cleland and Schmank are also directors
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 $1,000 and a fee of
$100 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 $100 per hour 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, 1994, and the aggregate compensation paid to each of the
directors during calendar year 1994 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.
29
<PAGE> 88
<TABLE>
<CAPTION>
PENSION OR RETIREMENT
AGGREGATE BENEFITS ACCRUED AS
COMPENSATION PART OF FUND EXPENSES ESTIMATED TOTAL
--------------------------- ------------------------- ANNUAL COMPENSATION FROM
NAME OF DIRECTOR TAX- TAX- BENEFITS THE SECURITY FUND
OF THE FUND INCOME EXEMPT CASH INCOME EXEMPT CASH UPON COMPLEX, INCLUDING
FUND FUND FUND FUND FUND FUND RETIREMENT THE FUNDS
-------------------- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Willis A. Anton, Jr. $1,431 $1,431 $1,431 $0 $0 $0 $0 $17,175
Donald A. Chubb, Jr. 1,081 1,081 1,081 0 0 0 0 12,975
John D. Cleland 0 0 0 0 0 0 0 0
Donald L. Hardesty 1,081 1,081 1,081 0 0 0 0 12,975
Penny A. Lumpkin 1,476 1,442 1,455 0 0 0 0 17,474
Mark L. Morris, Jr. 1,060 1,060 1,060 0 0 0 0 12,725
Jeffrey B. Pantages 0 0 0 0 0 0 0 0
Harold G. Worswick* 0 0 0 0 0 0 0 17,422
John J. Schaff 350 350 350 0 0 0 0 4,200
</TABLE>
*Each of the Security Income, Tax-Exempt and Cash Funds have accrued deferred
compensation in the amount of $1,431 for Mr. Worswick as of December 31,
1994.
On January 31, 1995, the Funds' officers and directors (as a group)
beneficially owned 39,569, 0, 2,171, and 30,560 of Class A shares of Corporate
Bond, Limited Maturity Bond, U.S. Government, Tax-Exempt Funds, respectively,
which represented approximately .291%, 0%, .122% and 1.160% of the total
outstanding Class A shares on that date. Cash Fund's officers and directors
(as a group) beneficially owned 225,333 shares which represented approximately
..432% of the total outstanding shares on January 31, 1995.
HOW TO PURCHASE SHARES
As discussed below, shares of Corporate Bond, Limited Maturity Bond, U.S.
Government, Global Aggressive Bond and Tax-Exempt 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, GLOBAL
AGGRESSIVE BOND AND TAX-EXEMPT FUNDS
Security Distributors, Inc. (the "Distributor"), 700 SW Harrison, Topeka,
Kansas, a wholly-owned subsidiary of the Investment Manager, is principal
underwriter for Corporate Bond, Limited Maturity Bond, U.S. Government, Global
Aggressive Bond and Tax-Exempt 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 36.) 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, Global Aggressive
Bond and Tax-Exempt Funds offer two classes of shares:
30
<PAGE> 89
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.
CLASS A SHARES
Class A shares of Corporate Bond, Limited Maturity Bond, U.S. Government,
Global Aggressive Bond and Tax-Exempt Funds are offered at net asset value plus
an initial sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE
---------------------------------------------------------------
APPLICABLE PERCENTAGE
AMOUNT OF PURCHASE PERCENTAGE OF PERCENTAGE OF NET REALLOWABLE TO
AT OFFERING PRICE OFFERING PRICE AMOUNT INVESTED DEALERS
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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)
</TABLE>
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
34. 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 Tax-Exempt 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 FUND'S CLASS A DISTRIBUTION PLAN
As discussed in the prospectus, each of Corporate Bond, Limited Maturity
Bond, U.S. Government and Global Aggressive Bond Funds has a Distribution Plan
for its Class A shares pursuant to Rule 12b-1 under the Investment Company Act
of 1940. The 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
31
<PAGE> 90
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.
The Plan became effective on August 15, 1985, and was renewed by the
directors of Income Fund on February 3, 1995, as to each of Corporate Bond and
U.S. Government Funds. The Plan was adopted with respect to Limited Maturity
Bond and Global Aggressive Bond Funds on October 21, 1994 and February 3, 1995,
respectively. The 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
Class A shareholders vote to terminate the Plan. Any agreement relating to the
implementation of the Plan terminates automatically if it is assigned. The
Plan 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 Pantages (directors of the Fund), Messrs. Young
and Schmank, Ms. Tedder, Ms. Lee and Ms. Luthi (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 and Global Aggressive
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 Global Aggressive Bond 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 and U.S.
Government Funds to the Distributor under the Plan for the year ended December
31, 1994, totaled $272,586. (The Limited Maturity Bond and Global Aggressive
Bond Funds did not begin operating until January 17, 1995 and June 1, 1995,
respectively, and as a result, paid no distribution fees in 1994.)
Approximately $160,239 of this amount was paid as a service fee to
broker/dealers, $40,627 was spent on advertising, and $116,457 was spent on
promotions. 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,
Global Aggressive Bond and Tax-Exempt 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.
32
<PAGE> 91
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:
<TABLE>
<CAPTION>
Year Since Purchase Payment Was Made Contingent Deferred Sales Charge
------------------------------------ --------------------------------
<S> <C>
First 5%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth and Following 0%
</TABLE>
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
Tax-Exempt 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.
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, Global
Aggressive Bond and Tax-Exempt 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 Tax-Exempt Funds on
July 23, 1993 and was renewed on February 3, 1994. The Plan was adopted with
respect to Limited Maturity Bond and Global Aggressive Bond Funds on October
21, 1994 and February 3, 1995, respectively. 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.
33
<PAGE> 92
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, U.S. Government and Tax-Exempt Funds to the Distributor under the Plan
for the year ended December 31, 1994, totaled $30,407. (The Limited Maturity
Bond and Global Aggressive Bond Funds did not begin operating until January 17,
1995 and June 1, 1995, respectively and as a result, paid no distribution fees
in 1994.) 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 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 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, including reallowance of up to the
entire sales charge, 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. The Distributor may also
provide financial assistance to dealers in connection with advertising. 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.
34
<PAGE> 93
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 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 $5,000,000 of such shares during that year.
For aggregate sales in excess of $5,000,000 but less than $10,000,000 the
marketing allowance will range from 0.15% to 0.60%. For sales of $10,000,000
or more, the allowance may range from 0.20% to 0.60%. For the calendar year
ended December 31, 1994, Legend Equities Corporation and Financial Network
Investment Corporation received marketing allowances in the amount of $29,383
and $2,991 respectively.
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 6660l-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) Wire federal funds to:
Bank IV of Topeka
Attention Security Distributors, Inc.
Topeka, Kansas 66603
Include investor's name and the account number.
(c) For initial investment, send a completed investment application to
the Fund at the above address.
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,
Global Aggressive Bond and Tax-Exempt 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
35
<PAGE> 94
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.
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,
Global Aggressive Bond and Tax-Exempt 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, Global
Aggressive Bond or Tax-Exempt 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, Global
Aggressive Bond or Tax-Exempt 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
36
<PAGE> 95
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 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 34. A Systematic Withdrawal form may
be obtained from the Funds.
INVESTMENT MANAGEMENT
Security Management Company (the "Investment Manager"), 700 Harrison
Street, Topeka, Kansas, has served as investment adviser to Income Fund,
Tax-Exempt Fund and Cash Fund, respectively, since September 14, 1970, October
7, 1983 and June 23, 1980. The current Investment Advisory Contracts for
Income Fund, Tax-Exempt 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 3, 1995. The Investment
Manager also acts as investment adviser to Security Equity Fund, Security
Growth and Income Fund, Security Ultra Fund and SBL Fund. Security Benefit
Group, Inc. ("SBG") owns all of the stock of the Investment Manager. 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 mutual life insurance company with over $13 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 Global Aggressive Bond 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 Tax-Exempt and Cash Funds 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 retained Lexington Management Corporation (the
"Sub-Adviser") to furnish certain advisory services to Global Aggressive Bond
Fund pursuant to a Sub-Advisory Agreement, to be effective May 1, 1995.
Pursuant to this agreement, the Sub-Adviser furnishes investment advisory,
statistical and research facilities, supervises and arranges for the purchase
and sale of securities on behalf of Global Aggressive 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 Board of
Directors of Security Income Fund and the Investment Manager. For such
services, the Investment Manager pays the Sub-Adviser an amount equal to .35%
of the average net assets of Global Aggressive 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.
The Sub-Adviser is a wholly-owned subsidiary of Piedmont Management
Company, Inc., a diversified financial services holding company which is
organized as a Delaware corporation, the majority of the common stock of which
is owned by descendents of Lunsford Richardson, Sr. and their spouses, trusts
and other related entities. The Sub-Adviser was established in 1938 and
currently manages over $3.8 billion in assets.
The Sub-Adviser has entered into a sub-advisory agreement with MFR
Advisors, Inc. ("MFR") to provide investment and economic research services to
Global Aggressive Bond Fund, subject to the control and supervision of the
Board of Directors of Security Income Fund. For such services, the Sub-Adviser
pays MFR an
37
<PAGE> 96
amount equal to .15% of the average net assets of Global Aggressive Bond Fund,
computed on a daily basis and payable monthly.
MFR is a subsidiary of Maria Fiorini Ramirez, Inc. ("Ramirez") which was
established in August of 1992 to provide global economic consulting, investment
advisory and broker-dealer services. Ramirez is the successor firm to Maria
Ramirez Capital Consultants, Inc. ("MRCC"). MRCC was formed in April 1990 as a
subsidiary of John Hancock Freedom Securities Corporation and offered in-depth
economic consulting services to clients. MFR currently acts as sub-adviser to
the Lexington Ramirez Global Income Fund and also serves as an institutional
manager for private clients.
The most restrictive expense limitation currently imposed by state
securities regulation, of which the Investment Manager is aware, provides that
the aggregate annual expenses of an investment company shall not exceed 2 1/2%
of the first $30 million of the average net assets, 2% of the next $70 million
of the average net assets, and 1 1/2% of the remaining average net assets of
the investment company for any fiscal year, determined at least monthly. For
this limitation, "aggregate annual expenses" include management fees, but
exclude interest, taxes, brokerage commissions, extraordinary expenses (such as
litigation) and distribution fees.
For its services, 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. Government, Tax-Exempt and
Cash Fund's net assets and .75% of the average daily closing value of Global
Aggressive Bond Fund's net assets, each computed on a daily basis and payable
monthly. During the fiscal years ended December 31, 1994, 1993 and 1992, the
Funds paid the following amounts to the Investment Manager for its services:
1994 - $560,388; 1993 - $638,559; and 1992 - $501,895 for Income Fund; 1994 -
$146,469; 1993 - $156,664; and 1992 - $127,395 for Tax-Exempt Fund; and 1994 -
$285,251; 1993 - $238,198; and 1992 - $239,197 for Cash Fund. For the years
ended December 31, 1994, 1993 and 1992, 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: 1994 - $11,684; 1993 - $10,364; and 1992 - $7,376;
and Corporate Bond Fund: 1994 - $4,276. For the years ended December 31, 1993
and 1992, expenses incurred by Cash Fund exceeded 1% of the average net assets
and accordingly, the Investment Manager reimbursed Cash Fund in the following
amounts: 1993 - $9,761; and 1992 - $15,578. Figures for Limited Maturity Bond
and Global Aggressive Bond Funds are not available as these Funds did not begin
operations until January 17, 1995 and June 1, 1995, respectively. For year
ended December 31, 1994, expenses incurred by Tax-Exempt Fund exceeded 1% of
the average net assets and accordingly, the investment manager reimbursed
Tax-Exempt Fund $1,505.
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 and
Income Fund, Tax-Exempt Fund and Cash Fund, dated March 27, 1987, October 7,
1983 and June 23, 1980, respectively, expire on April 1, 1996, May 1, 1996 and
June 1, 1996. 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 and
Tax-Exempt Funds and .045% of the average net assets of Cash and Global
Aggressive Bond Funds, calculated daily and payable monthly. In addition, the
Investment Manager receives, with respect to
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<PAGE> 97
Global Aggressive Bond Fund, an annual fee equal to the greater of .10% of its
average daily net assets or (i) $30,000 in the year ending April 29, 1996; (ii)
$45,000 in the year ending April 29, 1997; or (iii) $60,000 thereafter. During
the fiscal years ended December 31, 1994, 1993 and 1992, the Funds paid the
following amounts for administrative services: 1994 - $100,870; 1993 -
$114,940; and 1992 - $90,341 for Income Fund; 1994 - $26,364; 1993 - $28,199;
and 1992 - $22,931 for Tax-Exempt Fund; and 1994 - $25,703; 1993 - $21,674; and
1992 - $21,493 for Cash Fund. Figures for Limited Maturity Bond and Global
Aggressive Bond Funds are not available as these Funds did not begin operations
until January 17, 1995 and June 1, 1995, respectively.
The Investment Manager has arranged for the Sub-Adviser to provide certain
administrative services to the Global Aggressive Bond Fund, pursuant to a
Sub-Administrative Agreement, dated September 10, 1993, as amended effective
May 1, 1995. Pursuant to this agreement the Sub-Adviser provides certain
accounting functions, the pricing function and related recordkeeping for Global
Aggressive Bond Fund and certain other mutual funds for which the Investment
Manager acts as fund administrator. For such services the Investment Manager
pays the Sub-Adviser annual compensation which consists of an annual base fee
of $9,000 per fund (or series of a fund) per contract year, plus the greater of
(i) a minimum fee of $47,000 per fund (or series of a fund) per contract year
or (ii) an amount equal to the following percentages of the aggregate average
daily net assets of the funds/series:
<TABLE>
<CAPTION>
Average Daily Net Assets of the Combined Funds/Series Compensation
----------------------------------------------------- ------------
<S> <C>
Less than $500 million . . . . . . . . . . . . . . . . . . .07%, plus
$500 million but less than $1 billion . . . . . . . . . . . .045%, plus
$1 billion or more . . . . . . . . . . . . . . . . . . . . .025%
</TABLE>
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, 1994, 1993, and 1992, the Funds paid
the following amounts for transfer agency services: 1994 - $122,198; 1993 -
$115,313; and 1992 - $90,728 for Income Fund; 1994 - $18,811; 1993 - $19,044;
and 1992 - $15,908 for Tax-Exempt Fund; and 1994 - $139,429; 1993 - $140,300;
and 1992 - $156,117 for Cash Fund. Such fees were not paid for Limited
Maturity Bond and Global Aggressive Bond Funds as these Funds did not begin
operations until January 17, 1995 and June 1, 1995.
The total expenses of the Corporate Bond, U.S. Government, Tax-Exempt and
Cash Funds for the fiscal year ended December 31, 1994 were $1,064,728;
$102,912; $247,287; and $550,410; respectively. The expense ratio for fiscal
year 1994 was 1.01% and 1.85%, respectively of the average net assets of Class
A and B shares of the Corporate Bond Fund and 1.10% and 1.85%, respectively, of
the average net assets of Class A and Class B shares of U.S. Government Fund.
The expense ratio for the fiscal year was .82%, 2.00% and .96% respectively, of
the average net assets of the Class A and Class B shares of Tax-Exempt Fund and
Cash Fund. The expense figures quoted are net of expense reimbursements.
Expense figures for the Limited Maturity Bond and Global Aggressive Bond Funds
are not yet available as these Funds did not begin operations until January 17,
1995 and June 1, 1995, respectively.
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<PAGE> 98
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
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Jeffrey B. Pantages Director President, Chief Investment Officer and Director
John D. Cleland President and Director Senior Vice President and Director
James R. Schmank Vice President and Treasurer Senior Vice President, Treasurer, Chief Fiscal
Officer and Director
Jane A. Tedder Vice President Vice President and Senior Portfolio Manager
Mark E. Young Vice President Vice President-Operations
Amy J. Lee Secretary Secretary
Brenda M. Luthi Assistant Treasurer and Assistant Assistant Vice President, Assistant Treasurer and
Secretary Assistant Secretary
</TABLE>
PORTFOLIO MANAGEMENT
Corporate Bond, Limited Maturity Bond, U.S. Government, Tax-Exempt and Cash
Funds will be managed by the Fixed Income Team of the Investment Manager
consisting of John Cleland, Chief Investment Strategist, Jane Tedder, Tom
Swank, Steve Bowser and Elaine Miller. Jane A. Tedder, Vice President and
Senior Portfolio Manager of the Investment Manager has day-to-day
responsibility for managing Corporate Bond, Limited Maturity Bond, Tax-Exempt
and Cash Funds. Steve Bowser, Assistant Vice President and Portfolio Manager
of the Investment Manager, has day-to-day responsibility for managing U.S.
Government Fund.
Ms. Tedder has 20 years of experience in the investment field and has
managed the Corporate Bond, Tax-Exempt and Cash Funds since 1983 and the
Limited Maturity Bond Fund since its inception in 1995. Prior to joining the
Investment Manager in 1983, she served as Vice President and Trust Officer of
Douglas County Bank in Kansas. Ms. Tedder earned a bachelor's degree in
education from Oklahoma State University and advanced diplomas from National
Graduate Trust School, Northwestern University, and Stonier Graduate School of
Banking, Rutgers University. She is a Chartered Financial Analyst. Her
investment strategy is to manage portfolios to provide attractive long-term
total return, the greatest part of which will be provided by a consistent
income stream.
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.
Global Aggressive Bond Fund is managed by an investment management team of
the Sub-Adviser and MFR. Denis P. Jamison and Maria Fiorini Ramirez are the
lead managers.
Denis P. Jamison, C.F.A., Senior Vice President, Director Fixed Income
Strategy of the Sub-Adviser is responsible for fixed-income portfolio
management. He is a member of the New York Society of Security Analysts. Mr.
Jamison has more than 20 years investment experience. Prior to joining the
Sub-Adviser in 1981, Mr. Jamison had spent nine years at Arnold Bernhard &
Company, an investment counseling and financial services organization. At
Bernhard, he was a Vice President supervising the security analyst staff and
managing investment portfolios. He is a specialist in government, corporate
and municipal bonds. Mr. Jamison is a graduate of the City College of New York
with a B.A. in Economics.
Maria Fiorini Ramirez, President and Chief Executive Officer of MFR, began
her career as a credit analyst with American Express International Banking
Corporation in 1968. In 1972, she moved to Banco Nazionale De Lavoro in New
York. The following year, she started a ten year association with Merrill
Lynch, serving as Vice President and Senior Money Market Economist. She joined
Becker Paribas in 1984 as Vice President and Senior Money Market Economist
before joining Drexel Burnham Lambert that same year as First Vice President
and Money Market Economist. She was promoted to Managing Director of Drexel in
1986. Ms. Ramirez established MFR in August, 1992, where she is known in
international financial, banking and economic circles for her
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assessment of the interaction between global economic policy and political
trends and their effect on investments. Ms. Ramirez holds a B.A. in Business
Administration/Economics from Pace University.
From April, 1990 to August 1992, Ms. Ramirez was the President and Chief
Executive Officer of Maria Ramirez Capital Consultants, Inc., a subsidiary of
John Hancock Freedom Securities Corporation.
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 the Investment Manager, serves as the principal
underwriter for shares of Corporate Bond, Limited Maturity Bond, U.S.
Government, Global Aggressive Bond and Tax-Exempt 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
LS Variable Annuity, the Parkstone Variable Annuity Account, The Parkstone
Advantage Fund 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.
The Distributor received gross underwriting commissions on sales of Class A
shares of $244,043, $506,142, and $689,621 for Income Fund and $64,008,
$148,622, and $121,107 for Tax-Exempt Fund and retained net underwriting
commissions of $48,307, $92,668, and $125,834 for Income Fund and $13,009,
$15,186, and $23,668 for Tax-Exempt Fund for the fiscal years ended December
31, 1994, 1993 and 1992, 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
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<PAGE> 100
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. It is 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 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 Funds' transaction, it is believed that the procedure generally contributes
to better overall execution of the Fund's 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. No brokerage commissions were paid by the Funds for the years
ended December 31, 1994, 1993 and 1992.
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, 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 or, if there has been no sale that day, at the mean between
bid and asked price. If a mean cannot be determined, then the
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securities are valued at the best available current bid price. All other
securities, held by Corporate Bond, Limited Maturity Bond, U.S. Government and
Global Aggressive Bond 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 Tax-Exempt
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 Tax-Exempt 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. Tax-Exempt 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.
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 22, and "Dividends and
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<PAGE> 102
Taxes," page 47. 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 Tax-Exempt 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 Tax-Exempt 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 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 and Corporate Bond, Limited Maturity
Bond, U.S. Government and Tax-Exempt Funds offer redemption by check on Class A
shares only. Global Aggressive Bond Fund does not offer redemption by check.
If blank checks are requested on the Check Writing Request form, the Fund will
make a supply available. Such checks for Corporate Bond, Limited Maturity
Bond, U.S. Government and Tax-Exempt Funds may be drawn payable to the order of
any payee (not to cash) in any amount of $250, if the account value is $1,000
or more. Such checks for Cash Fund may be drawn in any amount of $100 or more.
Checks of each of the Funds 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 Fund shares
fluctuates 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
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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 54.)
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.
Tax-Exempt 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.
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 8:00 a.m. and 5:00 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. 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
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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 44.
HOW TO EXCHANGE SHARES
Pursuant to arrangements with the Distributor (which also acts as principal
underwriter for Security Equity, Growth and Income and Ultra Funds),
stockholders of the Funds may exchange their shares for shares of another of
the Funds, Security Equity Fund, Security Growth and Income Fund or Security
Ultra Fund (the "Security 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 Security Funds 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
Security Fund(s) 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 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 47.) 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 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
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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 8:00 a.m. and 5:00 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
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,
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) derive in each taxable year less than 30% of its gross
income from the sale or other disposition of certain assets held less than
three months (namely (a) stock or securities, (b) options, futures and forward
contracts (other than those on foreign currencies), and (c) foreign currencies
(including options, futures, and forward contracts on such currencies) not
directly related to a Fund's principal business of investing in stocks or
securities (or options and futures with respect to stocks and securities));
(iii) 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 (iv) 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.
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<PAGE> 106
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,
Global Aggressive Bond and Tax-Exempt Funds to pay dividends from net
investment income monthly and 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 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 Tax-Exempt 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.
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<PAGE> 107
Stockholders will report as long-term capital gains income any realized net
long-term capital gains in excess of any capital loss carryover which is
distributed to them, and designated by the Fund as a capital gain dividend
whether received in cash or reinvested in additional shares, and regardless of
the period of time such shares have been owned by the stockholder. 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.
Tax-Exempt 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 Tax-Exempt 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.
Tax-Exempt Fund will inform stockholders annually as to the portion of that
year's distributions from the Fund which constituted "exempt-interest
dividends."
To the extent that Tax-Exempt 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 Tax-Exempt 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 long-term capital gain
or loss if the shares have been held for more than one year. 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 Tax-Exempt 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 Tax-Exempt 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 Tax-Exempt Fund's
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<PAGE> 108
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 Global Aggressive Bond 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.
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.
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.
FOREIGN CURRENCY TRANSACTIONS. Under the Code, gains or losses
attributable to fluctuations in exchange rates which occur between the time a
Fund accrues income or other receivables or accrues expenses or other
liabilities denominated in a foreign currency and the time that Fund actually
collects such receivables or pays
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such liabilities generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of debt securities denominated in a foreign currency
and on disposition of certain futures contracts, forward contracts and options,
gains or losses attributable to fluctuations in the value of foreign currency
between the date of acquisition of the security or contract and the date of
disposition also are treated as ordinary gain or loss. These gains or losses,
referred to under the Code as "Section 988" gains or losses, may increase or
decrease the amount of a Fund's investment company taxable income to be
distributed to its shareholders as ordinary income.
ORIGINAL ISSUE DISCOUNT. Debt securities purchased by a Fund (such as zero
coupon bonds) may be treated for U.S. federal income tax purposes as having
original issue discount. Original issue discount is treated as interest for
federal income tax purposes and can generally be defined as the excess of the
stated redemption price at maturity over the issue price. Original issue
discount, whether or not cash payments actually are received by a Fund, is
treated for federal income tax purposes as income earned by the Fund, and
therefore is subject to the distribution requirements of the Code. Generally,
the amount of original issue discount included in the income of the Fund each
year is determined on the basis of a constant yield to maturity which takes
into account the compounding of accrued interest.
In addition, debt securities may be purchased by a Fund at a discount which
exceeds the original issue discount remaining on the securities, if any, at the
time the Fund purchased the securities. This additional discount represents
market discount for income tax purposes. Treatment of market discount varies
depending upon the maturity of the debt security. Generally, in the case of
any debt security having a fixed maturity date of more than one year from the
date of issue and having market discount, the gain realized on disposition will
be treated as ordinary income to the extent it does not exceed the accrued
market discount on the security (unless the Fund elects for all its debt
securities having a fixed maturity date of more than one year from the date of
issue to include market discount in income in tax years to which it is
attributable). Generally, market discount accrues on a daily basis. For any
debt security having a fixed maturity date of not more than one year from the
date of issue, special rules apply which may require in some circumstances the
ratable inclusion of income attributable to discount at which the bond was
acquired as calculated under the Code. A Fund may be required to capitalize,
rather than deduct currently, part or all of any net direct interest expense on
indebtedness incurred or continued to purchase or carry any debt security
having market discount (unless the Fund makes the election to include market
discount currently).
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 Tax-Exempt
Fund shares. (See "Municipal Securities," page .) 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 Tax-Exempt 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 capital stock of 1,000,000,000 shares of $1.00
par value and currently issues its shares in four series, Corporate Bond Fund,
Limited Maturity Bond Fund, U.S. Government Fund and Global Aggressive Bond
Fund, each of which has authority to issue 400,000,000 shares, 200,000,000
shares, 200,000,000 shares and 200,000,000 shares, respectively. 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. Tax-Exempt and Cash Funds have not issued shares in
any additional series at the present time. Tax-Exempt and Cash Funds have
authorized capital stock of 1,000,000,000 shares and 5,000,000,000 shares,
respectively, each of $0.10 par value.
Each of Corporate Bond, Limited Maturity Bond, U.S. Government, Global
Aggressive Bond and Tax-Exempt Funds currently issues two classes of shares
which participate proportionately based on their relative net asset
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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, Global
Aggressive Bond, Tax-Exempt 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.
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, Tax-Exempt Fund and Cash Fund. Chase
Manhattan Bank, N.A., 1211 Avenue of the Americas, New York, New York, acts as
custodian for the portfolio securities of Global Aggressive Bond Fund,
including those held by foreign banks and foreign securities depositories which
qualify as eligible foreign custodians under the rules adopted by the
Securities and Exchange Commission. Security Management Company 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 Tax-Exempt Fund and average annual total return
and aggregate total return for Tax-Exempt 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, 1994 was 4.72%.
Cash Fund's effective (or compound) yield for the same period was 4.83%.
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 Tax-Exempt 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:
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6
YIELD = 2 ((A-B + 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.
Tax-Exempt 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, 1994, the yield for the Class A
shares of the following Funds was 7.13% for the Corporate Bond Fund, 6.88% for
the U.S. Government Fund, and 5.40% for Tax-Exempt Fund. For the same period,
the tax equivalent yield for the Class A shares of Tax-Exempt Fund assuming a
15% income tax rate and a 28% income tax rate, respectively, was 6.35% and
7.50%.
For the 30-day period ended December 31, 1994, the yield for the Class B
shares of the following Funds was 7.05% for the Corporate Bond Fund, 6.45% for
the U.S. Government Fund, and 4.44% for Tax-Exempt Fund. For the same period,
the tax equivalent yield for the Class B shares of Tax-Exempt Fund assuming a
15% income tax rate and a 28% income tax rate, respectively, was 5.22% and
6.17%.
Yield figures for the Limited Maturity Bond and Global Aggressive Bond
Funds are not yet available as these Funds did not begin operations until
January 17, 1995 and June 1, 1995, respectively.
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 Tax-Exempt 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, 1994, the average
annual total return for Class A shares of the Corporate Bond Fund was -12.63%,
6.03% and 8.20%, respectively. For the 1-year period ended December 31, 1994,
the average total return for Class B shares of Corporate Bond Fund was -13.58%.
For the period October 19, 1993 (date of inception) to December 31, 1994, the
total return for Class B shares of the Corporate Bond Fund was -12.86%.
For the 1- and 5-year periods ended December 31, 1994, and the period of
August 15, 1985 (date of inception) to December 31, 1994, the average annual
total return for Class A shares of the U.S. Government Fund was -11.02%, 5.48%
and 7.13%, respectively. For the 1-year period ended December 31, 1994, the
average total return for Class B shares of U.S. Government Fund was -12.04%.
For the period October 19, 1993 (date of inception) to December 31, 1994, the
average annual total return for Class B shares of the U.S. Government Fund was
- -11.09%.
For the 1-, 5- and 10-year periods ended December 31, 1994, the average
annual total return for Class A shares of Tax-Exempt Fund was -12.66%, 4.55%
and 6.71%, respectively. For the 1-year period ended December 31, 1994, the
average total return for Class B shares of Tax-Exempt Fund was -13.99%. For
the period October 19, 1993 (date of inception) to December 31, 1994, the
average annual total return for Class B shares of Tax-Exempt Fund was -11.63%.
Average annual total return figures are not yet available for the Limited
Maturity Bond and Global Aggressive Bond Funds as these Funds did not begin
operations until January 17, 1995 and June 1, 1995, respectively.
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The aggregate total return for Income and Tax-Exempt 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 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 Tax-Exempt Fund calculated as
described above for the period from December 31, 1978, for the Corporate Bond
Fund, from August 15, 1985 for the U.S. Government Fund and from December 12,
1983 for Tax-Exempt Fund, through December 31, 1994 was 292.4%, 100.3% and
114.5%, 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 Tax-Exempt Fund calculated as
described above for the period October 19, 1993 through December 31, 1994 was
- -13.50%, -12.04% and -13.99%, respectively. These figures reflect 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.
Total return figures for the Limited Maturity Bond and Global Aggressive
Bond Funds are not yet available as these Funds did not begin operations until
January 17, 1995 and June 1, 1995, respectively.
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, Global Aggressive
Bond 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, Global
Aggressive Bond 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 is available to act as custodian for the plans
on a fee basis. For 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
54
<PAGE> 113
$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.
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, Global Aggressive Bond 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 Tax-Exempt Fund's investment
objective is to obtain a high level of interest income exempt from federal
taxes, Tax-Exempt 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,
Global Aggressive Bond 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
plus $15 to cover the fees for opening and maintaining the account for the
first year.
An individual may make a contribution to an IRA each year of up to the
lesser of $2,000 or 100% of earned income under current tax law. If
contributions are also made to an IRA of a nonworking spouse, the maximum is
raised to a total for the two accounts of $2,250; the taxpayers may choose how
to allocate the $2,250 between the accounts, as long as no more than $2,000 is
contributed to either account. If both husband and wife work, each may
establish his or her own IRA and contribute up to the maximum allowed for
individuals.
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 an 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.
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, Global Aggressive Bond 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.
55
<PAGE> 114
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, 1994, and the unaudited financial
statements for Limited Maturity Bond Fund for the period January 17, 1995 (date
of inception) to June 30, 1995, are incorporated herein by reference. A copy
of the Annual Report and the unaudited financial statements for Limited
Maturity Bond Fund is provided to every person requesting the Statement of
Additional Information.
TAX-EXEMPT VS. TAXABLE INCOME
The following table shows the approximate taxable yields for individuals
that are equivalent to tax-exempt yields using the 1995 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>
1995
0 - 39,000 0 - 23,350 15.0% 5.88 7.06 8.24 9.41 10.59 11.76 12.94 14.12
39,000 - 94,250 23,350 - 56,550 28.0 6.94 8.33 9.72 11.11 12.50 13.89 15.28 16.67
94,250 - 143,600 56,550 - 117,950 31.0 7.25 8.70 10.14 11.59 13.04 14.49 15.94 17.39
143,600 - 256,500 117,950 - 256,500 36.0 7.81 9.38 10.94 12.50 14.06 15.63 17.19 18.75
256,500 and over 256,500 and over 39.6 8.28 9.93 11.59 13.25 14.90 16.56 18.21 19.87
</TABLE>
56
<PAGE> 115
APPENDIX A
CLASS A SHARES OF CORPORATE BOND, LIMITED MATURITY BOND, U.S. GOVERNMENT,
GLOBAL AGGRESSIVE BOND AND TAX-EXEMPT 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, Global Aggressive Bond and Tax-Exempt 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, Global Aggressive Bond Fund or
Tax-Exempt 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, Global Aggressive Bond Fund, Tax-Exempt 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,
Global Aggressive Bond or Tax-Exempt 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, Global
Aggressive Bond Fund, Tax-Exempt 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.
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.
REINSTATEMENT PRIVILEGE
Stockholders who redeem their Class A shares of Corporate Bond Fund,
Limited Maturity Bond Fund, U.S. Government Fund, Global Aggressive Bond Fund
or Tax-Exempt Fund have a one-time privilege (1) to reinstate
57
<PAGE> 116
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.
58
<PAGE> 117
SECURITY INCOME FUND
STATEMENT OF NET ASSETS
JUNE 30, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET CURRENT
AMOUNT LIMITED MATURITY BOND SERIES COST VALUE YIELD
--------- ---------------------------- ---- ------ -------
<S> <C> <C> <C> <C> <C>
CORPORATE BONDS
ALUMINUM 4.4%
$148,000 Alcan Aluminum, 9.20% - 2001 $151,044 $165,390 8.2%
BANKS 3.9%
150,000 Nationsbank, 6.50% - 2003 131,738 146,250 6.7%
ELECTRIC COMPANIES 8.1%
150,000 Consolidated Edison Company, 6.625% - 2002 137,578 149,250 6.7%
150,000 Texas Utilites Electric Company, 7.375% - 2001 141,917 154,125 7.2%
------- -------
279,495 303,375
ELECTRIC & GAS COMPANIES 4.3%
150,000 Public Service Electric & Gas Company, 153,269 161,813 8.1%
8.75% - 1999
FINANCE 12.8%
150,000 Ford Motor Credit Company, 8.375% - 2000 150,094 160,313 7.8%
150,000 Household Finance Corporation, 8.00% - 2004 154,185 161,063 7.5%
150,000 International Lease Finance, 8.25% - 2000 149,692 159,375 7.8%
------- -------
453,971 480,751
GROCERY STORES 4.1%
150,000 Penn Traffic Company, 10.65% - 2004 148,500 155,813 10.3%
NATURAL GAS COMPANIES 4.4%
150,000 Vastar Resources, Inc., 8.75% - 2005 157,201 164,438 8.0%
PETROLEUM REFINING & PRODUCTS 4.5%
150,000 BP America, 8.75% - 2003 159,441 167,438 7.8%
RETAIL TRADE 7.0%
100,000 K-Mart Corporation, 8.125% - 2006 105,199 104,125 7.8%
150,000 Wal-Mart Stores, Inc., 7.50% - 2004 145,961 158,438 7.1%
------- -------
251,160 262,563
SANITARY SERVICES 4.2%
150,000 WMX Technologies, Inc., 8.25% - 1999 150,425 159,750 7.7%
</TABLE>
1
<PAGE> 118
SECURITY INCOME FUND
STATEMENT OF NET ASSETS
JUNE 30, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET CURRENT
AMOUNT LIMITED MATURITY BOND SERIES COST VALUE YIELD
--------- ---------------------------- ---- ------ -------
<S> <C> <C> <C> <C> <C>
CORPORATE BONDS (CONTINUED)
TOBACCO PRODUCTS 4.2%
$150,000 Phillip Morris Companies, Inc., 7.625% - 2002 $142,698 $156,750 7.3%
---------- ----------
TOTAL CORPORATE BONDS 61.9% 2,178,942 2,324,331
GOVERNMENT & GOVERNMENT AGENCY SECURITIES
CANADIAN GOVERNMENT AGENCIES 4.4%
150,000 Province of Quebec, 8.625% - 2005 151,997 166,125 7.8%
U.S. GOVERNMENT AGENCIES 18.0%
Federal Home Loan Bank,
100,000 7.17% - 2000 100,344 103,750 6.9%
150,000 7.69% - 1996 150,844 153,386 7.5%
100,000 Federal Home Loan Mortgage Corporation,
7.69% - 1996 100,375 102,285 7.5%
Federal National Mortgage Association,
150,000 7.05% - 1998 146,437 153,556 6.9%
150,000 8.50% - 2005 151,198 160,977 7.9%
---------- ----------
649,198 673,954
U.S. TREASURY 12.3%
U.S. Treasury Note
150,000 7.375% - 1997 150,906 154,872 7.1%
150,000 7.50% - 1997 150,937 153,713 7.3%
150,000 7.25% - 1998 151,078 154,866 7.0%
---------- ----------
452,921 463,451
---------- ----------
TOTAL GOVERNMENT & GOVERNMENT AGENCY SECURITIES
34.7% 1,254,116 1,303,530
---------- ----------
TOTAL INVESTMENTS 96.6% 3,433,058 3,627,861
CASH AND OTHER ASSETS, LESS LIABILITIES 3.4% 125,907 125,907
---------- ----------
TOTAL NET ASSETS - LIMITED MATURITY BOND SERIES 100.0% $3,558,965 $3,753,768
========== ==========
</TABLE>
2
<PAGE> 119
SECURITY INCOME FUND
BALANCE SHEET
JUNE 30, 1995
<TABLE>
<CAPTION>
LIMITED MATURITY
BOND SERIES
----------------
<S> <C>
Corporate bonds and government sponsored enterprises at market value
(identified cost $3,433,058) $3,627,861
Cash (including interest-bearing deposits) 41,339
Receivables:
Fund shares sold 39
Interest 82,424
Prepaid Expenses 3,935
Security Managment Company 0
Securities Sold 0
----------
Total assets $3,755,598
==========
Liabilities:
Payable for:
Fund shares redeemed $0
Securities Purchased 0
Other Liabilities:
Management fees 0
12b-1 distribution plan fees (Class A) 629
12b-1 distribution plan fees (Class B) 569
Custodian fees 0
Transfer fees 112
Administration fees 278
Professional fees 0
Miscellaneous 242
Taxes 0
----------
Total liabilities 1,830
Net assets:
Capital stock (200,000,000 shares authorized @ $1 par value for each 3,556,687
class)
Accumulated undistributed net investment income (loss) 1,434
Accumulated undistributed net realized loss on sale of investments 844
Net unrealized appreciation (depreciation) in value of investments 194,803
----------
Net assets applicable to outstanding shares of capital stock 3,753,768
Total liabilities and net assets ----------
$3,755,598
==========
CLASS "A" SHARES
Net asset value and redemption price per share ($3,062,396/289,287 shares
outstanding) $10.59
Sales charge 0.53
----------
Maximum offering price $11.12
==========
CLASS "B" SHARES
Net asset value and redemption price per share ($691,372/65,337 shares
outstanding) $10.58
==========
</TABLE>
3
<PAGE> 120
SECURITY INCOME FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD JANUARY 17, 1995 (DATE OF INCEPTION) TO JUNE 30, 1995
<TABLE>
<CAPTION>
LIMITED MATURITY
BOND SERIES
----------------
<S> <C>
Investment income:
Interest $104,701
Expenses:
Management fees 8,640
Transfer/maintenance fees 528
12b-1 distribution plan fees (Class A) 3,178
12b-1 distribution plan fees (Class B) 2,724
Administration fees 1,389
Custodian fees 0
Directors' fees 317
Professional fees 1,185
Registration fees 557
Other expense 470
--------
18,988
Reimbursement of expenses were voluntarily reduced by Investment Adviser (8,640)
--------
Total expenses 10,348
--------
Net investment income 94,353
Realized and unrealized gain (loss) on investments:
Realized gain (loss) on sale of investments:
Proceeds from sale of investments 50,625
Cost of investments sold 49,781
--------
Net realized gain (loss) 844
Unrealized appreciation (depreciation) of investments:
Beginning of period 0
End of period 194,803
--------
Unrealized appreciation (depreciation) of investments during the period 194,803
--------
Net gain (loss) on investments 195,647
--------
Net increase (decrease) in net assets resulting from operations $290,000
========
</TABLE>
4
<PAGE> 121
SECURITY INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD JANUARY 17, 1995 (DATE OF INCEPTION) TO JUNE 30, 1995
<TABLE>
<CAPTION>
LIMITED MATURITY
BOND SERIES
----------------
<S> <C>
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income $94,353
Net realized gain (loss) on investments 844
Unrealized appreciation (depreciation) of investments during the period 194,803
----------
Net increase in net assets resulting from operations 290,000
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A (a) (77,967)
Class B (b) (14,952)
Net realized gain on sale of investments
Class A (c) 0
Class B (d) 0
----------
Total distributions to shareholders (92,919)
CAPITAL SHARE TRANSACTIONS (e):
Proceeds from shares issued (Class A) 2,829,123
Proceeds from shares issued (Class B) 642,557
Dividends Reinvested (Class A) 76,643
Dividends Reinvested (Class B) 14,339
Cost of shares redeemed (Class A) (5,175)
Cost of shares redeemed (Class B) (800)
----------
Net increase (decrease) from capital share transactions 3,556,687
----------
Total increase (decrease) in net assets 3,753,768
NET ASSETS:
Beginning of period 0
----------
End of period $3,753,768
==========
Undistributed net investment income $1,434
==========
(a) Income dividends per share (Class A) $0.2780
(b) Income dividends per share (Class B) 0.2460
(c) Capital gains distribution per share (Class A) 0.0000
(d) Capital gains distribution per share (Class B) 0.0000
(e) Shares issued and redeemed:
Shares sold (Class A) 282,396
Shares sold (Class B) 64,035
Dividends reinvested (Class A) 7,387
Dividends reinvested (Class B) 1,381
Shares redeemed (Class A) (496)
Shares redeemed (Class B) (79)
==========
Net increase (decrease) 354,624
</TABLE>
5
<PAGE> 122
SECURITY INCOME 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 unaudited financial statements for Limited Maturity
Bond Series for the period January 17, 1995 (date of
inception) to June 30, 1995, are incorporated by
reference in Part B of this Registration Statement.
The audited financial statements contained in the most
recent Annual Report to Stockholders of Security Income Fund
for the year ended December 31, 1994 are incorporated by
reference in Part B and are further incorporated herein by
reference to the Annual Report that was filed with the
Registrant's Post-Effective Amendment No. 49 to Registration
Statement No. 2-39414 (May 1, 1995.)
b. Exhibits:
(1) Articles of Incorporation. (a)
(2) Corporate Bylaws of Registrant. (d)
(3) Not applicable.
(4) Specimen copy of share certificate for Registrant's
shares of capital stock. (d)
(5) (a) Investment Advisory Contract. (d)
(b) Sub-Advisory Agreement-Lexington. (d)
(c) Sub-Advisory Agreement-MFR. (d)
(6) (a) Distribution Agreement. (d)
(b) Class B Distribution Agreement. (d)
(7) Not applicable.
(8) (a) Custodian Agreement-UMB. (d)
(b) Custodian Agreement-Chase. (d)
(9) (a) Administrative Services and Transfer Agency
Agreement. (d)
(b) Sub-Administrative Agreement. (d)
(10) Opinion of counsel as to the legality of the
securities offered.(b)
(11) Consent of Independent Auditors.
(12) Not applicable.
(13) Not applicable.
(14) Not applicable.
(15) (a) Distribution Plan. (d)
(b) Class B Distribution Plan. (d)
(16) Schedule of Computation of Performance.(c)
(a) Incorporated herein by reference to the Exhibits filed with the
Registrant's Post-Effective Amendment No. 46 to Registration Statement No.
2-38414 (October 11, 1993).
(b) Incorporated herein by reference to the Exhibits filed with the
Registrant's Post-Effective Amendment No. 48 to Registration Statement No.
2-38414 (January 17, 1995)
(c) Incorporated herein by reference to the Exhibits filed with the
Registrant's Post-Effective Amendment No. 49 to Registration Statement No.
2-38414 (May 1, 1995).
(d) Incorporated herein by reference to the Exhibits filed with the
Registrant's Post-Effective Amendment No. 50 to Registration Statement No.
2-38414 (May 1, 1995).
<PAGE> 123
Item 25. Persons Controlled by or Under Common Control with Registrant.
Not applicable.
Item 26. Number of Holders of Securities as of July 5, 1995.
<TABLE>
<CAPTION>
(1) (2)
Number of Record
Title of Class Shareholders
-------------- ------------------
<S> <C>
Corporate Bond - Shares of Common Stock, Class A 4,013
Corporate Bond - Shares of Common Stock, Class B 554
U.S. Government - Shares of Common Stock, Class A 636
U.S. Government - Shares of Common Stock, Class B 95
Limited Maturity Bond - Shares of Common Stock, Class A 56
Limited Maturity Bond - Shares of Common Stock, Class B 4
Global Aggressive Bond - Shares of Common Stock, Class A 6
Global Aggressive Bond - Shares of Common Stock, Class B 1
</TABLE>
Item 27. Indemnification.
A policy of insurance covering Security Management Company, its
subsidiary (Security Distributors, Inc.), and all of the
registered investment companies advised by Security Management
Company insures the Registrant's directors and officers 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 23 of the Registrant's Bylaws, as amended March 23,
1979, provides in relevant part as follows:
23-A. Indemnification. The corporation shall indemnify
every 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,
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 or expense (including attorneys' fees)
asserted or threatened against and incurred by such person in
his capacity as or arising out of his 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; provided, however, that the corporation shall
not indemnify any person if such action would be in violation
of the provisions of the Investment Company Act of 1940. The
indemnification provided by this bylaw provision shall not be
exclusive of any other rights to which those indemnified may
be entitled under any other bylaw or under any agreement, and
shall not limit in any way any right which the corporation
may have to make different or further indemnifications which
respect to the same or different persons or classes of
persons.
<PAGE> 124
On March 25, 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."
Item 28. Business or Other Connections of Investment Adviser
SECURITY MANAGEMENT COMPANY:
Security Management Company also acts as investment manager to
Security Equity Fund, Security Ultra Fund, Security Growth and
Income Fund, Security Cash Fund, SBL Fund, and Security
Tax-Exempt Fund and as administrator to The Parkstone Advantage
Fund.
<PAGE> 125
<TABLE>
<CAPTION>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
---- -----------------------------------------------------
<S> <C>
Jeffrey B. Pantages President, Chief Investment Officer and Director
Security Management Company
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 and Chief Investment Officer
Security Benefit Life Insurance Company
Security Benefit Group, Inc.
Director
Mulvane Art Center
Mulvane Art Museum
Washburn University
17th & Jewell
Topeka, Kansas
United Way of Greater Topeka
P.O. Box 4188
Topeka, Kansas
John D. Cleland Senior Vice President and Director
Security Management Company
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
Vice President and Director
Security Distributors, Inc.
Trustee and Treasurer
Mount Hope Cemetery Corporation
4700 SW 17th
Topeka, Kansas
Past President
Top of the Tower Club
1 Townsite Plaza
Topeka, Kansas
Trustee
Topeka Community Foundation
5100 SW 10th
Topeka, Kansas
</TABLE>
<PAGE> 126
<TABLE>
<CAPTION>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
---- -----------------------------------------------------
<S> <C>
James W. Lammers Senior Vice President and Director
Security Management Company
National Sales Manager, Senior Vice President and Director
Security Distributors, Inc.
James R. Schmank Senior Vice President, Treasurer, Chief Fiscal Officer and
Director
Security Management Company
Chairman of the Board, President and Trustee
The Parkstone Advantage Fund
Vice President and Director
Security Distributors, Inc.
Vice President
Security Benefit Group, Inc. and Security Benefit Life
Insurance Company
Vice President and Treasurer
Security Growth and Income Fund, Security Income Fund,
Security Cash Fund, Security Tax-Exempt Fund, Security Ultra
Fund, Security Equity Fund, SBL Fund
Donald E. Caum Director
Security Management Company
Senior Vice President
Security Benefit Life Insurance Company
Security Benefit Group
Director
YMCA Metro
225 SW 12th Street
Topeka, Kansas
Executive Director
Boy Scouts of America
1020 SE Monroe
Topeka, Kansas
Jayhawk Area Council BSA
1020 SE Monroe
Topeka, Kansas
Metropolitan Ballet
Topeka, Kansas
</TABLE>
<PAGE> 127
<TABLE>
<CAPTION>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
---- -----------------------------------------------------
<S> <C>
James L. Woods Senior Vice President
Security Management Company
Senior Vice President and Treasurer
Security Benefit Life Insurance Company and Security
Benefit Group, Inc.
Director
Midwest Superconductivity
1315 Wakarusa Drive
Lawrence, Kansas
Mark E. Young Vice President - Operations
Security Management Company
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 Distributors,
Inc.
Trustee
Topeka Zoological Foundation
635 Gage Boulevard
Topeka, Kansas
Terry A. Milberger Senior Portfolio Manager and Vice President
Security Management Company
Vice President
Security Equity Fund, SBL Fund
Jane A. Tedder Vice President and Senior Portfolio Manager
Security Management Company
Vice President
Security Cash Fund, Security Income Fund, Security
Tax-Exempt Fund, SBL Fund
Gregory A. Hamilton Second Vice President
Security Management Company
Director
Downtown Topeka, Inc.
906 South Kansas Avenue
Topeka, Kansas
Trustee
Kansas State University Foundation
Manhattan, Kansas
</TABLE>
<PAGE> 128
<TABLE>
<CAPTION>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
---- -----------------------------------------------------
<S> <C>
Andrew P. Mohn Vice President
Security Distributors, Inc.
Assistant Vice President, Mutual Fund Marketing
Administration
Security Management Company
Vesper Member
St. Michaels and All Angels Episcopalian Church
6630 Nall Avenue
Mission, Kansas
Amy J. Lee Second Vice President and Assistant Counsel
Security Benefit Group, Inc. and Security Benefit Life
Insurance Company
Secretary
Security Management Company, 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
Vice President, Assistant Secretary and Assistant Treasurer
The Parkstone Advantage Fund
Director
Everywoman's Resource Center
1002 SW Garfield Avenue
Topeka, Kansas
Brenda M. Luthi Assistant Vice President, Assistant Treasurer and Assistant
Secretary
Security Management Company
Assistant Treasurer and Assistant Secretary
Security Equity Fund, Security Ultra Fund, Security
Growth and Income Fund, Security Income Fund, Security Cash
Fund, SBL Fund, Security Tax-Exempt Fund
Treasurer
Security Distributors, Inc.
Trustee, Vice President, Treasurer and Secretary
The Parkstone Advantage Fund
</TABLE>
<PAGE> 129
<TABLE>
<CAPTION>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
---- -----------------------------------------------------
<S> <C>
Steven M. Bowser Assistant Vice President and Portfolio Manager
Security Management Company
Assistant Vice President
Security Benefit Life Insurance Company
Security Benefit Group, Inc.
Thomas A. Swank Assistant Vice President and Portfolio Manager
Security Management Company
Assistant Vice President
Security Benefit Life Insurance Company
Security Benefit Group, Inc.
Barbara J. Davison Assistant Vice President
Security Management Company
Security Benefit Life Insurance Company
Security Benefit Group, Inc.
President
Topeka Chapter International
Institute of Internal Auditors
Topeka, Kansas
Executive Mentor
ASSIST Catholic Social Services
Topeka, Kansas
Cindy L. Shields Assistant Vice President and Portfolio Manager
Security Management Company
Larry L. Valencia Assistant Vice President and Senior Research Analyst
Security Management Company
</TABLE>
*Located at 700 Harrison, Topeka, Kansas 66636-0001
<PAGE> 130
LEXINGTON MANAGEMENT CORPORATION:
Lexington Management Corporation, sub-adviser to Global Aggressive
Bond Series, acts as investment adviser, sub-adviser and/or sponsor to 15
investment companies other than Registrant.
<TABLE>
<CAPTION>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
---- -----------------------------------------------------
<S> <C>
Robert M. DeMichele President and Director
Piedmont Management Company, Inc.
Chairman and Chief Executive Officer
Lexington Management Corporation, Lexington Funds
Distributor, Inc.
Director
Reinsurance Corporation of New York, Continental
National Corporation, Navigator's Insurance Group, Vanguard
Cellular Systems, Inc.
Chairman of the Board
Lexington Group of Investment Companies, Market Systems
Research, Inc., Market Systems Research Advisors, Inc.,
Lexington Capital Management, Inc.
Richard M. Hisey Chief Financial Officer, Managing Director and Director
Lexington Management Corporation
Chief Financial Officer, Vice President and Director
Lexington Funds Distributor, Inc.
Vice President and Treasurer
Market Systems Research Advisors, Inc.
Chief Financial Officer and Vice President
Lexington Group of Investment Companies
Lawrence Kantor Executive Vice President, Managing Director and Director
Lexington Management Corporation
Executive Vice President and Director
Lexington Funds Distributor, Inc.
Vice President and Director
Lexington Group of Investment Companies
James H. O'Leary Managing Director and Director
Lexington Management Corporation
Peter Palenzona Director
Lexington Management Corporation
Chief Financial Officer and Senior Vice President
Piedmont Management Company, Inc.
</TABLE>
<PAGE> 131
<TABLE>
<CAPTION>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
---- -----------------------------------------------------
<S> <C>
Stuart S. Richardson Director
Lexington Management Corporation
Vice Chairman
Piedmont Management Company, Inc.
John B. Waymire Vice President and Director
Lexington Management Corporation
President and Director
Lexington Capital Management, Inc.
</TABLE>
* Located at P.O. Box 1515, Saddle Brook, New Jersey 07662, except
for Messrs. Palenzona and Richardson whose address is 80 Maiden
Lane, New York, New York 10038 and Mr. Waymire whose address is
2339 Gold Meadow Way, Gold River, California 95670.
MFR ADVISORS, INC.:
Lexington Management Corporation contracts with MFR Advisors, Inc.
which provides advisory services for Global Aggressive Bond
Series. MFR Advisors, Inc. serves as advisor to no investment
companies other than Registrant.
<TABLE>
<CAPTION>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
---- -----------------------------------------------------
<S> <C>
Maria Fiorini Ramirez Chief Executive Officer and President
MFR Advisors, Inc.
Director
Statewide Savings Bank S.L.A. of New Jersey
Pace University
Medic Alert Foundation
Money Marketeers
Women's Economic Roundtable
Bruce Jensen Executive Vice President
MFR Advisors, Inc.
Timothy F. Downing Chief Financial Officer
MFR Advisors, Inc.
</TABLE>
* Located at One World Financial Center, 200 Liberty Street, New York, NY 10281
<PAGE> 132
Item 29. Principal Underwriters
(a) SBL Fund
Security Equity Fund
Security Ultra Fund
Security Growth and Income Fund
Security Tax-Exempt Fund
Variflex Variable Annuity Account
Varilife
Parkstone Variable Annuity Account
The Parkstone Advantage Fund
Security Varilife Separate Account
Variflex LS Variable Annuity Account
<TABLE>
<CAPTION>
(b)
(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 President and Director
and Director
James W. Lammers National Sales Manager, None
Senior Vice President
and Director
Louis R. Jicha Vice President None
and Director
James R. Schmank Vice President Vice President
and Director and Treasurer
Mark E. Young Vice President Vice President
Amy J. Lee Secretary Secretary
Brenda M. Luthi Treasurer Assistant Secretary and
Assistant Treasurer
Andrew P. Mohn Vice President None
Daniel J. McNichol Vice President None
Steven D. Eklund Regional Vice None
President
Sharon A. Burlingame Regional Vice None
President
Steven S. Doerrer Regional Vice None
President
</TABLE>
<PAGE> 133
<TABLE>
<CAPTION>
(1) (2) (3)
Name and Principal Position and Offices Position and Offices
Business Address* with Underwriter with Registrant
------------------ ----------------------- ---------------------
<S> <C> <C>
Anthony L. Hammock Regional Vice President None
Douglas J. Ikenberry Regional Vice President None
Robert L. Kirchner Regional Vice President None
Daniel R. Murphy Regional Vice President None
Ronald V. Vermillion Regional Vice President None
Jennifer A. Zaat Regional Vice President None
Kent N. Spillman Regional Vice President None
*700 Harrison, Topeka, Kansas 66636-0001
(c) Not applicable.
</TABLE>
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, 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 and Chase Manhattan Bank, n.a., 1211 Avenue of the
Americas, New York, New York 10036.
Item 31. Management Services.
Not applicable.
Item 32. Undertakings.
(a) Not applicable.
(b) Registrant hereby undertakes to file a post-effective
amendment, using financial statements which need not be
certified, within four to six months from the effective date
of Registrant's 1933 Act Registration Statement.
(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> 134
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and 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 7th day of July,
1995.
SECURITY EQUITY 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: July 7, 1995
Willis A. Anton, Jr. Director
- -----------------------------------
Willis A. Anton, Jr.
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.
Jeffrey B. Pantages Director
- -----------------------------------
Jeffrey B. Pantages
Harold G. Worswick Director
- -----------------------------------
Harold G. Worswick
<PAGE> 135
EXHIBIT INDEX
(1) None
(2) None
(3) None
(4) None
(5) None
(6) None
(7) None
(8) None
(9) None
(10) None
(11) Consent of Independent Auditors
(12) None
(13) None
(14) None
(15) None
(16) None
<PAGE> 1
EXHIBIT 11
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Financial
Highlights" and "Independent Auditors" in the Registration Statement (Form
N-1A) and related prospectus of Security Income Fund and to the incorporation
by reference of our report dated January 27, 1995, with respect to the
financial statements of Security Income Fund included in its Annual Report to
Shareholders for the year ended December 31, 1994.
Ernst & Young LLP
Kansas City, Missouri
July 17, 1995
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 5
<NAME> LIMITED MATURITY BOND SERIES, CLASS A
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-30-1994
<PERIOD-START> JAN-17-1995
<PERIOD-END> JUN-30-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 3,433
<INVESTMENTS-AT-VALUE> 3,628
<RECEIVABLES> 87
<ASSETS-OTHER> 41
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,756
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2
<TOTAL-LIABILITIES> 2
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,557
<SHARES-COMMON-STOCK> 289
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 1
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 195
<NET-ASSETS> 3,754
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 105
<OTHER-INCOME> 0
<EXPENSES-NET> 11
<NET-INVESTMENT-INCOME> 94
<REALIZED-GAINS-CURRENT> 1
<APPREC-INCREASE-CURRENT> 195
<NET-CHANGE-FROM-OPS> 290
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 78
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 282
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 7
<NET-CHANGE-IN-ASSETS> 3,062
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 11
<AVERAGE-NET-ASSETS> 3,456
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .29
<PER-SHARE-GAIN-APPREC> .578
<PER-SHARE-DIVIDEND> .278
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.59
<EXPENSE-RATIO> .53
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 5
<NAME> LIMITED MATURITY BOND SERIES, CLASS B
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-30-1994
<PERIOD-START> JAN-17-1995
<PERIOD-END> JUN-30-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 3,433
<INVESTMENTS-AT-VALUE> 3,628
<RECEIVABLES> 87
<ASSETS-OTHER> 41
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,756
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2
<TOTAL-LIABILITIES> 2
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,557
<SHARES-COMMON-STOCK> 65
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 1
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 195
<NET-ASSETS> 3,754
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 105
<OTHER-INCOME> 0
<EXPENSES-NET> 11
<NET-INVESTMENT-INCOME> 94
<REALIZED-GAINS-CURRENT> 1
<APPREC-INCREASE-CURRENT> 195
<NET-CHANGE-FROM-OPS> 290
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 15
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 64
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 1
<NET-CHANGE-IN-ASSETS> 691
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 11
<AVERAGE-NET-ASSETS> 3,456
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .25
<PER-SHARE-GAIN-APPREC> .576
<PER-SHARE-DIVIDEND> .246
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.58
<EXPENSE-RATIO> 1.33
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
