<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. 52 /X/
-----
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / /
Post-Effective Amendment No. 52 /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 November 1, 1995, pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(i)
/ / on November 1, 1995, pursuant to paragraph (a)(i)
/ / 75 days after filing pursuant to paragraph (a)(ii)
/ / on November 1, 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
----------- -------
Part A PROSPECTUS
------ ----------
<S> <C>
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
NOVEMBER 1, 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.
[SECURITY FUND LOGO] A Member of The Security Benefit
Group of Companies
<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
November 1, 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 or
instrumentalities. 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 obiective 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 MAINHIN 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
November 1, 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.
<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 first year, None
decreasing to 0% in the
sixth and following years
</TABLE>
<TABLE>
<CAPTION>
CORPORATE BOND LIMITED MATURITY U.S. GOVERNMENT GLOBAL AGGRESSIVE TAX-EXEMPT CASH
FUND BOND FUND FUND BOND FUND FUND FUND
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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% 0.32% 0.50% 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 $1,000 invest- 3 Years 78 88 81 88 81 86 107 115 72 93 31
ment, assuming(1) 5 percent 5 Years 101 120 105 120 105 120 91 128 53
annual return and (2) 10 Years 166 217 175 217 175 217 144 233 118
redemption at the end of
each time period (6)
EXAMPLE
You would pay the following l Year $ 57 $ 19 $ 58 $ 19 $ 58 $ 19 $ 67 $ 28 $ 55 $ 20 $ 10
expenses on a $1,000 invest- 3 Years 78 58 81 58 81 58 107 85 72 63 31
ment, assuming(1) 5 percent 5 Years 101 100 105 100 105 100 91 108 53
annual return and(2) no
redemption 10 Years 166 217 175 217 175 217 144 233 118
</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 from Class A shares which is imposed 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 Funds' 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.
<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 which is incorporated by reference in this
Prospectus. The Funds' Annual Report also contains additional information about
the performance of the Funds and may be obtained without charge by calling
Security Distributors, Inc. at 1-800-888-2461. The information for each of the
years in the period ended December 31, 1989, is not covered by the report of
Ernst & Young LLP. The financial highlights information, including total
returns, for Limited Maturity Bond Fund, for the period January 17, 1995 (date
of inception) to June 30, 1995, and for Global Aggressive Bond Fund for the
period of June 1,1995 (date of inception) to September 30,1995, has been
derived from the unaudited financial statements of the Funds.
<TABLE>
<CAPTION>
Net Total
asset Net gains from Dividends Distribu- Net
value Net (losses) on invest- from net tions asset Net assets
Fiscal beginn- invest- securities ment invest- (from Return Total value end of
year ing of ment (realized & opera- ment in- capital of distri- end of Total period
end period income unrealized)& tions come) gains) Capital butions period return(a) (thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CORPORATE BOND FUND (CLASS A)
1985 $7.80 $.91 $.64 $1.55 $(.95) $ -- $ -- $(.95) $8.40 21.5% $38,212
1986 8.40 .82 .05 .87 (.95) -- -- (.95) 8.32 11.0% 49,025
1987 8.32 .79 (.48) .31 (.85) -- -- (.85) 7.78 4.0% 44,093
1988 7.78 .77 (.292) .478 (.778) -- -- (.778) 7.48 6.5% 52,296
1989 7.48 .74 (.031) .709 (.739) -- -- (.739) 7.45 9.9% 56,184
1990 7.45 .69 (.232) .458 (.688) -- -- (.688) 7.22 6.6% 65,962
1991 7.22 .65 .458 1.108 (.648) -- -- (.648) 7.68 16.1% 85,824
1992 7.68 .61 .044 .654 (.614) -- -- (.614) 7.72 9.0% 104,492
1993 7.72 .52 .521 1.041 (.527) (.424) -- (.951) 7.81 13.4% 118,433
1994(f) 7.81 .49 (1.127) (.637) (.493) -- -- (.493) 6.68 (8.3%) 90,593
CORPORATE BOND FUND(CLASS B)
1993(b) $8.59 $0.11 $(.324) $(.214) $(.112) $(.424) $ -- $(.536) $7.84 (2.5%) $1,022
1994(f)(e) 7.84 0.43 (1.129) (.699) (.431) -- -- (.431) 6.71 (9.0%) 3,878
LIMITED MATURITY BOND FUND (CLASS A)
1995 $10.00 $0.29 $.578 $.868 $(.278) $ -- $ -- $(.278) $10.59 8.8% $3,062
LIMITED MATURITY BOND FUND (CLASS B)
1995 $10.00 $0.25 $.576 $.826 $(.246) $ -- $ -- $(.246) $10.58 8.3% $691
U.S. GOVERNMENT FUND (CLASS A)
1985(e) $5.00 $ .22 $.22 $ .44 $(.12) $ -- $ -- $(.12) $5.32 8.8% $ 1,219 *
1986(e) 5.32 .47 -- .47 (.50) -- -- (.50) 5.29 9.1% 2,716
1987(e) 5.29 .45 (.265) .185 (.475) -- -- (.475) 5.00 3.7% 4,467 1
1988(e) 5.00 .48 (.18) .30 (.49) -- -- (.49) 4.81 6.2% 4,229
1989(e) 4.81 .46 .078 .538 (.458) -- -- (.458) 4.89 11.8% 4,551
1990(e) 4.89 .42 .032 .452 (.412) -- -- (.412) 4.93 9.8% 6,017
1991(e) 4.93 .40 .248 .648 (.404) -- (.004) (.408) 5.17 13.8% 7,319
1992(e) 5.17 .37 (.126) .244 (.366) -- (.008) (.374) 5.04 5.0% 9,364
1993(e) 5.04 .31 .273 .583 (.310) (.344) -- (.654) 4.97 10.9% 10,098
1994(e) 4.97 .30 (.621) (.321) (.299) -- -- (.299) 4.35 (6.5%) 8,309
U.S. GOVERNMENT FUND (CLASS B)
1993(b)(e) $5.51 $ .04 $(.193) $(.153) $(.043) $(.344) $ -- $(.387) $4.97 (1.4%) $140
1994(e)(f) 4.97 .26 (.624) (.364) (.256) -- -- (.256) 4.35 (7.4%) 321
GLOBAL BOND FUND (CLASS A)
1995(g) 10.00 .367 (.024) .343 .323 $ -- $ -- .323 10.02 3.4% 2,356
GLOBAL BOND FUND (CLASS B)
1995(g) 10.00 .343 (.024) .319 .299 $ -- $ -- .299 10.02 3.2% 1,159
<CAPTION>
Ratio of
Ratio of net
expenses income
Fiscal to average Portfolio
year average net turnover
end net assets asset rate
- ---- ---------- ------- ------------
<S> <C> <C> <C>
CORPORATE BOND FUND (CLASS A)
1985 1.01% 11.36% 79%
1986 1.04% 10.09% 77%
1987 1.00% 9.73% 127%
1988 1.02% 10.04% 83%
1989 1.04% 9.83% 57%
1990 1.10% 9.42% 87%
1991 1.03% 8.75% 32%
1992 1.01% 7.97% 61%
1993 1.02% 6.46% 157%
1994(f) 1.01% 6.91% 204%
CORPORATE BOND FUND(CLASS B)
1993(b 1.88%* 5.16%* 164%*
1994(f) 1.85% 6.08% 204%
LIMITED MATURITY BOND FUND (CLASS A)
1995 0.53%* 6.24%* 4%*
LIMITED MATURITY BOND FUND (CLASS B)
1995 1.33%* 5.52%* 4%*
U.S. GOVERNMENT FUND (CLASS A)
1985(c) 0.16%* 11.31%* 3%*
1986(e) 1.00% 9.23% 48%
1987(e) 1.00% 8.78% 166%
1988(e) 1.00% 9.83% 107%
1989(e) 1.11% 9.46% 52%
1990(e) 1.11% 8.60% 22%
1991(e) 1.11% 7.94% 41%
1992(e) 1.11% 7.22% 157%
1993(e) 1.10% 5.90% 153%
1994(e) 1.10% 6.47% 220%
U.S. GOVERNMENT FUND (CLASS B)
1993(b) 1.61%* 5.54%* 114%*
1994(e) 1.85% 5.76%* 220%
GLOBAL BOND FUND (CLASS A)
1995(g) 2.00% 11.39% 58%
GLOBAL BOND FUND (CLASS B)
1995(g) 2.75% 10.89% 58%
</TABLE>
See accompanying notes.
2
<PAGE> 9
SECURITY FUNDS
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
Net
gains Ratio of
Net (losses) Total net
asset on from Dividends Distribu- Net Ratio of income Port-
value Net securities invest- (from net tions asset Net assets expenses to folio
Fiscal beginn- invest- (realized ment invest- (from Return Total value end of to average turn-
year ing of ment & opera- ment in- capital of distri- end of Total period average net over
end period income unrealized) tions come) gains) capital butions period return(a) (thousands) net assets assets rate
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%
</TABLE>
<TABLE>
<CAPTION>
TAX-EXEMPT FUND (CLASS B)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
<TABLE>
<CAPTION>
CASH FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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.
(g) For the period June 1, 1995 (date of inception) to September 30,
1995, percentage amounts for the period, except total return, have been
annualized.
*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
September 9, 1970, 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 each of 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 or
instrumentalities. 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.
4
<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 or
instrumentality 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 at the time of purchase. 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 under normal circumstances.
LIMITED MATURITY BOND FUND
The investment objective of the Limited Maturity Bond Fund is to seek
a high level of income consistent with moderate price fluctuation by investing
primarily in short- and intermediate-term bonds. As used herein the term "short-
and intermediate-term bonds" is used to describe any debt security with a
maturity of 15 years or less. In pursuing its investment objective, the Fund
will invest in a broad range of debt securities, including those (i) issued by
U.S. and Canadian corporations, (ii) issued or guaranteed by the U.S.
Government or any of its agencies or instrumentalities, including Treasury
bills, certificates of indebtedness, notes and bonds, (iii) 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 under "Investment Methods and Risk
Factors." Under normal circumstances, the Fund will invest at least 65 percent
of the value of its total assets in short- and intermediate-term bonds. It is
anticipated that the dollar weighted average maturity of the Fund's portfolio
will range from 5 to 7 years; however, the dollar weighted average maturity of
the Fund's portfolio will not exceed 10 years.
Limited Maturity Bond Fund will invest primarily in debt securities
rated Baa or higher by Moody's or BBB or higher by S&P at the time of purchase,
or if unrated, of equivalent quality as determined by the Investment Manager.
See Appendix A to this Prospectus for a description of corporate bond ratings.
Included in such securities may be convertible bonds or bonds with warrants
attached which are rated at least Baa or BBB at the time of purchase, or if
unrated, of equivalent quality as determined by the Investment Manager. A
"convertible bond" is a bond, debenture or preferred share which may be
exchanged, by the owner, for common stock or another security, usually of the
same company, in accordance with the terms of the issue. A "warrant" confers
upon its holder the right to purchase an amount of securities at a particular
time and price. Securities rated Baa by Moody's or BBB by S&P have speculative
characteristics as described under "Investment Methods and Risk Factors"--"Baa
or BBB Securities."
The Fund may invest in higher yielding debt securities in the lower
rating (higher risk) categories of the recognized rating services (commonly
referred to as "junk bonds"); however, the Fund will not hold more than 25
percent of its
5
<PAGE> 12
SECURITY FUNDS
PROSPECTUS
net assets in junk bonds. This includes securities rated Ba or lower by Moody's
or BB or lower by S&P, and such securities are regarded as predominantly
speculative with respect to the ability of the issuer to meet principal and
interest payments. The Fund will not invest in junk bonds which are rated in
default at the time of purchase. See "Investment Methods and Risk Factors" for
a discussion of the risks associated with investing in such securities.
Other than Yankee CDs 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.
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
6
<PAGE> 13
SECURITY FUNDS PROSPECTUS
mortgage bankers, commercial banks and savings and loan associations, are
either insured by the Federal Housing Administration or guaranteed by the
Veterans' Administration. A "pool" or group of such mortgages is assembled and,
after being approved by GNMA, is offered to investors through securities
dealers. Once approved by GNMA, the timely payment of interest and principal on
each mortgage is guaranteed by GNMA and backed by the full faith and credit of
the U.S. Government. Ginnie Mae certificates differ from bonds in that
principal is paid back monthly by the borrower over the term of the loan rather
than returned in a lump sum at maturity. Ginnie Mae certificates are called
"pass through" securities because both interest and principal payments
(including prepayments) are passed through to the holder of the certificate.
Upon receipt, principal payments 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 may invest in other mortgage backed securities (MBSs) as
discussed under "Investment Methods and Risk Factors - Mortgage Backed
Securities and Collateralized Mortgage Obligations." MBS.s include certain
securities issued by the United States government or one of its agencies or
instrumentalities, such as GNMAs, or securities issued by private issuers. The
Fund may not invest more than 20 percent of the value of its total assets in
MBSs issued by private issuers.
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.
7
<PAGE> 14
SECURITY FUNDS
PROSPECTUS
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 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 Fund 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
8
<PAGE> 15
SECURITY FUNDS
PROSPECTUS
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
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 obligations 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.
The Fund 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. See the discussion of
when-issued and forward commitment securities under "Investment Methods and
Risk Factors." The Fund may enter into repurchase agreements, reverse
repurchase agreements and "dollar rolls" which are discussed under "Investment
Methods and Risk Factors."
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
9
<PAGE> 16
SECURITY FUNDS
PROSPECTUS
that are traded in the markets of developed countries or groups of developed
countries. Investments in such securities involve special risks. The issuer of
the debt or the governmental authorities that control the repayment of the debt
may be unable or unwilling to repay principal or interest when due in
accordance with the terms of such debt. Periods of economic uncertainty may
result in the volatility of market prices of sovereign debt, and in turn the
Fund's net asset value, to a greater extent than the volatility inherent in
domestic fixed income securities. A sovereign debtor's willingness or ability
to repay principal and pay interest in a timely manner may be affected by,
among other factors, its cash flow situation, the extent of its foreign
reserves, the availability of sufficient foreign exchange on the date a payment
is due, the relative size of the debt service burden to the economy as a whole,
the sovereign debtor's policy toward principal international lenders and the
political constraints to which a sovereign debtor may be subject. Emerging
market governments could default on their sovereign debt. Such sovereign
debtors also may be dependent on expected disbursements from foreign
governments, multilateral agencies and other entities abroad to reduce
principal and interest arrearages on their debt. The commitment on the part of
these governments, agencies and others to make such disbursements may be
conditioned on a sovereign debtor's implementation of economic reforms and/or
economic performance and the timely service of such debtor's obligations.
Failure to implement such reforms, achieve such levels of economic performance
or repay principal or interest when due, may result in the cancellation of such
third parties' commitments to lend funds to the sovereign debtor, which may
further impair such debtor's ability or willingness to timely service its debt.
The occurrence of political, social or diplomatic changes in one or
more of the countries issuing sovereign debt could adversely affect the Fund's
investments. Emerging markets are faced with social and political issues and
some of them have experienced high rates of inflation in recent years and have
extensive internal debt. Among other effects, high inflation and internal debt
service requirements may adversely affect the cost and availability of future
domestic sovereign borrowing to finance governmental programs, and may have
other adverse social, political and economic consequences. Political changes or
a deterioration of a country's domestic economy or balance of trade may affect
the willingness of countries to service their sovereign debt. Although The
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
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SECURITY FUNDS
PROSPECTUS
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 debt securities may be illiquid. The
investment of the Fund in illiquid securities, including sovereign 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
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SECURITY FUNDS PROSPECTUS
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 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
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PROSPECTUS
maturities greater than one year. It is expected that the Fund's average
portfolio maturity under normal circumstances will be in the 15- to 25-year
range. 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 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 investment objective of Cash Fund is to seek as high a level of
current income as is consistent with preservation of capital and liquidity.
Cash Fund will attempt to achieve its objective by investing at least 95
percent of its total assets, measured at the time of investment, in a
diversified portfolio of highest quality money market instruments. Cash Fund
may also invest up to 5 percent of its total assets,
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SECURITY FUNDS
PROSPECTUS
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.
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.
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SECURITY FUNDS
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Cash Fund may invest in instruments having rates of interest that are
adjusted periodically according to a specified market rate for such investments
("Variable Rate Instruments"). The interest rate on a Variable Rate Instrument
is ordinarily determined by reference to, or is a percentage of, an objective
standard such as a bank's prime rate or the 91-day U.S. Treasury Bill rate.
Generally, the changes in the interest rate on Variable Rate Instruments reduce
the fluctuation in the market value of such securities. Accordingly, as
interest rates decrease or increase, the potential for capital appreciation or
depreciation is less than for fixed-rate obligations. Cash Fund determines the
maturity of Variable Rate Instruments in accordance with Rule 2a-7 under the
Investment Company Act of 1940 which allows the Fund to consider the maturity
date of such instruments to be the period remaining until the next readjustment
of the interest rate rather than the maturity date on the face of the
instrument.
Cash Fund may acquire certain securities that are restricted as to
disposition under the federal securities laws, provided that such securities
are eligible for resale to qualified institutional investors pursuant to Rule
144A under the Securities Act of 1933, and subject 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--Certain of the 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
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SECURITY FUNDS PROSPECTUS
which timely payment of interest and principal is guaranteed by the full faith
and credit of the U.S. Government. Although U.S. Government securities are
guaranteed by the U.S. Government, its agencies or instrumentalities, shares of
the Funds are not so guaranteed in any way.
CONVERTIBLE SECURITIES AND WARRANTS--Certain of the Funds may invest in debt or
preferred equity securities convertible into or exchangeable for equity
securities. Traditionally, convertible securities have paid dividends or
interest at rates higher than common stocks but lower than non-convertible
securities. They generally participate in the appreciation or depreciation of
the underlying stock into which they are convertible, but to a lesser degree.
In recent years, convertibles have been developed which combine higher or lower
current income with options and other features. Warrants are options to buy a
stated number of shares of common stock at a specified price any time during
the life of the warrants (generally two or more years).
MORTGAGE BACKED SECURITIES AND COLLATERALIZED MORTGAGE OBLIGATIONS--Certain of
the Funds may invest in 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 by the agency or instrumentality,
and some, such as GNMA certificates, are supported by the full faith and credit
of the U.S. Treasury; others are supported by the right of the issuer to borrow
from the Treasury; others, such as those of the FNMA, are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; still others, are supported only by the credit of the
instrumentality. Although securities issued by U.S. Government-related agencies
are guaranteed by the U.S. Government, its agencies or instrumentalities,
shares of the Fund are not so guaranteed in any way. The performance of private
label MBSs, issued by private institutions, is based on the financial health of
those institutions.
ASSET-BACKED SECURITIES--Certain of the Funds may also invest in
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.
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SECURITY FUNDS
PROSPECTUS
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES--Certain of the Funds may
purchase securities on a "when-issued" basis and may purchase or sell
securities on a "forward commitment" basis in order to hedge against
anticipated changes in interest rates and prices. The price, which is generally
expressed in yield terms, is fixed at the time the commitment is made, but
delivery and payment for the securities take place at a later date. When-issued
securities and forward commitments may be sold prior to the settlement date,
but the Funds will enter into when-issued and forward commitments only with the
intention of actually receiving or delivering the securities, as the case may
be. No income accrues on securities which have been purchased pursuant to a
forward commitment or on a when-issued basis prior to delivery of the
securities. If a Fund disposes of the right to acquire a when-issued security
prior to its acquisition or disposes of its right to deliver or receive against
a forward commitment, it may incur a gain or loss. At the time a Fund enters
into a transaction on a when-issued or forward commitment basis, a segregated
account consisting of cash or 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. There is
a risk that the securities may not be delivered and that the Fund may incur a
loss.
RESTRICTED SECURITIES (RULE 144A SECURITIES)--Certain of the Funds may invest
in restricted securities which are securities that are restricted as to
disposition under the federal securities laws, provided that such securities
are eligible for resale to qualified institutional investors pursuant to
Rule 144A under the Securities Act of 1933.
The 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 not be incurred in the sale of securities that were freely
marketable. Risks associated with restricted securities include the potential
obligation to pay all or part of the registration expenses in order to sell
certain restricted securities. A considerable period of time may elapse between
the time of the decision to sell a security and the time the Fund may be
permitted to sell it under an effective registration statement. If, during a
period, adverse conditions were to develop, the Fund might obtain a less
favorable price than prevailing when it decided to sell.
The Funds' Board of Directors is responsible for developing and
establishing guidelines and procedures for determining the liquidity of Rule
144A securities. As permitted by Rule 144A, the Board of Directors has
delegated this responsibility to the Investment Manager. In making the
determination regarding the liquidity of Rule 144A securities, the Investment
Manager will consider trading markets for the specific security taking into
account the unregistered nature of a Rule 144A security. In addition, the
Investment Manager may consider: 1) the frequency of trades and quotes; 2) the
number of dealers and potential purchasers; 3) dealer undertakings to make a
market; and 4) the nature of the security and of the market place trades (e.g.
the time needed to dispose of the security, the method of soliciting offers and
the mechanics of transfer). Investing in Rule 144A securities could have the
effect of increasing the amount of a Fund's assets invested in illiquid
securities to the extent that qualified institutional buyers become
uninterested, for a time, in purchasing these securities.
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
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SECURITY FUNDS PROSPECTUS
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 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% and
Corporate Bond, U.S. Government and Global Aggressive 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
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SECURITY FUNDS
PROSPECTUS
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 its 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 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" in
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 Fund 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 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 purchase put and call
options and write such options on a "covered" basis on securities that are
traded on recognized securities exchanges and over-the-counter ("OTC") markets.
The Fund will cause its custodian to segregate cash, U.S. Government securities
or other high grade liquid debt obligations having a value sufficient to meet
the Fund's obligations under the option. It 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
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SECURITY FUNDS
PROSPECTUS
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, and the purchase or sale of related
caps, floors and collars. The Fund expects to enter into these transactions
primarily to preserve a return or spread on a particular investment or portion
of its portfolio, 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 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 involves risks and
considerations not present in domestic investments. Foreign companies generally
are not subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to U.S.
Companies. The securities of non-U.S. issuers generally are not registered
with the SEC, nor are the issuers thereof usually subject to the SEC's
reporting requirements. Accordingly, there may be less publicly available
information about foreign securities and issuers than is available with
respect to U.S. securities and Issuers. A Fund's income and gains from
foreign issuers may be subject to non-U.S. withholding or other taxes,
thereby reducing their income and gains. In addition, with respect to some
foreign countries, there is the increased possibility of expropriation or
confiscatory taxation, limitations on the removal of funds or other assets of
the Fund, political or social instability, or diplomatic developments which
could affect the investments of the Fund in those countries. Moreover,
individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national product, rate of
inflation, rate of savings and capital reinvestment, resource self-sufficiency
and balance of payments positions.
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.
Chances in currency
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SECURITY FUNDS
PROSPECTUS
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 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.
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SECURITY FUNDS
PROSPECTUS
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)--Certain of the
Funds may invest in higher yielding debt securities in the lower rating (higher
risk) categories of the recognized rating services (commonly referred to as
"junk bonds"). Debt rated BB, B, CCC, CC and C by S&P rated Ba, B, Caa, Ca and
C by Moody's, is regarded, on balance, as predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. For S&P, BB indicates the lowest
degree of speculation and C the highest degree of speculation. For Moody's, Ba
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions. Similarly, debt rated Ba or BB and below is
regarded by the relevant rating agency as speculative. Debt rated C by Moody's
or S&P is the lowest quality debt that is not in default as to principal or
interest and such issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing. Such securities are
also generally considered to be subject to greater risk than higher quality
securities with regard to a deterioration of general economic conditions. 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.
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SECURITY FUNDS
PROSPECTUS
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
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'
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SECURITY FUNDS
PROSPECTUS
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 make 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 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 an annual basis, a fee equal to .35
percent of the average daily net assets of such Fund, calculated daily and
payable monthly. For the services 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.
For the period January 17, 1995 (date of inception) to June 30, 1995 and the
period June 1, 1995 (date of inception) to September 30,1995, the total
expenses were .53% for Class A shares and 1.33% for Class B shares of Limited
Maturity Bond Fund and 2.00% for Class A shares and 2.75% for Class B shares of
Global Aggressive Bond Fund, 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.
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SECURITY FUNDS
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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 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. 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. 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.
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
25
<PAGE> 32
SECURITY FUNDS
PROSPECTUS
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 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
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<PAGE> 33
SECURITY FUNDS
PROSPECTUS
"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.
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
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<PAGE> 34
SECURITY FUNDS
PROSPECTUS
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 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
28
<PAGE> 35
SECURITY FUNDS
PROSPECTUS
contingent deferred sales charges paid by Class B stockholders to the
Distributor). The Distributor intends, but is not obligated, to continue to
apply or accrue distribution charges incurred in connection with the Class B
Distribution Plan which exceed current annual payments permitted to be received
by the Distributor from the Funds. The Distributor intends to seek full payment
of such charges from the Fund (together with annual interest thereon at the
prime rate plus one percent) at such time in the future as, and to the extent
that, payment thereof by the Funds would be within permitted limits.
Each Fund's Class B Distribution Plan may be terminated at any time by vote of
its directors who are not interested persons of the Fund as defined in the 1940
Act or by vote of a majority of the outstanding Class B shares. In the event
the Class B Distribution Plan is terminated by the Class B stockholders or the
Funds' Board of Directors, the payments made to the Distributor pursuant to the
Plan up to that time would be retained by the Distributor. Any expenses
incurred by the Distributor in excess of those payments would be absorbed by
the Distributor. The Funds make no payments in connection with the sale of
their Class B shares other than the distribution fee paid to the Distributor.
CALCULATION AND WAIVER OF
CONTINGENT DEFERRED SALES CHARGES
Any contingent deferred sales charge imposed upon redemption of Class A shares
(purchased in an amount of $1,000,000 or more) and Class B shares is a
percentage of the lesser of (1) the net asset value of the shares redeemed or
(2) the net cost of such shares. No contingent deferred sales charge is imposed
upon redemption of amounts derived from (1) increases in the value above the
net cost of such shares due to increases in the net asset value per share of
the Fund; (2) shares acquired through reinvestment of income dividends and
capital gain distributions; or (3) Class A shares (purchased in an amount of
$1,000,000 or more) held for more than one year or Class B shares held for more
than five years. Upon request for redemption, shares not subject to the
contingent deferred sales charge will be redeemed first. Thereafter, shares
held the longest will be the first to be redeemed.
The contingent deferred sales charge is waived: (1) following the death of a
stockholder if redemption is made within one year after death; (2) upon the
disability (as 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
29
<PAGE> 36
SECURITY FUNDS
PROSPECTUS
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 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.
30
<PAGE> 37
SECURITY FUNDS
PROSPECTUS
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 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 annualized portfolio
turnover rate for the Limited Maturity Bond Fund for the period January 17, 1995
(date of inception) to June 30, 1995 and the Global Aggressive Bond Fund for the
period June 1, 1995 (date of inception) to September 30, 1995, was as follows:
Limited Maturity Bond, Class A-4 percent, Class B-4 percent; and Global
Aggressive Bond, Class A-58 percent, Class B-58 percent. The Corporate Bond and
Limited Maturity Bond Funds' portfolio turnover rate generally is expected to be
less than 100 percent, and that of the U.S. Government 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.
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
31
<PAGE> 38
SECURITY FUNDS
PROSPECTUS
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 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-today 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.
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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.
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
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SECURITY FUNDS
PROSPECTUS
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 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 stockhholder for
six months or less.
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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 accumulated net realized losses on sales of investments in
the following amounts: $13,842,177, $1,184,124 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
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SECURITY FUNDS
PROSPECTUS
market conditions. The Fund's officers, under the general supervision of its
Board of Directors, will regularly review procedures used by, and valuations
provided by, the pricing service.
U.S. Government Fund values U.S. Government securities at market value, if
available. If market quotations are not available, the Fund will value
securities, other than securities with 60 days or less to maturity as discussed
below, at fair prices based on market quotations for securities of similar
type, yield, quality and duration.
The securities held by Cash Fund are valued on the basis of the amortized cost
valuation technique which does not take into account unrealized gains or
losses. The amortized cost valuation technique involves valuing an instrument
at its cost and thereafter assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the instrument. A similar procedure may be used for valuing
securities held by the U.S. Government and 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
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SECURITY FUNDS
PROSPECTUS
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 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
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SECURITY FUNDS
PROSPECTUS
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 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
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telephone exchange of shares may be difficult to implement and stockholders
should make exchanges by writing to Security Distributors, Inc., 700 Harrison
Street, Topeka, Kansas 66636-0001. The telephone exchange privilege may be
changed or discontinued at any time at the discretion of the management of the
Funds.
RETIREMENT PLANS
The Funds have available tax-qualified retirement plans for individuals,
prototype plans for the self-employed, pension and profit sharing plans for
corporations and custodial accounts for employees of public school systems and
organizations meeting the requirements of Section 501(c)(3) of the Internal
Revenue Code. Further information concerning these plans is contained in the
Funds' Statement of Additional Information.
GENERAL INFORMATION
ORGANIZATION
The Articles of Incorporation of Income and 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.
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APPENDIX A
SECURITY FUNDS
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 "Al" 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
PROSPECTUS APPENDIX A
(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 Aal, Al and Baal 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
<TABLE>
<CAPTION>
SECURITY FUNDS
SECURITY CASH FUND APPLICATION
- -----------------------------------------------------------------------------------------------------------------------------------
<S><C>
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
- -----------------------------------------------------------------------------------------------------------------------------------
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 ______________________________ for Fund account number __________________________________
$100 City State
Subsequent When investing by wire, call the Fund to advise of the investment. The Fund will supply a control
investments of $20 number for initial investment. Wire federal funds to Bank IV of Topeka, Trust Department,
can be made Topeka, Kansas.
at any time Attn:________________________________________________________
(Include investor's name and account number)
- -----------------------------------------------------------------------------------------------------------------------------------
Dividends / / Reinvest automatically all daily dividends and other distributions.
(Check one box / / Cash payment of all dividends each month and send proceeds to investor.
- -----------------------------------------------------------------------------------------------------------------------------------
Checking / / Please send a supply of checks permitting me/us to redeem shares in this account by writing checks for
Account Privilege $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, Applicant authorizes
Options Exchange the Investment Manager to honor any telephone request for the exchange and/or
(Check applicable boxes) / / Telephone redemption of fund shares (maximum telephone 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 or Social Security No.
/ / Profit-Sharing ______________________________________________________
Account First Middle Last
Registration
(Please Print) ______________________________________________________ Industry Type______________________
Name of Corporation, Trust, Partnership, etc.
Telephone
______________________________________________________ Business ( ) ___________________
Street Address
______________________________________________________ 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 subiect 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 *The owner must strike out the language certifying that they are not subject to backup withholding due to
Withholding 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
In case of joint ownership, both must sign. If no form of
Date ________________________________________________ ownership is designed, 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 named 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
[SECURITY DISTRIBUTORS, INC. LOGO]
700 SW Harrison St.
Topeka, Kansas 66636-0001
(913) 295-3127
(800) 888-2461
SDI 607 (R11-95) 46-06072-00
<PAGE> 55
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
November 1, 1995
RELATING TO THE PROSPECTUS DATED NOVEMBER 1, 1995
(913) 295-3127
(800) 888-2461
INVESTMENT MANAGER
Security Management Company
700 SW Harrison Stsreet
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
SDI 298A (R11-95) 46-02981-01
SAI/by/10/27/95
<PAGE> 56
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
November 1, 1995
(RELATING TO THE PROSPECTUS DATED NOVEMBER 1, 1995)
This Statement of Additional Information is not a Prospectus. It
should be read in conjunction with the Prospectus dated November 1, 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.................................... 2
Limited Maturity Bond Fund............................. 3
U.S. Government Fund................................... 5
Global Aggressive Bond Fund............................ 6
Security Tax-Exempt Fund................................. 17
Security Cash Fund....................................... 21
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.................................... 55
Simplified Employee Pension Plans (SEPPs).................. 56
Financial Statements....................................... 56
Tax-Exempt vs. Taxable Income.............................. 56
Appendix A................................................. 57
</TABLE>
<PAGE> 57
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.)
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The Funds may utilize short-term trading to a limited extent in order to
take advantage of differentials in bond yields consistent with their respective
investment objectives. The portfolio turnover rate for Class A and B shares of
Corporate Bond, U.S. Government and Tax-Exempt Funds for the fiscal year ended
December 31, 1994, was: Corporate Bond - 204%; U.S. Government - 220%; and
Tax-Exempt - 88%. The portfolio turnover rate for the Funds' Class A shares
for the fiscal year ended December 31, 1993 was: Corporate Bond - 157%; U.S.
Government - 153%; and Tax-Exempt - 118%. The annualized portfolio turnover
rate for the Funds' Class B shares for the period October 19, 1993 (date of
Class B shares' inception) to December 31, 1993 was: Corporate Bond - 164%;
U.S. Government - 114%; and Tax-Exempt - 90%. The annualized portfolio
turnover rate for the Limited Maturity Bond Fund for the period January 17,
1995 (date of inception) to June 30, 1995 and the Global Aggressive Bond Fund
for the period June 1, 1995 (date of inception) to September 30, 1995 was:
Limited Maturity Bond - 4%; and Global Aggressive Bond - 58%. Portfolio
turnover is the percentage of the lower of security sales or purchases to the
average portfolio value and would be 100% if all securities in the Fund were
replaced within a period of one year.
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
SECURITY INCOME FUND
Security Income Fund ("Income Fund") consists of 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.
Corporate Bond, Limited Maturity Bond and U.S. Government Funds will
purchase solely debt securities and will not invest in securities which are not
publicly traded or marketable. Short-term obligations may be purchased in any
amount as the Investment Manager deems appropriate for defensive or liquidity
purposes. Each Fund's portfolio may include a significant amount of debt
securities which sell at discounts from their face amount as a result of
current market conditions. For example, debt securities with fixed-rate
coupons are generally sold at a discount from their face amount during periods
of rising interest rates.
Income Fund makes no representation that the stated investment objective
of any Series will be achieved. Although there is no present intention to do
so, the investment objective of any Series of the Fund may be altered by the
board of directors without the approval of stockholders of the series.
CORPORATE BOND FUND
The investment objective of the Corporate Bond Fund is to conserve capital
while generating interest income. 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
or instrumentalities.
Corporate Bond Fund may invest in repurchase agreements on an overnight
basis. See the discussion of repurchase agreements under "Investment Methods
and Risk Factors." The Fund may borrow money from banks as a temporary measure
for emergency purposes or to facilitate redemption requests. Borrowing is
discussed in more detail under "Investment Methods and Risk Factors." Pending
investment in securities or to meet potential redemptions, the Fund may invest
in certificates of deposit, bank demand accounts and high quality money market
instruments.
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 or instrumentality 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
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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 at the time of
purchase, 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.
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 CDs 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
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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). MO classes vary in the rate and time at which they
receive principal and interest payments. SEQs, also called plain vanilla,
clean pay, or current pay classes, sequentially receive principal payments from
underlying mortgage securities when the principal on a previous class has been
completely paid off. During the months prior to their receipt of principal
payments, SEQs receive interest payments at the coupon rate on their principal.
PACs are designed to produce a stable cash flow of principal payments over a
predetermined period of time. PACs guard against a certain level of prepayment
risk by distributing prepayments to SUPs, also called companion classes. TACs
pay a targeted principal payment schedule, as long as prepayments are not made
at a rate slower than an expected constant prepayment speed. If prepayments
increase, the excess over the target is paid to SUPs. SEQs may have a less
stable cash flow than PACs and TACs and, consequently, have a greater potential
yield. PACs generally pay a lower yield than TACs because of PACs' lower risk.
Because SUPs are directly affected by the rate of prepayment of underlying
mortgages, SUPs may experience volatile cash flow behavior. When prepayment
speeds fluctuate, the average life of a SUP will vary. SUPs, therefore, are
priced at a higher yield than less volatile classes of CMOs. Z Classes do not
receive payments, including interest payments, until certain other classes are
paid off. At that time, the Z Class begins to receive the accumulated interest
and principal payments. A Floater has a coupon rate that adjusts periodically
(usually monthly) by adding a spread to a benchmark index subject to a lifetime
maximum cap. The yield of a Floater is sensitive to prepayment rates and the
level of the benchmark index.
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.
Limited Maturity Bond Fund may invest in repurchase agreements on an
overnight basis. See the discussion of repurchase agreements under "Investment
Methods and Risk Factors." The Fund may borrow money from banks as a temporary
measure for emergency purposes or to facilitate redemption requests. Borrowing
is
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discussed in more detail under "Investment Methods and Risk Factors." Pending
investment in securities or to meet potential redemptions, the Fund may invest
in certificates of deposit, bank demand accounts and high quality money market
instruments.
From time to time, Limited Maturity Bond Fund may invest part or all of
its assets in commercial notes or money market instruments.
U.S. GOVERNMENT FUND
The investment objective of the U.S. Government Fund is to provide a high
level of interest income with security of principal by investing primarily in
U.S. Government securities. U.S. Government securities are obligations of, or
guaranteed (as to principal and interest) by, the U.S. Government, its agencies
(such as the Federal Housing Administration and Government National Mortgage
Association) or instrumentalities (such as Federal Home Loan Banks and Federal
Land Banks), and instruments fully collateralized with such obligations such as
repurchase agreements. U.S. Government securities include bills, Certificates
of Indebtedness, notes and bonds issued by the Treasury or by agencies or
instrumentalities of the U.S. Government. The Fund may, for defensive
purposes, temporarily invest part or all of its assets in money market
instruments including deposits and bankers acceptances in depository
institutions insured by the FDIC, and short-term U.S. Government and agency
securities. 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.
U.S. Government Fund may invest in repurchase agreements on an overnight
basis. See the discussion of repurchase agreements under "Investment Methods
and Risk Factors." The Fund may borrow money from banks as a temporary measure
for emergency purposes or to facilitate redemption requests. Borrowing is
discussed in more detail under "Investment Methods and Risk Factors." Pending
investment in securities or to meet potential redemptions, the Fund may invest
in certificates of deposit, bank demand accounts and high quality money market
instruments.
From time to time the portfolio of the U.S. Government Fund may consist
primarily of Government National Mortgage Association (GNMA) certificates.
GNMA certificates are mortgage-backed securities representing part ownership of
a pool of mortgage loans. These loans, issued by lenders such as mortgage
bankers, commercial banks and savings and loan associations, are either issued
by the Federal Housing Administration or guaranteed by the Veterans
Administration. A "pool" or group of such mortgages is assembled and, after
being approved by GNMA, is offered to investors through securities dealers.
Once approved by GNMA, the timely payment of interest and principal on each
mortgage is guaranteed by GNMA and backed by the full faith and credit of the
U.S. Government. GNMA certificates differ from bonds in that principal is paid
back monthly by the borrower over the term of the loan rather than returned in
a lump sum at maturity. GNMA certificates are called "pass through" securities
because both interest and principal payments (including prepayments) are passed
through to the holder of the certificate.
The Fund may invest in other mortgage backed securities (MBSs) as
discussed under "Investment Methods and Risk Factors - Mortgage Backed
Securities and Collateralized Mortgage Obligations" in the Prospectus. MBSs
include certain securities issued by the United States government or one of its
agencies or instrumentalities, such as GNMAs, or securities issued by private
issuers. The Fund may not invest more than 20% of the value of its total
assets in MBSs issued by private issuers. The Fund will not invest in any
stripped mortgage backed securities.
The Fund will attempt to maximize the return on its portfolio by taking
advantage of market developments and yield disparities, which may include use
of the following strategies:
1. Shortening the average maturity of its portfolio in anticipation of a rise
in interest rates so as to minimize depreciation of principal;
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2. Lengthening the average maturity of its portfolio in anticipation of a
decline in interest rates so as to maximize appreciation of principal;
3. Selling one type of U.S. Government obligation and buying another when
disparities arise in the relative values of each; and
4. Changing from one U.S. Government obligation to an essentially similar
U.S. Government obligation when their respective yields are distorted due
to market factors.
These strategies may result in increases or decreases in the Fund's
current income available for distribution to Fund shareholders, and the Fund
may hold obligations which sell at moderate to substantial premiums or
discounts from face value. Moreover, if the Fund's expectations of changes in
interest rates or its evaluation of the normal yield relationship between two
obligations proves to be incorrect, the Fund's income, net asset value per
share and potential capital gain may be decreased or its potential capital loss
may be increased. It is anticipated that securities invested in by this Fund
will be held by the Fund on an average from three to five years.
While there is minimal credit risk involved in the purchase of U.S.
Government securities, as with any fixed income security the market value is
generally affected by changes in the level of interest rates. An increase in
interest rates will tend to reduce the market value of fixed income
investments, and a decline in interest rates will tend to increase their value.
In addition, while debt securities with longer maturities normally produce
higher yields, they are subject to potentially greater capital changes in
market value than obligations with shorter maturities.
The potential for appreciation in GNMAs and other MBSs, which might
otherwise be expected to occur as a result of a decline in interest rates, may
be limited or negated by increased principal prepayments of the underlying
mortgages. Prepayments of MBSs occur with increasing frequency when mortgage
rates decline because, among other reasons, mortgagors may be able to refinance
their outstanding mortgages at lower interest rates or prepay their existing
mortgages. Such prepayments would then be reinvested by the Fund at the lower
current interest rates.
While mortgages underlying GNMA certificates have a stated maturity of up
to 30 years, it has been the experience of the mortgage industry that the
average life of comparable mortgages, owing to prepayments, refinancings and
payments from foreclosures, is considerably less. Yield tables, published in
1981, utilize a 12-year average life assumption for GNMA pools of 26-30 year
mortgages, and GNMA certificates continue to be traded based on this
assumption. Recently it has been observed that mortgage pools issued at high
interest rates have experienced accelerated prepayment rates as interest rates
decline, which would result in a shorter average life than 12 years.
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 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
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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. Global Aggressive Bond Fund may invest in repurchase agreements
which are agreements by which a purchaser 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. 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. Repurchase agreements are discussed in more detail under "Investment
Methods and Risk Factors."
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"
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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. See the discussion of borrowing under "Investment Methods and
Risk Factors."
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 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
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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.
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
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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 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.
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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's statement of assets and
liabilities. This asset will be adjusted daily to the option's current market
value, which will be the latest sale price at the time at which the net asset
value per share of 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 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
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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.
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
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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 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.
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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 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
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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 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;
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(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 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.
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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 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
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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 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.
Tax-Exempt Fund may invest in repurchase agreements which 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. Income earned
by the Fund on repurchase agreements is not exempt from federal income tax even
if the transaction involves municipal 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 the discussion of repurchase agreements under
"Investment Methods and Risk Factors."
Tax-Exempt Fund may borrow money from banks as a temporary measure for
emergency purposes or to facilitate redemption requests. Borrowing is
discussed in more detail under "Investment Methods and Risk Factors." Pending
investment in securities or to meet potential redemptions, the Fund may invest
in certificates of deposit, bank demand accounts and high quality money market
instruments.
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,
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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 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.
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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 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
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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 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 investment objective of Cash Fund is to seek as high a level of
current income as is consistent with preservation of capital and liquidity. No
assurances can be given that Cash Fund will achieve its objective. The Fund
will attempt to achieve its objective by investing at least 95% of its total
assets, measured at the time of investment, in a diversified portfolio of
highest quality money market instruments. Cash Fund may also invest up to 5%
of its total assets, measured at the time of investment, in money market
instruments that are in the second-highest rating category for short-term debt
obligations. Money market instruments in which Cash Fund may invest consist of
the following:
U.S. GOVERNMENT SECURITIES. Obligations issued or guaranteed (as to
principal or interest) by the United States Government or its agencies (such as
the Small Business Administration, the Federal Housing 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.
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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% 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.
Cash Fund may not invest more than 5% of its total assets, measured at the
time of investment, in the securities of any one issuer that are of the highest
quality or more than the greater of 1% of its total assets or $1,000,000,
measured at the time of investment, in securities of any one issuer that are in
the second-highest rating category, except that these limitations shall not
apply to U.S. Government securities. The Fund may exceed the 5% limitation for
up to three business days after the purchase of the securities of any one
issuer that are of the highest quality, provided that the Fund does not have
outstanding at any time more than one such investment. In the event that an
instrument acquired by Cash Fund is downgraded, the Investment Manager, under
procedures approved by the Board of Directors, (or the Board of Directors
itself if the Investment Manager becomes aware that a security has been
downgraded below the second-highest rating category and the Investment Manager
does not dispose of the security within five business days) shall promptly
reassess whether such security presents minimal credit risk and determine
whether or not to retain the instrument. In the event that an instrument
acquired by Cash Fund ceases to be of the quality that is eligible for the
Fund, the Fund shall promptly dispose of the instrument in an orderly manner
unless the Board of Directors determines that this would not be in the best
interests of the Fund.
Cash Fund may acquire one or more of the above types of securities subject
to repurchase agreements. A repurchase transaction involves a purchase by the
Fund of a security from a selling financial institution, such as a bank,
savings and loan association or broker/dealer, which agrees to repurchase such
security at a specified price and at a fixed time in the future, usually not
more than seven days from the date of purchase. Not more than 10% of Cash
Fund's total assets will be invested in illiquid assets, which include
repurchase agreements with maturities of over seven days. See the discussion
of repurchase agreements under "Investment Methods and Risk Factors."
Cash Fund may borrow money from banks as a temporary measure for emergency
purposes or to facilitate redemption requests. Borrowing is discussed in more
detail under "Investment Methods and Risk Factors." Pending investment in
securities or to meet potential redemptions, the Fund may invest in
certificates of deposit, bank demand accounts and high quality money market
instruments.
RULE 144A SECURITIES. Certain of the securities acquired by Cash Fund may
be restricted as to disposition under federal securities laws, provided that
such restricted securities are eligible for resale to qualified institutional
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
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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.
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 METHODS AND RISK FACTORS
Some of the risk factors related to certain securities, instruments and
techniques that may be used by one or more of the Funds are described in the
"Investment Objectives and Policies" and "Investment Methods and Risk Factors"
sections of the Prospectus and in this Statement of Additional Information.
The following is a description of certain additional risk factors related to
various securities, instruments and techniques. The risks so described only
apply to those Funds which may invest in such securities and instruments or
which use such techniques. Also included is a general description of some of
the investment instruments, techniques and methods which may be used by one or
more of the Funds. The methods described only apply to those Funds which may
use such methods. Although a Fund may employ the techniques, instruments and
methods described below, consistent with its investment objective and policies
and any applicable law, no Funds will be required to do so.
GENERAL RISK FACTORS. Each Fund's net asset value will fluctuate,
reflecting fluctuations in the market value of its portfolio positions and, if
applicable, its net currency exposure. The value of fixed income securities
held by the Funds generally fluctuates inversely with interest rate movements.
In other words, bond prices generally fall as interest rates rise and generally
rise as interest rates fall. Longer term bonds held by the Funds are subject
to greater interest rate risk. There is no assurance that any Fund will
achieve its investment objective.
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REPURCHASE AGREEMENTS. Each of the Funds may enter into repurchase
agreements. Repurchase agreements are transactions in which the purchaser buys
a debt security from a bank or recognized securities dealer and simultaneously
commits to resell that security to the bank or dealer at an agreed upon price,
date and market rate of interest unrelated to the coupon rate or maturity of
the purchased security. Repurchase agreements are considered to be loans which
must be fully collateralized including interest earned thereon during the
entire term of the agreement. If the institution defaults on the repurchase
agreement, the Fund will retain possession of the underlying securities. If
bankruptcy proceedings are commended with respect to the seller, realization on
the collateral by the Fund may be delayed or limited and the Fund may incur
additional costs. In such case, the Fund will be subject to risks associated
with changes in market value of the collateral securities. The Fund intends to
enter into repurchase agreements only with banks and broker/dealers believed to
present minimal credit risks. Accordingly, the Funds will enter into
repurchase agreements only with (a) brokers having total capitalization of at
least $40 million and a ratio of aggregate indebtedness to net capital of no
more than 4 to 1, or, alternatively, net capital equal to 6% of aggregate debit
balances, or (b) banks having at least $1 billion in assets and a net worth of
at least $100 million as of its most recent annual report. In addition, the
agregate repurchase price of all repurchase agreements held by the Fund with
any broker shall not exceed 15% of the total assets of the Fund or $5 million,
whichever is greater.
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 Aggressive Bond Funds may each borrow up to 5%
of total Fund assets. To the extent that a Fund purchases securities while is
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.
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); provided, however, that for the
Global Aggressive Bond Fund, this limitation applies only with
respect to 75% of the value of its total assets.
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4. Not to purchase more than 10% of the outstanding voting securities (or of
any class of outstanding securities) of any one issuer; (other than
securities of the U.S. Government, its agencies or instrumentalities).
5. Not to invest in companies for the purpose of exercising control of
management.
6. Not to act as underwriter of securities of other issuers.
7. Not to invest in an amount equal to, or in excess of, 25% of its total
assets in any particular industry (other than securities of the U.S.
Government, its agencies or instrumentalities).
8. Not to purchase or sell real estate. (This policy shall not prevent
the Fund from investing in securities or other instruments backed by real
estate or in securities of companies engaged in the real estate business.)
9. Not to buy or sell commodities or commodity contracts; provided,
however, that 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
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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.
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;
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12. Not to write, purchase or sell put or call options or combinations
thereof, except that it may purchase and hold puts or "stand-by
commitments" relating to municipal securities, as described in this
prospectus;
13. Not to invest in securities which are not readily marketable, securities
the disposition of which is restricted under federal securities laws or
repurchase agreements maturing in more than seven days (collectively
"illiquid securities") if, as a result, more than 10% of the Fund's net
assets would be invested in illiquid securities.
For purposes of restrictions (8) and (10) above, each governmental
subdivision, i.e., state, territory, possession of the United States or any
political subdivision of any of the foregoing, including agencies, authorities,
instrumentalities, or similar entities, or of the District of Columbia shall be
considered a separate issuer if its assets and revenues are separate from those
of the governmental body creating it and the security is backed only by its own
assets and revenues. Further, in the case of an industrial development bond,
if the security is backed only by the assets and revenues of a non-governmental
user, then such non-governmental user will be deemed to be the sole issuer. If
an industrial development bond or government issued security is guaranteed by a
governmental or other entity, such guarantee would be considered a separate
security issued by the guarantor.
The above limitations are applicable at the time of investment, and later
increases or decreases in percentages resulting from changes in value or net
assets will not result in violation of such limitations.
CASH FUND'S FUNDAMENTAL POLICIES
Cash Fund's fundamental investment policies are:
1. Not to purchase any securities other than those referred to under
"Security Cash Fund," page 21;
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 21;
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.)
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11. Not to engage in the underwriting of securities except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in disposing
of a portfolio security;
12. Not to make short sales of securities;
13. Not to purchase or sell real estate, although it may purchase securities of
issuers which engage in real estate operations, securities which are
secured by interests in real estate, or securities representing interests
in real estate;
14. Not to invest for the purpose of exercising control of management of
another company;
15. Not to purchase oil, gas or other mineral leases, rights, or royalty
contracts or exploration or development programs, except that the Fund may
invest in the securities of companies which invest in or sponsor such
programs;
16. Not to purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets;
17. Not to write, purchase or sell puts, calls, or combinations thereof;
18. Not to purchase or sell commodities or commodity futures contracts;
19. Not to issue senior securities as defined in the Investment Company Act of
1940.
In order to permit the sale of shares of Cash Fund in certain states, the
Fund may make commitments more restrictive than the fundamental restrictions
described above. Should the Fund determine that any such commitment is no
longer in the best interest of the Fund and its stockholders, it will revoke
the commitment by terminating sales of its shares in the state(s) involved.
Any investment restriction except restriction 2, which involves a maximum
or minimum percentage of securities or assets shall not be considered to be
violated unless an excess over or a deficiency under the percentage occurs
immediately after, and is caused by, an acquisition or disposition of
securities or utilization of assets by Cash Fund.
OFFICERS AND DIRECTORS
The officers and directors of the Funds and their principal occupations for
at least the last five years are as follows. Unless otherwise noted, the
address of each officer and director is 700 Harrison Street, Topeka, Kansas
66636-0001.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
NAME, ADDRESS AND POSITIONS HELD WITH THE FUNDS PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C>
JOHN D. CLELAND,* President and Director Senior Vice President and 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
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE> 85
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
NAME, ADDRESS AND POSITIONS HELD WITH THE FUNDS PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C>
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.
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 37, 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> 86
<TABLE>
<CAPTION>
PENSION OR RETIREMENT
BENEFITS ACCRUED AS PART
AGGREGATE COMPENSATION 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> 87
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> 88
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> 89
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> 90
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> 91
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
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<PAGE> 92
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
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<PAGE> 93
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
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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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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. For
the period January 17, 1995 (date of inception) to June 30, 1995 and the period
June 1, 1995 (date of inception) to September 30, 1995, the total expenses were
.53% for Class A shares and 1.33% for Class B shares of Limited Maturity Bond
Fund and 2.00% for Class A shares and 2.75% for Class B shares of Global
Aggressive Bond Fund, respectively.
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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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<PAGE> 97
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> 98
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 21, and "Dividends and
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<PAGE> 100
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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<PAGE> 102
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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<PAGE> 103
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> 104
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> 105
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> 106
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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<PAGE> 107
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 18.) 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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<PAGE> 108
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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<PAGE> 109
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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<PAGE> 110
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 50l(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
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<PAGE> 111
$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.
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<PAGE> 112
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, the unaudited Semiannual Report
dated June 30, 1995, the unaudited financial statements for Limited Maturity
Bond Fund for the period January 17, 1995 (date of inception) to June 30, 1995,
and the unaudited financial statements for Global Aggressive Bond Fund for the
period June 1, 1995 (date of inception) to September 30, 1995, are incorporated
herein by reference. A copy of the Annual Report, Semiannual Report, and the
unaudited financial statements for Limited Maturity Bond and Global Aggressive
Bond Funds 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> <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> 113
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.
57
<PAGE> 114
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 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> 115
SECURITY
FUNDS
SEMI-ANNUAL
REPORT
JUNE 30, 1995
- -Security Income
Fund
- Corporate Bond Series
- U.S. Government Series
- Limited Maturity Bond Series
- Global Aggressive Bond Series
- -Security Tax-Exempt Fund
- -Security Cash Fund
[LOGO]
A Member of The Security
Beneift Group of Companies
<PAGE> 116
[SECURITY FUNDS LOGO]
PRESIDENT'S LETTER
- ---------------------------------------------------------------------------
AUGUST 15, 1995
[PICTURE OF JOHN CLELAND]
Dear Shareholder:
The generally positive investment environment that marked the first half of
1995 was cheered by fixed-income investors, especially following 1994 - the
worst year for bonds since the Great Depression. Fixed-income investors who
remained in the market had the opportunity in the first half of 1995 to make up
for last year's losses and then some! History shows that market fluctuations
are inevitable. However, investors who remain committed and continue to invest
regardless of the overall level of the market stand to benefit over time.*
A gradual slowdown in economic growth and continued subdued inflation
produced a strong bond market rally in the first half of 1995. It appears the
Federal Reserve Board's five short-term interest rate increases in 1994 and
early 1995 were successful in cooling the economy and keeping inflation under
control. Early concern about whether the economy could have a soft landing gave
way to the belief by many that the economy had a "perfect" landing.
Triggering the bond market rally was a dramatic decline in interest rates
across all maturity sectors. Investors in taxable long-term bonds benefited
from substantial price appreciation. Tax-exempt bonds also experienced a
remarkable recovery in the second quarter thanks to declining interest rates.
Only short-term money funds saw yields decline.
Globally, the European bond market underperformed the U.S. market during
the six-month period. However, attractive buys are available on a
country-by-country basis. We anticipate that our new Global Aggressive Bond
Fund's exposure to the U.S. bond market will decrease as Treasury bills are
sold and the proceeds invested in European bonds. The portfolio will also
maintain its significant weighting in southern European countries. With the
exception of Turkey, all these countries are showing progress in reducing
inflation and government deficits.
Looking forward through the rest of 1995, we expect interest rates will
moderate slightly, providing continuing attractive returns for fixed-income
investors. We believe conditions should remain generally favorable for owners
of all types of financial assets for the remainder of the year.
Over the next several pages, we review the factors influencing the
performance of Security Tax-Exempt Fund, Security Cash Fund and each Series of
Security Income Fund for the six-month period ended June 30, 1995. As always,
our goal is to provide you with positive investment results over time along
with the highest-quality service in the industry. We invite your questions and
comments. Please call our customer service center at 1-800-888-2461, extension
3127.
Sincerely,
/s/ John D. Cleland
John D. Cleland
President - Security Funds
*Programs of regular investing do not assure profits or protect against loss in
a declining market.
1
<PAGE> 117
[SECURITY FUNDS LOGO]
SECURITY FUNDS
AUGUST 15, 1995
[PICTURE OF SECURITY MANAGEMENT FIXED-INCOME TEAM]
THE SECURITY MANAGEMENT FIXED-INCOME TEAM:
ELAINE MILLER, JANE TEDDER, GREG HAMILTON, JOHN CLELAND,
TOM SWANK, STEVE BOWSER
SECURITY INCOME FUND
CORPORATE BOND SERIES
U.S. GOVERNMENT SERIES
LIMITED MATURITY BOND SERIES
SECURITY TAX-EXEMPT FUND
SECURITY CASH FUND
The bond markets were much kinder to fixed-income investors in the first six
months of 1995 than they were in 1994. We were pleased with the actions taken
by the Federal Reserve Open Market Committee last year to keep inflation under
control. As economic activity slowed, fears of rampant inflation disappeared
and bond prices moved upward, producing attractive total returns for
shareholders.
When bond prices rise, a portfolio can benefit most by being on the long end of
the yield curve as was the Corporate Bond Series; that is, by holding
securities that are longer than average in maturity and duration. By the same
token, a portfolio which is on the long end of the yield curve will be at a
disadvantage when bond prices fall.
CORPORATE BOND SERIES
AVERAGE ANNUAL TOTAL RETURN
AS OF JUNE 30, 1995
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
<S> <C> <C> <C>
1 Year 5.26% 1 Year 4.82%
5 Years 7.33% Since Inception 4.12%
10 Years 8.21% 10-19-93
</TABLE>
- ----------------------------
[PIE CHART]
CORPORATE BOND SERIES
6-30-95
<TABLE>
<S> <C>
AAA 1.6%
AA 26.4%
A 64.9%
BBB 4.9%
CASH AND EQUIVALENTS 2.2%
- ----------------------------
</TABLE>
Being on the long end of the yield curve also allowed the U.S. Government
Series to perform very well for the period. The decision was made
early in 1995 to extend the maturities of many of the portfolio holdings out
beyond 20 years, thereby maximizing performance in the strong bond market. The
bonds held in this fund are of the highest credit quality, as all are issued by
the U.S. Government, its agencies or instrumentalities.* This high credit
standard did not constrain performance, however, as the total return for the
six-month period was 12.07%.**
2
<PAGE> 118
[SECURITY FUNDS LOGO]
SECURITY FUNDS
AUGUST 15, 1995
U.S. GOVERNMENT SERIES
AVERAGE ANNUAL TOTAL RETURN
AS OF JUNE 30, 1995
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
<S> <C> <C> <C>
1 Year 6.29% 1 Year 5.71%
5 Years 7.20% Since Inception -1.84%
10 Years 8.04% 10-19-93
</TABLE>
[PIE CHART]
<TABLE>
<CAPTION>
U.S. GOVERNMENT SERIES
6-30-95
<S> <C>
FNMAS 39.6%
GNMAS 22.0%
TREASURY 36.4%
CASH AND EQUIVALENTS 22.0%
</TABLE>
A new addition to the Security Income Fund family in 1995, the Limited Maturity
Bond Series, also performed well with a total return of 8.7% since its
inception on January 17, 1995.** This series is designed for investors who seek
a higher dividend yield than offered by money market funds, but who do not want
the additional risk that generally accompanies a long-maturity bond fund.
However, as with all bond funds, the share price of the Series will fluctuate
inversely with changes in interest rates. The weighted average maturity of the
securities in the Limited Maturity Bond Series will not exceed 10 years. While
this maturity restriction may dampen total return performance in periods of
rapidly rising bond prices, it will also reduce potential losses in periods of
declining prices.
LIMITED MATURITY BOND SERIES
AVERAGE ANNUAL TOTAL RETURN
AS OF JUNE 30, 1995
<TABLE>
<S> <C>
CLASS A SHARES
Since Inception 1-17-95 3.60%*
CLASS B SHARES
Since Inception 1-17-95 3.34%*
</TABLE>
*The percentage amounts are from inception and not annualized.
[PIE CHART]
<TABLE>
<CAPTION>
LIMITED MATURITY BOND SERIES
6-30-95
<S> <C>
CASH AND EQUIVALENTS 3.4%
AAA 30.3%
AA 12.9%
A 38.0
BBB 11.3%
BB 4.1%
</TABLE>
Investors' concerns about possible tax reform legislation and its impact on
municipal bonds held back performance in the tax exempt sector of the
fixed-income markets. Although performance in municipal bond funds was not as
spectacular as that of the taxable arena, the Security Tax Exempt Fund still
provided an attractive 7.81%** total return for the six-month period.*** As in
our other bond funds, the longer maturities of the securities in the portfolio
contributed to the strong results. At Security Management Company, we are
closely monitoring the numerous tax proposals submitted to Congress for
consideration. We believe, however, that it will be at least two years before
any kind of change can be effected in the tax structure. Any final legislation
will almost
3
<PAGE> 119
[SECURITY FUNDS LOGO] SECURITY FUNDS
AUGUST 15, 1995
certainly differ a great deal from the proposals being discussed at this time.
Meanwhile, the municipal market seems undervalued at today's prices, and may
present an appealing investment option.
TAX-EXEMPT FUND
AVERAGE ANNUAL TOTAL RETURN
AS OF JUNE 30, 1995
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
<S> <C> <C> <C>
1 Year 0.78% 1 Year -0.46%
5 Years 5.65% Since Inception -4.55%
10 Years 6.58% 10-19-93
</TABLE>
[PIE CHART]
TAX-EXEMPT FUND
6-30-95
<TABLE>
<S> <C>
CASH AND EQUIVALENTS 2.2%
AAA 8.3%
AA 61.9%
A 17.2%
BBB 10.4%
</TABLE>
Interest rate increases initiated by the Federal Reserve Open Market Committee
in 1994 allowed dividend yields on the Security Cash Fund to rise along with
other short-term investment instruments.+ The seven-day yield at June 30, 1995,
was 5.14%, compared with a rate of 3.42% on the same date in 1994. This fund
invests only in high-quality money market instruments, providing an excellent
option for short-term investments.
The Fixed-Income Management Team continually monitors economic changes and
developments, and is prepared to make adjustments accordingly. We are confident
that the Federal Reserve Board remains determined to keep inflation under
control, which should prove to be positive for the bond markets. We anticipate
interest rates will continue to decline in the second half of 1995, providing
continued attractive returns for shareholders.
*Although the securities purchased by the U.S. Government Series are guaranteed
as to the timely payment of principal and interest by the U.S. Government, its
agencies or instrumentalities, the shares of the Series itself are not so
guaranteed.
**These performance figures are based on Class A share prices and
do not reflect deduction of the sales charge.
***Income from the Security Tax-Exempt Fund may be subject to the alternative
minimum tax.
+The Security Cash Fund is neither insured nor guaranteed by the U.S.
Government and there is no assurance that the fund will be able to maintain a
stable net asset value of $1.00 per share.
The performance data given here represents past performance, which is not
predictive of future results. For Class A shares these figures reflect
deduction of the maximum sales charge of 4.75%. For Class B shares the total
return includes deduction of the maximum contingent deferred sales charge. The
investment return and principal value of an investment will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than their
original cost.
4
<PAGE> 120
[SECURITY FUNDS LOGO] SECURITY FUNDS
AUGUST 15, 1995
GLOBAL AGGRESSIVE BOND SERIES
[MFR LOGO] [LEXINGTON LOGO]
SUBADVISORS - MFR ADVISORS, INC., AND LEXINGTON MANAGEMENT CORPORATION
PORTFOLIO MANAGERS, MARIA FIORINI RAMIREZ AND DENIS JAMISON
Introduced June 1, 1995, our new Global Aggressive Bond Series' seeks to
provide shareholders a high level of current income with capital appreciation
as a secondary objective. No single bond market has consistently provided the
best returns, and the opportunity for maximum yield shifts from country to
country. The Series offers income oriented investors the opportunity to
globally diversify their portfolios with exposure to potentially the most
attractive fixed-income investments worldwide. To accomplish its goal, the
Series purchases fixed-income investments based upon positive outlooks for
individual countries: their economies, currencies and interest rates.
As of June 30, 1995, the Series portfolio was invested 54% in non-dollar
denominated bonds and 46% in dollar denominated bonds. We believe the
combination of a slowing domestic economy and declining short-term interest
rates limits the U.S. dollar's appreciation potential. As a result, the
portfolio's U.S. dollar exposure will likely decline to around 30% over the
next several months.
One of the portfolio's largest concentrations is in Southern European
countries, which are all showing progress on reducing inflation and government
deficits. Their currencies are tightening relative to those in the core
European countries of Switzerland, Germany and France. However, the
portfolio's small position in Turkey, whose currency is depreciating, is
designed to boost the portfolio's nominal yield.
As of June 30, 1995, the average maturity of the portfolio was 9.7 years.
However, some of the positions in the portfolio have variable interest rates
which are likely to reset sooner than the average maturity would indicate.
Because of their relatively stable economic environments, the bulk of the
longer term assets are in the U.S. dollar block - U.S., Canada and Australia -
and core European countries.
Investing in foreign countries may involve risks, such as currency fluctuations
and political instability, not associated with investing exclusively in the
U.S.
5
<PAGE> 121
STATEMENTS OF NET ASSETS
JUNE 30, 1995
(UNAUDITED)
SECURITY INCOME FUND
CORPORATE BOND SERIES
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT CORPORATE BONDS VALUE
- -------------------------------------------------------------------------------------
<S> <C> <C>
AEROSPACE & DEFENSE - 5.1%
$4,900,000 Lockheed Corporation,
7.875% - 2023 .................................... $ 5,028,625
ALUMINUM - 1.1%
1,000,000 Alcan Aluminum Ltd., 9.625%
- 2019 ........................................... 1,146,250
BANKS - 8.2%
3,640,000 Citicorp, 9.375% - 2016 ........................... 3,844,750
4,000,000 Bank of Montreal, 7.80% - 2007 .................... 4,225,000
-----------
8,069,750
BROKERS, DEALERS & SERVICES - 5.4%
1,000,000 Bear Stearns, 8.75% - 2004 ........................ 1,101,250
4,000,000 Lehman Brothers Holdings,
Inc., 8.50% - 2007 ............................... 4,230,000
-----------
5,331,250
DISCOUNT STORES - 4.5%
4,500,000 Wal-Mart Stores, Inc.,
7.25% - 2013...................................... 4,483,125
DRUGS - 4.5%
4,500,000 Eli Lilly & Company,
7.125% - 2025...................................... 4,449,375
DRUG STORES - 5.1%
4,800,000 Rite Aid Corporation,
7.625% - 2005...................................... 5,064,000
FOOD & BEVERAGE TRADE - 4.5%
4,300,000 Super Valu Stores, 8.875% - 2016..................... 4,504,250
INSURANCE - 4.5%
4,000,000 GEICO Corporation, 9.15% - 2021....................... 4,490,000
LUMBER & WOOD PRODUCTS - 4.9%
4,500,000 Georgia Pacific Company,
9.125% - 2022...................................... 4,826,250
MACHINERY - 3.5%
3,500,000 Ingersoll-Rand Company,
7.20% - 2025....................................... 3,430,000
PAPER PRODUCTS - 9.7%
4,600,000 International Paper Products,
7.625% - 2007...................................... 4,887,500
5,000,000 Scott Paper Company,
7.00% - 2023....................................... 4,650,000
-----------
9,537,500
PETROLEUM REFINING & PRODUCTS - 9.6%
BP America, Inc.,
$3,500,000 8.75% debs. - 2003................................. $ 3,906,875
1,000,000 10.00% debs - 2018................................. 1,116,250
4,500,000 Texaco Capital, Inc., 7.50% - 2043................... 4,471,875
-----------
9,495,000
SANITARY SERVICES - 5.0%
4,500,000 Waste Management Inc.,
8.75% - 2018....................................... 4,978,125
SPECIALTY CHEMICALS & PLASTICS - 4.6%
4,000,000 Rohm & Haas Company,
9.50% - 2021....................................... 4,525,000
TELECOMMUNICATION EQUIPMENT - 3.3%
3,000,000 Comsat Corporation, 8.125% - 2004.................... 3,240,000
UTILITIES - ELECTRIC - 4.5%
4,500,000 Potomac Edison Company,
7.625% - 2025...................................... 4,421,250
UTILITIES - ELECTRIC &GAS - 8.2%
5,000,000 Public Service Electric & Gas
Company, 8.75% - 2021.............................. 5,362,500
2,500,000 Washington Gas & Light
Company, 8.625% - 2017............................. 2,700,000
-----------
8,062,500
-----------
Total corporate bonds
- (cost $92,018,283) - 96.2% ........................ 95,082,250
GOVERNMENT & GOVERNMENT
AGENCY SECURITIES
-----------------------
U.S. GOVERNMENT AGENCIES - 1.6%
1,500,000 Federal Home Loan Mortgage
Corporation, 7.974% - 2005......................... 1,539,240
-----------
Total government & government
agency securities -
(cost $1,500,000) - 1.6%........................... 1,539,240
-----------
Total investments -
(cost $93,518,283) - 97.8% ........................ 96,621,490
Cash and other assets, less
liabilities - 2.2% ................................ 2,199,796
-----------
Total net assets - Corporate Bond
Series - 100.0% ................................... $98,821,286
===========
</TABLE>
See accompanying notes.
6
<PAGE> 122
STATEMENTS OF NET ASSETS
JUNE 30, 1995
(UNAUDITED)
SECURITY INCOME FUND
U.S. GOVERNMENT SERIES
<TABLE>
<CAPTION>
PRINCIPAL U.S. GOVERNMENT AND MARKET
AMOUNT GOVERNMENT AGENCY SECURITIES VALUE
- ---------------------------------------------------------------------------
<S> <C> <C>
FEDERAL NATIONAL MORTGAGE CORPORATION - 39.6%
$ 500,000 8.20% - 2016 .................................. $ 560,805
1,000,000 8.10% - 2019 .................................. 1,115,770
1,000,000 9.05% - 2021 .................................. 1,055,730
500,000 7.93% - 2025 .................................. 552,360
----------
3,284,665
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION - 22.0%
987,063 8.50%, due 8-20-24 ............................ 1,016,945
760,861 9.50%, due 8-15-09 ............................ 803,766
6,313 11.00%, due 10-15-15 .......................... 6,942
----------
1,827,653
U.S. TREASURY BONDS - 35.2%
1,100,000 8.75% - 2008 ................................. 1,266,166
1,050,000 7.25% - 2016 ................................. 1,114,837
500,000 7.50% - 2016 ................................. 544,720
----------
2,925,723
U.S. TREASURY NOTES - 1.2%
100,000 5.125% - 1995 ................................ 99,804
----------
Total investments - (cost $7,712,181) -
98.0% ......................................... 8,137,845
Cash and other assets, less
liabilities - 2.0% ............................ 162,077
----------
Total net assets - U.S. Government
Series - 100.0% ............................... $8,299,922
==========
</TABLE>
<TABLE>
<CAPTION>
SECURITY INCOME FUND
LIMITED MATURITY BOND SERIES
PRINCIPAL MARKET
AMOUNT CORPORATE BONDS VALUE
- ----------------------------------------------------------------------------
<S> <C> <C>
ALUMINUM - 4.4%
$148,000 Alcan Aluminum, 9.20% - 2001 ............... $ 165,390
BANKS - 3.9%
150,000 Nationsbank, 6.50% - 2003 .................. 146,250
ELECTRIC COMPANIES - 8.1%
150,000 Consolidated Edison Company,
6.625% - 2002 ............................. 149,250
150,000 Texas Utilities Electric Company,
7.375% - 2001 ............................. 154,125
----------
303,375
ELECTRIC & GAS COMPANIES - 4.3%
150,000 Public Service Electric & Gas
Company, 8.75% - 1999...................... 161,813
FINANCE - 12.8%
150,000 Ford Motor Credit Company,
8.375% - 2000 ............................. 160,313
150,000 Household Finance Corporation,
8.00% - 2004 .............................. 161,063
150,000 International Lease Finance Corporation,
8.25% - 2000 .............................. 159,375
----------
480,751
GROCERY STORES - 4.1%
150,000 Penn Traffic Company,
10.65% - 2004 ............................. 155,813
NATURAL GAS EXPLORATION & PRODUCTION - 4.4%
150,000 Vastar Resources, Inc.,
8.75% - 2005 ............................. 164,438
PETROLEUM REFINING & PRODUCTS - 4.5%
150,000 BP America, 8.75% - 2003 ................... 167,438
RETAIL TRADE - 7.0%
100,000 Kmart Corporation, 8.125% - 2006 ........... 104,125
150,000 Wal-Mart Stores, Inc., 7.50% - 2004 ........ 158,438
----------
262,563
</TABLE>
See accompanying notes.
7
<PAGE> 123
STATEMENTS OF NET ASSETS
JUNE 30, 1995
(UNAUDITED)
SECURITY INCOME FUND
LIMITED MATURITY BOND SERIES (CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT CORPORATE BONDS (continued) VALUE
- ------------------------------------------------------------------------------
<S> <C> <C>
SANITARY SERVICES - 4.2%
$150,000 WMX Technologies, Inc.,
8.25% - 1999 ................................... $ 159,750
TOBACCO PRODUCTS - 4.2%
150,000 Philip Morris Companies, Inc.,
7.625% - 2002 .................................. 156,750
---------
Total corporate bonds -
(cost $2,178,942) - 61.9% ...................... 2,324,331
GOVERNMENT & GOVERNMENT
AGENCY SECURITIES
CANADIAN PROVINCES - 4.4%
150,000 Province of Quebec, 8.625% - 2005 ................. 166,125
U.S. GOVERNMENT AGENCIES - 18.0%
Federal Home Loan Bank,
150,000 7.69% - 1996 ................................... 153,386
100,000 7.17% - 2000 ................................... 103,750
100,000 Federal Home Loan Mortgage
Corporation, 7.69% - 1996 ...................... 102,285
Federal National Mortgage Association,
150,000 7.05% - 1998 ................................... 153,556
150,000 8.50% - 2005 ................................... 160,977
---------
673,954
U.S. TREASURY - 12.3%
U.S. Treasury Notes,
150,000 7.375% - 1997 .................................. 154,872
150,000 7.50% - 1997 .................................. 153,713
150,000 7.25% - 1998 .................................. 154,866
---------
463,451
---------
Total government & government
agency securities - (cost $1,254,116)
- 34.7% ........................................ 1,303,530
---------
Total investments - (cost $3,433,058) -
96.6% .......................................... 3,627,861
Cash and other assets,
less liabilities - 3.4% ........................ 125,907
---------
Total net assets - Limited Maturity
Bond Series - 100.0% ........................... $ 3,753,768
=========
</TABLE>
SECURITY INCOME FUND
GLOBAL AGGRESSIVE BOND SERIES
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT GOVERNMENT OBLIGATIONS VALUE
- ------------------------------------------------------------------------------
<S> <C> <C>
ARGENTINA - 4.5%
350,000 Republic of Argentina,
5.00% - 2023 ................................... $ 168,000
AUSTRALIA - 3.9%
200,000 Treasury Corporation of Victoria,
10.25% - 2006(2) ............................... 147,756
BRAZIL - 5.3%
350,000 Republic of Brazil,
7.25% - 2024 ................................... 200,375
CANADA - 3.8%
200,000 Republic of Canada,
8.00% - 2023(2) ................................ 140,546
ECUADOR - 4.3%
500,000 Republic of Ecuador,
3.00% - 2025 ................................... 160,000
GERMANY - 3.8%
200,000 Bundesrepublic Deutschland,
6.875% - 2005(2) ............................... 144,243
GREECE - 8.4%
70,000,000 Hellenic Treasury Note,
17.75% - 2002(2) ............................... 313,130
IRELAND - 4.3%
100,000 Republic of Ireland,
8.00% - 2000(2) ................................ 160,651
ITALY - 3.7%
250,000,000 Buoni Poliennali Del Tes,
8.50% - 1999(2) ................................ 138,135
PHILIPPINES - 4.8%
250,000 Central Bank of Philippines,
5.75% - 2017 ................................... 180,938
PORTUGAL - 4.0%
22,500,000 Obrig Do Tes Medio Prazo,
8.875% - 1997(2) ............................... 149,045
SOUTH AFRICA - 3.1%
500,000 Republic of South Africa,
11.50% - 2000(2) ............................... 114,727
---------
Total government obligations -
(cost $2,048,251) - 53.9% ...................... 2,017,546
</TABLE>
See accompanying notes.
8
<PAGE> 124
STATEMENTS OF NET ASSETS
JUNE 30, 1995
(UNAUDITED)
SECURITY INCOME FUND
GLOBAL AGGRESSIVE BOND SERIES (CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT CORPORATE BONDS VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
BRAZIL - 3.7%
150,000 Aracruz Celulose S.A.,
10.375% - 2002 .................................... $139,875
CZECHOSLOVAKIA - 3.9%
3,750,000 Skofin S.R.O.,
11.625% - 2008(2) ................................. 146,430
DENMARK - 4.0%
900,000 Nykredit,
8.00% - 2026(2) ................................... 148,051
INDONESIA - 4.1%
150,000 Indah Kiat International Finance,
11.875% - 2002 .................................... 152,250
MEXICO - 3.5%
150,000 Cemex S.A.,
8.875% - 1998 ..................................... 129,844
SOUTH AFRICA - 3.6%
500,000 Electricity Supply Commission,
15.00% - 1998(2) .................................. 133,882
UNITED STATES - 4.1%
150,000 Chiquita Brands International, Inc.,
11.50% - 2001 ..................................... 153,750
----------
Total corporate bonds -
(cost $1,010,864) - 26.9% ......................... 1,004,082
<CAPTION>
PRINCIPAL MARKET
AMOUNT SHORT-TERM INVESTMENTS VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
POLAND - 4.3%
380,000 Government of Poland Treasury Bill,
0% - 07/26/95(2) .................................. $ 159,655
TURKEY - 2.8%
5,000,000,000 Government of Turkey Treasury Bill,
0% - 08/10/95(2) .................................. 104,648
UNITED STATES - 10.6%
200,000 U.S. Treasury Bill,
5.33% - 08/31/95 .................................. 198,194
200,000 U.S. Treasury Bill,
5.34% - 08/31/95 .................................. 198,190
----------
396,384
----------
Total short-term investments -
(cost $663,749) - 17.7% ........................... 660,687
----------
Total investments -
(cost $3,722,864) - 98.5% ......................... 3,682,315
Cash and other assets, less
liabilities - 1.5% ................................ 57,874
----------
Total net assets -
Global Aggressive
Bond Series - 100.0% ............................. $3,740,189
==========
</TABLE>
See accompanying notes.
9
<PAGE> 125
STATEMENTS OF NET ASSETS
JUNE 30, 1995
(UNAUDITED)
SECURITY TAX-EXEMPT FUND
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT MUNICIPAL BONDS VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
EDUCATION REVENUE - 16.5%
$1,000,000 Clark County, Nevada School District,
Series A, 5.50% - 2016 .......................... $ 932,500
1,250,000 Florida State Board of Education
Capital Outlay Refunding,
Series A, 5.50% - 2014 .......................... 1,182,813
1,000,000 Illinois Educational Facility
Authority (Northwestern University),
6.90% - 2021 .................................... 1,128,750
1,000,000 North Brunswick Township, N.J.
Board of Education,
6.30% - 2013 .................................... 1,028,750
-----------
4,272,813
ELECTRIC UTILITY REVENUE - 19.0%
1,300,000 Intermountain Power Agency
(Utah) Power Supply, Series C,
5.25% - 2014 .................................... 1,196,000
1,200,000 Massachusetts Municipal Wholesale
Electric Company Power Supply
System, Series B, 6.625% - 2004 ................. 1,291,500
1,000,000 Puerto Rico Electric Power Authority,
7.00% - 2021 .................................... 1,096,250
1,300,000 Washington Public Power Supply
System, Nuclear Project #2,
6.30% - 2012 .................................... 1,314,625
-----------
4,898,375
GENERAL OBLIGATION - 23.2%
1,000,000 Chicago, Illinois Metropolitan Water
Reclamation District G.O.,
6.25% - 2014 .................................... 1,023,750
1,000,000 Houston, Texas G.O., 6.25% - 2012 ................ 1,021,250
1,400,000 State of Illinois G.O., 6.25% - 2011 ............. 1,424,500
1,250,000 Commonwealth of Massachusetts
G.O., Series A, 6.50% - 2011 .................... 1,298,438
1,250,000 State of Washington G.O.,
5.80% - 2020 .................................... 1,201,563
-----------
5,969,501
HIGHWAY REVENUE - 5.5%
1,400,000 Harris County, Texas, Series A,
Toll Road & Tax, 6.125% - 2020 .................. 1,414,000
SEWER REVENUE - 3.9%
1,000,000 King County, Washington Sewer
Revenue, Series A, 6.25% - 2034 ................. 998,750
<CAPTION>
PRINCIPAL MARKET
AMOUNT MUNICIPAL BONDS (Continued) VALUE
- ----------------------------------------------------------------------------------
<S> <C> <C>
TRANSPORTATION - 5.4%
$1,300,000 Metropolitan Transit Authority of
New York Service Contract
Refunding Series 5, 7.00% - 2012 ................ $ 1,387,750
VARIOUS PURPOSE REVENUE - 16.6%
1,250,000 Austin Texas Utility System,
5.75% - 2024 .................................... 1,200,000
1,000,000 Indianapolis, Indiana Local Public
Improvement Bond Bank, Series A,
6.00% - 2018 .................................... 988,750
1,000,000 New York State Local Government
Assistance Corporation, Series A,
6.50% - 2020..................................... 1,031,250
1,000,000 Salt River Project, Arizona Agriculture
Improvement & Power District
Electric System, 6.625% - 2012................... 1,052,500
-----------
4,272,500
WASTE MANAGEMENT - 3.9%
1,000,000 Kentucky Infrastructure Authority,
Solid Waste Revolving Fund, PG-A,
6.30% - 2012..................................... 1,015,000
WATER SUPPLY REVENUE - 3.8%
1,000,000 Metropolitan Water District,
Southern California Water Works,
6.00% - 2021..................................... 981,250
----------
Total investments -
(cost $25,023,340) - 97.8% ..................... 25,209,939
Cash and other assets - less
liabilities - 2.2%.............................. 560,151
-----------
Total net assets -
Tax-Exempt Fund - 100.0% ....................... $25,770,090
===========
</TABLE>
See accompanying notes.
10
<PAGE> 126
STATEMENTS OF NET ASSETS
JUNE 30, 1995
(UNAUDITED)
SECURITY CASH FUND
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT COMMERCIAL PAPER RATING VALUE
- --------------------------------------------------------------------
<S> <C> <C> <C>
AIR TRANSPORTATION - 1.8%
$1,000,000 Harper Group, Inc., (The), A1
5.90% - 9-12-95 ................ $ 988,036
ALCOHOLIC & MALT BEVERAGES - 3.5%
2,000,000 Anheuser-Busch Companies, Inc., A1+
5.87% - 7-10-95 ................ 998,532
5.90% - 7-21-95 ................ 996,722
----------
1,995,254
AUTOMOBILES - 3.5%
2,000,000 Toyota Motor Credit Corporation, A1+
5.84% - 7-12-95 ................. 1,996,431
BEVERAGES - 3.5%
2,000,000 Coca-Cola Company, (The), A1+
5.80% - 9-15-95 ................. 1,975,511
BUSINESS SERVICES - 8.8%
2,000,000 AI Credit Corporation, A1+
5.91% - 7-19-95 ................. 1,994,090
1,000,000 General Electric Capital Corporation, A1+
5.80% - 9-14-95 ................. 987,917
1,000,000 Nordstrom Credit, Inc., A1
5.985% - 7-12-95 ................ 998,171
1,000,000 Penney (J.C.)Funding Corporation,
5.90% - 7-24-95 A1 996,230
----------
4,976,408
COMPUTERS - 1.8%
1,000,000 Hewlett-Packard Company, A1+
5.83% - 8-29-95 ................. 990,445
CONSTRUCTION - 6.1%
1,500,000 Stanley Works, 5.975% - 7-26-95 A1 1,493,776
2,000,000 Vulcan Materials Company, A1+
5.75% - 8-1-95................... 1,990,097
----------
3,483,873
DISCOUNT STORES - 3.5%
2,000,000 Wal-Mart Stores, Inc., A1+
5.965% - 7-14-95................. 1,995,692
DRUGS & TOILETRIES - 1.8%
1,000,000 Allergan, Inc., 5.91% - 8-01-95 A1 994,911
ELECTRICAL EQUIPMENT - 3.5%
2,000,000 General Electric Company, A1+
5.98% - 7-12-95............ 1,996,345
<CAPTION>
PRINCIPAL MARKET
AMOUNT COMMERCIAL PAPER (CONTINUED) RATING VALUE
- --------------------------------------------------------------------
<S> <C> <C> <C>
ELECTRIC COMPANIES & SYSTEMS - 15.8%
$2,000,000 Alabama Power Company, A1
5.89% - 7-31-95 ................. $ 497,546
5.965% - 7-31-95................. 1,492,544
2,200,000 Central & South West Corporation, P1
5.91% - 7-14-95 ................. 1,995,732
5.88% - 7-18-95 ................. 199,445
2,500,000 New England Power Company, A1
5.92% - 8-18-95 ................. 1,488,160
5.80% - 9-15-95 ................. 987,756
2,000,000 South Carolina Electric & Gas A1
Company, 5.93% - 8-07-95......... 1,987,810
300,000 Tampa Electric Company, A1+
5.86% - 7-10-95 ................. 299,560
----------
8,948,553
ELECTRONICS - 4.4%
2,500,000 TDK U.S.A. Corporation, A1+
5.94% - 7-17-95 ................. 2,493,400
GAS & ELECTRIC COMPANIES - 3.8%
2,175,000 Baltimore Gas & Electric Company, A1
5.91% - 7-27-95 ................. 995,732
5.91% - 8-08-95 ................. 1,167,670
----------
2,163,402
GROCERY STORES - 4.4%
2,500,000 Winn Dixie Stores, Inc., A1
5.86% - 9-14-95.................. 2,469,479
INSURANCE - 3.5%
2,000,000 American General Corporation, A1+
6.00% - 7-19-95.................. 1,994,000
LEASING COMPANIES - 7.9%
2,000,000 International Lease Finance
Corporation, A1
6.00% - 7-13-95.................. 1,996,000
2,500,000 P.H.H. Corporation, A1
5.935% - 7-05-95................. 499,670
5.93% - 7-13-95 ................. 1,996,047
---------
4,491,717
PRINTING - 3.5%
2,000,000 Houghton Mifflin Company, A1
5.985% - 7-10-95................. 1,997,007
</TABLE>
See accompanying notes.
11
<PAGE> 127
STATEMENTS OF NET ASSETS
June 30, 1995
(Unaudited)
SECURITY CASH FUND
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT COMMERCIAL PAPER (continued) Rating VALUE
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
TELEPHONE & TELEGRAPH - 5.4%
$2,000,000 AT &T Corporation, A1+
5.81% - 8-18-95 .................... $ 1,984,507
1,100,000 GTE Northwest, Inc., A1
6.03% - 7-05-95 .................... 1,099,263
------------
3,083,770
TOBACCO PRODUCTS - 7.0%
2,000,000 B.A.T. Capital Corporation, A1
5.95% - 7-26-95 .................... 1,991,778
2,000,000 Philip Morris Companies, Inc., A1
5.90% - 7-07-95 .................... 999,017
5.83% - 8-04-95 .................... 994,494
------------
3,985,289
TOYS & SPORTING GOODS - 4.9%
800,000 Hasbro, Inc., 5.88% - 8-14-95 A1 794,251
2,000,000 Toys "R" Us, Inc., A1+
5.91% - 7-28-95 .................... 1,991,135
------------
2,785,386
------------
Total commercial paper -
(cost $55,804,909) - 98.4% ......... 55,804,909
<CAPTION>
PRINCIPAL GOVERNMENT & GOVERNMENT MARKET
AMOUNT AGENCY SECURITIES VALUE
- -----------------------------------------------------------------------------
<S> <C> <C>
FEDERAL FARM CREDIT BANKS - 5.3%
$1,000,000 6.15% - 10-02-95 .................. $ 1,000,000
2,000,000 5.70% - 01-02-96 .................. 2,000,000
------------
3,000,000
SBAPOOLS - 3.4%
1,913,991 SBAPool GCS # 501 927,
7.25%, due 7-25-17(1) .............. 1,932,224
------------
Total U.S. government and
government agency securities
- (cost $4,932,224) - 8.7% 4,932,224
------------
Total investments - (cost
$60,737,133) - 107.1% ............. 60,737,133
Cash and other assets, less
liabilities - (7.1%) .............. (4,007,638)
------------
Total net assets -
Cash Fund 100.0% .................. $56,729,495
============
</TABLE>
The identified cost of investments owned at June 30, 1995 was the same for
Federal income tax and book purposes.
Ratings were provided by Moody's Investor Services and Standard & Poor's
Corporation.
(1) Variable rate security which may be reset the first of each month.
(2) Principal amount on foreign bond is reflected in local currency (i.e.
Japanese yen, Canadian dollar or deutsche mark) while market value is
reflected in base U.S. dollars.
See accompanying notes.
12
<PAGE> 128
BALANCE SHEETS
JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
Security Income Fund
------------------------------------------------------------------------
Corporate U.S. Limited Global Security Security
Bond Government Maturity Aggressive Tax-Exempt Cash
Series Series Bond Series Bond Series Fund Fund
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments, at value (identified cost
$93,518,283, $7,712,181, $3,433,058,
$3,722,864, $25,023,340 and
$4,932,224 respectively) . . . . . . . . . . . . . $ 96,621,490 $8,137,845 $3,627,861 $3,682,315 $25,209,939 $ 4,932,224
Commercial paper, at amortized cost
which approximates market value . . . . . . . . . -- -- -- -- -- 55,804,909
Cash. . . . . . . . . . . . . . . . . . . . . . . . 580,687 51,581 41,339 12,229 25,591 449,100
Receivables:
Fund shares sold . . . . . . . . . . . . . . . . 9,528 143 39 -- -- 482,203
Securities sold . . . . . . . . . . . . . . . . . 4,261,270 -- -- -- -- 5,835
Interest. . . . . . . . . . . . . . . . . . . . . 2,001,532 112,607 82,424 51,590 550,869 49,813
Security Management Company . . . . . . . . . . . 1,046 3,928 -- 3,785 492 --
Prepaid expense . . . . . . . . . . . . . . . . . 9,266 4,926 3,935 15,564 27,144
------------ ---------- ---------- ---------- ----------- -----------
Total assets . . . . . . . . . . . . $103,484,819 $8,311,030 $3,755,598 $3,749,919 $25,802,455 $61,751,228
============ ========== ========== ========== =========== ===========
LIABILITIES AND NET ASSETS
Liabilities:
Payable for fund shares redeemed . . . . . . . . $ 117,638 $ -- $ -- $ -- $ 12,567 $ 2,966,303
Dividends payable to shareholders . . . . . . . . -- -- -- -- -- 5,745
Securities purchased . . . . . . . . . . . . . . 4,456,076 -- -- -- -- 2,000,000
Other liabilities:
Management fees . . . . . . . . . . . . . . . 41,131 3,493 -- 2,315 10,755 22,845
12b-1 distribution plan fees . . . . . . . . 23,279 1,993 1,198 1,542 848 --
Custodian and transfer agent fees . . . . . . 8,158 1,508 112 2,136 1,364 12,105
Administration fees . . . . . . . . . . . . . 7,404 628 278 139 1,936 2,029
Professional fees . . . . . . . . . . . . . . 5,031 2,179 -- -- 2,625 3,392
Miscellaneous . . . . . . . . . . . . . . . . 4,816 1,307 242 3,598 2,270 9,314
------------ ---------- ---------- ---------- ----------- -----------
Total liabilities and net assets . . 4,663,533 11,108 1,830 9,730 32,365 5,021,733
Net Assets:
Paid in capital . . . . . . . . . . . . . . . . . 108,211,839 9,122,944 3,556,687 3,756,751 27,338,767 56,729,495
Accumulated and undistributed net
investment income . . . . . . . . . . . . . 19,887 1,998 1,434 28,116 1,361 --
Accumulated net realized gain (loss) on
sale of investments . . . . . . . . . . . (12,513,647) (1,250,684) 844 (4,318) (1,756,637) --
Net unrealized appreciation (depreciation)
in value of investments . . . . . . . . . . 3,103,207 425,664 194,803 (40,360) 186,599 --
------------ ---------- ---------- ---------- ----------- -----------
Net assets . . . . . . . . . . . . . . 98,821,286 8,299,922 3,753,768 3,740,189 25,770,090 56,729,495
------------ ---------- ---------- ---------- ----------- -----------
Total liabilities and net assets . . $103,484,819 $8,311,030 $3,755,598 $3,749,919 $25,802,455 $61,751,228
============ ========== ========== ========== =========== ===========
CLASS "A" SHARES
Capital shares outstanding . . . . . . . . . . . . 13,270,027 1,676,462 289,287 250,678 2,602,618 56,729,495
Net assets. . . . . . . . . . . . . . . . . . . . . $94,413,983 $7,896,427 $3,062,396 $2,496,229 $24,747,227 $56,729,495
Net asset value per share (net assets
divided by shares outstanding) . . . . . . . . . $7.11 $4.71 $10.59 $9.96 $9.51 $1.00
Add: Selling commission (4.75% of
offering price) (excluding Cash Fund) . . . . . . .35 0.23 0.53 .50 0.47 --
------------ ---------- ---------- ---------- ----------- -----------
Offering price per share (net asset
value divided by 95.25%) . . . . . . . . . . . . $7.46 $4.94 $11.12 $10.46 $9.98 $1.00
============ ========== ========= ========== =========== ===========
CLASS "B" SHARES
Capital shares outstanding . . . . . . . . . . . . 616,538 85,593 65,337 125,000 107,516 --
Net assets. . . . . . . . . . . . . . . . . . . . . $4,407,303 $403,495 $691,372 $1,243,960 $1,022,863 --
Net asset value per share (net assets
divided by shares outstanding) . . . . . . . . . $7.15 $4.71 $10.58 $9.95 $9.51 --
============ ========== ========= ========== =========== ===========
</TABLE>
See accompanying notes.
13
<PAGE> 129
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
SECURITY INCOME FUND
-------------------------------------------------------------------------------
CORPORATE U.S. LIMITED GLOBAL SECURITY SECURITY
BOND GOVERNMENT MATURITY AGGRESSIVE TAX-EXEMPT CASH
SERIES SERIES BOND SERIES BOND SERIES FUND FUND
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest . . . . . . . . . . . . . . . . . $ 3,966,897 $ 326,704 $104,701 $ 35,059 $ 763,363 $1,533,548
EXPENSES:
Management fees . . . . . . . . . . . . . 243,971 20,717 8,640 1,080 64,251 128,043
Transfer/maintenance fees . . . . . . . . 54,683 8,749 528 36 8,394 75,215
12b-1 distribution plan fees . . . . . . . 137,380 11,746 5,902 1,542 4,566 --
Administration fees . . . . . . . . . . . 43,914 3,729 1,389 139 11,565 11,442
Custodian fees . . . . . . . . . . . . . . 3,850 237 -- 2,100 -- 2,170
Directors' fees . . . . . . . . . . . . . 4,859 428 317 4 5,321 4,463
Professional fees . . . . . . . . . . . . 5,882 735 1,185 294 3,264 3,960
Registration . . . . . . . . . . . . . . . 16,957 10,087 557 1,785 13,291 20,244
Other expenses . . . . . . . . . . . . . . 12,172 2,087 470 2,513 4,392 10,548
------------ ---------- -------- ----------- ----------- -----------
523,668 58,515 18,988 9,493 115,044 256,085
Reimbursement of expenses . . . . . . . . (6,731) (11,551) (8,640) (2,550) (1,990) --
------------ ---------- -------- ----------- ----------- -----------
Total expenses . . . . . . . . . . . . 516,937 46,964 10,348 6,943 113,054 256,085
------------ ---------- -------- ----------- ----------- -----------
Net investment income . . . . . . . . 3,449,960 279,740 94,353 28,116 650,309 1,277,463
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain (loss) on sale of investments:
Proceeds from sale of investments . . . 96,583,307 5,488,867 50,625 145,451 13,041,994 --
Cost of investments sold . . . . . . . 95,164,933 5,555,862 49,781 149,769 12,962,895 --
------------ ---------- -------- ----------- ----------- -----------
Net realized gain (loss) . . . . . . 1,418,374 (66,995) 844 (4,318) 79,099 --
Unrealized appreciation (depreciation)
of investments:
Beginning of period . . . . . . . . . . (1,640,065) (312,720) -- -- (994,757) --
End of period . . . . . . . . . . . . . 3,103,207 425,664 194,803 (40,360) 186,599 --
------------ ---------- -------- ----------- ----------- -----------
Unrealized appreciation (depreciation)
of investments during the period . . 4,743,272 738,834 194,803 (40,360) 1,181,356 --
------------ ---------- -------- ----------- ----------- -----------
Net gain (loss) on investments . . . 6,161,646 671,389 195,647 (44,678) 1,260,455 --
------------ ---------- -------- ----------- ----------- -----------
Net increase (decrease) in net
assets resulting from operations $9,611,606 $ 951,129 $290,000 $(16,562) $1,910,764 $1,277,463
============ ========== ======== =========== =========== ===========
</TABLE>
See accompanying notes.
14
<PAGE> 130
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
SECURITY INCOME FUND
----------------------------------------------------------------------------
CORPORATE U.S. LIMITED GLOBAL SECURITY SECURITY
BOND GOVERNMENT MATURITY AGGRESSIVE TAX-EXEMPT CASH
SERIES SERIES BOND SERIES BOND SERIES FUND FUND
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income . . . . . . . . . . $ 3,449,960 $ 279,740 $ 94,353 $ 28,116 $ 650,309 $ 1,277,463
Net realized gain (loss) on sale of
investments . . . . . . . . . . . . . . . 1,418,374 (66,995) 844 (4,318) 79,099 --
Unrealized appreciation (depreciation)
of investments during the year. . . . . . 4,743,272 738,384 194,803 (40,360) 1,181,356 --
------------ ----------- ----------- ---------- ----------- -----------
Net increase (decrease) in net assets
resulting from operations . . . . . . 9,611,606 951,129 290,000 (16,562) 1,910,764 1,277,463
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A . . . . . . . . . . . . . . . . (3,323,092) (269,993) (77,967) -- (634,248) (1,277,463)
Class B . . . . . . . . . . . . . . . . (125,788) (11,132) (14,952) -- (18,559) --
------------ ----------- ----------- ---------- ----------- -----------
Total distributions to shareholders . . (3,448,880) (281,125) (92,919) -- (652,807) (1,277,463)
CAPITAL SHARE TRANSACTIONS (A):
Proceeds from sale of shares
Class A . . . . . . . . . . . . . . . . 3,456,308 335,550 2,829,123 2,506,751 898,537 158,154,617
Class B . . . . . . . . . . . . . . . . 587,695 97,104 642,557 1,250,000 222,183 --
Dividends reinvested
Class A . . . . . . . . . . . . . . . . 2,539,994 207,593 76,643 -- 360,298 1,258,477
Class B . . . . . . . . . . . . . . . . 101,266 7,265 14,339 -- 11,450 --
Cost of shares redeemed
Class A . . . . . . . . . . . . . . . . (8,078,627) (1,595,949) (5,175) -- (1,823,451) (160,785,314)
Class B . . . . . . . . . . . . . . . . (419,244) (51,784) (800) -- (8,989) --
Net increase (decrease) from capital ------------ ----------- ----------- ---------- ----------- -----------
share transactions. . . . . . . . . . (1,812,608) (1,000,221) 3,556,687 3,756,751 (339,972) (1,372,220)
------------ ----------- ----------- ---------- ----------- -----------
Total increase (decrease) in net assets 4,350,118 (330,217) 3,753,768 3,740,189 917,985 (1,372,220)
NET ASSETS:
Beginning of period . . . . . . . . . . . 94,471,168 8,630,139 -- -- 24,852,105 58,101,715
------------ ----------- ----------- ---------- ----------- -----------
End of period . . . . . . . . . . . . . . $98,821,286 $8,299,922 $3,753,768 $3,740,189 $25,770,090 $56,729,495
============ =========== =========== ========== =========== ===========
Undistributed net investment income . . . . . $19,887 $1,998 $1,434 $28,116 $1,361 --
============ =========== =========== ========== =========== ===========
(a) Shares issued and redeemed:
Shares sold
Class A . . . . . . . . . . . . . 503,212 73,979 282,396 250,678 94,868 158,154,617
Class B . . . . . . . . . . . . . 84,651 21,706 64,035 125,000 23,257 --
Dividends reinvested
Class A . . . . . . . . . . . . . 365,470 45,805 7,387 -- 37,821 1,258,477
Class B . . . . . . . . . . . . . 14,506 1,596 1,381 -- 1,201 --
Shares redeemed
Class A . . . . . . . . . . . . . (1,157,772) (354,803) (496) -- (193,074) (160,785,314)
Class B . . . . . . . . . . . . . (60,694) (11,499) (79) -- (943) --
------------ ----------- ----------- ---------- ----------- -----------
Net increase (decrease) . . . . . . . (250,627) (223,216) 354,624 325,678 (36,870) (1,372,220)
============ =========== =========== ========== =========== ===========
</TABLE>
See accompanying notes.
15
<PAGE> 131
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
SECURITY INCOME FUND
--------------------------------------------------------------
CORPORATE U.S. SECURITY SECURITY
BOND GOVERNMENT TAX-EXEMPT CASH
SERIES SERIES FUND FUND
---------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
FROM OPERATIONS:
Net investment income . . . . . . . . . . . . . . . . . . . . $ 7,115,246 $ 590,335 $ 1,432,309 $ 1,855,864
Net realized loss on sale of investments . . . . . . . . . . . (13,932,021) (1,181,780) (1,836,112) --
Unrealized depreciation
of investments during the year . . . . . . . . . . . . . . . (2,419,117) (67,508) (2,221,295) --
------------ ----------- ----------- -----------
Net increase (decrease) in net assets resulting
from operations . . . . . . . . . . . . . . . . . . . . . (9,235,892) (658,953) (2,625,098) 1,855,864
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,917,267) (572,250) (1,408,315) (1,855,864)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . (183,907) (16,526) (19,759) --
------------ ----------- ----------- -----------
Total distributions to shareholders . . . . . . . . . . . (7,101,174) (588,776) (1,428,074) (1,855,864)
CAPITAL SHARE TRANSACTIONS (A):
Proceeds from sale of shares
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . 24,783,087 2,812,392 12,166,067 301,350,492
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . 4,319,121 262,697 780,435 --
Dividends reinvested
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . 5,297,609 445,310 841,591 1,707,488
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . 151,234 7,183 12,160 --
Cost of shares redeemed
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . (41,957,570) (3,833,454) (17,034,040) (316,825,978)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . (1,240,487) (54,497) (81,117) --
------------ ----------- ----------- -----------
Net decrease from capital share
transactions . . . . . . . . . . . . . . . . . . . . . . (8,647,006) (360,369) (3,314,904) (13,767,998)
------------ ----------- ----------- -----------
Total decrease in net assets . . . . . . . . . . . . . (24,984,072) (1,608,098) (7,368,076) (13,767,998)
NET ASSETS:
Beginning of period . . . . . . . . . . . . . . . . . . . . . 119,455,240 10,238,237 32,220,181 71,869,713
------------ ----------- ----------- -----------
End of period . . . . . . . . . . . . . . . . . . . . . . . . $ 94,471,168 $ 8,630,139 $24,852,105 $58,101,715
============ =========== =========== ===========
Undistributed net investment income . . . . . . . . . . . . . . . $18,807 $3,383 $3,859 --
============ =========== =========== ===========
(a) Shares issued and redeemed:
Shares sold
Class A . . . . . . . . . . . . . . . . . . . . . . . 3,430,737 603,088 1,239,726 301,350,492
Class B . . . . . . . . . . . . . . . . . . . . . . . 604,793 55,933 80,986 --
Dividends reinvested
Class A . . . . . . . . . . . . . . . . . . . . . . . 747,626 97,587 88,532 1,707,488
Class B . . . . . . . . . . . . . . . . . . . . . . . 21,813 1,631 1,306 --
Shares redeemed
Class A . . . . . . . . . . . . . . . . . . . . . . . (5,789,251) (820,118) (1,762,983) (316,825,978)
Class B . . . . . . . . . . . . . . . . . . . . . . . (179,031) (11,973) (8,499) --
------------ ----------- ----------- -----------
Net decrease . . . . . . . . . . . . . . . . . . . . . . (1,163,313) (73,852) (360,932) (13,767,998)
============ =========== =========== ===========
</TABLE>
See accompanying notes.
16
<PAGE> 132
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH
PERIOD
<TABLE>
<CAPTION>
Net
Fiscal asset Net gain Total Dividends Distri-
year value Net (loss) on from (from net butions
ended begin- invest- securities invest- invest- (from Return Total
Decem- ning of ment (realized & ment ment capital of distribu-
ber 31 period income unrealized) operations income) gains) capital tions
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CORPORATE BOND SERIES (CLASS A)
1990 $7.45 $0.69 $(0.232) $0.458 $(0.688) $ -- $ -- $(0.688)
1991 7.22 0.65 0.458 1.108 (0.648) -- -- (0.648)
1992 7.68 0.61 0.044 0.654 (0.614) -- -- (0.614)
1993 7.72 0.52 0.521 1.041 (0.527) (0.424) -- (0.951)
1994 7.81 0.49 (1.127) (0.637) (0.493) -- -- (0.493)
1995(d) 6.68 0.24 0.437 0.677 (0.247) -- -- (0.247)
CORPORATE BOND SERIES (CLASS B)
1993(b) $8.59 $0.11 $(0.324) $(0.214) $(0.112) $(0.424) $ -- $(0.536)
1994(c) 7.84 0.43 (1.129) (0.699) (0.431) -- -- (0.431)
1995(d) 6.71 0.22 0.433 0.653 (0.213) -- -- (0.213)
U.S. GOVERNMENT SERIES (CLASS A)
1990(c) $4.89 $0.42 $ 0.032 $0.452 $(0.412) $ -- $ -- $(0.412)
1991(c) 4.93 0.40 0.248 0.648 (0.404) -- (.004) (0.408)
1992(c) 5.17 0.37 (0.126) 0.244 (0.366) -- (.008) (0.374)
1993(c) 5.04 0.31 0.273 0.583 (0.310) (0.344) -- (0.654)
1994(c) 4.97 0.30 (0.621) (0.321) (0.299) -- -- (0.299)
1995(d) 4.35 0.15 0.366 0.516 (0.156) -- -- (0.156)
U.S. GOVERNMENT SERIES (CLASS B)
1993(b)(c) $5.51 $0.04 $(0.193) $(0.153) $(0.043) $(0.344) $ -- $(0.387)
1994(c) 4.97 0.26 (0.624) (0.364) (0.256) -- -- (0.256)
1995(d) 4.35 0.13 0.366 0.496 (0.136) -- -- (0.136)
LIMITED MATURITY BOND SERIES (CLASS A)
1995(d)(e) $10.00 $0.29 $0.578 $0.868 $(0.278) $ -- $ -- $(0.278)
LIMITED MATURITY BOND SERIES (CLASS B)
1995(d)(e) $10.00 $0.25 $0.576 $0.826 $(0.246) $ -- $ -- $(0.246)
GLOBAL AGGRESSIVE BOND SERIES (CLASS A)
1995(d)(f) $10.00 $0.08 $(0.120) $(0.040) $ -- $ -- $ -- $ --
GLOBAL AGGRESSIVE BOND SERIES (CLASS B)
1995(d)(f) $10.00 $0.07 $(0.120) $(0.050) $ -- $ -- $ -- $ --
<CAPTION>
Net
Fiscal assets Ratio of Ratio of Port-
year Net asset end of expenses net in- folio
ended value period to aver- come to turn-
Decem- end of Total (thou- age net average over
ber 31 period return (a) sands) assets net assets rate
- ------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CORPORATE BOND SERIES (CLASS A)
1990 $7.22 6.6% $65,962 1.10% 9.42% 87%
1991 7.68 16.1% 85,824 1.03% 8.75% 32%
1992 7.72 9.0% 104,492 1.01% 7.97% 61%
1993 7.81 13.4% 118,433 1.02% 6.46% 157%
1994 6.68 (8.3%) 90,593 1.01% 6.91% 204%
1995(d) 7.11 10.3% 94,414 1.02% 7.11% 177%
CORPORATE BOND SERIES (CLASS B)
1993(b) $7.84 (2.5%) $1,022 1.88% 5.16% 164%
1994(c) 6.71 (9.0%) 3,878 1.85% 6.08% 204%
1995(d) 7.15 9.9% 4,407 1.85% 6.14% 177%
U.S. GOVERNMENT SERIES (CLASS A)
1990(c) $4.93 9.8% $6,017 1.11% 8.60% 22%
1991(c) 5.17 13.8% 7,319 1.11% 7.94% 41%
1992(c) 5.04 5.0% 9,364 1.11% 7.22% 157%
1993(c) 4.97 10.9% 10,098 1.10% 5.90% 153%
1994(c) 4.35 (6.5%) 8,309 1.10% 6.47% 220%
1995(d) 4.71 12.1% 7,896 1.10% 6.79% 117%
U.S. GOVERNMENT SERIES (CLASS B)
1993(b)(c) $4.97 (1.4%) $140 1.61% 5.54% 114%
1994(c) 4.35 (7.4%) 321 1.85% 5.76% 220%
1995(d) 4.71 11.6% 403 1.85% 5.91% 117%
LIMITED MATURITY BOND SERIES (CLASS A)
1995(d)(e) $10.59 8.8% $3,062 0.53% 6.24% 4%
LIMITED MATURITY BOND SERIES (CLASS B)
1995(d)(e) $10.58 8.3% $691 1.33% 5.52% 4%
GLOBAL AGGRESSIVE BOND SERIES (CLASS A)
1995(d)(f) $9.96 (.40%) $2,496 2.00% 9.36% 58%
GLOBAL AGGRESSIVE BOND SERIES (CLASS B)
1995(d)(f) $9.95 (.60%) $1,244 2.75% 8.61% 58%
</TABLE>
See accompanying notes.
17
<PAGE> 133
FINANCIAL HIGHLIGHTS (CONTINUED)
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH
PERIOD
<TABLE>
<CAPTION>
Net
Fiscal asset Net gain Total Dividends Distri-
year value Net (loss) on from (from net butions Net asset
ended begin- invest- securities invest- invest- (from Return Total value
Decem- ning of ment (realized & ment ment capital of distribu- end of Total
ber 31 period income unrealized) operations income) gains) capital tions period return(a)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SECURITY TAX-EXEMPT FUND (CLASS A)
1990 $9.60 $0.64 $(0.072) $0.568 $(0.638) $ -- $ -- $(0.638) $9.53 6.2%
1991 9.53 0.63 0.446 1.076 (0.636) -- -- (0.636) 9.97 11.7%
1992 9.97 0.61 0.092 0.702 (0.612) -- -- (0.612) 10.06 7.3%
1993 10.06 0.51 0.702 1.212 (0.514) (0.388) -- (0.902) 10.37 11.6%
1994 10.37 0.47 (1.317) (0.847) (0.473) -- -- (0.473) 9.05 (8.3%)
1995(d) 9.05 0.23 0.474 0.704 (0.244) -- -- (0.244) 9.51 7.8%
SECURITY TAX-EXEMPT FUND (CLASS B)
1993 $10.88 $0.10 $(0.128) $ (0.028) $(0.094) $(0.388) $ -- $(0.482) $10.37 (0.2%)
1994 10.37 0.35 (1.321) (0.971) (0.349) -- -- (0.349) 9.05 (9.5%)
1995(d) 9.05 0.18 0.479 0.659 (0.199) -- -- (0.199) 9.51 7.2%
SECURITY CASH FUND
1990(c) $1.00 $0.073 $ -- $0.073 $(0.073) $ -- $ -- $(0.073) $1.00 7.6%
1991 1.00 0.051 -- 0.051 (0.051) -- -- (0.051) 1.00 5.2%
1992(c) 1.00 0.028 -- 0.028 (0.028) -- -- (0.028) 1.00 2.8%
1993(c) 1.00 0.023 -- 0.023 (0.023) -- -- (0.023) 1.00 2.4%
1994 1.00 0.033 -- 0.033 (0.033) -- -- (0.033) 1.00 3.4%
1995(d) 1.00 0.025 -- 0.025 (0.025) -- -- (0.025) 1.00 2.9%
<CAPTION>
Net
Fiscal assets Ratio of Ratio of Port-
year end of expenses net in- folio
ended period to aver- come to turn-
Decem- (thou- age net average over
ber 31 sands) assets net assets rate
- -----------------------------------------------------
<S> <C> <C> <C> <C>
SECURITY TAX-EXEMPT FUND (CLASS A)
1990 $20,566 0.96% 6.75% 74%
1991 23,218 0.89% 6.55% 38%
1992 28,608 0.84% 6.07% 91%
1993 32,115 0.82% 4.92% 118%
1994 24,092 0.82% 4.74% 88%
1995(d) 24,747 0.84% 5.11% 105%
SECURITY TAX-EXEMPT FUND (CLASS B)
1993 $106 2.89% 2.71% 90%
1994 760 2.00% 3.50% 88%
1995(d) 1,023 2.00% 3.86% 105%
SECURITY CASH FUND
1990(c) $65,018 1.00% 7.31% --
1991 48,843 0.96% 5.21% --
1992(c) 56,694 1.00% 2.75% --
1993(c) 71,870 1.00% 2.28% --
1994 58,102 0.96% 3.24% --
1995(d) 56,729 1.00% 5.00% --
</TABLE>
(a) Total return information does not take into account any charges paid
at time of purchase or contingent deferred sales charges paid at time
of redemption.
(b) Class "B" shares were initially issued on October 19, 1993. Percentage
amounts for the period, except total return, have been annualized.
(c) Fund expenses were reduced by the Investment Manager during the
period, and expense ratios absent such reimbursement would have been
as follows:
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Corporate Bond Class A -- -- -- -- -- --
Class B -- -- -- -- 2.00% 2.18%
U.S. Government Class A 1.34% 1.24% 1.20% 1.20% 1.20% 1.30%
Class B -- -- -- 1.75% 2.91% 3.82%
Limited Maturity Class A -- -- -- -- -- 1.09%
Bond Class B -- -- -- -- -- 1.89%
Global Aggressive Class A -- -- -- -- -- 2.67%
Bond Class B -- -- -- -- -- 3.88%
Tax-Exempt Class A -- -- -- -- -- --
Class B -- -- -- -- 2.32% 2.43%
Cash 1.01% -- 1.03% 1.03% -- --
</TABLE>
(d) For the six months ended June 30, 1995 (unaudited). Percentage amounts
for the period, except total return, have been annualized. Per share
data has been calculated using the average month-end shares
outstanding.
(e) Security Limited Maturity Bond Series was initially capitalized on
January 17, 1995, with a net asset value of $10 per share.
(f) Security Global Aggressive Bond Series was initially capitalized on
June 1, 1995, with a net asset value of $10 per share.
See accompanying notes.
18
<PAGE> 134
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995
1. SIGNIFICANT ACCOUNTING POLICIES
Security Income Fund, Security Tax-Exempt Fund and Security Cash Fund
(the Funds) are registered under the Investment Company Act of 1940, as
amended, as diversified, open-end management investment companies. The shares
of Security Income Fund are currently issued in four Series, the Corporate Bond
Series, the U.S. Government Series, the Limited Maturity Bond Series and the
Global Aggressive Bond Series, with each Series, in effect, representing a
separate fund. The Income Fund is required to account for each series
separately and to allocate general expenses to each series based upon the net
asset value of each Series. The Limited Maturity Bond Series and the Global
Aggressive Bond Series were initially capitalized on January 17, 1995 and June
1, 1995 respectively. The following is a summary of the significant accounting
policies followed by the Funds in the preparation of their financial
statements.
A. SECURITY VALUATION -- Valuations of Income Fund's and Tax-Exempt
Fund's securities are supplied by a pricing service approved by the Board of
Directors. Securities listed or traded on a national securities exchange are
valued on the basis of the last sales price. If there are no sales on a
particular day, then the securities are valued at the mean between the bid and
the asked prices. If a mean cannot be determined, then the securities for which
market quotations are available are valued on the basis of the current bid
price. Securities for which market quotations are not readily available are
valued by a pricing service considering securities with similar yields,
quality, type of issue, coupon, duration and rating. The Funds' officers, under
the general supervision of the Board of Directors, regularly review procedures
used by, and valuations provided by, the pricing service.
Cash Fund, by approval of the Board of Directors, utilizes the amortized
cost method for valuing portfolio securities, whereby all investments are
valued by reference to their acquisition cost as adjusted for amortization of
premium or accretion of discount.
Generally, trading in foreign securities markets is substantially
completed each day at various times prior to the close of the New York Stock
Exchange. The values of foreign securities are determined as of the close of
such foreign markets or the close of the New York Stock Exchange if earlier.
All investments quoted in foreign currency are valued in U.S. dollars on the
basis of the foreign currency exchange rate prevailing at the close of
business.
Foreign Currency Transactions -- Foreign currencies (and foreign currency
receivables and payables) are translated into U.S. dollar amounts at the
current exchange rate. Translation gains or losses resulting from changes in
exchange rates and realized gains and losses on the settlement of foreign
currency transactions are reported in the statement of operations. In addition,
Global Aggressive Bond Series may enter into forward foreign exchange contracts
in order to manage against foreign currency risk from purchase or sale of
securities denominated in foreign currency. Global Aggressive Bond Series may
also enter into such contracts to manage changes in foreign currency exchange
rates on portfolio positions. These contracts are marked to market daily, by
recognizing the difference between the contract exchange rate and the current
market rate as unrealized gains or losses. Realized gains or losses are
recognized when contracts are settled and are reflected in the statement of
operations. These contracts involve market risk in excess of the amount
reflected in the balance sheet. The face or contract amount in U.S. dollars
reflects the total exposure the Global Aggressive Bond Series has in that
particular currency contract. Losses may arise due to changes in the value of
the foreign currency or if the counterparty does not perform under the
contract.
B. FEDERAL INCOME TAXES -- The Funds complied with the requirements of
the Internal Revenue Code applicable to regulated investment companies and
distributed their taxable net income and net realized gains sufficient to
relive them from all, or substantially all, federal income, excise and state
income taxes. Therefore, no provision for federal or state income tax is
required.
C. OTHER -- As is common in the industry, security transactions are
accounted for on the date the securities are purchased or sold. Distributions
to shareholders are recorded on the ex-dividend date. Interest is accrued on
portfolio investments daily. Realized gains and losses are reported on an
identified cost basis. Premiums and discounts (except original issue discount)
on securities are not amortized, except Security Tax-Exempt Fund which
amortizes premiums. Income distributions and capital gain distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due
to differing treatments related to wash sales.
2. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Management fees are payable to Security Management Company (SMC) under
investment advisory contracts at an annual rate of 1/2 of 1% of the average net
assets of each Fund. For Global Aggressive Bond Series this fee is an annual
rate of 3/4 of 1% of the average net assets of the Series. SMC has agreed to
waive all of the management fees for the Limited Maturity Bond Series until
July 1, 1995 and .40% of the management fees for the Global Aggressive Bond
Series until December 1, 1995. The investment advisory contract for Income Fund
provides that the total annual expenses of each series of the Fund (including
management fees, but excluding interest, taxes, brokerage commissions and
extraordinary expenses) will not exceed the level of expenses which Income Fund
is permitted to bear under the most restrictive expense limitation imposed by
any state in which shares of the Fund are then qualified for sale. For the
period ended June 30, 1995, SMC agreed to limit the total expenses of Corporate
Bond Series, U.S. Government Series and Limited Maturity Bond Series to an
annual rate of 1.1% of the average daily net asset value of Class A shares and
1.85% of Class B shares of each respective Series; SMC has also agreed to limit
the total expenses of the Global Aggressive Bond Series to 2.0% for Class A
Shares and 2.75% for Class B shares. The investment advisory contract for
Tax-Exempt and Cash Funds provide that the total annual expenses of the Funds
will not exceed an amount equal to an annual rate of 1.0% of the average net
assets of Class A shares and 2.0% of Class B shares of the Tax-Exempt Fund as
calculated on a daily basis.
See accompanying notes.
19
<PAGE> 135
NOTES TO FINANCIAL STATEMENTS (continued)
The Funds have entered into contracts with SMC for transfer agent
services and certain other administrative services which SMC provides to the
Funds. SMC is paid an annual fixed charge per account and shareholder and
dividend transaction fees. The administrative services provided by SMC
principally include all fund and portfolio accounting and regulatory filings.
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 SMC 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 SMC 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.
SMC pays the Sub-Advisor, Lexington Management Corporation (LMC) an
annual fee in an amount equal to .35% of the average net assets of Global
Aggressive Bond Series, for investment advisory and certain administrative
services provided to the Global Aggressive Bond Series. The Sub-Advisor has
entered into a sub-advisory contract with MFR Advisors, Inc., ("MFR"), under
which MFR will provide the Global Aggressive Bond Fund with investment and
economic research services. For the service provided by MFR, MFR receives from
the Sub-Advisor, a fee equal to .15% of the average daily net assets of the
Global Aggressive Bond Fund.
Income and Tax-Exempt Funds have adopted Distribution Plans related to
the offering of Class B shares pursuant to Rule 12b-1 under the Investment
Company Act of 1940. The Plan provides for payments at an annual rate of 1.0%
of the average net assets of Class B shares. Class A shares of Income Fund
incur 12b-1 distribution fees at an annual rate of .25% of average net assets
of each Series.
Security Distributors, Inc. (SDI), a wholly-owned subsidiary of SMC and
the national distributor for Income and Tax-Exempt Funds, received net
underwriting commissions after allowances to brokers and dealers in the amounts
presented below:
<TABLE>
<CAPTION>
LIMITED GLOBAL
CORPORATE U.S. MATURITY AGGRESSIVE TAX-
BOND GOVERNMENT BOND BOND EXEMPT
SERIES SERIES SERIES SERIES FUND
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SDI Underwriting $ 2,007 $1,560 $0 $0 $2,187
Broker/Dealer 30,242 7,685 3,413 $0 8,109
</TABLE>
Certain officers and directors of the Funds are also officers and/or
directors of Security Benefit Life Insurance Company and its subsidiaries,
which include SMC and SDI.
3. INVESTMENT TRANSACTIONS
Investment transactions for the period ended June 30, 1995, (excluding
overnight investments and short-term debt securities) were as follows:
<TABLE>
<CAPTION>
LIMITED GLOBAL
CORPORATE U.S. MATURITY AGGRESSIVE TAX-
BOND GOVERNMENT BOND BOND EXEMPT
SERIES SERIES SERIES SERIES FUND
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Purchases $95,023,758 $4,689,789 $3,482,839 $3,308,884 $13,043,049
Proceeds
from sales 96,583,307 5,488,867 50,625 145,451 13,041,994
</TABLE>
4. FEDERAL INCOME TAX MATTERS
The amounts of unrealized appreciation (depreciation) as of June 30,
1995, were as follows:
<TABLE>
<CAPTION>
LIMITED GLOBAL
CORPORATE U.S. MATURITY AGGRESSIVE TAX-
BOND GOVERNMENT BOND BOND EXEMPT
SERIES SERIES SERIES SERIES FUND
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aggregate gross
unrealized
appreciation $3,463,487 $448,408 $195,877 $ 16,596 $485,453
Aggregate gross
unrealized
depreciation (360,280) (22,744) (1,074) (56,956) (298,854)
Net unrealized
appreciation
(depreciation) $3,103,207 $425,664 $194,803 $(40,360) $186,599
</TABLE>
See accompanying notes.
20
<PAGE> 136
THE SECURITY GROUP
OF MUTUAL FUNDS
Security Growth and Income Fund
Security Equity Fund
. Equity Series
. Equity Global Series
. Asset Allocation Series
Security Ultra Fund
Security Income Fund
. Corporate Bond Series
. U.S. Government Series
. Limited Maturity Bond Series
. Global Aggressive Bond Series
Security Tax-Exempt Fund
Security Cash Fund
This report is submitted for the general information of the shareholders of the
Funds. The report is not authorized for distribution to prospective investors
in the Funds unless preceded or accompanied by an effective prospectus which
contains details concerning the sales charges and other pertinent information.
SECURITY FUNDS
OFFICERS AND DIRECTORS
DIRECTORS
Willis A. Anton
Donald A. Chubb, Jr.
John D. Cleland
Jack H. Hamilton
Donald L. Hardesty
Penny A. Lumpkin
Mark L. Morris, Jr., D.V.M.
Jeffrey B. Pantages
Harold G. Worswick
OFFICERS
John D. Cleland, President
James R. Schmank, Vice President and Treasurer
Jane A. Tedder, Vice President
Mark E. Young, Vice President
Greg Hamilton, Assistant Vice President
Amy J. Lee, Secretary
Brenda M. Luthi, Assistant Treasurer and Assistant Secretary
[SECURITY DISTRIBUTORS, INC. LOGO]
700 SW Harrison St.
Topeka, KS 66636-0001
(913) 295-3127
(800) 888-2461
SDI-609 (R8-95) 46-06091-00
<PAGE> 137
SECURITY INCOME GLOBAL AGGRESSIVE BOND
STATEMENT OF NET ASSETS
(Including the Portfolio of Investments)
September 30, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET AMORTIZED UNREALIZE
AMOUNT SECURITY VALUE COST GAIN/LOSS
- -------------- ------------------------------- ---------- --------- ---------
<S> <C> <C> <C> <C>
LONG-TERM DEBENTURES: 76.9%
GOVERNMENT OBLIGATIONS: 54.2%
ARGENTINA: 4.3%
$350,000 Republic of Argentina
5.00%, due 03/31/23 $169,969 $185,215 ($15,246)
---------- ---------- ---------
AUSTRALIA: 4.2%
200,000 Treasury Corporation of Victoria
10.25%, due 11/15/06 164,539 155,270 9,269
---------- ---------- ---------
BRAZIL: 5.4%
350,000 Republic of Brazil
7.25%, due 04/15/24 212,625 206,565 6,060
---------- ---------- ---------
CANADA: 3.9%
200,000 Stelco, Inc.
10.40%, due 11/30/09 152,944 150,616 2,328
---------- ---------- ---------
ECUADOR: 4.2%
500,000 Republic of Ecuador
3.00%, due 02/28/25 163,100 169,196 (6,096)
---------- ---------- ---------
GREECE: 7.7%
70,000,000 Hellenic Treasury Note
17.75%, due 06/30/02 302,762 313,241 (10,479)
---------- ---------- ---------
ITALY: 3.7%
250,000,000 Buoni Poliennali Del Tes
8.50%, due 01/01/99 144,448 141,612 2,836
---------- ---------- ---------
PHILIPPINES: 4.7%
250,000 Central Bank of Philippines
5.75%, due 12/01/17 185,300 173,594 11,706
---------- ---------- ---------
SPAIN: 3.8%
20,000,000 Bonos Y Oblig Del Estado
7.40%, due 07/30/99 147,058 146,871 187
---------- ---------- ---------
PORTUGAL: 3.8%
22,500,000 Obrig Do Tes Medio Prazo
8.875%, due 01/23/97 147,964 148,459 (495)
---------- ---------- ---------
</TABLE>
<PAGE> 138
SECURITY INCOME GLOBAL AGGRESSIVE BOND
STATEMENT OF NET ASSETS
(Including the Portfolio of Investments)
September 30, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET AMORTIZED UNREALIZE
AMOUNT SECURITY VALUE COST GAIN/LOSS
- -------------- ------------------------------- ---------- --------- ---------
<S> <C> <C> <C> <C>
GOVERNMENT OBLIGATIONS: 54.2% (Continued)
SOUTH AFRICA: 8.5%
500,000 Electricity Supply Commission
15.00%, due 10/01/98 $138,735 $132,135 $6,600
800,000 Republic of South Africa
11.50%, due 05/30/00 194,987 185,720 9,267
---------- ---------- ---------
333,722 317,855 15,867
---------- ---------- ---------
TOTAL GOVERNMENT OBLIGATIONS 2,124,431 2,108,494 6,483
---------- ---------- ---------
Corporate Bonds: 22.7%
BRAZIL: 3.6%
150,000 Aracruz Celulose S.A.
10.375%, due 01/31/02 142,687 141,786 901
---------- ---------- ---------
CZECHOSLOVAKIA: 3.7%
3,750,000 Skofin S.R.O
11.625%, due 02/09/08 143,530 144,978 (1,448)
---------- ---------- ---------
DENMARK: 3.8%
900,000 Nykredit
8.00%, due 10/01/26 149,585 151,964 (2,379)
---------- ---------- ---------
INDONESIA: 4.0%
150,000 Indah Kiat International Finance
11.875%, due 06/15/02 154,875 154,834 41
---------- ---------- ---------
MEXICO: 3.6%
500,000 Cemex S.A.
8.875%, due 06/10/98 141,938 130,374 11,564
---------- ---------- ---------
UNITED STATES: 4.0%
150,000 Chiquita Brands International, Inc.
11.50%, due 06/01/01 155,250 156,562 (1,312)
---------- ---------- ---------
TOTAL CORPORATE BONDS 887,865 880,498 7,367
---------- ---------- ---------
TOTAL LONG-TERM DEBENTURES 3,012,296 2,988,992 23,304
---------- ---------- ---------
</TABLE>
<PAGE> 139
SECURITY INCOME GLOBAL AGGRESSIVE BOND
STATEMENT OF NET ASSETS
(Including the Portfolio of Investments)
September 30, 1995
<TABLE>
<CAPTION>
PRINCIPAL MARKET AMORTIZED UNREALIZE
AMOUNT SECURITY VALUE COST GAIN/LOSS
- -------------- ------------------------------- ---------- --------- ---------
<S> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS: 14.8%
MEXICO: 2.5%
700,000 Cetes
0%, due 01/25/96 $99,475 $100,569 ($1,094)
---------- ---------- ---------
NEW ZEALAND: 4.2%
250,000 New Zealand Treasury Bills
0%, due 11/08/95 162,940 161,412 1,528
---------- ---------- ---------
POLAND: 5.0%
500,000 Government of Poland Treasury Bill
0%, due 12/06/95 197,164 199,597 (2,433)
---------- ---------- ---------
TURKEY: 3.1%
6,000,000,000 Government of Turkey Treasury Bill
0%, due 10/13/95 119,766 129,565 (9,799)
---------- ---------- ---------
TOTAL SHORT-TERM INVESTMENTS 579,345 591,143 (11,798)
---------- ---------- ---------
CALL OPTIONS ON CURRENCY: 0.0%
900,000 Written Call Option on Danish Krone
strike price 5.48 DKK expires 10/23/95 (1,440)
----------
TOTAL INVESTMENTS: 91.7% 3,590,201 $3,580,135 $10,066
---------- ---------- ---------
Other assets in excess of
liabilities: 8.3% 324,441
----------
TOTAL NET ASSETS: 100% $3,914,642
==========
</TABLE>
Principal amounts on certain foreign bonds are reflected
in local currency (i.e. Japanese yen, Canadian dollar or
deutsche mark) while market value is reflected in base
U. S. dollars.
<PAGE> 140
SECURITY INCOME FUND-GLOBAL AGGRESSIVE BOND SERIES
BALANCE SHEET
SEPTEMBER 30, 1995
<TABLE>
<S> <C>
Investments in securities, at value (cost $3,580,135) $3,590,201
respectively)
Cash 30,176
Receivables:
Interest 120,828
Prepaid Expenses 2,005
Security Managment Company 14,928
Securities Sold 162,699
----------
Total assets $3,920,837
==========
Liabilities:
Management fees 6,195
----------
Total liabilities 6,195
Net assets:
Capital stock 3,905,657
Accumulated undistributed net investment income (loss) 18,490
Accumulated undistributed net realized loss on sale of
investments (20,774)
Net unrealized appreciation (depreciation) in value
of investments 11,269
----------
Net assets applicable to outstanding shares of
capital stock 3,914,642
----------
Total liabilities and net assets $3,920,837
==========
CLASS "A" SHARES
Net asset value and redemption price per share
($2,624,282/261,798 shares outstanding) $10.02
Sales charge 0.50
----------
Maximum offering price $10.52
==========
CLASS "B" SHARES
Net asset value and redemption price per share
($1,290,360/128,751 shares outstanding) $10.02
==========
</TABLE>
11
<PAGE> 141
SECURITY INCOME FUND-GLOBAL AGGRESSIVE BOND SERIES
STATEMENT OF OPERATIONS
For The Period June 1, 1995 to September 30, 1995
<TABLE>
<S> <C>
Investment income:
Interest $167,960
Less: foreign taxes withheld 1,841
----------
166,119
Expenses:
Management fees 4,411
Transfer/maintenance fees and custodian fees 2,543
12b-1 distribution plan fees (Class A) 2,108
12b-1 distribution plan fees (Class B) 4,172
Administration fees 10,479
Directors' fees 17
Professional fees 1,176
Registration fees 13,140
Other expense 143
----------
38,189
Reimbursement of expenses (9,852)
----------
Total expenses 28,337
----------
Net investment income 137,782
Realized and unrealized gain (loss) on investments:
Realized loss on sale of investments and foreign
currency transactions (20,774)
Unrealized appreciation of investments 11,269
----------
Net gain (loss) on investments (9,505)
----------
Net increase (decrease) in net assets resulting
from operations $128,277
==========
</TABLE>
11
<PAGE> 142
SECURITY INCOME FUND-GLOBAL AGGRESSIVE BOND SERIES
STATEMENT OF CHANGES IN NET ASSETS
For The Period June 1, 1995 to September 30, 1995
<TABLE>
<S> <C>
Increase in net assets from operations:
Net investment income $137,782
Net realized loss on investments (20,774)
Unrealized appreciation
of investments during the period 11,269
----------
Net increase in net assets resulting from operations 128,277
Distributions to shareholders from:
Net investment income (119,292)
Capital share transactions (e):
Proceeds from shares issued 2,536,809
Proceeds from shares issued (Class B) 1,250,100
Dividends Reinvested (Class A) 81,914
Dividends Reinvested (Class B) 37,378
Cost of shares redeemed (Class A) (544)
Cost of shares redeemed (Class B) 0
----------
Net increase (decrease) from capital share transactions 3,905,657
----------
Total increase (decrease) in net assets 3,914,642
Net assets:
Beginning of period 0
----------
End of period $3,914,642
----------
Undistributed net investment income $18,490
----------
(a) Income dividends per share (Class A) $0.3230
(b) Income dividends per share (Class B) 0.2990
(e) Shares issued and redeemed:
Shares sold (Class A) 253,657
Shares sold (Class B) 125,010
Dividends reinvested (Class A) 8,194
Dividends reinvested (Class B) 3,741
Shares redeemed (Class A) (53)
Shares redeemed (Class B) 0
----------
Net increase (decrease) 390,549
==========
</TABLE>
11
<PAGE> 143
SECURITY INCOME FUND
PART C. OTHER INFORMATION
<TABLE>
<S> <C>
Item 24. Financial Statements and Exhibits
- ------- ---------------------------------
a. Financial Statements
Included in Part A of this Registration Statement:
Per Share Income and Capital Changes
To be included in Part B of this Registration Statement:
the unaudited Semiannual Report dated June 30, 1995, and
the unaudited financials for the Global Aggressive Bond
Series dated September 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.
(b) Sub-Advisory Agreement-Lexington.
(c) Sub-Advisory Agreement-MFR.
(6) (a) Distribution Agreement. (d)
(b) Class B Distribution Agreement.
(7) Not applicable.
(8) (a) Custodian Agreement-UMB. (d)
(b) Custodian Agreement-Chase.
(9) (a) Administrative Services and Transfer Agency Agreement
(b) Sub-Administrative Agreement.
(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)
</TABLE>
(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> 144
Item 25. Persons Controlled by or Under Common Control with Registrant.
Not applicable.
Item 26. Number of Holders of Securities as of October 26, 1995.
<TABLE>
<CAPTION>
(1) (2)
Number of Record
Title of Class Shareholders
-------------- ------------------
<S> <C>
Corporate Bond - Shares of Common Stock, Class A 3308
Corporate Bond - Shares of Common Stock, Class B 563
U.S. Government - Shares of Common Stock, Class A 502
U.S. Government - Shares of Common Stock, Class B 101
Limited Maturity Bond - Shares of Common Stock, Class A 59
Limited Maturity Bond - Shares of Common Stock, Class B 6
Global Aggressive Bond - Shares of Common Stock, Class A 18
Global Aggressive Bond - Shares of Common Stock, Class B 2
</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> 145
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."
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
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> 146
<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> 147
<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> 148
<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
</TABLE>
<PAGE> 149
<TABLE>
<CAPTION>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
---- -----------------------------------------------------
<S> <C>
Gregory A. Hamilton Second Vice President
Security Management Company
Assistant Vice President
Security Equity Fund, Security Income Fund, SBL Fund
Director
Downtown Topeka, Inc.
906 South Kansas Avenue
Topeka, Kansas
Trustee
Kansas State University Foundation
Manhattan, Kansas
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
</TABLE>
<PAGE> 150
<TABLE>
<CAPTION>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
---- -----------------------------------------------------
<S> <C>
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
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
Assistant Vice President
Security Ultra Fund, SBL Fund
Larry L. Valencia Assistant Vice President and Senior Research Analyst
Security Management Company
</TABLE>
<PAGE> 151
<TABLE>
<CAPTION>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
---- -----------------------------------------------------
<S> <C>
James Schier Assistant Vice President and Senior Research Analyst
Security Management Company
</TABLE>
*Located at 700 Harrison, Topeka, Kansas 66636-0001
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
</TABLE>
<PAGE> 152
<TABLE>
<CAPTION>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
---- -----------------------------------------------------
<S> <C>
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.
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> 153
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
(b)
<TABLE>
<CAPTION>
(1) (2) (3)
Name and Principal Position and Offices Position and Offices
Business Address* with Underwriter with Registrant
------------------ -------------------- ---------------------
<S> <C> <C>
Richard K Ryan President and Director None
John D. Cleland Vice President and Director President and Director
James W. Lammers National Sales Manager, Senior None
Vice President and Director
Louis R. Jicha Vice President and Director None
James R. Schmank Vice President and Director Vice President
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 President None
Steven S. Doerrer Regional Vice President None
Anthony L. Hammock Regional Vice President None
</TABLE>
<PAGE> 154
<TABLE>
<CAPTION>
(1) (2) (3)
Name and Principal Position and Offices Position and Offices
Business Address* with Underwriter with Registrant
------------------ -------------------- ---------------------
<S> <C> <C>
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
Carla D. Griffin Regional Vice President None
*700 Harrison, Topeka, Kansas 66636-0001
</TABLE>
(c) Not applicable.
Item 30. Location of Accounts and Records.
Certain accounts, books and other documents required to be
maintained by Section 31(a) of the 1940 Act and the rules
promulgated thereunder are maintained by Security Management
Company, 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> 155
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 31st day of
October, 1995.
SECURITY INCOME 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: October 31, 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> 156
EXHIBIT INDEX
<TABLE>
<S> <C>
(1) None
(2) None
(3) None
(4) None
(5) (a) Investment Advisory Contract
(b) Sub-Advisory Agreement - Lexington
(c) Sub-Advisory Agreement - MFR
(6) (a) None
(b) Class B Distribution Agreement
(7) None
(8) (a) None
(b) Custodian Agreement - Chase Manhattan Bank
(9) (a) Administrative Services and Transfer Agency Agreement
(b) Sub-Administrative Agreement
(10) None
(11) Consent of Independent Auditors
(12) None
(13) None
(14) None
(15) None
(16) None
</TABLE>
<PAGE> 1
EXHIBIT (5)(A)
INVESTMENT ADVISORY CONTRACT
INVESTMENT ADVISORY CONTRACT
THIS AGREEMENT, made this 27th day of March, 1987, between SECURITY INCOME
FUND, a Kansas corporation (hereinafter referred to as the "Fund"), and
SECURITY MANAGEMENT COMPANY, a Kansas corporation (hereinafter referred to as
the "Management Company"),
WITNESSETH:
WHEREAS, the Fund is engaged in business as an open-end management investment
company registered under the Federal Investment Company Act of 1940; and
WHEREAS, the Fund is authorized to issue shares of capital stock in separate
Series, with each such Series representing interests in a separate portfolio of
securities and other assets; and
WHEREAS, the Fund currently offers shares in three separate series designated
the Corporate Bond Series, the U.S. Government Series, and the High Yield
Series (the "Series"), such series together with all other series subsequently
established by the Fund with respect to which the Fund desires to retain the
Management Company to render investment advisory services hereunder and with
respect to which the Management Company is willing so to do, being herein
collectively referred to as the "Series", and
WHEREAS, the Management Company is willing to provide investment research and
advice to the Fund on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and mutual agreements made
herein, the parties hereto agree as follows:
1. EMPLOYMENT OF MANAGEMENT COMPANY. The Fund hereby employs the Management
Company to act as investment adviser to each Series of the Fund with
respect to the investment of its assets, and to supervise and arrange the
purchase of securities for and the sale of securities held in the
portfolios of the Series of the Fund, subject always to the supervision
of the Board of Directors of the Fund, during the period and upon and
subject to the terms and conditions herein set forth. The Management
Company hereby accepts such employment and agrees to perform the services
required by this Agreement for the compensation herein provided.
In the event the Fund establishes additional series with respect to which
it desires to retain the Management Company to render investment advisory
services hereunder, it shall notify the Management Company in writing.
If the Management Company is willing to render such services it shall
notify the Fund in writing, whereupon such series shall become a Series
subject to the terms and conditions hereunder, and to such amended or
additional provisions as shall be specifically agreed to by the Fund and
the Management Company in accordance with applicable law.
<PAGE> 2
2. INVESTMENT ADVISORY DUTIES. The Management Company shall regularly
provide each Series of the Fund with investment research, advice and
supervision, continuously furnish an investment program and recommend
that securities shall be purchased and sold and what portion of the
assets of each series shall be held uninvested and shall arrange for the
purchase of securities and other investments for and the sale of
securities and other investments held in the portfolio of each Series.
All investment advice furnished by the Management Company to each Series
under this Section 2 shall at all times conform to any requirements
imposed by the provisions of the Fund's Articles of Incorporation and
Bylaws, the Investment Company Act of 1940 and the rules and regulations
promulgated thereunder, any other applicable provisions of law, and the
terms of the registration statements of the Fund under the Securities Act
of 1933 and the Investment Company Act of 1940, all as from time to time
amended. The Management Company shall advise and assist the officers or
other agents of the Fund in taking such steps as are necessary or
appropriate to carry out the decisions of the Fund's Board of Directors
(and any duly appointed committee thereof) with regard to the foregoing
matters and the general conduct of the Fund's business.
3. PORTFOLIO TRANSACTIONS AND BROKERAGE.
(a) Transactions in portfolio securities shall be effected by the
Management Company, through brokers or otherwise, in the manner
permitted in this Section 3 and in such manner as the Management
Company shall deem to be in the best interests of the Fund after
consideration is given to all relevant factors.
(b) In reaching a judgment relative to the qualification of a broker
to obtain the best execution of a particular transaction, the
Management Company may take into account all relevant factors and
circumstances, including the size of any contemporaneous market in
such securities; the importance to the Fund of speed and
efficiency of execution; whether the particular transaction is
part of a larger intended change in portfolio position in the same
securities; the execution capabilities required by the
circumstances of the particular transaction; the capital required
by the transaction; the overall capital strength of the broker;
the broker's apparent knowledge of or familiarity with sources
from or to whom such securities may be purchased or sold; as well
as the efficiency, reliability and confidentiality with which the
broker has handled the execution of prior similar transactions.
(c) Subject to any statements concerning the allocation of brokerage
contained in the Fund's prospectus or statement of additional
information, the Management Company is authorized to direct the
execution of portfolio transactions for the Fund to brokers who
furnish investment information or research service to the
Management Company. Such allocation shall be in such amounts and
proportions as the Management Company may determine. If the
transaction is directed to a broker providing brokerage and
research services to the Management Company, the commission paid
for such transaction may be in excess of the commission another
broker would have charged for effecting that transaction, if the
Management Company shall have determined in good faith that the
commission is reasonable in relation to the value of
<PAGE> 3
the brokerage and research services provided, viewed in terms of
either that particular transaction or the overall responsibilities
of the Management Company with respect to all accounts as to which
it now or hereafter exercises investment discretion. For purposes
of the immediately preceding sentence, "providing brokerage and
research services" shall have the meaning generally given such
terms or similar terms under Section 28(e)(3) of the Securities
Exchange Act of 1934, as amended.
(d) In the selection of a broker for the execution of any transaction
not subject to fixed commission rates, the Management Company
shall have no duty or obligation to seek advance competitive
bidding for the most favorable negotiated commission rate to be
applicable to such transaction, or to select any broker solely on
the basis of its purported or "posted" commission rates.
(e) In connection with transactions on markets other than national or
regional securities exchanges, the Fund will deal directly with
the selling principal or market maker without incurring charges
for the services of a broker on its behalf unless, in the best
judgment of the Management Company, better price or execution can
be obtained in utilizing the services of a broker.
4. ALLOCATION OF EXPENSES AND CHARGES. The Management Company shall provide
investment advisory, statistical and research facilities and all clerical
services relating to research, statistical and investment work, and shall
provide for the compilation and maintenance of such records relating to
these functions as shall be required under applicable law and the rules
and regulations of the Securities and Exchange Commission. The
Management Company will also provide the Fund with a president, a chief
financial officer, and a secretary, subject to the approval of the Board
of Directors, and will pay the salaries and expenses of such officers of
the Fund who are also directors, officer or employees of the Management
Company.
Other than as specifically indicated in the preceding sentences, the
Management Company shall not be required to pay any expenses of the Fund,
and in particular, but without limiting the generality of the foregoing,
the Management Company shall not be required to pay office rental or
general administrative expenses; Board of Directors' fees; legal,
auditing and accounting expenses; insurance premiums; broker's
commissions; taxes and governmental fees and any membership dues; fees of
custodian, transfer agent, registrar and dividend disbursing agent (if
any); expenses of obtaining quotations on the Fund's portfolio securities
and pricing of the Fund's shares; cost of stock certificates and any
other expenses (including clerical expenses) of issue, sale, repurchase
or redemption of shares of the Fund's capital stock; costs and expenses
in connection with the registration of the Fund's capital stock under the
Securities Act of 1933 and qualification of the Fund's capital stock
under the Blue Sky laws of the states where such stock is offered; costs
and expenses in connection with the registration of the Fund under the
Investment Company Act of 1940 and all periodic and other reports
required thereunder; expenses of preparing, printing and distributing
reports, proxy statements, prospectuses, statements or additional
information, notices and distributions to stockholders; costs of
stationery; costs of stockholder and other meetings;
<PAGE> 4
expenses of maintaining the Fund's corporate existence; and such
nonrecurring expenses as may arise including litigation affecting the
Fund and the legal obligations the Fund may have to indemnify its
officers and directors.
5. COMPENSATION OF MANAGEMENT COMPANY.
(a) As compensation for the services rendered by the Management
Company as provided herein, for each of the Fund's fiscal years
this Agreement is in effect, the Fund shall pay the Management
Company an annual fee equal to .5 percent of the average daily
closing value of the net assets of each Series computed on a daily
basis. Such fee shall be adjusted and payable monthly. If this
Agreement shall be effective for only a portion of a year in which
a fee is owed for any Series, then the Management Company's
compensation for said year shall be prorated for such portion.
For purposes of this Section 5, the value of the net assets of the
Series shall be computed in the same manner as the value of such
net assets is computed in connection with the determination of the
net asset value of the shares of the Fund as described in the
Fund's Prospectus and Statement of Additional Information. The net
asset value of each Series shall be included in and comprise a
part of the net assets of the Fund for purposes of determining
said fee under this Section.
(b) For each of the Fund's full fiscal years this Agreement remains
in force, the Management Company agrees that if the total annual
expenses of each Series of the Fund, exclusive of interest and
taxes and extraordinary expenses (such as litigation), but
inclusive of the Management Company's compensation, exceed any
expense limitation imposed by state securities law or regulation
in any state in which shares of the Fund are then qualified for
sale, as such regulations may be amended from time to time, the
Management Company will contribute to such Series such funds or
to waive such portion of its fee, adjusted monthly as may be
requisite to insure that such annual expenses will not exceed
any such limitation. If this Contract shall be effective for
only a portion of one of the Series' fiscal years, then the
maximum annual expenses shall be prorated for such portion.
Brokerage fees and commissions incurred in connection with the
purchase or sale of any securities by a Series shall not be
deemed to be expenses with the meaning of this paragraph (b).
6. MANAGEMENT COMPANY NOT TO RECEIVE COMMISSIONS. In connection with the
purchase or sale of portfolio securities for the account of the Fund,
neither the Management Company nor any officer or director of the
Management Company shall act as principal or receive any compensation
from the Fund other than its compensation as provided for in Section 5
above. If the Management Company, or any "affiliated person" (as defined
in the Investment Company Act of 1940) receives any cash, credits,
commissions or tender fees from any person in connection with
transactions in the Fund's portfolio securities (including but not
limited to the tender or delivery of any securities held in the Fund's
portfolio), the Management Company shall immediately pay such amount to
the Fund in cash or as a credit against any then earned but unpaid
management fees due by the Fund to the Management Company.
<PAGE> 5
7. LIMITATION OF LIABILITY OF MANAGEMENT COMPANY. So long as the Management
Company shall give the Fund the benefit of its best judgment and effort
in rendering services hereunder, the Management Company shall not be
liable for any errors of judgment or mistake of law, or for any loss
sustained by reason of the adoption of any investment policy or the
purchase, sale or retention of any security on its recommendation,
whether or not such recommendation shall have been based upon its own
investigation and research or upon investigation and research made by any
other individual, firm or corporation, if such recommendation shall have
been made and such other individual, firm or corporation shall have been
selected with due care and in good faith. Nothing herein contained
shall, however, be construed to protect the Management Company against
any liability to the Fund or its security holders by reason of willful
misfeasance, bad faith or gross negligence in the performance of its
duties or by reason of its reckless disregard of its obligations and
duties under this Agreement. As used in this Section 7, "Management
Company" shall include directors, officers and employees of the
Management Company, as well as that corporation itself.
8. OTHER ACTIVITIES NOT RESTRICTED. Nothing in this Agreement shall prevent
the Management Company or any officer thereof from acting as investment
adviser for any other person, firm, or corporation, nor shall it in any
way limit or restrict the Management Company or any of its directors,
officers, stockholders or employees from buying, selling, or trading any
securities for its own accounts or for the accounts of others for whom it
may be acting; provided, however, that the Management Company expressly
represents that it will undertake no activities which, in its judgment,
will conflict with the performance of its obligations to the Fund under
this Agreement. The Fund acknowledges that the Management Company acts
as investment adviser to other investment companies, and it expressly
consents to the Management Company acting as such; provided, however,
that if in the opinion of the Management Company, particular securities
are consistent with the investment objectives of, and are desirable
purchases or sales for the portfolios of one or more Series and one or
more of such other investment companies or series of such companies at
approximately the same time, such purchases or sales will be made on a
proportionate basis if feasible, and if not feasible, then on a rotating
or other equitable basis.
9. DURATION AND TERMINATION OF AGREEMENT. This Agreement shall become
effective on March 27, 1987, provided that on that date it is approved by
the holders of a majority of the outstanding voting securities of each
Series of the Fund. This Agreement shall continue in force until
April 1, 1988, and for successive 12-month periods thereafter, unless
terminated, provided each such continuance is specifically approved at
least annually by (a) the vote of a majority of the entire Board of
Directors of the Fund, and the vote of a majority of the directors of the
Fund who are not parties to this Agreement or interested persons (as such
terms are defined in the Investment Company Act of 1940) of any such
party cast in person at a meeting of such directors called for the
purpose of voting upon such approval, or (b) by the vote of the holders
of a majority of the outstanding voting securities of each series of the
Fund (as defined in the Investment Company Act of 1940). In the event a
majority of the outstanding shares of one series vote for continuance of
the Advisory Contract, it will be continued for that series even though
the Advisory Contract is not approved by either a
<PAGE> 6
majority of the outstanding shares of any other series or by a majority
of outstanding shares of the Fund. Upon this Agreement becoming
effective, any previous agreement between the Fund and the Management
Company providing for investment advisory and management services shall
concurrently terminate, except that such termination shall not affect
fees accrued and guarantees of expenses with respect to any period prior
to termination.
This Agreement may be terminated at any time as to any series of the
Fund, without payment of any penalty, by vote of the Board of Directors
of the Fund or by vote of the holders of a majority of the outstanding
voting securities of that series of the Fund, or by the Management
Company, upon 60 days' written notice to the other party.
This Agreement shall automatically terminate in the event of its
"assignment" (as defined in the Investment Company Act of 1940).
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their respective corporate officers thereto duly authorized on the
day, month and year first above written.
ATTEST: SECURITY INCOME FUND
Amy J. Lee By: Michael J. Provines
------------------------ ----------------------
Title: Secretary President
ATTEST: SECURITY MANAGEMENT COMPANY
Amy J. Lee By: Michael J. Provines
------------------------ ----------------------
Title: Secretary President
Please note that this Agreement was re-executed October 21, 1991, to correct a
typographical error.
<PAGE> 7
AMENDMENT TO INVESTMENT ADVISORY CONTRACT
WHEREAS, Security Income Fund (the "Fund") and Security Management Company (the
"Management Company") are parties to an Investment Advisory Contract dated
March 27, 1987 (the "Agreement"), under which the Management Company agrees to
provide investment research and advice to the Fund in return for the
compensation specified in the Agreement;
WHEREAS, Security Income Fund currently offers its shares in two series, the
Corporate Bond Series and the U.S. Government Series (hereinafter collectively
referred to as the "Series");
WHEREAS, effective October 19, 1993, the Fund will offer its shares in two
Classes, Class A shares, which are currently being offered, and a new class,
Class B shares;
WHEREAS, the Fund has adopted a Distribution Plan with respect to its Class B
shares and, as a result, such shares are subject to distribution fees to which
Class A shares are not subject;
WHEREAS, the distribution fees associated with Class B shares require the
amendment of the Agreement relative to that class of shares;
WHEREAS, on October 1, 1993, the initial Class B shareholder of each Series of
the Fund approved such amendment to this Agreement;
WHEREAS, the changes to the Agreement which are contemplated by this Amendment
do not affect the interests of Class A shareholders of the Fund;
NOW, THEREFORE, the Fund and the Management Company hereby amend the Investment
Advisory Contract, dated March 27, 1987, effective October 1, 1993, as follows:
A. The Management Company agrees to provide investment research and advice,
to the Fund pursuant to the terms and conditions set forth in the
Agreement, as amended in section B below.
B. Section 5(b) of the Agreement shall be amended by deleting it in its
entirety and replacing it with the following:
(b) For each of the Fund's full fiscal years this Agreement remains in
force, the Management Company agrees that if the total annual
expenses of each Series of the Fund, exclusive of interest and
taxes, extraordinary expenses (such as litigation), and
distribution fees paid under the Fund's Class B Distribution Plan,
but inclusive of the Management Company's compensation, exceed any
expense limitation imposed by state securities law or regulation
in any state in which shares of the Fund are then qualified for
sale, as such regulations may be amended from time to time, the
Management Company will contribute to such Series such funds or
waive such portion of its fee, adjusted monthly as may be
requisite to insure that such annual expenses will not exceed any
such limitation. If this Contract shall be effective for only a
portion of
<PAGE> 8
one of the Series' fiscal years, then the maximum annual expenses
shall be prorated for such portion. Brokerage fees and
commissions incurred in connection with the purchase or sale of
any securities by a Series shall not be deemed to be expenses with
the meaning of this paragraph (b).
IN WITNESS WHEREOF, the parties hereto have made this Amendment to the
Investment Advisory Contract this 1st day of October 1993.
ATTEST: SECURITY INCOME FUND
Amy J. Lee By: Michael J. Provines
- ------------------------ ---------------------------
Amy J. Lee, Secretary President
ATTEST: SECURITY MANAGEMENT COMPANY
Amy J. Lee By: Michael J. Provines
- ------------------------ ---------------------------
Amy J. Lee, Secretary President
<PAGE> 9
AMENDMENT TO INVESTMENT ADVISORY CONTRACT
WHEREAS, Security Income Fund (the "Fund") and Security Management Company (the
"Management Company") are parties to an Investment Advisory Contract dated
March 27, 1987, as amended (the "Advisory Contract"), under which the
Management Company agrees to provide investment research, advice and
supervision and business management services to the Fund in return for the
compensation specified in the Advisory Contract:
WHEREAS, on October 21, 1994, the Board of Directors of the Fund authorized the
Fund to offer its common stock in a new series designated as the Limited
Maturity Bond Series, in addition to its presently offered series of common
stock of Corporate Bond Series and U.S. Government Series;
WHEREAS, on October 21, 1994, the Board of Directors of the Fund further
authorized the Fund to offer shares of the Limited Maturity Bond Series in two
classes, designated Class A shares and Class B shares;
WHEREAS, on October 21, 1994, the Board of Directors of the Fund approved the
amendment of the Advisory Contract to provide that the Management Company would
provide investment advisory and business management services to each class of
common stock of the Limited Maturity Bond Series of the Fund under the terms
and conditions of the Advisory Contract; and
WHEREAS, on December 30, 1994, the initial shareholder of the Limited Maturity
Bond Series approved such amendment to the Advisory Contract;
NOW, THEREFORE BE IT RESOLVED, that the Fund and the Management Company hereby
amend the Advisory Contract, to provide that the Management Company shall
provide all investment advisory services, and each of the Management Company
and the Fund shall fulfill all of their respective obligations under the
Advisory Contract, as to each Series of the Fund, including the Limited
Maturity Bond Series.
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to the
Investment Advisory Contract this 30th day of December 1994.
ATTEST: SECURITY INCOME FUND
Amy J. Lee By: John D. Cleland
--------------------- ------------------------------
Amy J. Lee, Secretary John D. Cleland, President
ATTEST: SECURITY MANAGEMENT COMPANY
Amy J. Lee By: Jeffrey B. Pantages
--------------------- ------------------------------
Amy J. Lee, Secretary Jeffrey B. Pantages, President
<PAGE> 11
AMENDMENT TO INVESTMENT ADVISORY CONTRACT
WHEREAS, Security Income Fund (the "Fund") and Security Management Company (the
"Management Company") are parties to an Investment Advisory Contract dated
March 27, 1987, as amended (the "Advisory Contract"), under which the
Management Company agrees to provide investment research, advice and
supervision and business management services to the Fund in return for the
compensation specified in the Advisory Contract;
WHEREAS, on February 3, 1995, the Board of Directors of the Fund authorized the
Fund to offer its common stock in a new series designated as the Global
Aggressive Bond Series, in addition to its presently offered series of common
stock of Corporate Bond Series, Limited Maturity Bond Series and
U.S. Government Series;
WHEREAS, on February 3, 1995, the Board of Directors of the Fund further
authorized the Fund to offer shares of the Global Aggressive Bond Series in two
classes, designated Class A shares and Class B shares;
WHEREAS, on February 3, 1995, the Board of Directors of the Fund approved the
amendment of the Advisory Contract to provide that the Management Company would
provide investment advisory and business management services to each class of
common stock of the Global Aggressive Bond Series of the Fund under the terms
and conditions of the Advisory Contract; and
WHEREAS, on April 18, 1995, the initial shareholder of the Global Aggressive
Bond Series approved such amendment to the Advisory Contract;
NOW, THEREFORE BE IT RESOLVED, that the Fund and the Management Company hereby
amend the Advisory Contract, dated March 27, 1987, as follows, effective May 1,
1995:
<PAGE> 12
Paragraph 5(a) shall be amended as follows (new language underlined):
5. Compensation of Management Company
a) As compensation for the services to be rendered by the Management Compa
ny as provided for herein, for each of the years this Agreement is in
effect, the Fund shall pay the Management Company an annual fee equal to
.75 percent of the average daily closing value of the net assets of
Global Aggressive Bond Series of the Fund, and .50 percent of the
average daily closing value of the net assets of Corporate Bond Series,
Limited Maturity Bond Series, and U.S. Government Series of the Fund,
computed on a daily basis. Such fee shall be adjusted and payable
monthly. If this Agreement shall be effective for only a portion of
a year, then the Management Company's compensation for said year shall
be prorated for such portion. For purposes of this Section 5, the value
of the net assets of each such Series shall be computed in the same
manner at the end of the business day as the value of such net assets
is computed in connection with the determination of the net asset
value of the Fund's shares as described in the Fund's prospectus.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to the
Investment Advisory Contract this 28 day of April, 1995.
ATTEST: SECURITY INCOME FUND
Amy J. Lee By: John D. Cleland
--------------------- ------------------------------
Amy J. Lee, Secretary John D. Cleland, President
ATTEST: SECURITY MANAGEMENT COMPANY
Amy J. Lee By: Jeffrey B. Pantages
--------------------- ------------------------------
Amy J. Lee, Secretary Jeffrey B. Pantages, President
<PAGE> 1
EXHIBIT (5)(b)
SUB-ADVISORY AGREEMENT - LEXINGTON
SUB-ADVISORY AGREEMENT
THIS AGREEMENT is made this 1st day of May 1995, by and between SECURITY
MANAGEMENT COMPANY, a Kansas Corporation (The "Adviser"), and LEXINGTON
MANAGEMENT CORPORATION, a Delaware corporation (the "Sub-Adviser"),
WITNESSETH:
WHEREAS, the Adviser is a registered investment adviser under the Investment
Advisers Act of 1940, as amended, and engages in the business of acting as an
investment adviser;
WHEREAS, the Adviser is the investment adviser for the Security Income Fund
(the "Fund"), and provides investment advisory services to the Fund on the
terms and conditions set forth in an investment advisory contract;
WHEREAS, the Fund is registered as a diversified, open-end investment company
under the Investment Company Act of 1940, as amended, (the "1940 Act"), and the
rules and regulations promulgated thereunder;
WHEREAS, the Fund is authorized to issue shares in separate series, with each
such series representing interests in a separate portfolio of securities and
other assets; and
WHEREAS, the Adviser desires to retain the Sub-Adviser as the Adviser's agent
to furnish certain advisory services to the Global Aggressive Bond Series of
the Fund (the "Series"), on the terms and conditions hereinafter set forth.
<PAGE> 2
NOW THEREFORE, in consideration of the mutual covenants herein contained and
other good and valuable consideration, the receipt of which is hereby
acknowledged, the parties hereto agree as follows:
1. APPOINTMENT. The Adviser hereby appoints Sub-Adviser to provide certain
sub-investment advisory services to the Series for the period and on the
terms set forth in this Agreement. Sub-Adviser accepts such appointment
and agrees to furnish the services herein set forth for the compensation
herein provided.
2. INVESTMENT ADVICE. The Sub-Adviser shall furnish the Series with
investment research and advice consistent with the investment policies set
forth in the Prospectus and Statement of Additional Information of the
Fund, subject at all times to the policies and control of the Fund's Board
of Directors and the supervision of the Adviser. In addition, the
Sub-Adviser may avail itself of any investment research or advice provided
by the Adviser. The Sub-Adviser shall give the Series the benefit of its
best judgment, efforts and facilities in rendering its services as
Sub-Adviser.
3. INVESTMENT ANALYSIS AND IMPLEMENTATION. In carrying out its obligation
under paragraph 2 hereof, the Sub-Adviser shall:
(a) determine which issuers and securities shall be represented in the
Series' portfolio and regularly report thereon to the Fund's Board
of Directors and the Adviser;
(b) formulate and implement continuing programs for the purchase and
sale of the securities of such issuers and regularly report thereon
to the Fund's Board of Directors and the Adviser;
(c) continuously review the Series' security holdings and the
investment program and the investment policies of the Series; and
(d) take, on behalf of the Series, all actions which appear necessary
to carry into effect such purchase and sale programs, including the
placement of orders for the purchase and sale of securities for the
Series.
2
<PAGE> 3
4. BROKER-DEALER RELATIONSHIPS. The Sub-Adviser is responsible for decisions
to buy and sell securities for the Series, broker/dealer selection, and
negotiation of brokerage commission rates. The Sub-Adviser's primary
consideration in effecting a security transaction will be execution at the
most favorable price. In selecting a broker/dealer to execute each
particular transaction, the Sub-Adviser will take the following into
consideration: the best net price available; the reliability, integrity
and financial condition of the broker/dealer; the size of and difficulty
in executing the order; and the value of the expected contribution of the
broker/dealer to the investment performance of the Series on a continuing
basis. Accordingly, the price to the Series in any transaction may be
less favorable than that available from another broker/dealer if the
difference is reasonably justified by other aspects of the portfolio
execution services offered. Subject to such policies as the Board of
Directors may determine, the Sub-Adviser shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or
otherwise solely by reason of its having caused the Series to pay a broker
for effecting a portfolio investment transaction in excess of the amount
of commission another broker or dealer would have charged for effecting
that transaction if the Sub-Adviser determines in good faith that such
amount of commission was reasonable in relation to the value of the
brokerage and research services provided by such broker or dealer, viewed
in terms of either that particular transaction or the Sub-Adviser's
overall responsibilities with respect to the Series and to its other
clients as to which it exercises investment discretion. The Sub-Adviser
is further authorized to place and/or to effect orders with such brokers
and dealers who may provide research or statistical material or other
services to the Series or to the Sub-Adviser. Such allocation shall be in
such amounts and proportions as the Sub-Adviser shall determine and the
Sub-Adviser will report on said allocations regularly to the Board of
Directors of the Fund and the Adviser indicating the brokers to whom such
allocations have been made and the basis therefor.
3
<PAGE> 4
5. CONTROL BY BOARD OF DIRECTORS. Any investment program undertaken by the
Sub-Adviser pursuant to this Agreement, as well as any other activities
undertaken by the Sub-Adviser on behalf of the Series pursuant thereto,
shall at all times be subject to any directives of the Board of Directors
of the Fund.
6. COMPLIANCE WITH APPLICABLE REQUIREMENTS. In carrying out its obligations
under this Agreement, the Sub-Adviser shall ensure that the Series
complies with:
(a) all applicable provisions of the 1940 Act;
(b) the provisions of the Registration Statement of the Fund, as
amended, under the Securities Act of 1933 and the 1940 Act;
(c) all applicable statutes and regulations necessary to qualify the
Series as a Regulated Investment Company under Subchapter M of the
Internal Revenue Code (or any successor or similar provision), and
shall notify the Adviser immediately upon having a reasonable basis
for believing that the Series has ceased to so qualify or that it
might not so qualify in the future;
(d) the provisions of the Fund's Articles of Incorporation, as amended;
(e) the provisions of the Bylaws of the Fund, as amended; and
(f) any other applicable provisions of state and federal law.
7. RECORDS. The Sub-Adviser hereby agrees to maintain all records relating
to its activities and obligations under this Agreement which are
required to be maintained by Rule 31a-1 under the 1940 Act and agrees to
preserve such records for the periods prescribed by Rule 31a-2 under the
Act. The Sub-Adviser further agrees that all such records are the
property of the Fund and agrees to surrender promptly to the Fund any such
records upon the Fund's request.
8. EXPENSES. The expenses connected with the Fund shall be borne by the
Sub-Adviser as follows:
(a) The Sub-Adviser shall maintain, at its expense and without cost to
the Adviser or the Series, a trading function in order to carry out
its obligations under subparagraph (d) of
4
<PAGE> 5
paragraph 3 hereof to place orders for the purchase and sale of
portfolio securities for the Series.
(b) The Sub-Adviser shall pay any expenses associated with carrying out
its obligation under subparagraph (b) of paragraph 2 hereof to
prepare reports for the Fund's Board of Directors concerning
issuers and securities represented in the Series' portfolio and the
expenses of any travel by employees of the Sub-Adviser in
connection with such reports to the Fund's Board of Directors.
(c) The Sub-Adviser shall pay any expenses that it may incur in
communicating with the Adviser in connection with its obligations
under this Agreement, including the expenses of telephone calls,
special mail services and telecopier charges.
9. DELEGATION OF RESPONSIBILITIES. Upon request of the Adviser and with the
approval of the Fund's Board of Directors, the Sub-Adviser may perform
services on behalf of the Fund which are not required by this Agreement.
Such services will be performed on behalf of the Fund, and the
Sub-Adviser's cost in rendering such services may be billed monthly to the
Adviser, subject to examination by the Adviser's independent accountants.
Payment or assumption by the Sub-Adviser of any Fund expense that the
Sub-Adviser is not required to pay or assume under this Agreement shall
not relieve the Adviser or the Sub-Adviser of any of their obligations to
the Fund or obligate the Sub-Adviser to pay or assume any similar Fund
expense on any subsequent occasions.
10. DELEGATION OF DUTIES. The Sub-Adviser may, at its discretion, delegate,
assign or subcontract any of the duties, responsibilities and
services governed by this agreement to a third party, whether or not by
formal written agreement, provided that such arrangement with a third
party has been approved by the Board of Directors of the Fund. The
Sub-Adviser shall, however, retain ultimate responsibility to the Fund and
shall implement such reasonable procedures as may be necessary for
assuring that any duties, responsibilities or services so assigned,
subcontracted or delegated are performed in conformity with the terms and
conditions of this agreement.
5
<PAGE> 6
11. COMPENSATION. For the services to be rendered and the facilities
furnished hereunder, the Adviser shall pay the Sub-Adviser an annual fee
equal to .35 percent of the average daily closing value of the net assets
of the Series, computed on a daily basis. Such fee shall be computed and
payable monthly. If this Agreement shall be effective for only a portion
of a year, then the Sub-Adviser's compensation for said year shall be
prorated for such portion. For purposes of this paragraph 11, the value
of the net assets of the Series shall be computed in the same manner at
the end of the business day as the value of such net assets is computed in
connection with the determination of the net asset value of the Series'
shares as described in the Fund's prospectus and statement of additional
information. Payment of the Sub-Adviser's compensation for the preceding
month shall be made as promptly as possible after the end of each month.
12. NON-EXCLUSIVITY. The services of the Sub-Adviser to the Adviser are not
to be deemed to be exclusive, and the Sub-Adviser shall be free to render
investment advisory or other services to others (including other
investment companies) and to engage in other activities, so long as its
services under this Agreement are not impaired thereby.
13. TERM. This Agreement shall become effective at the close of business on
the date first shown above. It shall remain in force and effect, subject
to paragraph 14 hereof for one year from the date hereof.
14. RENEWAL. Following the expiration of its initial year
term, this Agreement shall continue in force and effect from year to
year, provided that such continuance is specifically approved at least
annually:
(a) (i) by the Fund's Board of Directors or (ii) by the vote of a
majority of the Series' outstanding voting securities (as defined in
Section 2(a)(42) of the 1940 Act), and
(b) by the affirmative vote of a majority of the directors who are not
parties to this Agreement or interested persons of a party to this
Agreement (other than as a director of the Fund), by votes cast in
person at a meeting specifically called for such purpose.
6
<PAGE> 7
15. TERMINATION. This Agreement may be terminated at any time, without the
payment of any penalty, by vote of the Fund's Board of Directors or by
vote of a majority of the Series' outstanding voting securities (as
defined in Section 2(a)(42) of the 1940 Act), or by the Adviser or by the
Sub-Adviser on sixty (60) days' written notice to the other party. This
Agreement shall automatically terminate in the event of its "assignment"
as that term is defined in Section 2(a)(4) of the 1940 Act. This
Agreement shall automatically terminate in the event that the investment
advisory contract between the Adviser and the Fund is terminated, assigned
or not renewed.
16. LIABILITY OF THE SUB-ADVISER. In the absence of willful misfeasance, bad
faith or gross negligence on the part of the Sub-Adviser or its officers,
directors or employees, or reckless disregard by the Sub-Adviser of its
duties under this Agreement, the Sub-Adviser shall not be liable to the
Adviser, the Fund or to any shareholder of the Fund for any act or
omission in the course of, or connected with, rendering services hereunder
or for any losses that may be sustained in the purchase, holding or sale
of any security, provided the Sub-Adviser has acted in good faith.
17. INDEMNIFICATION. The Adviser and the Sub-Adviser each agree to indemnify
the other against any claim against, loss, or liability to, such other
party (including reasonable attorney's fees) arising out of any action on
the part of the indemnifying party which constitutes willful misfeasance,
bad faith or gross negligence.
18. NOTICES. Any notices under this Agreement shall be in writing, addressed
and delivered or mailed postage-paid to the other party at such address as
such other party may designate for the receipt of such notice. Until
further notice to the other party, it is agreed that the address of the
Sub-Adviser for this purpose shall be Park 80 West, Plaza Two, Saddle
Brook, New Jersey 07662, and the address of the Adviser for this purpose
shall be 700 Harrison Street, Topeka, Kansas 66636-0001.
7
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate by their respective officers on the day and year first
above written.
ATTEST: SECURITY MANAGEMENT COMPANY
Amy J. Lee By: James R. Schmank
- ------------------------------------- ------------------------------
Title: Secretary Senior Vice President
ATTEST: LEXINGTON MANAGEMENT
CORPORATION
Lisa Curcio By: Lawrence Kantor
- ------------------------------------- ------------------------------
Title: Senior Vice President & Secretary Executive Vice President
8
<PAGE> 1
EXHIBIT (5)(c)
SUB-ADVISORY AGREEMENT - MFR
SUB-ADVISORY AGREEMENT
THIS AGREEMENT is made this _______ day of ____________ 1995 by and between
LEXINGTON MANAGEMENT CORPORATION, a Delaware corporation ("LMC"), and MFR
ADVISORS, INC., a New York corporation ("MFR"), with respect to the following
recital of fact:
RECITAL
WHEREAS, Security Income Fund - Global Income Series (the "Fund") is registered
as an open-end, diversified management investment company under the Investment
Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations
promulgated thereunder; and
WHEREAS, Security Management Company ("SMC") is a registered investment advisor
is the investment advisor to the Fund; and
WHEREAS, LMC is registered as an investment advisor under the Investment
Advisers Act of 1940, as amended, and engages in the business of acting as an
investment advisor; and
WHEREAS, LMC is the sub-advisor to the Fund pursuant to a Sub-Advisory
Agreement dated _____________ between LMC and SMC; and
WHEREAS, MFR is registered as an investment adviser under the Investment
Advisers Act of 1940, as amended, and engages in the business of acting as an
investment advisor; and
WHEREAS, LMC desires to appoint MFR as its sub-advisor to provide certain
investment advisory services to the Fund; and
WHEREAS, MFR proposes to render investment management services to LMC in
connection with LMC's responsibilities to the Fund on the terms and conditions
hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants herein contained and
other good and valuable consideration, the receipt of which is hereby
acknowledged, the parties hereto agree as follows:
1. Duties. MFR shall:
(a) Provide LMC with such economic research and securities analysis as
LMC may from time to time consider necessary.
(b) Obtain and evaluate pertinent information about significant
developments and economic, statistical and financial data,
domestic, foreign or otherwise, whether affecting the economy
generally or the Fund.
<PAGE> 2
2. Control by Board of Directors. Any investment program undertaken by MFR
pursuant to this Agreement, as well as any other activities undertaken by MFR
on behalf of the Fund pursuant thereto, shall at all times be subject to any
directives of the Board of Directors of the Fund.
3. Compliance With Applicable Requirements. In carrying out its obligations
under this Agreement, MFR shall at all times conform to:
(a) all applicable provisions of the 1940 Act; and
(b) the provisions of the Registration Statement of the fund under the
Securities Act of 1933 and the 1940 Act; and
(c) the provisions of the Fund's Agreement and Articles of
Incorporation; and
(d) the provisions of the By-Laws of the Fund; and
(e) all applicable statutes and regulations necessary to qualify the
Fund as a Regulated Investment Company under Sub-Chapter M of the
Internal Revenue Code (or any successor or similar provision), and
shall notify LMC immediately upon having a reasonable basis for
believing that the Fund has ceased to so qualify or that it might
not so qualify in the future; and
(f) any other applicable provisions of state and federal law.
4. Expenses. The expenses connected with the Fund shall be borne by MFR as
follows:
(a) MFR shall pay the salaries and payroll expenses of persons serving
as officers or Directors of the Fund who are also employees of MFR
or any of its affiliates.
5. Delegation of Responsibilities. MFR shall provide such services to LMC
for the Fund subject to the oversight and supervision of LMC, SMC and the
Fund's Board of Directors.
6. Other Services. Upon request of LMC and with the approval of the Fund's
Board of Directors MFR may perform services on behalf of the Fund which
are not required by this Agreement. Such services will be performed on
behalf of the Fund and MFR's cost in rendering such services may be
billed monthly to LMC, subject to examination by LMC's independent
accountants. Payment or assumption by MFR of any Fund expense that MFR
is not required to pay or assume under this Agreement shall not relieve
LMC or MFR of any of their obligations to the Fund or obligate MFR to pay
or assume any similar Fund expense on any subsequent occasions.
7. Compensation. For the services to be rendered and the facilities
furnished hereunder, LMC shall pay MFR monthly compensation of the sum of
the amount determined by applying the following annual rate of the Fund's
average daily net assets net of reimbursement, .15% of the Fund's annual
average daily net assets. Compensation under this Agreement shall be
<PAGE> 3
paid monthly. If this Agreement becomes effective subsequent to the
first day of the month or shall terminate before the last day of the
month, compensation for that part of the month this Agreement is in
effect shall be prorated in a manner consistent with the calculation for
the preceding month and shall be made as promptly as possible after the
end of each month.
8. Term. This Agreement shall become effective at the close of business on
the date hereof and shall remain in force and effect, subject to Section
11 hereof for one year from the date hereof.
9. Renewal. Following the expiration of its initial term, this Agreement
shall continue in force and effect from year to year, provided that such
continuance is specifically approved at least annually.
(a) (i) by the Fund's Board of Directors or (ii) by the vote of a
majority of the Fund's outstanding voting securities (as defined
in Section 2(a)(42) of the 1940 Act), and
(b) by the affirmative vote of a majority of the Directors who are not
parties of this Agreement or interested persons of a party to the
Agreement (other than as a Director of the Fund), by votes cast in
person at a meeting specifically called for such purposes.
10. Termination. This Agreement may be terminated at any time, without the
payment of any penalty, by vote of the Fund's Board of Directors or by
vote of a majority of the Fund's outstanding voting securities or by MFR
on sixty (60) days' written notice to the other party. This Agreement
shall automatically terminate in the event of its assignment, the term
"assignment" for the purposes having the meaning defined in Section
2(a)(42) of the Investment Company Act of 1940.
11. Liability of MFR. In the absence of willful misfeasance, bad faith,
gross negligence on the part of MFR or its officers, directors or
employees, or reckless disregard by MFR of its duties under this
Agreement, MFR shall not be liable to LMC, the Fund or to any shareholder
of the Fund for any act or omission in the course of, or connected with,
rendering services hereunder or for any losses that may be sustained in
the purchase, holding or sale of any security, provided MFR has acted in
good faith.
12. Notices. Any notices under this Agreement shall be in writing, addressed
and delivered or mailed postage paid to the other party at such address
as such other party may designate for the receipt of such notice. Until
further notice to the other party, it is agreed that the address of LMC
shall be Park 80 West, Plaza Two, Saddle Brook, New Jersey 07663, and
that of MFR for this purpose shall be One World Financial Center, 200
Liberty Street, New York, New York 10281.
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate by their respective officers on the day and year first
above written.
LEXINGTON MANAGEMENT CORPORATION
By
-----------------------------
Attest: Executive Vice President
- ------------------------------
MFR ADVISORS, INC.
By
-----------------------------
Attest: President
- ------------------------------
<PAGE> 1
EXHIBIT (6)(b)
CLASS B DISTRIBUTION AGREEMENT
CLASS B
DISTRIBUTION AGREEMENT
THIS AGREEMENT, made this 1st day of October 1993, between Security Income
Fund, a Kansas corporation (hereinafter referred to as the "Company"), and
Security Distributors, Inc., a Kansas corporation (hereinafter referred to as
the "Distributor").
WITNESSETH:
WHEREAS, the Company is engaged in business as an open-end, management
investment company registered under the federal Investment Company Act of 1940
(the "1940 Act"); and
WHEREAS, the Distributor is willing to act as principal underwriter for the
Company to offer for sale, sell and deliver after sale, the Class B Shares of
the Company's $1.00 par value common stock (hereinafter referred to as the
"Shares") on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements herein
set forth, the parties hereto agree as follows:
1. Employment of Distributor. The Company hereby employs the Distributor
to act as principal underwriter for the Company with respect to its
Class B Shares and hereby agrees that during the term of this
Agreement, and any renewal or extension thereof, or until any prior
termination thereof, the Distributor shall have the exclusive right to
offer for sale and to distribute any and all of its Class B Shares
issued or to be issued by the Company. The Distributor hereby accepts
such employment and agrees to act as the distributor of the Class B
Shares issued or to be issued by the Company during the period this
Agreement is in effect and agrees during such period to offer for sale
such Shares as long as such Shares remain available for sale, unless
the Distributor is unable legally to make such offer for sale as the
result of any law or governmental regulation.
2. Offering Price and Commissions. Prior to the issuance of any Shares
by the Company pursuant to any subscription tendered by or through the
Distributor and confirmed for sale to or through the Distributor, the
Distributor shall pay or cause to be paid to the custodian of the
Company in cash, an amount equal to the net asset value of such Shares
at the time of acceptance of each such subscription and confirmation
by the Company of the sale of such Shares. All Shares shall be sold
to the public only at their public offering price at the time of such
sale, and the Company shall receive not less than the full net asset
value thereof.
3. Allocation of Expenses and Charges. During the period this Agreement
is in effect, the Company shall pay all costs and expenses in
connection with the registration of Shares under the Securities Act of
1933 (the "1933 Act"), including all expenses in connection with the
preparation and printing of any registration statements and
prospectuses necessary for registration thereunder but excluding any
additional costs and expenses incurred in furnishing the Distributor
with prospectuses.
<PAGE> 2
The Company will also pay all costs, expenses and fees incurred in connection
with the qualification of the Shares under the applicable Blue Sky laws of the
states in which the Shares are offered.
During the period this Agreement is in effect, the Distributor will pay or
reimburse the Company for:
(a) All costs and expenses of printing and mailing prospectuses (other
than to existing shareholders) and confirmations, and all costs and
expenses of preparing, printing and mailing advertising material,
sales literature, circulars, applications, and other materials used or
to be used in connection with the offering for sale and the sale of
Shares; and
(b) All clerical and administrative costs in processing the applications
for and in connection with the sale of Shares.
The Distributor agrees to submit to the Company for its prior approval all
advertising material, sales literature, circulars and any other material which
the Distributor proposes to use in connection with the offering for sale of
Shares.
4. Redemption of Shares. The Distributor, as agent of and for the
account of the Fund, may redeem Shares of the Fund offered for resale
to it at the net asset value of such Shares (determined as provided in
the Articles of Incorporation or Bylaws) and not in excess of such
maximum amounts as may be fixed from time to time by an officer of the
Fund. Whenever the officers of the Fund deem it advisable for the
protection of the shareholders of the Fund, they may suspend or cancel
such authority.
5. Sales Charges. A contingent deferred sales charge shall be retained
by the Distributor from the net asset value of Shares of the Fund that
it has redeemed, it being understood that such amounts will not be in
excess of that set forth in the then-current registration statement of
the Fund. Furthermore, the Distributor may retain any amounts
authorized for payment to it under the Fund's Distribution Plan.
6. Distributor May Act as Broker and Receive Commissions.
Notwithstanding any other provisions of this Agreement, it is
understood and agreed that the Distributor may act as a broker, on
behalf of the Company, in the purchase and sale of securities not
effected on a securities exchange, provided that any such transactions
and any commission paid in connection therewith shall comply in every
respect with the requirements of the 1940 Act and in particular with
Section 17(e) of that Act and the rules and regulations of the
Securities and Exchange Commission promulgated thereunder.
7. Agreements Subject to Applicable Law and Regulations. The parties
hereto agree that all provisions of this Agreement will be performed
in strict accordance with the requirements of: the 1940 Act, the 1933
Act, the Securities Exchange Act of 1934, the rules and regulations of
the Securities and Exchange Commission under said statutes, all
applicable state Blue Sky laws and the rules and regulations
thereunder, the rules of the National Association of Securities
Dealers, Inc., and, in strict accordance with, the provisions of the
Articles of Incorporation and Bylaws of the Company.
-2-
<PAGE> 3
8. Duration and Termination of Agreement. This Agreement shall become
effective at the date and time that the Company's prospectus,
reflecting the underwriting arrangements provided by this Agreement,
shall become effective under the 1933 Act, and shall, unless
terminated as provided herein, continue in force for two years from
that date, and from year to year thereafter, provided that such
continuance for each successive year is specifically approved in
advance at least annually by either the Board of Directors or by the
vote of a majority (as defined in the 1940 Act) of the outstanding
voting securities of the Company and, in either event, by the vote of
a majority of the directors of the Company who are not parties to this
Agreement or interested persons of any such party, cast in person at a
meeting called for the purpose of voting upon such approval. As used
in the preceding sentence, the words "interested persons" shall have
the meaning set forth in Section 2(a)(19) of the 1940 Act. Written
notice of any such approval by the Board of Directors or by the
holders of a majority of the outstanding voting securities of the
Company and by the directors who are not such interested persons shall
be given promptly to the Distributor.
This Agreement may be terminated at any time without the payment of any penalty
by the Company by giving the Distributor at least sixty (60) days' previous
written notice of such intention to terminate. This Agreement may be
terminated by the Distributor at any time by giving the Company at least sixty
(60) days' previous written notice of such intention to terminate.
This Agreement shall terminate automatically in the event of its assignment.
As used in the preceding sentence, the word "assignment" shall have the meaning
set forth in Section 2(a)(4) of the 1940 Act.
9. Construction of Agreement. No provision of this Agreement is intended
to or shall be construed as protecting the Distributor against any
liability to the Company or to the Company's security holders to which
the Distributor would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of its
duties under this Agreement.
Terms or words used in the Agreement, which also occur in the Articles of
Incorporation or Bylaws of the Company, shall have the same meaning herein as
given to such terms or words in the Articles of Incorporation or Bylaws of the
Company.
10. Distributor an Independent Contractor. The Distributor shall be
deemed to be an independent contractor and, except as expressly
provided or authorized by the Company, shall have no authority to act
for or represent the Company.
11. Notice. Any notice required or permitted to be given hereunder to
either of the parties hereto shall be deemed to have been given if
mailed by certified mail in a postage-prepaid envelope addressed to
the respective party as follows, unless any such party has notified
the other party hereto that notices thereafter intended for such party
shall be mailed to some other address, in which event notices
thereafter shall be addressed to such party at the address designated
in such request:
-3-
<PAGE> 4
Security Income Fund
Security Benefit Group Building
700 Harrison
Topeka, Kansas
Security Distributors, Inc.
Security Benefit Group Building
700 Harrison
Topeka, Kansas
12. Amendment of Agreement. No amendment to this Agreement shall be
effective until approved by (a) a majority of the Board of Directors
of the Company and a majority of the directors of the Company who are
not parties to this Agreement or affiliated persons of any such party,
or (b) a vote of the holders of a majority of the outstanding voting
securities of the Company.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed
by their respective corporate officers thereto duly authorized on the day,
month and year first above written.
SECURITY INCOME FUND
BY: Michael J. Provines
--------------------------
President
ATTEST:
Amy J. Lee
- ---------------
Secretary
(SEAL)
SECURITY DISTRIBUTORS, INC.
BY: Howard R. Fricke
-----------------------
President
ATTEST:
Amy J. Lee
- ---------------
Secretary
(SEAL)
-4-
<PAGE> 5
AMENDMENT TO CLASS B DISTRIBUTION AGREEMENT
WHEREAS, Security Income Fund (the "Fund") and Security Distributors, Inc. (the
"Distributor") are parties to a Class B Distribution Agreement dated October 1,
1994 (the "Distribution Agreement"), under which the Distributor has agreed to
act as principal underwriter in connection with sales of the shares of the
Fund's Class B common stock;
WHEREAS, on October 21, 1994, the Board of Directors of the Fund authorized the
Fund to offer its common stock in a new series designated as the Limited
Maturity Bond Series, in addition to its presently offered series of common
stock of Corporate Bond Series and U.S. Government Series;
WHEREAS, on October 21, 1994, the Board of Directors of the Fund further
authorized the Fund to offer shares of the Limited Maturity Bond Series in two
classes, designated Class A shares and Class B shares; and
WHEREAS, on October 21, 1994, the Board of Directors of the Fund approved an
amendment to the Class B Distribution Agreement between the Fund and the
Distributor to include the sale of Class B shares of the Limited Maturity Bond
Series;
NOW, THEREFORE BE IT RESOLVED, that the Fund and Distributor hereby amend the
Class B Distribution Agreement to include the sale of Class B shares of the
Limited Maturity Bond Series of the Fund.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to the
Class B Distribution Agreement this 30th day of December 1994.
SECURITY INCOME FUND
By: John D. Cleland
-------------------
President
ATTEST:
Amy J. Lee
- ----------------
Secretary
SECURITY DISTRIBUTORS, INC.
By: Richard K Ryan
-----------------------
President
ATTEST:
Amy J. Lee
- -----------------
Secretary
-5-
<PAGE> 6
AMENDMENT TO CLASS B DISTRIBUTION AGREEMENT
WHEREAS, Security Income Fund (the "Fund") and Security Distributors, Inc. (the
"Distributor") are parties to a Class B Distribution Agreement dated October 1,
1993 (the "Distribution Agreement"), under which the Distributor has agreed to
act as principal underwriter in connection with sales of the shares of the
Fund's Class B common stock;
WHEREAS, on February 3, 1995, the Board of Directors of the Fund authorized the
Fund to offer its common stock in a new series designated as the Global
Aggressive Bond Series, in addition to its presently offered series of common
stock of Corporate Bond Series, Limited Maturity Bond Series and
U.S. Government Series;
WHEREAS, on February 3, 1995, the Board of Directors of the Fund further
authorized the Fund to offer shares of the Global Aggressive Bond Series in two
classes, designated Class A shares and Class B shares; and
WHEREAS, on February 3, 1995, the Board of Directors of the Fund approved an
amendment to the Class B Distribution Agreement between the Fund and the
Distributor to include the sale of Class B shares of the Global Aggressive Bond
Series;
NOW, THEREFORE BE IT RESOLVED, that the Fund and Distributor hereby amend the
Class B Distribution Agreement to include the sale of Class B shares of the
Global Aggressive Bond Series of the Fund.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to the
Class B Distribution Agreement this 18th day of April, 1995.
ATTEST: SECURITY INCOME FUND
By: Amy J. Lee By: John D. Cleland
--------------------------- --------------------------
Amy J. Lee, Secretary John D. Cleland, President
ATTEST: SECURITY DISTRIBUTORS, INC.
By: Amy J. Lee By: Richard K. Ryan
--------------------------- --------------------------
Amy J. Lee, Secretary Richard K. Ryan, President
-6-
<PAGE> 1
EXHIBIT (8)(b)
CUSTODIAN AGREEMENT - CHASE
MANHATTAN BANK
GLOBAL CUSTODY AGREEMENT
This AGREEMENT is effective May 15, 1995, and is between THE CHASE MANHATTAN
BANK, N.A. (the "Bank") and Security Income Fund - Global Aggressive Bond
Series (the "Customer").
1. CUSTOMER ACCOUNTS.
The Bank agrees to establish and maintain the following accounts
("Accounts"):
(a) A custody account in the name of the Customer ("Custody Account")
for any and all stocks, shares, bonds, debentures, notes,
mortgages or other obligations for the payment of money, bullion,
coin and any certificates, receipts, warrants or other instruments
representing rights to receive, purchase or subscribe for the same
or evidencing or representing any other rights or interests
therein and other similar property whether certificated or
uncertificated as may be received by the Bank or its Subcustodian
(as defined in Section 3) for the account of the Customer
("Securities"); and
(b) A deposit account in the name of the Customer ("Deposit Account")
for any and all cash in any currency received by the Bank or its
Subcustodian for the account of the Customer, which cash shall not
be subject to withdrawal by draft or check.
The Customer warrants its authority to: 1) deposit the cash and
Securities ("Assets") received in the Accounts and 2) give Instructions
(as defined in Section 11) concerning the Accounts. The Bank may deliver
securities of the same class in place of those deposited in the Custody
Account.
Upon written agreement between the Bank and the Customer, additional
Accounts may be established and separately accounted for as additional
Accounts under the terms of this Agreement.
2. MAINTENANCE OF SECURITIES AND CASH AT BANK AND SUBCUSTODIAN LOCATIONS.
Unless Instructions specifically require another location acceptable to
the Bank:
(a) Securities will be held in the country or other jurisdiction in
which the principal trading market for such Securities is located,
where such Securities are to be presented for payment or where
such Securities are acquired; and
(b) Cash will be credited to an account in a country or other
jurisdiction in which such cash may be legally deposited or is the
legal currency for the payment of public or private debts.
<PAGE> 2
Cash may be held pursuant to Instructions in either interest or
non-interest bearing accounts as may be available for the particular
currency. To the extent Instructions are issued and the Bank can comply
with such Instructions, the Bank is authorized to maintain cash balances
on deposit for the Customer with itself or one of its affiliates at such
reasonable rates of interest as may from time to time be paid on such
accounts, or in non-interest bearing accounts as the Customer may direct,
if acceptable to the Bank.
If the Customer wishes to have any of its Assets held in the custody of
an institution other than the established Subcustodians as defined in
Section 3 (or their securities depositories), such arrangement must be
authorized by a written agreement, signed by the Bank and the Customer.
3. SUBCUSTODIANS AND SECURITIES DEPOSITORIES.
The Bank may act under this Agreement through the subcustodians listed in
Schedule A of this Agreement with which the Bank has entered into
subcustodial agreements ("Subcustodians"). The Customer authorizes the
Bank to hold Assets in the Accounts in accounts which the Bank has
established with one or more of its branches or Subcustodians.
The Bank and Subcustodians are authorized to hold any of the Securities
in their account with any securities depository in which they
participate.
The Bank reserves the right to add new, replace or remove Subcustodians.
The Customer will be given reasonable notice by the Bank of any amendment
to Schedule A. Upon request by the Customer, the Bank will identify the
name, address and principal place of business of any Subcustodian of the
Customer's Assets and the name and address of the governmental agency or
other regulatory authority that supervises or regulates such
Subcustodian.
4. USE OF SUBCUSTODIAN.
(a) The Bank will identify such Assets on its books as belonging to
the Customer.
(b) A Subcustodian will hold such Assets together with assets
belonging to other customers of the Bank in accounts identified on
such Subcustodian's books as special custody accounts for the
exclusive benefit of customers of the Bank.
(c) Any Assets in the Accounts held by a Subcustodian will be subject
only to the instructions of the Bank or its agent. Any Securities
held in a securities depository for the account of a Subcustodian
will be subject only to the instructions of such Subcustodian.
(d) Any agreement the Bank enters into with a Subcustodian for holding
its customer's assets shall provide that such assets will not be
subject to any right, charge, security interest, lien or claim of
any kind in favor of such Subcustodian except for safe
2
<PAGE> 3
custody or administration, and that the beneficial ownership of
such assets will be freely transferable without the payment of
money or value other than for safe custody or administration. The
foregoing shall not apply to the extent of any special agreement
or arrangement made by the Customer with any particular
Subcustodian.
5. DEPOSIT ACCOUNT TRANSACTIONS.
(a) The Bank or its Subcustodians will make payments from the Deposit
Account upon receipt of Instructions which include all information
required by the Bank.
(b) In the event that any payment to be made under this Section 5
exceeds the funds available in the Deposit Account, the Bank, in
its discretion, may advance the Customer such excess amount which
shall be deemed a loan payable on demand, bearing interest at the
rate customarily charged by the Bank on similar loans.
(c) If the Bank credits the Deposit Account on a payable date, or at
any time prior to actual collection and reconciliation to the
Deposit Account, with interest, dividends, redemptions or any
other amount due, the Customer will promptly return any such
amount upon oral or written notification: (i) that such amount
has not been received in the ordinary course of business or (ii)
that such amount was incorrectly credited. If the Customer does
not promptly return any amount upon such notification, the Bank
shall be entitled, upon oral or written notification to the
Customer, to reverse such credit by debiting the Deposit Account
for the amount previously credited. The Bank or its Subcustodian
shall have no duty or obligation to institute legal proceedings,
file a claim or a proof of claim in any insolvency proceeding or
take any other action with respect to the collection of such
amount, but may act for the Customer upon Instructions after
consultation with the Customer.
6. CUSTODY ACCOUNT TRANSACTIONS.
(a) Securities will be transferred, exchanged or delivered by the Bank
or its Subcustodian upon receipt by the Bank of Instructions which
include all information required by the Bank. Settlement and
payment for Securities received for, and delivery of Securities
out of, the Custody Account may be made in accordance with the
customary or established securities trading or securities
processing practices and procedures in the jurisdiction or market
in which the transaction occurs, including, without limitation,
delivery of Securities to a purchaser, dealer or their agents
against a receipt with the expectation of receiving later payment
and free delivery. Delivery of Securities out of the Custody
Account may also be made in any manner specifically required by
Instructions acceptable to the Bank.
(b) The Bank, in its discretion, may credit or debit the Accounts on a
contractual settlement date with cash or Securities with respect
to any sale, exchange or purchase of Securities. Otherwise, such
transactions will be credited or debited to the Accounts
3
<PAGE> 4
on the date cash or Securities are actually received by the Bank
and reconciled to the Account.
(i) The Bank may reverse credits or debits made to the Accounts
in its discretion if the related transaction fails to settle
within a reasonable period, determined by the Bank in its
discretion, after the contractual settlement date for the
related transaction.
(ii) If any Securities delivered pursuant to this Section 6 are
returned by the recipient thereof, the Bank may reverse the
credits and debits of the particular transaction at any
time.
7. ACTIONS OF THE BANK.
The Bank shall follow Instructions received regarding assets held in the
Accounts. However, until it receives Instructions to the contrary, the
Bank will perform the following functions:
(a) Present for payment any Securities which are called, redeemed or
retired or otherwise become payable and all coupons and other
income items which call for payment upon presentation, to the
extent that the Bank or Subcustodian is actually aware of such
opportunities.
(b) Execute in the name of the Customer such ownership and other
certificates as may be required to obtain payments in respect of
Securities.
(c) Exchange interim receipts or temporary Securities for definitive
Securities.
(d) Appoint brokers and agents for any transaction involving the
Securities, including, without limitation, affiliates of the Bank
or any Subcustodian.
(e) Issue statements to the Customer, at times mutually agreed upon,
identifying the Assets in the Accounts.
The Bank will send the Customer an advice or notification of any
transfers of Assets to or from the Accounts. Such statements, advices or
notifications shall indicate the identity of the entity having custody of
the Assets. Unless the Customer sends the Bank a written exception or
objection to any Bank statement within sixty (60) days of receipt, the
Customer shall be deemed to have approved such statement. In such event,
or where the Customer has otherwise approved any such statement, the Bank
shall, to the extent permitted by law, be released, relieved and
discharged with respect to all matters set forth in such statement or
reasonably implied therefrom as though it had been settled by the decree
of a court of competent jurisdiction in an action where the Customer and
all persons having or claiming an interest in the Customer or the
Customer's Accounts were parties.
4
<PAGE> 5
All collections of funds or other property paid or distributed in respect
of Securities in the Custody Account shall be made at the risk of the
Customer. The Bank shall have no liability for any loss occasioned by
delay in the actual receipt of notice by the Bank or by its Subcustodians
of any payment, redemption or other transaction regarding Securities in
the Custody Account in respect of which the Bank has agreed to take any
action under this Agreement.
8. CORPORATE ACTIONS; PROXIES.
Whenever the Bank receives information concerning the Securities which
requires discretionary action by the beneficial owner of the Securities
(other than a proxy), such as subscription rights, bonus issues, stock
repurchase plans and rights offerings, or legal notices or other material
intended to be transmitted to securities holders ("Corporate Actions"),
the Bank will give the Customer notice of such Corporate Actions to the
extent that the Bank's central corporate actions department has actual
knowledge of a Corporate Action in time to notify its customers.
When a rights entitlement or a fractional interest resulting from a
rights issue, stock dividend, stock split or similar Corporate Action is
received which bears an expiration date, the Bank will endeavor to obtain
Instructions from the Customer or its Authorized Person, as defined in
Section 10, but if Instructions are not received in time for the Bank to
take timely action, or actual notice of such Corporate Action was
received too late to seek Instructions, the Bank is authorized to sell
such rights entitlement or fractional interest and to credit the Deposit
Account with the proceeds or take any other action it deems, in good
faith, to be appropriate in which case it shall be held harmless for any
such action.
The Bank will deliver proxies to the Customer or its designated agent
pursuant to special arrangements which may have been agreed to in
writing. Such proxies shall be executed in the appropriate nominee name
relating to Securities in the Custody Account registered in the name of
such nominee, but without indicating the manner in which such proxies are
to be voted; and where bearer Securities are involved, proxies will be
delivered in accordance with Instructions.
9. NOMINEES.
Securities which are ordinarily held in registered form may be registered
in a nominee name of the Bank, Subcustodian or securities depository, as
the case may be. The Bank may without notice to the Customer cause any
such Securities to cease to be registered in the name of any such nominee
and to be registered in the name of the Customer. In the event that any
Securities registered in a nominee name are called for partial redemption
by the issuer, the Bank may allot the called portion to the respective
beneficial holders of such class of security in any manner the Bank deems
to be fair and equitable. The Customer agrees to hold the Bank,
Subcustodians, and their respective nominees harmless from any liability
arising directly or indirectly from their status as a mere record holder
of Securities in the Custody Account.
5
<PAGE> 6
10. AUTHORIZED PERSONS.
As used in this Agreement, the term "Authorized Person" means employees
or agents including investment managers as have been designated by
written notice from the Customer or its designated agent to act on behalf
of the Customer under this Agreement. Such persons shall continue to be
Authorized Persons until such time as the Bank receives Instructions from
the Customer or its designated agent that any such employee or agent is
no longer an Authorized Person.
11. INSTRUCTIONS.
The term "Instructions" means instructions of any Authorized Person
received by the Bank, via telephone, telex, TWX, facsimile transmission,
bank wire or other teleprocess or electronic instruction or trade
information system acceptable to the Bank which the Bank believes in good
faith to have been given by Authorized Persons or which are transmitted
with proper testing or authentication pursuant to terms and conditions
which the Bank may specify. Unless otherwise expressly provided, all
Instructions shall continue in full force and effect until canceled or
superseded.
Any Instructions delivered to the Bank by telephone shall promptly
thereafter be confirmed in writing by an Authorized Person (which
confirmation may bear the facsimile signature of such Person), but the
Customer will hold the Bank harmless for the failure of an Authorized
Person to send such confirmation in writing, the failure of such
confirmation to conform to the telephone instructions received or the
Bank's failure to produce such confirmation at any subsequent time. The
Bank may electronically record any Instructions given by telephone, and
any other telephone discussions with respect to the Custody Account. The
Customer shall be responsible for safeguarding any testkeys,
identification codes or other security devices which the Bank shall make
available to the Customer or its Authorized Persons.
12. STANDARD OF CARE; LIABILITIES.
(a) The Bank shall be responsible for the performance of only such
duties as are set forth in this Agreement or expressly contained
in Instructions which are consistent with the provisions of this
Agreement as follows:
(i) The Bank will use reasonable care with respect to its
obligations under this Agreement and the safekeeping of
Assets. The Bank shall be liable to the Customer for any
loss which shall occur as the result of the failure of a
Subcustodian to exercise reasonable care with respect to the
safekeeping of such Assets to the same extent that the Bank
would be liable to the Customer if the Bank were holding
such Assets in New York. In the event of any loss to the
Customer by reason of the failure of the Bank or its
Subcustodian to utilize reasonable care, the Bank shall be
liable to the Customer only to the extent of the Customer's
direct damages, to be determined based on the market value
of the
6
<PAGE> 7
property which is the subject of the loss at the date of
discovery of such loss and without reference to any special
conditions or circumstances.
(ii) The Bank will not be responsible for any act, omission,
default or for the solvency of any broker or agent which it
or a Subcustodian appoints unless such appointment was made
negligently or in bad faith.
(iii) The Bank shall be indemnified by, and without liability to
the Customer for any action taken or omitted by the Bank
whether pursuant to Instructions or otherwise within the
scope of this Agreement if such act or omission was in good
faith, without negligence. In performing its obligations
under this Agreement, the Bank may rely on the genuineness
of any document which it believes in good faith to have been
validly executed.
(iv) The Customer agrees to pay for and hold the Bank harmless
from any liability or loss resulting from the imposition or
assessment of any taxes or other governmental charges, and
any related expenses with respect to income from or Assets
in the Accounts.
(v) The Bank shall be entitled to rely, and may act, upon the
advice of counsel (who may be counsel for the Customer) on
all matters and shall be without liability for any action
reasonably taken or omitted pursuant to such advice.
(vi) The Bank need not maintain any insurance for the benefit of
the Customer.
(vii) Without limiting the foregoing, the Bank shall not be liable
for any loss which results from: 1) the general risk of
investing, or 2) investing or holding Assets in a particular
country including, but not limited to, losses resulting from
nationalization, expropriation or other governmental
actions; regulation of the banking or securities industry;
currency restrictions, devaluations or fluctuations; and
market conditions which prevent the orderly execution of
securities transactions or affect the value of Assets.
(viii) Neither party shall be liable to the other for any loss due
to forces beyond their control including, but not limited to
strikes or work stoppages, acts of war or terrorism,
insurrection, revolution, nuclear fusion, fission or
radiation, or acts of God.
(b) Consistent with and without limiting the first paragraph of this
Section 12, it is specifically acknowledged that the Bank shall
have no duty or responsibility to:
(i) question Instructions or make any suggestions to the
Customer or an Authorized Person regarding such Instructions;
7
<PAGE> 8
(ii) supervise or make recommendations with respect to
investments or the retention of Securities;
(iii) advise the Customer or an Authorized Person regarding any
default in the payment of principal or income of any
security other than as provided in Section 5(c) of this
Agreement;
(iv) evaluate or report to the Customer or an Authorized Person
regarding the financial condition of any broker, agent or
other party to which Securities are delivered or payments
are made pursuant to this Agreement;
(v) review or reconcile trade confirmations received from
brokers. The Customer or its Authorized Persons (as defined
in Section 10) issuing Instructions shall bear any
responsibility to review such confirmations against
Instructions issued to and statements issued by the Bank.
(c) The Customer authorizes the Bank to act under this Agreement
notwithstanding that the Bank or any of its divisions or
affiliates may have a material interest in a transaction, or
circumstances are such that the Bank may have a potential conflict
of duty or interest including the fact that the Bank or any of its
affiliates may provide brokerage services to other customers, act
as financial advisor to the issuer of Securities, act as a lender
to the issuer of Securities, act in the same transaction as agent
for more than one customer, have a material interest in the issue
of Securities, or earn profits from any of the activities listed
herein.
13. FEES AND EXPENSES.
The Customer agrees to pay the Bank for its services under this Agreement
such amount as may be agreed upon in writing, together with the Bank's
reasonable out-of-pocket or incidental expenses, including, but not
limited to, legal fees. The Bank shall have a lien on and is authorized
to charge any Accounts of the Customer for any amount owing to the Bank
under any provision of this Agreement.
14. MISCELLANEOUS.
(a) Foreign Exchange Transactions. To facilitate the administration
of the Customer's trading and investment activity, the Bank is
authorized to enter into spot or forward foreign exchange
contracts with the Customer or an Authorized Person for the
Customer and may also provide foreign exchange through its
subsidiaries, affiliates or Subcustodians. Instructions,
including standing instructions, may be issued with respect to
such contracts but the Bank may establish rules or limitations
concerning any foreign exchange facility made available. In all
cases where the Bank, its subsidiaries, affiliates or
Subcustodians enter into a foreign exchange contract related to
Accounts, the terms and conditions of the then current foreign
exchange contract of
8
<PAGE> 9
the Bank, its subsidiary, affiliate or Subcustodian and, to the
extent not inconsistent, this Agreement shall apply to such
transaction.
(b) Certification of Residency, etc. The Customer certifies that it
is a resident of the United States and agrees to notify the Bank
of any changes in residency. The Bank may rely upon this
certification or the certification of such other facts as may be
required to administer the Bank's obligations under this
Agreement. The Customer will indemnify the Bank against all
losses, liability, claims or demands arising directly or
indirectly from any such certifications.
(c) Access to Records. The Bank shall allow the Customer's
independent public accountant reasonable access to the records of
the Bank relating to the Assets as is required in connection with
their examination of books and records pertaining to the
Customer's affairs. Subject to restrictions under applicable law,
the Bank shall also obtain an undertaking to permit the Customer's
independent public accountants reasonable access to the records of
any Subcustodian which has physical possession of any Assets as
may be required in connection with the examination of the
Customer's books and records.
(d) Governing Law: Successors and Assigns. This Agreement shall be
governed by the laws of the State of New York and shall not be
assignable by either party, but shall bind the successors in
interest of the Customer and the Bank.
(e) Entire Agreement: Application Riders. Customer represents that
the Assets deposited in the Accounts are (Check one):
______ Employee Benefit Plan or other assets subject to the
Employee Retirement Income Security Act of 1974, as
amended ("ERISA");
__X___ Mutual Fund assets subject to certain Securities and
Exchange Commission ("SEC") rules and regulations;
______ Neither of the above.
This Agreement consists exclusively of this document together with
Schedule A, Exhibits I - __________ and the following Rider(s)
[Check applicable rider(s)]:
______ ERISA
__X___ MUTUAL FUND
______ SPECIAL TERMS AND CONDITIONS
9
<PAGE> 10
There are no other provisions of this Agreement and this Agreement
supersedes any other agreements, whether written or oral, between the
parties. Any amendment to this Agreement must be in writing, executed by
both parties.
(f) Severability. In the event that one or more provisions of this
Agreement are held invalid, illegal or enforceable in any respect
on the basis of any particular circumstances or in any
jurisdiction, the validity, legality and enforceability of such
provision or provisions under other circumstances or in other
jurisdictions and of the remaining provisions will not in any way
be affected or impaired.
(g) Waiver. Except as otherwise provided in this Agreement, no
failure or delay on the part of either party in exercising any
power or right under this Agreement operates as a waiver, nor does
any single or partial exercise of any power or right preclude any
other or further exercise, or the exercise of any other power or
right. No waiver by a party of any provision of this Agreement,
or waiver of any breach or default, is effective unless in writing
and signed by the party against whom the waiver is to be enforced.
(h) Notices. All notices under this Agreement shall be effective when
actually received. Any notices or other communications which may
be required under this Agreement are to be sent to the parties at
the following addresses or such other addresses as may
subsequently be given to the other party in writing:
BANK: The Chase Manhattan Bank, N.A.
Chase MetroTech Center
Brooklyn, NY 11245
Attention: Global Custody Division
or telex: __________________________
CUSTOMER: Security Income Fund
Global Aggressive Bond Series
700 Harrison Street
Topeka, Kansas 66636 0001
Attention: James R. Schmank
or telex: (913) 295-3080
(i) Termination. This Agreement may be terminated by the Customer or
the Bank by giving sixty (60) days written notice to the other,
provided that such notice to the Bank shall specify the names of
the persons to whom the Bank shall deliver the Assets in the
Accounts. If notice of termination is given by the Bank, the
Customer shall, within sixty (60) days following receipt of the
notice, deliver to the Bank Instructions specifying the names of
the persons to whom the Bank shall deliver the Assets. In either
case, the Bank will deliver the Assets to the persons so specified
after deducting any amounts which the Bank determines in good
faith to be owed to it under
10
<PAGE> 11
Section 13. If within sixty (60) days following receipt of a
notice of termination by the Bank, the Bank does not receive
Instructions from the Customer specifying the names of the persons
to whom the Bank shall deliver the Assets, the Bank, at its
election, may deliver the Assets to a bank or trust company doing
business in the State of New York to be held and disposed of
pursuant to the provisions of this Agreement, or to Authorized
Persons, or may continue to hold the Assets until Instructions are
provided to the Bank.
SECURITY INCOME FUND -
GLOBAL AGGRESSIVE BOND SERIES
By: Brenda M. Luthi
--------------------------------
Title
Brenda M. Luthi, Assistant Treasurer
THE CHASE MANHATTAN BANK, N.A.
By: Matthew Goad
--------------------------------
Title
M. Goad, Second Vice President
11
<PAGE> 12
STATE OF KANSAS )
: ss.
COUNTY OF SHAWNEE )
On this 15th day of May, 1995, before me personally came Brenda M. Luthi, to me
known, who being by me duly sworn, did depose and say that he/she resides in
Kansas at 4920 NW Valencia, Silver Lake; that he/she is Assistant Treasurer of
Security Income Fund - Global Aggressive Bond Series, the entity described in
and which executed the foregoing instrument; that he/she knows the seal of said
entity, that the seal affixed to said instrument is such seal, that it was so
affixed by order of said entity, and that he/she signed his/her name thereto by
like order.
-----------------------------------
Sworn to before me this 15th day of May, 1995.
Peggy S. Avey
-----------------------------------
Peggy S. Avey, Notary
My Commission Expires: November 21, 1996
12
<PAGE> 13
STATE OF NEW YORK )
: ss.
COUNTY OF NEW YORK )
On this 15th day of May, 1995, before me personally came Matthew Goad, to me
known, who being by me duly sworn, did depose and say that he/she resides in
Brooklyn, New York at 433 Pacific Street; that he/she is a Second Vice
President of THE CHASE MANHATTAN BANK, (National Association), the corporation
described in and which executed the foregoing instrument; that he/she knows the
seal of said corporation, that the seal affixed to said instrument is such
corporate seal, that it was so affixed by order of the Board of Directors of
said corporation, and that he/she signed his/her name thereto by like order.
Matthew Goad
----------------------------
Sworn to before me this 15th day of May, 1995.
Laiyee Ng
---------------------------------
Notary
13
<PAGE> 14
Mutual Fund Rider to Global Custody Agreement
Between The Chase Manhattan Bank, N.A. and
Security Income Fund - Global Aggressive Bond Series
effective May 15, 1995
Customer represents that the Assets being placed in the Bank's custody are
subject to the Investment Company Act of 1940 (the Act), as the same may be
amended from time to time.
Except to the extent that the Bank has specifically agreed to comply with a
condition of a rule, regulation, interpretation promulgated by or under the
authority of the SEC or the Exemptive Order applicable to accounts of this
nature issued to the Bank (Investment Company Act of 1940, Release No. 12053,
November 20, 1981), as amended, or unless the Bank has otherwise specifically
agreed, the Customer shall be solely responsible to assure that the maintenance
of Assets under this Agreement complies with such rules, regulations,
interpretations or interpretations or exemptive order promulgated by or under
the authority of the Securities Exchange Commission.
The following modifications are made to the Agreement:
Section 3. Subcustodians and Securities Depositories.
Add the following language to the end of Section 3:
The terms Subcustodian and securities depositories as used in this
Agreement shall mean a branch of a qualified U.S. bank, an eligible
foreign custodian or an eligible foreign securities depository, which are
further defined as follows:
(a) "qualified U.S. Bank" shall mean a qualified U.S. bank as defined
in Rule 17f-5 under the Investment Company Act of 1940;
(b) "eligible foreign custodian" shall mean (i) a banking institution
or trust company incorporated or organized under the laws of a
country other than the United States that is regulated as such by
that country's government or an agency thereof and that has
shareholders' equity in excess of $200 million in U.S. currency
(or a foreign currency equivalent thereof), (ii) a majority owned
direct or indirect subsidiary of a qualified U.S. bank or bank
holding company that is incorporated or organized under the laws
of a country other than the United States and that has
shareholders' equity in excess of $100 million in U.S. currency
(or a foreign currency equivalent thereof), (iii) a banking
institution or trust company incorporated or organized under the
laws of a country other than the United States or a majority owned
direct or indirect subsidiary of a qualified U.S. bank or bank
holding company that is incorporated or organized under the laws
of a country other than the United States which has such other
qualifications as shall be specified in Instructions and approved
by the Bank; or
14
<PAGE> 15
(iv) any other entity that shall have been so qualified by
exemptive order, rule or other appropriate action of the SEC; and
(c) "eligible foreign securities depository" shall mean a securities
depository or clearing agency, incorporated or organized under the
laws of a country other than the United States, which operates (i)
the central system for handling securities or equivalent
book-entries in that country, or (ii) a transnational system for
the central handling of securities or equivalent book-entries.
The Customer represents that its Board of Directors has approved each of
the Subcustodians listed in Schedule A to this Agreement and the terms of
the subcustody agreements between the Bank and each Subcustodian, which
are attached as Exhibits I through _____ of Schedule A, and further
represents that its Board has determined that the use of each
Subcustodian and the terms of each subcustody agreement are consistent
with the best interests of the Fund(s) and its (their) shareholders. The
Bank will supply the Customer with any amendment to Schedule A for
approval. The Customer has supplied or will supply the Bank with
certified copies of its Board of Directors resolution(s) with respect to
the foregoing prior to placing Assets with any Subcustodian so approved.
Section 11. Instructions.
Add the following language to the end of Section 11:
Deposit Account Payments and Custody Account Transactions made pursuant
to Section 5 and 6 of this Agreement may be made only for the purposes
listed below. Instructions must specify the purpose for which any
transaction is to be made and Customer shall be solely responsible to
assure that Instructions are in accord with any limitations or
restrictions applicable to the Customer by law or as may be set forth in
its prospectus.
(a) In connection with the purchase or sale of Securities at prices as
confirmed by Instructions;
(b) When Securities are called, redeemed or retired, or otherwise
become payable;
(c) In exchange for or upon conversion into other securities alone or
other securities and cash pursuant to any plan or merger,
consolidation, reorganization, recapitalization or readjustment;
(d) Upon conversion of Securities pursuant to their terms into other
securities;
(e) Upon exercise of subscription, purchase or other similar rights
represented by Securities;
(f) For the payment of interest, taxes, management or supervisory
fees, distributions or operating expenses;
15
<PAGE> 16
(g) In connection with any borrowings by the Customer requiring a
pledge of Securities, but only against receipt of amounts borrowed;
(h) In connection with any loans, but only against receipt of adequate
collateral as specified in Instructions which shall reflect any
restrictions applicable to the Customer;
(i) For the purpose of redeeming shares of the capital stock of the
Customer and the delivery to, or the crediting to the account of,
the Bank, its Subcustodian or the Customer's transfer agent, such
shares to be purchased or redeemed;
(j) For the purpose of redeeming in kind shares of the Customer
against delivery to the Bank, its Subcustodian or the Customer's
transfer agent of such shares to be so redeemed;
(k) For delivery in accordance with the provisions of any agreement
among the Customer, the Bank and a broker-dealer registered under
the Securities Exchange Act of 1934 (the "Exchange Act") and a
member of The National Association of Securities Dealers, Inc.
("NASD"), relating to compliance with the rules of The Options
Clearing Corporation and of any registered national securities
exchange, or of any similar organization or organizations,
regarding escrow or other arrangements in connection with
transactions by the Customer;
(l) For release of Securities to designated brokers under covered call
options, provided, however, that such Securities shall be released
only upon payment to the Bank of monies for the premium due and a
receipt for the Securities which are to be held in escrow. Upon
exercise of the option, or at expiration, the Bank will receive
from brokers the Securities previously deposited. The Bank will
act strictly in accordance with Instructions in the delivery of
Securities to be held in escrow and will have no responsibility or
liability for any such Securities which are not returned promptly
when due other than to make proper request for such return;
(m) For spot or forward foreign exchange transactions to facilitate
security trading, receipt of income from Securities or related
transactions;
(n) For other proper purposes as may be specified in Instructions
issued by an officer of the Customer which shall include a
statement of the purpose for which the delivery or payment is to
be made, the amount of the payment or specific Securities to be
delivered, the name of the person or persons to whom delivery or
payment is to be made, and a certification that the purpose is a
proper purpose under the instruments governing the Customer; and
(o) Upon the termination of this Agreement as set forth in Section
14(i).
16
<PAGE> 17
Section 12. Standard of Care: Liabilities.
Add the following subsection (c) to Section 12:
(c) The Bank hereby warrants to the Customer that in its opinion,
after due inquiry, the established procedures to be followed by
each of its branches, each branch of a qualified U.S. bank, each
eligible foreign custodian and each eligible foreign securities
depository holding the Customer's Securities pursuant to this
Agreement afford protection for such Securities at least equal to
that afforded by the Bank's established procedures with respect to
similar securities held by the Bank and its securities
depositories in New York.
Section 14. Access to Records.
Add the following language to the end of Section 14(c):
Upon reasonable request from the Customer, the Bank shall furnish the
Customer such reports (or portions thereof) of the Bank's system of
internal accounting controls applicable to the Bank's duties under this
Agreement. The Bank shall endeavor to obtain and furnish the Customer
with such similar reports as it may reasonably request with respect to
each Subcustodian and securities depository holding the Customer's
assets.
17
<PAGE> 18
THE CHASE MANHATTAN BANK, N.A.
FEE SCHEDULE
FOR
SECURITY EQUITY FUND - GLOBAL SERIES; SBL FUND, SERIES D; SBL FUND, SERIES K;
SECURITY INCOME FUND - GLOBAL AGGRESSIVE BOND SERIES
I. DOMESTIC CUSTODY
(Market value fees and transaction charges to be applied on a fund by
fund basis)
MARKET VALUE FEES
<TABLE>
<S> <C> <C> <C>
$0 - $300MM 1.00bp
$300MM - $600MM 0.75bp
Over $600MM 0.50bp
<CAPTION>
TRANSACTIONS
<S> <C>
Book Entry $ 8.00
Physical $15.00
</TABLE>
II. GLOBAL CUSTODY
COUNTRY SAFEKEEPING AND TRANSACTION FEES
(To be applied on a fund by fund basis)
<TABLE>
<CAPTION>
Basis Point Transactions
----------- ------------
<S> <C> <C>
Band A 3.0 $ 30
Band B 5.0 $ 40
Band C 6.0 $ 60
Band D 9.0 $ 60
Band E 11.0 $ 80
Band F 26.0 $120
Band G 41.0 $120
</TABLE>
18
<PAGE> 19
III. MISCELLANEOUS FEES
Out of pocket expenses (i.e., scrip fees, As incurred
stamp taxes, transaction costs, etc.)
Transfer to successor custodian Refer to country bands
SECURITY EQUITY FUND - GLOBAL SERIES
SBL FUND, SERIES D
SBL FUND, SERIES K
SECURITY INCOME FUND - GLOBAL
THE CHASE MANHATTAN BANK, N.A. AGGRESSIVE BOND SERIES
Matthew Goad 6/22/95 James R. Schmank
- ------------------------------- ----------------
(effective as of 1/1/95, i.e. for all activity in the above accounts from
1/1/95 onwards)
19
<PAGE> 20
COUNTRY BAND SCHEDULE
<TABLE>
<CAPTION>
BAND A BAND B BAND C
------ ------ ------
<S> <C> <C>
Japan Canada Australia
Cedel Germany Belgium
Euroclear Netherlands Denmark
Switzerland France
New Zealand
Norway
Sweden
United Kingdom
<CAPTION>
BAND D BAND E BAND F
------ ------ ------
<S> <C> <C>
Austria Mexico Argentina
Finland Portugal Brazil
Hong Kong Spain Chile
Ireland Thailand Colombia
Italy Greece
Luxembourg Indonesia
Malaysia Jordan
Singapore Pakistan
South Africa Philippines
South Korea
Turkey
Venezuela
<CAPTION>
BAND G
------
<S> <C>
Bangladesh India
Botswana Mauritius
China (Shenzhen & Shanghai) Morocco
Czech Republic Peru
Ghana Poland
Hungary Slovakia
Israel Sri Lanka
Taiwan
</TABLE>
20
<PAGE> 1
EXHIBIT (9)(a)
ADMINISTRATIVE SERVICES AND
TRANSFER AGENCY AGREEMENT
This Agreement, made and entered into this 1st day of April, 1987, by and
between Security Income Fund, a Kansas corporation ("Fund"), and Security
Management Company, a Kansas corporation, ("SMC").
WHEREAS, the Fund is engaged in business as an open-end management investment
company registered under the Investment Company Act of 1940; and
WHEREAS, Security Management Company is willing to provide general
administrative, fund accounting, transfer agency, and dividend disbursing
services to the Fund under the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and mutual agreements made
herein, the parties agree as follows:
1. Employment of Security Management Company
SMC will provide the Fund with general administrative, fund
accounting, transfer agency, and dividend disbursing services
described and set forth in Schedule A attached hereto and made
a part of this agreement by reference. SMC agrees to maintain
sufficient trained personnel and equipment and supplies to
perform such services in conformity with the current
prospectus of the Fund and such other reasonable standards of
performance as the Fund may from time to time specify, and
otherwise in an accurate, timely, and efficient manner.
2. Compensation
As consideration for the services described in Section I, the
Fund agrees to pay SMC a fee as described and set forth in
Schedule B attached hereto and made a part of this agreement
by reference, as it may be amended from time to time, such fee
to be calculated and accrued daily and payable monthly.
3. Expenses
A. Expenses of SMC. SMC shall pay all of the expenses
incurred in providing Fund the services and
facilities described in this agreement, whether or
not such expenses are billed to SMC or the fund,
except as otherwise provided herein.
B. Direct Expenses. Anything in this agreement to the
contrary notwithstanding, the Fund shall pay, or
reimburse SMC for the payment of, the following
described expenses of the Fund (hereinafter called
"direct expenses") whether or not billed to the Fund,
SMC or any related entity:
<PAGE> 2
1. Fees and expenses of its independent
directors and the meetings thereof;
2. Fees and costs of investment advisory
services;
3. Fees and costs of independent auditors and
income tax preparation;
4. Fees and costs of outside legal counsel and
any legal counsel directly employed by the
Fund or its Board of Directors;
5. Custodian and banking services, fees and
costs;
6. Costs of printing and mailing prospectuses to
existing shareholders, proxy statements and
other reports to shareholders, where such
costs are incurred through the use of
unaffiliated vendors or mail services.
7. Fees and costs for the registration of its
securities with the Securities and Exchange
Commission and the jurisdictions in which it
qualifies its share for sale, including the
fees and costs of registering and bonding
brokers, dealers and salesmen as required;
8. Dues and expenses associated with membership
in the Investment Company Institute;
9. Expenses of fidelity and liability insurance
and bonding covering Fund;
10. Organizational costs.
4. Insurance
The Fund and SMC agree to procure and maintain, separately or
as joint insureds with themselves, their directors, employees,
agents and others, and other investment companies for which
SMC acts as investment advisor and transfer agent, a policy or
policies of insurance against loss arising from breaches of
trust, errors and omissions, and a fidelity bond meeting the
requirements of the Investment Company Act of 1940, in the
amounts and with such deductibles as may be agreed upon from
time to time, and to pay such portions of the premiums
therefor as amount of the coverage attributable to each party
is to the aggregate amount of the coverage for all parties.
5. Registration and Compliance
A. SMC represents that as of the date of this agreement
it is registered as a transfer agency with the
Securities and Exchange Commission ("SEC") pursuant
to Subsection 17A of the Securities and Exchange Act
of 1934 and the rules and regulations thereunder, and
agrees to maintain said registration and comply with
all
<PAGE> 3
of the requirements of said Act, rules and
regulations so long as this agreement remains in
force.
B. The Fund represents that it is a diversified
management investment company registered with the SEC
in accordance with the Investment Company Act of 1940
and the rules and regulations thereunder, and
authorized to sell its shares pursuant to said Act,
the Securities Act of 1933 and the rules and
regulations thereunder.
6. Liabilities and Indemnification
SMC shall be liable for any actual losses, claims, damages or
expenses (including any reasonable counsel fees and expenses)
resulting from SMC's bad faith, willful misfeasance, reckless
disregard of its obligations and duties, negligence or failure
to properly perform any of its responsibilities or duties
under this agreement. SMC shall not be liable and shall be
indemnified and held harmless by the Fund, for any claim,
demand or action brought against it arising out of, or in
connection with:
A. Bad faith, willful misfeasance, reckless disregard of
its duties or negligence of the Board of Directors of
the Fund, or SMC's acting upon any instructions
properly executed and authorized by the Board of
Directors of the Fund;
B. SMC acting in reliance upon advice given by
independent counsel retained by the Board of
Directors of the Fund.
In the event that SMC requests the Fund to indemnify or hold
it harmless hereunder, SMC shall use its best efforts to
inform the Fund of the relevant facts concerning the matter in
question. SMC shall use reasonable care to identify and
promptly notify the Fund concerning any matter which presents,
or appears likely to present, a claim for indemnification
against the Fund.
The Fund shall have the election of defending SMC against any
claim which may be the subject of indemnification hereunder.
In the event the Fund so elects, it will so notify SMC and
thereupon the Fund shall take over defenses of the claim, and
(if so requested by the Fund, SMC shall incur no further legal
or other claims related thereto for which it would be entitled
to indemnity hereunder provided, however, that nothing herein
contained shall prevent SMC from retaining, at its own
expense, counsel to defend any claim. Except with the Fund's
prior consent, SMC shall in no event confess any claim or make
any compromise in any matter in which the Fund will be asked
to indemnify or hold SMC harmless hereunder.
Punitive Damages. SMC shall not be liable to the
Fund, or any third party, for punitive, exemplary,
indirect, special or consequential damages (even if
SMC has been advised of the possibility of such
damages) arising from its obligations and the
services provided under this agreement, including but
not limited to loss of profits,
<PAGE> 4
loss of use of the shareholder accounting
system, cost of capital and expenses of substitute
facilities, programs or services.
Force Majeure. Anything in this agreement to the
contrary notwithstanding, SMC shall not be liable for
delays or errors occurring by reason of circumstances
beyond its control, including but not limited to acts
of civil or military authority, national emergencies,
work stoppages, fire, flood, catastrophe, earthquake,
acts of God, insurrection, war, riot, failure of
communication or interruption.
7. Delegation of Duties
SMC may, at its discretion, delegate, assign or subcontract
any of the duties, responsibilities and services governed by
this agreement, to its parent company, Security Benefit Group,
Inc., whether or not by formal written agreement. SMC shall,
however, retain ultimate responsibility to the Fund, and shall
implement such reasonable procedures as may be necessary, for
assuring that any duties, responsibilities or services so
assigned, subcontracted or delegated are performed in
conformity with the terms and conditions of this agreement.
8. Amendment
This agreement and the schedules forming a part hereof may be
amended at any time, without shareholder approval, by a
writing signed by each of the parties hereto. Any change in
the Fund's registration statements or other documents of
compliance or in the forms relating to any plan, program or
service offered by its current prospectus which would require
a change in SMC's obligations hereunder shall be subject to
SMC's approval, which shall not be unreasonably withheld.
9. Termination
This agreement may be terminated by either party without cause
upon 120 days' written notice to the other, and at any time
for cause in the event that such cause remains unremedied for
more than 30 days after receipt by the other party of written
specification of such cause.
In the event Fund designates a successor to any of SMC's
obligations hereunder, SMC shall, at the expense and pursuant
to the direction of the Fund, transfer to such successor all
relevant books, records and other data of Fund in the
possession or under the control of SMC.
10. Severability
If any clause or provision of this agreement is determined to
be illegal, invalid or unenforceable under present or future
laws effective during the term hereof, then such
<PAGE> 5
clause or provision shall be considered severed herefrom and
the remainder of this agreement shall continue in full force
and effect.
11. Term
This agreement initially shall become effective upon its
approval by a majority vote of the Board of Directors of the
Fund, including a majority vote of the Directors who are not
"interested persons" of Fund or SMC, as defined in the
Investment Company Act of 1940, and shall continue until
terminated pursuant to its provisions.
12. Applicable Law
This agreement shall be subject to and construed in accordance
with the laws of the State of Kansas.
SECURITY MANAGEMENT COMPANY
BY: Everett S. Gille, President
---------------------------
ATTEST:
Barbara W. Rankin, Secretary
- ----------------------------
SECURITY INCOME FUND
BY: Everett S. Gille, President
---------------------------
ATTEST:
Barbara W. Rankin, Secretary
- ----------------------------
<PAGE> 6
SCHEDULE A
ADMINISTRATIVE SERVICES AND
TRANSFER AGENCY AGREEMENT
Schedule of Administrative and Fund Accounting
Facilities and Services
Security Management Company agrees to provide the Fund the following
Administrative facilities and services:
1. Fund and Portfolio Accounting
A. Maintenance of Fund General Ledger and Journal.
B. Preparing and recording disbursements for direct fund expenses.
C. Preparing daily money transfers.
D. Reconciliation of all Fund bank and custodian accounts.
E. Assisting Fund independent auditors as appropriate.
F. Prepare daily projection of available cash balances.
G. Record trading activity for purposes of determining net asset
values and daily dividend.
H. Prepare daily portfolio evaluation report to value portfolio
securities and determine daily accrued income.
I. Determine the daily net asset value per share.
J. Determine the daily, monthly, quarterly, semiannual or annual
dividend per share.
K. Prepare monthly, quarterly, semiannual and annual financial
statements.
L. Provide financial information for reports to the securities
and exchange commission in compliance with the provisions of
the Investment Company Act of 1940 and the Securities Act of
1933, the Internal Revenue Service and other regulatory
agencies as required.
M. Provide financial, yield, net asset value, etc. information to
NASD and other survey and statistical agencies as instructed
by the Fund.
<PAGE> 7
N. Report to the Audit Committee of the Board of Directors, if
applicable.
2. Legal
A. Provide registration and other administrative services
necessary to qualify the shares of the Fund for sale in those
jurisdictions determined from time to time by the Fund's Board
of Directors (commonly known as "Blue Sky Registration").
B. Provide registration with and reports to the Securities and
Exchange Commission in compliance with the provisions of the
Investment Company Act of 1940 and the Securities Act of 1933.
C. Prepare and review Fund prospectus and Statement of Additional
Information.
D. Prepare proxy statements and oversee proxy tabulation for
annual meetings.
E. Prepare Board materials and maintain minutes of Board meetings.
F. Draft, review and maintain contractual agreements between Fund
and Investment Advisor, Custodian, Distributor and Transfer
Agent.
G. Oversee printing of proxy statements, financial reports to
shareholders, prospectuses and Statements of Additional
Information.
H. Provide legal advice and oversight regarding shareholder
transactions, administrative services, compliance with
contractual agreements and the provisions of the 1940 and 1933
Acts.
(Notwithstanding the above, outside counsel for the Funds may provide
the services listed above as a direct Fund expense or at the option of
the Funds, the Funds may employ their own counsel to perform any of
these services.)
<PAGE> 8
SCHEDULE OF SHARE TRANSFER AND DIVIDEND DISBURSING SERVICES
Security Management Company agrees to provide the Fund the following transfer
agency and dividend disbursing services:
1. Maintenance of shareholder accounts, including processing of new
accounts.
2. Posting address changes and other file maintenance for shareholder
accounts.
3. Posting all transactions to the shareholder file, including:
A. Direct purchases
B. Wire order purchases
C. Direct redemptions
D. Wire order redemptions
E. Draft redemptions
F. Direct exchanges
G. Transfers
H. Certificate issuances
I. Certificate deposits
4. Monitor fiduciary processing, insuring accuracy and deduction of fees.
5. Prepare daily reconciliations of shareholder processing to money
movement instructions.
6. Handle bounced check collections. Immediately liquidate shares
purchased and return to the shareholder the check and confirmation of
the transaction.
7. Issuing all checks and stopping and replacing lost checks.
8. Draft clearing services.
A. Maintenance of signature cards and appropriate corporate
resolutions.
B. Comparison of the signature on the check to the signatures on
the signature card for the purpose of paying the face amount
of the check only.
<PAGE> 9
C. Receiving checks presented for payment and liquidating shares
after verifying account balance.
D. Ordering checks in quantity specified by the Fund for the
shareholder.
9. Mailing confirmations, checks and/or certificates resulting from
transaction requests to shareholders.
10. Performing all of the Fund's other mailings, including:
A. Dividend and capital gain distributions.
B. Semiannual and annual reports.
C. 1099/year-end shareholder reporting.
D. Systematic withdrawal plan payments.
E. Daily confirmations.
11. Answering all service related telephone inquiries from shareholders
and others, including:
A. General and policy inquiries (research and resolve problems).
B. Fund yield inquiries.
C. Taking shareholder processing requests and account maintenance
changes by telephone as described above.
D. Submit pending requests to correspondence.
E. Monitor online statistical performance of unit.
F. Develop reports on telephone activity.
12. Respond to written inquiries (research and resolve problems);
including:
A. Initiate shareholder account reconciliation proceeding when
appropriate.
B. Notify shareholder of bounced investment checks.
C. Respond to financial institutions regarding verification of
deposit.
D. Initiate proceedings regarding lost certificates.
<PAGE> 10
E. Respond to complaints and log activities.
F. Correspondence control.
13. Maintaining and retrieving all required past history for shareholders
and provide research capabilities as follows:
A. Daily monitoring of all processing activity to verify back-up
documentation.
B. Provide exception reports.
C. Microfilming.
D. Storage, retrieval and archive.
14. Prepare materials for annual meetings.
A. Address and mail annual proxy and related material.
B. Prepare and submit to Fund and affidavit of mailing.
C. Furnish certified list of shareholders (hard copy or
microfilm) and inspectors of election.
15. Report and remit as necessary for state escheat requirements.
Approved: Fund__________________________ SMC Everette S. Gille
<PAGE> 11
<TABLE>
<CAPTION>
MODEL: MONTHLY FUNDS
-------------
<S> <C>
MAINTENANCE FEE. . . . . . . . . . . . . . . . . . $8.00
TRANSACTIONS . . . . . . . . . . . . . . . . . . . $1.00
DIVIDENDS . . . . . . . . . . . . . . . . . . . . $0.50
ADMINISTRATION FEE . . . . . . . . . . . . . . . . 0.00045
(BASED ON DAILY NET ASSET VALUE)
</TABLE>
<TABLE>
<CAPTION>
MASTER WORKSHEET BOND GOV HIGH YIEL
------------------------------------------------------------------
<S> <C> <C> <C>
1986:
TRANSACTIONS - 6,897 603 260
DIVIDENDS - 23,264 2,195 314
SHAREHOLDER ACCTS - 3,574 226 258
AVERAGE NET ASSETS - 45,164,242.34 2,260,755.40 2,948,233.60
INCOME - 4,804,113.27 207,258.25 223,104.47
EXPENSES - 449,036.13 21,101.91 17,675.96
SERVICE FEES - 50,806.27 962.23 1,118.94
</TABLE>
<TABLE>
<CAPTION>
1986 1986
SERVICE TRANSFER & EXPENSE EXPENSE
FEES ADMINISTRATION PERCENT RATIO RATIO
ACTUAL MODEL INCREASE ACTUAL MODEL
<S> <C> <C> <C> <C> <C>
BOND 50,806.27 67,444.91 32.75% 0.994% 1.031%
GOVERNMENT 962.23 4,525.84 370.35% 0.933% 1.091%
HIGH YIELD 1,118.94 2,603.71 132.69% 0.600% 0.862%
</TABLE>
<PAGE> 12
SCHEDULE B
AMENDMENT TO SECURITY INCOME FUND
ADMINISTRATIVE SERVICES AND
TRANSFER AGENCY AGREEMENT
Schedule of Fees
Annual Maintenance Fee................................ $8.00 per account
Transactions...........................................$1.00 per transaction
Administration Fee.....................................0.09% of the average
net assets of the Fund (calculated daily and payable monthly).
This amendment shall take effect as of April 28, 1989.
In witness thereof, the parties hereto have caused this amendment to
be executed on the date indicated.
Security Income Fund
By: Michael J. Provines, President
------------------------------
Date: January 27, 1989
Attest:
Amy J. Lee, Secretary
- ---------------------
Security Management Company
By: Michael J. Provines, President
------------------------------
Date: January 27, 1989
Attest:
Amy J. Lee, Secretary
- ---------------------
<PAGE> 13
AMENDMENT TO ADMINISTRATIVE SERVICES
AND TRANSFER AGENCY AGREEMENT
WHEREAS, Security Income Fund (hereinafter referred to as the "Fund") and
Security Management Company (hereinafter referred to as "SMC") are parties to
an Administrative Services and Transfer Agency Agreement dated April 1, 1987,
(the "Administrative Services Agreement") under which SMC agrees to provide
general administrative, fund accounting, transfer agency, and dividend
disbursing services to the Fund in return for the compensation specified in the
Administrative Services Agreement; and
WHEREAS, on July 7, 1989, the Board of Directors of the Fund voted to amend the
Administrative Services Agreement to provide for payment by the Fund of the
fees of all directors;
NOW THEREFORE, the Fund and the Management Company hereby amend the
Administrative Services Agreement, dated April 1, 1987, effective July 7, 1989,
as follows:
Paragraph 3.B.1. shall be deleted in its entirety and the following
paragraph inserted in lieu thereof:
3. Expenses
B. Direct Expenses
1. Fees and expenses of its directors (including the
fees of those directors who are deemed to be
"interested persons" of the Fund as that term is
defined in the Investment Company Act of 1940) and
the meetings thereof;
IN WITNESS WHEREOF, the parties hereto have made this Amendment to the
Administrative Services Agreement this 7th day of July, 1989.
SECURITY INCOME FUND
By: Michael J. Provines, President
------------------------------
Attest:
Amy J. Lee, Secretary
- ---------------------
SECURITY MANAGEMENT COMPANY
By: Michael J. Provines, President
------------------------------
Attest:
Amy J. Lee, Secretary
- ---------------------
<PAGE> 14
AMENDMENT TO ADMINISTRATIVE SERVICES
AND TRANSFER AGENCY AGREEMENT
WHEREAS, Security Income Fund (hereinafter referred to as the "Fund") and
Security Management Company (hereinafter referred to as "SMC") are parties to
an Administrative Services and Transfer Agency Agreement dated April 1, 1987,
as amended January 27, 1989, and July 7, 1989, (the "Administrative Services
Agreement") under which SMC agrees to provide general administrative, fund
accounting, transfer agency, and dividend disbursing services to the Fund in
return for the compensation specified in the Administrative Services Agreement;
and
WHEREAS, on July 27, 1990, the Board of Directors of the Fund voted to amend
the Administrative Services Agreement to provide for payment by the Fund of the
fees of only those directors who are not "interested persons" of the Fund;
NOW THEREFORE, the Fund and SMC hereby amend the Administrative Services
Agreement, dated April 1, 1987, effective July 27, 1990, as follows:
Paragraph 3.B.1. shall be deleted in its entirety and the following
paragraph inserted in lieu thereof:
3. Expenses
B. Direct Expenses
1. Fees and expenses of its directors (including the
fees of those directors who are deemed to be
"interested persons" of the Fund as that term is
defined in the Investment Company Act of 1940) and
the meetings thereof;
IN WITNESS WHEREOF, the parties hereto have made this Amendment to the
Administrative Services Agreement this 27th day of July, 1990.
SECURITY INCOME FUND
By: Michael J. Provines, President
------------------------------
Attest:
Amy J. Lee, Secretary
- ---------------------
SECURITY MANAGEMENT COMPANY
By: Michael J. Provines, President
------------------------------
Attest:
Amy J. Lee, Secretary
- ---------------------
<PAGE> 15
AMENDMENT TO ADMINISTRATIVE
SERVICES AND TRANSFER AGENCY AGREEMENT
WHEREAS, Security Income Fund (the "Fund") and Security Management Company (the
"Management Company") are parties to an Administrative Services and Transfer
Agency Agreement dated April 1, 1987, as amended (the "Administrative
Agreement"), under which the Management Company provides general
administrative, fund accounting, transfer agency and dividend disbursing
services to the Fund in return for the compensation specified in the
Administrative Agreement;
WHEREAS, on October 21, 1994, the Board of Directors of the Fund authorized the
Fund to offer its common stock in a new series designated as the Limited
Maturity Bond Series, in addition to its presently offered series of common
stock of Corporate Bond Series and U.S. Government Series;
WHEREAS, on October 21, 1994, the Board of Directors of the Fund further
authorized the Fund to offer shares of the Limited Maturity Bond Series in two
classes, designated Class A shares and Class B shares; and
WHEREAS, on October 21, 1994, the Board of Directors approved the amendment of
the Administrative Agreement to provide that the Management Company would
provide general administrative, fund accounting, transfer agency, and dividend
disbursing services to each class of the Limited Maturity Bond Series under the
terms and conditions of the Administrative Agreement;
NOW, THEREFORE BE IT RESOLVED, that the Fund and Management Company hereby
amend the Administrative Agreement, to provide that the Management Company
shall provide those administrative and other services described in the
Administrative Contract, and each of the Management Company and the Fund shall
fulfill all of their respective obligations under the
<PAGE> 16
Administrative Contract, as to each of the Series of the Fund, including the
Limited Maturity Bond Series of the Fund.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to the
Administrative Agreement this 30th day of December 1994.
SECURITY INCOME FUND
By: John D. Cleland
-----------------------------
John D. Cleland, President
ATTEST:
Amy J. Lee
- ------------------------------
Amy J. Lee, Secretary
SECURITY MANAGEMENT COMPANY
By: Jeffrey B. Pantages
-----------------------------
Jeffrey B. Pantages, President
ATTEST:
Amy J. Lee
- ------------------------------
Amy J. Lee, Secretary
<PAGE> 17
AMENDMENT TO
ADMINISTRATIVE SERVICES AND TRANSFER AGENCY AGREEMENT
WHEREAS, Security Income Fund (the "Fund") and Security Management Company (the
"Management Company") are parties to an Administrative Services and Transfer
Agency Agreement dated April 1, 1987, as amended (the "Administrative
Agreement"), under which the Management Company provides general
administrative, fund accounting, transfer agency and dividend disbursing
services to the Fund in return for the compensation specified in the
Administrative Agreement;
WHEREAS, on February 3, 1995, the Board of Directors of the Fund authorized the
Fund to offer its common stock in a new series designated as the Global
Aggressive Bond Series, in addition to its presently offered series of common
stock of Corporate Bond Series, Limited Maturity Bond Series and
U.S. Government Series;
WHEREAS, on February 3, 1995, the Board of Directors of the Fund further
authorized the Fund to offer shares of the Global Aggressive Bond Series in two
classes, designated Class A shares and Class B shares; and
WHEREAS, on February 3, 1995, the Board of Directors approved the amendment of
the Administrative Agreement to provide that the Management Company would
provide general administrative, fund accounting, transfer agency, and dividend
disbursing services to each class of the Global Aggressive Bond Series under
the terms and conditions of the Administrative Agreement;
<PAGE> 18
NOW, THEREFORE BE IT RESOLVED, that the Fund and Management Company hereby
amend the Administrative Agreement, dated April 1, 1987, as follows, effective
May 1, 1995,
1. Schedule B shall be deleted in its entirety and the attached
Schedule B inserted in lieu thereof.
2. The Administrative Agreement is hereby amended to cover the Global
Aggressive Bond Series of the Fund.
3. Paragraph 7 shall be deleted in its entirety and the following
paragraph inserted in lieu thereof:
Delegation of Duties
The Management Company may, at its discretion, delegate, assign or
subcontract any of the duties, responsibilities and services
governed by this agreement, to its parent company, Security Benefit
Group, Inc., whether or not by formal written agreement, or to any
third party, provided that such arrangement with a third party has
been approved by the Board of Directors of the Fund. The Management
Company shall, however, retain ultimate responsibility to the Fund and
shall implement such reasonable procedures as may be necessary for
assuring that any duties, responsibilities or services so assigned,
subcontracted or delegated are performed in conformity with the terms
and conditions of this agreement.
<PAGE> 19
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to the
Administrative Agreement this 28th day of April, 1995.
SECURITY INCOME FUND
By: John D. Cleland
--------------------------------
John D. Cleland, President
ATTEST:
Amy J. Lee
- -------------------------
Amy J. Lee, Secretary
SECURITY MANAGEMENT COMPANY
By: Jeffrey B. Pantages
--------------------------------
Jeffrey B. Pantages, President
ATTEST:
Amy J. Lee
- -------------------------
Amy J. Lee, Secretary
<PAGE> 20
SECURITY INCOME FUND ADMINISTRATIVE SERVICES
AND TRANSFER AGENCY AGREEMENT
SCHEDULE B
The following charges apply to all Series of Security Income Fund:
Maintenance Fee: $8.00 per account
Transaction Fee: $1.00
Dividend Fee: $1.00
Annual Administration Fee: 0.45% (based on daily net asset value)
The following charges apply only to Global Aggressive Bond Series of the
Security Income Fund: Global Administration Fee: In addition to the above
fees, Global Aggressive Bond Series shall pay 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. If this Agreement shall terminate before the last
day of a month, compensation for that part of the month this Agreement is in
effect shall be prorated in a manner consistent with the calculation of the
fees set forth above.
<PAGE> 1
EXHIBIT (9)(b)
SUB-ADMINISTRATIVE AGREEMENT
THIS AGREEMENT is made this 10th day of September 1993, by and between SECURITY
MANAGEMENT COMPANY, a Kansas corporation, (the "Administrator") and LEXINGTON
MANAGEMENT CORPORATION, a Delaware corporation, (the "Sub-Administrator").
WITNESSETH:
WHEREAS, the Administrator and Sub-Administrator are parties to a
Sub-Administrative Agreement dated April 26, 1991, whereby the
Sub-Administrator provides administrative services on behalf of the
Administrator to Series D of SBL Fund;
WHEREAS, the Administrator desires to retain Sub-Administrator as its agent to
provide administrative services to certain other accounts of the Administrator
in addition to Series D of SBL Fund;
WHEREAS, the parties hereto agree that the Sub-Administrative Agreement dated
April 26, 1991, shall be terminated and superseded by the execution of this
Agreement;
WHEREAS, the Administrator is a registered investment adviser under the
Investment Advisers Act of 1940, as amended, and engages in the business of
acting as an investment adviser to the Security Equity Fund and SBL Fund and
also provides administrative services to the Security Equity Fund, SBL Fund and
the Parkstone Advantage Fund (collectively referred to as the "Funds");
WHEREAS, the Administrator provides general administrative, fund accounting,
transfer agency and dividend disbursing services to the Funds;
<PAGE> 2
WHEREAS, the Funds are registered as diversified, open-end management
investment companies under the Investment Company Act of 1940 (the "1940 Act"),
and the rules and regulations promulgated thereunder;
WHEREAS, each Fund is authorized to issue shares in separate series, with each
such series representing interests in a separate portfolio of securities and
other assets;
WHEREAS, the Sub-Administrator is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended, and engages in the business of
acting as an investment adviser and provider of administrative services; and
WHEREAS, the Administrator desires to retain the Sub-Administrator as the
Administrator's agent to furnish certain administrative services to the Global
Series (both Class A and Class B Shares) of the Security Equity Fund, Series D
of SBL Fund and the International Discovery Series of the Parkstone Advantage
Fund (collectively referred to as the "Series") on the terms and conditions
hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants herein contained and
other good and valuable consideration, the receipt of which is hereby
acknowledged, the parties hereto agree as follows:
1. Appointment. The Administrator hereby appoints Sub-Administrator to
provide certain sub-administrative services to the Series under the
terms set forth in this Agreement. Sub-Administrator accepts such
appointment and agrees to furnish the services herein set forth for the
compensation herein provided.
2. Administrative Services. The Sub-Administrator shall furnish the
Series administrative services as set forth below, subject at all
times to the policies and control of each of the
<PAGE> 3
Fund's Board of Directors and the supervision of the Administrator. The
Sub-Administrator shall give the Series the benefit of its best judgment,
efforts and facilities in rendering its services as Sub-Administrator and
agrees to maintain sufficient trained personnel, equipment and supplies
to perform such services in conformity with the current prospectus of the
Funds and in an accurate and timely manner. The Sub-Administrator shall,
for all purposes herein, be deemed an independent contractor and shall
have, unless otherwise expressly provided or authorized, no authority to
act for or represent the Series in any way or otherwise be deemed an
agent of the Series.
The Sub-Administrator agrees to provide to each of the Series the following
administrative facilities and services:
a. Maintenance of Series' General Ledgers and Journals.
b. Preparing and recording disbursements for custodian related
expenses.
c. Preparing daily money transfers from the custodian account.
d. Reconciliation of Series' custodian account.
e. Assisting the Fund's independent auditors as appropriate.
f. Recording trading activity for purposes of determining net
asset value.
g. Preparing daily portfolio evaluation report to value portfolio
securities and determine daily accrued income.
h. Determining the daily net asset value per share and providing
daily price to Administrator no later than 4:15 p.m. Central
time each day on a best efforts basis, provided that if the
Sub-Administrator is not able to provide the price by 4:15
p.m. it will so notify the Administrator in a timely manner.
i. Assisting in the determination of the annual dividend per
share.
<PAGE> 4
j. Preparing monthly financial statements.
k. Providing financial information for inclusion in reports to
the Securities and Exchange Commission in compliance with the
provisions of the 1940 Act, the Securities Act of 1933 and any
other regulatory agencies as required.
l. Providing financial information to Administrator to assure
compliance with all pertinent provisions of the Internal
Revenue Code and regulations thereunder as they apply to
regulated investment companies.
m. Providing financial, yield, net asset value, etc. information
to the Administrator to be provided to the NASD and other
survey and statistical agencies as instructed by the Funds.
n. Reporting by telephone to the audit committee of the Funds'
Boards of Directors.
The facilities and services outlined above shall be provided separately for
Class A and Class B Shares of the Global Series of Security Equity Fund where
appropriate, including but not limited to items c, h, i, and j as set forth
above.
3. Administrator's Duties. In order that Sub-Administrator may fulfill
its obligations hereunder, the Administrator shall furnish to
Sub-Administrator, on a daily basis, certain accounting entries and
information, including Series expense information and daily
shareholder transaction data. Administrator shall furnish this
information in a timely and accurate manner.
4. Compliance With Applicable Requirements. In carrying out its
obligations under this Agreement, the Sub-Administrator shall at all
times conform to: a) all applicable requirements of the 1940 Act, as
amended; b) the provisions of the current Registration Statement of
the Funds under the Securities Act of 1933 and the 1940 Act; c) the
provisions of the Funds' Articles of Incorporation and Bylaws or
Declaration of Trust as applicable, all as amended; and d) any other
applicable provisions of state and federal law.
<PAGE> 5
5. Records. The Sub-Administrator hereby agrees to maintain all records
relating to its activities and obligations under this Agreement which
are required to be maintained by Rule 31a-1 under the 1940 Act and
agrees to preserve such records for the periods prescribed by
Rule 31a-2 under the Act. The Sub-Administrator further agrees that
all such records are the property of the Fund and agrees to surrender
promptly to the Fund any such records upon the Fund's request.
6. Expenses. The expenses connected with the Series shall be borne by
the Sub-Administrator as follows:
a. Sub-Administrator shall pay the Series' expenses for office
rent, utilities, telephone, furniture, equipment and supplies
utilized at the Sub-Administrator's office.
b. Sub-Administrator shall pay the salaries and payroll expenses
of persons providing administrative services to the Series who
are employees of the Sub-Administrator or any of its
affiliates.
c. Sub-Administrator shall pay the expenses of any pricing
service or any other source utilized in the daily pricing of
the Series portfolio which the Sub-Administrator engages.
Sub-Administrator will not be liable; however, for the expense
of any pricing service which it is specifically directed by
the Administrator to utilize in pricing the Series portfolios.
d. Sub-Administrator shall pay any expenses that it may incur in
communicating with the Administrator in connection with its
obligations under this Agreement, including the expenses of
telephone calls, special mail services and telecopier charges.
7. Delegation of Responsibilities. Upon request of the Administrator and
with the approval of the Funds' Board of Directors, the
Sub-Administrator may perform services on behalf of the Series which
are not required by this Agreement. Such services will be performed
on behalf of the Series and the Sub-Administrator's cost in rendering
such services may be billed monthly to the Administrator subject to
examination by the Funds' independent accountants.
<PAGE> 6
Payment or assumption by the Sub-Administrator of any Series' expense
that the Sub-Administrator is not required to pay or assume under this
Agreement shall not relieve the Sub-Administrator of any of its
obligations to the Series or obligate the Sub-Administrator to pay
or assume any similar Series expense on any subsequent occasion.
8. Compensation. For the services to be rendered to the Series and the
facilities furnished hereunder, the Administrator shall pay the
Sub-Administrator annual compensation at the following rates:
<TABLE>
<CAPTION>
Average Daily Net Assets of the Series Compensation
-------------------------------------- ------------
<S> <C>
Less than $100 million .17%, plus
$100 million but less than $200 million .10%, plus
$200 million but less than $300 million .08%, plus
$300 million but less than $400 million .05%, plus
$400 million or more .025%
</TABLE>
The schedule above is subject, however, to the following minimums:
(i) $125,000 in the first contract year,
(ii) $145,000 in the second contract year,
(iii) $165,000 in the third contract year and each year thereafter.
A contract year shall be deemed to be that 12-month period starting from the
date of this Agreement.
Such compensation shall be computed daily and payable monthly. If this
Agreement shall be effective for only a portion of a year, then the
Sub-Administrator's compensation for said year shall be prorated for such
portion, including any minimum fees. Payment of the
<PAGE> 7
Sub-Administrator's compensation for the preceding month shall
be made as promptly as possible after the end of each month.
9. Non-Exclusivity. The services of the Sub-Administrator to
the Series are not to be deemed to be exclusive, and the
Sub-Administrator shall be free to render similar services to others
(including other investment companies) and to engage in other
activities, so long as its services under this Agreement are not
impaired thereby.
10. Amendment. This Agreement may be amended at any time by a
writing signed by each of the parties hereto.
11. Termination. This Agreement may be terminated at any time
by the Administrator or the Sub-Administrator on ninety (90) days'
written notice to the other party. However, if the Administrator
terminates this Agreement within fifteen (15) months of the date of
this Agreement, the Sub-Administrator shall be entitled to a
cancellation fee as set forth in Exhibit 1 to this Agreement.
Notwithstanding the foregoing provision, this Agreement shall
automatically terminate without the payment of any cancellation fee,
in the event of its assignment as that term is defined in Section
2(a)(4) of the 1940 Act, in the event of formal proceedings being
instituted against the Sub-Administrator by the SEC or any state
Securities Department or any other regulatory body that materially
relate to or are likely to materially affect the Sub-Administrator's
duties under this Agreement, in the event of the commencement of
bankruptcy, liquidation or similar proceedings respecting the
Sub-Administrator, or in the event of a material breach in performing
the duties specified under this Agreement (such termination to be at
the option of the non-breaching party).
12. Liability of the Sub-Administrator. In the absence of willful
misfeasance, bad faith or gross negligence on the part of the
Sub-Administrator or its officers, directors or employees, or
reckless disregard by the Sub-Administrator of its duties under this
Agreement, the
<PAGE> 8
Sub-Administrator, its officers, directors or employees shall not be
liable to the Administrator, the Funds or to any shareholder of
the Funds for any act or omission in the course of, or connected with,
rendering services hereunder or for any losses that may be sustained
in the purchase, holding or sale of any security, provided that the
Sub-Administrator has acted in good faith.
13. Indemnification. The Administrator and the Sub-Administrator each
agree to indemnify the other against any claim against loss, or
liability to, such other party (including reasonable attorneys' fees)
arising out of any action on the part of the indemnifying party which
constitutes willful misfeasance, bad faith or gross negligence.
14. Notices. Any notices under this Agreement shall be in
writing, addressed and delivered or mailed postage-paid to the other
party at such address as such other party may designate for the
receipt of such notice. Until further notice to the other party, it
is agreed that the address of the Sub-Administrator for this purpose
shall be Park 80 West, Plaza Two, Saddle Brook, New Jersey 07662, and
the address of the Administrator for this purpose shall be 700
Harrison Street, Topeka, Kansas 66636-0001.
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate by their respective officers on the day and year first
above written.
ATTEST: SECURITY MANAGEMENT COMPANY
Brenda M. Luthi By: James R. Schmank
- --------------------------- ---------------------
Title: Assistant Treasurer Senior Vice President
ATTEST: LEXINGTON MANAGEMENT CORPORATION
Siobhan Gilfillan Richard M. Hisey
- --------------------------- -----------------------------------------
Title: Assistant Treasurer Managing Director/Chief Financial Officer
<PAGE> 10
EXHIBIT 1
CANCELLATION FEE
The parties hereto agree that the Sub-Administrator shall be entitled to
$161,250, over a fifteen (15) month period, as the minimum compensation under
the terms of this Agreement. Therefore, if the Administrator terminates this
Agreement before the expiration of such fifteen month period (except for
termination under any one of the automatic termination provisions set forth in
Section 11 of the Agreement), the Sub-Administrator shall be entitled to a
cancellation fee which equals the difference between the amount previously paid
by the Administrator under this Agreement (as of the effective date of the
termination) and the minimum compensation of $161,250.
<PAGE> 11
AMENDMENT TO SUB-ADMINISTRATIVE AGREEMENT
WHEREAS, Security Management Company (hereafter "SMC" or the "Administrator")
and Lexington Management Corporation (hereafter "LMC" or the
"Sub-Administrator") are parties to a Sub-Administrative Agreement dated
September 10, 1993 (the "Agreement") under which LMC, as Sub-Administrator,
agrees to provide certain administrative services, as specified in section 2 of
the Agreement, to certain identified mutual funds or series of mutual funds for
which SMC serves as Administrator; and
WHEREAS, SMC desires to retain the services of LMC to provide the same
administrative services as outlined in the Agreement to certain other mutual
funds;
NOW THEREFORE, SMC and LMC hereby amend the Sub-Administrative Agreement dated
September 10, 1993, effective May 1, 1995, as follows:
Notwithstanding any other provision of the Agreement to the contrary, LMC
agrees to provide the services identified in section 2 of the Agreement to the
following mutual funds, or series thereof: the Global Series (both Class A and
Class B shares) of Security Equity Fund, the Global Aggressive Bond Series
(both Class A and Class B shares) of Security Income Fund, Series D and K of
the SBL Fund and the International Discovery Series of the Parkstone Advantage
Fund (collectively referred to as the "Series").
Notwithstanding any other provision of the Agreement to the contrary, the
facilities and services outlined in section 2 of the Agreement shall be
provided separately, where appropriate, for Class A and Class B shares of the
Global Series of Security Equity Fund and for the Global Income Series of
Security Income Fund, including but not limited to items c, h, i, and j of
section 2.
Section 8 of the Agreement shall be deleted in its entirety and the following
section inserted in lieu thereof:
8. Compensation. For the services to be rendered to the Series and the
facilities furnished hereunder, the Administrator shall pay the
Sub-Administrator annual compensation which shall consist of an Annual Base Fee
of $9,000 per Series per contract year, plus the greater of (i) the Minimum
Fund Fee of $47,000 per Series per contract year or (ii) the Aggregate Asset
Fee below. However, if the Sub-Administrator is instructed by the
Administrator to discontinue providing services to the International Discovery
Series of the Parkstone Advantage Fund, there will be a corresponding reduction
in the Annual Base Fee and the Minimum Fund Fee. If such instruction relative
to the International Discovery Series is received by the Sub-Administrator
prior to the end of a contract year, the reduction in the Annual Base Fee and
the Minimum Fund Fee shall be prorated.
<PAGE> 12
Aggregate Asset Fee
<TABLE>
<CAPTION>
Average Daily Net Assets of the 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>
The Annual Base Fee for each Series shall be paid monthly at 1/12th of the
annual rate stated. The greater of (i) or (ii) above will be paid monthly at
1/12th of the annual rate stated for the Minimum Fund Fee or at 1/12th of the
annual rate for the Aggregate Asset Fee based on annual average net assets, as
applicable.
A contract year shall be deemed to be that 12-month period starting from the
date of this Amendment. If this Agreement shall be effective for only a
portion of a year, then the Sub-Administrator's annual compensation for said
year shall be prorated for such portion. Payment of the Sub-Administrator's
compensation for the preceding month shall be made as promptly as possible
after the end of each month.
The compensation provided for in this Section 8 does not include out-of-pocket
expenses incurred by LMC on behalf of the Series. Example's of out-of-pocket
expenses include but are not limited to disaster recovery, pricing services
(except pricing services already provided as part of LMC's in-house quote
system or as part of the DST software services) and overnight mailing services.
Out-of-pocket expenses will be billed by LMC on a monthly basis and will be
billed separately from service fees. However, out-of-pocket expenses incurred
by LMC for converting Series D of SBL Fund to the DST system, will be borne by
LMC.
Section 11 of the Agreement (including Exhibit 1 to the Agreement) shall be
deleted in its entirety and the following section inserted in lieu thereof:
11. Termination. The term of this Agreement shall be two years and shall
begin on the date of this Amendment. Thereafter, the Agreement shall continue
at the will of the parties and may be canceled without the payment of any
penalty upon ninety (90) days written notice to the other party.
Notwithstanding any of the foregoing, this Agreement shall automatically
terminate without the payment of any penalty (i) in the event of its assignment
as that term is defined in Section 2(a)(4) of the 1940 Act, (ii) in the event
of formal proceedings being instituted against the Sub-Administrator by the SEC
or any state Securities Department or any other regulatory body that materially
relate to or are likely to materially affect the Sub-Administrator's duties
under this Agreement, (iii) in the event of the commencement of bankruptcy,
liquidation or similar proceedings respecting the Sub-Administrator, or (iv) in
the event of a material breach in performing the duties specified under this
Agreement (such termination to be at the option of the non-breaching party).
<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have made this Amendment to the
Sub-Administrative Agreement this 1st day of May, 1995.
ATTEST: SECURITY MANAGEMENT COMPANY
Amy J. Lee By: James R. Schmank
- ------------------------------------ -------------------------------
Title: Secretary Senior Vice President
ATTEST: LEXINGTON MANAGEMENT CORPORATION
Lisa Curcio By: Richard M. Hisey
- ----------------------------------------- --------------------------------
Title: Senior Vice President & Secretary Managing Director & CFO
<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
October 31, 1995
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000088498
<NAME> SECURITY INCOME FUND
<SERIES>
<NUMBER> 7
<NAME> GLOBAL AGGRESSIVE BOND CLASS A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> DEC-30-1995
<PERIOD-START> JUN-01-1995
<PERIOD-END> SEP-30-1995
<INVESTMENTS-AT-COST> 3,580
<INVESTMENTS-AT-VALUE> 3,591
<RECEIVABLES> 298
<ASSETS-OTHER> 30
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,919
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4
<TOTAL-LIABILITIES> 4
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,906
<SHARES-COMMON-STOCK> 262
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 19
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (21)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11
<NET-ASSETS> 3,915
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 166
<OTHER-INCOME> 0
<EXPENSES-NET> 28
<NET-INVESTMENT-INCOME> 138
<REALIZED-GAINS-CURRENT> (21)
<APPREC-INCREASE-CURRENT> 11
<NET-CHANGE-FROM-OPS> 128
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 119
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 254
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 8
<NET-CHANGE-IN-ASSETS> 2,624
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 28
<AVERAGE-NET-ASSETS> 3,828
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .367
<PER-SHARE-GAIN-APPREC> (.024)
<PER-SHARE-DIVIDEND> .323
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.02
<EXPENSE-RATIO> 2.0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000088498
<NAME> SECURITY INCOME FUND
<SERIES>
<NUMBER> 8
<NAME> GLOBAL AGGRESSIVE BOND CLASS B
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> DEC-30-1995
<PERIOD-START> JUN-01-1995
<PERIOD-END> SEP-30-1995
<INVESTMENTS-AT-COST> 3,580
<INVESTMENTS-AT-VALUE> 3,591
<RECEIVABLES> 298
<ASSETS-OTHER> 30
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,919
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4
<TOTAL-LIABILITIES> 4
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,906
<SHARES-COMMON-STOCK> 125
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 19
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (21)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11
<NET-ASSETS> 3,915
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 166
<OTHER-INCOME> 0
<EXPENSES-NET> 28
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