<PAGE>
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. 59 [X]
--------
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [_]
Post-Effective Amendment No. 59 [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:
(785) 431-3127
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 7, 1997, pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on November 7, 1997, pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on November 7, 1997, pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
[_] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
--------------------
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 25, 1997.
<PAGE>
SECURITY INCOME FUND
FORM N-1A
CROSS REFERENCE SHEET
Form N-1A
ITEM NUMBER CAPTION
PART A PROSPECTUS
1. Cover Page
2. Not Applicable
2a. Transaction and Operating Expense Table
3. Financial Highlights; Performance
4. Investment Objectives and Policies of the Funds
5. Management of the Funds; Portfolio Management, Trading Practices
and Brokerage
6. General Information; Organization; Stockholder Inquiries;
Dividends and Taxes
7. How to Purchase Shares; Alternative Purchase Options; Class A
Shares; Security Income Fund's Class A Distribution Plan; Class B
Shares; Class B Distribution Plan; Calculation and Waiver of
Contingent Deferred Sales Charges; Arrangements with
Broker/Dealers and Others; Determination of Net Asset Value;
Purchases at Net Asset Value; Stockholder Services; Accumulation
Plan; Exchange Privilege; Exchange by Telephone; Retirement
Plans; Appendix C
8. How to Redeem Shares; Telephone Redemptions; Systematic
Withdrawal Program
9. Not Applicable
EXPLANATORY NOTE
This Post-Effective Amendment No. 59 (the "Amendment") to
the Registrant's Registration Statement on Form N-1A (File Nos.
2-38414 and 811-2120) is being filed solely for the purpose of
updating the financial statements of the MFR Emerging Markets
Total Return Series and the MFR Global Asset Allocation Series of
the Registrant in accordance with the undertaking filed as part
of the Series' initial Registration Statement. As a result, the
Amendment does not affect the Registrant's currently effective
Corporate Bond, Limited Maturity Bond, U.S. Government and High
Yield Series prospectus, which is hereby incorporated by
reference as most recently filed pursuant to Rule 497 under the
Securities Act of 1933, as amended.
<PAGE>
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. Organization
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); SIMPLE IRAs; Pension and
Profit Sharing Plans; 403(b) Retirement Plans; Simplified
Employee Pension Plans (SEPPs); Appendix A
20. Dividends and Taxes
21. Distributor
22. Performance Information
23. Financial Statements; Independent Auditors
<PAGE>
PROSPECTUS
================================================================================
* MFR EMERGING MARKETS TOTAL RETURN SERIES
* MFR GLOBAL ASSET ALLOCATION SERIES
* MFR GLOBAL HIGH YIELD SERIES
700 SW HARRISON STREET
TOPEKA, KS 66636-0001
PROSPECTUS
NOVEMBER 7, 1997
MFR Emerging Markets Total Return Series, MFR Global Asset Allocation
Series and MFR Global High Yield Series (formerly Global Aggressive Bond Series)
are diversified series of an open-end management investment company. Each series
has its own identified assets, net asset values and investment objective.
The investment objective of the Emerging Markets Total Return Series is to
maximize total return. To achieve this goal, the Series invests in a combination
of equity and/or debt securities of companies domiciled in, or doing business
in, emerging countries and emerging markets and sovereign debt securities of
emerging market countries.
The investment objective of the Global Asset Allocation Series is to seek a
high level of total return consisting of capital appreciation and current
income. To achieve its investment objective the Series follows an asset
allocation strategy that contemplates shifts among a wide range of investment
categories and market sectors, including equity and debt securities of domestic
and foreign issuers.
The investment objective of the Global High Yield Series is to seek high
current income with capital appreciation as a secondary objective through
investment primarily in a combination of foreign and domestic high yield, lower
rated securities.
EACH OF THE SERIES MAY INVEST IN DEBT SECURITIES THAT INCLUDE DOMESTIC AND
FOREIGN DEBT SECURITIES RATED BELOW INVESTMENT GRADE AND FOREIGN DEBT SECURITIES
WHOSE CREDIT QUALITY IS GENERALLY CONSIDERED THE EQUIVALENT OF SUCH SECURITIES,
WHICH ARE COMMONLY KNOWN AS "JUNK BONDS." INVESTMENTS OF THIS TYPE ARE SUBJECT
TO A GREATER RISK OF 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 SERIES.
This Prospectus sets forth concisely the information that a prospective
investor should know about the Series. It should be read and retained for future
reference. Certain additional information is contained in a Statement of
Additional Information about the Series, dated November 7, 1997, which has been
filed with the Securities and Exchange Commission. The Statement of Additional
Information, as it may be supplemented from time to time, is incorporated by
reference in this Prospectus. It is available at no charge by writing Security
Distributors, Inc., 700 Harrison Street, Topeka, Kansas 66636-0001, or by
calling (800) 643-8188.
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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.
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<PAGE>
CONTENTS
================================================================================
Page
Transaction and Operating Expense Table................................... 1
Financial Highlights...................................................... 2
Investment Objective and Policies of the Series........................... 6
MFR Emerging Markets Total Return Series................................ 6
MFR Global Asset Allocation Series...................................... 9
MFR Global High Yield Series............................................ 13
Investment Methods and Risk Factors....................................... 15
Management of the Series.................................................. 31
Portfolio Management.................................................... 33
How to Purchase Shares.................................................... 33
Alternative Purchase Options............................................ 34
Class A Shares.......................................................... 34
Class A Distribution Plan............................................... 35
Class B Shares.......................................................... 36
Class B Distribution Plan............................................... 37
Calculation and Waiver of Contingent Deferred Sales Charges............. 37
Arrangements with Broker-Dealers and Others............................. 38
Purchases at Net Asset Value.............................................. 38
Trading Practices and Brokerage........................................... 39
How to Redeem Shares...................................................... 40
Telephone Redemptions .................................................. 40
Dividends and Taxes....................................................... 41
Foreign Taxes........................................................... 42
Determination of Net Asset Value.......................................... 43
Performance............................................................... 43
Stockholder Services...................................................... 44
Accumulation Plan....................................................... 44
Systematic Withdrawal Program........................................... 44
Exchange Privilege...................................................... 45
Exchange by Telephone................................................... 45
Retirement Plans........................................................ 45
General Information....................................................... 46
Organization............................................................ 46
Stockholder Inquiries................................................... 46
Appendix A................................................................ 47
Appendix B................................................................ 49
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<PAGE>
PROSPECTUS
================================================================================
TRANSACTION AND OPERATING EXPENSE TABLE
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<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B(1)
- -------------------------------- ------- ----------
<S> <C> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of offering price) 4.75% None
Maximum Sales Load Imposed on Reinvested Dividends 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,
decreasing to 0% in the
sixth and following years
</TABLE>
<TABLE>
<CAPTION>
MFR EMERGING MFR GLOBAL MFR GLOBAL
MARKETS TOTAL RETURN ASSET ALLOCATION HIGH YIELD
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES
Management Fees 1.00% 1.00% 1.00% 1.00% 0.75% 0.75%
12b-1 Fees(3) 0.25% 1.00% 0.25% 1.00% 0.25% 1.00%
Other Expenses (after expense reimbursements)(4) 0.75% 0.75% 0.75% 0.75% 1.00% 1.00%
Total Fund Operating Expenses(5) 2.00% 2.75% 2.00% 2.75% 2.00% 2.75%
EXAMPLE
You would pay the following expenses on a $1,000 1 Year $ 67 $ 78 $ 67 $ 78 $ 67 $ 78
investment, assuming (1) 5 percent annual return 3 Years 107 115 107 115 107 115
and (2) redemption at the end of each time period 5 Years --- --- --- --- 150 165
10 Years --- --- --- --- 269 308
EXAMPLE
You would pay the following expenses on a $1,000 1 Year $ 67 $ 28 $ 67 $ 28 $ 67 $ 28
investment, assuming (1) 5 percent annual return 3 Years 107 85 107 85 107 85
and (2) no redemption 5 Years --- --- --- --- 150 145
10 Years --- --- --- --- 269 308
</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 34.
(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 the Emerging Markets Total Return and
Global Asset Allocation Series is based on estimated amounts for the fiscal
year ending December 31, 1997.
(5) During the fiscal year ending December 31, 1997, MFR will reimburse certain
expenses of each Series; absent such reimbursement and waiver, "Other
Expenses" would be as follows: 5.13% for Class A and 5.06% for Class B
shares of Emerging Markets Total Return; 5.05% for Class A and 5.12% for
Class B shares of Global Asset Allocation; and 1.73% for Class A shares and
2.00% for Class B shares of Global High Yield Series.
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 the Series will
bear directly or indirectly. For a more detailed discussion of the Series' fees
and expenses, see the discussion under "Management of the Series," page 31.
Information on the Series' 12b-1 Plans may be found under the headings "Class A
Distribution Plan" on page 35 and "Class B Distribution Plan" on page 37. See
"How to Purchase Shares," page 33, for more information concerning the sales
load. Also, see Appendix B 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.
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1
<PAGE>
FINANCIAL HIGHLIGHTS
================================================================================
The following financial highlights for each of the years in the period
ended December 31, 1996, except the six-month period ended June 30, 1997 and the
period from May 19, 1997 to September 30, 1997, have been audited by Ernst &
Young LLP. Such information for each of the years in the period ended December
31, 1996, should be read in conjunction with the financial statements of the
Series and the report of Ernst & Young LLP, the Series' independent auditors,
appearing in the December 31, 1996 Annual Report which is incorporated by
reference in this Prospectus. The Annual Report also contains additional
information about the performance of the Global High Yield Series and may be
obtained without charge by calling Security Distributors, Inc. at
1-800-643-8188.
<TABLE>
<CAPTION>
GLOBAL HIGH YIELD SERIES (CLASS A)
FISCAL YEAR ENDED DECEMBER 31
--------------------------------------------
1997(B)(E) 1996(B)(C) 1995(B)(C)(D)
---------- ---------- -------------
<S> <C> <C> <C>
PER SHARE DATA
Net asset value beginning of period....................... $10.36 $10.15 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income..................................... .65 1.06 .63
Net gains (losses) on securities (realized & unrealized).. (.43) .064 .09
----- ------ -----
Total from investment operations.......................... .22 1.124 .72
LESS DISTRIBUTIONS
Dividends (from net investment income).................... (.39) (.687) (.55)
Distributions (from capital gains)........................ --- (.227) (.02)
Return of capital......................................... --- --- ---
----- ------ -----
Total distributions....................................... (.39) (.914) (.57)
----- ------ -----
Net asset value end of period............................. $10.19 $10.36 $10.15
===== ====== =====
Total return (a).......................................... 2.2% 11.6% 7.3%
RATIOS/SUPPLEMENTAL DATA
Net assets end of period (thousands)...................... $4,575 $3,507 $2,968
Ratio of expenses to average net assets................... 1.90% 1.98% 2.00%
Ratio of net investment income to average net assets...... 8.19% 10.39% 11.04%
Portfolio turnover rate................................... 104% 96% 127%
Average commission paid per investment security traded (h) N/A N/A N/A
GLOBAL HIGH YIELD SERIES (CLASS B)
FISCAL YEAR ENDED DECEMBER 31
--------------------------------------------
1997(B)(E) 1996(B)(C) 1995(B)(C)(D)
---------- ---------- -------------
PER SHARE DATA
Net asset value beginning of period....................... $10.41 $10.17 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income..................................... .64 .98 .56
Net gains (losses) on securities (realized & unrealized).. (.472) .06 .12
------ ------ -----
Total from investment operations.......................... .168 1.04 .68
LESS DISTRIBUTIONS
Dividends (from net investment income).................... (.358) (.573) (.49)
Distributions (from capital gains)........................ --- (.227) (.02)
Return of capital......................................... --- --- ---
------ ------ -----
Total distributions....................................... (.358) (.80) (.51)
------ ------ -----
Net asset value end of period............................. $10.22 $10.41 $10.17
====== ====== =====
Total return (a).......................................... 1.7% 10.7% 6.9%
RATIOS/SUPPLEMENTAL DATA
Net assets end of period (thousands)...................... $1,607 $1,541 $1,440
Ratio of expenses to average net assets................... 1.96% 2.75% 2.75%
Ratio of net investment income to average net assets...... 8.14% 9.64% 10.24%
Portfolio turnover rate................................... 104% 96% 127%
Average commission paid per investment security traded (h) N/A N/A N/A
</TABLE>
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2
<PAGE>
EMERGING MARKETS TOTAL RETURN SERIES (CLASS A)
PERIOD ENDED
SEPTEMBER 30
-------------
1997(B)(F)(G)
PER SHARE DATA
Net asset value beginning of period....................... $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income..................................... .130
Net gains on securities (realized & unrealized)........... .410
------
Total from investment operations.......................... .540
LESS DISTRIBUTIONS
Dividends (from net investment income).................... ---
Distributions (from capital gains)........................ ---
Return of capital......................................... ---
------
Total distributions....................................... ---
------
Net asset value end of period............................. $10.54
======
Total return (a).......................................... 5.4%
RATIOS/SUPPLEMENTAL DATA
Net assets end of period (thousands)...................... $546
Ratio of expenses to average net assets................... 2.00%
Ratio of net investment income to average net assets...... 3.59%
Portfolio turnover rate................................... 26%
Average commission paid per investment security traded (h) $.0112
EMERGING MARKETS TOTAL RETURN SERIES (CLASS B)
PERIOD ENDED
SEPTEMBER 30
-------------
1997(B)(F)(G)
PER SHARE DATA
Net asset value beginning of period....................... $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income..................................... .100
Net gains on securities (realized & unrealized)........... .410
------
Total from investment operations.......................... .510
LESS DISTRIBUTIONS
Dividends (from net investment income).................... ---
Distributions (from capital gains)........................ ---
Return of capital......................................... ---
------
Total distributions....................................... ---
------
Net asset value end of period............................. $10.51
======
Total return (a).......................................... 5.1%
RATIOS/SUPPLEMENTAL DATA
Net assets end of period (thousands)...................... $556
Ratio of expenses to average net assets................... 2.75%
Ratio of net investment income to average net assets...... 2.84%
Portfolio turnover rate................................... 26%
Average commission paid per investment security traded (h) $.0112
- --------------------------------------------------------------------------------
3
<PAGE>
GLOBAL ASSET ALLOCATION SERIES (CLASS A)
PERIOD ENDED
SEPTEMBER 30
-------------
1997(B)(F)(G)
PER SHARE DATA
Net asset value beginning of period....................... $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income..................................... .120
Net gains on securities (realized & unrealized)........... .510
------
Total from investment operations.......................... .630
LESS DISTRIBUTIONS
Dividends (from net investment income).................... ---
Distributions (from capital gains)........................ ---
Return of capital......................................... ---
------
Total distributions....................................... ---
------
Net asset value end of period............................. $10.63
======
Total return (a).......................................... 6.3%
RATIOS/SUPPLEMENTAL DATA
Net assets end of period (thousands)...................... $581
Ratio of expenses to average net assets................... 2.00%
Ratio of net investment income to average net assets...... 2.72%
Portfolio turnover rate................................... 20%
Average commission paid per investment security traded (h) $.0196
GLOBAL ASSET ALLOCATION SERIES (CLASS B)
PERIOD ENDED
SEPTEMBER 30
-------------
1997(B)(F)(G)
PER SHARE DATA
Net asset value beginning of period....................... $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income..................................... .110
Net gains on securities (realized & unrealized)........... .500
------
Total from investment operations.......................... .610
LESS DISTRIBUTIONS
Dividends (from net investment income).................... ---
Distributions (from capital gains)........................ ---
Return of capital......................................... ---
------
Total distributions....................................... ---
------
Net asset value end of period............................. $10.61
======
Total return (a).......................................... 6.1%
RATIOS/SUPPLEMENTAL DATA
Net assets end of period (thousands)...................... $537
Ratio of expenses to average net assets................... 2.75%
Ratio of net investment income to average net assets...... 1.99%
Portfolio turnover rate................................... 20%
Average commission paid per investment security traded (h) $.0196
- --------------------------------------------------------------------------------
4
<PAGE>
(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) Fund expenses were reduced by the Investment Manager during the period, and
expense ratios absent such reimbursement would have been as follows:
---------------------------------------------------------------------------
1995 1996 1997
---------------------------------------------------------------------------
Global High Yield Series Class A 2.42% 2.73% 2.89%*
Class B 3.93% 3.75% 2.95%*
---------------------------------------------------------------------------
Emerging Markets Total Return Series Class A --- --- 6.38%**
Class B --- --- 7.06%**
---------------------------------------------------------------------------
Global Asset Allocation Series Class A --- --- 6.30%**
Class B --- --- 7.12%**
---------------------------------------------------------------------------
*For the six-month period ended June 30, 1997.
**For the period May 19, 1997 (date of inception) to September 30, 1997.
---------------------------------------------------------------------------
(c) Net investment income was computed using the average month-end shares
outstanding throughout the period.
(d) Global High Yield Series (formerly referred to as Global Aggressive Bond
Series) was initially capitalized on June 1, 1995, with a net asset value
of $10 per share. Percentage amounts for the period have been annualized,
except for total return.
(e) Unaudited figures for the period ended June 30, 1997. Percentage amounts
for the period, except total return, have been annualized.
(f) Emerging Markets Total Return Series and Global Asset Allocation Series
were initially capitalized on May 19, 1997, with a net asset value of $10
per share. Percentage amounts for the period have been annualized, except
total return.
(g) Unaudited figures for the period May 19, 1997 (date of inception) to
September 30, 1997. Percentage amounts for the period, except total return,
have been annualized.
(h) Brokerage commissions paid on portfolio transactions increase the cost of
securities purchased or reduce the proceeds of securities sold and are not
reflected in the Fund's statement of operations. Shares traded on a
principal basis, such as most over-the-counter and fixed-income
transactions, are excluded. Generally, non-U.S. commissions are lower than
U.S. commissions when expressed as cents per share but higher when
expressed as a percentage of transactions because of the lower per-share
prices of many non-U.S. securities.
- --------------------------------------------------------------------------------
5
<PAGE>
PROSPECTUS
================================================================================
INVESTMENT OBJECTIVES AND POLICIES OF THE SERIES
MFR Emerging Markets Total Return Series, MFR Global Asset Allocation
Series and MFR Global High Yield Series (the "Series") are diversified series of
an open-end management investment company (commonly known as a mutual fund),
Security Income Fund (the "Fund"). The Fund was organized as a Kansas
corporation on September 9, 1970. Each of the Series has its own investment
objective and policies which are discussed in more detail below. Although the
Emerging Markets Total Return Series and Global Asset Allocation Series are
series of Security Income Fund, each series may invest to a substantial degree
in equity securities as discussed below. There, of course, can be no assurance
that the Series will achieve their investment objectives. While there is no
present intention to do so, the investment objective and policies of each Series
may be changed by the Board of Directors of the Fund without the approval of
stockholders. If a change in investment objective is made, stockholders should
consider whether the Series remains an appropriate investment in light of their
then current financial position and needs.
Each of the Series is subject to certain investment policy limitations,
which may not be changed without stockholder approval. Among these limitations,
some of the more important ones are: (1) with respect to 75 percent of the value
of its total assets, no Series will invest more than 5 percent of the value of
its assets in any one issuer other than the U.S. Government or its
instrumentalities; (2) no Series will purchase more than 10 percent of the
outstanding voting securities of any one issuer; nor (3) invest 25 percent or
more of its total assets in any one industry. The full text of the investment
policy limitations of each Series is set forth in the Series' Statement of
Additional Information.
Each of the Series 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 Series may invest in
certificates of deposit, bank demand accounts, repurchase agreements and high
quality money market instruments.
MFR EMERGING MARKETS TOTAL RETURN SERIES
The investment objective of MFR Emerging Markets Total Return Series is to
seek to maximize total return. The Series under normal circumstances invests
substantially all of its assets in a portfolio of emerging country and emerging
market equity and debt securities. Equity securities will consist of all types
of common stocks and equivalents (the following constitute equivalents:
convertible debt securities and warrants). The Series also may invest in
preferred stocks, bonds, money market instruments of foreign and domestic
companies, U.S. government, and governmental agencies and debt securities of
sovereign emerging market issuers. The Series may invest up to 100 percent 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 Series also may invest in zero coupon
securities and securities that are in default
- --------------------------------------------------------------------------------
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 Fund, the Investment Manager, or the Distributor.
- --------------------------------------------------------------------------------
6
<PAGE>
PROSPECTUS
================================================================================
as to payment of principal and/or interest. A description of certain 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 and zero coupon securities. Many emerging market debt securities are
not rated by United States rating agencies such as Moody's and Standard &
Poor's. The Series' ability to achieve its investment objective is thus more
dependent on the credit analysis of MFR Advisors, Inc. ("MFR") than would be the
case if the Series were to invest in higher quality bonds. The Series may invest
in fixed income securities without limitation as to maturity. INVESTORS SHOULD
PURCHASE SHARES ONLY AS A SUPPLEMENT TO AN OVERALL INVESTMENT PROGRAM AND ONLY
IF WILLING TO UNDERTAKE THE RISKS INVOLVED.
"Emerging markets" will consist of all countries determined by the World
Bank or the United Nations to have developing or emerging economies and markets.
These countries are generally expected to include every country in the world
except the United States, Canada, Japan, Australia, New Zealand and most
countries in Western Europe.
Currently, investing in many of the emerging countries and emerging markets
is not feasible. Accordingly, MFR 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 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 percent 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 Series' investments in emerging country securities are not subject to
any maximum limit, and it is the intention of MFR to invest substantially all of
the Series' assets in emerging country and emerging market securities. However,
to the extent that the Series' assets are not invested in emerging country and
emerging market securities, the remaining 35 percent of the assets may be
invested in (i) other equity and debt securities without regard to whether they
qualify as emerging country or emerging market securities, and (ii) cash
reserves of the type described under "Investment Methods and Risk Factors." In
addition, for temporary defensive purposes, the Series may invest less than 65
percent of its assets in emerging country and emerging market securities, in
which case the Series may invest in other equity or debt securities or may
invest in cash reserves without limitation.
The Series' investments in emerging market debt securities consist
substantially of high yield, lower-rated debt securities of foreign
corporations, and "Brady Bonds" and other sovereign debt securities issued by
emerging market governments. "Sovereign debt securities" are those issued by
emerging market governments that are traded in the markets of developed
countries or groups of developed countries. MFR may invest in debt securities of
emerging market issuers that it determines to be suitable investments for the
Series without regard to ratings. Currently, the substantial majority of
emerging market debt securities are considered to have a credit quality below
investment grade. The Series may invest up to 100 percent of its total assets in
debt securities with credit quality below investment grade (known as junk
bonds). Such securities are predominantly speculative and involve a high degree
of risk as discussed under "Investment Methods and Risk Factors."
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For the period May 19, 1997 (date of inception) to September 30, 1997, the
dollar weighted average of Emerging Markets Total Return Series' holdings
(excluding equities) had the following credit quality characteristics.
PERCENT OF
INVESTMENT NET ASSETS
---------- ----------
U.S. Government and Government Agency Securities........... 0%
Cash and other Assets, Less Liabilities.................... 12.1%
Rated Fixed Income Securities
AAA..................................................... 0%
AA...................................................... 0%
A....................................................... 4.6%
Baa/BBB................................................. 7.9%
Ba/BB................................................... 11.7%
B....................................................... 0%
Caa/CCC................................................. 0%
Unrated Securities Comparable in Quality to
A....................................................... 0%
Baa/BBB................................................. 0%
Ba/BB................................................... 0%
B....................................................... 5.4%
Caa/CCC................................................. 0%
----
41.7%
The foregoing table is intended solely to provide disclosure about Emerging
Markets Total Return Series' asset composition for the period ended September
30, 1997. The asset composition in the future may or may not be approximately
the same as shown above.
The Series may invest in bank loan participations and assignments, which
are fixed and floating rate loans arranged through private negotiations between
foreign or domestic entities.
The Series invests in securities allocated among diverse markets and
denominated in various currencies, including U.S. dollars, or in multinational
currency units such as European Currency Units. The Series 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 Series 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 the discussion of such risks, including
currency risk, under "Investment Methods and Risk Factors."
MFR selectively will allocate the assets of the Series in securities of
issuers in countries and in currency denominations where the combination of
market returns, the price appreciation potential of securities and currency
exchange rate movements will present opportunities for maximum total return. In
so doing, MFR intends to take advantage of the different yield, risk and return
characteristics that investment in the security markets of different countries
can provide for U.S. investors. Fundamental economic strength, credit quality,
earnings growth potential and currency and market trends will be the principal
determinants of the emphasis given to various country, geographic and industry
sectors within the Series.
MFR evaluates 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. However, the Series may seek to
protect itself against such negative currency movements through the use of
sophisticated investment techniques. See the discussion of forward currency
transactions,
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options and futures under "Investment Methods and Risk Factors."
Futures may be used to gain exposure to markets where there is insufficient
cash to purchase a diversified portfolio of securities. Currencies may be held
to gain exposure to an international market prior to investing in a non-dollar
security.
The Series may enter into futures contracts (a type of derivative) (or
options thereon) to hedge all or a portion of its portfolio, as a hedge against
changes in prevailing levels of interest rates or currency exchange rates, or as
an efficient means of adjusting its exposure to the bond, stock, and currency
markets. The Series will not use futures contracts for leveraging purposes. The
Series will limit its use of futures contracts so that initial margin deposits
or premiums on such contracts used for non-hedging purposes will not equal more
than 5 percent of the Series' net asset value. The Series may also write call
and put options on a covered basis and purchase put and call options on
securities, financial indices, and currencies. The aggregate market value of the
Series' portfolio securities or currencies covering call or put options will not
exceed 25 percent of the Series' net assets. The Series may enter into foreign
futures and options transactions. See the discussion of options and futures
contracts under "Investment Methods and Risk Factors." As part of its investment
program and to maintain greater flexibility, the Series may invest in
instruments which have the characteristics of futures, options and securities,
known as "hybrid instruments." For a discussion of such instruments and the
risks involved in investing therein, see "Investment Methods and Risk Factors."
The Series 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 Series may enter into repurchase agreements, reverse repurchase
agreements and "dollar rolls" which are discussed under "Investment Methods and
Risk Factors." The Series may also invest in restricted securities as discussed
under "Investment Methods and Risk Factors."
MFR GLOBAL ASSET ALLOCATION SERIES
The investment objective of MFR Global Asset Allocation Series is to seek a
high level of total return by investing primarily in a diversified portfolio of
fixed income and equity securities. The Series is designed to balance the
potential appreciation of common stocks with the income and relative stability
of principal of bonds over the long term. The primary consideration in changing
the asset allocation mix will be the fundamental economic outlook of the Series'
Adviser, MFR, for the different markets in which the Series invests. Shifts
between the fixed income and equity sectors will normally be done gradually and
MFR will not attempt to precisely "time" the market. There is, of course, no
guarantee that MFR's gradual approach to allocating the Series' assets will be
successful in achieving the Series' objective. The Series will maintain cash
reserves to facilitate the Series' cash flow needs (redemptions, expenses and
purchases of Series securities) and it may invest in cash reserves without
limitation for temporary defensive purposes. See the discussion of cash reserves
under "Investment Methods and Risk Factors."
Assets allocated to the fixed income portion of the Series will be invested
primarily in U.S. and foreign investment grade bonds, high yield bonds (U.S. and
foreign, including "Brady Bonds"), short-term investments and currencies, as
needed to gain exposure to foreign markets. Investment grade debt securities
include long, intermediate and short-term investment grade debt securities
(e.g., AAA, AA, A or BBB by S&P or if not rated, of equivalent investment
quality as determined by
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PROSPECTUS
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MFR). The weighted average maturity for this portion (investment grade debt
securities) of the Series' portfolio is generally expected to be intermediate
(3-10 years), although it may vary significantly. Non-dollar debt securities
include non-dollar denominated government and corporate debt securities or
currencies. See "Investment Methods and Risk Factors" for a discussion of the
risks involved in foreign investing. High-yield securities include
high-yielding, income-producing debt securities in the lower rating categories
(commonly referred to as "junk bonds") and preferred stocks including
convertible securities. High yield bonds may be purchased without regard to
maturity; however, the average maturity is expected to be approximately 10
years, although it may vary if market conditions warrant. Quality will generally
range from lower medium to low and the Series may also purchase bonds in default
if, in the opinion of MFR, there is significant potential for capital
appreciation. Lower-rated debt obligations are generally considered to be high
risk investments. See "Investment Methods and Risk Factors" for a discussion of
the risks involved in investing in high-yield, lower-rated debt securities. The
Series may invest in zero coupon securities that pay no interest prior to
maturity and payment in kind securities that pay interest in the form of
additional securities. See the discussion of such securities under "Investment
Methods and Risk Factors." Securities which may be held as cash reserves include
liquid short-term investments of one year or less rated within the top two
categories by at least one established rating organization, or if not rated, of
equivalent investment quality as determined by MFR. The Series may use
currencies to gain exposure to an international market prior to investing in
non-dollar securities.
For the period May 19, 1997 (date of inception) to September 30, 1997, the
dollar weighted average of Global Asset Allocation Series' holdings (excluding
equities) had the following credit quality characteristics.
PERCENT OF
INVESTMENT NET ASSETS
---------- ----------
U.S. Government and Government Agency Securities......... 0%
Cash and other Assets, Less Liabilities.................. 9.3%
Rated Fixed Income Securities
AAA................................................... 0%
AA.................................................... 3.3%
A..................................................... 4.5%
Baa/BBB............................................... 1.9%
Ba/BB................................................. 6.9%
B..................................................... 5.4%
Caa/CCC............................................... 0%
Unrated Securities Comparable in Quality to
A..................................................... 0%
Baa/BBB............................................... 0%
Ba/BB................................................. 0%
B..................................................... 0%
Caa/CCC............................................... 0%
----
31.3%
The foregoing table is intended solely to provide disclosure about Global Asset
Allocation Series' asset composition for the period ended September 30, 1997.
The asset composition in the future may or may not be approximately the same as
shown above.
The Series' equity sector will be allocated among large and small capital
("Large Cap" and "Small Cap" respectively) U.S. and non-dollar equity
securities, currencies, real estate investment trusts ("REITs") and futures. See
the discussion of REITs under "Investment Methods and Risk Factors." Large Cap
securities generally include stocks of well established companies with
capitalization over $1 billion which can produce increasing dividend income.
Non-dollar securities include foreign currencies and common stocks of
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PROSPECTUS
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established non-U.S. companies. Investments may be made solely for capital
appreciation or solely for income or any combination of both for the purpose of
achieving a higher overall return. MFR intends to diversify the non-dollar
portion of the Series' portfolio broadly among countries and normally to have at
least three different countries represented. The countries of the Far East and
Western Europe as well as South Africa, Australia, Canada, and other areas
(including developing countries) may be included. Under unusual circumstances,
however, investment may be substantially in one or two countries.
Futures may be used to gain exposure to equity markets where there is
insufficient cash to purchase a diversified portfolio of stocks. Currencies also
may be held to gain exposure to an international market prior to investing in a
non-dollar stock.
Small Cap securities include common stocks of small companies or companies
which offer the possibility of accelerated earnings growth because of
rejuvenated management, new products or structural changes in the economy.
Current income is not a factor in the selection of these stocks. Higher risks
are often associated with small companies. These companies may have limited
product lines, markets and financial resources, or they may be dependent on a
small or inexperienced management group. In addition, their securities may trade
less frequently and in limited volume and move more abruptly than securities of
larger companies. However, securities of smaller companies may offer greater
potential for capital appreciation since they are often overlooked or
undervalued by investors.
Until the Series reaches approximately $20 million in assets, the Series
may be unable to prudently achieve diversification among the described asset
classes. During this initial period, the Series may use futures contracts and
purchase foreign currencies to a greater extent than it will once the start-up
period is over. See "Investment Methods and Risk Factors."
Some of the countries in which the Series may invest may be considered to
be developing and may involve special risks. For a discussion of the risks
involved in investment in foreign securities, including investment in emerging
markets, see "Investment Methods and Risk Factors." The Series' foreign
investments are also subject to currency risk described under "Investment
Methods and Risk Factors". To manage this risk and facilitate the purchase and
sale of foreign securities, the Series may engage in foreign currency
transactions involving the purchase and sale of forward foreign currency
exchange contracts. Although forward currency transactions will be used
primarily to protect the Series from adverse currency movements, they also
involve the risk that anticipated currency movements will not be accurately
predicted and the Series' total return could be adversely affected as a result.
For a discussion of forward currency transactions and the risks associated with
such transactions, see "Investment Methods and Risk Factors." Purchases by the
Series of currencies in substitution of purchases of stocks and bonds will
subject the Series to risks different from a fund invested solely in stocks and
bonds.
The Series' investments include, but are not limited to, equity and fixed
income securities of any type and the Series may utilize the investment methods
and investment vehicles described below.
The Series may enter into futures contracts (a type of derivative) (or
options thereon) to hedge all or a portion of its portfolio, as a hedge against
changes in prevailing levels of interest rates or currency exchange rates, or as
an efficient means of adjusting its exposure to the bond, stock, and currency
markets. The Series will not use futures contracts for leveraging purposes. The
Series will limit its use of futures contracts so that initial margin deposits
or premiums on such contracts
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11
<PAGE>
PROSPECTUS
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used for non-hedging purposes will not equal more than 5 percent of the Series'
net asset value. The Series may also write call and put options on a covered
basis and purchase put and call options on securities, financial indices, and
currencies. The aggregate market value of the Series' portfolio securities or
currencies covering call or put options will not exceed 25 percent of the
Series' net assets. The Series may enter into foreign futures and options
transactions. See the discussion of options and futures contracts under
"Investment Methods and Risk Factors." As part of its investment program and to
maintain greater flexibility, the Series may invest in instruments which have
the characteristics of futures, options and securities, known as "hybrid
instruments." For a discussion of such instruments and the risks involved in
investing therein, see "Investment Methods and Risk Factors."
The Series may acquire illiquid securities in an amount not exceeding 15
percent of net assets. Because an active trading market does not exist for such
securities the sale of such securities may be subject to delay and additional
costs. The Series will not invest more than 15 percent of its total assets in
restricted securities (other than securities eligible for resale under Rule 144A
of the Securities Act of 1933). For a discussion of restricted securities, see
"Investment Methods and Risk Factors."
The Series may invest in asset-backed securities, which securities involve
certain risks. For a discussion of asset-backed securities and the risks
involved in investment in such securities, see the discussion under "Investment
Methods and Risk Factors." The Series may invest in mortgage-backed securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
or institutions such as banks, insurance companies and savings and loans. Some
of these securities, such as GNMA certificates, are backed by the full faith and
credit of the U.S. Treasury while others, such as Freddie Mac certificates, are
not. The Series also may invest in collateralized mortgage obligations (CMOs)
and stripped mortgage securities (a type of derivative). Stripped mortgage
securities are created by separating the interest and principal payments
generated by a pool of mortgage-backed bonds to create two classes of
securities, "interest only" (IO) and "principal only" (PO) bonds. There are
risks involved in mortgage-backed securities, CMOs and stripped mortgage
securities. See "Investment Methods and Risk Factors" for an additional
discussion of such securities and the risks involved therein.
While the Series will remain invested in primarily common stocks and bonds,
it may, for temporary defensive purposes, invest in cash reserves without
limitation. The Series may establish and maintain reserves as MFR believes is
advisable to facilitate the Series' cash flow needs. Cash reserves include money
market instruments, including repurchase agreements, in the two highest rating
categories. Short-term securities may be held in the equity sector as collateral
for futures contracts. These securities are segregated and may not be available
for the Series' cash flow needs.
The Series may invest in debt or preferred equity securities convertible
into or exchangeable for equity securities and warrants. As a fundamental
policy, for the purpose of realizing additional income, the Series may lend
securities with a value of up to 33 1/3 percent of its total assets to
broker-dealers, institutional investors, or other persons. Any such loan will be
continuously secured by collateral at least equal to the value of the securities
loaned. For a discussion of the limitations on lending and risks of lending, see
"Investment Methods and Risk Factors."
The Series may purchase securities on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis as discussed under
"Investment Methods and Risk Factors." The Series may enter into repurchase
agreements, reverse repurchase agreements, and
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"dollar rolls" also as discussed under "Investment Methods and Risk Factors."
MFR GLOBAL HIGH YIELD SERIES
The MFR Global High Yield Series 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
Series will invest at least 65 percent of its total assets in high yield bonds
as discussed herein. High yield bonds consist of debt securities rated below
investment grade ("junk bonds") and foreign debt securities that yield, as
determined by MFR or Lexington, in excess of domestic investment grade debt
securities. The Series 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 Series also may invest up to 50 percent 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 Series selects particular debt securities in each sector based
on their relative investment merits. Within each area, the Series 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 Series may invest consist of bonds, notes,
debentures and other similar instruments. The Series may invest up to 100
percent 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 Series 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 Series' ability to
achieve its investment objectives is thus more dependent on MFR's credit
analysis than would be the case if the Series 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.
For the year ended December 31, 1996, the dollar weighted average of Global
High Yield Series' holdings (excluding equities) had the following credit
quality characteristics.
PERCENT OF
INVESTMENT NET ASSETS
---------- ----------
U.S. Government and Government Agency Securities......... 0%
Cash and other Assets, Less Liabilities.................. 2.8%
Rated Fixed Income Securities
AAA................................................... 12.9%
AA.................................................... 6.5%
A..................................................... 18.5%
Baa/BBB............................................... 23.7%
Ba/BB................................................. 16.1%
B..................................................... 19.5%
Caa/CCC............................................... 0%
Unrated Securities Comparable in Quality to
A..................................................... 0%
Baa/BBB............................................... 0%
Ba/BB................................................. 0%
B..................................................... 0%
Caa/CCC............................................... 0%
----
100%
The foregoing table is intended solely to provide disclosure about Global High
Yield Series' asset
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PROSPECTUS
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composition for the year ended December 31, 1996. The asset composition in the
future may or may not be approximately the same as shown above.
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. Accordingly, MFR 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 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 percent 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 Series' investments in emerging market securities consist substantially
of high yield, lower-rated debt securities of foreign corporations and "Brady
Bonds" and other sovereign debt securities issued by emerging market
governments. The Series 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 Series may invest in bank loan participations and assignments, which
are fixed and floating rate loans arranged through private negotiations between
foreign entities. The Series may also invest in zero coupon securities. See the
discussion of sovereign debt securities, Brady Bonds, loan participations and
assignments and zero coupon securities under "Investment Methods and Risk
Factors."
TEMPORARY INVESTMENTS. The Series 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 Series'
investment objectives, MFR may employ a temporary defensive investment strategy
if it determines such a strategy to be warranted. Pursuant to such a defensive
strategy, the Series temporarily may hold cash (U.S. dollars, foreign currencies
or multinational currency units) and/or invest up to 100 percent 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 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 MFR. It is impossible to predict
whether, when or for how long the Series 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 Series invests in debt obligations allocated
among diverse markets
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PROSPECTUS
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and denominated in various currencies, including U.S. dollars, or in
multinational currency units such as European Currency Units. The Series 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 Series 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.s
MFR will seek to allocate the assets of the Series 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, MFR
intends 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 Series. Securities held by the Series may be invested in without limitation
as to maturity.
MFR evaluates 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 Series may seek to protect
itself against such negative currency movements through the use of sophisticated
investment techniques although the Series 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 Series 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 Series may enter into repurchase agreements, reverse repurchase
agreements and "dollar rolls" which are discussed under "Investment Methods and
Risk Factors." The Series may purchase restricted securities as discussed under
"Investment Methods and Risk Factors."
MORTGAGE-BACKED SECURITIES AND COLLATERALIZED MORTGAGE OBLIGATIONS. The
Series may invest in mortgage-backed securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities or institutions such as banks,
insurance companies and savings and loans. Some of these securities, such as
GNMA certificates, are backed by the full faith and credit of the U.S. Treasury
while others, such as Freddie Mac certificates, are not. The Series also may
invest in collateralized mortgage obligations (CMOs). There are risks involved
in mortgage-backed securities and CMOs. See "Investment Methods and Risk
Factors" for an additional discussion of such securities and the risks involved
therein.
INVESTMENT METHODS AND RISK FACTORS
Some of the risk factors related to certain securities, instruments and
techniques that may be
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15
<PAGE>
PROSPECTUS
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used by one or more of the Series 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 Series' 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 Series 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 Series. The methods described only apply to
those Series which may use such methods.
INVESTMENT VEHICLES
BAA OR BBB SECURITIES - Each of the Series 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 MFR). 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. Each Series also may
invest in higher yield debt securities in the lower rating (higher risk)
categories of the recognized rating services (commonly referred to as "junk
bonds"). See Appendix A to this Prospectus for a complete description of
corporate bond ratings and see "Risks Associated with Lower-Rated Debt
Securities (Junk Bonds)."
U.S. GOVERNMENT SECURITIES - Each of the Series may invest in U.S.
Government securities which include obligations issued or guaranteed (as to
principal and interest) by the United States Government or its agencies (such as
the Small Business Administration, the Federal Housing Administration, and
Government National Mortgage Association), or instrumentalities (such as Federal
Home Loan Banks and Federal Land Banks), and instruments fully collateralized
with such obligations such as repurchase agreements. Some U.S. Government
securities, such as Treasury bills and bonds, are supported by the full faith
and credit of the U.S. Treasury; others are supported by the right of the issuer
to borrow from the Treasury; others, such as those of the Federal National
Mortgage Association, are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; still others, such as those of
the Student Loan Marketing Association, are supported only by the credit of the
instrumentality. Government National Mortgage Association (GNMA) certificates
are mortgage-backed securities representing part ownership of a pool of mortgage
loans on which timely payment of interest and principal is guaranteed by the
full faith and credit of the U.S. Government. Although U.S. Government
securities are guaranteed by the U.S. Government, its agencies or
instrumentalities, shares of the Series are not so guaranteed in any way.
CONVERTIBLE SECURITIES AND WARRANTS - The Emerging Markets Total Return and
Global Asset Allocation Series 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
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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).
REAL ESTATE INVESTMENT TRUSTS (REITS) - The Global Asset Allocation Series
may invest in REITs. A REIT is a trust that invests in a diversified portfolio
of real estate holdings. Investment in REITs involves certain special risks.
Equity REITs may be affected by any changes in the value of the underlying
property owned by the trusts, while mortgage REITs may be affected by the
quality of any credit extended. Further, equity and mortgage REITs are dependent
upon management skill, are not diversified, and are therefore subject to the
risk of financing single or a limited number of projects. Such trusts are also
subject to heavy cash flow dependency, defaults by borrowers, self liquidation,
and the possibility of failing to qualify for special tax treatment under
Subchapter M of the Internal Revenue Code and to maintain an exemption under the
Investment Company Act of 1940. Finally, certain REITs may be self-liquidating
in that a specific term of existence is provided for in the trust document. Such
trusts run the risk of liquidating at an economically inopportune time.
MORTGAGE BACKED SECURITIES AND COLLATERALIZED MORTGAGE OBLIGATIONS - The
Global Asset Allocation Series and Global High Yield Series may invest in
mortgage-backed securities (MBSs), including mortgage pass through securities
and collateralized mortgage obligations (CMOs). MBSs include certain securities
issued or guaranteed by the United States government or one of its agencies or
instrumentalities, such as the Government National Mortgage Association (GNMA),
Federal National Mortgage Association (FNMA), or Federal Home Loan Mortgage
Corporation (FHLMC); securities issued by private issuers that represent an
interest in or are collateralized by mortgage-backed securities issued or
guaranteed by the U.S. government or one of its agencies or instrumentalities;
and securities issued by private issuers that represent an interest in or are
collateralized by mortgage loans. A mortgage pass through security is a pro rata
interest in a pool of mortgages where the cash flow generated from the mortgage
collateral is passed through to the security holder. CMOs are obligations fully
collateralized by a portfolio of mortgages or mortgage-related securities.
The Global Asset Allocation Series may invest in securities known as
"inverse floating obligations," "residual interest bonds," and "interest only"
(IO) and "principal only" (PO) bonds, the market values of which will generally
be more volatile than the market values of most MBSs. An inverse floating
obligation is a derivative adjustable rate security with interest rates that
adjust or vary inversely to changes in market interest rates. The term "residual
interest" bond is used generally to describe those instruments in collateral
pools, such as CMOs, which receive any excess cash flow generated by the pool
once all other bondholders and expenses have been paid. IOs and POs are created
by separating the interest and principal payments generated by a pool of
mortgage-backed bonds to create two classes of securities. Generally, one class
receives interest only payments (IOs) and the other class principal only
payments (POs). MBSs have been referred to as "derivatives" because the
performance of MBSs is dependent upon and derived from underlying securities.
Investment in MBSs poses several risks, including prepayment, market and
credit risks. PREPAYMENT RISK reflects the chance that borrowers may prepay
their 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
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on the mortgages and the Global Asset Allocation Series 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 Series 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 Series 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 - The Global Asset Allocation Series may invest in
asset-backed securities which represent a participation in, or are secured by
and payable from, a stream of payments generated by particular assets, for
example, automobile, credit card or trade receivables. Asset-backed commercial
paper, one type of asset-backed security, is issued by a special purpose entity,
organized solely to issue the commercial paper and to purchase interests in the
assets. The credit quality of these securities depends primarily upon the
quality of the underlying assets and the level of credit support and/or
enhancement provided. The underlying assets (e.g., loans) are subject to
prepayments which shorten the securities' weighted average life and may lower
their return. If the credit support or enhancement is exhausted, losses or
delays in payment may result if the required payments of principal and interest
are not made. The value of these securities also may change because of changes
in the market's perception of the creditworthiness of the servicing agent for
the pool, the originator of the pool, or the financial institution providing the
credit support or enhancement. Asset-backed securities are subject to risks
similar to those discussed above with respect to MBSs.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES - Each of the Series 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 Series 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 Series 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 Series enters into a transaction on a when-issued or
forward commitment basis, a segregated
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account consisting of cash or liquid securities equal to the value of the
when-issued or forward commitment securities will be established and maintained
with its custodian and will be marked to market daily. There is a risk that the
securities may not be delivered and that the Series may incur a loss.
RESTRICTED SECURITIES (RULE 144A SECURITIES) - Each of the Series may
invest in restricted securities which are securities that are restricted as to
disposition under the federal securities laws. The Series 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 Series 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 Series may be
permitted to sell it under an effective registration statement. If, during a
period, adverse conditions were to develop, the Series might obtain a less
favorable price than prevailing when it decided to sell.
Trading restricted securities pursuant to Rule 144A may enable a Series to
dispose of restricted securities at a time considered to be advantageous and/or
at a more favorable price than would be available if such securities were not
traded pursuant to Rule 144A. However, the Rule 144A market is relatively new
and liquidity of a Series' investment in such market could be impaired if
trading does not develop or declines.
The Series' 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 MFR. In making the determination regarding the liquidity
of Rule 144A securities, MFR will consider trading markets for the specific
security taking into account the unregistered nature of a Rule 144A security. In
addition, MFR 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 Series' assets invested in illiquid
securities to the extent that qualified institutional buyers become
uninterested, for a time, in purchasing these securities.
AMERICAN DEPOSITARY RECEIPTS (ADRS) - Each of the Series may invest in
ADRs. ADRs are dollar-denominated receipts issued generally by U.S. banks and
which represent the deposit with the bank of a foreign company's securities.
ADRs are publicly traded on exchanges or over-the-counter in the United States.
Investors should consider carefully the substantial risks involved in investing
in securities issued by companies of foreign nations, which are in addition to
the usual risks inherent in domestic investments. See "Foreign Investment
Risks," below.
SOVEREIGN DEBT - Each of the Series may invest in sovereign debt securities
of emerging market governments, including Brady Bonds. Sovereign debt securities
are those issued by emerging market governments that are traded in the markets
of developed countries or groups of developed countries. Investments in such
securities involve special risks. The issuer of the debt or the governmental
authorities that control the repayment of the debt may be unable or unwilling to
repay principal or interest when due
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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
Series' 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 Series'
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 MFR
intends to manage the Series in a manner that will minimize the exposure to such
risks, there can be no assurance that adverse political changes will not cause a
Series 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 Series
expect 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
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securities is likely to be influenced strongly by a country's balance of trade
and its access to trade and other international credits. A country whose exports
are concentrated in a few commodities could be vulnerable to a decline in the
international prices of one or more of such commodities. Increased protectionism
on the part of a country's trading partners could also adversely affect its
exports. Such events could diminish a country's trade account surplus, if any.
To the extent that a country receives payment for its exports in currencies
other than hard currencies, its ability to make hard currency payments could be
affected.
Investors should also be aware that certain sovereign debt instruments in
which a Series 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 Series 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 Series anticipates
that such securities could be sold only to a limited number of dealers or
institutional investors. Certain sovereign debt securities may be illiquid.
BRADY BONDS - Each of the Series 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 have been issued by the governments of Argentina,
Brazil, Bulgaria, Costa Rica, Dominican Republic, Ecuador, Jordan, Mexico,
Nigeria, Panama, Peru, The Philippines, Poland, Uruguay and Venezuela 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. Series
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 Series 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 Emerging Markets Total Return and
Global High
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Yield Series 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 Series' 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 Series having a
contractual relationship only with the Lender, not with the borrower. The Series
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 Series 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
Series may not directly benefit from any collateral supporting the Loan in which
it has purchased the Participation. As a result, the Series will assume the
credit risk of both the borrower and the Lender that is selling the
Participation.
In the event of the insolvency of the Lender selling a Participation, the
Series 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 Series will acquire
Participations only if the Lender interpositioned between the Series and the
borrower is determined by MFR to be creditworthy. When the Series purchases
Assignments from Lenders, the Series 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 Series as the purchaser of an Assignment may differ
from, and be more limited than, those held by the assigning Lender.
The Series may have difficulty disposing of Assignments and Participations.
The liquidity of such securities is limited and the Series 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 Series' ability to dispose of particular
Assignments or Participations when necessary to meet the Series' 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 Series to
assign a value to those securities for purposes of valuing the Series' portfolio
and calculating its net asset value.
ZERO COUPON SECURITIES - Each of the Series may invest in certain zero
coupon securities that are "stripped" U.S. Treasury notes and bonds. The Series
also may invest in zero coupon and other deep discount securities issued by
foreign governments and domestic and foreign corporations, including certain
Brady Bonds and other foreign debt and payment-in-kind securities. Zero coupon
securities pay no interest to holders prior to maturity, and payment-in-kind
securities pay interest in the form of additional securities. However, a portion
of the original issue discount on zero coupon securities and the "interest" on
payment-in-kind securities will be included in the investing Series' income.
Accordingly, for the Series to qualify for tax treatment as a regulated
investment company and to avoid certain taxes (see "Dividends and Taxes" in the
Statement of Additional Information), the Series 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 Series' cash assets or, if necessary,
from the proceeds of sales of portfolio securities. The Series will not be
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able to purchase additional income-producing securities with cash used to make
such distributions and its current income ultimately may be reduced as a result.
Zero coupon and payment-in-kind securities usually trade at a deep discount from
their face or par value and will be subject to greater fluctuations of market
value in response to changing interest rates than debt obligations of comparable
maturities that make current distributions of interest in cash.
REPURCHASE AGREEMENTS, REVERSE REPURCHASE AGREEMENTS AND ROLL TRANSACTIONS
- - Each of the Series 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 Series will retain
possession of the underlying securities. If bankruptcy proceedings are commenced
with respect to the seller, realization on the collateral by the Series may be
delayed or limited and the Series may incur additional costs. In such case, the
Series will be subject to risks associated with changes in market value of the
collateral securities. The Series intends to enter into repurchase agreements
only with banks and broker/dealers believed to present minimal credit risks.
Each Series also may enter into reverse repurchase agreements with the same
parties with whom they may enter into repurchase agreements. Under a reverse
repurchase agreement, a Series 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 Series may decline below the price of the securities the Series 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 Series' obligation to repurchase the securities, and the
Series' use of the proceeds of the reverse repurchase agreement may effectively
be restricted pending such decision.
Each Series also may enter into "dollar rolls," in which the Series 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 Series would
forego principal and interest paid on such securities. The Series 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. At the time a Series enters into reverse
repurchase agreements or dollar rolls, it will establish and maintain a
segregated account with its custodian containing cash or liquid high grade debt
securities having a value not less than the repurchase price, including accrued
interest. Reverse repurchase agreements and dollar rolls will be treated as
borrowings and will be deducted from the Series' assets for purposes of
calculating compliance with the Series' borrowing limitation. See the discussion
under "Borrowing" below.
INVESTMENT METHODS
CASH RESERVES - Each of the Series may establish and maintain reserves as
MFR believes is advisable to facilitate the Series' cash flow needs (e.g.,
redemptions, expenses and, purchases of
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portfolio securities) or for temporary, defensive purposes. Such reserves may be
invested in domestic and foreign money market instruments rated within the top
two credit categories by a national rating organization, or if unrated, the MFR
equivalent. Each Series may invest in shares of other investment companies. A
Series' investment in shares of other investment companies may not exceed
immediately after purchase 10 percent of the Series' total assets and no more
than 5 percent of its total assets may be invested in the shares of any one
investment company. Investment in the shares of other investment companies has
the effect of requiring shareholders to pay the operating expenses of two mutual
funds.
BORROWING - Each of the Series may borrow money from banks as a temporary
measure for emergency purposes, to facilitate redemption requests, or for other
purposes consistent with the Series' investment objective and policies.
From time to time, it may be advantageous for a Series to borrow money
rather than sell existing portfolio positions to meet redemption requests.
Accordingly, each Series may borrow from banks or through reverse repurchase
agreements and "roll" transactions. Global High Yield Series may borrow up to 5
percent of its total assets and the Global Asset Allocation and Emerging Markets
Total Return Series each may borrow up to 33 1/3 percent of total assets. To the
extent that a Series purchases securities while it has outstanding borrowings,
it is using leverage, i.e., using borrowed funds for investment. Leveraging will
exaggerate the effect on net asset value of any increase or decrease in the
market value of a Series' 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 Series 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.
OPTIONS, FUTURES AND FORWARD CURRENCY TRANSACTIONS - To manage exposure to
changes in securities prices, interest rates and currency exchange rates and as
an efficient means of adjusting overall exposure to certain markets, each Series
may employ certain risk management practices involving the use of forward
currency contracts and options contracts, futures contracts and options on
futures contracts. Each Series also may enter into interest rate, currency and
index swaps and purchase or sell related caps, floors and collars. The Series'
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 a
Series' 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 Series 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 Series 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 Series may enter into
forward currency contracts either with respect to
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specific transactions or with respect to portfolio positions. For example, when
a Series 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 it is anticipated
that a particular currency may decline compared to the U.S. dollar or another
currency, the Series may enter into a forward contract to sell the currency
expected to decline in an amount up to the value of the portfolio securities
held by the Series denominated in a foreign currency.
In addition, each Series may purchase put and call options and write such
options on a "covered" basis on securities that are traded on recognized
securities exchanges and over-the-counter ("OTC") markets. The Series will cause
its custodian to segregate cash or liquid securities having a value sufficient
to meet the Series' obligations under the option. Each Series also may enter
into interest rate futures contracts and stock index futures contracts and may
purchase and write options to buy and sell such futures contracts, to the extent
permitted under regulations of the Commodities Futures Trading Commission
("CFTC").
An interest rate futures contract obligates the seller of the contract to
deliver, and the purchaser to take delivery of, interest rate securities called
for in a contract at a specified future time at a specified price. A stock index
assigns relative values to common stocks included in the index and the index
fluctuates with changes in the market values of the common stocks included. A
stock index futures contract is a bilateral contract pursuant to which two
parties agree to take or make delivery of an amount of cash equal to a specified
dollar amount times the difference between the stock index value at the close of
the last trading day of the contract and the price at which the futures contract
is originally struck. An option on a financial futures contract gives the
purchaser the right to assume a position in the contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the period of the option.
The Series will not employ these practices for speculation; however, these
practices may result in the loss of principal under certain conditions. In
addition, certain provisions of the Internal Revenue Code of 1986, as amended
("Code"), limit the extent to which a Series may enter into forward contracts or
futures contracts or engage in options transactions. See "Dividends and Taxes"
in the Statement of Additional Information. The Series also may purchase put or
call options or futures contracts on currencies for the same purposes as they
may use forward currency contracts.
A Series' use of forward currency contracts or options and futures
transactions thereon, involve certain investment risks and transaction costs to
which it might not otherwise be subject. These risks include: an inability 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 Series' currency risks are
different from those needed to select the securities in which a Series invests.
The Series 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 - Each Series may enter into interest rate,
index and currency swaps, and the purchase or sale of related caps, floors and
collars. The Series expect 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
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protect against any increase in the price of securities the Series anticipates
purchasing at a later date. The Series intend to use these transactions as
hedges and not as speculative investments, and a Series will not sell interest
rate caps or floors if it does not own securities or other instruments providing
the income the Series may be obligated to pay.
Interest rate swaps involve the exchange by the Series 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.
HYBRID INSTRUMENTS - The Global Asset Allocation and Emerging Markets Total
Return Series may invest in hybrid instruments which combine the elements of
futures contracts or options with those of debt, preferred equity or a
depository instrument ("Hybrid Instruments"). Often these Hybrid Instruments are
indexed to the price of a commodity or particular currency or a domestic or
foreign debt or equity securities index. Hybrid Instruments may take a variety
of forms, including, but not limited to, debt instruments with interest or
principal payments or redemption terms determined by reference to the value of a
currency or commodity at a future point in time, preferred stock with dividend
rates determined by reference to the value of a currency, or convertible
securities with the conversion terms related to a particular commodity. The
risks of investing in Hybrid Instruments reflect a combination of the risks from
investing in securities, futures and currencies, including volatility and lack
of liquidity. Reference is made to the discussion of futures and forward
contracts in the Statement of Additional Information for a discussion of these
risks. Further, the prices of the Hybrid Instrument and the related commodity or
currency may not move in the same direction or at the same time. Hybrid
Instruments may bear interest or pay preferred dividends at below market (or
even relatively nominal) rates. In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market or in a
private transaction between the Series and the seller of the Hybrid Instrument,
the creditworthiness of the contract party to the transaction would be a risk
factor which the Series would have to consider. Hybrid Instruments also may not
be subject to regulation of the CFTC, which generally regulates the trading of
commodity futures by U.S. persons, the SEC, which regulates the offer and sale
of securities by and to U.S. persons, or any other governmental regulatory
authority.
LENDING OF PORTFOLIO SECURITIES - The Global Asset Allocation Series may
lend securities to broker-dealers, institutional investors, or other persons to
earn income. The principal risk is the potential insolvency of the broker-dealer
or other borrower. In this event, the Series could experience delays in
recovering its securities and possibly capital losses. Any loan will be
continuously secured by collateral at least equal to the value of the security
loaned. Such lending could result in delays in receiving additional collateral
or in the recovery of the securities or possible loss of rights in the
collateral should the borrower fail financially.
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RISK FACTORS
GENERAL RISK FACTORS - Each Series' net asset value will fluctuate,
reflecting fluctuations in the market value of its portfolio positions and its
net currency exposure. The value of fixed income securities held by the Series
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 Series are subject to greater interest
rate risk. There is no assurance that any Series will achieve its investment
objective.
FUTURES AND OPTIONS RISK - Futures contracts and options can be highly
volatile and could result in reduction of a Series' total return, and a Series'
attempt to use such investments for hedging purposes may not be successful.
Successful futures strategies require the ability to predict future movements in
securities prices, interest rates and other economic factors. Losses from
options and futures could be significant if a Series is unable to close out its
position due to distortions in the market or lack of liquidity. A Series' risk
of loss from the use of futures extends beyond its initial investment and could
potentially be unlimited.
The use of futures, options and forward contracts involves investment risks
and transaction costs to which a Series would not be subject absent the use of
these strategies. If MFR, Lexington or SMC seeks to protect a Series against
potential adverse movements in the securities, foreign currency or interest rate
markets using these instruments, and such markets do not move in a direction
adverse to such Series, such Series could be left in a less favorable position
than if such strategies had not been used. Risks inherent in the use of futures,
options and forward contracts include: (a) the risk that interest rates,
securities prices and currency markets will not move in the directions
anticipated; (b) imperfect correlation between the price of futures, options and
forward contracts and movements in the prices of the securities or currencies
being hedged; (c) the fact that skills needed to use these strategies are
different from those needed to select portfolio securities; (d) the possible
absence of a liquid secondary market for any particular instrument at any time;
and (e) the possible need to defer closing out certain hedged positions to avoid
adverse tax consequences. A Series' ability to terminate option positions
established in the over-the-counter market may be more limited than in the case
of exchange-traded options and may also involve the risk that securities dealers
participating in such transactions would fail to meet their obligations to such
Series.
The use of options and futures involves the risk of imperfect correlation
between movements in options and futures prices and movements in the price of
securities which are the subject of a hedge. Such correlation, particularly with
respect to options on stock indices and stock index futures, is imperfect, and
such risk increases as the composition of the Series diverges from the
composition of the relevant index. The successful use of these strategies also
depends on the ability of MFR and the relevant sub-adviser to correctly forecast
interest rate movements and general stock market price movements.
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 Series' income and gains from foreign issuers
may be
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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 Series, political or social
instability, or diplomatic developments which could affect the investments of
the Series 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 each Series may invest substantially in securities
denominated in currencies other than the U.S. dollar, and since they may hold
foreign currencies, the value of such securities will be affected favorably or
unfavorably by exchange control regulations or changes in the exchange rates
between such currencies and the U.S. dollar. Changes in currency exchange rates
will influence the value of the Series' shares, and also may affect the value of
dividends and interest earned by the Series and gains and losses realized by the
Series. In addition, the Series will incur costs in connection with the
conversion or transfer of foreign currencies. 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 - Each of the Series
may invest in emerging markets. Because of the special risks associated with
investing in emerging markets, an investment in a Series making such investments
should be considered speculative. Investors are strongly advised to consider
carefully the special risks involved in emerging markets, which are in addition
to the usual risks of investing in developed foreign markets around the world.
Investing in emerging markets involves risks relating to potential political and
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, a Series 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
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liquid and more volatile than the securities markets of the United States and
other more developed countries. Disclosure and regulatory standards in many
respects are less stringent than in the United States and other major markets.
There also may be a lower level of monitoring and regulation of emerging
securities markets and the activities of investors in such markets, and
enforcement of existing regulations has been extremely limited. Investments may
also be made in former communist countries. There is a possibility that these
countries may revert to communism. In addition, brokerage commissions, custodial
services and other costs relating to investment in foreign markets generally are
more expensive than in the United States, particularly with respect to emerging
markets. Such markets have different settlement and clearance procedures. In
certain markets there have been times when settlements have been unable to keep
pace with the volume of securities transactions, making it difficult to conduct
such transactions. The inability of a Series to make intended securities
purchases due to settlement problems could cause it to forego attractive
investment opportunities. Inability to dispose of a portfolio security caused by
settlement problems could result either in losses to a Series due to subsequent
declines in value of the portfolio security or, if a Series has entered into a
contract to sell the security, could result in possible liability to the
purchaser.
The risk also exists that an emergency situation may arise in one or more
emerging markets as a result of which trading of securities may cease or may be
substantially curtailed and prices for a Series' portfolio securities in such
markets may not be readily available. Section 22(e) of the 1940 Act permits a
registered investment company to suspend redemption of its shares for any period
during which an emergency exists, as determined by the SEC. Accordingly, when
the Fund believes that appropriate circumstances warrant, it will promptly apply
to the SEC for a determination that an emergency exists within the meaning of
Section 22(e) of the 1940 Act. During the period commencing from the Fund's
identification of such conditions until the date of SEC action, the portfolio
securities of a Series 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) - Each of
the Series may invest in higher yielding debt securities in the lower rating
(higher risk) categories of the recognized rating services (commonly referred to
as "junk bonds"). Debt rated BB, B, CCC, CC and C by S&P and rated Ba, B, Caa,
Ca and C by Moody's, is regarded, on balance, as predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. For S&P, BB indicates the lowest
degree of speculation and C the highest degree of speculation. For Moody's, Ba
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions. Similarly, debt rated Ba or BB and below is
regarded by the relevant rating agency as speculative. Debt rated C by Moody's
or S&P is the lowest quality debt that is not in default as to principal or
interest and such issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing. Such securities are
also generally considered to be subject to greater risk than higher quality
securities with regard to a deterioration of general economic conditions. Each
Series 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
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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 Series. If an issuer exercises these provisions in a declining
interest rate market, the Series may have to replace the security with a lower
yielding security, resulting in a decreased return for investors. In addition,
the Series 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 Series
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 portfolios of the Series.
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 Series 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 Series will adversely impact
net asset value of the Series. 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 Series also may incur additional expenses to the extent they are
required to seek
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recovery upon a default in the payment of principal or interest on portfolio
holdings, and the Series 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.
MFR and Lexington 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 Series and consider their ability to assume the
investment risks involved before making an investment in the Series.
MANAGEMENT OF THE SERIES
The management of the Series' business and affairs is the responsibility of
the Fund's Board of Directors. MFR Advisors, Inc. ("MFR"), One Liberty Plaza,
New York, New York 10006 is responsible for selection and management of the
Series' portfolio investments. MFR currently acts as subadviser to the Lexington
Ramirez Global Income Fund and SBL Fund-Global Aggressive Bond Series and also
serves as an institutional manager for private clients. Maria Fiorini Ramirez,
Inc. ("Ramirez") owns 80 percent of the outstanding common stock of MFR. Ramirez
which was established in August of 1992 to provide global economic consulting,
and through its subsidiary companies, investment advisory and broker-dealer
services 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. Maria Fiorini Ramirez owns 100 percent of the common stock of Ramirez
and Freedom Securities Corporation owns preferred securities which would under
certain circumstances be convertible to 20 percent of Ramirez's common stock.
Security Benefit Life Insurance Company ("SBL") owns the remaining 20 percent of
the outstanding common stock of MFR and has stock rights that would enable SBL
in the future to acquire up to 100 percent of the ownership in MFR.
MFR has engaged Security Management Company, LLC ("SMC"), 700 SW Harrison
Street, Topeka, Kansas 66636, to provide certain investment advisory services to
the Global Asset Allocation Series with respect to the Series' investments in
domestic equity securities. SMC is a wholly-owned subsidiary of SBL. MFR has
also engaged Lexington Management Corporation ("Lexington"), Park 80 West, Plaza
Two, Saddle Brook, New Jersey 07663, to provide certain investment advisory
services to the Global High Yield Series, Global Asset Allocation Series and
Emerging Market Total Return Series. Lexington is a wholly-owned subsidiary of
Lexington Global Asset Managers, Inc., a Delaware corporation with offices at
Park 80 West, Plaza Two, Saddle Brook, New Jersey 07663. Descendants of Lunsford
Richardson, Sr., their spouses, trusts and other related entities have a
majority voting control of the outstanding shares of Lexington Global Asset
Managers, Inc. Lexington was established in 1938 and currently manages over $3.8
billion in assets.
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Subject to the supervision and direction of the Fund's Board of Directors,
MFR and Lexington, and with respect to the Global Asset Allocation Series, SMC,
manage the Series' portfolios in accordance with each Series' stated investment
objective and policies and make all investment decisions. MFR has agreed that
total annual expenses of the respective Series (including for any fiscal year,
the management fee, but excluding interest, taxes, brokerage commissions,
extraordinary expenses and Class B distribution fees) shall not exceed the level
of expenses which the Series are permitted to bear under the most restrictive
expense limitation imposed by any state in which shares of the Series are then
qualified for sale. MFR will contribute such funds to the Series 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 investment
management services, MFR receives on an annual basis, .75 percent of the average
daily net assets of the Global High Yield Series, and 1 percent of the average
daily net assets of each of the Global Asset Allocation Series and Emerging
Markets Total Return Series, computed on a daily basis and payable monthly. As
compensation for the services provided to the Global Asset Allocation Series,
MFR pays each of Lexington and SMC, as Sub-Advisers, on an annual basis, a fee
equal to .20 percent and .15 percent, respectively, of the average daily net
assets of the Series. With respect to the Global High Yield and Emerging Markets
Total Return Series, MFR pays Lexington, as Sub-Adviser, on an annual basis, a
fee equal to .20 percent of the average daily net assets of each such Series.
Fees paid to the Sub-Advisers are calculated daily and payable monthly.
SMC also acts as the administrative agent for the Series, 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, an
administrative fee of .045 percent of the average daily net assets of each
Series calculated daily and payable monthly. In addition, SMC receives, with
respect to Global High Yield Series, an accounting fee equal to the greater of
.10 percent of its average daily net assets or $60,000 and with respect to the
Emerging Markets Total Return and Asset Allocation Series, an accounting fee
equal to the greater of .10 percent of the average daily net assets of each
Series, calculated daily and payable monthly, or (i) $30,000 in the year ended
May 1, 1998; (ii) $45,000 in the year ended May 1, 1999; or (iii) $60,000
thereafter. For the period ended June 30, 1997, SMC limited the accounting fee
for Global High Yield Series to $45,000, and for the period ended September 30,
1997, SMC limited the accounting fees for Emerging Markets Total Return Series
and Global Asset Allocation Series to $15,000. There can be no assurance that
SMC will continue to waive these fees in the future.
SMC also acts as the transfer agent and dividend disbursing agent for the
Series. The Series' expenses include fees paid to MFR and SMC as well as
expenses of brokerage commissions, interest, taxes, distribution fees and
extraordinary expenses approved by the Board of Directors of the Fund.
For the six-month period ended June 30, 1997, the total expenses, as a
percentage of average net assets, were 1.90 percent for Class A shares and 1.96
percent for Class B shares of Global High Yield Series. For the period May 19,
1997 (date of inception) to September 30, 1997, the total expenses, as a
percentage of average net assets, were 2.00 percent for Class A shares and 2.75
percent for Class B shares of Emerging Markets Total Return Series and 2.00
percent for Class A shares and 2.75 percent of Class B shares of Global Asset
Allocation Series.
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PORTFOLIO MANAGEMENT
The Global Asset Allocation Series is managed by an investment management
team of MFR. Bruce Jensen, Chief Investment Officer, has day-to-day
responsibility for managing the Series and directs the allocation of investments
among common stocks and fixed income securities. The common stock portion of the
Series' portfolio receives sub-investment advisory services from Lexington for
international equities and SMC for domestic equities. The Global High Yield
Series is managed by an investment management team of Lexington and MFR. Denis
P. Jamison and Maria Fiorini Ramirez have day-to-day responsibility for managing
the Series and have managed the Series since its inception in 1995. The Emerging
Markets Total Return Series is managed by an investment management team of MFR.
Bruce Jensen, Chief Investment Officer, has day-to-day responsibility for
managing the Series and directs the allocation of investments among common
stocks and fixed income securities. The common stock portion of the Series
receives sub-investment advisory services from Lexington.
Denis Jamison, C.F.A., Senior Vice President, Director Fixed Income
Strategy of Lexington, 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 Lexington 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.
Bruce Jensen, Chief Investment Officer of MFR, holds a bachelor's degree in
Accounting from Boston University and an M.B.A. in Finance from Fairleigh
Dickinson University. Prior to joining the Investment Manager in 1992, he spent
six years with the Pilgrim Group in Los Angeles and was Senior Vice President in
charge of Fixed Income. Prior to Pilgrim, Mr. Jensen was a fixed income
Portfolio Manger with Lexington. Mr. Jensen has managed the Emerging Markets
Total Return and Global Asset Allocation Series since their inception, May 1997.
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 the Series may be purchased with either a
front-end or contingent deferred sales charge. Each Series reserves the right to
withdraw all or any part of the offering made by this prospectus and to reject
purchase orders.
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As a convenience to investors and to save operating expenses, the Series do
not issue certificates for Series shares except upon written request by the
stockholder.
Security Distributors, Inc. (the "Distributor"), is principal underwriter
for the Series. Shares of the Series may be purchased through authorized
investment dealers. In addition, banks and other financial institutions that
have an agreement with the Distributor may make shares of the Series 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 the Series 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 Distributor 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 Distributor prior to the close of business on the next
business day will receive the next business day's offering price.
ALTERNATIVE PURCHASE OPTIONS The Series 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 B on page 49 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 Series will not normally accept any purchase of Class
B shares in the amount of $250,000 or more.
Dealers or others receive different levels of compensation depending on
which class of shares they sell.
CLASS A SHARES
Class A shares of the Series are offered at net asset value plus an initial
sales charge as follows:
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SALES CHARGE
--------------------------------------------
PERCENTAGE
APPLICABLE OF NET PERCENTAGE
AMOUNT OF PURCHASE PERCENTAGE OF AMOUNT REALLOWABLE
AT OFFERING PRICE OFFERING PRICE INVESTED TO DEALERS
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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)
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Purchases of Class A shares in amounts of $1,000,000 or more are made at
net asset value (without a sales charge), but are subject to a contingent
deferred sales charge of one percent in the event of redemption within one year
following purchase. For a discussion of the contingent deferred sales charge,
see "Calculation and Waiver of Contingent Deferred Sales Charges" on page 37.
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.
CLASS A DISTRIBUTION PLAN
In addition to the sales charge deducted from Class A shares at the time of
purchase, each Series 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 the Series to the Distributor, to finance various activities relating to the
distribution of 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 Series.
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 each Series' Class A shares. The distribution
fee is charged to each Series in proportion to the relative net assets of their
Class A shares. The distribution fees collected may be used by the Series to
finance joint distribution activities, for example joint advertisements, and the
costs of such joint activities will be allocated among the Series on a fair and
equitable basis, including on the basis of the relative net assets of their
Class A shares.
The Class A Distribution Plan authorizes payment by the Class A shares of
the Series 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 Series' books to obtain certain administrative services for the Series'
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 Series and their
transactions with the Series. The Distributor is also authorized to engage in
advertising, the preparation and distribution of sales literature and other
promotional activities on behalf of the Series. Other promotional activities
which may be financed pursuant to the Plan include (i) informational meetings
concerning the Series for registered representatives interested in selling
shares of the Series and (ii) bonuses or incentives offered to all or specified
dealers on the basis of
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sales of a specified minimum dollar amount of Class A shares of the Series 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 Series'
Statement of Additional Information.
The Series' Class A Distribution Plan may be terminated at any time by vote
of the directors of the 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 of the Series. In the event the Class A Distribution Plan is terminated
by the Series' 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 the Series are offered at net asset value, without an
initial sales charge. With certain exceptions, the Series 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:
YEAR SINCE CONTINGENT DEFERRED
PURCHASE WAS MADE SALES CHARGE
------------------- -------------------
First 5%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth and following 0%
Class B shares (except shares purchased through the reinvestment of
dividends and other distributions paid with respect to Class B shares) will
automatically convert on the eighth anniversary of the date such shares were
purchased to Class A shares which are subject to a lower distribution fee. This
automatic conversion of Class B shares will take place without imposition of a
front-end sales charge or exchange fee. (Conversion of Class B shares
represented by stock certificates will require the return of the stock
certificates to SMC.) 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 Fund's 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
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appropriate and in the best interests of the Class B stockholders.
CLASS B DISTRIBUTION PLAN
Each of the Series 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 Series' 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 Series 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 each year after the first, quarterly, in an amount
equal to .25 percent annually of the average daily net asset value of Class B
shares sold by such dealers and other firms and remaining outstanding on the
books of the Series.
NASD Rules limit the aggregate amount that each Series may pay annually in
distribution costs for the sale of its Class B shares to 6.25 percent of gross
sales of Class B shares since the inception of the Distribution Plan, plus
interest at the prime rate plus one percent on such amount (less any contingent
deferred sales charges paid by Class B stockholders to the Distributor). The
Distributor intends, but is not obligated, to continue to apply or accrue
distribution charges incurred in connection with the Class B Distribution Plan
which exceed current annual payments permitted to be received by the Distributor
from the Series. The Distributor intends to seek full payment of such charges
from the Series (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 Series would be within permitted limits.
Each Series' 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 Fund's 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 Series 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
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made within one year after the disability, provided such disability occurred
after the stockholder opened the account; (3) in connection with required
minimum distributions in the case of an IRA, SAR-SEP or Keogh or any other
retirement plan qualified under section 401(a), 401(k) or 403(b) of the Code;
and (4) in the case of distributions from retirement plans qualified under
section 401(a) or 401(k) of the Internal Revenue Code due to (i) returns of
excess contributions to the plan, (ii) retirement of a participant in the plan,
(iii) a loan from the plan (repayment of loans, however, will constitute new
sales for purposes of assessing the contingent deferred sales charge), (iv)
"financial hardship" of a participant in the plan, as that term is defined in
Treasury Regulation section 1.401(k)1(d)(2), as amended from time to time, (v)
termination of employment of a participant in the plan, (vi) any other
permissible withdrawal under the terms of the plan. The contingent deferred
sales charge will also be waived in the case of redemptions of Class B shares of
the Series pursuant to a systematic withdrawal program. See "Systematic
Withdrawal Program," page 44 for details.
ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS
The Distributor, from time to time, will provide promotional incentives or
pay a bonus to certain dealers whose representatives have sold or are expected
to sell significant amounts of the Series. Such promotional incentives will
include payment for attendance (including travel and lodging expenses) by
qualifying registered representatives (and members of their families) at sales
seminars at luxury resorts within or outside the United States. Bonus
compensation may include reallowance of the entire sales charge and may also
include, with respect to Class A shares, an amount which exceeds the entire
sales charge and, with respect to Class B shares, an amount which exceeds the
maximum commission. The Distributor, or MFR may also provide financial
assistance to certain dealers in connection with conferences, sales or training
programs for their employees, seminars for the public, advertising, sales
campaigns, and/or shareholder services and programs regarding one or more of the
Series. Certain of the promotional incentives or bonuses may be financed by
payments to the Distributor under a Rule 12b-1 Distribution Plan. The payment of
promotional incentives and/or bonuses will not change the price an investor will
pay for shares or the amount that the Series will receive from such sale. No
compensation will be offered to the extent it is prohibited by the laws of any
state or self-regulatory agency, such as the National Association of Securities
Dealers, Inc. ("NASD"). A Dealer to whom substantially the entire sales charge
on Class A shares is reallowed may be deemed to be an "underwriter" under
federal securities laws.
The Distributor also may pay banks and other financial services firms that
facilitate transactions in shares of the Series for their clients a transaction
fee up to the level of the payments made allowable to dealers for the sale of
such shares as described above. Banks currently are prohibited under the
Glass-Steagall Act from providing certain underwriting or distribution services.
If banking firms were prohibited from acting in any capacity or providing any of
the described services, the Fund's Board of Directors would consider what
action, if any, would be appropriate.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
PURCHASES AT NET ASSET VALUE
Class A shares of the Series may be purchased at net asset value by (1)
directors, officers and employees of the Fund, MFR (and its affiliates) or
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the 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 Series.
Class A shares of the Series also may be purchased at net asset value when
the purchase is made on the recommendation of (i) a registered investment
adviser, trustee or financial intermediary who has authority to make investment
decisions on behalf of the investor; or (ii) a certified financial planner or
registered broker-dealer who either charges periodic fees to its customers for
financial planning, investment advisory or asset management services, or
provides such services in connection with the establishment of an investment
account for which a comprehensive "wrap fee" is imposed. The Distributor must be
notified when a purchase is made that qualifies under this provision.
TRADING PRACTICES AND BROKERAGE
The portfolio turnover rate for the Global High Yield Series for the fiscal
year ended December 31, 1996, was 96 percent and for the period June 1, 1995
(date of inception) to December 31, 1995, was 127 percent on an annualized
basis. The annualized portfolio turnover rate for the Emerging Markets Total
Return Series and Global Asset Allocation Series for the period May 19, 1997
(date of inception) to September 30, 1997 was 26 percent and 20 percent,
respectively. The portfolio turnover rate of each Series may exceed 100 percent,
but is not expected to do so. Higher portfolio turnover subjects a Series to
increased brokerage costs and may, in some cases, have adverse tax effects on a
Series or its stockholders.
Transactions in portfolio securities are effected in the manner deemed to
be in the best interests of each Series. 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 MFR or Lexington or who sell shares of the
Series. MFR may, consistent with the NASD Rules of Fair Practice, consider sales
of shares of the Series in the selection of a broker.
Securities held by the Series also may be held by other investment advisory
clients of MFR, including other investment companies. Purchases or sales of the
same security occurring on the same day may be aggregated and executed as a
single transaction, subject to MFR's obligation to seek best execution.
Aggregated purchases or sales are generally effected at an average price and on
a pro rata basis (transaction costs will also be shared on a pro rata basis) in
proportion to the amounts desired to be purchased or sold. See the Series'
Statement of Additional Information for a more detailed description of
aggregated transactions.
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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 Series' Transfer Agent, Security Management Company, LLC ("SMC"). A request
is made in proper order by submitting the following items to SMC: (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
SMC 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. SMC
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 SMC by calling
1-800-643-8188.
The redemption price will be the net asset value of the shares next
computed after the redemption request in proper order is received by SMC.
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 SMC, within
seven days after receipt of the redemption request in proper order. If a wire
transfer is requested, SMC 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.
In addition to the foregoing redemption procedures, the Series 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 also may 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 SMC. The proceeds of a telephone redemption will be sent to the
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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 SMC, a stockholder may redeem shares by calling the Series
at 1-800-643-8188, on weekdays (except holidays) between the hours of 7:00 a.m.
and 6:00 p.m. Central time. Telephone redemptions are not accepted for IRA and
403(b)(7) accounts. 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 SMC to act upon the instructions of any person
identifying themselves as the owner of an account or the owner's broker. SMC 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. SMC'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, SMC, nor the
Distributor shall be liable for any loss, liability, cost or expense arising out
of any redemption request, provided SMC 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 SMC or the Fund.
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 40.
DIVIDENDS AND TAXES
It is the policy of the Global High Yield Series to pay dividends from net
investment income quarterly and to distribute realized capital gains (if any) in
excess of any capital losses and capital loss carryovers, at least once a year.
The other Series expect to distribute, at least once a year, substantially all
of the Series' net investment income and net realized capital gains. Because
Class A shares of the Series bear most of the costs of distribution of such
shares through payment of a front-end sales charge, while Class B shares of the
Series 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 Series 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 Series at net asset value as of the record date (reduced by an
amount equal to the amount of the dividend or distribution) unless SMC is
previously notified in writing by the stockholder that such dividends or
distributions are to be received in cash. A stockholder also may 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 Series 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.
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Certain requirements relating to the qualification of a Series as a
regulated investment company may limit the extent to which a Series 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 Series were unable to dispose of portfolio
securities due to settlement problems relating to foreign investments or due to
the holding of illiquid securities, the Series' ability to qualify as a
regulated investment company might be affected.
The Series will not pay dividends or distributions of less than $25 in cash
but will automatically reinvest them.
Each of the Series 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 Series, and makes federal income tax
upon income and capital gains generated by a Series' investments, the sole
responsibility of its stockholders provided the Series continues to so qualify
and distributes all of its net investment income and net realized capital gain
to its stockholders. Furthermore, the Series generally will not be subject to
excise taxes imposed on certain regulated investment companies provided that
each Series distributes 98 percent of its ordinary income and 98 percent of its
net capital gain income each year.
Distributions of net investment income and realized net short-term capital
gain by the Series are taxable to stockholders as ordinary income whether
received in cash or reinvested in additional shares. Distributions (designated
by the Series 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 Series' shares and regardless of whether received in cash or reinvested
in additional shares.
At December 31, 1996, Global High Yield Series had accumulated net realized
losses on sales of investments in the amount of $99,652.
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
Series.
The Series 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 10 to 15 percent) or to exemptions from tax. If
applicable, the Series will operate so as to qualify for such reduced tax rates
or tax exemptions whenever possible. While stockholders of the Series 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 Series.
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DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Series 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 Series plus any
cash or other assets, less all liabilities, by the number of shares outstanding
of the Series.
Securities which are listed or traded on a national securities exchange are
valued at the last sale price. If there are no sales on a particular day, then
the securities are valued at the last bid price. All other securities for which
market quotations are readily available are valued on the basis of the last
current bid price. If there is no bid price or if the bid price is deemed to be
unsatisfactory by the Board of Directors or by SMC, then the securities are
valued in good faith by such method as the Board of Directors determines will
reflect the fair market value.
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.
Because the expenses of distribution are borne by Class A shares of the
Series through a front-end sales charge and by Class B shares of such Series
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 Series 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," "average annual total
return" and "aggregate total return."
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.
Average annual total return will be expressed in terms of the average
annual compounded rate of return of a hypothetical investment in the Series over
periods of one, five and ten years (up to the life of the Series). Such average
annual total return figures will reflect the deduction of the maximum sales
charge and a proportional share of Series 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 the Series on the date of the commencement
of the period and assuming that all dividends and distributions are reinvested
when paid. The net increase or decrease in the value of the investment over the
period will be divided by its beginning value to arrive at aggregate total
return.
Quotations of performance reflect only the performance of a hypothetical
investment in a Series during the particular time period on which the
calculations are based. Such quotations for the Series will vary based on
changes in market conditions and the level of the Series' expenses, and no
reported performance figure should be
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considered an indication of performance which may be expected in the future.
In connection with communicating performance to current or prospective
stockholders, the Series 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. The Series will
include performance data for both Class A and Class B shares of the Series in
any advertisement or report including performance data of the Series.
For a more detailed description of the methods used to calculate
performance, see the Series' Statement of Additional Information.
STOCKHOLDER SERVICES
ACCUMULATION PLAN
An investor in the Series 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 Series 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 Series 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 (800) 643-8188.
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 be
allowed only if shares with a current offering price of $5,000 or more are
deposited with SMC, which will act as agent for the stockholder under the
program. Payments are available on a monthly, quarterly, semiannual or annual
basis. Shares are liquidated at net asset value. The stockholder will receive a
confirmation following each transaction. The program may be terminated on
written notice, or it will terminate automatically if all shares are liquidated
or withdrawn from the account.
A stockholder may establish a Systematic Withdrawal Program with respect to
Class B shares without the imposition of any applicable contingent deferred
sales charge, provided that such withdrawals do not in any 12-month period,
beginning on the date the Program is established, exceed 10 percent of the value
of the account on that date ("Free Systematic Withdrawals"). Free Systematic
Withdrawals are not available if a Program established with respect to Class B
shares provides for withdrawals in excess of 10 percent of the value of the
account in any Program year and, as a result, all withdrawals under such a
Program would be subject to any applicable contingent deferred sales charge.
Free Systematic Withdrawals will be made first by redeeming those shares that
are not subject to the contingent deferred sales charge and then by redeeming
shares held the longest. The contingent deferred sales charge applicable to a
redemption of Class B shares requested while Free Systematic Withdrawals are
being made will be calculated as described under "Calculation and Waiver of
Contingent Deferred Sales Charges," page 37. A Systematic Withdrawal form may be
obtained from the Series.
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44
<PAGE>
PROSPECTUS
================================================================================
EXCHANGE PRIVILEGE
Stockholders who own shares of the Series may exchange those shares for
shares of another of the Series or for shares of other mutual funds distributed
by the Distributor (the "Security Funds"). Exchanges may be made only in those
states where shares of the Series or the Security 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 Series may be exchanged for Class
A and Class B shares, respectively, of another Series or Security Fund. Any
applicable contingent deferred sales charge will be calculated from the date of
the initial purchase. Exchanges of Class A shares are made at net asset value
without a front-end sales charge.
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 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 Fund upon 60 days' notice to
stockholders. A current prospectus of the Series 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 SMC. Once authorization has been received by SMC, a stockholder
may exchange shares by telephone by calling the Funds at 1-800-643-8188, on
weekdays (except holidays) between the hours of 7:00 a.m. and 6:00 p.m. Central
time. Exchange requests received by telephone after the close of the New York
Stock Exchange (normally 3 p.m. Central time) will be treated as if received on
the next business day.
A stockholder who authorizes telephone exchanges authorizes SMC to act upon
the instructions of any person by telephone to exchange shares between any
identically registered accounts with the Series. SMC 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. SMC'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, SMC nor the Distributor will be liable for
any loss, liability, cost or expense arising out of any request, including any
fraudulent request, provided SMC complied with its procedures. Thus, a
stockholder who authorizes telephone exchanges may bear the risk of loss from a
fraudulent or unauthorized request.
In periods of severe market or economic conditions, the telephone exchange
of shares may be difficult to implement and stockholders should make exchanges
by writing to Security Distributors, Inc., 700 Harrison Street, Topeka, Kansas
66636-0001. The telephone exchange privilege may be changed or discontinued at
any time at the discretion of the management of the Fund.
RETIREMENT PLANS
The Series 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
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45
<PAGE>
PROSPECTUS
================================================================================
501(c)(3) of the Internal Revenue Code. Further information concerning these
plans is contained in the Series' Statement of Additional Information.
GENERAL INFORMATION
ORGANIZATION
The Articles of Incorporation of the Fund provide for the issuance of an
indefinite number of shares of capital stock in one or more classes or series.
The Fund has authorized capital stock of $1.00 par value. Its shares are
currently issued in seven series: Emerging Markets Total Return, Global Asset
Allocation, Global High Yield, Corporate Bond, Limited Maturity Bond, U.S.
Government, and High Yield Series. 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.
Each of the Series 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 Series' shares will be fully paid and
nonassessable by the Series. 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 the 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 Fund does not generally hold annual meetings of stockholders and will
do so only when required by law. Stockholders may remove directors from office
by votes cast in person or by proxy at a meeting of stockholders. Such a meeting
will be called at the written request of the holders of 10 percent of the Fund's
outstanding shares.
STOCKHOLDER INQUIRIES
Stockholders who have questions concerning their account or wish to obtain
additional information may write to the Series at 700 SW Harrison Street,
Topeka, Kansas 66636-0001, or call 1-800-643-8188.
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46
<PAGE>
PROSPECTUS APPENDIX A
================================================================================
APPENDIX A
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 a debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA - Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A - Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects
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47
<PAGE>
PROSPECTUS APPENDIX A
================================================================================
of changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of obligations. BB indicates
the lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C - The rating C is reserved for income bonds in which no interest is being
paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
NOTE: Standard & Poor's ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
categories.
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49
<PAGE>
PROSPECTUS
================================================================================
APPENDIX B
REDUCED SALES CHARGES
CLASS A SHARES
Initial sales charges may be reduced or eliminated for persons or
organizations purchasing Class A shares of the Series.
For purposes of qualifying for reduced sales charges on purchases made
pursuant to Rights of Accumulation or a Statement of Intention (also referred to
as a "Letter of Intent"), the term "Purchaser" includes the following persons:
an individual; an individual, his or her spouse and children under the age of
21; a trustee or other fiduciary of a single trust estate or single fiduciary
account established for their benefit; an organization exempt from federal
income tax under Section 501(c)(3) or (13) of the Internal Revenue Code; or a
pension, profit-sharing or other employee benefit plan whether or not qualified
under Section 401 of the Internal Revenue Code.
RIGHTS OF ACCUMULATION
To reduce sales charges on purchases of Class A shares of the Series a
Purchaser may combine all previous purchases of the Series 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 the Class A
shares of a Series and one or more of the other Series in those states where
shares of the Series being purchased are qualified for sale.
STATEMENT OF INTENTION
A Purchaser of the Series 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 the Series. 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 Series if the Purchaser is
required to pay additional sales charges. Any dividends paid by the Series will
be payable with respect to escrow shares. The Purchaser bears the risk that the
escrow shares may decrease in value.
A Statement of Intention may be revised during the 13-month (or, if
applicable, 36-month) period. Additional shares received from reinvestment of
income dividends and capital gains distributions are included in the total
amount used to determine reduced sales charges.
REINSTATEMENT PRIVILEGE
Stockholders who redeem their Class A shares of the Series 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 Series, without a sales charge up to the
dollar amount of the redemption proceeds. To exercise this privilege, a
stockholder must provide written notice and the amount to be reinvested to the
Series within 30 days after the redemption request.
The reinstatement or exchange will be made at the net asset value next
determined after the reinvestment is received by the Series.
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MFR EMERGING MARKETS TOTAL RETURN SERIES
MFR GLOBAL ASSET ALLOCATION SERIES
MFR GLOBAL HIGH YIELD SERIES
(formerly Global Aggressive Bond Series)
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 7, 1997
RELATING TO THE PROSPECTUS DATED NOVEMBER 7, 1997,
AS IT MAY BE SUPPLEMENTED FROM TIME TO TIME
(800) 643-8188
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INVESTMENT ADVISER
MFR Advisors, Inc.
One Liberty Plaza, 46th Floor
New York, New York 10006
DISTRIBUTOR
Security Distributors, Inc.
700 SW Harrison Street
Topeka, Kansas 66636-0001
SUB-ADVISERS
Lexington Management Corporation
Park 80 West, Plaza Two
Saddle Brook, New Jersey 07663
Security Management Company, LLC
700 SW Harrison Street
Topeka, Kansas 66636-0001
CUSTODIAN
Chase Manhattan Bank
4 Chase MetroTech Center
Brooklyn, New York 11245
INDEPENDENT AUDITORS
Ernst & Young LLP
One Kansas City Place
1200 Main Street
Kansas City, Missouri 64105-2143
SDI 734A (5-97) 46-07340-01
<PAGE>
MFR EMERGING MARKETS TOTAL RETURN SERIES
MFR GLOBAL ASSET ALLOCATION SERIES
MFR GLOBAL HIGH YIELD SERIES
700 SW Harrison, Topeka, Kansas 66636-0001
STATEMENT OF
ADDITIONAL INFORMATION
November 7, 1997
(RELATING TO THE PROSPECTUS DATED NOVEMBER 7, 1997,
AS IT MAY BE SUPPLEMENTED FROM TIME TO TIME)
This Statement of Additional Information is not a Prospectus. It should be
read in conjunction with the Prospectus dated November 7, 1997, as it may be
supplemented from time to time. A Prospectus may be obtained by writing Security
Distributors, Inc., 700 SW Harrison, Topeka, Kansas 66636-0001, or by calling
(800) 643-8188.
TABLE OF CONTENTS
Page
General Information........................................................ 1
Investment Objectives and Policies of the Series........................... 2
MFR Emerging Markets Total Return Series................................ 2
MFR Global Asset Allocation Series...................................... 4
MFR Global High Yield Series............................................ 6
Investment Methods and Risk Factors........................................ 8
Investment Policy Limitations.............................................. 23
Officers and Directors..................................................... 25
Remuneration of Directors and Others....................................... 26
How to Purchase Shares..................................................... 27
Alternative Purchase Options............................................ 27
Class A Shares.......................................................... 28
Class A Distribution Plan............................................... 28
Class B Shares.......................................................... 29
Class B Distribution Plan............................................... 29
Calculation and Waiver of Contingent Deferred Sales Charges............. 30
Arrangements With Broker/Dealers and Others................................ 31
Purchases at Net Asset Value............................................... 31
Accumulation Plan.......................................................... 31
Systematic Withdrawal Program.............................................. 32
Investment Management...................................................... 32
Portfolio Management.................................................... 34
Code of Ethics.......................................................... 35
Distributor................................................................ 35
Allocation of Portfolio Brokerage.......................................... 36
Determination of Net Asset Value........................................... 37
How to Redeem Shares....................................................... 37
Telephone Redemptions................................................... 38
How to Exchange Shares..................................................... 39
Exchange by Telephone................................................... 39
Dividends and Taxes........................................................ 40
Organization............................................................... 43
Custodian, Transfer Agent and Dividend-Paying Agent........................ 43
Independent Auditors....................................................... 44
Performance Information.................................................... 44
Retirement Plans........................................................... 45
Individual Retirement Accounts (IRAs)...................................... 46
SIMPLE IRAs................................................................ 46
Pension and Profit-Sharing Plans........................................... 46
403(b) Retirement Plans.................................................... 46
Simplified Employee Pension Plans (SEPPs).................................. 47
Financial Statements....................................................... 47
Appendix A................................................................. 48
<PAGE>
GENERAL INFORMATION
MFR Emerging Markets Total Return Series, MFR Global Asset Allocation
Series, and MFR Global High Yield Series (the "Series") are series of Security
Income Fund (the "Fund"), a diversified open-end management investment company
(commonly known as a mutual fund). The Fund was organized as a Kansas
corporation on April 20, 1965. The Fund is registered with the Securities and
Exchange Commission ("SEC"), which registration does not involve supervision by
the SEC of the management or policies of the Series. The name of the Global High
Yield Series was Global Aggressive Bond Series prior to May 1, 1997. The
investment objective and policies of the Series under its former name were
identical to those of the Series presently. The Series, 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 37.)
Each Series 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 any Series, unless otherwise noted, may be changed by
the Fund's Board of Directors without the approval of stockholders. Each of the
Series 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 23.
An investment in one of the Series does not constitute a complete investment
program.
The value of the shares of each Series fluctuates with the value of the
portfolio securities. Each Series 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
40.)
The shares of the Series 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"). (See "How to Purchase Shares," page
27.)
The Series receive investment advisory services from MFR Advisors, Inc.
("MFR") and administrative, accounting, and transfer agency services from
Security Management Company, LLC ("SMC") for a fee. MFR has guaranteed that the
aggregate annual expenses of the Series (including management compensation but
excluding brokerage commissions, interest, taxes, extraordinary expenses and
Class B distribution fees) shall not exceed any expense limitation imposed by
any state. MFR has engaged Lexington Management Corporation ("Lexington") to
provide certain sub-advisory services to each Series and SMC to provide
sub-advisory services to the Global Asset Allocation Series with respect to its
investments in domestic equity securities. (See page 32 for a discussion of MFR
and the Investment Advisory Contract.)
Each Series will pay all of its expenses not assumed by MFR 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 Series also will 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 Series 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 the
Series pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the
"1940 Act"), the Series are authorized to pay to the Distributor, an annual fee
equal to .25% of the average daily net assets of the Class A shares of the
Series to finance various distribution-related activities. (See "Class A
Distribution Plan," page 28.)
Under a Distribution Plan adopted with respect to the Class B shares of the
Series pursuant to Rule 12b-1 under the 1940 Act, each Series 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 Series to finance various
distribution-related activities. (See "Class B Distribution Plan," page 29.)
The portfolio turnover rate for the Global High Yield Series for the fiscal
year ended December 31, 1996, was 96% and for the period June 1, 1995 (date of
inception) to December 31, 1995, was 127% on an annualized basis. The annualized
portfolio turnover rate for the Emerging Markets Total Return Series and Global
Asset Allocation Series for the period May 19, 1997 (date of inception) to
September 30, 1997 was 26 percent and 20 percent, respectively. Portfolio
turnover is the percentage of the lower of security sales or purchases to the
average portfolio value and would be 100% if all securities in the Series were
replaced within a period of one year.
1
<PAGE>
Portfolio turnover information is not yet available for the Emerging Markets
Total Return and Global Asset Allocation Series as they did not begin operations
until May 1997.
INVESTMENT OBJECTIVES AND POLICIES OF THE SERIES
Each Series represents a different investment objective and 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 objective will be achieved.
Some of the risks are described below.
The 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 may be altered by the Board of Directors
of the Fund without the approval of stockholders of the Series.
MFR EMERGING MARKETS TOTAL RETURN SERIES
The investment objective of MFR Emerging Markets Total Return Series is to
seek to maximize total return. The Series under normal circumstances invests
substantially all of its assets in a portfolio of emerging country and emerging
market equity and debt securities. Equity securities will consist of all types
of common stocks and equivalents (the following constitute equivalents:
convertible debt securities and warrants). The Series also may invest in
preferred stocks, bonds, money market instruments of foreign and domestic
companies, U.S. government, and governmental agencies and debt securities of
sovereign emerging market issuers. The Series 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 Series also may invest in zero coupon securities
and securities that are in default as to payment of principal and/or interest. A
description of certain debt ratings is included as Appendix A to the Prospectus.
See "Investment Methods and Risk Factors" for a discussion of the risks
associated with investing in junk bonds and zero coupon securities. Many
emerging market debt securities are not rated by United States rating agencies
such as Moody's and Standard & Poor's. The Series' ability to achieve its
investment objective is thus more dependent on the credit analysis of MFR
Advisors, Inc. ("MFR") than would be the case if the Series were to invest in
higher quality bonds. The Series may invest in fixed income securities without
limitation as to maturity. INVESTORS SHOULD PURCHASE SHARES ONLY AS A SUPPLEMENT
TO AN OVERALL INVESTMENT PROGRAM AND ONLY IF WILLING TO UNDERTAKE THE RISKS
INVOLVED.
"Emerging markets" will consist of all countries determined by the World
Bank or the United Nations to have developing or emerging economies and markets.
These countries are generally expected to include every country in the world
except the United States, Canada, Japan, Australia, New Zealand and most
countries in Western Europe.
Currently, investing in many of the emerging countries and emerging markets
is not feasible. Accordingly, MFR 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 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 Series' investments in emerging country securities are not subject to
any maximum limit, and it is the intention of MFR to invest substantially all of
the Series' assets in emerging country and emerging market securities. However,
to the extent that the Series' assets are not invested in emerging country and
emerging market securities, the remaining 35% of the assets may be invested in
(i) other equity and debt securities without regard to whether they qualify as
emerging country or emerging market securities, and (ii) cash reserves of the
type described under "Investment Methods and Risk Factors" in the Prospectus. In
addition, for temporary defensive purposes, the Series may invest less than 65%
of its assets in emerging country and emerging market securities, in which case
the Series may invest in other equity or debt securities or may invest in cash
reserves without limitation.
2
<PAGE>
The Series' investments in emerging market debt securities consist
substantially of high yield, lower-rated debt securities of foreign
corporations, and "Brady Bonds" and other sovereign debt securities issued by
emerging market governments. "Sovereign debt securities" are those issued by
emerging market governments that are traded in the markets of developed
countries or groups of developed countries. MFR may invest in debt securities of
emerging market issuers that it determines to be suitable investments for the
Series without regard to ratings. Currently, the substantial majority of
emerging market debt securities are considered to have a credit quality below
investment grade. The Series may invest up to 100% of its total assets in debt
securities with credit quality below investment grade (known as "junk bonds").
Such securities are predominantly speculative and involve a high degree of risk
as discussed under "Investment Methods and Risk Factors." The Series may invest
in bank loan participations and assignments, which are fixed and floating rate
loans arranged through private negotiations between foreign or domestic
entities.
The Series invests in securities allocated among diverse markets and
denominated in various currencies, including U.S. dollars, or in multinational
currency units such as European Currency Units. The Series 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 Series 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 the discussion of such risks, including
currency risk, under "Investment Methods and Risk Factors."
MFR selectively will allocate the assets of the Series in securities of
issuers in countries and in currency denominations where the combination of
market returns, the price appreciation potential of securities and currency
exchange rate movements will present opportunities for maximum total return. In
so doing, MFR intends to take advantage of the different yield, risk and return
characteristics that investment in the security markets of different countries
can provide for U.S. investors. Fundamental economic strength, credit quality,
earnings growth potential and currency and market trends will be the principal
determinants of the emphasis given to various country, geographic and industry
sectors within the Series.
MFR evaluates 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. However, the Series may seek to
protect itself against such negative currency movements through the use of
sophisticated investment techniques. See the discussion of forward currency
transactions, options and futures under "Investment Methods and Risk Factors."
Futures may be used to gain exposure to markets where there is insufficient
cash to purchase a diversified portfolio of securities. Currencies may be held
to gain exposure to an international market prior to investing in a non-dollar
security.
The Series may enter into futures contracts (a type of derivative) (or
options thereon) to hedge all or a portion of its portfolio, as a hedge against
changes in prevailing levels of interest rates or currency exchange rates, or as
an efficient means of adjusting its exposure to the bond, stock, and currency
markets. The Series will not use futures contracts for leveraging purposes. The
Series will limit its use of futures contracts so that initial margin deposits
or premiums on such contracts used for non-hedging purposes will not equal more
than 5 percent of the Series' net asset value. The Series may also write call
and put options on a covered basis and purchase put and call options on
securities, financial indices, and currencies. The aggregate market value of the
Series' portfolio securities or currencies covering call or put options will not
exceed 25 percent of the Series' net assets. The Series may enter into foreign
futures and options transactions. See the discussion of options and futures
contracts under "Investment Methods and Risk Factors." As part of its investment
program and to maintain greater flexibility, the Series may invest in
instruments which have the characteristics of futures, options and securities,
known as "hybrid instruments." For a discussion of such instruments and the
risks involved in investing therein, see "Investment Methods and Risk Factors"
in the Prospectus.
The Series 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 Series may enter into repurchase agreements, reverse repurchase
agreements and "dollar rolls" which are
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discussed under "Investment Methods and Risk Factors." The Series may also
invest in restricted securities as discussed under "Investment Methods and Risk
Factors."
MFR GLOBAL ASSET ALLOCATION SERIES
The investment objective of MFR Global Asset Allocation Series is to seek a
high level of total return by investing primarily in a diversified portfolio of
fixed income and equity securities. The Series is designed to balance the
potential appreciation of common stocks with the income and relative stability
of principal of bonds over the long term. The primary consideration in varying
the asset allocation mix will be the fundamental economic outlook of the Series'
Adviser, MFR, for the different markets in which the Series invests. Shifts
between the fixed income and equity sectors will normally be done gradually and
MFR will not attempt to precisely "time" the market. There is, of course, no
guarantee that MFR's gradual approach to allocating the Series' assets will be
successful in achieving the Series' objective. The Series will maintain cash
reserves to facilitate the Series' cash flow needs (redemptions, expenses and
purchases of Series securities) and it may invest in cash reserves without
limitation for temporary defensive purposes. See the discussion of cash reserves
under "Investment Methods and Risk Factors" in the Prospectus.
Assets allocated to the fixed income portion of the Series will be invested
primarily in U.S. and foreign investment grade bonds, high yield bonds (U.S. and
foreign, including "Brady Bonds"), short-term investments and currencies, as
needed to gain exposure to foreign markets. Investment grade debt securities
include long, intermediate and short-term investment grade debt securities
(e.g., AAA, AA, A or BBB by S&P or if not rated, of equivalent investment
quality as determined by MFR). The weighted average maturity for this portion
(investment grade debt securities) of the Series' portfolio is generally
expected to be intermediate (3-10 years), although it may vary significantly.
Non-dollar debt securities include non-dollar denominated government and
corporate debt securities or currencies. See "Investment Methods and Risk
Factors" for a discussion of the risks involved in foreign investing. High-yield
securities include high-yielding, income-producing debt securities in the lower
rating categories (commonly referred to as "junk bonds") and preferred stocks
including convertible securities. High yield bonds may be purchased without
regard to maturity; however, the average maturity is expected to be
approximately 10 years, although it may vary if market conditions warrant.
Quality will generally range from lower medium to low and the Series may also
purchase bonds in default if, in the opinion of MFR, there is significant
potential for capital appreciation. Lower-rated debt obligations are generally
considered to be high risk investments. See "Investment Methods and Risk
Factors" for a discussion of the risks involved in investing in high-yield,
lower-rated debt securities. The Series may invest in zero coupon securities
that pay no interest prior to maturity and payment in kind securities that pay
interest in the form of additional securities. See the discussion of such
securities under "Investment Methods and Risk Factors" in the Prospectus.
Securities which may be held as cash reserves include liquid short-term
investments of one year or less rated within the top two categories by at least
one established rating organization, or if not rated, of equivalent investment
quality as determined by MFR. The Series may use currencies to gain exposure to
an international market prior to investing in non-dollar securities.
The Series' equity sector will be allocated among large and small capital
("Large Cap" and "Small Cap" respectively) U.S. and non-dollar equity
securities, currencies, real estate investment trusts ("REITs"), and futures.
See the discussion of REITs under "Investment Methods and Risk Factors" in the
Prospectus. Large Cap securities generally include stocks of well established
companies with capitalization over $1 billion which can produce increasing
dividend income. Non-dollar securities include foreign currencies and common
stocks of established non-U.S. companies. Investments may be made solely for
capital appreciation or solely for income or any combination of both for the
purpose of achieving a higher overall return. MFR intends to diversify the
non-dollar portion of the Series' portfolio broadly among countries and normally
to have at least three different countries represented. The countries of the Far
East and Western Europe as well as South Africa, Australia, Canada, and other
areas (including developing countries) may be included. Under unusual
circumstances, however, investment may be substantially in one or two countries.
Futures may be used to gain exposure to equity markets where there is
insufficient cash to purchase a diversified portfolio of stocks. Currencies also
may be held to gain exposure to an international market prior to investing in a
non-dollar stock.
Small Cap securities include common stocks of small companies or companies
which offer the possibility of accelerated earnings growth because of
rejuvenated management, new products or structural changes in the
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economy. Current income is not a factor in the selection of these stocks. Higher
risks are often associated with small companies. These companies may have
limited product lines, markets and financial resources, or they may be dependent
on a small or inexperienced management group. In addition, their securities may
trade less frequently and in limited volume and move more abruptly than
securities of larger companies. However, securities of smaller companies may
offer greater potential for capital appreciation since they are often overlooked
or undervalued by investors.
Until the Series reaches approximately $20 million in assets, the Series
may be unable to prudently achieve diversification among the described asset
classes. During this initial period, the Series may use futures contracts and
purchase foreign currencies to a greater extent than it will once the start-up
period is over. See "Investment Methods and Risk Factors."
Some of the countries in which the Series may invest may be considered to
be developing and may involve special risks. For a discussion of the risks
involved in investment in foreign securities, including investment in emerging
markets, see "Investment Methods and Risk Factors." The Series' foreign
investments are also subject to currency risk described under "Investment
Methods and Risk Factors". To manage this risk and facilitate the purchase and
sale of foreign securities, the Series may engage in foreign currency
transactions involving the purchase and sale of forward foreign currency
exchange contracts. Although forward currency transactions will be used
primarily to protect the Series from adverse currency movements, they also
involve the risk that anticipated currency movements will not be accurately
predicted and the Series' total return could be adversely affected as a result.
For a discussion of forward currency transactions and the risks associated with
such transactions, see "Investment Methods and Risk Factors." Purchases by the
Series of currencies in substitution of purchases of stocks and bonds will
subject the Series to risks different from a fund invested solely in stocks and
bonds.
The Series' investments include, but are not limited to, equity and fixed
income securities of any type and the Series may utilize the investment methods
and investment vehicles described below.
The Series may enter into futures contracts (a type of derivative) (or
options thereon) to hedge all or a portion of its portfolio, as a hedge against
changes in prevailing levels of interest rates or currency exchange rates, or as
an efficient means of adjusting its exposure to the bond, stock, and currency
markets. The Series will not use futures contracts for leveraging purposes. The
Series will limit its use of futures contracts so that initial margin deposits
or premiums on such contracts used for non-hedging purposes will not equal more
than 5% of the Series' net asset value. The Series may also write call and put
options on a covered basis and purchase put and call options on securities,
financial indices, and currencies. The aggregate market value of the Series'
portfolio securities or currencies covering call or put options will not exceed
25% of the Series' net assets. The Series may enter into foreign futures and
options transactions. See the discussion of options and futures contracts under
"Investment Methods and Risk Factors." As part of its investment program and to
maintain greater flexibility, the Series may invest in instruments which have
the characteristics of futures, options and securities, known as "hybrid
instruments." For a discussion of such instruments and the risks involved in
investing therein, see "Investment Methods and Risk Factors" in the Prospectus.
The Series may acquire illiquid securities in an amount not exceeding 15%
of net assets. Because an active trading market does not exist for such
securities the sale of such securities may be subject to delay and additional
costs. The Series will not invest more than 15% of its total assets in
restricted securities (other than securities eligible for resale under Rule 144A
of the Securities Act of 1933). For a discussion of restricted securities, see
"Investment Methods and Risk Factors."
The Series may invest in asset-backed securities, which securities involve
certain risks. For a discussion of asset-backed securities and the risks
involved in investment in such securities, see the discussion under "Investment
Methods and Risk Factors." The Series may invest in mortgage-backed securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
or institutions such as banks, insurance companies and savings and loans. Some
of these securities, such as GNMA certificates, are backed by the full faith and
credit of the U.S. Treasury while others, such as Freddie Mac certificates, are
not. The Series also may invest in collateralized mortgage obligations (CMOs)
and stripped mortgage securities (a type of derivative). Stripped mortgage
securities are created by separating the interest and principal payments
generated by a pool of mortgage-backed bonds to create two classes of
securities, "interest only" (IO) and "principal only" (PO) bonds. There are
risks involved in mortgage-backed securities, CMOs and stripped mortgage
securities. See "Investment Methods and Risk Factors" for an additional
discussion of such securities and the risks involved therein.
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While the Series will remain invested in primarily common stocks and bonds,
it may, for temporary defensive purposes, invest in cash reserves without
limitation. The Series may establish and maintain reserves as MFR believes is
advisable to facilitate the Series' cash flow needs. Cash reserves include money
market instruments, including repurchase agreements, in the two highest rating
categories. Short-term securities may be held in the equity sector as collateral
for futures contracts. These securities are segregated and may not be available
for the Series' cash flow needs.
The Series may invest in debt or preferred equity securities convertible
into or exchangeable for equity securities and warrants. As a fundamental
policy, for the purpose of realizing additional income, the Series may lend
securities with a value of up to 33 1/3% of its total assets to broker-dealers,
institutional investors, or other persons. Any such loan will be continuously
secured by collateral at least equal to the value of the securities loaned. For
a discussion of the limitations on lending and risks of lending, see "Investment
Methods and Risk Factors."
The Series may purchase securities on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis as discussed under
"Investment Methods and Risk Factors." The Series may enter into repurchase
agreements, reverse repurchase agreements, and "dollar rolls" also as discussed
under "Investment Methods and Risk Factors."
MFR GLOBAL HIGH YIELD SERIES
The investment objective of the Global High Yield Series is to seek high
current income. Capital appreciation is a secondary objective. The Series, 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 High Yield Series
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 Series
also may 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 MFR and the Series'
Sub-Adviser, Lexington Management Corporation ("Lexington"), 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 Series' 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. Accordingly, MFR 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 MFR and Lexington and approved by the
Board of Directors of the Series 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. The Series also
may invest in shares of other investment companies as discussed under
"Investment Methods and Risk Factors," below.
SELECTION OF DEBT INVESTMENTS. In determining the appropriate distribution
of investments among various countries and geographic regions for the Global
High Yield Series, MFR ordinarily will consider the following factors: prospects
for relative economic growth among the different countries in which the Series
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 the Series values assets daily in terms of U.S. dollars, the
Series does not intend to convert holdings of foreign currencies into U.S.
dollars on a daily basis. The Series 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 Series at one rate, while offering a lesser rate of exchange should the
Series desire to sell that currency to the dealer.
Global High Yield Series 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
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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 Series 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 fundamental investment
restrictions, Global High Yield Series 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 the Series 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 High Yield Series'
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 the Series to investment risks that are different in some respects from
those of investments in obligations of domestic issuers. Although the Series
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 Series. 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 High Yield Series 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 High Yield Series 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 High Yield Series may enter into reverse repurchase agreements. A
reverse repurchase agreement is a borrowing transaction in which the Series
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. The Series
also may engage in "roll" borrowing transactions which involve the Series' sale
of fixed income securities together with a commitment (for which the Series may
receive a fee) to purchase similar, but not identical, securities at a future
date. Global High Yield Series will maintain, in a segregated account with a
custodian, cash or liquid securities in an amount sufficient to cover its
obligation under "roll" transactions and reverse repurchase agreements.
BORROWING. Global High Yield Series is prohibited from borrowing money in
order to purchase securities. The Series 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. The Series 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 Series sells a security in anticipation that the market price of
that security will decline. The Series 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. The Series only may make short sales
"against the box." In this type of short sale, at the time of the sale, the
Series 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, the Series 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. The Series 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 Series, because
the Series might want to continue to receive interest and dividend payments on
securities in its portfolio that are convertible into the securities sold short.
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Global High Yield Series might make a short sale "against the box" in order
to hedge against market risks when MFR believes that the price of a security may
decline, causing a decline in the value of a security owned by the Series or a
security convertible into or exchangeable for such security, or when MFR wants
to sell the security the Series owns at a current attractive price, but also
wishes to defer recognition of 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 the Series' 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 the Series owns,
either directly or indirectly, and, in the case where a Series 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 the Series will endeavor to offset these
costs with income from the investment of the cash proceeds of short sales.
ILLIQUID SECURITIES. The Series may invest up to 15% of total net assets in
illiquid securities. Securities may be considered illiquid if the Series cannot
reasonably expect to receive approximately the amount at which the Series 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, the 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. The Fund's Board has delegated
the function of making day-to-day determinations of liquidity to MFR in
accordance with procedures approved by the Fund's Board of Directors. MFR takes
into account a number of factors in reaching liquidity decisions, including, but
not limited to: (i) the frequency of trades and quotes; (ii) the number of
dealers and potential purchasers; (iii) the number of dealers that have
undertaken to make a market in the security; and (iv) the nature of the security
and how trading is effected (e.g., the time needed to sell the security, how
offers are solicited and the mechanics of transfer). MFR will monitor the
liquidity of securities held by the Series and report periodically on such
decisions to the Board of Directors.
MORTGAGE-BACKED SECURITIES AND COLLATERALIZED MORTGAGE OBLIGATIONS. The
Series may invest in mortgage-backed securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities or institutions such as banks,
insurance companies and savings and loans. Some of these securities, such as
GNMA certificates, are backed by the full faith and credit of the U.S. Treasury
while others, such as Freddie Mac certificates, are not. The Series also may
invest in collateralized mortgage obligations (CMOs). There are risks involved
in mortgage-backed securities and CMOs. See "Investment Methods and Risk
Factors" for an additional discussion of such securities and the risks involved
therein.
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 Series 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 Series 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 Series. The methods described only apply to those Series which may use
such methods. Although a Series may employ the techniques, instruments and
methods described below, consistent with its investment objective and policies
and any applicable law, no Series will be required to do so.
GENERAL RISK FACTORS. Each Series' net asset value will fluctuate,
reflecting fluctuations in the market value of its portfolio positions and its
net currency exposure. The value of fixed income securities held by the Series
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 Series are subject to greater interest
rate risk. There is no assurance that any Series will achieve its investment
objective.
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SHARES OF OTHER INVESTMENT COMPANIES. Each of the Series may invest in
shares of other investment companies. A Series' investment in shares of other
investment companies may not exceed immediately after purchase 10% of the
Series' total assets and no more than 5% of its total assets may be invested in
the shares of any one investment company. Investment in the shares of other
investment companies has the effect of requiring shareholders to pay the
operating expenses of two mutual funds.
REPURCHASE AGREEMENTS, REVERSE REPURCHASE AGREEMENTS AND ROLL TRANSACTIONS.
Each of the Series 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 Series will retain
possession of the underlying securities. If bankruptcy proceedings are commenced
with respect to the seller, realization on the collateral by the Series may be
delayed or limited and the Series may incur additional costs. In such case, the
Series will be subject to risks associated with changes in market value of the
collateral securities. The Series intends to enter into repurchase agreements
only with banks and broker/dealers believed to present minimal credit risks.
Accordingly, the Series will enter into repurchase agreements only with (a)
brokers having total capitalization of at least $40 million and a ratio of
aggregate indebtedness to net capital of no more than 4 to 1, or, alternatively,
net capital equal to 6% of aggregate debit balances, or (b) banks having at
least $1 billion in assets and a net worth of at least $100 million as of its
most recent annual report. In addition, the aggregate repurchase price of all
repurchase agreements held by the Series with any broker shall not exceed 15% of
the total assets of the Series or $5 million, whichever is greater.
Each Series also may enter into reverse repurchase agreements with the same
parties with whom they may enter into repurchase agreements. Under a reverse
repurchase agreement, a Series 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 Series may decline below the price of the securities the Series 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 Series' obligation to repurchase the securities, and the
Series' use of the proceeds of the reverse repurchase agreement may effectively
be restricted pending such decision.
Each Series also may enter into "dollar rolls," in which the Series 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 Series would
forego principal and interest paid on such securities. The Series would be
compensated by the difference between the current sales price and the forward
price for the future purchase, as well as by the interest earned on the cash
proceeds of the initial sale.
BORROWING. Each of the Series 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 Series to borrow money
rather than sell existing portfolio positions to meet redemption requests.
Accordingly, the Series may borrow from banks and through reverse repurchase
agreements and "roll" transactions, in connection with meeting requests for the
redemption of Series shares. The Emerging Markets Total Return and Global Asset
Allocation Series may borrow up to 33 1/3%, and Global High Yield Series may
borrow up to 5% of total Series assets. To the extent that a Series purchases
securities while it has outstanding borrowings, it is using leverage, i.e. using
borrowed funds for investment. Leveraging will exaggerate the effect on net
asset value of any increase or decrease in the market value of a Series'
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 Series 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.
LENDING OF PORTFOLIO SECURITIES. For the purpose of generating income, the
Global Asset Allocation Series may make secured loans of Series securities
amounting to not more than 33 1/3% of total assets. Securities loans are made to
broker/dealers, institutional investors, or other persons pursuant to agreements
requiring that the loans be continuously secured by collateral at least equal at
all times to the value of the securities lent marked to
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market on a daily basis. The collateral received will consist of cash, U.S.
Government securities, letters of credit or such other collateral as may be
permitted under its investment program. While the securities are being lent, the
Series will continue to receive the equivalent of the interest or dividends paid
by the issuer on the securities, as well as interest on the investment of the
collateral or a fee from the borrower. The Series has a right to call each loan
and obtain the securities on five business days' notice or, in connection with
securities trading on foreign markets, within such longer period of time which
coincides with the normal settlement period for purchases and sales of such
securities in such foreign markets. The Series will not have the right to vote
securities while they are being lent, but it will call a loan in anticipation of
any important vote. The risks in lending portfolio securities, as with other
extensions of secured credit, consist of possible delay in receiving additional
collateral or in the recovery of the securities or possible loss of rights in
the collateral should the borrower fail financially. Loans will only be made to
persons deemed by MFR (or Lexington or SMC) to be of good standing and will not
be made unless, in the judgment of MFR or the relevant sub-adviser, the
consideration to be earned from such loans would justify the risk.
RESTRICTED SECURITIES (RULE 144A SECURITIES). Each of the Series may invest
in restricted securities which are securities that are restricted as to
disposition under the federal securities laws, including securities that are
eligible for resale to qualified institutional investors pursuant to Rule 144A
under the Securities Act of 1933. Rule 144A permits the resale to "qualified
institutional buyers" of "restricted securities" that, when issued, were not of
the same class as securities listed on a U.S. securities exchange or quoted in
the National Association of Securities Dealers Automated Quotation System (the
"Rule 144A Securities"). A "qualified institutional buyer" is defined by Rule
144A generally as an institution, acting for its own account or for the accounts
of other qualified institutional buyers, that in the aggregate owns and invests
on a discretionary basis at least $100 million in securities of issuers not
affiliated with the institution. A dealer registered under the Securities
Exchange Act of 1934 (the "Exchange Act"), acting for its own account or the
accounts of other qualified institutional buyers, that in the aggregate owns and
invests on a discretionary basis at least $10 million in securities of issuers
not affiliated with the dealer may also qualify as a qualified institutional
buyer, as well as an Exchange Act registered dealer acting in a riskless
principal transaction on behalf of a qualified institutional buyer.
The Fund's Board of Directors is responsible for developing and
establishing guidelines and procedures for determining the liquidity of Rule
144A Securities. As permitted by Rule 144A, the Board of Directors has delegated
this responsibility to MFR or the relevant sub-adviser. In making the
determination regarding the liquidity of Rule 144A Securities, MFR or the
relevant sub-adviser will consider trading markets for the specific security
taking into account the unregistered nature of a Rule 144A security. In
addition, it 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 Series' assets invested in illiquid
securities to the extent that qualified institutional buyers become
uninterested, for a time, in purchasing these securities.
Each Series also may purchase restricted securities that are not eligible
for resale pursuant to Rule 144A. The Series 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 Series 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 Series may be
permitted to sell it under an effective registration statement. If, during a
period, adverse conditions were to develop, the Series might obtain a less
favorable price than prevailing when it decided to sell.
RISKS ASSOCIATED WITH LOWER-RATED DEBT SECURITIES AND COMPARABLE UNRATED
SECURITIES (JUNK BONDS). Each of the Series 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") and unrated securities of
similar credit quality. Debt rated BB, B, CCC, CC and C by S&P and rated Ba, B,
Caa, Ca and C by Moody's, is regarded, on balance, as predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. For S&P, BB indicates the lowest
degree of speculation and C the highest degree of speculation. For Moody's, Ba
indicates the lowest degree of speculation and C the highest
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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. The
Series 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 Series. If an issuer exercises these provisions in a declining
interest rate market, the Series may have to replace the security with a lower
yielding security, resulting in a decreased return for investors. In addition,
the Series 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 Series
anticipate 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 Series to obtain accurate market quotations for purposes
of valuing the securities in the portfolio of the Series.
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 Series 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 Series will adversely impact
net asset value of the Series. See "Risk Factors" in the Prospectus. In addition
to the foregoing, such factors may include: (i) potential adverse publicity;
(ii) heightened sensitivity to general economic or political conditions; and
(iii) the likely adverse impact of a major economic recession. The Series 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 Series 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
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issued by governments in emerging markets in the event of default by the
governments under commercial bank loan agreements.
MFR and Lexington 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 Series and consider their ability to assume the
investment risks involved before making an investment in the Series.
CONVERTIBLE SECURITIES AND WARRANTS. The Emerging Markets Total Return and
Global Asset Allocation Series 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 nonconvertible securities. They generally
participate in the appreciation or depreciation of the underlying stock into
which they are convertible, but to a lesser degree. In recent years,
convertibles have been developed which combine higher or lower current income
with options and other features. Warrants are options to buy a stated number of
shares of common stock at a specified price any time during the life of the
warrants (generally two or more years).
MORTGAGE-BACKED SECURITIES AND COLLATERALIZED MORTGAGE OBLIGATIONS. The
Global Asset Allocation Series and Global High Yield Series may invest in
mortgage-backed securities (MBSs), including mortgage pass-through securities
and collateralized mortgage obligations (CMOs). MBSs include certain securities
issued or guaranteed by the United States Government or one of its agencies or
instrumentalities, such as the Government National Mortgage Association (GNMA),
Federal National Mortgage Association (FNMA), or Federal Home Loan Mortgage
Corporation (FHLMC); securities issued by private issuers that represent an
interest in or are collateralized by mortgage-backed securities issued or
guaranteed by the U.S. Government or one of its agencies or instrumentalities;
and securities issued by private issuers that represent an interest in or are
collateralized by mortgage loans. A mortgage pass-through security is a pro rata
interest in a pool of mortgages where the cash flow generated from the mortgage
collateral is passed through to the security holder. CMOs are obligations fully
collateralized by a portfolio of mortgages or mortgage-related securities. The
Global Asset Allocation Series may invest in securities known as "inverse
floating obligations," "residual interest bonds," or "interest-only" (IO) and
"principal-only" (PO) bonds, the market values of which will generally be more
volatile than the market values of most MBSs. An inverse floating obligation is
a derivative adjustable rate security with interest rates that adjust or vary
inversely to changes in market interest rates. The term "residual interest" bond
is used generally to describe those instruments in collateral pools, such as
CMOs, which receive any excess cash flow generated by the pool once all other
bondholders and expenses have been paid. IOs and POs are created by separating
the interest and principal payments generated by a pool of mortgage-backed bonds
to create two classes of securities. Generally, one class receives interest only
payments (IOs) and the other class principal only payments (POs). MBSs have been
referred to as "derivatives" because the performance of MBSs is dependent upon
and derived from underlying securities.
CMOs may be issued in a variety of classes and the Series may invest in
several CMO classes, including, but not limited to Floaters, Planned
Amortization Classes (PACs), Scheduled Classes (SCHs), Sequential Pay Classes
(SEQs), Support Classes (SUPs), Target Amortization Classes (TACs) and Accrual
Classes (Z Classes). CMO classes vary in the rate and time at which they receive
principal and interest payments. SEQs, also called plain vanilla, clean pay, or
current pay classes, sequentially receive principal payments from underlying
mortgage securities when the principal on a previous class has been completely
paid off. During the months prior to their receipt of principal payments, SEQs
receive interest payments at the coupon rate on their principal. PACs are
designed to produce a stable cash flow of principal payments over a
predetermined period of time. PACs guard against a certain level of prepayment
risk by distributing prepayments to SUPs, also called companion classes. TACs
pay a targeted principal payment schedule, as long as prepayments are not made
at a rate slower than an expected constant prepayment speed. If prepayments
increase, the excess over the target is paid to SUPs. SEQs may have a less
stable cash flow than PACs and TACs and, consequently, have a greater potential
yield. PACs generally pay a lower yield than TACs because of PACs' lower risk.
Because SUPs are directly affected by the rate of prepayment of underlying
mortgages, SUPs may experience volatile cash flow behavior. When prepayment
speeds fluctuate, the average life of a SUP will vary. SUPs, therefore, are
priced at a higher yield than less volatile classes of CMOs. Z Classes do not
receive payments, including interest payments, until certain other classes are
paid off. At that time, the Z Class begins to receive the accumulated interest
and principal
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payments. A Floater has a coupon rate that adjusts periodically (usually
monthly) by adding a spread to a benchmark index subject to a lifetime maximum
cap. The yield of a Floater is sensitive to prepayment rates and the level of
the benchmark index.
Investment in MBSs poses several risks, including prepayment, market and
credit risks. Prepayment risk reflects the chance that borrowers may prepay
their mortgages faster than expected, thereby affecting the investment's average
life and perhaps its yield. Borrowers are most likely to exercise their
prepayment options at a time when it is least advantageous to investors,
generally prepaying mortgages as interest rates fall, and slowing payments as
interest rates rise. Certain classes of CMOs may have priority over others with
respect to the receipt of prepayments on the mortgages and the Series may invest
in CMOs which are subject to greater risk of prepayment as discussed above.
Market risk reflects the chance that the price of the security may fluctuate
over time. The price of MBSs may be particularly sensitive to prevailing
interest rates, the length of time the security is 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 Series 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 Series 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 Series 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. The Global Asset Allocation Series also may invest
in "asset-backed securities." These include secured debt instruments backed by
automobile loans, credit card loans, home equity loans, manufactured housing
loans and other types of secured loans providing the source of both principal
and interest. Asset-backed securities are subject to risks similar to those
discussed above with respect to MBSs. See the discussion of asset-backed
securities in the Prospectus.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES. Each of the Series 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 Series 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 Series 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 Series enters into a transaction on a when-issued or
forward commitment basis, a segregated account consisting of cash or liquid
securities equal to the value of the when-issued or forward commitment
securities will be established and maintained with its custodian and will be
marked to market daily. There is a risk that the securities may not be delivered
and that the Series may incur a loss.
DERIVATIVE INSTRUMENTS: OPTIONS, FUTURES AND FORWARD CURRENCY STRATEGIES
WRITING COVERED CALL OPTIONS. Each of the Series may write (sell) covered
call options. Covered call options generally will be written on securities and
currencies which, in the opinion of MFR or the relevant sub-adviser, as
applicable, are not expected to make any major price moves in the near future
but which, over the long term, are deemed to be attractive investments.
A call option gives the holder (buyer) the right to purchase a security or
currency at a specified price (the exercise price) at any time until a certain
date (the expiration date). So long as the obligation of the writer of a call
option continues, he or she may be assigned an exercise notice by the
broker/dealer through whom such option was sold, requiring delivery of 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
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purchase transaction by purchasing an option identical to that previously sold.
MFR, Lexington and SMC believe that writing covered call options is less risky
than writing uncovered or "naked" options, which the Series 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 that Series' investment objectives. When writing a covered call option, the
Series 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,
a Series 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 a Series has written expires,
the Series 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, a Series
will realize a gain or loss from the sale of the underlying security or
currency.
The premium which a Series receives for writing a call option is deemed to
constitute the market value of an option. The premium the Series 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, MFR or the relevant sub-adviser, as applicable, will consider the
reasonableness of the anticipated premium and the likelihood that a liquid
secondary market will exist for those options. The premium received by a Series
for writing covered call options will be recorded as a liability in the Series'
statement of assets and liabilities. This liability will be adjusted daily to
the option's current market value, which will be the latest sales price at the
time which the net asset value per share of the Series 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 a Series to write
another call option on the underlying security or currency with either a
different exercise price, expiration date or both. If the Series desires to sell
a particular security or currency from its portfolio on which it has written a
call 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 the Series will be able to effect such closing transactions at favorable
prices. If the Series 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.
The Series will pay transaction costs in connection with the writing of
options and in entering into closing purchase contracts. Transaction costs
relating to options activity normally are higher than those applicable to
purchases and sales of portfolio securities.
Call options written by the Series 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,
the Series 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.
The Series 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 Series.
WRITING COVERED PUT OPTIONS. Each of the Series 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
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expiration date. The operation of put options in other respects, including their
related risks and rewards, is substantially identical to that of call options.
The Series would write put options only on a covered basis, which means
that the Series would either (i) set aside cash or liquid securities in an
amount not less than the exercise price at all times while the put option is
outstanding (the rules of the Options Clearing Corporation currently require
that such assets be deposited in escrow to secure payment of the exercise
price), (ii) sell short the security 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 Series. The
Series generally would write covered put options in circumstances where MFR or
the relevant sub-adviser, wishes to purchase the underlying security or currency
for the Series' portfolio at a price lower than the current market price of the
security or currency. In such event, the Series would write a put option at an
exercise price which, reduced by the premium received on the option, reflects
the lower price it is willing to pay. Since the Series 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. Each of the Series may purchase put options. As the
holder of a put option, the Series would have the right to sell the underlying
security or currency at the exercise price at any time during the option period.
The Series may enter into closing sale transactions with respect to such
options, exercise them or permit them to expire.
The Series may purchase a put option on an underlying security or currency
("protective put") owned by the Series 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
the Series, 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 MFR or the relevant sub-adviser, as applicable, deems
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.
The Series also may purchase put options at a time when the Series does not
own the underlying security or currency. By purchasing put options on a security
or currency it does not own, the Series seeks to benefit from a decline in the
market price of the underlying security or currency. If the put option is not
sold when it has remaining value, and if the market price of the underlying
security or currency remains equal to or greater than the exercise price during
the life of the put option, the Series 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 the Series when purchasing a put option will be
recorded as an asset in the Series' statement of assets and liabilities. This
asset will be adjusted daily to the option's current market value, which will be
the latest sale price at the time at which the net asset value per share of the
Series 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. Each of the Series may purchase call options. As
the holder of a call option, the Series would have the right to purchase the
underlying security or currency at the exercise price at any time during the
option period. The Series may enter into closing sale transactions with respect
to such options, exercise them or permit them to expire. Call options may be
purchased by the Series for the purpose of acquiring the underlying security or
currency for its portfolio. Utilized in this fashion, the purchase of call
options would enable the Series 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 a Series 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, the Series is
partially protected from any unexpected decline in the
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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.
The Series 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 the Series' current
return. For example, the Series 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 Series, an increase in the market
price could result in the exercise of the call option written by the Series 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 the
Series' total assets at the time of purchase.
Each of the Series 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
the Series 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 the Series as purchaser the right (but not the obligation) to
purchase a specified amount of currency at the exercise price until its
expiration. The Series 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
the Series 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 Series 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. OTC
options will not be purchased unless the Series believes that daily valuations
for such options are readily obtainable. OTC options differ from exchange-traded
options in that OTC options are transacted with dealers directly and not through
a clearing corporation (which guarantees performance). Consequently, there is a
risk of non-performance by the dealer. Since no exchange is involved, OTC
options are valued on the basis of a quote provided by the dealer. In the case
of OTC options, there can be no assurance that a liquid secondary market will
exist for any particular option at any specific time.
OPTIONS ON STOCK INDICES. Options on stock indices are similar to options
on specific securities except that, rather than the right to take or make
delivery of the specific security at a specific price, an option on a stock
index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of that stock index is greater than, in the
case of a call, or less than, in the case of a put, the exercise price of the
option. This amount of cash is equal to such difference between the closing
price of the index and the exercise price of the option expressed in dollars
multiplied by a specified multiple. The writer of the option is obligated, in
return for the premium received, to make delivery of this amount. Unlike options
on specific securities, all settlements of options on stock indices are in cash
and gain or loss depends on general movements in the stocks included in the
index rather than price movements in particular stocks. A stock index futures
contract is an agreement in which one party agrees to deliver to the other an
amount of cash equal to a specific amount multiplied by the difference between
the value of a specific stock index at the close of the last trading day of the
contract and the price at which the agreement is made.No physical delivery of
securities is made.
RISK FACTORS IN OPTIONS ON INDICES. Because the value of an index option
depends upon the movements in the level of the index rather than upon movements
in the price of a particular security, whether the Series will realize a gain or
a loss on the purchase or sale of an option on an index depends upon the
movements in the level of prices in the market generally or in an industry or
market segment rather than upon movements in the price of the individual
security. Accordingly, successful use of positions will depend upon the ability
of MFR or the relevant
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sub-adviser to predict correctly movements in the direction of the market
generally or in the direction of a particular industry. This requires different
skills and techniques than predicting changes in the prices of individual
securities.
Index prices may be distorted if trading of securities included in the
index is interrupted. Trading in index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number of
securities in the index. If this occurred, a Series would not be able to close
out options which it had written or purchased and, if restrictions on exercise
were imposed, might be unable to exercise an option it purchased, which would
result in substantial losses.
Price movements in Series securities will not correlate perfectly with
movements in the level of the index and therefore, a Series bears the risk that
the price of the securities may not increase as much as the level of the index.
In this event, the Series would bear a loss on the call which would not be
completely offset by movements in the prices of the securities. It is also
possible that the index may rise when the value of the Series' securities does
not. If this occurred, a Series would experience a loss on the call which would
not be offset by an increase in the value of its securities and might also
experience a loss in the market value of its securities.
Unless a Series has other liquid assets which are sufficient to satisfy the
exercise of a call on the index, the Series will be required to liquidate
securities in order to satisfy the exercise.
When a Series has written a call on an index, there is also the risk that
the market may decline between the time the Series has the call exercised
against it, at a price which is fixed as of the closing level of the index on
the date of exercise, and the time the Series is able to sell securities. As
with options on securities, MFR or the relevant sub-adviser will not learn that
a call has been exercised until the day following the exercise date, but, unlike
a call on securities where the Series would be able to deliver the underlying
security in settlement, the Series may have to sell part of its securities in
order to make settlement in cash, and the price of such securities might decline
before they could be sold.
If a Series exercises a put option on an index which it has purchased
before final determination of the closing index value for the day, it runs the
risk that the level of the underlying index may change before closing. If this
change causes the exercised option to fall "out-of-the-money" the Series will be
required to pay the difference between the closing index value and the exercise
price of the option (multiplied by the applicable multiplier) to the assigned
writer. Although the Series may be able to minimize this risk by withholding
exercise instructions until just before the daily cutoff time or by selling
rather than exercising an option when the index level is close to the exercise
price, it may not be possible to eliminate this risk entirely because the cutoff
time for index options may be earlier than those fixed for other types of
options and may occur before definitive closing index values are announced.
TRADING IN FUTURES CONTRACTS. Each of the Series may enter into financial
futures contracts, including stock index, interest rate and currency Futures
("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 Series. A Series' 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.
The Series will not enter into Futures Contracts for speculation and will
only enter into Futures Contracts which are traded on national futures exchanges
and are standardized as to maturity date and underlying financial instrument.
The principal interest rate 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 a Fund's exposure to interest rate and currency exchange
rate fluctuations, the Series may be able to hedge exposure more effectively and
at a lower cost through using Futures Contracts.
The Series will not enter into a Futures Contract if, as a result thereof,
more than 5% of the Series' total assets (taken at market value at the time of
entering into the contract) would be committed to "margin" (down payment)
deposits on such Futures Contracts.
A Futures Contract provides for the future sale by one party and purchase
by another party of a specified amount of a specific financial instrument
(security or currency) for a specified price at a designated date, time and
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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 securities 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 security or
currency and the same delivery date. If the offsetting purchase price is less
than the original sale price, the Series realizes a gain; if it is more, the
Series realizes a loss. Conversely, if the offsetting sale price is more than
the original purchase price, the Series realizes a gain; if it is less, the
Series realizes a loss. The transaction costs also must be included in these
calculations. There can be no assurance, however, that the Series will be able
to enter into an offsetting transaction with respect to a particular Futures
Contract at a particular time. If the Series is not able to enter into an
offsetting transaction, the Series 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 the Series.
Persons who trade in Futures Contracts may be broadly classified as
"hedgers" and "speculators." Hedgers, such as the Series, whose business
activity involves investment or other commitment in securities or other
obligations, use the Futures markets primarily to offset unfavorable changes in
value that may occur because of fluctuations in the value of the securities and
obligations held or expected to be acquired by them or fluctuations in the value
of the currency in which the securities or obligations are denominated. Debtors
and other obligors also may hedge the interest cost of their obligations. The
speculator, like the hedger, generally expects neither to deliver nor to receive
the financial instrument underlying the Futures Contract, but, unlike the
hedger, hopes to profit from fluctuations in prevailing interest rates or
currency exchange rates.
The Series' Futures transactions will be entered into primarily 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 Series'
owns, or Futures Contracts will be purchased to protect the Series against an
increase in the price of securities or currencies it has committed to purchase
or expects to purchase. Stock index futures contracts may be used to provide a
hedge for a portion of the Series' portfolio, as a cash management tool, or as
an efficient way for MFR or the relevant sub-adviser to implement either an
increase or decrease in portfolio market exposure in response to changing market
conditions. Stock index futures contracts are currently traded with respect to
the S&P 500 Index and other broad stock market indices, such as the New York
Stock Exchange Composite Stock Index and the Value Line Composite Stock Index.
The Series may, however, purchase or sell futures contracts with respect to any
stock index. Nevertheless, to hedge the Series' portfolio successfully, the
Series must sell futures contracts with respect to indexes or subindexes whose
movements will have a significant correlation with movements in the prices of
the Series' securities.
"Margin" with respect to Futures Contracts is the amount of funds that must
be deposited by the Series, in a segregated account with the Series' custodian,
in order to initiate Futures trading and to maintain the Series' open positions
in Futures Contracts. A margin deposit made when the Futures Contract is entered
into ("initial margin") is intended to assure the Series' performance of the
Futures Contract. The margin required for a particular Futures Contract is set
by the exchange on which the Futures Contract is traded, and may be modified
significantly from time to time by the exchange during the term of the Futures
Contract. Futures Contracts customarily are purchased and sold on margins that
may range upward from less than 5% of the value of the Futures Contract being
traded.
If the price of an open Futures Contract changes (by increase in the case
of a sale or by decrease in the case of a purchase) so that the loss on the
Futures Contract reaches a point at which the margin on deposit does not satisfy
margin requirements, the broker will require an increase in the margin deposit
("margin variation"). If the value of a position increases because of favorable
price changes in the Futures Contract so that the margin deposit exceeds the
required margin, however, the broker will pay the excess to the Series. In
computing daily net asset values, the Series will mark to market the current
value of its open Futures Contracts. The Series expect to earn interest income
on margin deposits.
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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, the Series
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 the Series, or to
reduce or eliminate the hedge position then currently held by the Series, the
Series 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.
RISKS OF USING FUTURES CONTRACTS. The prices of Futures Contracts are
volatile and are influenced, among other things, by actual and anticipated
changes in the market and interest rates, which in turn are affected by fiscal
and monetary policies and national and international political and economic
events.
Successful use of futures contracts by the Series for hedging purposes is
subject to MFR or the relevant sub-adviser's ability to correctly predict
movements in the direction of the market. It is possible that, when the Series
has sold futures to hedge its portfolio against a decline in the market, the
index, indices, or underlying instruments on which the futures are written might
advance and the value of the underlying instruments held in the Series'
portfolio might decline. If this were to occur, the Series would lose money on
the futures and also would experience a decline in value in its underlying
instruments. However, while this might occur to a certain degree, it is believed
that over time the value of the Series' portfolio will tend to move in the same
direction as the market indices which are intended to correlate to the price
movements of the underlying instruments sought to be hedged. It is also possible
that if the Series were to hedge against the possibility of a decline in the
market (adversely affecting the underlying instruments held in its portfolio)
and prices instead increased, the Series would lose part or all of the benefit
of increased value of those underlying instruments that it has hedged, because
it would have offsetting losses in its futures positions. In addition, in such
situations, if the Series had insufficient cash, it might have to sell
underlying instruments to meet daily variation margin requirements. Such sales
of underlying instruments might be, but would not necessarily be, at increased
prices (which would reflect the rising market). The Series might have to sell
underlying instruments at a time when it would be disadvantageous to do so.
Because of the low margin deposits required, Futures trading involves an
extremely high degree of leverage. As a result, a relatively small price
movement in a Futures Contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10% of
the value of the Futures Contract is deposited as margin, a subsequent 10%
decrease in the value of the Futures Contract would result in a total loss of
the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss of 150% of
the original margin deposit, if the Contract were closed out. Thus, a purchase
or sale of a Futures Contract may result in losses in excess of the amount
invested in the Futures Contract. However, the Series presumably would have
sustained comparable losses if, instead of the Futures Contract, it had invested
in the underlying security and sold it after the decline.
Furthermore, in the case of a Futures Contract purchase, in order to be
certain that the Series has sufficient assets to satisfy its obligations under a
Futures Contract, the Series sets aside and commits to back the Futures Contract
an amount of cash and liquid securities equal in value to the current value of
the underlying instrument less margin deposit.
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In the case of a Futures contract sale, the Series 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 Series to purchase
the same Futures Contract at a price no higher than the contract price. Assets
used as cover cannot be sold while the position in the corresponding Futures
Contract is open, unless they are replaced with similar assets. As a result, the
commitment of a significant portion of the Series' assets to cover could impede
portfolio management or the Series' ability to meet redemption requests or other
current obligations.
Most U.S. Futures exchanges limit the amount of fluctuation permitted in
Futures Contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a Futures Contract may vary either up or
down from the previous day's settlement price at the end of a trading session.
Once the daily limit has been reached in a particular type of Futures Contract,
no trades may be made on that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and therefore does
not limit potential losses, because the limit may prevent the liquidation of
unfavorable positions. Futures Contract prices occasionally have moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of Futures positions and subjecting some
Futures traders to substantial losses.
FORWARD CURRENCY CONTRACTS AND OPTIONS ON CURRENCY. Each of the Series may
enter into forward currency contracts and related options. 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. The
Series 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. The Series will
utilize Forward Contracts only on a covered basis. The Series engage in forward
currency transactions in anticipation of, or to protect against, fluctuations in
exchange rates. The Series 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, the Series 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, the
Series 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. The Series will enter into such
Forward Contracts with major U.S. or foreign banks and securities or currency
dealers in accordance with guidelines approved by the Fund's Board of Directors.
The Series may enter into Forward Contracts either with respect to specific
transactions or with respect to the Series' 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 the Series to purchase
additional foreign currency on the spot (i.e., cash) market (and bear the
expense of such purchase) if the market value of the security is less than the
amount of foreign currency the Series 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 the Series 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 the Series 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 Series to
sell a currency, the Series 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 Series will obtain, on the same maturity date,
the same amount of the currency which it is obligated to deliver. Similarly, the
Series 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. The Series
would realize a gain or loss as a result of entering into such an offsetting
Forward Contract under either
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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 the Series 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 Series 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, the Series' ability to utilize Forward Contracts in
the manner set forth above may be restricted.
INTEREST RATE AND CURRENCY SWAPS. Each of the Series may enter into
interest rate, index and currency swaps and the purchase or sale of related
caps, floors and collars. A Series 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 Series 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 Series, MFR, Lexington and
SMC, as applicable, 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 Series' borrowing restrictions. A Series will not enter into any
swap, cap, floor, collar or other derivative transaction unless, at the time of
entering into the transaction, the unsecured long-term debt rating of the
counterparty combined with any credit enhancements is rated at least A by
Moody's or S&P or has an equivalent rating from a nationally recognized
statistical rating organization or is determined to be of equivalent credit
quality by MFR or the relevant sub-adviser. If a counterparty defaults, the
Series may have contractual remedies pursuant to the agreements related to the
transactions. The swap market has grown substantially in recent years, with a
large number of banks and investment banking firms acting both as principals and
as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps, floors and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, for that reason, they are less liquid than swaps.
EMERGING COUNTRIES. Each of the Series 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
Series' investment opportunities, including restrictions on investment in
issuers or industries deemed sensitive to national interests; (iv) foreign
taxation; and (v) the absence of developed structures governing private or
foreign investment or allowing for judicial redress for injury to private
property.
FOREIGN INVESTMENT RESTRICTIONS. Certain countries prohibit or impose
substantial restrictions on investments in their capital markets, particularly
their equity markets, by foreign entities such as the Series. As illustrations,
certain countries require governmental approval prior to investments by foreign
persons, or limit the amount of investment by foreign persons in a particular
company, or limit the investments by foreign persons to only a specific class of
securities of a company that may have less advantageous terms than securities of
the company available for purchase by nationals. Moreover, the national policies
of certain countries may restrict investment opportunities in issuers or
industries deemed sensitive to national interests. In addition, some countries
require governmental approval for the repatriation of investment income, capital
or the proceeds of securities sales by foreign investors. A Series 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.
CURRENCY FLUCTUATIONS. Because each of the Series, under normal
circumstances, may invest substantial portions of their 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 Series' 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 the Series' holdings of securities denominated in such
currency and, therefore,
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will cause an overall decline in the Series' net asset value and any net
investment income and capital gains to be distributed in U.S. dollars to
shareholders of the Series.
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 the Series value their assets daily in terms of U.S. dollars, the
Series do not intend to convert holdings of foreign currencies into U.S. dollars
on a daily basis. The Series 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
Series at one rate, while offering a lesser rate of exchange should the Series
desire to sell that currency to the dealer.
POLITICAL AND ECONOMIC RISKS. Investing in securities of non-U.S. companies
may entail additional risks due to the potential political and economic
instability of certain countries and the risks of expropriation,
nationalization, confiscation or the imposition of restrictions on foreign
investment and on repatriation of capital invested. In the event of such
expropriation, nationalization or other confiscation by any country, a Series
could lose its entire investment in any such country.
An investment in a Series which invests in non-U.S. companies is subject to
the political and economic risks associated with investments in foreign markets.
Even though opportunities for investment may exist in emerging markets, any
change in the leadership or policies of the governments of those countries or in
the leadership or policies of any other government which exercises a significant
influence over those countries, may halt the expansion of or reverse the
liberalization of foreign investment policies now occurring and thereby
eliminate any investment opportunities which may currently exist.
Investors should note that upon the accession to power of authoritarian
regimes, the governments of a number of emerging market countries previously
expropriated large quantities of real and personal property similar to the
property which will be represented by the securities purchased by a Series. The
claims of property owners against those governments were never finally settled.
There can be no assurance that any property represented by securities purchased
by a Series will not also be expropriated, nationalized, or otherwise
confiscated. If such confiscation were to occur, the Series could lose a
substantial portion of its investments in such countries. The Series'
investments would similarly be adversely affected by exchange control regulation
in any of those countries.
RELIGIOUS AND ETHNIC INSTABILITY. Certain countries in which a Series may
invest may have vocal minorities that advocate radical religious or
revolutionary philosophies or support ethnic independence. Any disturbance on
the part of such individuals could carry the potential for wide-spread
destruction or confiscation of property owned by individuals and entities
foreign to such country and could cause the loss of the Series' investment in
those countries.
NON-UNIFORM CORPORATE DISCLOSURE STANDARDS AND GOVERNMENTAL REGULATION.
Foreign companies are subject to accounting, auditing and financial standards
and requirements that differ, in some cases significantly, from those applicable
to U.S. companies. In particular, the assets, liabilities and profits appearing
on the financial statements of such a company may not reflect its financial
position or results of operations in the way they would be reflected had such
financial statements been prepared in accordance with U.S. generally accepted
accounting principles. Most of the foreign securities held by a Series will not
be registered with the SEC or regulators of any foreign country, nor will the
issuers thereof be subject to the SEC's reporting requirements. Thus, there will
be less available information concerning foreign issuers of securities held by
the Series 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, MFR or the relevant sub-adviser will take
appropriate steps to evaluate the proposed investment, which may include on-site
inspection of the issuer, interviews with its management and consultations with
accountants, bankers and other specialists. There is substantially less publicly
available information about foreign companies than there are reports and ratings
published about U.S. companies and the U.S. Government. In addition, where
public information is available, it may be less reliable than such information
regarding U.S. issuers.
ADVERSE MARKET CHARACTERISTICS. Securities of many foreign issuers may be
less liquid and their prices more volatile than securities of comparable U.S.
issuers. In addition, foreign securities exchanges and brokers generally are
subject to less governmental supervision and regulation than in the U.S., and
foreign securities
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exchange transactions usually are subject to fixed commissions, which generally
are higher than negotiated commissions on U.S. transactions. In addition,
foreign securities exchange transactions may be subject to difficulties
associated with the settlement of such transactions. Delays in settlement could
result in temporary periods when assets of the Series are uninvested and no
return is earned thereon. The inability of the Series to make intended security
purchases due to settlement problems could cause it to miss attractive
opportunities. Inability to dispose of a portfolio security due to settlement
problems either could result in losses to the Series due to subsequent declines
in value of the portfolio security or, if the Series has entered into a contract
to sell the security, could result in possible liability to the purchaser. MFR
and the relevant sub-adviser will consider such difficulties when determining
the allocation of the Series' assets.
NON-U.S. WITHHOLDING TAXES. A Series' investment income and gains from
foreign issuers may be subject to non-U.S. withholding and other taxes, thereby
reducing the Series' investment income and gains.
COSTS. Investors should understand that the expense ratio of each Series
can be expected to be higher than investment companies investing in domestic
securities since the cost of maintaining the custody of foreign securities and
the rate of advisory fees paid by the Series are higher.
EASTERN EUROPE. Changes occurring in Eastern Europe and Russia today could
have long-term potential consequences. As restrictions fail, this could result
in rising standards of living, lower manufacturing costs, growing consumer
spending, and substantial economic growth. However, investment in the countries
of Eastern Europe and Russia is highly speculative at this time. Political and
economic reforms are too recent to establish a definite trend away from
centrally-planned economies and state owned industries. In many of the countries
of Eastern Europe and Russia, there is no stock exchange or formal market for
securities. Such countries may also have government exchange controls,
currencies with no recognizable market value relative to the established
currencies of western market economies, little or no experience in trading in
securities, no financial reporting standards, a lack of a banking and securities
infrastructure to handle such trading, and a legal tradition which does not
recognize rights in private property. In addition, these countries may have
national policies which restrict investments in companies deemed sensitive to
the country's national interest. Further, the governments in such countries may
require governmental or quasi-governmental authorities to act as custodian of
the Fund's assets invested in such countries and these authorities may not
qualify as a foreign custodian under the Investment Company Act of 1940 and
exemptive relief from such Act may be required. All of these considerations are
among the factors which could cause significant risks and uncertainties with
respect to investment in Eastern Europe and Russia.
AMERICAN DEPOSITARY RECEIPTS (ADRS). Each of the Series may invest in ADRs.
ADRs are dollar-denominated receipts issued generally by U.S. banks and which
represent the deposit with the bank of a foreign company's securities. ADRs are
publicly traded on exchanges or over-the-counter in the United States. Investors
should consider carefully the substantial risks involved in investing in
securities issued by companies of foreign nations, which are in addition to the
usual risks inherent in domestic investments. See "Foreign Investment
Restrictions," above.
INVESTMENT POLICY LIMITATIONS
Each of the Series operates within certain fundamental investment policy
limitations. These limitations may not be changed for the Series 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 Series are present or represented by proxy, or (ii) more than 50% of the
outstanding voting securities of that Series.
The fundamental investment policies of the Series are:
1. Not to invest in the securities of an issuer if the officers and directors
of the Fund, Underwriter or Investment Adviser own more than 1/2 of 1% of
such securities or if all such persons together own more than 5% of such
securities.
2. 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 this limitation applies only
with respect to 75% of the value of the Series' total assets.
3. 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).
4. Not to invest in companies for the purpose of exercising control of
management.
23
<PAGE>
5. Not to act as underwriter of securities of other issuers.
6. 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).
7. Not to purchase or sell real estate. (This policy shall not prevent the
Series from investing in securities or other instruments backed by real
estate or in securities of companies engaged in the real estate business.)
8. Not to buy or sell commodities or commodity contracts; provided, however,
that the Series may, to the extent appropriate under their investment
programs, purchase securities of companies engaged in such activities, may
enter into transactions in financial futures contracts and related options
for hedging purposes, may engage in transactions on a when-issued or
forward commitment basis and may enter into forward currency contracts.
9. Not to make loans to other persons other than for the purchase of publicly
distributed debt securities and U.S. Government obligations or by entry
into repurchase agreements; provided, however, that Emerging Markets Total
Return and Global Asset Allocation Series may make loans consistent with
the 1940 Act.
10. Not to invest in limited partnerships or similar interests in oil, gas,
mineral lease, mineral exploration or development programs; provided,
however, that the Series may invest in the securities of other
corporations whose activities include such exploration and development.
11. With respect to the Global High Yield Series, not to borrow money, except
that the Series may (a) enter into certain futures contracts and options
related thereto; (b) enter into commitments to purchase securities in
accordance with the Series' investment program, including delayed delivery
and when-issued securities and reverse repurchase agreements, and (c) for
temporary emergency purposes, borrow money in amounts not exceeding 5% of
the value of its total assets at the time the loan is made. The Emerging
Markets Total Return and Global Asset Allocation Series may borrow in
amounts not exceeding 33 1/3% of the value of total assets at the time the
loan is made.
12. With respect to Global High Yield Series, not to purchase securities of
any other investment company; provided, however that it 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.
13. With respect to Global High Yield Series not to issue senior securities
(as defined in the 1940 Act) except as follows: (a) the Series may enter
into commitments to purchase securities in accordance with the Series'
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 Series 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 Series
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 Series may borrow money as authorized by the 1940 Act.
The Emerging Markets Total Return and Global Asset Allocation Series may
issue senior securities in compliance with the 1940 Act.
14. With respect to Global High Yield Series, not to invest more than 15% of
its total assets in illiquid securities.
The Global High Yield Series will not purchase securities on margin except
as provided below. The following investment policy of Global High Yield Series
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 High Yield Series
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 Series' total assets, at market value; and (b) no
more than 5% of the Series' total assets, at market value at the time of
entering into a contract, shall be committed to margin deposits in relation to
futures contracts.
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 Series interpret Fundamental Policy (7) to
prohibit the purchase of real estate limited partnerships.
24
<PAGE>
OFFICERS AND DIRECTORS
The officers and directors of the Fund 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 FUND PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
JOHN D. CLELAND,* President and Director Senior Vice President and Managing Member Representative, Security
Management Company, LLC; Senior Vice President, Security Benefit
Group, Inc. and Security Benefit Life Insurance Company.
DONALD A. CHUBB, JR.,** Director Business broker, Griffith & Blair Realtors. Prior to 1997,
2222 SW 29th Street President, Neon Tube Light Company, Inc.
Topeka, Kansas 66611
DONALD L. HARDESTY, Director Chairman and Chief Executive Officer, Central Research and
900 NationsBank Tower Consulting.
Topeka, Kansas 66603
PENNY A. LUMPKIN,** Director Vice President, Palmer Companies (Wholesalers, Retailers
3616 Canterbury Town Road and Developers) and Bellairre Shopping Center (Leasing and
Topeka, Kansas 66610 Shopping Center Management); Secretary-Treasurer, Palmer
News, Inc. (Wholesale Distributors).
MARK L. MORRIS, JR.,** Director Retired. Former General Partner, Mark Morris Associates
5500 SW 7th Street (Veterinary Research and Education).
Topeka, Kansas 66606
HUGH L. THOMPSON, Director President Emeritus, Washburn University. Prior to June
2728 Newfound Harbour Drive 1997, President, Washburn University.
Merritt Island, Florida 32952
BRUCE JENSEN, *Director Executive Vice President, Maria Fiorini Ramirez, Inc. Prior
One Liberty Plaza, 46th Floor to December 1992, Senior Vice President, Pilgrim Group, Inc.
New York, New York, 10006
MARIA FIORINI RAMIREZ, *Director President and Chief Executive Officer, Maria Fiorini Ramirez, Inc.
One Liberty Plaza, 46th Floor
New York, New York 10006
JAMES R. SCHMANK, Vice President and Treasurer President, Treasurer, Chief Fiscal Officer and Managing Member
Representative, Security Management Company, LLC; Vice President,
Security Benefit Group, Inc. and Security Benefit Life Insurance
Company.
MARK E. YOUNG, Vice President Vice President, Security Management Company, LLC; Assistant Vice
President, Security Benefit Group, Inc. and Security Benefit Life
Insurance Company.
JANE A. TEDDER, Vice President Vice President and Senior Economist, Security Management Company,
LLC; Vice President, Security Benefit Group, Inc. and Security
Benefit Life Insurance Company.
AMY J. LEE, Secretary Secretary, Security Management Company, LLC; Vice President,
Associate General Counsel and Assistant Secretary, Security Benefit
Group, Inc. and Security Benefit Life Insurance Company.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
NAME, ADDRESS AND POSITIONS HELD WITH THE FUND PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
BRENDA M. HARWOOD, Assistant Treasurer and Assistant Vice President, Assistant Treasurer and Assistant
Assistant Secretary Secretary, Security Management Company, LLC; Assistant Vice
President, Security Benefit Group, Inc. and Security
Benefit Life Insurance Company.
STEVEN M. BOWSER, Assistant Vice President Second Vice President and Portfolio Manager, Security
Management Company, LLC; Second Vice President, Security
Benefit Group, Inc. and Security Benefit Life Insurance
Company. Prior to October 1992, Assistant Vice President
and Portfolio Manager, Federal Home Loan Bank.
THOMAS A. SWANK, Assistant Vice President Vice President and Portfolio Manager, Security Management
Company, LLC; Vice President, Security Benefit Group, Inc.
and Security Benefit Life Insurance Company.
DAVID ESHNAUR, Assistant Vice President Assistant Vice President and Portfolio Manager, Security Management
Company, LLC; Assistant Vice President, Security Benefit Group, Inc.
and Security Benefit Life Insurance Company. Prior to July 1997,
Assistant Vice President and Assistant Portfolio Manager, Waddell &
Reed.
CHRISTOPHER D. SWICKARD, Assistant Secretary Assistant Vice President and Assistant Counsel, Security Benefit
Group, Inc. and Security Benefit Life Insurance Company.
</TABLE>
- --------------------------------------------------------------------------------
* These directors are deemed to be "interested persons" of the Fund under the
Investment Company Act of 1940, as amended.
**These directors serve on the Fund's audit committee, the purpose of which is
to meet with the independent auditors, to review the work of the auditors,
and to oversee the handling by Security Management Company, LLC of the
accounting functions for the Series.
- --------------------------------------------------------------------------------
The officers of the Fund hold identical offices with each of the funds in
the Security Funds' complex, which consists of Security Equity, Security Ultra,
Security Growth and Income, Security Tax-Exempt, Security Cash and SBL Funds,
except Mr. Bowser who is also Assistant Vice President of SBL Fund and Security
Tax-Exempt Fund and Mr. Swank who is also Assistant Vice President of SBL Fund,
Security Growth and Income and Security Tax-Exempt Funds. The directors of the
Fund, except Mr. Jensen and Ms. Ramirez, also serve as directors of the other
Funds in the Security Funds' complex. See the table under "Investment
Management," page 32, for positions held by such persons with SMC and MFR. Mr.
Young and Ms. Lee hold identical offices for the Distributor (Security
Distributors, Inc.). Messrs. Cleland and Schmank are also directors and Vice
Presidents of the Distributor and Ms. Harwood is Treasurer of the Distributor.
REMUNERATION OF DIRECTORS AND OTHERS
The Fund directors, except those directors who are "interested persons" of
the Fund, receive from the Fund an annual retainer of $1,042 and a fee of $133
per meeting, plus reasonable travel costs, for each meeting of the board
attended. Each of the seven Series of the Fund paid a pro rata portion of the
directors' fees based on the amount of its net assets. Certain directors who are
members of the Fund's audit committee receive a fee of $100 per hour and
reasonable travel costs for each meeting of the audit committee attended.
The Fund does not pay any fees to, or reimburse expenses of, directors who
are considered "interested persons" of the Fund. The aggregate compensation paid
by the Fund to each of the directors, except Mr. Jensen and Ms. Ramirez, during
the fiscal year ended December 31, 1996, and the aggregate compensation paid to
each of the directors during calendar year 1996 by all seven of the registered
investment companies in the "Security Fund Complex," are set forth in the
accompanying chart. Each of the directors, except Mr. Jensen and Ms. Ramirez, is
a director of each of the other registered investment companies in the Security
Fund Complex.
26
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
PENSION OR RETIREMENT TOTAL COMPENSATION
NAME OF AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM THE SECURITY
DIRECTOR OF COMPENSATION AS PART OF FUND BENEFITS UPON FUND COMPLEX,
THE FUND FROM THE FUND EXPENSES RETIREMENT INCLUDING THE FUND
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Willis A. Anton, Jr. $1,542 $0 $0 $18,500
Donald A. Chubb, Jr. 1,571 0 0 18,900
John D. Cleland 0 0 0 0
Donald L. Hardesty 1,542 0 0 18,500
Penny A. Lumpkin 1,571 0 0 18,900
Mark L. Morris, Jr. 1,571 0 0 18,900
Jeffrey B. Pantages 0 0 0 0
Harold G. Worswick* 0 0 0 6,450
Hugh L. Thompson 1,181 0 0 14,175
- ----------------------------------------------------------------------------------------------------------------------------
*The Fund has accrued deferred compensation in the amount of $537 for Mr. Worswick as of December 31, 1996.
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
On October 31, 1997, the Fund's officers and directors (as a group) owned
less than 1% of the Fund.
HOW TO PURCHASE SHARES
As discussed below, shares of the Series may be purchased with either a
front-end or contingent deferred sales charge. Each of the Series 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 Series do
not issue certificates for Series shares except upon written request by the
stockholder.
Security Distributors, Inc. (the "Distributor"), 700 SW Harrison, Topeka,
Kansas, a wholly-owned subsidiary of Security Benefit Group, Inc., is principal
underwriter for the Series. Investors may purchase shares of the Series 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 Series available to their customers. (Banks and other financial
institutions that make shares of the Series 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 31.) An application
may be obtained from the Distributor.
Orders for the purchase of shares of the Series 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 Series. 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
The Series offers two classes of shares:
CLASS A SHARES - FRONT-END LOAD OPTION. Class A shares are sold with a
sales charge at the time of purchase. Class A shares are not subject to a sales
charge when they are redeemed (except that shares sold in an amount of
$1,000,000 or more without a front-end sales charge will be subject to a
contingent deferred sales charge of 1% for one year). See Appendix A for a
discussion of "Rights of Accumulation" and "Statement of Intention," which
options may serve to reduce the front-end sales charge.
CLASS B SHARES - BACK-END LOAD OPTION. Class B shares are sold without a
sales charge at the time of purchase, but are subject to a deferred sales charge
if they are redeemed within five years of the date of purchase. Class B shares
will automatically convert tax-free to Class A shares at the end of eight years
after purchase.
The decision as to which class is more beneficial to an investor depends on
the amount and intended length of the investment. Investors who would rather pay
the entire cost of distribution at the time of investment, rather than spreading
such cost over time, might consider Class A shares. Other investors might
consider Class B shares, in
27
<PAGE>
which case 100% of the purchase price is invested immediately, depending on the
amount of the purchase and the intended length of investment. The Series 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 the Series 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
AT OFFERING PRICE OFFERING PRICE AMOUNT INVESTED TO 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 the Series 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 30. 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.
CLASS A DISTRIBUTION PLAN
As discussed in the prospectus, each of the Series has a Distribution Plan
for its Class A shares pursuant to Rule 12b-1 under the Investment Company Act
of 1940. The Plan authorizes the Series to pay an annual fee to the Distributor
equal to .25% of the average daily net asset value of the Class A shares of each
Series to finance various activities relating to the distribution of such shares
to investors. These expenses include, but are not limited to, the payment of
compensation (including compensation to securities dealers and other financial
institutions and organizations) to obtain various administrative services for
each Series. 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 Series and their
transactions with the Series. The Distributor is also authorized to engage in
advertising, the preparation and distribution of sales literature and other
promotional activities on behalf of each Series. The Distributor is required to
report in writing to the Board of Directors of the 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 with respect to Global High Yield Series on June
1, 1995, and the other Series on May 1, 1997, and was renewed by the directors
of the Fund with respect to Global High Yield Series on February 7, 1997. 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 the 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 may be terminated
at any time on 60 days' written notice, without penalty, if a majority of the
disinterested directors or the Class A shareholders of a Series 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 Series.
Because all amounts paid pursuant to the Distribution Plan are paid to the
Distributor, SMC and its officers, directors and employees, including Messrs.
Cleland and Pantages (directors of the Fund), Messrs. Young, Schmank, Hamilton,
Bowser and Swickard, Ms. Lee and Ms. Harwood (officers of the Fund), all may be
deemed
28
<PAGE>
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 Series 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
Series' 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 the Series' assets, and
facilitating economies of scale (e.g., block purchases) in the Series'
securities transactions.
Distribution fees paid by Class A stockholders of the Global High Yield
Series to the Distributor under the Plan for the year ended December 31, 1996,
totaled $7,921. Approximately $7,721 of this amount was paid as a service fee to
broker/dealers and $200 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 the Series. 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 the Series are offered at net asset value, without an
initial sales charge. With certain exceptions, these Series may impose a
deferred sales charge on shares redeemed within five years of the date of
purchase. No deferred sales charge is imposed on amounts redeemed thereafter. If
imposed, the deferred sales charge is deducted from the redemption proceeds
otherwise payable to the stockholder. The deferred sales charge is retained by
the Distributor.
Whether a contingent deferred sales charge is imposed and the amount of the
charge will depend on the number of years since the stockholder made a purchase
payment from which an amount is being redeemed, according to the following
schedule:
YEAR SINCE PURCHASE PAYMENT WAS MADE CONTINGENT DEFERRED SALES CHARGE
------------------------------------ --------------------------------
First 5%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth and Following 0%
Class B shares (except shares purchased through the reinvestment of
dividends and other distributions with respect to Class B shares) will
automatically convert on the eighth anniversary of the date such shares were
purchased to Class A shares which are subject to a lower 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 SMC.) 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 Fund's 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 the Series 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"). This Plan was adopted by the Board of Directors of the Fund
with respect to Global High
29
<PAGE>
Yield Series on February 3, 1995, and with respect to the Emerging Markets Total
Return and Global Asset Allocation Series, on February 7, 1997. The Plan was
renewed with respect to Global High Yield Series on February 7, 1997. 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 Series 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 each year after the first,
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 Series.
Rules of the National Association of Securities Dealers, Inc. ("NASD")
limit the aggregate amount that each Series 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 Series. The
Distributor intends to seek full payment of such charges from the Series
(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 Series would be
within permitted limits.
Each Series' Class B Distribution Plan may be terminated at any time with
respect to any Series by vote of the 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 of the Series. In the event the Class B Distribution Plan is
terminated by the Class B stockholders or the Fund's 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 Global High Yield Series to the Distributor under the
Plan for the year ended December 31, 1996, totaled $15,035. The Series 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
Series; (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 also may be waived in the case of certain redemptions of shares of
the Series pursuant to a Systematic Withdrawal Program (refer to page 32 for
details).
30
<PAGE>
ARRANGEMENTS WITH BROKER/DEALERS AND OTHERS
The Distributor, from time to time, may provide promotional incentives or
pay a bonus to certain dealers whose representatives have sold or are expected
to sell significant amounts of the Series. Such promotional incentives may
include payment for attendance (including travel and lodging expenses) by
qualifying registered representatives (and members of their families) to sales
seminars at luxury resorts within or without the United States. Bonus
compensation may include reallowance of the entire sales charge and also may
include, with respect to Class A shares, an amount which exceeds the entire
sales charge and, with respect to Class B shares, an amount which exceeds the
maximum commission. The Distributor also may provide financial assistance to
certain dealers in connection with conferences, sales or training programs for
their employees, seminars for the public, advertising, sales campaigns, and/or
shareholder services and programs regarding one or more of the Series. Certain
of the promotional incentives or bonuses may be financed by payments to the
Distributor under a Rule 12b-1 Distribution Plan. The payment of promotional
incentives and/or bonuses will not change the price an investor will pay for
shares or the amount that the Series will receive from such sale. No
compensation will be offered to the extent it is prohibited by the laws of any
state or self-regulatory agency, such as the National Association of Securities
Dealers, Inc. ("NASD"). A Dealer to whom substantially the entire sales charge
of Class A shares is reallowed may be deemed to be an "underwriter" under
federal securities laws.
The Distributor also may pay banks and other financial services firms that
facilitate transactions in shares of the Series for their clients a transaction
fee up to the level of the payments made allowable to dealers for the sale of
such shares as described above. Banks currently are prohibited under the
Glass-Steagall Act from providing certain underwriting or distribution services.
If banking firms were prohibited from acting in any capacity or providing any of
the described services, the Fund's Board of Directors would consider what
action, if any, would be appropriate.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
PURCHASES AT NET ASSET VALUE
Class A shares of the Series may be purchased at net asset value by (1)
directors, officers and employees of the Funds, MFR (and its affiliates) or the
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.
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 the Series also may 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 the Series 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 Series as of the close of business on the day such payment is
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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 Series purchases. There is no additional charge for using Secur-O-Matic.
An application may be obtained from the Series.
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
Fund does 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
SMC acting as agent for the stockholder under the Program. There is no service
charge on the Program as SMC 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 the
Series 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 Fund, and it will
terminate automatically if all shares are liquidated or withdrawn from the
account.
A stockholder may establish a Systematic Withdrawal Program with respect to
Class B shares without the imposition of any applicable contingent deferred
sales charge, provided that such withdrawals do not in any 12-month period,
beginning on the date the Program is established, exceed 10% of the value of the
account on that date ("Free Systematic Withdrawals"). Free Systematic
Withdrawals are not available if a Program established with respect to Class B
shares provides for withdrawals in excess of 10% of the value of the account in
any Program year and, as a result, all withdrawals under such a Program are
subject to any applicable contingent deferred sales charge. Free Systematic
Withdrawals will be made first by redeeming those shares that 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 30. A Systematic Withdrawal form may be obtained from the
Fund.
INVESTMENT MANAGEMENT
MFR Advisors, Inc. ("MFR"), One Liberty Plaza, New York, New York 10006,
has served as investment adviser to the Series since May 1, 1997 (date of
inception of Emerging Markets Total Return and Global Asset Allocation Series).
Prior to that date, MFR served as a sub-adviser to the Global High Yield Series
and SMC served as investment adviser. The current Investment Advisory Contract
for the Series is dated April 28, 1997 and was approved by the Fund's Board of
Directors at a regular meeting held February 7, 1997. MFR is a subsidiary of
Maria Fiorini Ramirez, Inc. ("Ramirez") which was established in August of 1992
to provide global economic consulting, and through its subsidiary companies,
investment advisory and broker-dealer services. Ramirez owns 80% of the
outstanding common stock of MFR. Maria Fiorini Ramirez owns 100% of the
outstanding capital stock of Ramirez. MFR currently acts as sub-adviser to the
Lexington Ramirez Global Income Fund and SBL Fund, Global Aggressive Bond Series
and also serves as an institutional manager for private clients. Security
Benefit Life Insurance Company ("SBL") owns the remaining 20% of MFR's
outstanding common stock and has stock rights that would enable SBL to acquire a
100% ownership interest in MFR in the future.
Pursuant to the Investment Advisory Contract, MFR furnishes investment
advisory, statistical and research services to the Series, supervises and
arranges for the purchase and sale of securities on behalf of the Series,
provides for the maintenance and compilation of records pertaining to the
investment advisory functions, and makes certain guarantees with respect to the
Series' annual expenses. MFR guarantees that the aggregate
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annual expenses of the respective Series (including for any fiscal year, the
management fee, but excluding interest, taxes, brokerage commissions,
extraordinary expenses and Class B distribution fees) shall not exceed the level
of expenses which the Series is permitted to bear under the most restrictive
expense limitation imposed by any state in which shares of the Series are then
qualified for sale. (MFR is not aware of any state that currently imposes limits
on the level of mutual fund expenses.) MFR will contribute such funds or waive
such portion of its management fee as may be necessary to insure that the
aggregate expenses of the Series do not exceed the guaranteed maximum.
MFR has retained Lexington Management Corporation ("Lexington") to furnish
certain advisory services to the Series pursuant to a Sub-Advisory Agreement,
effective May 1, 1997. Pursuant to this agreement, Lexington furnishes
investment advisory, statistical and research facilities, supervises and
arranges for the purchase and sale of securities on behalf of the Series 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 the Fund, and MFR. For such services, MFR pays Lexington
an amount equal to .20% of the average net assets of the Series, 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 MFR and the Fund is terminated, assigned or
not renewed.
Lexington is a wholly-owned subsidiary of Lexington Global Asset Managers,
Inc., a Delaware corporation with offices at Park 80 West Plaza Two, Saddle
Brook, New Jersey 07663. Descendants of Lunsford Richardson, Sr., their spouses,
trusts and other related entities have a majority voting control of the
outstanding shares of Lexington Global Asset Managers, Inc. Lexington was
established in 1938 and currently manages over $3.8 billion in assets.
MFR has entered into a Sub-Advisory Agreement with Security Management
Company, LLC ("SMC"), 700 SW Harrison Street, Topeka, Kansas 66636-0001, to
provide investment advisory services with respect to the Global Asset Allocation
Series' investments in domestic equities, subject to the control and supervision
of the Board of Directors of the Fund. For such services, MFR pays SMC an amount
equal to .15% of the average net assets of the Global Asset Allocation Series,
computed on a daily basis and payable monthly. SMC is a wholly-owned subsidiary
of SBL.
For its services, MFR is entitled to receive compensation on an annual
basis equal to 1.0% of the average daily closing value of the net assets of each
of Emerging Markets Total Return and Global Asset Allocation Series and .75% of
the average daily closing value of the net assets of Global High Yield Series,
computed on a daily basis and payable monthly. During the fiscal year ended
December 31, 1996 and the period June 1, 1995 (date of inception) to December
31, 1995, the former Investment Adviser, SMC, waived its advisory fee in the
amount of $34,900 and $9,033, respectively; after the fee waiver, Global High
Yield Series paid $0 and $7,904, respectively, to SMC for its services. For the
fiscal year ended December 31, 1996 and the period June 1, 1995 (date of
inception) through December 31, 1995, expenses incurred by Global High Yield
Series exceeded 2.0% of the average net assets and accordingly, the former
investment adviser, SMC, reimbursed the Series $3,690 and $15,172, respectively.
For the period May 19, 1997 (date of inception) to September 30, 1997, the
investment adviser waived its advisory fee in the amount of $3,838 for Emerging
Markets Total Return Series and $3,886 for Global Asset Allocation Series. For
this same period, expenses incurred by Emerging Markets Total Return Series and
Global Asset Allocation Series exceeded 2.0% of the average net assets of their
Class A shares and 2.75% of the average net assets of their Class B shares, and
accordingly, the investment adviser reimbursed the Emerging Markets Total Return
Series $12,921 and the Global Asset Allocation Series $12,957.
Each Series will pay all of its expenses not assumed by MFR 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 Series also will 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 Series will pay
nonrecurring expenses as may arise, including litigation affecting it.
The Investment Advisory Contract between MFR and the Fund expires on May 1,
1998. The contract is renewable annually by the Fund's Board of Directors or by
a vote of a majority of a Series' outstanding securities and, in either event,
by a majority of the board who are not parties to the contract or interested
persons of any
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such party. The contract provides that it may be terminated without penalty at
any time by either party on 60 days' notice and is automatically terminated in
the event of assignment.
Pursuant to an Administrative Services Agreement with the Fund, SMC also
acts as the administrative agent for the Fund and as such performs
administrative functions and the bookkeeping, accounting and pricing functions
for the Series. For these services, SMC receives, on an annual basis, a fee of
.045% of the average net assets of the Series, calculated daily and payable
monthly. In addition, SMC receives, with respect to Global High Yield Series, an
annual fee equal to the greater of .10% of its average daily net assets or
$60,000 and with respect to the Emerging Markets Total Return and Asset
Allocation Series, an annual fee equal to the greater of .10% of its average
daily net assets or (i) $30,000 in the year ending May 1, 1998; (ii) $45,000 in
the year ending May 1, 1999; or (iii) $60,000 thereafter. For the period ended
June 30, 1997, SMC limited the accounting fee for Global High Yield series to
$45,000, and for the period ended September 30, 1997, SMC limited the accounting
fees for Emerging Markets Total Return Series and Global Asset Allocation Series
to $15,000. There can be no assurance that SMC will continue to waive these fees
in the future.
Under the Administrative Services Agreement identified above, SMC acts as
the transfer agent for the Series. As such, SMC 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,
SMC receives an annual maintenance fee of $8.00 per account, a fee of $1.00 per
shareholder transaction, and a fee of $1.00 per dividend transaction.
For the fiscal year ended December 31, 1996, the expense ratios were 1.98%
and 2.75%, respectively of the average net assets of Class A and B shares of the
Global High Yield Series. For the period May 19, 1997 (date of inception) to
September 30, 1997, the expense ratios were 2.00% and 2.75%, respectively of the
average net assets of Class A and B shares of the Emerging Markets Total Return
Series, and 2.00% and 2.75%, respectively of the average net assets of Class A
and B shares of the Global Asset Allocation Series. The expense figures quoted
are net of expense reimbursements and fees paid indirectly as a result of
earnings credits earned on overnight cash balances.
The following persons are affiliated with the Funds and also with MFR in
these capacities:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
NAME POSITIONS WITH THE FUND POSITIONS WITH MFR ADVISORS, INC.
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Maria Fiorini Director President
Ramirez
Bruce Jensen Director Chief Investment Officer
Tim Downing None Chief Financial Officer
- -----------------------------------------------------------------------------------------------------------------------------
The following persons are affiliated with the Funds and also with SMC in these capacities:
- -----------------------------------------------------------------------------------------------------------------------------
NAME POSITIONS WITH THE FUND POSITIONS WITH SECURITY MANAGEMENT COMPANY, LLC
- -----------------------------------------------------------------------------------------------------------------------------
James R. Schmank Vice President and Treasurer President, Treasurer, Chief Fiscal Officer and Managing
Member Representative
John D. Cleland President and Director Senior Vice President and Managing Member Representative
Mark E. Young Vice President Vice President
Amy J. Lee Secretary Secretary
Brenda M. Harwood Assistant Treasurer and Assistant Assistant Vice President, Assistant Treasurer
Secretary and Assistant Secretary
Steven M. Bowser Assistant Vice President Second Vice President and Portfolio Manager
Thomas A. Swank Assistant Vice President Vice President and Portfolio Manager
David Eshnaur Assistant Vice President Assistant Vice President and Portfolio Manager
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
PORTFOLIO MANAGEMENT
The Global Asset Allocation Series is managed by an investment team of MFR.
Bruce Jensen, Chief Investment Officer, has day-to-day responsibility for
managing the Series and directs the allocation of investments among common
stocks and fixed income securities. The common stock portion of the Series'
portfolio receives
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sub-investment advisory services from Lexington for international equities and
SMC for domestic equities. The Global High Yield Series is managed by an
investment management team of Lexington and MFR. Denis P. Jamison and Maria
Fiorini Ramirez have day-to-day responsibility for managing the Series and have
managed the Series since its inception in 1995. The Emerging Markets Total
Return Series is managed by an investment team of MFR. Bruce Jensen, Chief
Investment Officer, has day-to-day responsibility for managing the Series and
directs the allocation of investments among common stocks and fixed income
securities. The common stock portion of the Series receives sub-investment
advisory services from Lexington.
Denis P. Jamison, C.F.A., Senior Vice President, Director Fixed Income
Strategy of Lexington 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 Lexington 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.
Bruce Jensen, Chief Investment Officer of MFR, holds a bachelor's degree in
Accounting from Boston University and an M.B.A. in Finance from Fairleigh
Dickinson University. Prior to joining the Investment Manager in 1992, he spent
six years with the Pilgrim Group in Los Angeles and was Senior Vice President in
Charge of Fixed Income. Prior to Pilgrim, Mr. Jensen was a fixed income
Portfolio Manger with Lexington. Mr. Jensen has managed the Emerging Markets
Total Return and Global Asset Allocation Series since their inception, May 1,
1997.
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.
CODE OF ETHICS
The Fund, MFR 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 Fund and MFR and employees that participate in, or obtain information
regarding, the purchase or sale of securities by the Series 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 Series; (b) is being purchased or sold by one or
more of the Series; 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 Series that he or she
manages trades in that security. Any material violation of the Code of Ethics is
reported to the Board of the Fund. The Board also reviews the administration of
the Code of Ethics on an annual basis.
DISTRIBUTOR
Security Distributors, Inc. (the "Distributor"), a Kansas corporation and
wholly-owned subsidiary of Security Benefit Group, Inc., serves as the principal
underwriter for shares of the Series and the other Series of the Fund: Corporate
Bond, Limited Maturity Bond, U.S. Government and High Yield Series pursuant to
Class A and Class B Distribution Agreements. The Distributor also acts as
principal underwriter for the following investment companies: Security Equity
Fund, Security Growth and Income Fund, Security Ultra Fund, Security Tax-Exempt
Fund, Variflex Variable Annuity Account, SBL Variable Annuity Account VIII, the
Parkstone Variable Annuity Account and Security Varilife Separate Account.
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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 and contingent deferred sales charges on redemptions of Class B shares of
Global High Yield Series of $8,510 and $2,167, and retained net underwriting
commissions of $4,824 and $379 for the fiscal year ended December 31, 1996 and
the period June 1, 1995 (date of inception) to December 31, 1995, respectively.
For the period May 19, 1997 (date of inception) to September 30, 1997, the
Distributor received gross underwriting commissions on the sale of Class A and B
shares and contingent deferred sales charges on redemptions of Class B shares of
$1,639 for Emerging Markets Total Return Series and $240 for Global Asset
Allocation Series and retained net underwriting commissions of $69 for Emerging
Markets Total Return Series and $15 for Global Asset Allocation Series.
The Distributor, on behalf of the Fund, 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 Series' Distribution Agreement is renewable annually either by the
Fund's Board of Directors or by a vote of a majority of the Series' 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 Series. 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 MFR (or in some cases, Lexington or SMC),
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 Global High Yield Series does not
anticipate that it 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. When
trading fixed income securities, the Series will deal directly with the selling
or purchasing principal without incurring charges for the services of a broker
on its behalf unless it is determined that a better price or execution may be
obtained by utilizing the services of a broker. The Series 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 MFR (or, if applicable,
Lexington or SMC). 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 MFR (or,
if applicable, Lexington or SMC) 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 MFR (or, if applicable, Lexington
or SMC) with respect to all accounts as to which it exercises investment
discretion. MFR (or, if applicable, Lexington or SMC) 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 Series.
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<PAGE>
In addition, brokerage transactions may be placed with broker/dealers who
sell shares of the Series (or other mutual funds/Series distributed by the
Distributor) who may or may not also provide investment information and research
services. MFR (or, if applicable, Lexington or SMC) may, consistent with the
NASD Rules of Fair Practice, consider sales of such shares in the selection of a
broker/dealer.
Securities held by the Series also may be held by other investment advisory
clients of MFR (or, if applicable, Lexington or SMC), including other investment
companies. In addition, SMC's parent company, Security Benefit Life Insurance
Company ("SBL"), also may hold some of the same securities as the Series. When
selecting securities for purchase or sale for a Series, MFR (or, if applicable,
Lexington or SMC) may, at the same time, be purchasing or selling the same
securities for one or more of such other accounts. Subject to each adviser's
obligation to seek best execution, such purchases or sales may be executed
simultaneously or "bunched." It is the policy of MFR, Lexington and SMC not to
favor one account over the other. Any purchase or sale orders executed
simultaneously (which with respect to SMC, may also include orders from SBL) are
allocated at the average price and as nearly as practicable on a pro rata basis
(transaction costs will also generally be shared on a pro rata basis) in
proportion to the amounts desired to be purchased or sold by each account. In
those instances where it is not practical to allocate purchase or sale orders on
a pro rata basis, then the allocation will be made on a rotating or other
equitable basis. While it is conceivable that in certain instances this
procedure could adversely affect the price or number of shares involved in the
Series' transaction, it is believed that the procedure generally contributes to
better overall execution of the Series' portfolio transactions. The Board of
Directors of the Fund has adopted guidelines governing this procedure and will
monitor the procedure to determine that the guidelines are being followed and
that the procedure continues to be in the best interest of the Fund and its
stockholders. With respect to the allocation of initial public offerings
("IPOs"), MFR (and Lexington and SMC) may determine not to purchase such
offerings for certain of its clients (including investment company clients) due
to the limited number of shares typically available in an IPO. No brokerage
commissions were paid by Global High Yield Series for the fiscal year ended
December 31, 1996 and the period June 1, 1995 (date of inception) to December
31, 1995.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Series is determined as of the close
of regular trading hours on the New York Stock Exchange (normally 3:00 p.m.
Central time) on each day that the Exchange is open for trading, which is Monday
through Friday except for the following dates when the Exchange is closed in
observance of Federal holidays: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, July Fourth, Labor Day, Thanksgiving
Day and Christmas Day. The determination is made by dividing the total value of
the portfolio securities of each Series, plus any cash or other assets
(including dividends accrued but not collected), less all liabilities, by the
number of shares outstanding of the Series.
Securities listed or traded on a national securities exchange are valued at
the last sale price. If there are no sales on a particular day, then the
securities are valued at the last bid price. All other securities, held by the
Series, 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 Series'
securities are supplied by a pricing service approved by the Board of Directors.
The Series 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
SMC which serves as the Series' transfer agent. A request is made in proper
order by submitting the following items to SMC: (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 SMC 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
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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. SMC 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 SMC.
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 SMC
less any applicable deferred sales charge. Payment of the redemption price will
be made by check (or by wire at the sole discretion of SMC 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.
When investing in the Series, 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 Fund 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 Series in the case of orders for purchase of
Series shares before it receives federal funds.
In addition to the foregoing redemption procedure, the Series 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 45.)
At various times the Series may be requested to redeem shares for which
they have not yet received good payment. Accordingly, the Series 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.
TELEPHONE REDEMPTIONS
Stockholders of the Series 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 SMC. 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
SMC, a stockholder may redeem shares by calling the Fund at (800) 643-8188, on
weekdays (except holidays) between the hours of 7:00 a.m. and 6:00 p.m. Central
time. Redemption requests received by telephone after the close of the New York
Stock Exchange (normally 3:00 p.m. Central time) will be treated as if received
on the next business day. Telephone redemptions are not accepted for IRA and
403(b)(7) accounts. A stockholder who authorizes telephone redemptions
authorizes SMC to act upon the instructions of any person identifying themselves
as the owner of the account or the owner's broker. SMC 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. SMC'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, SMC, nor the Distributor will be liable for
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any loss, liability, cost or expense arising out of any redemption request
provided that SMC 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 SMC 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 37.
HOW TO EXCHANGE SHARES
Pursuant to arrangements with the Distributor, stockholders of the Series
may exchange their shares for shares of another of the Series or for shares of
other mutual funds distributed by the Distributor (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 Series may be exchanged for Class A and
Class B shares, respectively, of another of the Series or a Security Fund. Any
applicable contingent deferred sales charge will be calculated from the date of
the initial purchase.
Stockholders making such exchanges must provide SMC with sufficient
information to permit verification of their prior ownership of shares of one of
the other Series or Security Fund. Any such exchange is subject to the minimum
investment and eligibility requirements of each Series. No service fee is
presently imposed on such an exchange.
Exchanges may be accomplished by submitting a written request to SMC, 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 may be avoided by making exchange requests directly to SMC.
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 40.)
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 Series may be made only in jurisdictions where
shares of the Series being acquired may lawfully be sold. 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 Fund 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
series 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 SMC. Authorization must be on file
with SMC before exchanges may be made by telephone. Once authorization has been
received by SMC, a stockholder may exchange shares by telephone by calling (800)
643-8188, on weekdays (except holidays) between the hours of 7:00 a.m. and 6:00
p.m. Central time. Exchange requests received by telephone after the close of
the New York Stock Exchange (normally 3:00 p.m. Central time) will be treated as
if received on the next business day. Shares which are held in certificate form
may not be exchanged by telephone. The telephone exchange privilege is only
permitted between accounts with identical registration. SMC 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. SMC'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 Series from which and into which the exchange
is to be made, and such instructions must be received on a recorded line.
Neither the Fund, SMC, nor the Distributor will be liable for any loss,
liability, cost or expense arising out of any request, including any fraudulent
request provided SMC complied with its procedures. Thus, a stockholder who
authorizes telephone exchanges may bear the risk of loss from a fraudulent or
unauthorized
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request. This telephone exchange privilege may be changed or discontinued at any
time at the discretion of the management of the Fund. In particular, the Fund
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 Series intends to qualify annually and 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 Series 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
Series' 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 Series' 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 Series' 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 Series 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 Series 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 Series, must distribute
amounts on a timely basis in accordance with a calendar year distribution
requirement in order to avoid a nondeductible 4% excise tax. Generally, to avoid
the tax, a regulated investment company must distribute during each calendar
year, (i) at least 98% of its ordinary income (not taking into account any
capital gains or losses) for the calendar year, (ii) at least 98% of its capital
gains in excess of its capital losses (adjusted for certain ordinary losses) for
the 12-month period ending on October 31 of the calendar year, and (iii) all
ordinary income and capital gains for previous years that were not distributed
during such years. To avoid application of the excise tax, each Series intends
to make its distributions in accordance with the calendar year distribution
requirement. A distribution 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
Series 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 Series 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 Series
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
Series 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 Series were
unable to obtain
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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 the Global High Yield Series to pay dividends from net
investment income quarterly and of the Emerging Markets Total Return and Global
Asset Allocation Series to distribute at least once a year substantially all of
its net investment income. It is the policy of the Series 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 Series bear
most of the costs of distribution of such shares through payment of a front-end
sales charge, while Class B shares of the Series 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 Series 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 Series at net asset value, as of the record date
(reduced by an amount equal to the amount of the dividend or distribution),
unless SMC 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. The Series 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 the Series are taxable as
ordinary income whether received in cash or reinvested in additional shares.
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 Series 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. Advice as to
the tax status of each year's dividends and distributions will be mailed
annually.
Stockholders of the Series 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 Series 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 Series 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.
The Series 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 Series will 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.
A purchase of shares shortly before payment of a dividend or distribution
would be disadvantageous because the dividend or distribution to the purchaser
would have the effect of reducing the per share net asset value of his or her
shares by the amount of the dividends or distributions. In addition all or a
portion of such dividends or distributions, although in effect a return of
capital, are subject to taxes, which may be at ordinary income tax rates.
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OPTIONS, FUTURES AND FORWARD CONTRACTS AND SWAP AGREEMENTS. Certain
options, futures contracts, and forward contracts in which a Series 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 Series 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 Series 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 Series. In addition, losses
realized by a Series 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 Series are not
entirely clear. The transactions may increase the amount of short-term capital
gain realized by a Series which is taxed as ordinary income when distributed to
shareholders.
A Series may make one or more of the elections available under the Code
which are applicable to straddles. If a Series 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 Series 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 Series as a regulated investment company might be
affected.
The requirements applicable to a Series' qualification as a regulated
investment company may limit the extent to which a Series 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 Series 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 Series accrues
income or other receivables or accrues expenses or other liabilities denominated
in a foreign currency and the time that Series actually collects such
receivables or pays 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 Series' investment company taxable
income to be distributed to its shareholders as ordinary income.
ORIGINAL ISSUE DISCOUNT. Debt securities purchased by a Series (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 Series, is
treated for federal income tax purposes as income earned by the Series, and
therefore is subject to the distribution requirements of the Code. Generally,
the amount of original issue discount included in the income of the Series each
year is determined on the basis of a constant yield to maturity which takes into
account the compounding of accrued interest.
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In addition, debt securities may be purchased by a Series at a discount
which exceeds the original issue discount remaining on the securities, if any,
at the time the Series 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 Series 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 Series 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 Series 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 Series. 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 Series' contacts with a state or local
jurisdiction, the Series 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. Shareholders are advised to consult their own
tax advisers with respect to the particular tax consequences to them of an
investment in a Series.
ORGANIZATION
The Articles of Incorporation of the Fund provide for the issuance of
shares of common stock in one or more classes or series.
The Fund has authorized the issuance of an indefinite number of shares of
capital stock of $1.00 par value and currently issues its shares in the
following series: Emerging Markets Total Return, Global Asset Allocation, Global
High Yield, Corporate Bond, Limited Maturity Bond, U.S. Government and High
Yield Series. The shares of each Series of the 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.
Each of the series of the Fund currently issues two classes of shares which
participate proportionately based on their relative net asset values in
dividends and distributions and have equal voting, liquidation and other rights
except that (i) expenses related to the distribution of each class of shares or
other expenses that the Board of Directors may designate as class expenses from
time to time, are borne solely by each class; (ii) each class of shares has
exclusive voting rights with respect to any Distribution Plan adopted for that
class; (iii) each class has different exchange privileges; and (iv) each class
has a different designation. When issued and paid for, the shares of the Series
will be fully paid and nonassessable. 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 the 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 Fund does 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 the Fund's outstanding shares.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND-PAYING AGENT
Chase Manhattan Bank, 4 Chase MetroTech Center, Brooklyn, New York, acts as
custodian for the portfolio securities of the Series, 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. SMC acts as the Series' transfer and dividend-paying agent.
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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 the Fund to serve as the independent auditors of the Series, and as
such, the firm will perform the annual audit of each Series' financial
statements.
PERFORMANCE INFORMATION
The Series 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 and average annual total return and aggregate total return
for each Series.
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:
YIELD = 2((A-B + 1)(6) - 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.
For the 30-day period ended December 31, 1996, the yield for the Class A
shares of the Global High Yield Series was 8.21% and for the Class B shares was
7.83%.
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 Series' portfolio, the portfolio quality and average
maturity of such instruments, changes in interest rates and the actual Series
expenses. Yield computations will reflect the expense limitations described in
this Prospectus under "Investment Management."
Quotations of average annual total return will be expressed in terms of the
average annual compounded rate of return of a hypothetical investment in a
Series over periods of 1, 5 and 10 years (up to the life of the Series),
calculated pursuant to the following formula:
P(1+T)(n) = 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 Series expenses on an
annual basis, and assume that all dividends and distributions are reinvested
when paid.
For the 1-year period ended December 31, 1996, the average annual total
return for Class A and B shares respectively of Global High Yield Series was
6.24% and 5.67%. For the period June 1, 1995 (date of inception) to December 31,
1996 the average annual total return for Class A and B shares respectively of
Global High Yield Series was 8.63% and 8.78%.
For the period May 19, 1997 (date of inception) to September 30, 1997, the
average annual total return for the Class A shares of the Emerging Markets Total
Return Series and Global Asset Allocation Series was 1.03% and 3.64%,
respectively. For the period May 19, 1997 (date of inception) to September 30,
1997 the average annual total return for the Class B shares of the Emerging
Markets Total Return and Global Asset Allocation Series was .27% and 3.00%,
respectively.
The aggregate total return for the Series is calculated for any specified
period of time pursuant to the following formula:
P(1+T)(n) = 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 Series may, from
time to time, include
44
<PAGE>
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
Global High Yield Series calculated as described above for the period from June
1, 1995 (date of inception) through December 31, 1996 was 14.0%. This figure
reflects deduction of the maximum initial sales load.
The aggregate total return on an investment made in Class B shares of
Global High Yield Series for the same period was 14.3%. This figure reflects
deduction of the maximum contingent deferred sales charge.
The aggregate total return on an investment made in Class A shares of
Emerging Markets Total Return Series and Global Asset Allocation Series
calculated as described above for the period May 19, 1997 (date of inception) to
September 30, 1997 was .38% and 1.33%, respectively. These figures reflect
deduction of the maximum initial sales load.
The aggregate total return on an investment made in Class B shares of
Emerging Markets Total Return Series and Global Asset Allocation Series for the
same period was .10% and 1.10%. 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.
Quotations of 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 Series' 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, average annual total return or
aggregate total return to current or prospective stockholders, each Series 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 Series will include performance data
for both Class A and Class B shares of the Series in any advertisement or report
including performance data of the Series. 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
The Series offers tax-qualified retirement plans for individuals
(Individual Retirement Accounts, known as IRAs), SIMPLE IRAs, several prototype
retirement plans for the self-employed (Keogh plans), pension and profit-sharing
plans for corporations, and custodial account plans for employees of public
school systems and organizations meeting the requirements of Section 501(c)(3)
of the Internal Revenue Code. Actual documents and detailed materials about the
plans will be provided upon request to the Distributor.
Purchases of shares of the Series 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.
SMC is available to act as custodian for the plans on a fee basis. For
IRAs, SIMPLE IRAs, Section 403(b) Retirement Plans, and Simplified Employee
Pension Plans (SEPPs), service fees for such custodial services currently are:
(1) $10 for annual maintenance of the account, and (2) benefit distribution fee
of $5 per distribution. Service fees for other types of plans will vary. These
fees will be deducted from the plan assets. Optional supplemental services are
available from Security Benefit Life Insurance Company for additional charges.
Retirement investment programs involve commitments covering future years.
It is important that the investment objective and structure of the Series be
considered by the investors for such plans. Investments in insurance and annuity
contracts also may be purchased in addition to shares of the Series.
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.
45
<PAGE>
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 the Series. An individual may initiate an IRA through
the Distributor by executing the custodial agreement and making a minimum
initial investment of at least $100. A $10 annual fee is charged for maintaining
the account.
An individual may make a contribution to 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 $4,000, provided 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.
SIMPLE IRAS
The Small Business Job Protection Act of 1996 created a new retirement
plan, the Savings Incentive Match Plan for Employees of Small Employers (SIMPLE
Plans). SIMPLE Plan participants must establish a SIMPLE IRA into which plan
contributions will be deposited.
The Investment Manager makes available SIMPLE IRAs to provide investment in
shares of the Series. Contributions to a SIMPLE IRA may be either salary
deferral contributions or employer contributions. Contributions must be made in
cash and cannot exceed the maximum amount allowed under the Internal Revenue
Code. On a pre-tax basis, up to $6,000 of compensation (through salary
deferrals) may be contributed to a SIMPLE IRA. In addition, employers are
required to make either (1) a dollar-for-dollar matching contribution or (2) a
nonelective contribution to each participant's account each year. In general,
matching contributions must equal up to 3% of compensation, but under certain
circumstances, employers may make lower matching contributions. Instead of the
match, employers may make a nonelective contribution equal to 2% of compensation
(compensation for purposes of any nonelective contribution is limited to
$160,000, as indexed).
Distributions from a SIMPLE IRA are (1) taxed as ordinary income; (2)
includable in gross income; and (3) subject to applicable state tax laws.
Distributions prior to age 59 1/2 may be subject to a 10% penalty tax which
increases to 25% for distributions made before a participant has participated in
the SIMPLE Plan for at least two years. An annual fee of $10 is charged for
maintaining the SIMPLE IRA.
PENSION AND PROFIT-SHARING PLANS
Prototype corporate pension or profit-sharing prototype plans meeting the
requirements of Internal Revenue Code Section 401(a) are available. Information
concerning these plans may be obtained from Security Distributors, Inc.
403(B) RETIREMENT PLANS
Employees of public school systems and tax-exempt organizations meeting the
requirements of Internal Revenue Code Section 501(c)(3) may purchase custodial
account plans funded by their employers with shares of the Series in accordance
with Code Section 403(b). Section 403(b) plans are subject to numerous
restrictions on
46
<PAGE>
the amount that may be contributed, the persons who are eligible to participate
and on the time when distributions may commence.
SIMPLIFIED EMPLOYEE PENSION PLANS (SEPPS)
A prototype SEPP is available for corporations, partnerships or sole
proprietors desiring to adopt such a plan for purchases of IRAs for their
employees. Employers establishing a SEPP may contribute a maximum of $30,000 a
year to an IRA for each employee. This maximum is subject to a number of
limitations.
FINANCIAL STATEMENTS
The audited financial statements of Global High Yield Series, which are
contained in the Fund's Annual Report dated December 31, 1996, the unaudited
financial statements of the Series which are contained in the Series' June 30,
1997 Semiannual Report, and the unaudited financial statements of the Emerging
Markets Total Return Series and Global Asset Allocation Series for the period
May 19, 1997 (date of inception) to September 30, 1997, are incorporated herein
by reference. Copies of the Annual Report, Semiannual Report, and the unaudited
financial statements of the Series (except Global High Yield Series) are
provided to every person requesting the Statement of Additional Information.
47
<PAGE>
APPENDIX A
REDUCED SALES CHARGES
Initial sales charges may be reduced or eliminated for persons or
organizations purchasing Class A shares of a Series alone or in combination with
Class A shares of another of the Series.
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 Class A shares of the Series, a
Purchaser may combine all previous purchases with a contemplated current
purchase of Class A shares of a Series 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 Series 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 two or
more of the Series in those states where shares of the Series being purchased
are qualified for sale.
STATEMENT OF INTENTION
A Purchaser 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 the Series to be made within a period
of 13 months (or a 36-month period for purchases of $1 million or more) and
thereby become eligible for the reduced front-end sales charge applicable to the
actual amount purchased under the Statement. Five percent of the amount
specified in the Statement of Intention will be held in escrow shares until the
Statement is completed or terminated. The shares so held may be redeemed by the
Fund if the investor is required to pay additional sales charge which may be due
if the amount of purchases made by the investor during the period the Statement
is effective is less than the total specified in the Statement of Intention.
A Statement of Intention may be revised during the 13-month period (or, if
applicable, 36-month period). Additional Class A shares received from
reinvestment of income dividends and capital gains distributions (if any are
realized) are included in the total amount used to determine reduced sales
charges. The Statement is not a binding obligation upon the investor to purchase
or any Series 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 SMC.
48
<PAGE>
REINSTATEMENT PRIVILEGE
Stockholders who redeem their Class A shares of a Series have a one-time
privilege (1) to reinstate their accounts by purchasing shares of the Series
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 Series 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.
49
<PAGE>
MFR EMERGING MARKETS TOTAL RETURN SERIES
STATEMENT OF NET ASSETS
September 30, 1997
(UNAUDITED)
NUMBER OF MARKET
COMMON STOCKS SHARES VALUE
---------- ---------
ARGENTINA - 2.7%
Telefonica de Argentina S.A. ADR..................... 800 $ 29,300
BRAZIL - 9.7%
Aracruz Celulose S.A. ADR............................ 1,200 24,675
CESP - Companhia Energetica de Sao Paulo ADR*........ 1,100 26,257
Companhia Cervejaria Brama ADR....................... 2,000 30,750
Telecom Braxileiras S.A. ADR......................... 200 25,750
-------
107,432
CHILE - 2.5%
Maderas Y Sinteticos S.A. ADR........................ 2,000 27,750
CZECH REPUBLIC - 1.1%
SPT Telecom A.S.*.................................... 100 12,657
GREECE - 6.0%
Hellenic Tellecommunication Organization S.A......... 1,178 29,520
Titan Cement Company S.A............................. 600 36,244
-------
65,764
HONG KONG - 4.3%
Founder Hong Kong Limited............................ 31,000 30,245
Glorious Sun Enterprises............................. 42,000 16,961
-------
47,206
HUNGARY - 2.4%
Zalakermia Rt........................................ 600 26,447
INDONESIA - 1.9%
Pt Ramayana Lestari Sentosa.......................... 10,000 20,642
MEXICO - 11.6%
Cemex S.A. De C.V. (Cl. B)........................... 5,000 29,709
Grupo Casa Autrey S.A. de C.V. ADR................... 1,200 27,450
Grupo Industrial Maseca S.A. De C.V. ADR............. 2,000 36,250
World Equity Benchmark Shares-Mexico................. 2,000 34,250
-------
127,659
PHILIPPINES - 0.6%
C & P Homes, Inc..................................... 65,000 6,244
POLAND - 5.5%
Elektrim Spolka Arcyjna S.A.......................... 2,800 31,366
E. Wedel S.A......................................... 500 29,248
-------
60,614
See accompanying notes.
50
<PAGE>
MFR EMERGING MARKETS TOTAL RETURN SERIES
STATEMENT OF NET ASSETS (CONTINUED)
September 30, 1997
(UNAUDITED)
PRINCIPAL
AMOUNT OR
NUMBER OF MARKET
COMMON STOCKS (CONTINUED) SHARES VALUE
--------- ------
PORTUGAL - 2.4%
Portual Telecom S.A.................................. 600 $ 26,034
SINGAPORE - 2.0%
Want Want Holdings - A*.............................. 1,500 3,570
Want Want Holdings*.................................. 7,500 19,050
-------
22,620
SOUTH AFRICA - 2.6%
South African Breweries Limited...................... 1,000 29,008
SPAIN - 3.8%
Tele Pizza, S.A.*.................................... 600 41,831
-------
TOTAL COMMON STOCKS - 59.1%.......................... 651,208
GOVERNMENT OBLIGATIONS
ARGENTINA - 3.4%
Republic of Argentina 5.50% - 2023 (b)............... $50,000 37,781
BRAZIL - 4.3%
Government of Brazil "C" Bond, 8.00% - 2014 (c)...... $56,033 47,663
COSTA RICA - 4.6%
Banco Costa Rica, 6.25% - 2010....................... $57,712 50,137
ECUADOR - 5.6%
Republic of Ecuador, 6.4375% - 2025 (d).............. $75,000 61,524
GREECE - 4.3%
Hellenic Republic, 14.00% - 2003 (a)................. 13,000,000 46,969
HUNGARY - 4.9%
Government of Hungary, 23.00% - 1999 (a)............. 10,000,000 54,350
PERU - 2.4%
Peru - PDI, 4.00% - 2017............................. $39,000 26,081
SOUTH AFRICA - 3.6%
Republic of South Africa, 12.00% - 2005 (a).......... 200,000 39,251
-------
TOTAL GOVERNMENT OBLIGATIONS - 33.1%................. 363,756
See accompanying notes.
51
<PAGE>
MFR EMERGING MARKETS TOTAL RETURN SERIES
STATEMENT OF NET ASSETS (CONTINUED)
September 30, 1997
(UNAUDITED)
PRINCIPAL
AMOUNT OR
NUMBER OF MARKET
SHORT-TERM INVESTMENTS SHARES VALUE
--------- ------
MEXICO - 3.0%
Mexico Cetes, 0% 10/20/97 (a)........................ 255,040 $ 32,783
MONEY MARKET FUND - 0.4%
Vista Treasury Plus International Fund............... 4,784 4,784
---------
TOTAL SHORT-TERM INVESTMENTS - 3.4%.................. 37,567
---------
TOTAL INVESTMENTS - 95.6%............................ 1,052,531
CASH AND OTHER ASSETS, LESS LIABILITIES - 4.4%....... 48,948
---------
TOTAL NET ASSETS - 100.0%............................ $1,101,479
==========
At September 30, 1997, Emerging Markets Total Return Series' investment
concentration, by industry, was as follows:
Brewery.............................................. 5.4%
Building Materials................................... 11.5%
Computer Systems..................................... 2.7%
Electric Utilities................................... 2.4%
Electronics.......................................... 2.9%
Food Processing...................................... 4.7%
Foods................................................ 3.3%
Medical.............................................. 2.5%
Miscellaneous........................................ 3.1%
Paper & Paper Products............................... 2.2%
Restaurants.......................................... 3.8%
Retail/Department Store.............................. 1.9%
Telecommunications................................... 6.2%
Telephone............................................ 5.0%
Textiles............................................. 1.5%
-------
59.1%
Foreign Government Bonds............................. 33.1%
Cash, short term investments, and other assets,
less liabilities................................... 7.8%
-------
Total net assets..................................... 100.0%
=======
See accompanying notes.
52
<PAGE>
MFR GLOBAL ASSET ALLOCATION SERIES
STATEMENT OF NET ASSETS
September 30, 1997
(UNAUDITED)
NUMBER OF MARKET
COMMON STOCKS SHARES VALUE
---------- ---------
ARGENTINA - 2.0%
Telefonica de Argentina S.A. ADR..................... 600 $ 21,975
AUSTRALIA - 2.8%
Foster's Brewing Group Ltd........................... 15,000 31,609
AUSTRIA - 2.3%
Boehler-Uddeholm AG.................................. 300 25,222
CANADA - 7.5%
Bombardier, Inc. (Cl. B)............................. 1,000 20,249
Imax Corporation*.................................... 1,500 38,673
Stelco, Inc. (Cl. A)................................. 3,200 25,225
---------
84,147
CZECH REPUBLIC - 1.1%
SPT Telecom A.S.*.................................... 100 12,657
FRANCE - 4.1%
Alcatel Alsthom...................................... 200 26,600
Sidel, S.A........................................... 300 19,672
---------
46,272
GREECE - 5.9%
Hellenic Tellecommunication Organization S.A......... 1,178 29,520
Titan Cement Company, S.A............................ 600 36,244
---------
65,764
HONG KONG - 2.7%
Founder Hong Kong Limited............................ 31,000 30,245
IRELAND - 2.1%
Allied Irish Banks Plc............................... 2,600 22,970
JAPAN - 4.7%
Amway Japan Limited.................................. 300 8,598
Mitsubishi Motors Corporation........................ 3,000 15,406
Sony Corporation..................................... 300 28,328
---------
52,332
MEXICO - 2.7%
Cemex S.A. de C.V. (Cl. B)........................... 5,000 29,709
NEW ZEALAND - 2.2%
Fletcher Challenge Building.......................... 7,500 24,482
Fletcher Challenge Forests........................... 300
374
---------
24,856
See accompanying notes.
53
<PAGE>
MFR GLOBAL ASSET ALLOCATION SERIES
STATEMENT OF NET ASSETS
September 30, 1997
(UNAUDITED)
NUMBER OF MARKET
COMMON STOCKS SHARES VALUE
---------- ---------
PHILIPPINES - 0.4%
C & P Homes, Inc..................................... 50,000 $ 4,803
POLAND - 2.9%
Electrim Spolka Akcyjna S.A.......................... 1,600 17,923
E, Wedel S.A......................................... 250 14,624
---------
32,547
SINGAPORE - 2.0%
Want Want Holdings - A*.............................. 1,500 3,570
Want Want Holdings* ................................. 7,500 19,050
---------
22,620
SPAIN - 4.4%
Adolfo Dominguez S.A.*............................... 600 27,888
Tele Pizza, S.A.*.................................... 400 21,036
---------
48,924
SWEDEN - 2.2%
Skandinaviska Enskilda Banken........................ 2,000 24,267
SWITZERLAND - 2.1%
Saurer AG*........................................... 30 23,818
UNITED KINGDOM - 1.6%
British Telecommunications Plc....................... 2,700 17,861
UNITED STATES - 13.6%
Baxter International................................. 500 26,125
Cisco Systems, Inc.*................................. 200 14,613
General Electric Company............................. 500 34,031
International Business Machines Corporation.......... 300 31,781
Northern Trust Corporation........................... 400 23,650
Royal Dutch Petroleum Company ADR.................... 100 22,200
---------
152,400
---------
TOTAL COMMON STOCKS - 69.3%.......................... 774,998
See accompanying notes.
54
<PAGE>
MFR GLOBAL ASSET ALLOCATION SERIES
STATEMENT OF NET ASSETS (CONTINUED)
September 30, 1997
(UNAUDITED)
NUMBER OF MARKET
COMMON STOCKS SHARES VALUE
---------- ---------
CANADA - 2.4%
CHC Helicopter, 11.50% - 2002 (a).................... 25,000 $ 26,688
DENMARK - 4.0%
Nykredit, 7.00% - 2026 (a)........................... 300,000 44,276
UNITED STATES - 4.7%
Archibald Candy Corporation, 10.25% - 2004........... $50,000 52,125
---------
TOTAL CORPORATE BONDS - 11.1%........................ 123,089
GOVERNMENT OBLIGATIONS
ARGENTINA - 3.4%
Republic of Argentina, 5.50% - 2023 (b).............. $50,000 37,781
BRAZIL - 4.3%
Government of Brazil "C" Bond, 8.00% - 2014 (c)...... $56,033 47,663
ECUADOR - 1.8%
Republic of Ecuador, 6.4375% - 2025 (d)............. $25,000 20,508
GREECE - 4.2%
Hellenic Republic, 14.00% - 2003 (a)................. 13,000,000 46,968
SOUTH AFRICA - 1.8%
Republic of South Africa, 12.00% - 2005 (a).......... 100,000 19,626
---------
TOTAL GOVERNMENT OBLIGATIONS - 15.5%................. 172,546
TEMPORARY CASH INVESTMENTS
MONEY MARKET FUNDS - 2.7%
Vista Treasury Plus International Fund............... 30,685 30,685
---------
TOTAL INVESTMENTS - 98.6%............................ 1,101,318
CASH AND OTHER ASSETS, LESS LIABILITIES - 1.4%....... 16,411
---------
TOTAL NET ASSETS - 100.0%............................ $1,117,729
=========
See accompanying notes.
55
<PAGE>
MFR GLOBAL ASSET ALLOCATION SERIES
STATEMENT OF NET ASSETS (CONTINUED)
September 30, 1997
(UNAUDITED)
At September 30, 1997, Global Asset Allocation Series' investment concentration,
by industry, was as follows:
Apparel.......................................... 1.9%
Automobiles...................................... 1.4%
Banks & Credit................................... 4.2%
Brewery.......................................... 2.8%
Building Materials............................... 8.5%
Commercial Banks................................. 2.1%
Computer Hardware................................ 2.8%
Computer Systems................................. 2.7%
Electrical Equipment............................. 3.0%
Electronics...................................... 4.1%
Entertainment.................................... 3.5%
Financial........................................ 4.0%
Food Processing.................................. 3.3%
Forestry......................................... 0.1%
Industrial Services.............................. 4.7%
Integrated Petroleum-International............... 2.0%
Machinery........................................ 5.7%
Medical Supplies................................. 2.3%
Metals & Minerals................................ 2.3%
Miscellaneous.................................... 0.8%
Networking....................................... 1.3%
Restaurants...................................... 2.5%
Steel............................................ 2.3%
Telecommunications............................... 7.7%
Telephone........................................ 2.0%
Transportation................................... 2.4%
-----
80.4%
Foreign Government Bonds......................... 15.5%
Cash, short-term investments, and other assets,
less liabilities................................ 4.1%
-----
Total net assets................................. 100.0%
======
The identified cost of investments owned at September 30, 1997, was the same for
federal income tax and book purposes.
*Securities on which no cash dividend was paid during the preceding twelve
months.
ADR (American Depositary Receipt)
(a) Principal amount on foreign bond is reflected in local currency (e.g.
Japanese yen) while market value is reflected in U.S. dollars.
(b) Step-up rate security which will increase over the life of the bond.
(c) Variable rate security which may be reset over the life of the bond.
(d) Floating rate security which may be reset the first of each semi-annual
period.
See accompanying notes.
56
<PAGE>
BALANCE SHEETS
September 30,1997
(Unaudited)
MFR
GLOBAL
MFR EMERGING ASSET
MARKETS TOTAL ALLOCATION
RETURN SERIES SERIES
-------------- -----------
ASSETS:
Investments, at value (identified
cost $1,012,356 and $1,050,461 respectively)....... $1,052,531 $1,101,318
Cash................................................. 3,728 1,959
Receivables:
Securities sold................................... 21,150 0
Interest.......................................... 15,810 11,838
Dividends......................................... 295 1,339
MFR Advisors, Inc................................. 2,280 2,147
Foreign taxes recoverable......................... 459 969
Prepaid expenses..................................... 15,410 15,176
--------- ---------
Total assets................................ $1,111,663 $1,134,746
========= =========
LIABILITIES AND NET ASSETS
Liabilities:
Payable for forward foreign exchange contracts.... 3,843 10,671
Other Liabilities:
Custodian fees................................. 2,937 2,937
Transfer and administration fees............... 73 51
Professional fees.............................. 2,118 2,151
12b-1 distribution plan fees................... 593 587
Miscellaneous fees............................. 620 620
--------- ---------
Total liabilities........................... 10,184 17,017
Net Assets:
Paid in capital...................................... 1,048,415 1,054,600
Undistributed net investment income.................. 12,264 8,460
Accumulated undistributed net realized gain on
sale of investments and foreign currency
transactions........................................ 4,694 14,587
Net unrealized appreciation in value of investments
and translation of assets and liabilities in
foreign currencies.................................. 36,106 40,082
--------- ---------
Net Assets..................................... 1,101,479 1,117,729
--------- ---------
Total liabilities and net assets............ $1,111,663 $1,134,746
========= =========
CLASS "A" SHARES
Capital shares outstanding........................... 51,776 54,592
Net assets........................................... $ 545,649 $ 580,990
Net asset value per share (net assets divided by
shares outstanding)................................. $10.54 $ 10.64
Add: Selling commission (4.75% of the
offering price)..................................... 0.53 0.53
--------- ---------
Offering price per share (net asset value divided
by 95.25%).......................................... $11.07 $ 11.17
========= =========
CLASS "B" SHARES
Capital shares outstanding........................... 52,907 50,573
Net assets........................................... $ 555,830 $ 536,739
Net asset value per share (net assets divided by
shares outstanding)................................. $10.51 $10.61
========= =========
See accompanying notes.
57
<PAGE>
STATEMENTS OF OPERATIONS
For May 19, 1997 to September 30, 1997
(Unaudited)
MFR
GLOBAL
MFR EMERGING ASSET
MARKETS TOTAL ALLOCATION
RETURN SERIES SERIES
-------------- -----------
INVESTMENT INCOME:
Dividends......................................... $ 3,530 $ 7,200
Interest ......................................... 17,926 11,179
-------- -------
21,456 18,379
Less foreign tax expense....................... (77) (711)
--------- -------
Total investment income..................... 21,379 17,668
EXPENSES:
Management fees................................... 3,838 3,886
Custodian fees.................................... 2,937 2,937
Transfer/maintenance fees......................... 55 27
Administration fees............................... 7,159 7,374
Directors' fees................................... 91 91
Professional fees................................. 868 868
Reports to shareholders........................... 549 549
Registration fees................................. 7,508 7,507
Other expenses.................................... 470 403
12b-1 distribution plan fees...................... 2,399 2,409
Reimbursement of expenses......................... (16,759) (16,843)
--------- -------
Total expenses.............................. 9,115 9,208
--------- -------
Net investment income.................... 12,264 8,460
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) during the period on:
Investments.................................... 5,380 10,246
Foreign currency transactions.................. (686) 4,341
--------- -------
Net realized gain........................... 4,694 14,587
Net change in unrealized appreciation (depreciation)
during the period on:
Investments.................................... 40,175 50,857
Translation of assets and liabilities in
foreign currencies............................... (4,069) (10,775)
--------- -------
Net unrealized appreciation................. 36,106 40,082
--------- -------
Net gain................................. 40,800 54,669
--------- -------
Net increase in net assets resulting from
operations....................................... $ 53,064 $ 63,129
========= =======
See accompanying notes.
58
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
For May 19, 1997 to September 30, 1997
(Unaudited)
MFR
GLOBAL
MFR EMERGING ASSET
MARKETS TOTAL ALLOCATION
RETURN SERIES SERIES
-------------- -----------
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income.............................. $ 12,264 $ 8,460
Net realized gain.................................. 4,694 14,587
Unrealized appreciation during the period.......... 36,106 40,082
--------- ---------
Net increase in net assets resulting from
operations.................................... 53,064 63,129
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A......................................... 0 0
Class B......................................... 0 0
Net realized gain
Class A......................................... 0 0
Class B......................................... 0 0
--------- ---------
Total distributions to shareholders....... 0 0
CAPITAL SHARE TRANSACTIONS (A):
Proceeds from sales of shares
Class A......................................... 523,092 548,500
Class B......................................... 530,115 506,100
Dividends reinvested
Class A......................................... 0 0
Class B......................................... 0 0
Shares redeemed
Class A......................................... (4,792) 0
Class B......................................... 0 0
--------- ---------
Net increase from capital share transactions. 1,048,415 1,054,600
--------- ---------
Total increase in net assets.............. 1,101,479 1,117,729
NET ASSETS:
Beginning of period................................ 0 0
End of period...................................... 1,101,479 1,117,729
--------- ---------
Undistributed net investment income at end of
period............................................ $ 12,264 $ 8,460
========= =========
(a) Shares issued and redeemed
Shares sold
Class A......................................... 52,239 54,592
Class B......................................... 52,907 50,573
Dividends reinvested
Class A......................................... 0 0
Class B......................................... 0 0
Shares redeemed
Class A......................................... (463) 0
Class B......................................... 0 0
--------- ---------
Net increase.............................. 104,683 105,165
========= =========
See accompanying notes.
59
<PAGE>
FINANCIAL HIGHLIGHTS
September 30, 1997
(Unaudited)
EMERGING MARKETS TOTAL RETURN SERIES CLASS A CLASS B
------------- -------------
1997(B)(C)(D) 1997(B)(C)(D)
------------- -------------
PER SHARE DATA
Net Asset Value Beginning of Period................. $10.00 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income............................... 0.130 0.100
Net Gain on Securities (Realized and Unrealized).... 0.410 0.410
----- -----
Total from Investment Operations................. 0.540 0.510
LESS DISTRIBUTIONS
Dividends (from Net Investment Income).............. 0.000 0.000
Distributions (from Capital Gains).................. 0.000 0.000
Return of Capital................................... 0.000 0.000
----- -----
Total Distributions.............................. 0.000 0.000
----- -----
Net Asset Value End of Period....................... $10.54 $10.51
===== =====
Total Return (a).................................... 5.40% 5.10%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (Thousands)................ $546 $556
Ratio of Expenses to Average Net Assets............. 2.00% 2.75%
Ratio of Net Income to Average Net Assets........... 3.59% 2.84%
Portfolio Turnover Rate............................. 26% 26%
Average Commission Paid Per Equity Shares Traded.... $0.0112 $0.0112
GLOBAL ASSET ALLOCATION SERIES CLASS A CLASS B
------------- -------------
1997(B)(C)(D) 1997(B)(C)(D)
------------- -------------
PER SHARE DATA
Net Asset Value Beginning of Period................. $10.00 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income............................... 0.120 0.110
Net Gain on Securities (Realized and Unrealized).... 0.510 0.500
----- -----
Total from Investment Operations................. 0.630 0.610
LESS DISTRIBUTIONS
Dividends (from Net Investment Income).............. 0.000 0.000
Distributions (from Capital Gains).................. 0.000 0.000
Return of Capital................................... 0.000 0.000
----- -----
Total Distributions.............................. 0.000 0.000
----- -----
Net Asset Value End of Period....................... $10.63 $10.61
===== =====
Total Return (a).................................... 6.30% 6.10%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (Thousands)................ $581 $537
Ratio of Expenses to Average Net Assets............. 2.00% 2.75%
Ratio of Net Income to Average Net Assets........... 2.72% 1.99%
Portfolio Turnover Rate............................. 20% 20%
Average Commission Paid Per Equity Shares Traded.... $0.0196 $0.0196
See accompanying notes.
60
<PAGE>
FINANCIAL HIGHLIGHTS
September 30, 1997
(Unaudited)
(a) Total return information does not take into account any charges paid at
time of purchase or contingent deferred sales paid at time of redemption.
(b) Emerging Markets Total Return Series and Global Asset Allocation Series
were initially capitalized on May 19, 1997, with a net asset value of $10
per share. Percentage amounts for the period have been annualized, except
for total return.
(c) Fund expenses were reduced by the Investment Manager and expense ratios
absent such reimbursement would have been as follows:
1997
------
Emerging Markets Total Return Series-Class A........ 6.38%
Emerging Markets Total Return Series-Class B........ 7.06%
Global Asset Allocation Series-Class A.............. 6.30%
Global Asset Allocation Series-Class B.............. 7.12%
(d) Unaudited figures for the period ended September 30, 1997. Percentage
amounts for the period, except total return have been annualized.
See accompanying notes.
61
<PAGE>
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
MFR Emerging Markets Total Return Series and MFR Global Asset Allocation
Series are diversified Series of Security Income Fund, an open-end
investment management company registered under the Investment Company Act
of 1940, as amended. Each Series is accounted for separately and general
expenses are allocated to each Series based upon the net asset value of
each Series. The following is a summary of the significant accounting
policies followed by the Series in the preparation of their financial
statements. These policies are in conformity with generally accepted
accounting principles.
A. SECURITY VALUATION - Valuations of the Series' securities are supplied
by pricing services approved by the Board of Directors. Securities
listed or traded on a national securities exchange are valued on the
basis of the last sales price. If there are no sales on a particular
day, then the securities are valued at the last bid price. Securities
for which market quotations are not readily available are valued by a
pricing servi3ce considering securities with similar yields, quality,
type of issue, coupon, duration, and rating. If there is no bid price
or if the bid price is deemed to be unsatisfactory by the Board of
Directors or by the Series' investment manager, then the securities
are valued in good faith by such method as the Board of Directors
determines will reflect the fair value. The Series' officers, under
the general supervision of the Board of Directors, regularly review
procedures used by, and valuations provided by, the pricing service.
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. Investments in foreign
securities may involve risks not present in domestic investments.
Since foreign securities may be denominated in a foreign currency and
involve settlement and pay interest in foreign currencies, changes in
the relationship of these foreign currencies to the U.S. dollar can
significantly affect the value of the investments and earnings of the
Series. Foreign investments may also subject the Series to foreign
government exchange restrictions, expropriation, taxation or other
political, social or economic developments, all of which could affect
the market and/or credit risk of the investments.
B. FOREIGN CURRENCY TRANSACTIONS - The accounting records of the Series
are maintained in U.S. dollars. All assets and liabilities initially
expressed in foreign currencies are converted into U.S. dollars at
prevailing exchange rates. Purchases and sales of investment
securities, dividend and interest income, and certain expenses are
translated at the rates of exchange prevailing on the respective dates
of such transactions.
The Series isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the
fluctuations arising from changes in the market prices of securities
held.
Net realized foreign exchange gains or losses arise from sales of
portfolio securities, sales of foreign currencies, and the difference
between asset and liability amounts initially stated in foreign
currencies and the U.S. dollar value of the amounts actually received
or paid. Net unrealized foreign exchange gains or losses arise from
changes in the exchange rates which effect the value of portfolio
securities and other assets and liabilities at the end of the
reporting period.
62
<PAGE>
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
C. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS - The 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. The Series may also enter into such contracts to
manage changes in foreign currency exchange rates on portfolio
positions. These contracts are marked to market daily, by recognizing
the difference between the contract exchange rate and the current
market rate as unrealized gains or losses. Realized gains or losses
are recognized when contracts are settled and are reflected in the
statement of operations. These contracts involve market risk in excess
of the amount reflected in the Balance Sheet. The face or contract
amount in U.S. dollars reflects the total exposure the Series has in
that particular currency contract. Losses may arise due to changes in
the value of the foreign currency or if the counterpart does not
perform under the contract.
D. OPTIONS - The Series may purchase put and call options and write such
options on a covered basis on securities that are traded on recognized
securities exchanges and over-the-counter markets. Call and put
options on securities give the holder the right to purchase or sell,
respectively (and the writer the obligation to sell or purchase), a
security at a specified price, on or until a certain date. The primary
risks associated with the use of options are an imperfect correlation
between the change in market value of the securities held by the
Series and the price of the option, the possibility of an illiquid
market, and the inability of the counter-party to meet the terms of
the contract.
The premium received for a written option is recorded as an asset,
with an equal liability which is marked to market based on the
option's quoted daily settlement price. Fluctuation in the value of
such instruments are recorded as unrealized appreciation
(depreciation) until terminated, at which time realized gains and
losses are recognized. Below, are the premiums received from written
call options.
FUND PREMIUM
--------------------------------------------------------------
Emerging Markets Total Return Series................. $1,894
Global Asset Allocation Series....................... $1,894
E. SECURITY TRANSACTIONS AND INVESTMENT INCOME - Security transactions
are accounted for on the date the securities are purchased or sold.
Realized gains and losses are reported on an identified cost basis.
Interest income is recognized on the accrual basis. Premium and
discounts on debt securities are amortized.
F. DISTRIBUTIONS TO SHAREHOLDERS - Distributions to shareholders are
recorded on the ex-dividend date. The character of distributions made
during the year from net investment income or net realized gains may
differ from their ultimate characterization for federal income tax
purposes. These differences are primarily due to the
recharacterization of foreign currency gains and losses.
G. TAXES - The Series complied with the requirements of the Internal
Revenue Code applicable to regulated investment companies and
distributed all of their taxable net income and net realized gains
sufficient to relieve them from all, or substantially all, federal
income, excise and state income taxes. Therefore, no provision for
federal or state income tax is required.
63
<PAGE>
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
2. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Management fees are payable to MFR Advisors, Inc. (MFR) under investment
advisory contracts at an annual rate of 1% of the average net assets for
Emerging Markets Total Return Series and Global Asset Allocation Series.
MFR has agreed to waive all of the management fees for the Series until
December 31, 1997. In addition, for the period ended September 30, 1997,
MFR agreed to limit the total expenses of each Series to an annual rate of
2.0% of the average daily net asset value of Class A shares and 2.75% of
the average daily net asset value of the Class B shares.
As compensation for the services provided to the Global Asset Allocation
Series, MFR pays each of Lexington Management Corporation (Lexington) and
Security Management Company, LLC (SMC), as Sub-Advisors, on an annual
basis, a fee equal to .20 percent and .15 percent, respectively, of the
average daily net assets of the Series. With respect to the Emerging
Markets Total Return Series, MFR pays Lexington, as Sub-Advisor, on an
annual basis, a fee equal to .20 percent of the average daily net assets of
each Series. Fees paid to the Sub-Advisors are calculated daily and payable
monthly.
The Series have entered into contracts with SMC for transfer agent services
and certain other administrative services which SMC provides to the Series.
SMC is paid an annual fixed charge per account and a shareholder and
dividend transaction fee.
As the administrative agent for the Series, SMC performs administrative
functions, such as regulatory filings, bookkeeping, accounting and pricing
functions for the Series. For this service SMC receives on an annual basis,
.045 percent of the average daily net assets of the Series, calculated
daily and payable monthly. For the identified administrative services SMC
also receives an annual fee equal to the greater of .10 percent of the
average daily net assets of each Series, calculated daily and payable
monthly, or (i) $30,000 in the year ended May 31, 1998; (ii) $45,000 in the
year ended May 31, 1999; or (iii) $60,000 thereafter, for the Global Asset
Allocation Series and the Emerging Markets Total Return Series. SMC has
agreed to limit these fees to $15,000 for the Emerging Markets Total Return
Series and the Global Asset Allocation Series until December 31, 1997.
The Series have adopted Distribution Plans related to the offering of Class
B shares pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The Plans provide for payments at an annual rate of 1.0% of the average net
assets of Class B shares. Class A shares incur 12b-1 fees at an annual rate
of .25% of the average net assets of each Series.
Security Distributors, Inc. (SDI), a wholly-owned subsidiary of Security
Benefit Group, Inc., is national distributor for the Series. SDI received
net underwriting commissions on sales of Class A shares and contingent
deferred sales charges on redemptions occurring within 5 years of the date
of purchase of Class B shares, after allowances to brokers and dealers for
the period ended September 30, 1997, in the amounts presented below:
SDI BROKER/ BROKER/
UNDERWRITING CDSC DEALER DEALER
FUND (CLASS A) (CLASS B) (CLASS A) (CLASS B)
---------------------------------------------------------------------------
Emerging Markets Total Return
Series......................... $69 $0 $369 $1,201
Global Asset Allocation Series.. $15 $0 $0 $225
Certain officers and directors of the Funds are also officers and/or
directors of MFR Advisors, Inc. and Security Benefit Life Insurance Company
and its subsidiaries, which include SMC and SDI.
64
<PAGE>
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
3. INVESTMENT TRANSACTIONS
Investment transactions for the period ended September 30, 1997, (excluding
overnight investments and short-term debt securities) were as follows:
PROCEEDS FROM
FUND PURCHASES SALES
------------------------------------------------------------------------
Emerging Markets Total Return Series........ $1,060,093 $88,240
Global Asset Allocation Series.............. $1,082,512 $71,902
4. FEDERAL INCOME TAX MATTERS
The amounts of unrealized appreciation (depreciation) as of September 30,
1997, were as follows:
<TABLE>
<CAPTION>
AGGREGATE AGGREGATE NET
GROSS GROSS UNREALIZED
UNREALIZED UNREALIZED APPRECIATION
FUND APPRECIATION DEPRECIATION (DEPRECIATION)
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Emerging Markets Total Return Series................ $88,030 $(51,924) $36,106
Global Asset Allocation Series...................... $91,941 $(51,859) $40,082
</TABLE>
5. FORWARD FOREIGN EXCHANGE CONTRACTS
At September 30, 1997, the following Series had open forward foreign
exchange contracts to sell currency (excluding foreign currency contracts
used for purchase and sale settlements):
<TABLE>
<CAPTION>
SETTLEMENT CONTRACT CONTRACT CURRENT UNREALIZED
FUND CURRENCY DATE AMOUNT RATE RATE GAIN/(LOSS)
------------------------------------------------------------------------------------------------------------------------
Emerging Markets
<S> <C> <C> <C> <C> <C> <C>
Total Return Series Deutsche Marks 10/08/97 $ 92,522 1.8374 1.764120 $ (3,843)
========
Global Asset Canadian Dollar 10/08/97 $ 72,504 1.379225 1.38182 $ 136
Allocation Series Canadian Dollar 10/08/97 $ 72,131 1.38637 1.38182 238
Deutsche Marks 10/10/97 $ 44,334 1.8045 1.763976 (1,018)
Deutsche Marks 10/10/97 $159,736 1.8781 1.763976 (10,335)
Japanese Yen 10/27/97 $ 41,974 119.119999 120.66333 536
New Zealand Dollar 10/06/97 $ 18,974 1.581153 1.56238 (228)
--------
$(10,671)
========
</TABLE>
<PAGE>
SECURITY FUNDS
================================================================================
SEMI-ANNUAL REPORT
JUNE 30, 1997
*SECURITY INCOME FUND
- CORPORATE BOND SERIES
- U.S. GOVERNMENT SERIES
- LIMITED MATURITY BOND SERIES
- HIGH YIELD SERIES
*SECURITY TAX-EXEMPT FUND
*SECURITY CASH FUND
[SDI LOGO]
SECURITY DISTRIBUTORS, INC.
A Member of The Security Benefit
Group of Companies
<PAGE>
PRESIDENT'S LETTER
AUGUST 15, 1997
To Our Shareholders:
The first six months of 1997 have been a roller-coaster ride for fixed income
investors. At the beginning of the year the bellwether thirty-year Treasury bond
yielded 6.64%. By late April the yield had risen to 7.14% before it began its
descent to 6.78% at the end of June. As you know, bond prices move inversely to
yields, staging a "mirror" roller coaster ride which produced a 2.3% total
return on the long Treasury bond for the period.
THE INFLATION STORY IN 1997
Contrary to what this volatility might indicate, the compelling story for the
six-month period was the absence of reacceleration of inflation pressures. In
fact, evidence suggests that inflation is actually declining. This is true
particularly when one takes into account the overstatement of structural
inflation revealed by the Boskin report, the study commissioned by the Senate
Finance Committee to review the calculation of the Consumer Price Index (CPI).
This report found that the CPI probably overstates true increases in the cost of
living by approximately 1.1% per year.
This leaves us with the understanding that real interest rates on the long
Treasury bond are 300 to 400 basis points higher than might be expected given
today's actual annualized inflation rate of around 2%. We therefore conclude
that there is opportunity for further declines in long-term rates with their
commensurate increase in bond prices as we move through the second half of 1997.
CAN THE GOOD NEWS CONTINUE?
The good news on the inflation front should continue to be a positive influence
on fixed income markets for some time as the economy continues to slow its
growth rate from the torrid pace of 1997's first quarter. We believe that due to
the continuation of productivity improvements in U.S. businesses, economic
growth rates of around 3% may be sustainable without reigniting inflation. This
is in contrast to the 2% to 2.5% rates of growth that have been historically
viewed by the Federal Reserve Board as a "speed bump." Therefore, for fixed
income investors the climate should remain favorable for returns of at least the
portfolio coupon rate, with the possibility of some capital appreciation if long
term interest rates decline as we believe they will, in recognition of the
pattern of slowing global inflation pressures.
As always, we appreciate your continuing investment in the Security Funds. We
invite your questions and comments at any time.
John Cleland, President
The Security Funds
1
<PAGE>
MANAGER'S COMMENTARY
AUGUST 15, 1997
SECURITY INCOME FUND
CORPORATE BOND SERIES
Volatility was the key word for fixed income market behavior in the first half
of 1997. The thirty-year Treasury bond began the year yielding 6.64% and
finished June at 6.78%. In the intervening months it rose as high as 7.14%,
managing to gain only 2.3% in total return over the six months. Corporate issues
fared slightly better, as the Lehman Corporate Bond Index rose 3.07%. The
Corporate Bond Series of Security Income Fund generated a positive total return
for the six-month period of 2.35%, slightly lagging its peer group average of
2.68%.(1)
CONTRIBUTORS TO PERFORMANCE IN THE FIRST HALF
The Series underperformed in the first quarter of 1997 primarily because of its
position in property and casualty insurer Home Holdings. This company, which was
beset with problems among some of its insured risks, continued to lose value and
was ultimately sold from the portfolio.
While the first quarter's total return was negative, the second quarter was much
improved. Steps were taken to upgrade the overall credit quality of the
holdings. The high yield portion of the portfolio is now concentrated in issues
rated BB and B, the upper tiers of the high yield rating universe. Some of these
issues have the potential to be upgraded to investment grade ratings in the
not-too-distant future, which should add a capital gain return element to their
attractive coupon rates.
HOW THE PORTFOLIO LOOKS NOW
The sector composition of the portfolio at the end of June was about 53.5% high
grade corporate bonds, 20% high yield issues, 17% Yankee bonds (U.S.
dollar-denominated securities issued by foreign corporations), and 9.5%
mortgage-backed bonds issued primarily by agencies of the U.S. Government. This
sector diversification gives the portfolio some downside protection because the
various sectors will not always move up or down in value in tandem.
The average rating of the portfolio is a strong BBB, and the average coupon of
the portfolio holdings is 7.92%. Average duration of the securities is about 6.6
years, slightly longer than that of the benchmark Lehman Corporate Bond Index
duration of 5.88 years. We are working to reduce the block size of issues in the
portfolio so that each issuer will represent 2.5% or less of total assets, in
order to achieve further diversification.
LOOKING TO THE SECOND HALF
The Corporate Bond Series' portfolio is well positioned for the coming months.
Our emphasis on upgrading credit quality should help bring total returns more in
line with those of the benchmark index. Diversification among sectors and rating
classes can add a further element of safety. The mortgage-backed securities and
Yankee bonds provide cash flow through their generally higher coupon interest
rates than other classes. Finally, fundamentally improving stories among our
high yield credits provide the potential for additional return through capital
gains.
Thomas A. Swank
Portfolio Manager
Steven M. Bowser
Portfolio Manager
(1) Performance figures are based on Class A shares and do not reflect
deduction of the sales charge.
CORPORATE BOND SERIES
6-30-97
Credit Quality Rating
Average Maturity 16.8 years
AAA ................. 14.1%
AA .................. 14.6%
A ................... 32.6%
BBB ................. 18.8%
BB .................. 19.9%
CORPORATE BOND SERIES
AVERAGE ANNUAL TOTAL RETURN
AS OF JUNE 30, 1997
CLASS A SHARES CLASS B SHARES
1 Year 0.7% 1 Year -0.3%
5 Years 4.7% Since Inception 0.3%
10 Years 6.8% (10-19-93)
The performance data above represents past performance which is not predictive
of future results. For Class A shares these figures reflect deduction of the
maximum sales charge of 4.75%. For Class B shares the figures reflect deduction
of the maximum contingent deferred sales charge, ranging from 5% in the first
year to 0% in the sixth and following years. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
2
<PAGE>
MANAGER'S COMMENTARY
AUGUST 15, 1997
U.S. GOVERNMENT SERIES
The U.S. Government Series of Security Income Fund returned 2.46% in the first
half of 1997, right in line with its peer group average return of 2.47%.1 The
benchmark Lehman Government Bond Index returned a slightly higher 2.63% over the
same period.
CONTRIBUTORS TO PERFORMANCE
The portfolio had a large weighting in longer-duration Federal agency bonds,
with moderate positions in shorter Treasury issues and mortgage-backed
securities throughout the first six months. During the first quarter the
Treasuries and mortgage-backed bonds provided downside protection and allowed
the total return to be higher (actually, less negative) than that of the peer
group of funds. In March, April and May, however, the bond markets recovered and
these same defensive issues dampened returns somewhat, holding back overall
performance.
PORTFOLIO COMPOSITION AT THE END OF THE FIRST HALF
The sector weighting in the Series consisted of 41% federal agency securities,
36% GNMA mortgage-backed bonds secured by home mortgages, and 23% U.S. Treasury
issues. In general, mortgage-backed bonds and federal agency issues carry
slightly higher coupon rates than comparable Treasury bonds. This adds a small
extra increment to total return.
The duration of the portfolio at the end of June was 4.85 years, close to that
of the benchmark index's duration of 4.78 years. The average coupon, however,
was considerably higher than that of the index at 8.15%, compared with the
benchmark's 6.95% average.
PLANS FOR THE NEXT SIX MONTHS
The U.S. Government Series is designed for conservative investors, with a strong
emphasis on credit quality of the securities held in the portfolio. Because
shareholders in the Series tend to be cautious, we don't try to outguess the
markets by dramatically lengthening or shortening the duration of portfolio
holdings.
In the coming months, we anticipate maintaining our sector allocations close to
their present levels. We expect portfolio durations to also remain close to
current lengths. As always, we keep an eye on the markets to watch for sharp
movements in either direction, and retain the ability to make stronger moves
than usual if it becomes necessary.
Steven M. Bowser
Portfolio Manager
(1) Performance figures are based on Class A shares and do not reflect
deduction of the sales charge.
U.S. GOVERNMENT SERIES
6-30-97
Sectors Represented
Treasuries ................. 23%
Agencies ................... 41%
Mortgage Backed ............ 36%
U.S. GOVERNMENT SERIES
AVERAGE ANNUAL TOTAL RETURN
AS OF JUNE 30, 1997
CLASS A SHARES CLASS B SHARES
1 Year 2.2% 1 Year 1.1%
5 Years 5.4% Since Inception 2.3%
10 Years 7.2% (10-19-93)
The performance data above represents past performance which is not predictive
of future results. For Class A shares these figures reflect deduction of the
maximum sales charge of 4.75%. For Class B shares the figures reflect deduction
of the maximum contingent deferred sales charge, ranging from 5% in the first
year to 0% in the sixth and following years. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
3
<PAGE>
MANAGER'S COMMENTARY
AUGUST 15, 1997
LIMITED MATURITY BOND SERIES
Throughout a period of volatility in the bond markets, the Limited Maturity Bond
Series performed very well in the first half of 1997. The Series produced a
total return of 3.20%, comparing favorably with its peer group average of 2.74%,
and outperforming its benchmark Lehman Brothers Intermediate Corporate Bond
Index return of 3.05%.(1) The ten-year Treasury bond, representative of the
maturity structure of this portfolio, began the year yielding 6.42%, touched
6.90% in late March and early April, and fell back to close the first half at
6.50%.
CONTRIBUTORS TOWARD STRONG PERFORMANCE
Several of the high yield holdings in the portfolio experienced strong earnings
and strengthened balance sheets through debt reduction over the first six
months. These include PanAmerican Beverages, Inc., a Latin American producer and
bottler of Coca Cola and other soft drinks. Valassis Communications Corporation,
a company that produces special coupon inserts for Sunday newspapers, is
generally expected to be upgraded to investment grade in the near future after
reducing expenses and benefiting from lower paper costs.
Seagull Energy Corporation, an oil and gas explorer and developer, has lowered
overall company costs, realizing benefits of a recent acquisition. It is now on
Standard & Poor's ratings watch list for an upgrade. Comcast Corporation, a
cable television and telecommunications company, was upgraded to BB just after
the close of the first half.
COMPOSITION OF THE PORTFOLIO
The Limited Maturity Bond Series is currently comprised of about 46% high grade
bonds, 23% high yield issues (the maximum high yield allocation permitted in the
portfolio is 25%), 22% mortage-backed securities issued primarily by Federal
government agencies, and 9% Yankee bonds (dollar denominated securities issued
by foreign corporations).
The portfolio duration is approximately 4.3 years, just slightly longer than the
benchmark index's 4.21 years. The average coupon is a relatively high 8.1%,
lifted by the high yield and mortgage-backed securities holdings. The average
rating of securities remains well within the investment grade classification at
a mid-A level.
WHAT'S AHEAD FOR THE LIMITED MATURITY PORTFOLIO
We plan to maintain the overall portfolio quality at its present level, and to
keep the duration close to that of the benchmark intermediate corporate bond
index. The broad diversification of asset classes should help keep volatility at
lower levels, since the various sectors will not always move up or down in value
in tandem with each other. The intermediate-maturity bond portfolios tend to
outperform their longer counterparts in periods of rising interest rates, and so
make an attractive investment medium for a portion of shareholders' fixed income
allocations.
Thomas A. Swank
Portfolio Manager
Steven M. Bowser
Portfolio Manager
(1) Performance figures are based on Class A shares and do not reflect
deduction of the sales charge.
LIMITED MATURITY BOND SERIES
6-30-97
Credit Quality Rating
Average Maturity 6.5 Years
AAA ................ 31.6%
AA ................. 7.7%
A .................. 27.0%
BBB ................ 9.8%
BB ................. 19.5%
B .................. 0.9%
NR ................. 3.5%
LIMITED MATURITY BOND SERIES
AVERAGE ANNUAL TOTAL RETURN
AS OF JUNE 30, 1997
CLASS A SHARES CLASS B SHARES
1 Year 0.6% 1 Year -0.6%
Since Inception 5.3% Since Inception 4.8%
(1-17-95) (1-17-95)
The performance data above represents past performance which is not predictive
of future results. For Class A shares these figures reflect deduction of the
maximum sales charge of 4.75%. For Class B shares the figures reflect deduction
of the maximum contingent deferred sales charge, ranging from 5% in the first
year to 0% in the sixth and following years. The investment return and principal
value of an investment will fluctuate so tht an investor's shares, when
redeemed, may be worth more or less than their original cost.
4
<PAGE>
MANAGER'S COMMENTARY
AUGUST 15, 1997
HIGH YIELD SERIES
The high yield segment of the fixed income markets was the best-performing
domestic bond sector during the first half of 1997. The High Yield Series ranked
above median in its peer group, returning 5.79% for the period.(1) The peer
group average return was 5.92%, while the benchmark Lehman Brothers High Yield
Index posted a return of 5.82%.
COMPOSITION OF THE PORTFOLIO
At the end of June the High Yield Series portfolio was skewed toward the BB
rating category, the highest level on the high yield bond rating scale. With
approximately 70% of the issues in this category and the remaining ones rated B,
we feel that there is less concern about credit risk and more ability to
liquidate easily should selling become necessary. Our analysts seek out issues
which are currently rated BB, but whose financial statements show improvement
that could lead to an upgrade to investment grade in the near future.
Throughout the six months the portfolio has been underweight in basic industries
such as mining, metals, and chemicals, which have for the most part
underperformed other sectors. We were overweight in consumer cyclicals (cable
television companies, retail stores, gaming, and home construction) and
financials, including banks and insurance companies. Our underweight position in
utility bonds hurt, as this sector did very well during the period.
CONTRIBUTORS TO STRONG PERFORMANCE
Some issues in the portfolio were upgraded by the major rating agencies
recently. Knoll, Inc., which manufactures and distributes office systems and
business furniture, brought an initial public offering (IPO) to market and used
the proceeds to pay down more expensive debt. The company's securities were
subsequently upgraded from a low B to a high B level. Comcast Corporation, a
cable television and telecommunications company, was upgraded to BB just after
the close of the first half of 1997.
Other strong performers included AGCO Corporation, a worldwide manufacturer and
distributor of agricultural equipment and related replacement parts. AGCO has
benefited from the strong farm economy, both in the U.S. and abroad. Four
Seasons Hotels, Inc. offered to repurchase its 9.125% notes at a price which was
very attractive relative to their cost in our portfolio.
PLANS FOR THE REST OF 1997
We intend to continue our strategy of staying cognizant of credit quality and
looking for bonds which have a potential of being upgraded from BB to investment
grade. The high yield bond markets are similar to the equity markets in that
they have risen a good deal, but investment funds continue to pour in, driving
them up further. We plan to structure the portfolio to be sound from a credit
standpoint so that it can better withstand any unforseen shocks to the market.
Thomas A. Swank
Portfolio Manager
(1) Performance figures are based on Class A shares and do not reflect
deduction of the sales charge.
Investors should remember that while high yield bonds provide potentially higher
yields than many other types of bonds, they also present greater credit risk.
HIGH YIELD SERIES
6-30-97
Quality Credit Rating
Average Maturity 4.81 years
BBB ............ 1%
BB ............. 57%
B .............. 42%
HIGH YIELD SERIES
AVERAGE ANNUAL TOTAL RETURN
AS OF JUNE 30, 1997
CLASS A SHARES CLASS B SHARES
Since Inception 6.0% Since Inception 5.4%
(8-05-96) (8-05-96)
The performance data above represents past performance which is not predictive
of future results. For Class A shares these figures reflect deduction of the
maximum sales charge of 4.75%. For Class B shares the figures reflect deduction
of the maximum contingent deferred sales charge, ranging from 5% in the first
year to 0% in the sixth and following years. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
5
<PAGE>
MANAGER'S COMMENTARY
AUGUST 15, 1997
SECURITY TAX-EXEMPT FUND
The municipal market in the first half of the year outperformed its taxable
counterparts in the domestic fixed income markets. The Lehman Brothers Municipal
Bond Index rose 3.20% during the period, outpacing the Lehman Brothers Aggregate
Fixed Income Index return of 3.09%. The corporate and government components of
the aggregate index also showed lower returns than those of the municipal index.
PORTFOLIO PERFORMANCE IN THE FIRST HALF
The Security Tax-Exempt Fund produced a positive total return of 2.58%, modestly
underperforming its peer group average of 2.95% for the six months.(1) Our
somewhat shorter duration of 6.9 years, compared with the benchmark index
duration of 7.42 years, held back performance in the latter part of the
six-month period when interest rates were falling. Longer maturities tend to
outperform shorter bonds in such an interest rate environment.
The average credit quality of the bonds in the portfolio, currently at a mid-AA
level, while providing comfort to investors because of its strength, also holds
back performance when interest rates are declining. We generally maintain a
higher-than-average portfolio rating since financial information on many
municipal issuers is difficult to obtain, and sometimes not timely enough to
protect investors when finances deteriorate. In addition, if municipalities
experience strains on their budgets when Congress "pushes down" budget items to
the state and local levels, those bonds with higher credit quality should hold
their value better.
THE COMPOSITION OF THE PORTFOLIO CURRENTLY
The Security Tax-Exempt Fund seeks to add a measure of safety through
diversification. In municipal portfolios, this means including a large number of
geographic locations as well as diversifying by industry. At June 30, the
holdings represented 17 states plus the District of Columbia. The largest
represented, in terms of market value of the bonds, was Washington State,
followed by Illinois and California.
In terms of industry classification, the largest grouping of bonds is in the
Education Revenue sector. Education issues are viewed favorably by most
municipal bond holders, since municipalities are highly likely to support their
school systems and avoid bond defaults in this area. Second largest is Electric
Utility Revenue, another area where cash inflows to retire bonds are considered
relatively stable.
OUTLOOK FOR MUNICIPAL BONDS
A constant threat to the value of tax exempt bonds is talk of tax bracket
reductions. While various tax "breaks" are under discussion in Congress as they
try to agree on a balanced budget package, a lowering of tax brackets for those
individuals most likely to invest in municipal bonds seems unlikely at this
time. We believe that tax exempt bonds continue to be an attractive investment
for taxpayers in the upper brackets, and should be for some time to come.
Thomas A. Swank
Portfolio Manager
Steven M. Bowser
Portfolio Manager
(1) Performance figures are based on Class A shares and do not reflect
deduction of the sales charge.
TAX-EXEMPT FUND
6-30-97
Credit Quality Rating
AAA ................ 49.6%
AA ................. 25.2%
A .................. 13.6%
BBB ................ 11.6%
TAX-EXEMPT FUND
AVERAGE ANNUAL TOTAL RETURN
AS OF JUNE 30, 1997
CLASS A SHARES CLASS B SHARES
1 Year 2.3% 1 Year 1.1%
5 Years 4.3% Since Inception 0.8%
10 Years 5.8% (10-19-93)
The performance data above represents past performance which is not predictive
of future results. For Class A shares these figures reflect deduction of the
maximum sales charge of 4.75%. For Class B shares the figures reflect deduction
of the maximum contingent deferred sales charge, ranging from 5% in the first
year to 0% in the sixth and following years. The investment return and principal
value of an investment will fluctuate so tht an investor's shares, when
redeemed, may be worth more or less than their original cost.
6
<PAGE>
MANAGER'S COMMENTARY
AUGUST 15, 1997
SECURITY CASH FUND
The total return on money market funds in the first half of 1997 was near that
of its close relatives, the fixed income funds, as interest rates on thirty-year
Treasury bonds fluctuated in a range roughly between 6.50% and 7.25%. Security
Cash Fund posted a gain of 2.36% for the period, very near the 2.38% peer group
average yield. Money market funds, unlike longer-term fixed income securities,
generally benefit from increases in short-term interest rates such as the one
executed by the Federal Reserve Open Market Committee in March.
AVERAGE MATURITY TARGETS FOR THE FUND
At June 30, the Cash Fund had a 61-day average maturity, seven days longer than
that of the benchmark IBC Donoghue Money Fund Report. Our goal is to stay within
ten days more or less than the Donoghue average and avoid trying to outguess the
markets by moving maturities sharply shorter or longer. Because of the
short-maturity nature of money market assets we can quickly adjust to interest
rate changes when they occur, without taking unnecessary maturity risk in this
conservative portfolio.
ASSET SECTORS REPRESENTED IN THE PORTFOLIO
The assets in Security Cash Fund at the end of the six-month period consisted of
76% commercial paper, 15% federal agency securities, and 11% Small Business
Administration issues. The commercial paper we purchase is entirely in the "top
tier" of rating agency classifications, rated at least A1 by Standard and Poor's
rating agency or P1 by Moody's. Federal agency holdings may from time to time
include short-term securities issued by the Federal National Mortgage
Association, the Federal Home Loan Bank, and Federal Farm Credit Banks.
The Small Business Association (SBA) holdings are fully guaranteed by the
federal government as to timely payment of principal and interest. These issues,
while bearing stated maturities in the twenty- to thirty-year range, are
considered to be short-maturity paper because their interest rate resets
periodically (usually monthly or quarterly). This enables the issues to carry
coupons representing recent market levels, staying competitive with other
short-term investment instruments.
OUTLOOK FOR THE NEXT SIX MONTHS
Interest rates have recently been declining on long-term bonds. Although this
movement has some effect on short-term rates, until the Federal Reserve decides
to lower their short rate targets, commercial paper and short-maturity agency
interest rates should not drop substantially. We expect the Fed to maintain
their cautious stance toward a rekindling of inflationary pressures, and
therefore believe that money fund returns will not vary substantially in the
near future.
Barbara Davison
Fixed Income Team
The Security Cash Fund is neither insured nor guaranteed by the U.S. Government
and there is no assurance that the fund will be able to maintain a stable net
asset value of $1.00 per share.
7
<PAGE>
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SECURITY INCOME FUND
CORPORATE BOND SERIES
PRINCIPAL MARKET
CORPORATE BONDS AMOUNT VALUE
- --------------------------------------------------------------------------------
AIR TRANSPORTATION - 5.6%
Southwest Airlines Company, 7.875% - 2007.......... $2,000,000 $ 2,097,500
United Airlines, 11.21% - 2014..................... 1,200,000 1,570,500
----------
3,668,000
BANKS - 11.2%
ABN AMRO Bank NV, 7.55% - 2006..................... 1,000,000 1,030,000
Abbey National PLC, 6.69% - 2005................... 1,250,000 1,225,000
BCH Cayman Islands, Ltd., 7.70% - 2006............. 1,000,000 1,025,000
Bank of New York, Inc., 6.50% - 2003............... 1,500,000 1,464,375
Malayan Bank of New York, 7.125% - 2005............ 1,250,000 1,235,937
Santander Financial Issuances, Ltd., 7.00% - 2006.. 1,400,000 1,382,500
----------
7,362,812
BROKERS, DEALERS & SERVICES - 2.2%
Lehman Brothers, Inc., 7.25% - 2003................ 1,450,000 1,455,438
COMMUNICATIONS - 12.5%
Comcast Corporation, 9.125% - 2006................. 1,000,000 1,047,500
New Jersey Bell, 6.625% - 2008..................... 3,000,000 2,872,500
Paramount Communications, 7.50% - 2023............. 1,000,000 878,750
Rogers Cablesystems, Ltd., 9.625% - 2002........... 750,000 792,188
Rogers Communication, Inc., 9.125% - 2006.......... 550,000 556,875
Valassis Communications, Inc., 9.55% - 2003........ 1,250,000 1,348,437
Westinghouse Electric Company, 8.375% - 2002....... 700,000 726,250
----------
8,222,500
CONSUMER GOODS & SERVICES - 2.2%
Nike, Inc., 6.375% - 2003.......................... 1,500,000 1,460,625
DEPARTMENT STORES - 1.5%
J.C. Penney, 7.625% - 2097......................... 1,000,000 975,000
ELECTRONICS - 1.6%
Pioneer Standard Electronics, Inc., 8.50% - 2006... 1,000,000 1,042,500
FINANCE - 3.1%
Countrywide Capital Industries, Inc., 8.00% - 2026. 1,000,000 997,500
PRINCIPAL MARKET
CORPORATE BONDS (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
FINANCE (CONTINUED)
Washington Mutual Capital, 8.375% - 2002........... $1,000,000 $ 1,016,250
----------
2,013,750
FOOD & BEVERAGES - 7.5%
Chiquita Brands International, Inc., 10.25% - 2006. 1,125,000 1,198,125
Coca-Cola Enterprises, Inc., 6.70% - 2036(3)....... 2,000,000 2,000,000
Panamerican Beverage, Inc., 8.125% - 2003.......... 1,750,000 1,780,625
----------
4,978,750
FUNERAL HOMES - 2.7%
Loewen Group International, Inc., 8.25% - 2003..... 1,750,000 1,778,438
HOSPITAL MANAGEMENT - 1.3%
Tenet Healthcare, 10.125% - 2005................... 800,000 874,000
INSURANCE - 1.5%
Travelers Capital Trust, 7.75% - 2036.............. 1,050,000 1,018,500
MEDIA - 5.0%
Time Warner Entertainment, 10.15% - 2012........... 1,250,000 1,510,937
Turner Broadcasting, 8.375% - 2013................. 1,750,000 1,811,250
----------
3,322,187
MEDICAL AND HEALTH SERVICES - 1.5%
Columbia\HCA, 7.50% - 2095......................... 1,000,000 967,500
MANUFACTURING - 1.5%
Caterpillar, Inc., 7.375% - 2097................... 1,000,000 966,250
MOTOR VEHICLES & EQUIPMENT - 3.0%
Chrysler Corporation, 7.45% - 2027................. 2,000,000 1,972,500
OIL & GAS COMPANIES - 7.4%
Petroleum Geo-Services, 7.50% - 2007............... 1,142,226 1,157,188
Petroleum Nasional Berhad, 7.125% - 2006........... 1,650,000 1,645,875
Seagull Energy Corporation, 8.625% - 2005.......... 1,000,000 1,017,500
Transocean Offshore, Inc., 8.00% - 2027............ 1,000,000 1,033,750
----------
4,854,313
PAPER & LUMBER PRODUCTS - 1.9%
Domtar, Inc., 9.50% - 2016......................... 1,250,000 1,262,500
See accompanying notes.
8
<PAGE>
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SECURITY INCOME FUND
CORPORATE BOND SERIES (CONTINUED)
PRINCIPAL
AMOUNT OR
NUMBER OF MARKET
CORPORATE BONDS (CONTINUED) SHARES VALUE
- --------------------------------------------------------------------------------
PUBLISHING & PRINTING - 1.2%
K-III Communications Corporation, 10.25% - 2004.... $ 300,000 $ 316,500
Quebecor Printing Capital, 7.25% - 2007............ $ 500,000 503,750
----------
820,250
STEEL & METAL PRODUCTS - 1.2%
AK Steel, 10.75% - 2004............................ $ 750,000 808,125
UTILITIES - 2.0%
Tennessee Gas Pipeline, 7.50% - 2017............... $1,300,000 1,298,375
TRANSPORTATION - 1.5%
Union Pacific Resources Group, 7.50% - 2026........ $1,000,000 986,250
----------
Total corporate bonds - 79.1% ................... 52,108,563
TRUST PREFERRED SECURITIES(4)
- -----------------------------
FINANCE - 5.6%
Chase Capital Trust, 6.1047% - 2027(2)............. $2,500,000 2,450,725
SI Financing Inc., 9.50% - 2026.................... 48,000 1,269,000
----------
Total trust preferred securities - 5.6%.......... 3,719,725
MORTGAGE BACKED SECURITIES
- --------------------------
U.S. GOVERNMENT AGENCIES - 6.4%
Federal Home Loan Mortgage Corporation,
#1311 J, 7.50%-2021 CMO.......................... $1,050,000 1,059,595
#1930 AB, 7.50%-2023 CMO......................... $1,661,212 1,682,102
#112 H, 8.80%-2020 CMO........................... $ 646,027 659,087
Federal National Mortgage Association,
#1990-52D, 9.30%-2019 CMO........................ $ 820,825 840,941
----------
4,241,725
U.S. GOVERNMENT SECURITIES - 0.9%
Government National Mortgage Association, #2445,
8% - 2027........................................ $ 575,000 585,601
NON-AGENCY SECURITIES - 4.2%
Chase Capital Mortgage Securities Company, 1997-1B,
7.37% - 2007 CMO................................. $1,500,000 1,526,250
General Electric Capital Mortgage Securities,
1992-7A, 8.30% - 2023 CMO........................ $1,213,754 1,234,854
----------
2,761,104
----------
Total mortgage backed securities - 11.5%......... 7,588,430
----------
Total investments - 96.2%........................ 63,416,718
PRINCIPAL MARKET
AMOUNT VALUE
- --------------------------------------------------------------------------------
Cash and other assets, less liabilities - 3.8% .. $ 2,473,213
----------
Total net assets - 100.0%........................ $65,889,931
==========
SECURITY INCOME FUND
U.S. GOVERNMENT SERIES
U.S. GOVERNMENT & GOVERNMENT AGENCY SECURITIES
- ----------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION - 8.5%
7.125% - 2001.................................... $ 700,000 $ 708,526
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 18.6%
7.40% - 2004..................................... 600,000 624,450
7.875% - 2005.................................... 340,000 363,130
8.28% - 2025..................................... 500,000 566,950
----------
1,554,530
FEDERAL HOME LOAN BANK - 2.0%
8.29% - 2015..................................... 150,000 166,904
FINANCING CORPORATION - 6.1%
9.65% - 2018..................................... 400,000 507,000
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 35.2%
#365608 8.50% - 2024............................. 615,934 642,216
#411643 7.75% - 2025............................. 690,973 699,811
#1849 8.00% - 2026............................. 794,565 809,154
#2270 8.25% - 2026............................. 265,666 274,140
#9365 7.50% - 2034............................. 521,743 520,767
----------
2,946,088
STUDENT LOAN MARKETING ASSOCIATION - 5.7%
9.25% - 2004..................................... 420,000 479,695
U.S. TREASURY NOTES - 14.6%
7.25% - 1998..................................... 135,000 136,228
8.00% - 1999..................................... 460,000 476,785
8.50% - 2000..................................... 580,000 611,268
----------
1,224,281
U.S. TREASURY BONDS - 8.0%
8.75% - 2008..................................... 600,000 665,394
----------
Total investments- 98.7%......................... 8,252,418
Cash and other assets, less liabilities - 1.3%... 113,618
----------
Total net assets - 100%.......................... $ 8,366,036
==========
See accompanying notes.
9
<PAGE>
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SECURITY INCOME FUND
LIMITED MATURITY BOND SERIES
PRINCIPAL MARKET
CORPORATE BONDS AMOUNT VALUE
- --------------------------------------------------------------------------------
AIR TRANSPORTATION - 1.8%
Atlas Air, 12.25% - 2002........................... $ 100,000 $ 111,000
ALUMINUM - 2.4%
Alcan Aluminum, Ltd., 9.20% - 2001................. 148,000 151,145
BANKS - 8.2%
Bangkok Bank Public Company, 7.25% - 2005.......... 150,000 144,188
Bank Austria, 7.25% - 2017......................... 160,000 157,200
First Union Corporation, 8.125% - 2002............. 110,000 115,500
Santander Financial Issuances, Ltd., 7.00% - 2006.. 100,000 98,750
----------
515,638
COMMUNICATIONS - 9.2%
Comcast Corporation, 9.125% - 2006................. 100,000 104,750
Heritage Media Corporation, 8.75% - 2006........... 50,000 51,875
K-III Communications Corporation, 10.25% - 2004.... 75,000 79,125
Rogers Communication, Inc., 9.125% - 2006.......... 100,000 101,250
Valassis Communications, Inc., 9.55% - 2003........ 125,000 134,844
Westinghouse Electric Company, 8.37% - 2002........ 100,000 103,750
----------
575,594
ELECTRIC COMPANIES - 2.4%
Consolidated Edison Company of New York, -
6.625% - 2002.................................... 150,000 148,687
ELECTRIC & GAS COMPANIES - 2.5%
Public Service Electric & Gas Company, 8.75% - 1999 150,000 156,187
ELECTRONICS - 1.7%
Pioneer Standard Electronics, Inc., 8.50% - 2006... 100,000 104,250
FINANCE - 9.9%
Ford Motor Credit Company, 8.375% - 2000 .......... 150,000 156,375
Household Finance Corporation, 8.00% - 2004........ 150,000 157,875
International Lease Finance Corporation 8.25% -
2000............................................. 150,000 155,813
MCN Investment Corporation, 6.32% - 2003........... 150,000 146,250
----------
616,313
PRINCIPAL MARKET
CORPORATE BONDS (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
FOOD & BEVERAGE TRADE - 4.1%
Cott Corporation, 9.375% - 2005.................... $ 100,000 $ 104,750
FEMSA Fomento Economico Mexicano SA, 9.50% - 1997.. 100,000 100,125
Panamerican Beverage, Inc., 8.125% - 2003.......... 50,000 50,875
----------
255,750
HOSPITAL MANAGEMENT - 1.7%
Tenet Healthcare, 10.125% - 2005................... 100,000 109,250
INSURANCE - 2.3%
Travelers Capital Trust, 7.75% - 2036.............. 150,000 145,500
MANUFACTURING - 1.7%
Shop Vac Corporation, 10.625% - 2003............... 100,000 106,250
NATURAL GAS COMPANIES - 2.6%
Vastar Resources, Inc., 8.75% - 2005............... 150,000 161,437
OIL & GAS COMPANIES - 4.8%
Petroleum Nasional Berhad, 7.125% - 2006........... 150,000 149,625
Seagull Energy Corporation, 8.625% - 2005.......... 150,000 152,625
----------
302,250
RETAIL TRADE - 2.5%
Walmart Stores, Inc., 7.50% - 2004................. 150,000 155,063
SANITARY SERVICES - 2.5%
WMX Technologies, Inc., 8.25% - 1999............... 150,000 155,812
TOBACCO PRODUCTS - 2.5%
Dimon, Inc., 8.875% - 2006......................... 150,000 156,375
----------
Total corporate bonds - 62.8%.................... 3,926,501
TRUST PREFERRED SECURITIES(4)
- -----------------------------
FINANCE - 1.9%
SI Financing Inc., 9.50% - 2026.................... 4,560 120,555
MORTGAGE BACKED SECURITIES
- --------------------------
U.S. GOVERNMENT AGENCIES - 21.4%
Federal Home Loan Mortgage Corporation,
#1311 J, 7.50%-2021 CMO.......................... 100,000 100,914
#1930 AB, 7.50%-2023 CMO......................... 195,437 197,894
#1102 G, 8.00%-2020 CMO.......................... 171,084 173,339
#1104 K, 8.50%-2020 CMO.......................... 44,000 45,188
#42 K, 8.00% - 2024 CMO.......................... 186,000 190,775
See accompanying notes.
10
<PAGE>
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SECURITY INCOME FUND
LIMITED MATURITY BOND SERIES (CONTINUED)
PRINCIPAL MARKET
MORTGAGE BACKED SECURITIES (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCIES, CONTINUED
Federal National Mortgage Association
#1992-98 PJ, 7.50% - 2019 CMO ................... $ 118,000 $ 118,993
#1992-143 J, 7.00% - 2020 CMO.................... 100,000 98,110
#1993-160 ZB, 6.50%- 2023 CMO.................... 165,774 146,866
#1993-194 E, 5.70% - 2008 CMO.................... 120,265 115,102
Government National Mortgage Association,
#2445, 8.00% - 2027 ............................. 150,000 152,766
----------
1,339,947
NON AGENCY SECURITIES - 3.5%
General Electric Capital Mortgage Securities
#1992-7A, 8.30% - 2023 CMO....................... 112,753 114,713
Sears Mortgage Securities
#1994-14 T3, 8.50% - 2022 CMO.................... 100,000 103,078
----------
217,791
----------
Total mortgage backed securities - 24.9%......... 1,557,738
GOVERNMENT & GOVERNMENT AGENCY SECURITIES
- -----------------------------------------
CANADIAN GOVERNMENT AGENCIES - 2.6%
Province of Quebec, 8.625% - 2005 ................. 150,000 163,313
U.S. GOVERNMENT AGENCY SECURITIES - 2.5%
Federal National Mortgage Association, 8.50% - 2005 150,000 156,185
----------
Total government & government agency
securities - 5.1%.............................. 319,498
----------
Total investments - 94.7%........................ 5,924,292
Cash and other assets, less liabilities - 5.3%... 334,346
----------
Total net assets - 100.0%........................ $ 6,258,638
==========
SECURITY INCOME FUND
HIGH YIELD SERIES
CORPORATE BONDS
- ---------------
APPAREL - 2.3%
Tultex Corporation, 10.625% - 2005................. $ 150,000 $ 164,625
BANKS & CREDIT - 1.5%
B.F. Saul Reit, 11.625% - 2002..................... 100,000 107,500
SECURITY INCOME FUND
HIGH YIELD SERIES (CONTINUED)
PRINCIPAL MARKET
CORPORATE BONDS (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
BEVERAGES - 2.9%
Cott Corporation, 9.375% - 2005.................... $ 100,000 $ 104,750
Delta Beverage Group, 9.75% - 2003................. 100,000 104,375
----------
209,125
BROADCAST MEDIA - 2.8%
Allbritton Communications Company, 9.75% - 2004.... 135,000 99,250
Heritage Media Corporation, 8.75% - 2006........... 100,000 103,750
----------
203,000
CABLE SYSTEMS - 1.5%
Rogers Cablesystems, 9.625% - 2002................. 100,000 105,625
CHEMICALS - 2.6%
Envirodyne Industries, Inc., 12.00% - 2000......... 170,000 185,938
COMMUNICATIONS - 3.2%
K-III Communications, 10.25% - 2004................ 50,000 52,750
Rogers Communications, Inc., 9.125% - 2006......... 70,000 70,875
Valassis Communications, Inc., 9.55% - 2003........ 100,000 107,875
----------
231,500
COMMUNICATION SERVICES - 7.4%
CF Cable TV, Inc., 11.625% - 2005.................. 125,000 143,125
Cablevision Systems Corporation, 10.75% - 2004..... 100,000 103,625
Century Communications Corporation, 9.50% - 2005... 125,000 128,437
Comcast Corporation, 9.125% - 2006................. 150,000 157,125
----------
532,312
ELECTRIC UTILITIES - 4.3%
AES Corporation, 10.25% - 2006..................... 135,000 160,500
Cal Energy Company, Inc. 9.50% - 2006.............. 150,000 147,150
----------
307,650
ENTERTAINMENT - 4.2%
Harrahs Operating, Inc., 8.75% - 2000 ............. 100,000 102,375
Showboat, Inc., 9.25% - 2008....................... 100,000 102,500
Station Casinos, Inc., 9.625% - 2003............... 100,000 99,500
----------
304,375
See accompanying notes.
11
<PAGE>
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SECURITY INCOME FUND
HIGH YIELD SERIES (CONTINUED)
PRINCIPAL MARKET
CORPORATE BONDS (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
FINANCIAL SERVICES - 3.5%
Dollar Financial Group, Inc., 10.875% - 2006....... $ 100,000 $ 107,000
Homeside Inc., 11.25% - 2003....................... 125,000 145,156
----------
252,156
FOOD AND BEVERAGES - 1.5%
Chiquita Brands International Inc., 10.25% - 2006 . 100,000 106,500
FOOD PROCESSING - 1.6%
TLC Beatrice International Holdings, Inc.,
11.50% - 2005.................................... 100,000 112,375
FOOD WHOLESALERS - 1.1%
Southland Corporation, 4.50% - 2004................ 100,000 78,750
HEALTH CARE SERVICES - 3.7%
Regency Health Services, Inc., 9.875% - 2002....... 100,000 103,250
Tenet Healthcare Corporation, 10.125% - 2005....... 150,000 163,875
----------
267,125
HOTEL/MOTEL - 1.9%
Four Seasons Hotel, Inc., 9.125% - 2000............ 125,000 134,688
MANUFACTURING - 8.7%
AAF-McQuay Inc., 8.875% - 2003..................... 100,000 100,250
AGCO Corporation, 8.50% - 2006..................... 100,000 102,625
Johns Manville International Group, Inc.,
10.875% - 2004................................... 100,000 111,250
Sequa Corporation, 9.375% - 2003................... 100,000 102,125
Shop Vac Corporation, 10.625% - 2003............... 100,000 106,250
Titan Wheel International, Inc. 8.75% - 2007....... 100,000 101,750
----------
624,250
MISCELLANEOUS - 0.8%
Packard Bioscience Company, 9.375% - 2007.......... 60,000 60,900
OIL - 4.1%
Maxus Energy Corporation, 9.50% - 2003............. 135,000 141,581
Seagull Energy Corporation, 8.625% - 2005.......... 150,000 152,625
----------
294,206
OFFICE EQUIPMENT AND SUPPLIES - 1.5%
Knoll, Inc., 10.875% - 2006........................ 100,000 110,750
PRINCIPAL MARKET
CORPORATE BONDS (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
PACKAGING & CONTAINERS - 1.8%
Plastic Containers, Inc., 10.00% - 2006............ $ 125,000 $ 129,688
PETROLEUM - 1.4%
Crown Central Petroleum, 10.875% - 2005............ 100,000 104,750
PUBLISHING - 3.6%
Golden Books Publishing, Inc., 7.65% - 2002........ 170,000 160,225
Hollinger International Publishing, 8.625% - 2005.. 100,000 101,750
----------
261,975
RECREATION - 1.5%
AMF Group, Inc., 10.875% - 2006.................... 100,000 108,000
RESTAURANTS - 2.0%
Carrols Corporation, 11.50% - 2003................. 135,000 144,618
RETAIL - 1.4%
Central Tractor, 10.625% - 2007.................... 100,000 103,750
RETAIL - GENERAL MERCHANDISING - 1.5%
Cole National Group, 9.875% - 2006................. 100,000 105,250
STEEL - 1.1%
AK Steel Corporation, 9.125% - 2006................ 75,000 77,063
TELECOMMUNICATIONS - 2.1%
Centennial Cellular, 8.875% - 2001................. 150,000 150,000
TEXTILES - 3.4%
Pillowtex Corporation, 10.00% - 2006............... 100,000 105,875
Westpoint Stevens,Inc. 9.375% - 2005............... 135,000 141,581
----------
247,456
TOBACCO - 2.0%
Dimon, Inc. 8.875% - 2006.......................... 135,000 140,738
TRANSPORTATION - 4.6%
Atlas Air, Inc., 12.25% - 2002..................... 175,000 194,250
Teekay Shipping Corporation, 8.32% - 2003.......... 135,000 136,350
----------
330,600
----------
Total corporate bonds - 87.5% ................... 6,297,238
See accompanying notes.
12
<PAGE>
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SECURITY INCOME FUND
HIGH YIELD SERIES (CONTINUED)
PRINCIPAL
AMOUNT OR
NUMBER OF MARKET
PREFERRED STOCKS SHARES VALUE
- --------------------------------------------------------------------------------
BANKS AND CREDIT - 2.7%
California Federal Bank............................ 1,750 $ 194,250
COMMUNICATIONS - 1.7%
Cablevision Systems................................ 514 52,411
K-III Communications............................... 65,100 71,225
----------
123,636
----------
Total preferred stocks - 4.4%.................... 317,886
TRUST PREFERRED SECURITIES(4)
- -----------------------------
FINANCE - 1.5%
Salomon Brothers Financing, 9.50% -2026............ 4,000 105,750
----------
Total investments - 93.4%........................ 6,720,874
Cash and other assets, less liabilities - 6.6%... 473,573
----------
Total net assets -100.0%......................... $ 7,194,447
==========
SECURITY TAX-EXEMPT FUND
MUNICIPAL BONDS
- ---------------
CIVIC CENTER DEVELOPMENT REVENUE - 1.1%
District of Columbia Redevelopment Washington D.C.
Sports Arena 5.40% - 2000 ....................... $ 250,000 $ 250,938
EDUCATION REVENUE - 29.7%
Illinois Chicago School, Series A, 4.90% - 2005.... $1,000,000 990,000
Iowa Higher Education, St. Ambrose, 5.75% - 2011... $ 480,000 466,200
Island County Washington School District South
Whidbey, 6.75% - 2007 ........................... $1,000,000 1,153,460
Federal Way, Washington School District,
4.80% - 2007..................................... $1,000,000 977,500
Mukwanago, Wisconsin School District, 5.00% - 2004. $ 500,000 506,250
North Brunswick Township, New Jersey Board of
Education, 6.30% - 2013.......................... $1,000,000 1,071,250
Northfield, Minnesota School District #659,
4.80% - 2007 .................................... $ 500,000 493,125
Vigo County Indiana Middle School Building
Corporation, 5.80% - 2013 ....................... $1,000,000 1,012,500
----------
6,670,285
SECURITY TAX-EXEMPT FUND (CONTINUED)
PRINCIPAL MARKET
MUNICIPAL BONDS (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
ELECTRIC UTILITY REVENUE - 19.4%
Georgia Municipal Electric Authority, 5.25% - 2025. $1,000,000 $ 947,500
Massachusetts Municipal Wholesale Electric Company
Power Supply System, Series B, 6.625% - 2004....... 1,200,000 1,296,000
Nebraska Public Power District Revenue, Series A,
6.25% - 2022..................................... 1,000,000 1,038,750
Washington Public Power Supply System Revenue
Nuclear Project #2, 6.30% - 2012................. 1,000,000 1,075,000
----------
4,357,250
GENERAL OBLIGATION - 12.7%
Clark County, Nevada School District, Series A,
5.50% - 2016..................................... 1,000,000 1,000,000
Dade County Florida, 5.75% - 2001.................. 1,000,000 1,048,750
State of Illinois, 6.10% - 2003.................... 750,000 802,500
----------
2,851,250
POLLUTION CONTROL - 4.5%
Kansas City, Kansas General Motors Corporation
Project, 5.45% - 2006............................ 1,000,000 1,015,000
PORTS & HARBORS - 2.3%
Kansas City, Missouri Port Authority Riverfront
Park, 5.75% - 2005............................... 500,000 516,250
SALES TAX REVENUE - 4.4%
Los Angeles, California, 5.625% - 2018............. 1,000,000 996,250
SEWER REVENUE - 19.0%
DuPage County, Illinois Stormwater Project
Refunding, 5.60% - 2021.......................... 1,000,000 1,016,250
Houston, Texas Water & Sewer System Revenue,
Series A, 6.20% - 2020........................... 1,000,000 1,048,750
King County Washington Sewer Revenue, Series A,
6.25% - 2034..................................... 1,000,000 1,053,750
Los Angeles, CA Wastewater System Revenue,
6.00% - 2014..................................... 1,100,000 1,138,500
----------
4,257,250
See accompanying notes.
13
<PAGE>
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
SECURITY TAX-EXEMPT FUND (CONTINUED)
PRINCIPAL MARKET
MUNICIPAL BONDS (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
VARIOUS PURPOSE REVENUE - 4.5%
Denver Metropolitan Major League Baseball Stadium
Project, 4.00% - 1999............................ $1,000,000 $ 996,250
----------
Total investments - 97.6%........................ 21,910,723
Cash and other assets, less liabilities - 2.4%... 538,848
----------
Total net assets - 100.0%........................ $22,449,571
==========
SECURITY CASH FUND
COMMERCIAL PAPER
- ----------------
BEVERAGES - 1.0%
PepsiCo, Inc., 5.48%, 7-7-97....................... $ 500,000 $ 499,543
BROKERAGE - 9.9%
Bear Stearns Companies, Inc., 5.57%, 7-8-97........ 2,300,000 2,297,509
Merrill Lynch & Company, Inc.,..................... 2,252,000
5.53%, 7-3-97.................................... 1,421,563
5.56%, 7-7-97.................................... 99,907
5.55%, 7-10-97................................... 414,424
5.58%, 8-8-97.................................... 102,394
5.59%, 9-29-97................................... 209,037
----------
4,544,834
BUSINESS SERVICES - 6.5%
A1 Credit Corporation, 5.48%, 7-7-97............... 1,000,000 999,087
General Electric Capital Corporation, 5.54%, 8-8-97 2,000,000 1,988,304
----------
2,987,391
COMBINATION GAS & ELECTRIC - 9.6%
Dayton Power & Light Company, 5.56%, 7-15-97....... 2,200,000 2,195,243
Pacific Gas & Electric Company 5.56%, 7-21-97...... 2,000,000 1,993,822
South Carolina Electric & Gas Company,
5.52%, 7-18-97................................... 250,000 249,348
----------
4,438,413
COMPUTER SYSTEMS - 2.6%
International Business Machines Corporation,
5.50%, 7-14-97................................... 1,200,000 1,197,617
SECURITY CASH FUND (CONTINUED)
PRINCIPAL MARKET
COMMERCIAL PAPER (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
ELECTRIC UTILITIES - 15.6%
Alabama Power Company, 5.55%, 7-11-97.............. $ 100,000 $ 99,846
Carolina Power & Light Company, 5.53%, 7-29-97..... 1,380,000 1,374,064
Idaho Power Company, 5.53%, 7-21-97................ 915,000 912,189
Interstate Power Company,.......................... 2,037,000
5.53%, 7-9-97.................................... 998,771
5.55%, 7-9-97.................................... 99,877
5.55%, 7-9-97.................................... 236,708
5.55%, 8-19-97................................... 694,712
New England Power Company, 5.57%, 7-14-97.......... 638,000 636,717
Progress Capital Holdings, Inc.,................... 2,150,000
5.54%, 7-11-97................................... 698,923
5.5%, 7-11-97.................................... 199,691
5.55%, 7-17-97................................... 1,246,917
----------
7,198,415
ELECTRONICS - 3.7%
AVNET, Inc., 5.57%, 8-11-97........................ 1,700,000 1,689,217
ENGINEERING - 4.8%
Fluor Corporation, 5.54%, 7-31-97.................. 2,200,000 2,189,843
INSURANCE - 2.7%
AIG Funding, Inc., 5.48%, 7-3-97................... 1,240,000 1,239,622
MANUFACTURING - 4.3%
Eaton Corporation, 5.55%, 7-25-97.................. 2,000,000 1,992,600
NATURAL GAS - 2.8%
LaClede Gas Company, 5.52%, 7-10-97................ 1,300,000 1,298,206
PHARMACEUTICALS - 3.6%
Allergan, Inc.,.................................... 1,685,000
5.56%, 7-22-97................................... 598,054
5.55%, 8-5-97.................................... 1,079,146
----------
1,677,200
PHOTOGRAPH/IMAGING - 4.7%
Eastman Kodak Company,............................. 2,170,000
5.50%, 7-18-97................................... 668,260
5.50%, 7-30-97................................... 1,493,354
----------
2,161,614
TELECOMMUNICATIONS - 4.5%
Pacific Bell, 5.60%, 7-11-97....................... 2,100,000 2,096,733
----------
Total commercial paper - 76.3%................... 35,211,248
See accompanying notes.
14
<PAGE>
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITES)
SECURITY CASH FUND (CONTINUED)
PRINCIPAL MARKET
U.S. GOVERNMENT & AGENCIES AMOUNT VALUE
- --------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGES - 15.2%
5.90%, 7-8-98.................................... $2,000,000 $ 2,000,000
6.13%, 4-17-98................................... 1,000,000 1,000,000
5.87%, 1-30-98................................... 2,000,000 2,000,000
5.63%, 3-30-98................................... 2,000,000 2,000,000
----------
7,000,000
SMALL BUSINESS ASSOCIATION POOLS - 11.7%
#501927, 6.75%, 20171............................ 1,832,168 1,849,477
#501398, 6.125%, 20182........................... 929,169 932,654
#503152, 6.125%, 20202........................... 919,524 919,524
#503295, 6.00%, 20212............................ 813,286 813,794
#503303, 6.00%, 20212............................ 861,133 861,671
----------
5,377,120
Total U.S. government & agencies - 26.9%......... 12,377,120
----------
Total investments - 103.2%....................... 47,588,368
Liabilities in excess of cash & other
assets - (3.2%)............................... (1,496,109)
----------
Total net assets - 100%.......................... $46,092,259
==========
The identified cost of investments owned at June 30, 1997, was the same for
federal income tax and book purposes.
CMO - (Collateralized Mortgage Obligation)
(1) Varible rate security which may be reset the first of each month.
(2) Variable rate security which may be reset the first of each quarter.
(3) Put bond - a type of specialty bond that gives the holder the right to
redeem to the issuer at certain specified times before maturity.
(4) Trust preferred securities - securities issued by financial institutions to
augment their Tier 1 capital base. Issued on a subordinate basis relative
to senior notes or debentures. Institutions may defer cash payments for up
to 10 pay periods.
See accompanying notes.
15
<PAGE>
BALANCE SHEETS
JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SECURITY INCOME FUND
--------------------------------------------------------
U.S. LIMITED SECURITY
CORPORATE GOVERNMENT MATURITY HIGH YIELD TAX-EXEMPT SECURITY
BOND SERIES SERIES BOND SERIES SERIES FUND CASH FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments, at value (identified cost
$63,108,877, $8,188,786, $5,862,720,
$6,495,108, $21,466,535 and
$12,377,120, respectively)............. $63,416,718 $8,252,418 $5,924,292 $6,720,874 $21,910,723 $12,377,120
Commercial paper, at amortized cost which
approximates market value.............. 35,211,248
Cash..................................... 662,349 24,189 95,820 346,845 152,424 246,222
Receivables:
Fund shares sold....................... 249,653 10,694 8,339 476 286 174,044
Securities sold........................ 539,076 --- 107,815 --- --- 163,954
Interest............................... 1,127,654 137,735 120,483 136,937 398,814 218,399
Prepaid expenses....................... 15,350 16,047 16,129 823 12,300 44,888
---------- --------- --------- --------- ---------- ----------
Total assets......................... $66,010,800 $8,441,083 $6,272,878 $7,205,955 $22,474,547 $48,435,875
========== ========= ========= ========= ========== ==========
LIABILITIES AND NET ASSETS
Liabilities:
Payable for:
Securities purchased ................ $ --- $ --- $ --- $ --- $ --- $ 2,000,000
Fund shares redeemed................. 50,865 65,955 5,000 --- 4,801 89,882
Dividends payable to shareholders.... --- --- --- --- --- 197,852
Other Liabilities:
Management fees...................... 28,063 --- --- --- 9,543 26,214
Custodian fees....................... --- 3,173 3,041 --- --- 2,488
Transfer and administration fees..... 13,713 2,184 919 841 2,972 11,775
Professional fees.................... 5,668 --- 2,299 1,771 1,411 4,979
12b-1 distribution plan fees......... 18,702 2,263 1,882 3,479 1,067 ---
Miscellaneous fees................... 3,858 1,472 1,099 5,417 5,182 10,426
---------- --------- --------- --------- ---------- ----------
Total liabilities.................. 120,869 75,047 14,240 11,508 24,976 2,343,616
Net Assets:
Paid in capital........................ 79,186,608 9,253,172 6,269,515 6,971,265 23,419,310 46,092,259
Undistributed net investment income
(loss)............................... 54,741 11,328 9,795 1,076 7,394 ---
Accumulated undistributed net realized
gain (loss)on sale of investments.... (13,659,259) (962,096) (82,244) (3,660) (1,421,321) ---
Net unrealized appreciation
(depreciation)in value of investments 307,841 63,632 61,572 225,766 444,188 ---
---------- --------- --------- --------- ---------- ----------
Net assets......................... 65,889,931 8,366,036 6,258,638 7,194,447 22,449,571 46,092,259
---------- --------- --------- --------- ---------- ----------
Total liabilities and net assets. $66,010,800 $8,441,083 $6,272,878 $7,205,955 $22,474,547 $48,435,875
========== ========= ========= ========= ========== ==========
CLASS "A" SHARES
Capital shares outstanding............. 8,605,563 1,633,517 530,358 261,532 2,174,152 46,092,259
Net assets............................. $58,539,150 $7,636,561 $5,366,418 $4,071,017 $21,191,750 $46,092,259
Net asset value per share (net assets
divided by shares outstanding)....... $6.80 $4.67 $10.12 $15.57 $9.75 $1.00
Add: Selling commission (4.75% of the
offering price)...................... 0.34 0.23 0.50 0.78 0.49 ---
---------- ---------- ---------- ---------- ---------- ----------
Offering price per share (net asset
value divided by 95.25%)............. $7.14 $4.90 $10.62 $16.35 $10.24 $1.00
========== ========== ========== ========== ========== ==========
CLASS "B" SHARES
Capital shares outstanding............. 1,074,782 156,272 88,394 200,907 128,842 ---
Net assets............................. $ 7,350,781 $ 729,475 $ 892,220 $3,123,430 $ 1,257,821 ---
Net asset value per share (net assets
divided by shares outstanding)....... $6.84 $4.67 $10.09 $15.55 $9.76 ---
========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
16
<PAGE>
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED
JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SECURITY INCOME FUND
--------------------------------------------------------
U.S. LIMITED SECURITY
CORPORATE GOVERNMENT MATURITY HIGH YIELD TAX-EXEMPT SECURITY
BOND SERIES SERIES BOND SERIES SERIES FUND CASH FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends.............................. $ --- $ --- $ --- $ 14,812 $ --- $ ---
Interest............................... 2,740,937 316,292 227,482 270,997 604,384 1,363,485
---------- ------- ------- ------- ------- ---------
Total investment income.............. 2,740,937 316,292 227,482 285,809 604,384 1,363,485
EXPENSES:
Management fees........................ 175,787 21,048 14,800 16,877 57,082 122,068
Custodian fees......................... 11,666 1,475 1,172 545 641 3,796
Transfer/maintenance fees.............. 53,657 9,072 2,482 1,153 7,780 59,549
Administration fees.................... 31,641 3,788 2,664 2,826 10,275 10,986
Directors' fees........................ 3,719 477 222 145 4,873 4,751
Professional fees...................... 3,320 2,315 2,801 3,571 2,881 2,976
Reports to shareholders................ 2,889 528 254 29 1,157 4,462
Registration fees...................... 12,490 261 1,633 12,827 12,102 1,493
Other expenses......................... 4,809 743 670 851 1,404 4,699
12b-1 distribution plan fees........... 114,982 13,054 10,684 18,645 6,289 ---
---------- ------- ------- ------- ------- ---------
414,960 52,761 37,382 57,469 104,484 214,780
Less: Earnings credits applied.......... --- --- (922) --- (641) ---
Reimbursement of expenses......... (8,429) (21,048) (14,800) (16,877) (1,279) ---
---------- ------- ------- ------- ------- ---------
Total expenses.................. 406,531 31,713 21,660 40,592 102,564 214,780
---------- ------- ------- ------- ------- ---------
Net investment income......... 2,334,406 284,579 205,822 245,217 501,820 1,148,705
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) during the
period on:
Investments........................ (1,302,331) 16,281 (12,680) 32,925 56,566 ---
Net change in unrealized appreciation
(depreciation) during the period on:
Investments........................ 510,568 (97,957) (1,978) 78,699 (7,665) ---
---------- ------- ------- ------- ------- ---------
Net gain (loss).................. (791,763) (81,676) (14,658) 111,624 48,901 ---
---------- ------- ------- ------- ------- ---------
Net increase in net assets
resulting from operations...... $ 1,542,643 $202,903 $191,164 $356,841 $550,721 $1,148,705
========== ======= ======= ======= ======= =========
</TABLE>
See accompanying notes.
17
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED
JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SECURITY INCOME FUND
--------------------------------------------------------
U.S. LIMITED SECURITY
CORPORATE GOVERNMENT MATURITY HIGH YIELD TAX-EXEMPT SECURITY
BOND SERIES SERIES BOND SERIES SERIES FUND CASH FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income.................... $ 2,334,406 $ 284,579 $ 205,822 $ 245,217 $ 501,820 $ 1,148,705
Net realized gain (loss)................. (1,302,331) 16,281 (12,680) 32,925 56,566 ---
Unrealized appreciation (depreciation)
during the period...................... 510,568 (97,957) (1,978) 78,699 (7,665) ---
---------- ---------- --------- --------- ---------- ----------
Net increase in net assets
resulting from operations.......... 1,542,643 202,903 191,164 356,841 550,721 1,148,705
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A ............................... (2,065,526) (253,835) (169,955) (139,147) (480,210) (1,148,705)
Class B................................ (214,139) (19,574) (26,072) (105,715) (19,775) ---
Net realized gain
Class A ............................... --- --- --- --- --- ---
Class B ............................... --- --- --- --- --- ---
---------- ---------- --------- --------- ---------- ----------
Total distributions to
shareholders....................... (2,279,665) (273,409) (196,027) (244,862) (499,985) (1,148,705)
CAPITAL SHARE TRANSACTIONS (A):
Proceeds from sale of shares
Class A................................ 2,847,618 488,692 1,049,826 1,196,616 292,969 126,053,217
Class B................................ 2,095,075 116,369 186,411 255,623 43,996 ---
Dividends reinvested
Class A................................ 1,557,138 210,311 151,594 139,098 276,810 1,096,379
Class B................................ 196,736 16,786 26,072 105,715 13,490 ---
Shares redeemed
Class A................................ (18,556,565) (1,033,432) (770,958) (112,283) (2,729,189) (126,388,061)
Class B................................ (2,176,694) (59,583) (78,353) (1,407) (313,744) ---
---------- ---------- --------- --------- ---------- ----------
Net increase (decrease)from
capital share transactions......... (14,036,692) (260,857) 564,592 1,583,362 (2,415,668) 761,535
---------- ---------- --------- --------- ---------- ----------
Total increase (decrease)
in net assets.................. (14,773,714) (331,363) 559,729 1,695,341 (2,364,932) 761,535
NET ASSETS:
Beginning of period...................... 80,663,645 8,697,399 5,698,909 5,499,106 24,814,503 45,330,724
---------- ---------- --------- --------- ---------- ----------
End of period............................ $65,889,931 $ 8,366,036 $6,258,638 $7,194,447 $22,449,571 $46,092,259
========== ========== ========= ========= ========== ==========
Undistributed net investment income at
end of period ......................... $54,741 $11,328 $9,795 $1,076 $7,394 $---
========== ========== ========= ========= ========== ==========
(a) Shares issued and redeemed
Shares sold
Class A............................ 418,427 104,439 104,775 78,338 30,148 126,053,217
Class B............................ 307,492 25,092 18,521 16,649 4,522 ---
Dividends reinvested
Class A............................ 230,231 45,284 15,099 9,033 28,713 1,096,379
Class B............................ 167,775 3,617 2,602 6,871 1,397 ---
Shares redeemed
Class A ........................... (2,724,117) (221,050) (76,428) (7,307) (282,449) (126,388,061)
Class B............................ (319,394) (12,765) (7,820) (92) (32,347) ---
---------- ---------- --------- --------- ---------- ----------
Net increase (decrease).......... (1,919,586) (55,383) 56,749 103,492 (250,016) 761,535
========== ========== ========= ========= ========== ==========
</TABLE>
See accompanying notes.
18
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SECURITY INCOME FUND
--------------------------------------------------------
U.S. LIMITED SECURITY
CORPORATE GOVERNMENT MATURITY HIGH YIELD TAX-EXEMPT SECURITY
BOND SERIES SERIES BOND SERIES SERIES FUND CASH FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS:
Net investment income.................... $ 5,712,167 $ 685,751 $ 351,230 $ 151,652 $ 1,153,538 $ 2,158,130
Net realized gain (loss)................. (1,347,012) 182,946 (46,509) (36,585) 56,324 ---
Unrealized appreciation (depreciation)
during the period...................... (5,522,985) (735,463) (186,260) 147,067 (671,331) ---
---------- ---------- --------- --------- ---------- ----------
Net increase (decrease) in net assets
resulting from operations.............. (1,157,830) 133,234 118,461 262,134 538,531 2,158,130
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A................................ (5,393,982) (655,579) (304,962) (79,996) (1,107,445) (2,158,130)
Class B................................ (343,417) (32,686) (47,156) (70,935) (44,319) ---
Tax return of capital
Class A................................ --- --- (5,684) --- --- ---
Class A................................ --- --- (879) --- --- ---
---------- ---------- --------- --------- ---------- ----------
Total distributions to shareholders.. (5,737,399) (688,265) (358,681) (150,931) (1,151,764) (2,158,130)
CAPITAL SHARE TRANSACTIONS (A):
Proceeds from sale of shares
Class A................................ 8,731,109 1,930,782 2,444,146 2,644,208 1,613,431 310,586,017
Class B................................ 3,464,361 375,419 269,401 2,611,381 579,929 ---
Dividends Reinvested
Class A................................ 4,241,649 543,532 284,749 79,998 626,193 1,969,086
Class B................................ 304,987 26,151 47,452 70,935 31,495 ---
Cost of shares redeemed
Class A................................ (26,834,054) (3,998,800) (913,142) (48) (3,379,177) (305,382,279)
Class B................................ (1,793,517) (286,899) (267,281) (18,571) (260,053) ---
---------- ---------- --------- --------- ---------- ----------
Net increase (decrease) from capital
share transactions................. (11,885,465) (1,409,815) 1,865,325 5,387,903 (788,182) 7,172,824
---------- ---------- --------- --------- ---------- ----------
Total increase (decrease) in net
assets........................... (18,780,694) (1,964,846) 1,625,105 5,499,106 (1,401,415) 7,172,824
NET ASSETS:
Beginning of period...................... 99,444,339 10,662,245 4,073,804 --- 26,215,918 38,157,900
---------- ---------- --------- --------- ---------- ----------
End of period............................ $80,663,645 $ 8,697,399 $5,698,909 $5,499,106 $24,814,503 $45,330,724
========== ========== ========= ========= ========== ==========
Undistributed net investment income at
end of period.......................... $ --- $ 158 $ --- $ 721 $ 5,559 $ ---
========== ========== ========= ========= ========== ==========
(a) Shares issued and redeemed
Shares sold
Class A ........................... 1,257,439 408,653 236,285 176,201 167,132 310,586,017
Class B............................ 497,238 79,022 25,885 174,028 59,521 ---
Dividends reinvested
Class A............................ 608,432 115,124 27,590 5,270 65,031 1,969,086
Class B............................ 43,584 5,533 4,593 4,677 3,268 ---
Shares redeemed
Class A............................ (3,860,010) (845,356) (88,496) (3) (350,952) (305,382,279)
Class B............................ (256,329) (61,304) (25,864) (1,226) (27,117) ---
---------- ---------- --------- --------- ---------- ----------
Net increase (decrease).......... (1,709,646) (298,328) 179,993 358,947 (83,117) 7,172,824
========== ========== ========= ========= ========== ==========
</TABLE>
See accompanying notes.
19
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each period
<TABLE>
<CAPTION>
CORPORATE BOND SERIES (CLASS A) FISCAL PERIOD ENDED DECEMBER 31
---------------------------------------------------------------------------------------------
1997(D)(H) 1996(D)(F) 1995(D)(F) 1994 1993 1992
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD. $ 6.87 $7.39 $6.68 $7.81 $7.72 $7.68
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income............... 0.233 0.470 0.470 0.490 0.520 0.610
Net Gain (Loss) on Securities
(realized & unrealized)........... (0.076) (0.517) 0.708 (1.127) 0.521 0.044
------------- ------------- ------------- ------------- ------------- -------------
Total from Investment Operations.. 0.157 (0.047) 1.178 (0.637) 1.041 0.654
LESS DISTRIBUTIONS
Dividends (from Net Investment
Income)........................... (0.227) (0.473) (0.468) (0.493) (0.527) (0.614)
Distributions (from Capital Gains).. --- --- --- --- (0.424) ---
------------- ------------- ------------- ------------- ------------- -------------
Total Distributions............... (0.227) (0.473) (0.468) (0.493) (0.951) (0.614)
------------- ------------- ------------- ------------- ------------- -------------
NET ASSET VALUE END OF PERIOD....... $6.80 $6.87 $7.39 $6.68 $7.81 $7.72
============= ============= ============= ============= ============= =============
TOTAL RETURN (A).................... 2.35% (0.50%) 18.20% (8.30%) 13.40% 9.00%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) $58,539 $73,360 $93,701 $90,593 $118,433 $104,492
Ratio of Expenses to Average Net
Assets............................ 1.08% 1.01% 1.02% 1.01% 1.02% 1.01%
Ratio of Net Income (Loss) to
Average Net Assets................ 6.72% 6.54% 6.62% 6.91% 6.46% 7.97%
Portfolio Turnover Rate............. 165% 292% 200% 204% 157% 61%
</TABLE>
<TABLE>
<CAPTION>
CORPORATE BOND SERIES (CLASS B) FISCAL PERIOD ENDED DECEMBER 31
-----------------------------------------------------------------------------
1997(C)(D)(H) 1996(C)(D)(F) 1995(C)(D)(F) 1994(C) 1993(B)
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD. $ 6.90 $ 7.43 $ 6.71 $ 7.84 $8.59
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income............... 0.195 0.400 0.400 0.430 0.110
Net Gain (Loss) on Securities
(realized & unrealized)........... (0.053) (0.517) 0.725 (1.129) (0.324)
------------- ------------- ------------- ------------- -------------
Total from Investment Operations.. 0.142 (0.117) 1.125 (0.699) (0.214)
LESS DISTRIBUTIONS
Dividends (from Net Investment
Income)........................... (0.202) (0.413) (0.405) (0.431) (0.112)
Distributions (from Capital Gains).. --- --- --- --- (0.424)
------------- ------------- ------------- ------------- -------------
Total Distributions .............. (0.202) (0.413) (0.405) (0.431) (0.536)
------------- ------------- ------------- ------------- -------------
NET ASSET VALUE END OF PERIOD....... $6.84 $6.90 $7.43 $6.71 $7.84
============= ============= ============= ============= =============
TOTAL RETURN(A)..................... 2.12% (1.40%) 17.30% (9.00%) (2.50%)
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) $7,351 $7,303 $5,743 $3,878 $1,022
Ratio of Expenses to Average Net
Assets............................ 1.85% 1.85% 1.85% 1.85% 1.88%
Ratio of Net Income (Loss) to
Average Net Assets................ 5.94% 5.70% 5.80% 6.08% 5.16%
Portfolio Turnover Rate............. 165% 292% 200% 204% 164%
</TABLE>
See Accompanying Notes.
20
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each period
<TABLE>
<CAPTION>
U.S. GOVERNMENT SERIES (CLASS A) FISCAL PERIOD ENDED DECEMBER 31
---------------------------------------------------------------------------------------------
1997(C)(D)(H) 1996(C)(D)(F) 1995(C)(D)(F) 1994(C) 1993(C) 1992(C)
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD. $4.71 $4.97 $4.35 $4.97 $5.04 $5.17
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income............... 0.160 0.310 0.300 0.300 0.310 0.370
Net Gain (Loss) on Securities
(realized & unrealized)........... (0.047) (0.256) 0.620 (0.621) 0.274 (0.126)
------------- ------------- ------------- ------------- ------------- -------------
Total from Investment Operations.. 0.113 0.054 0.920 (0.321) 0.584 0.244
LESS DISTRIBUTIONS
Dividends (from Net Investment
Income)........................... (0.153) (0.314) (0.300) (0.299) (0.310) (0.366)
Distributions (from Capital Gains).. --- --- --- --- (0.344) ---
Return of Capital................... --- --- --- --- --- (0.008)
------------- ------------- ------------- ------------- ------------- -------------
Total Distributions............... (0.153) (0.314) (0.300) (0.299) (0.654) (0.374)
------------- ------------- ------------- ------------- ------------- -------------
NET ASSET VALUE END OF PERIOD....... $4.67 $4.71 $4.97 $4.35 $4.97 $5.04
============= ============= ============= ============= ============= =============
TOTAL RETURN (A).................... 2.47% 1.30% 21.90% (6.50%) 10.90% 5.00%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) $7,637 $8,036 $10,080 $8,309 $10,098 $9,364
Ratio of Expenses to Average Net
Assets............................ 0.55% 0.65% 1.11% 1.10% 1.10% 1.11%
Ratio of Net Income (Loss) to
Average Net Assets................ 5.67% 6.44% 6.41% 6.47% 5.90% 7.22%
Portfolio Turnover Rate............. 25% 75% 81% 220% 153% 157%
</TABLE>
<TABLE>
<CAPTION>
U.S. GOVERNMENT SERIES (CLASS A) FISCAL PERIOD ENDED DECEMBER 31
-----------------------------------------------------------------------------
1997(C)(D)(H) 1996(C)(D)(F) 1995(C)(D)(F) 1994(C) 1993(B)(C)
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD. $4.71 $4.97 $4.35 $4.97 $5.51
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income............... 0.120 0.250 0.260 0.260 0.040
Net Gain (Loss) on Securities
(realized & unrealized)........... (0.027) (0.254) 0.625 (0.624) (0.193)
------------- ------------- ------------- ------------- -------------
Total from Investment Operations.. 0.093 (0.004) 0.885 (0.364) (0.153)
LESS DISTRIBUTIONS
Dividends (from Net Investment
Income)........................... (0.133) (0.256) (0.265) (0.256) (0.043)
Distributions (from Capital Gains).. --- --- --- --- (0.344)
Return of Capital................... --- --- --- --- ---
------------- ------------- ------------- ------------- -------------
Total Distributions............... (0.133) (0.2560) (0.265) (0.256) (0.387)
------------- ------------- ------------- ------------- -------------
NET ASSET VALUE END OF PERIOD....... $4.67 $4.71 $4.97 $4.35 $4.97
============= ============= ============= ============= =============
TOTAL RETURN (A).................... 2.03% (0.02%) 20.90% (7.40%) (1.40%)
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) $729 $661 $582 $321 $140
Ratio of Expenses to Average Net
Assets............................ 1.52% 1.86% 1.87% 1.85% 1.61%
Ratio of Net Income (Loss) to
Average Net Assets................ 4.70% 5.23% 5.69% 5.76% 5.54%
Portfolio Turnover Rate............. 25% 75% 81% 220% 114%
</TABLE>
See accompanying notes.
21
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each period
<TABLE>
<CAPTION>
LIMITED MATURITY BOND SERIES (CLASS A) FISCAL PERIOD ENDED DECEMBER 31
---------------------------------------------------
1997(C)(D)(F)(H) 1996(C)(D)(F) 1995(C)(D)(E)(F)
---------------- ------------- ----------------
<S> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD. $10.14 $ 10.66 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income............... 0.354 0.720 0.620
Net Gain (Loss) on Securities
(realized & unrealized)........... (0.037) (0.507) 0.652
------------- ------------- -------------
Total from Investment Operations.. 0.317 0.213 1.272
LESS DISTRIBUTIONS
Dividends (from Net Investment
Income)........................... (0.337) (0.720) (0.612)
Distributions (from Capital Gains).. --- --- ---
Return of Capital................... --- (0.013) ---
------------- ------------- -------------
Total Distributions............... (0.337) (0.733) (0.612)
------------- ------------- -------------
NET ASSET VALUE END OF PERIOD....... $10.12 $10.14 $10.66
============= ============= =============
TOTAL RETURN (A).................... 3.20% 2.10% 13.00%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) $5,366 $4,938 $3,322
Ratio of Expenses to Average Net
Assets............................ 0.63% 0.90% 0.84%
Ratio of Net Income (Loss) to
Average Net Assets ............... 7.08% 6.97% 5.97%
Portfolio Turnover Rate............. 79% 105% 4%
</TABLE>
<TABLE>
<CAPTION>
LIMITED MATURITY BOND SERIES (CLASS B) FISCAL PERIOD ENDED DECEMBER 31
---------------------------------------------------
1997(C)(D)(F)(H) 1996(C)(D)(F) 1995(C)(D)(E)(F)
---------------- ------------- ----------------
<S> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD. $ 10.14 $ 10.67 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income............... 0.290 0.630 0.530
Net Gain (Loss) on Securities
(realized & unrealized)........... (0.044) (0.524) 0.664
------------- ------------- -------------
Total from Investment Operations.. 0.246 0.106 1.194
LESS DISTRIBUTIONS
Dividends (from Net Investment
Income)........................... (0.296) (0.624) (0.524)
Distributions (from Capital Gains).. --- --- ---
Return of Capital................... --- (0.012) ---
------------- ------------- -------------
Total Distributions............... (0.296) (0.636) (0.524)
------------- ------------- -------------
NET ASSET VALUE END OF PERIOD....... $10.09 $10.14 $10.67
============= ============= =============
TOTAL RETURN (A).................... 2.49% 1.10% 12.20%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) $892 $761 $752
Ratio of Expenses to Average Net
Assets............................ 1.53% 1.88% 1.71%
Ratio of Net Income (Loss) to
Average Net Assets................ 6.23% 5.99% 5.12%
Portfolio Turnover Rate ............ 79% 105% 4%
</TABLE>
See accompanying notes.
22
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each period
<TABLE>
<CAPTION>
HIGH YIELD SERIES (CLASS A) FISCAL PERIOD ENDED DECEMBER 31
-------------------------------
1997(C)(D)(H) 1996(C)(D)(G)
------------- -------------
<S> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD. $15.32 $15.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income............... 0.610 0.450
Net Gain (Loss) on Securities
(realized & unrealized)........... 0.259 0.320
------------- -------------
Total from Investment Operations.. 0.869 0.770
LESS DISTRIBUTIONS
Dividends (from Net Investment
Income)........................... (0.619) (0.450)
Distributions (from Capital Gains).. --- ---
------------- -------------
Total Distributions............... (0.619) (0.450)
------------- -------------
NET ASSET VALUE END OF PERIOD....... $15.57 $15.32
============= =============
TOTAL RETURN (A).................... 5.79% 5.20%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) $4,701 $2,780
Ratio of Expenses to Average Net
Assets............................ 0.90% 1.54%
Ratio of Net Income (Loss) to Average
Net Assets........................ 8.21% 7.47%
Portfolio Turnover Rate............. 58% 168%
</TABLE>
<TABLE>
<CAPTION>
HIGH YIELD SERIES (CLASS B) FISCAL PERIOD ENDED DECEMBER 31
-------------------------------
1997(C)(D)(H) 1996(C)(D)(G)
------------- -------------
<S> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD. $15.32 $15.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income............... 0.550 0.410
Net Gain (Loss) on Securities
(realized & unrealized)........... 0.237 0.320
------------- -------------
Total from Investment Operations.. 0.787 0.730
LESS DISTRIBUTIONS
Dividends (from Net Investment
Income)........................... (0.557) (0.410)
Distributions (from Capital Gains).. --- ---
------------- -------------
Total Distributions............... (0.557) (0.410)
------------- -------------
NET ASSET VALUE END OF PERIOD....... $15.55 $15.32
============= =============
TOTAL RETURN (A).................... 5.24% 4.90%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) $3,123 $2,719
Ratio of Expenses to Average Net
Assets............................ 0.88% 2.26%
Ratio of Net Income (Loss) to
Average Net Assets................ 3.63% 6.74%
Portfolio Turnover Rate............. 58% 168%
</TABLE>
See accompanying notes.
23
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each period
<TABLE>
<CAPTION>
SECURITY TAX-EXEMPT FUND (CLASS A) FISCAL PERIOD ENDED DECEMBER 31
---------------------------------------------------------------------------------------------
1997(C)(D)(F)(H) 1996(C)(D)(F) 1995(C)(D)(F) 1994 1993 1992
---------------- ------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD. $9.72 $9.94 $9.05 $10.37 $10.06 $9.97
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income............... 0.220 0.450 0.480 0.470 0.510 0.610
Net Gain (Loss) on Securities
(realized & unrealized)........... 0.026 (0.215) 0.891 (1.317) 0.702 0.092
------------- ------------- ------------- ------------ ------------ ------------
Total from Investment Operations.... 0.246 0.235 1.371 (0.847) 1.212 0.702
LESS DISTRIBUTIONS
Dividends (from Net Investment
Income)........................... (0.216) (0.455) (0.481) (0.473) (0.514) (0.612)
Distributions (from Capital Gains).. --- --- --- --- (0.388) ---
------------- ------------- ------------- ------------ ------------ ------------
Total Distributions............... (0.216) (0.455) (0.481) (0.473) (0.902) (0.612)
------------- ------------- ------------- ------------ ------------ ------------
NET ASSET VALUE END OF PERIOD....... $9.75 $9.72 $9.94 $9.05 $10.37 $10.06
============= ============= ============= ============ ============ ============
TOTAL RETURN (A).................... 2.58% 2.50% 15.50% (8.30%) 11.60% 7.30%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) $21,192 $23,304 $25,026 $24,092 $32,115 $28,608
Ratio of Expenses to Average
Net Assets........................ 0.84% 0.78% 0.86% 0.82% 0.82% 0.84%
Ratio of Net Income (Loss) to
Average Net Assets................ 4.46% 4.67% 5.02% 4.74% 4.92% 6.07%
Portfolio Turnover Rate............. 4% 54% 103% 88% 118% 90%
</TABLE>
<TABLE>
<CAPTION>
SECURITY TAX-EXEMPT FUND (CLASS B) FISCAL PERIOD ENDED DECEMBER 31
------------------------------------------------------------------------------
1997(C)(D)(F)(H) 1996(C)(D)(F) 1995(C)(D)(F) 1994(C) 1993(B)
---------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD. $9.73 $9.95 $9.05 $10.37 $10.88
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income............... 0.160 0.330 0.370 0.350 0.100
Net Gain (Loss) on Securities
(realized & unrealized)........... 0.023 (0.215) 0.902 (1.321) (0.128)
------------- ------------- ------------- ------------ ------------
Total from Investment Operations.. 0.183 0.115 1.272 (0.971) (0.028)
LESS DISTRIBUTIONS
Dividends (from Net Investment
Income)........................... (0.153) (0.335) (0.372) (0.349) (0.094)
Distributions (from Capital
Gains)............................ --- --- --- --- (0.388)
------------- ------------- ------------- ------------ ------------
Total Distributions............. (0.153) (0.335) (0.372) (0.349) (0.482)
------------- ------------- ------------- ------------ ------------
NET ASSET VALUE END OF PERIOD....... $9.76 $9.73 $9.95 $9.05 $10.37
============= ============= ============= ============ ============
TOTAL RETURN (A).................... 1.91% 1.20% 14.3% (9.50%) (0.20%)
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) $1,258 $1,510 $1,190 $760 $106
Ratio of Expenses to Average Net
Assets............................ 2.01% 2.01% 2.00% 2.00% 2.89%
Ratio of Net Income (Loss) to
Average Net Assets................ 3.29% 3.44% 3.90% 3.50% 2.71%
Portfolio Turnover Rate............. 4% 54% 103% 88% 90%
</TABLE>
See accompanying notes.
24
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each period
<TABLE>
<CAPTION>
SECURITY CASH FUND FISCAL PERIOD ENDED DECEMBER 31
---------------------------------------------------------------------------------------------
1997(D)(F)(H) 1996(C)(D)(F) 1995(C)(D)(F) 1994 1993(C) 1992(C)
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income............... 0.023 0.450 0.049 0.033 0.023 0.028
Net Gain (Loss) on Securities
(realized & unrealized)........... --- --- --- --- --- ---
------------- ------------- ------------- ------------- ------------- -------------
Total from Investment Operations.... 0.023 0.045 0.049 0.033 0.023 0.028
LESS DISTRIBUTIONS
Dividends (from Net Investment
Income............................ (0.023) (0.045) (0.049) (0.033) (0.023) (0.028)
Distributions (from Capital Gains).. --- --- --- --- --- ---
------------- ------------- ------------- ------------- ------------- -------------
Total Distributions............... (0.023) (0.045) (0.049) (0.033) (0.023) (0.028)
------------- ------------- ------------- ------------- ------------- -------------
NET ASSET VALUE END OF PERIOD....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
============= ============= ============= ============= ============= =============
TOTAL RETURN (A).................... 2.36% 4.60% 5.00% 3.40% 2.40% 2.80%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) $46,092 $45,331 $38,158 $58,102 $71,870 $56,694
Ratio of Expenses to Average Net
Assets............................ 0.88% 1.01% 1.00% 0.96% 1.00% 1.00%
Ratio of Net Income (Loss) to
Average Net Assets................ 2.30% 4.47% 5.00% 3.24% 2.28% 2.75%
Portfolio Turnover Rate............. --- --- --- --- --- ---
</TABLE>
(a) Total return information does not take into account any charges paid at
time of purchase or contingent deferred sales charges paid at time of
redemption.
(b) Class "B" shares were initially issued on October 19, 1993. Percentage
amounts for the period, except total return, have been annualized.
(c) Fund expenses were reduced by the Investment Manager and expense ratios
absent such reimbursement would have been as follows:
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Corporate Bond Class B --- --- 2.00% 2.19% 2.05% 2.08%
U.S. Government Class A 1.20% 1.20% 1.20% 1.22% 1.17% 0.96%
Class B --- 1.75% 2.91% 3.70% 3.26% 1.93%
Limited Maturity Class A --- --- --- 1.04% 1.40% 1.13%
Bond Class B --- --- --- 2.12% 2.60% 2.03%
High Yield Class A --- --- --- --- 2.11% 1.43%
Class B --- --- --- --- 2.83% 2.30%
Tax-Exempt Class A --- --- --- 0.86% 0.78% 0.84%
Class B --- --- 2.32% 2.45% 2.19% 2.01%
Cash 1.03% 1.03% --- 1.04% 1.01% ---
</TABLE>
(d) Net investment income was computed using the average month-end shares
outstanding throughout the period.
(e) Security Limited Maturity Bond Series was initially capitalized on January
17, 1995, with a net asset value of $10 per share. Percentage maounts for
period have been annualized, except for total return.
(f) Expense ratios including reimbursements, were calculated without the
reduction for custodian fees earnings credits beginning February 1, 1995.
Expense ratios with such reductions would have been as follows:
<TABLE>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Corporate Bond Class A 1.02% 1.01% ---
Class B 1.85% 1.85% ---
U.S. Government Class A 1.10% 0.64% ---
Class B 1.85% 1.85% ---
Limited Maturity Class A 0.81% 0.87% 0.60%
Bond Class B 1.65% 1.85% 1.50%
Tax-Exempt Class A 0.85% 0.77% 0.83%
Class B 2.00% 2.00% 2.00%
Cash Fund 1.00% 1.00% 0.88%
</TABLE>
(g) Security High Yield Bond Series was initially capitalized on August 15,
1996, with a net asset value of $15 per share. Percentage amounts for the
period have been annualized, except for total return.
(h) Unaudited figures for the six months ended June 30, 1997. Percentage
amounts for the period have been annualized, except for total return.
See accompanying notes.
25
<PAGE>
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Security Income Fund, Security Tax-Exempt Fund and Security Cash Fund (the
Funds) are registered under the Investment Company Act of 1940, as amended, as
diversified open-end management investment companies. The shares of Security
Income Fund are currently issued in multiple series, with each series, in
effect, representing a separate Fund. The Income Fund is required to account for
each series separately and to allocate general expenses to each series based
upon the net asset value of each series. The following is a summary of the
significant accounting policies followed by the Funds in the preparation of
their financial statements. These policies are in conformity with generally
accepted accounting principles.
A. SECURITY VALUATION - Valuations of Income Funds' and Tax-Exempt Fund's
securities are supplied by pricing services approved by the Board of Directors.
Securities listed or traded on a national securities exchange are valued on the
basis of the last sales price. If there are no sales on a particular day, then
the securities are valued at the last bid price. Securities for which market
quotations are not readily available are valued by a pricing service considering
securities with similar yields, quality, type of issue, coupon, duration and
rating. If there is no bid price or if the bid price is deemed to be
unsatisfactory by the Board of Directors or by the Funds' investment manager,
then the securities are valued in good faith by such method as the Board of
Directors determines will reflect the fair value. The Funds' officers, under the
general supervision of the Board of Directors, regularly review procedures used
by, and valuations provided by, the pricing service.
Cash Fund, by approval of the Board of Directors, utilizes the amortized
cost method for valuing portfolio securities, whereby all investments are valued
by reference to their acquisition cost as adjusted for amortization of premium
or accretion of discount.
B. OPTIONS - The High Yield bond Series may purchase put and call options
and write such options on a covered basis on securities that are traded on
recognized securities exchanges and over-the-counter markets. Call and put
options on securities give the holder the right to purchase or sell,
respectively (and the writer the obligation to sell or purchase), a security at
a specified price, on or until a certain date. The primary risks associate d
with the use of options are an imperfect correlation between the change in
market value of the securities held by the Series and the price of the option,
the possibility of an illiquid market, and the inability of the counter-party to
meet the terms of the contract.
The premium received for a written option is recorded as an asset, with an
equal liability which is marked to market based on the option's quoted daily
settlement price. Fluctuation in the value of such instruments are recorded as
unrealized appreciation (depreciation) until terminated, at which time realized
gains and losses are recognized.
C. SECURITY TRANSACTIONS AND INVESTMENT INCOME - Security transactions are
accounted for on the date the securities are purchased or sold. Realized gains
and losses are reported on an identified cost basis.Interest income is
recognized on the accrual basis. Premium and discounts (except original issue
discounts) on debt securities are not amortized, except Security Tax-Exempt Fund
which amortizes premiums.
D. DISTRIBUTIONS TO SHAREHOLDERS - Distributions to shareholders are
recorded on the ex-dividend date. The character of distributions made during the
year from net investment income or net realized gains may differ from their
ultimate characterization for federal income tax purposes. These differences are
primarily due to the recharacterization of foreign currency gains and losses.
E. TAXES - The Funds complied with the requirements of the Internal Revenue
Code applicable to regulated investment companies and distributed all of their
taxable net income and net realized gains sufficient to relieve them from all,
or substantially all, federal income, excise and state income taxes. Therefore,
no provision for federal or state income tax is required.
F. EARNINGS CREDITS - Under the fee schedule with the custodian, the Funds
earn credits based on overnight custody cash balances. These credits are
utilized to reduce related custodial expenses. The custodian fees disclosed in
the statement of operations do not reflect the reduction in expense from the
related earnings credits.
2. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Management fees are payable to Security Management Company, LLC (SMC) under
investment advisory contracts at an annual rate of .50 of 1% of the average net
assets of each fund, except for the High Yield Bond Series whose fees are .60 of
1% of the average net assets of the Series. The investment advisory contract for
Income Fund provides that the total annual expenses of each Series of the Fund
(including management fees and custodian fees net of earnings credits, but
excluding interest, taxes, brokerage commissions and extraordinary expenses)
will not exceed the level of expenses which Income Fund is permitted to bear
under the most restrictive expense limitation imposed by any state in which
shares of the Fund are then qualified for sale. For the period ended June30,
1997, SMC agreed to limit the total expenses of Corporate Bond Series, U.S.
Government Series and Limited Maturity Bond Series to an annual rate of 1.1% of
the average daily net asset value of Class A shares and 1.85% of Class B shares
of each respective Series. SMC also agreed to limit the total expenses of the
High Yield Bond Series to 2.0% for Class A Shares and 2.75% for Class B shares.
In addition, SMC agreed to waive all of the management fees for the U.S.
Government Series, Limited Maturity Bond Series and the High Yield Bond Series
until December 31, 1997. The investment advisory contract for Tax-Exempt and
Cash Funds provides that the total annual expenses of the Funds net of custodian
fee earnings credits will not exceed an amount equal to an annual rate of 1.0%
of the average net assets of Class A shares and 2.0% of Class B shares of the
Tax-Exempt Fund as calculated on a daily basis.
The Funds have entered into contracts with SMC for transfer agent services
and certain other administrative services which SMC provides to the Funds. SMC
is paid an annual fixed charge per account and shareholder and dividend
transaction fees.
As the administrative agent for the Funds, SMC performs administrative
functions, such as regulatory filings, bookkeeping,
26
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
accounting and pricing functions for the Funds. For this service SMC receives on
an annual basis, a fee of .09% of the average daily net assets of Corporate Bond
Series, U.S. Government Series, Limited Maturity Bond Series, High Yield Bond
Series, and Tax-Exempt Fund and .045% of the average daily net assets of Cash
Fund calculated daily and payable monthly.
Income and Tax-Exempt Funds have adopted Distribution Plans related to the
offering of Class B shares pursuant to Rule 12b-1 under the Investment Company
Act of 1940. The Plans provide for payments at an annual rate of 1.0% of the
average net assets of Class B shares. Class A shares of Income Fund incur 12b-1
distribution fees at an annual rate of .25% of the average net assets of each
Series.
Security Distributors, Inc. (SDl), a wholly-owned subsidiary of Security
Benefit Group, Inc., a financial services holding company, is national
distributor for Income and Tax-Exempt Funds. SDI received net underwriting
commissions on sales of Class A shares and contingent deferred sales charges
(CDSC) on redemptions occurring within 5 years of the date of purchase of Class
B shares, after allowances to brokers and dealers for the period ended June30,
1997, in the amounts presented below:
<TABLE>
<CAPTION>
CORPORATE U.S. LIMITED HIGH TAX-
BOND GOVERNMENT MATURITY YIELD EXEMPT
SERIES SERIES SERIES SERIES FUND
--------- ---------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
SDI underwriting (Class A) $ 3,171 $1,992 $1,258 $ 252 $1,318
CDSC (Class B) $ 7,418 $1,365 $ 168 $ 25 $ 267
Broker/Dealer (Class A) $ 7,618 $8,315 $5,337 $1,327 $5,666
Broker/Dealer (Class B) $29,092 $4,298 $6,698 $9,970 $1,870
</TABLE>
Certain officers and directors of the Funds are also officers and/or
directors of Security Benefit Life Insurance Company and its subsidiaries, which
include SMC and SDI.
3. INVESTMENT TRANSACTIONS
Investment transactions for the period ended June 30, 1997, (excluding
overnight investments and short-term debt securities) were as follows:
CORPORATE U.S. LIMITED HIGH TAX-
BOND GOVERNMENT MATURITY YIELD EXEMPT
SERIES SERIES SERIES SERIES FUND
--------- ---------- -------- ------ ------
Purchases $55,179,626 $2,115,282 $2,951,143 $3,241,098 $1,003,130
Proceeds from
sales $66,779,015 $2,310,448 $2,137,828 $1,683,875 $3,009,341
4. FEDERAL INCOME TAX MATTERS
The amounts of unrealized appreciation (depreciation)as of June 30, 1997,
were as follows:
CORPORATE U.S. LIMITED HIGH TAX-
BOND GOVERNMENT MATURITY YIELD EXEMPT
SERIES SERIES SERIES SERIES FUND
--------- ---------- -------- ------ ------
Gross unrealized
appreciation $ 685,094 $ 93,423 $ 84,357 $229,047 $493,541
Gross unrealized
depreciation (377,253) (29,791) (22,785) (3,281) (49,353)
-------- ------- ------- ------- -------
Net unrealized
appreciation $ 307,841 $ 63,632 $ 61,572 $225,766 $444,188
5.SHAREHOLDER'S MEETING.
The Board of Directors of Security Income Fund approved a change in the
name of one of the existing series of the Fund from Global Aggressive Bond
Series to Global High Yield Series to more fully reflect the investment
objectives of the Series. The name change was effective May 1, 1997. The Global
High Yield Series, formerly Global Aggressive Bond Series, is now offered by a
separate prospectus. In addition, its annual and semi-annual reports are also
presented as part of a separate document from the report for the rest of the
Income Fund Series.
A special meeting of the stockholders of the Global Aggressive Bond Series
of Security Income Fund was held on April 28, 1997. At this meeting,
shareholders voted to approve a new investment advisory contract which replaced
Security Management Company, LLC as investment manager to the Fund with MFR
Advisors, Inc.. In addition, shareholders also voted to approve a new
sub-advisory contract between MFR Advisors, Inc. and Lexington Management
Corporation. The total number of eligible votes were 489,633. The results of the
votes are as follows: 463,099 in favor, 0 votes against and 1,508 votes
abstained.
27
<PAGE>
THIS PAGE LEFT BLANK INTENTIONALLY
<PAGE>
THE SECURITY GROUP OF MUTUAL FUNDS
Security Growth and Income Fund
Security Equity Fund
* Equity Series
* Global Series
* Asset Allocation Series
* Social Awareness Series
* Value Series
Security Ultra Fund
Security Income Fund
* Corporate Bond Series
* U.S. Government Series
* Limited Maturity Bond Series
* High Yield Series
Security Tax-Exempt Fund
Security Cash Fund
This report is submitted for the general information of the shareholders of
the Funds. The report is not authorized for distribution to prospective
investors in the Funds unless preceded or accompanied by an effective prospectus
which contains details concerning the sales charges and other pertinent
information.
SECURITY FUNDS
OFFICERS AND DIRECTORS
DIRECTORS
- ---------
Donald A. Chubb, Jr.
John D. Cleland
Donald L. Hardesty
Bruce Jensen (Income Fund only)
Penny A. Lumpkin
Mark L. Morris, Jr., D.V.M.
Jeffrey B. Pantages
Maria Fiorini Ramirez (Income Fund only)
Hugh L. Thompson, Ph.D.
OFFICERS
- --------
John D. Cleland, President
James R. Schmank, Vice President and Treasurer
Mark E. Young, Vice President
Steven M. Bowser, Vice President
Jane A. Tedder, Vice President
Barbara J. Davison, Assistant Vice President
Thomas A. Swank, Vice President
Amy J. Lee, Secretary
Christopher D. Swickard, Assistant Secretary
Brenda M. Harwood, Assistant Treasurer and Assistant Secretary
[SDI LOGO]
SECURITY DISTRIBUTORS, INC. BULK RATE
700 SW Harrison St. U.S. POSTAGE
Topeka, KS 66636-0001 PAID
(785) 431-3112 SECURITY BENEFIT
(800) 888-2461
<PAGE>
MFR
================================================================================
SEMI-ANNUAL REPORT
JUNE 30, 1997
*MFR EMERGING MARKETS TOTAL RETURN SERIES
*MFR GLOBAL ASSET ALLOCATION SERIES
*MFR GLOBAL HIGH YIELD SERIES
[MFR LOGO] MFR Advisors, Inc.
[SDI LOGO]
SECURITY DISTRIBUTORS, INC.
A Member of The Security Benefit
Group of Companies
<PAGE>
MANAGER'S COMMENTARY
JUNE 30, 1997
MFR EMERGING MARKETS TOTAL RETURN
Dear Shareholders:
Welcome to the MFR Emerging Markets TotalReturnFund. The Fund seeks to maximize
total return by investing primarily in a portfolio of emerging market equity and
fixed income securities. With many of the fastest growing economies in the world
located in emerging countries, we believe that these markets represent exciting
investment opportunities. In allocating the Fund's assets, the investment
adviser, MFR Advisors, Inc., uses the proprietary macroeconomic research of
Maria Fiorini Ramirez, Inc. (MFR), the parent company of MFR Advisors, Inc. For
many years, MFR has been providing global economic research to financial
institutions around the world, and we are now pleased to be able to offer our
investment insights through the MFR mutual funds.
Countries considered emerging markets have tremendous growth potential. With
their inexpensive labor forces, they have attracted, and will continue to
attract, direct investment in plant and equipment from many of the world's
largest manufacturers. As these countries grow, they tend to upgrade their
infrastructures, including their telephone systems, roads, railways and
utilities. State-owned monopolies in many of these industries have been
privatized and many represent excellent investment opportunities. As you can see
in the attached portfolio, the Fund owns a number of telecommunication and other
infrastructure type investments.
The Fund currently also has a high percentage (approximately 38% of net assets)
of its portfolio invested in the sovereign debt of emerging market countries.
This portion of the Fund provides a steady stream of high income and also has
significant upside potential. As countries' economies expand and governments
start putting their fiscal houses in order, the credit rating of their debt may,
in many cases, be upgraded. We have seen a good number of upgrades in recent
years and we believe this trend will continue.
Looking ahead, we see a volatile second half for 1997, which should provide some
good buying opportunities. Speculative selling pressures combined with either
poor economic fundamentals and/or currency overvaluation to force the effective
devaluations of the Thai Baht, Czech Koruna and the Philippine Peso. As of the
writing of this letter, there were also heavy selling pressures on the
Indonesian Rupiah, Malaysian Ringgit and Polish Zloty. The common theme among
these currencies is that they all had "managed levels" set by their governments,
as opposed to floating freely against other currencies. In most instances, the
governments were using a relatively (and as it turned out, unsustainable) strong
currency to mask fundamental problems, either in the economy or in governmental
policies. We believe that this string of devaluations will force more freely
floating currencies, which in turn, will eventually force sound governmental
economic policies. In the long run, this can only be positive for these markets.
In closing, we would like to add that MFR Advisors, Inc. is working for you, the
shareholder, and that as your money manager, we welcome your calls regarding
your investment.
Maria Fiorini Ramirez Bruce Jensen
President and CEO Chief Investment Officer
MFR Advisors, Inc. MFR Advisors, Inc.
Investing in foreign countries may involve risks, such as currency fluctuations
and political instability, not associated with investing exclusively in the U.S.
1
<PAGE>
MANAGER'S COMMENTARY (CONTINUED)
JUNE 30, 1997
MFR GLOBAL ASSET ALLOCATION
Dear Shareholders:
Welcome to the MFR Global Asset Allocation Fund. The Fund seeks to maximize
total return by investing primarily in a globally diverse portfolio of equity
and fixed income securities. In allocating the Fund's assets, the investment
adviser, MFR Advisors, Inc., uses the proprietary macroeconomic research of
Maria Fiorini Ramirez, Inc., (MFR), the parent company of MFR Advisors, Inc. For
many years, MFR has been providing global economic research to financial
institutions around the world, and we are now pleased to be able to offer our
investment insights through the MFR mutual funds.
Our view of the world is a positive one. Increasing globalization and investment
in new technology have resulted in strong anti-inflationary forces. Moreover,
governments have almost universally adopted strict fiscal discipline and
monetary policy makers have shown their commitment to control inflation. All of
these factors have led to a healthy environment for both stocks and bonds on a
global basis.
Looking forward, we do not see these positive trends ending anytime soon. The
labor marketplace has not yet fully absorbed the benefits of globalization,
including the addition of the inexpensive workers of former communist countries.
Structural problems related to the weakness of the financial system in Japan and
labor rigidity in Europe should keep interest rates low, providing ample
liquidity to markets. Economic activity continues to expand, and may well pick
up a little speed as European growth starts to recover.
Our investment outlook stresses three themes as represented in the attached
portfolio. First, and most important, we believe stocks should continue to
outperform bonds in this positive economic environment. This has led us to
invest approximately 70% of the portfolio (as of the date of this letter) in
equities, which we consider an overweight equity position. Second, we believe
that high yield bonds (whether foreign or domestic) will continue to outperform
high grade, lower yielding fixed income securities. And last, we believe that
growth prospects, and therefore investment opportunities, are superior in higher
growth nations outside of the G-5 (U.S., Japan, United Kingdom, Germany and
France).
In closing, we would like to add that MFR Advisors, Inc. is working for you, the
shareholder, and that as your money manager, we welcome your calls regarding
your investment.
Maria Fiorini Ramirez Bruce Jensen
President and CEO Chief Investment Officer
MFR Advisors, Inc. MFR Advisors, Inc.
Investing in foreign countries may involve risks, such as currency fluctuations
and political instability, not associated with investing exclusively in the U.S.
2
<PAGE>
MANAGER'S COMMENTARY (CONTINUED)
JUNE 30, 1997
MFR GLOBAL HIGH YIELD
Dear Shareholders:
MFR Advisors, Inc. would first like to thank the Fund's shareholders for
approving our appointment as Investment Adviser to the Fund on April 28, 1997.
Since the Fund's inception as Security Global Aggressive Bond Series, MFR
Advisors, Inc. has been the Fund's sub-investment adviser. Now named MFR Global
High Yield Series, the Fund's investment objective remains unchanged; high
current income with capital appreciation as the secondary objective.
The first half of 1997 saw mediocre returns for the global fixed investor. Many
of the world's developed government bond markets performed reasonably well. In
fact, the average 10-year yield of the G-7 (Germany, France, United Kingdom,
Italy, Japan, Canada and the United States) started the year at a 6.02% yield
and fell 0.20% (20 basis points) during the first six months of the year.
Interestingly, the United States was the only country in the G-7 that
experienced a rise in its 10-year yields (.08%). What made global bond returns
mediocre for the U.S. investor was the rise in the value of the U.S. dollar
versus most European currencies.
The two big anchors of core Europe, Germany and France, remained in the economic
doldrums. Constrained by the economic guidelines of the rapidly approaching
European Monetary Union (EMU), neither country has the fiscal latitude needed to
jump start their economies. This will not change in the near future. This
continued anemic economic growth outlook combined with the large short-term
investment rate differentials between core Europe and the U.S. (Germany's 3
month interest rates are 2.5% below the U.S.) pushed the U.S. dollar up
approximately 11% versus the deutschmark in the first half of 1997. This decline
more than offset interest income and bond gains and resulted in the Lehman
Brothers Global Bond Index being down 1.58% in the first half of the year.
MFR Global High Yield Series returned 2.18% for the first half of 1997(1). The
Fund owed much of its positive return to its investment in dollar denominated
high yield bonds. This category includes "BradyBonds", U.S high yield corporate
debt and dollar denominated mortgages. All of these high yielding sectors saw
their interest rate spreads narrow versus U.S. Treasuries as investors around
the world are seeking relatively high yielding securities. With yields in the
G-7 countries averaging about 5.8% on June 30, 1997, this comes as no surprise.
We are optimistic about the Fund's return for the second half of this year. The
global interest rate environment should remain friendly with subdued inflation
being the most important contributor. In addition, we believe that most of the
bad news regarding Europe has been priced into the U.S. dollar. These factors
combined with a continued flow of funds into the high yield sectors bode well
for MFR Global High Yield Series.
Maria Fiorini Ramirez Bruce Jensen
President and CEO Chief Investment Officer
MFR Advisors, Inc. MFR Advisors, Inc.
(1) Performance figures are based on Class A shares and do not reflect
deduction of the sales charge.
Investing in foreign countries may involve risks, such as currency fluctuations
and political instability, not associated with investing exclusively in the U.S.
3
<PAGE>
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
EMERGING MARKETS TOTAL RETURN SERIES
NUMBER MARKET
COMMON STOCKS OF SHARES VALUE
- --------------------------------------------------------------------------------
ARGENTINA - 2.7%
Telefonica de Argentina S.A. ADR................... 800 $ 27,700
BRAZIL - 9.3%
Aracruz Celulose S.A. ADR.......................... 1,200 24,450
CESP - Companhia Energetica de Sao Paulo ADR*...... 2,000 40,720
Companhia Cervejaria Brama ADR..................... 2,000 30,625
---------
95,795
CHILE - 3.3%
Maderas Y Sinteticos S.A. ADR ..................... 2,000 33,250
CZECH REPUBLIC - 1.0%
SPT Telecom A.S.*.................................. 100 10,493
GREECE - 5.4%
Hellenic Tellecommunication Organization S.A....... 1,100 25,850
Titan Cement Company S.A........................... 600 29,621
---------
55,471
HONG KONG - 4.0%
Founder Hong Kong Limited.......................... 31,000 21,007
Glorious Sun Enterprises*.......................... 42,000 19,923
---------
40,930
HUNGARY - 2.3%
Zalakeramia Rt..................................... 600 23,243
INDONESIA - 2.8%
PT Ramayana Lestari Sentosa*....................... 10,000 28,789
MEXICO - 7.9%
Cemex S.A. de C.V. (CI.B).......................... 5,000 24,075
Grupo Casa Autrey S.A. de C.V. ADR................. 1,200 24,375
Grupo Industrial Maseca S.A. de C.V. ADR........... 2,000 33,000
---------
81,450
PHILIPPINES - 2.4%
C & P Homes, Inc................................... 65,000 24,397
SINGAPORE - 5.3%
Clipsal Industries Ltd............................. 7,000 24,780
Want Want Holdings*................................ 9,000 29,880
---------
54,660
PRINCIPAL
AMOUNT OR
NUMBER OF MARKET
COMMON STOCKS SHARES VALUE
- --------------------------------------------------------------------------------
SOUTH AFRICA - 3.0%
South African Breweries Limited.................... 1,000 $ 30,702
SPAIN - 3.4%
Tele Pizza, S.A.*.................................. 600 35,085
---------
Total common stocks - 52.8%...................... 541,965
GOVERNMENT OBLIGATIONS
- ----------------------
ARGENTINA - 3.4%
Republic of Argentina, 5.50% - 2023(2)............. $ 50,000 34,625
BRAZIL - 4.4%
Government of Brazil "C" Bond, 8.00% - 2014(3)..... $ 56,033 45,001
COSTA RICA - 4.8%
Banco Costa Rica, 6.25% - 2010..................... $ 57,712 48,767
ECUADOR - 5.3%
Republic of Ecuador, 6.4375% - 2025(4)............. $ 75,000 53,719
GREECE - 4.8%
Hellenic Republic, 14.00% - 2003(1)................ 13,000,000 49,188
HUNGARY - 5.6%
Government of Hungary, 23.00% - 1999(1)............ 10,000,000 57,177
PERU - 2.4%
Peru - PDI, 4.00% - 2017........................... $ 39,000 25,350
SOUTH AFRICA - 3.8%
Republic of South Africa, 12.00% - 2005(1)......... 200,000 39,316
---------
Total government obligations - 34.5%............. 353,143
See accompanying notes.
4
<PAGE>
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
EMERGING MARKETS TOTAL RETURN SERIES (CONTINUED)
PRINCIPAL MARKET
SHORT-TERM INVESTMENTS AMOUNT VALUE
- --------------------------------------------------------------------------------
MEXICO - 3.0%
Mexico Cetes, 0% - 10/20/97(1)..................... 255,040 $ 30,860
---------
Total investments - 90.3%........................ 925,968
WRITTEN OPTIONS - (0.1%)
Call option on Government of Brazil "C" Bond,
strike price 80.50 USD - July 1997 (premium $564) $ 56,033 (479)
Cash and other assets, less liabilities - 9.8%... 97,984
---------
Total net assets - 100.0%........................ $1,023,473
=========
INVESTMENT CONCENTRATION
- --------------------------------------------------------------------------------
At June 30, 1997, Emerging Markets Total Return Series' investment
concentration, by industry, was as follows:
Brewery................................. 6.0%
Building Materials...................... 10.8%
Computer Systems........................ 2.1%
Electric Utilities...................... 4.0%
Electrical Equipment.................... 2.4%
Food Processing......................... 6.0%
Foreign Government Bonds................ 34.5%
Paper and Paper Products................ 2.4%
Pharmaceuticals......................... 2.4%
Real Estate Development................. 2.4%
Restaurants............................. 3.4%
Retail/Department Store................. 2.8%
Telecommunications...................... 3.5%
Telephone............................... 2.7%
Textiles................................ 1.9%
Cash, short term instruments and
other assets, less liabilities........ 12.7%
-----
Total net assets.................... 100.0%
=====
GLOBAL ASSET ALLOCATION SERIES
NUMBER MARKET
COMMON STOCKS OF SHARES VALUE
- --------------------------------------------------------------------------------
ARGENTINA - 2.0%
Telefonica de Argentina S.A. ADR................... 600 $ 20,775
AUSTRALIA - 2.7%
Foster's Brewing Group, Ltd........................ 15,000 27,644
AUSTRIA - 2.3%
Boehler-Uddeholm AG................................ 300 23,269
BRAZIL - 2.4%
CESP - Companhia Energetica de Sao Paulo ADR*...... 1,200 24,432
CANADA - 8.1%
Bombardier, Inc. (CI.B)............................ 1,000 22,688
Imax Corporation*.................................. 1,500 36,968
Stelco, Inc. (CI.A)*............................... 3,200 23,892
---------
83,548
CZECH REPUBLIC - 1.0%
SPT Telecom A.S.*.................................. 100 10,493
FRANCE - 4.7%
Alcatel Alsthom.................................... 200 25,073
Sidel, S.A......................................... 300 23,250
---------
48,323
GREECE - 5.4%
Hellenic Tellecommunication Organization S.A....... 1,100 25,850
Titan Cement Company S.A........................... 600 29,621
---------
55,471
HONG KONG - 2.0%
Founder Hong Kong Limited.......................... 31,000 21,007
IRELAND - 1.9%
Allied Irish Banks PLC............................. 2,600 19,896
JAPAN - 5.6%
Amway Japan, Ltd................................... 300 10,172
Mitsubishi Motors Corporation...................... 3,000 21,498
Sony Corporation................................... 300 26,191
---------
57,861
MEXICO - 2.3%
Cemex S.A. de C.V. (Cl.B).......................... 5,000 24,074
See accompanying notes.
5
<PAGE>
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
GLOBAL ASSET ALLOCATION SERIES (CONTINUED)
PRINCIPAL
AMOUNT OR
NUMBER OF MARKET
COMMON STOCKS OF SHARES VALUE
- --------------------------------------------------------------------------------
NETHERLANDS - 2.1%
Royal Dutch Petroleum Company ADR.................. 100 $ 21,600
NEW ZEALAND - 2.2%
Fletcher Challenge Building........................ 7,500 22,518
Fletcher Challenge Forests......................... 300 435
---------
22,953
PHILIPPINES - 1.8%
C & P Homes, Inc................................... 50,000 18,767
SINGAPORE - 2.9%
Want Want Holdings*................................ 9,000 29,880
SPAIN - 4.6%
Adolfo Dominguez S.A.*............................. 600 23,662
Tele Pizza, S.A.*.................................. 400 23,390
---------
47,052
SWEDEN - 2.1%
Skandinaviska Enskilda Banken...................... 2,000 21,598
SWITZERLAND - 1.9%
Saurer AG*......................................... 30 19,899
UNITED KINGDOM - 1.9%
British Telecommunications PLC..................... 2,700 20,041
UNITED STATES - 7.6%
Baxter International............................... 500 26,125
General Electric Company........................... 500 32,688
Northern Trust Corporation......................... 400 19,350
---------
78,163
---------
Total common stocks - 67.5% ..................... 696,746
CORPORATE BONDS
- ---------------
DENMARK - 4.3%
Nykredit, 7.00% - 2026(1).......................... 300,000 44,330
PRINCIPAL
AMOUNT OR
NUMBER OF MARKET
CORPORATE BONDS (CONTINUED) SHARES VALUE
- --------------------------------------------------------------------------------
UNITED STATES - 4.9%
Archibald Candy Corporation, 10.25% - 2004......... $ 50,000 $ 50,875
---------
Total corporate bonds - 9.2%..................... 95,205
GOVERNMENT OBLIGATIONS
- ----------------------
ARGENTINA - 3.4%
Republic of Argentina, 5.50% - 2023(2)............. $ 50,000 34,625
BRAZIL - 4.4%
Government of Brazil "C" Bond, 8.00% - 2014(3)..... $ 56,033 45,001
GREECE - 4.8%
Hellenic Republic, 14.00% - 2003(1)................ 13,000,000 49,188
SOUTH AFRICA - 1.9%
Republic of South Africa, 12.00% - 2005(1)......... 100,000 19,658
---------
Total government obligations - 14.5%............. 148,472
---------
Total investments - 91.2%....................... 940,423
WRITTEN OPTIONS - (0.1%)
Call option on Government of Brazil "C" Bond,
strike price 80.50 USD - July 1997 (premium $564) 56,033 (479)
Cash and other assets, less liabilities-8.9%..... 91,956
---------
Total net assets - 100.0%........................ $1,031,900
=========
See accompanying notes.
6
<PAGE>
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
GLOBAL ASSET ALLOCATION SERIES (CONTINUED)
INVESTMENT CONCENTRATION
- --------------------------------------------------------------------------------
At June 30, 1997, Global Asset Allocation Series' investment concentration by
industry was as follows:
Apparel................................... 2.3%
Automobiles............................... 2.1%
Banks & Credit............................ 4.0%
Brewery................................... 2.7%
Building Materials........................ 7.4%
Commercial Banks.......................... 1.9%
Computer Systems.......................... 2.0%
Electric Utilities........................ 2.4%
Electrical Equipment...................... 3.2%
Electronics............................... 2.5%
Entertainment............................. 3.6%
Financial................................. 4.3%
Food Processing........................... 2.9%
Foreign Government Bonds.................. 14.5%
Forestry.................................. 0.1%
Industrial Services....................... 4.9%
Integrated Petroleum-International........ 2.1%
Machinery................................. 4.2%
Manufacturing - Diversified............... 2.2%
Medical Supplies.......................... 2.5%
Miscellaneous............................. 1.0%
Real Estate Development................... 1.8%
Restaurants............................... 2.2%
Steel..................................... 4.5%
Telecommunications........................ 7.9%
Telephone................................. 2.0%
Cash and other assets, less liabilities. 8.8%
-----
Total net assets...................... 100.0%
=====
GLOBAL HIGH YIELD SERIES
PRINCIPAL MARKET
GOVERNMENT OBLIGATIONS AMOUNT VALUE
- --------------------------------------------------------------------------------
ARGENTINA - 4.5%
Republic of Argentina, 5.50% - 2023(2)............ $ 400,000 $ 277,000
AUSTRALIA - 3.4%
New South Wales Treasury Corporation,
6.50% - 2006(1).................................. 290,000 207,908
GLOBAL HIGH YIELD SERIES (CONTINUED)
PRINCIPAL MARKET
GOVERNMENT OBLIGATIONS (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
BRAZIL - 5.1%
Government of Brazil "C", 4.50% - 2014(3).......... $ 392,228 $ 315,008
CANADA - 2.0%
Canadian Government 8.00% - 2023(1)................ 150,000 123,205
COSTA RICA - 4.1%
Banco Costa Rica, 6.25% - 2010..................... $ 300,000 253,500
DOMINICAN REPUBLIC - 3.4%
Central Bank of Dominican Republic,
6.875% - 2024(4)................................. $ 250,000 208,750
ECUADOR - 3.5%
Republic of Ecuador, 6.4375% - 2025(4)............. $ 300,000 214,877
GREECE - 7.3%
Hellenic Republic, 14.00% - 2003(1)................ 120,000,000 454,039
HUNGARY - 5.5%
Government of Hungary, 23.00% - 1999(1)............ 30,000,000 171,532
Government of Hungary, 21.00% - 1999(1)............ 30,000,000 172,429
---------
343,961
JORDAN - 2.6%
Kingdom of Jordan, 4.00% - 2023(2)................. $ 250,000 162,500
MEXICO - 3.1%
United Mexican States, 6.25% - 2019................ $ 250,000 193,282
NEW ZEALAND - 3.3%
New Zealand Government, 6.50% - 2000(1)............ 300,000 202,516
POLAND - 5.1%
Government of Poland, 16.00% - 1998(1)............. 1,120,000 317,298
SOUTH AFRICA - 3.2%
Republic of South Africa, 12.00% - 2005(1)......... 1,000,000 196,581
SPAIN - 2.8%
Bonos Y Oblig Del Estado, 10.15% - 2006(1)......... 20,000,000 170,606
See accompanying notes.
7
<PAGE>
STATEMENTS OF NET ASSETS
JUNE 30, 1997
(UNAUDITED)
GLOBAL HIGH YIELD SERIES (CONTINUED)
PRINCIPAL MARKET
GOVERNMENT OBLIGATIONS (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
VENEZUELA - 3.8%
Venezuela - DCB, 6.75% - 2007(4)................... $ 250,000 $ 231,875
---------
Total government obligations - 62.7%............. 3,872,906
CORPORATE BONDS
- ---------------
CANADA - 8.2%
CHC Helicopter, 11.5% - 2002....................... $ 237,000 246,480
Roger's Communication, Inc., 10.50% - 2006(1)...... 100,000 80,129
Stelco, Inc., 10.40% - 2009(1)..................... 200,000 178,790
---------
505,399
CZECH REPUBLIC - 2.9%
CEZ, a.s., 11.30% - 2005(1)........................ 2,500,000 73,298
Skofin, S.R.O., a.s., 11.625% - 1998(1)............ 3,500,000 103,697
---------
176,995
DENMARK - 9.5%
Unikredit Realkredit, 7% - 2026(1)................. 1,000,000 147,344
Nykredit, 7.00% - 2026(1).......................... 1,494,000 220,764
Realkredit Danmark, 7.00% - 2026(1)................ 1,494,000 220,989
---------
589,097
UNITED STATES - 11.0%
Archibald Candy Corporation, 10.25% - 2004......... $ 250,000 254,375
Clark Materials Handling, 10.75% - 2006............ $ 250,000 262,500
Countrywide Home Loans, 7.50% - 2027............... $ 199,309 167,799
__________
684,674
_________
Total corporate bonds - 31.6%.................... 1,956,165
PRINCIPAL MARKET
SHORT-TERM INVESTMENTS AMOUNT VALUE
- --------------------------------------------------------------------------------
MEXICO - 2.8%
Mexican Cetes, 0% - 19971.......................... 1,400,000 $ 173,761
---------
Total short-term investments - 2.8%.............. 173,761
---------
Total investments - 97.1%........................ 6,002,832
WRITTEN OPTIONS - (0.1)%
Call option on Brazil "C" Bond strike price 80.5
USD - July 1997 (premium $3,947)................. $ 392,228 (3,353)
Call option on United Mexican States, strike price
78.4375 USD - July 1997 (premium $2,125)......... $ 250,000 (1,153)
---------
(4,506)
Cash and other assets, less liabilities - 3.0%... 183,505
---------
Total net assets - 100.0%........................ $6,181,831
=========
The identified cost of investments owned at June 30, 1997, was the same for
federal income tax and book purposes.
*Securities on which no cash dividend was paid during the preceding twelve
months.
ADR (American Depositary Receipt)
(1) Principal amount on foreign bond is reflected in local currency (e.g.
Japanese yen) while market value is reflected in U.S. dollars.
(2) Step-up rate security which will increase over the life of the bond.
(3) Variable rate security which may be reset over the life of the bond.
(4) Floating rate security which may be reset the first of each semi-annual
payment.
See accompanying notes.
8
<PAGE>
BALANCE SHEETS
JUNE 30, 1997
(UNAUDITED)
EMERGING GLOBAL GLOBAL
MARKETS ASSET HIGH
TOTAL RETURN ALLOCATION YIELD
SERIES SERIES SERIES
-----------------------------------------
ASSETS
Investments, at value (identified
cost $906,451, $911,891 and
$6,012,344, respectively).......... $ 925,968 $ 940,423 $6,002,832
Cash ................................ 63,719 112,589 19,874
Receivable:
Fund shares sold................... --- --- 10,233
Securities sold ................... 564 564 458,978
Forward foreign exchange contracts. --- 157 1,729
Interest........................... 12,354 7,727 178,088
Dividends.......................... 1,447 905 ---
MFR Advisors, Inc.................. 3,857 3,843 4,538
Prepaid expenses................... 20,258 20,148 10,278
Foreign taxes recoverable.......... 341 581 6,319
--------- --------- ---------
Total assets..................... $1,028,508 $1,086,937 $6,692,869
========= ========= =========
LIABILITIES AND NET ASSETS
Liabilities:
Payable for:
Securities purchased............. $ --- $ 50,000 $ 479,989
Fund shares redeemed............. --- --- 83
Written call options outstanding. 479 479 4,506
Other Liabilities:
Custodian fees .................. 921 921 8,026
Transfer and administration fees. 40 40 5,641
Professional fees................ 2,772 2,772 9,624
12b-1 distribution plan fees..... 538 539 2,324
Miscellaneous fees............... 285 286 845
--------- --------- ---------
Total liabilities.............. 5,035 55,037 511,038
Net Assets:
Paid in capital.................... 1,000,200 1,000,200 6,097,020
Undistributed net investment income 4,072 2,615 132,257
Accumulated undistributed net
realized gain (loss)on sale of
investments and foreign currency
transactions..................... (265) 394 (35,659)
Net unrealized appreciation
(depreciation)in value of
investments and translation of
assets and liabilities in
foreign currencies............... 19,466 28,691 (11,787)
--------- --------- ---------
Net assets..................... 1,023,473 1,031,900 6,181,831
--------- --------- ---------
Total liabilities and net
assets .................... $1,028,508 $1,086,937 $6,692,869
========= ========= =========
CLASS "A" SHARES
Capital shares outstanding......... 50,010 50,010 449,078
Net assets......................... $ 511,957 $ 516,173 $4,575,134
Net asset value per share (net
assets divided by shares
outstanding)..................... $10.24 $10.32 $10.19
Add: Selling commission (4.75% of
the offering price).......... 0.51 0.51 0.51
--------- --------- ---------
Offering price per share (net asset
value divided by 95.25%)......... $10.75 $10.83 $10.70
========= ========= =========
CLASS "B" SHARES
Capital shares outstanding......... 50,010 50,010 157,261
Net assets......................... $ 511,516 $ 515,727 $1,606,697
Net asset value per share (net
assets divided by shares
outstanding)..................... $10.23 $10.31 $10.22
========= ========= =========
See accompanying notes.
9
<PAGE>
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED
JUNE 30, 1997
(UNAUDITED)
EMERGING GLOBAL GLOBAL
MARKETS ASSET HIGH
TOTAL RETURN ALLOCATION YIELD
SERIES* SERIES* SERIES
-----------------------------------------
INVESTMENT INCOME:
Dividends............................ $ 2,176 $ 2,969 $ ---
Interest............................. 4,739 2,723 280,197
--------- --------- ---------
6,915 5,692 280,197
Less foreign tax expense........... --- (232) (4,274)
--------- --------- ---------
Total investment income.......... 6,915 5,460 275,923
EXPENSES:
Management fees...................... 1,162 1,163 20,362
Custodian fees....................... 921 921 4,706
Transfer/maintenance fees............ 7 7 1,546
Administration fees.................. 52 52 24,032
Director's fees...................... 29 29 91
Professional fees.................... 3,689 3,689 12,308
Reports to shareholders.............. 172 172 199
Registration fees.................... 2,357 2,357 3,258
Other expenses....................... 137 126 199
12b-1 distribution plan fees ........ 726 727 12,653
Reimbursement of expenses............ (6,409) (6,398) (26,914)
--------- --------- ---------
Total expenses..................... 2,843 2,845 52,440
--------- --------- ---------
Net investment income .......... 4,072 2,615 223,483
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) during the
period on:
Investments........................ --- --- 87,667
Foreign currency transactions...... (265) 394 (23,674)
--------- --------- ---------
Net realized gain (loss)......... (265) 394 63,993
Net change in unrealized appreciation
(depreciation) during the period on:
Investments........................ 19,517 28,532 (148,776)
Translation of assets and
liabilities in foreign currencies (51) 159 (7,499)
--------- --------- ---------
Net unrealized appreciation
(depreciation)................. 19,466 28,691 (156,275)
--------- --------- ---------
Net gain (loss)................ 19,201 29,085 (92,282)
--------- --------- ---------
Net increase in net assets
resulting from operations.. $ 23,273 $ 31,700 $ 131,201
========= ========= =========
*Period May 19, 1997 (inception) through June 30, 1997
See accompanying notes.
10
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED
JUNE 30, 1997
(UNAUDITED)
EMERGING GLOBAL GLOBAL
MARKETS ASSET HIGH
TOTAL RETURN ALLOCATION YIELD
SERIES* SERIES* SERIES
-----------------------------------------
INCREASE IN NET ASSETS FROM
OPERATIONS:
Net investment income ............... $ 4,072 $ 2,615 $ 223,483
Net realized gain (loss)............. (265) 394 63,993
Unrealized appreciation (depreciation)
during the period.................. 19,466 28,691 (156,275)
--------- --------- ---------
Net increase in net assets resulting
from operations.................. 23,273 31,700 131,201
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A............................ --- --- (154,370)
Class B............................ --- --- (54,204)
Net realized gain
Class A............................ --- --- ---
Class B............................ --- --- ---
--------- --------- ---------
Total Distributions to Shareholders.. --- --- (208,574)
CAPITAL SHARE TRANSACTION (A):
Proceeds from sale of shares
Class A............................ 500,100 500,100 995,376
Class B............................ 500,100 500,100 41,220
Dividends reinvested
Class A............................ --- --- 150,006
Class B............................ --- --- 53,140
Shares redeemed
Class A............................ --- --- (27,615)
Class B............................ --- --- (171)
--------- --------- ---------
Net increase from capital share
transactions....................... 1,000,200 1,000,200 1,211,956
--------- --------- ---------
Total increase in net assets....... 1,023,473 1,031,900 1,134,583
NET ASSETS:
Beginning of period.................. --- --- 5,047,248
--------- --------- ---------
End of period........................ $1,023,473 $1,031,900 $6,181,831
========= ========= =========
Undistributed net investment income
at end of period................... $ 4,072 $ 2,615 $ 132,257
========= ========= =========
(a) Shares issued and redeemed
Shares sold
Class A........................ 50,010 50,010 98,377
Class B........................ 50,010 50,010 4,021
Dividends reinvested
Class A........................ 0 0 14,793
Class B........................ 0 0 5,230
Shares redeemed
Class A........................ 0 0 (2,696)
Class B........................ 0 0 (17)
--------- --------- ---------
Net increase ................ 100,020 100,020 119,708
========= ========= =========
*Period May 19, 1997 (inception) through June 30, 1997.
See accompanying notes.
11
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED
DECEMBER 31, 1996
GLOBAL
AGGRESSIVE
BOND SERIES
-----------
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income.............................................. $ 472,087
Net realized loss.................................................. (40,713)
Unrealized appreciation during the period.......................... 75,068
---------
Net increase in net assets resulting from operations............. 506,442
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A.......................................................... (210,236)
Class B.......................................................... (85,158)
In excess of net realized gain
Class A.......................................................... (74,660)
Class B.......................................................... (32,900)
---------
Total distributions to shareholders.............................. (402,954)
CAPITAL SHARE TRANSACTIONS (A):
Proceeds from sale of shares
Class A.......................................................... 255,854
Class B.......................................................... 79,004
Dividends reinvested
Class A.......................................................... 283,688
Class B.......................................................... 110,636
Cost of shares redeemed
Class A.......................................................... (66,489)
Class B.......................................................... (127,192)
---------
Net increase from capital share transactions....................... 535,501
---------
Total increase in net assets..................................... 638,989
NET ASSETS:
Beginning of period................................................ 4,408,259
---------
End of period...................................................... $5,047,248
=========
Undistributed net investment income at end of period............... $ 117,348
=========
(a) Shares issued and redeemed:
Shares sold
Class A...................................................... 24,675
Class B...................................................... 7,907
Dividends reinvested
Class A...................................................... 27,930
Class B...................................................... 10,901
Shares redeemed
Class A...................................................... (6,449)
Class B...................................................... (12,357)
---------
Net increase............................................... 52,607
=========
See accompanying notes.
12
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each period
EMERGING MARKETS TOTAL RETURN SERIES (CLASS A) 1997(B)(C)(E)
-------------
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD ............................. $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income ........................................... 0.040
Net Gain (Loss) on Securities (realized and unrealized) ......... 0.200
------
Total from Investment Operations .............................. 0.240
LESS DISTRIBUTIONS:
Dividends (from Net Investment Income) .......................... ---
Distributions (from Capital Gains) .............................. ---
-----
Total Distributions ........................................... ---
------
NET ASSET VALUE END OF PERIOD ................................... $10.24
======
TOTAL RETURN (A) ................................................ 2.40%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) ............................ $512
Ratio of Expenses to Average Net Assets ......................... 2.00%
Ratio of Net Income (loss) to Average Net Assets ................ 3.88%
Portfolio Turnover Rate ......................................... 0%
Average Commission Paid Per Equity Shares Traded ................ $0.0111
EMERGING MARKETS TOTAL RETURN SERIES (CLASS B) 1997(B)(C)(E)
-------------
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD ............................. $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income ........................................... 0.040
Net Gain (Loss) on Securities (realized and unrealized) ......... 0.190
------
Total from Investment Operations .............................. 0.230
LESS DISTRIBUTIONS:
Dividends (from Net Investment Income) .......................... ---
Distributions (from Capital Gains) .............................. ---
------
Total Distributions ........................................... ---
------
NET ASSET VALUE END OF PERIOD ................................... $10.23
======
TOTAL RETURN (A) ................................................ 2.30%
RATIOS/SUPPLEMENTAL DATA:
Net Assets End of Period (thousands) ............................ $512
Ratio of Expenses to Average Net Assets ......................... 2.75%
Ratio of Net Income (loss) to Average Net Assets ................ 3.13%
Portfolio Turnover Rate ......................................... 0%
Average Commission Paid Per Equity Shares Traded ................ $0.0111
See accompanying notes.
13
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each period
GLOBAL ASSET ALLOCATION SERIES (CLASS A) 1997(B)(C)(E)
-------------
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD ............................. $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income ........................................... 0.04
Net Gain (Loss) on Securities (realized and unrealized) ......... 0.28
------
Total from Investment Operations .............................. 0.32
LESS DISTRIBUTIONS:
Dividends (from Net Investment Income) .......................... ---
Distributions (from Capital Gains) .............................. ---
------
Total Distributions ........................................... ---
------
NET ASSET VALUE END OF PERIOD ................................... $10.32
======
TOTAL RETURN (A) ................................................ 3.20%
RATIOS/SUPPLEMENTAL DATA:
Net Assets End of Period (thousands) ............................ $516
Ratio of Expenses to Average Net Assets ......................... 2.00%
Ratio of Net Income (loss) to Average Net Assets ................ 2.82%
Portfolio Turnover Rate ......................................... 0%
Average Commission Paid Per Equity Shares Traded ................ 0.0181
GLOBAL ASSET ALLOCATION SERIES (CLASS B) 1997(B)(C)(E)
-------------
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD ............................. $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income ........................................... 0.030
Net Gain (Loss) on Securities (realized and unrealized) ......... 0.280
-----
Total from Investment Operations .............................. 0.310
LESS DISTRIBUTIONS:
Dividends (from Net Investment Income) .......................... ---
Distributions (from Capital Gains) .............................. ---
------
Total Distributions ........................................... ---
------
NET ASSET VALUE END OF PERIOD ................................... $10.31
======
TOTAL RETURN (A) ................................................ 3.10%
RATIOS/SUPPLEMENTAL DATA:
Net Assets End of Period (thousands) ............................ $516
Ratio of Expenses to Average Net Assets ......................... 2.75%
Ratio of Net Income (loss) to Average Net Assets ................ 2.07%
Portfolio Turnover Rate ......................................... 0%
Average Commission Paid Per Equity Shares Traded ................ $0.0181
See accompanying notes.
14
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each period
FISCAL PERIOD ENDED DECEMBER 31
--------------------------------------
GLOBAL HIGH YIELD SERIES (CLASS A) 1997(C)(E) 1996(C) 1995(C)(D)
--------------------------------------
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD .... $10.36 $10.15 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income .................. 0.650 1.060 0.63
Net Gain (Loss) on Securities
(realized and unrealized) ............ (.430) .064 0.09
------ ------ ------
Total from Investment Operations ..... 0.220 1.124 0.72
LESS DISTRIBUTIONS:
Dividends (from Net Investment Income) . (0.39) (0.687) (0.55)
Distributions (from Capital Gains) ..... --- (0.227) (0.02)
------ ------ ------
Total Distributions .................. (0.39) (0.914) (0.57)
------ ------ ------
NET ASSET VALUE END OF PERIOD .......... $10.19 $10.36 $10.15
====== ====== ======
TOTAL RETURN (A) ....................... 2.2% 11.6% 7.3%
RATIOS/SUPPLEMENTAL DATA:
Net Assets End of Period (thousands) ... $4,575 $3,507 $2,968
Ratio of Expenses to Average Net Assets. 1.90% 1.98% 2.00%
Ratio of Net Income (loss) to Average
Net Assets ........................... 8.19% 10.39% 11.04%
Portfolio Turnover Rate ................ 104% 96% 127%
FISCAL PERIOD ENDED DECEMBER 31
--------------------------------------
GLOBAL HIGH YIELD SERIES (CLASS B) 1997(C)(E) 1996(C) 1995(C)(D)
--------------------------------------
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD .... $10.41 $10.17 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income .................. 0.640 0.980 0.56
Net Gain (Loss) on Securities
(realized and unrealized) ............ (.472) 0.060 0.12
------ ------ ------
Total from Investment Operations ... 0.168 1.040 0.68
LESS DISTRIBUTIONS:
Dividends (from Net Investment Income) . (0.358) (0.573) (0.49)
Distributions (from Capital Gains) ..... --- (0.227) (0.02)
------ ------ ------
Total Distributions .................. (0.358) (0.800) (0.51)
------ ------ ------
NET ASSET VALUE END OF PERIOD .......... $10.22 $10.41 $10.17
====== ====== ======
TOTAL RETURN (A) ....................... 1.7% 10.7% 6.9%
RATIOS/SUPPLEMENTAL DATA:
Net Assets End of Period (thousands) ... $1,607 $1,541 $1,440
Ratio of Expenses to Average Net Assets. 1.96% 2.75% 2.75%
Ratio of Net Income (loss) to Average
Net Assets ........................... 8.14% 9.64% 10.24%
Portfolio Turnover Rate ................ 104% 96% 127%
See accompanying notes.
15
<PAGE>
FINANCIAL HIGHLIGHTS
(a) Total return information does not take into account any charges paid at
time of purchase or contingent deferred sales paid at time of redemption.
(b) Emerging Markets Total Return Series and Global Asset Allocation Series
were initially capitalized on May 19, 1997, with a net asset value of $10
per share. Percentage amounts for the period have been annualized, except
for total return.
(c) Fund expenses were reduced by the Investment Manager and expense ratios
absent such reimbursement would have been as follows:
1995 1996 1997
---- ---- ----
Emerging Markets Total Class A --- --- 7.58%
Return Series Class B --- --- 8.34%
Global Asset Allocation Class A --- --- 7.56%
Series Class B --- --- 8.32%
Global High Yield Series Class A 2.42% 2.73% 3.59%
Class B 3.93% 3.75% 3.45%
(d) Global Aggressive Bond Series was initially capitalized on June 1, 1995,
with a net asset value of $10 per share. Percentage amounts for the period
have been annualized except for total return.
(e) Unaudited figures for the period ended June 30, 1997. Percentage amounts
for the period, except total return, have been annualized.
See accompanying notes.
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
MFR Emerging Markets Total Return Series, MFR Global Asset Allocation
Series, and MFR Global High Yield Series (formally Global Aggressive Bond
Series) (the Series) are diversified series of Security Income Fund, an open-end
investment management company registered under theInvestment Company Act of
1940, as amended. Each Series is accounted for separately and general expenses
are allocated to each Series based upon the net asset value of each Series. The
following is a summary of the significant accounting policies followed by the
Series in the preparation of their financial statements. These policies are in
conformity with generally accepted accounting principles.
A. SECURITY VALUATION -- Valuations of the Series' securities are supplied by
pricing services approved by the Board of Directors. Securities listed or traded
on a national securities exchange are valued on the basis of the last sales
price. If there are no sales on a particular day, then the securities are valued
at the last bid price. Securities for which market quotations are not readily
available are valued by a pricing service considering securities with similar
yields, quality, type of issue, coupon, duration, and rating. If there is no bid
price or if the bid price is deemed to be unsatisfactory by the Board of
Directors or by the Series' investment manager, then the securities are valued
in good faith by such method as the Board of Directors determines will reflect
the fair value. The Series' officers, under the general supervision of the Board
of Directors, regularly review procedures used by, and valuations provided by,
the pricing service.
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. Investments
in foreign securities may involve risks not present in domestic investments.
Since foreign securities may be denominated in a foreign currency and involve
settlement and pay interest in foreign currencies, changes in the relationship
of these foreign currencies to the U.S. dollar can significantly affect the
value of the investments and earnings of the Series. Foreign investments may
also subject the Series to foreign government exchange restrictions,
expropriation, taxation or other political, social or economic developments, all
of which could affect the market and/or credit risk of the investments.
B. FOREIGN CURRENCY TRANSACTIONS -- The accounting records of the Series' are
maintained in U.S. dollars. All assets and liabilities initially expressed in
foreign currencies are converted into U.S. dollars at prevailing exchange rates.
Purchases and sales of investment securities, dividend and interest income, and
certain expenses are translated at the rates of exchange prevailing on the
respective dates of such transactions.
The Series isolate that portion of the results of operations resulting from
changes in foreign exchange rates on investments from the fluctuations arising
from changes in the market prices of securities held.
Net realized foreign exchange gains or losses arise from sales of portfolio
securities, sales of foreign currencies, and the difference between asset and
liability amounts initially stated in foreign currencies and the U.S. dollar
value of the amounts actually received or paid. Net unrealized foreign exchange
gains or losses arise from changes in the exchange rates which effect the value
of portfolio securities and other assets and liabilities at the end of the
reporting period.
C. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS -- The Series may enter into
forward foreign currency exchange contracts in order to manage against foreign
currency risk from purchase or sale of securities denominated in foreign
currency. The Series may also enter into such contracts to manage changes in
foreign currency exchange rates on portfolio positions. These contracts are
marked to market daily, by recognizing the difference between the contract
exchange rate and the current market rate as unrealized gains or losses.
Realized gains or losses are recognized when contracts are settled and are
reflected in the statement of operations. These contracts involve market risk in
excess of the amount reflected in the Balance Sheet. The face or contract amount
in U.S. dollars reflects the total exposure the Series has in that particular
currency contract. Losses may arise due to changes in the value of the foreign
currency or if the counterparty does not perform under the contract.
D. OPTIONS -- The Series may purchase put and call options and write such
options on a covered basis on securities that are traded on recognized
securities exchanges and over-the-counter markets. Call and put options on
securities give the holder the right to purchase or sell, respectively (and the
writer the obligation to sell or purchase), a security at a specified price, on
or until a certain date. The primary risks associated with the use of options
are an imperfect correlation between the change in market valu e of the
securities held by the Series and the price of the option, the possibility of an
illiquid market, and the inability of the counter-party to meet the terms of the
contract.
The premium received for a written option is recorded as an asset, with an
equal liability which is marked to market based on the option's quoted daily
settlement price. Fluctuation in the value of such instruments are recorded as
unrealized appreciation (depreciation) until terminated, at which time realized
gains and losses are recognized. Below are the premiums received for the period
ended June 30, 1997, from written call options.
Fund Premium
---------------------------------------------------
Global High Yield Series $30,614
Emerging Market Total Return Series $564
Global Asset Allocation Series $564
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
E. SECURITY TRANSACTIONS AND INVESTMENT INCOME -- Security transactions are
accounted for on the date the securities are purchased or sold. Realized gains
and losses are reported on an identified cost basis. Interest income is
recognized on the accrual basis. Premium and discounts on debt securities are
amortized.
F. DISTRIBUTIONS TO SHAREHOLDERS -- Distributions to shareholders are recorded
on the ex-dividend date. The character of distributions made during the year
from net investment income or net realized gains may differ from their ultimate
characterization for federal income tax purposes. These differences are
primarily due to the recharacterization of foreign currency gains and losses.
G. TAXES -- The Series complied with the requirements of the Internal Revenue
Code applicable to regulated investment companies and distributed all of their
taxable net income and net realized gains sufficient to relieve them from all,
or substantially all, federal income, excise and state income taxes. Therefore,
no provision for federal or state tax is required.
2. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Management fees are payable to MFR Advisors, Inc. (MFR) under investment
advisory contracts at an annual rate of .75 of 1% of the average net assets for
Global High Yield Bond Series and 1% of the average net assets for Emerging
Markets Total Return Series and Global Asset Allocation Series. MFR has agreed
to waive all of the management fees for the Series until August 31, 1997. In
addition, for the period ended June 30, 1997, MFR agreed to limit the total
expenses of each Series to an annual rate of 2.0% of the average daily net asset
value of Class A shares and 2.75% of the average daily net asset value of the
Class B shares.
As compensation for the services provided to the Global Asset Allocation
Series, MFR pays each of Lexington Management Corporation (Lexington) and
Security Management Company, LLC (SMC), as Sub-Advisors, on an annual basis, a
fee equal to .20 percent and .15 percent, respectively, of the average daily net
assets of the Series. With respect to the Global High Yield and Emerging Markets
Total Return Series, MFR pays Lexington, as Sub-Advisor, on an annual basis, a
fee equal to .20 percent of the average daily net assets of each Series. Fees
paid to the Sub-Advisors are calculated daily and payable monthly.
The Series have entered into contracts with SMC for transfer agent services
and certain other administrative services which SMC provides to the Series. SMC
is paid an annual fixed charge per account and a shareholder and dividend
transaction fee.
As the administrative agent for the Series, SMC performs administrative
functions, such as regulatory filings, bookkeeping, accounting and pricing
functions for the Series. For this service, SMC receives on an annual basis .045
percent of the average daily net assets of the Series, plus an annual fee equal
to the greater of .10 percent of the average daily net assets of each Series,
calculated daily and payable monthly, or (i) $30,000 in the year ended May 31,
1998; (ii) $45,000 in the year ended May 31, 1999; or (iii) $60,000 thereafter,
for the Global Asset Allocation Series and the Emerging Markets Total Return
Series. For the Global High Yield Series, this fee is equal to .10 percent of
the average daily net assets or $60,000 annually. For the period ending June 30,
1997, SMC has agreed to limit these fees to $15,000 for the Emerging Markets
Total Return Series and the Global Asset Allocation Series; and $45,000 for the
Global High Yield Series.
The Series have adopted Distribution Plans related to the offering of Class
B shares pursuant to Rule 12b-1 under the Investment Company Act of 1940. The
Plans provide for payments at an annual rate of 1.0% of the average net assets
of Class B shares. Class A shares incur 12b-1 fees at an annual rate of .25% of
the average net assets of each Series.
Security Distributors, Inc. (SDI), a wholly-owned subsidiary of Security
Benefit Group of Companies, Inc., is national distributor for the Series. SDI
received net underwriting commissions on sales of Class A shares and contingent
deferred sales charges on redemptions occurring within 5 years of the date of
purchase of Class B shares, after allowances to brokers and dealers for the
period ended June 30, 1997, in the amounts presented below:
Global Emerging Global
High Markets Asset
Yield Total Return Allocation
Series Series Series
-----------------------------------------------------------------------
SDI underwriting (Class A) $111 $0 $0
CDSC (Class B) $ 0 $0 $0
Broker/Dealer (Class A) $614 $0 $0
Broker/Dealer (Class B) $365 $0 $0
Certain officers and directors of the Funds are also officers and/or
directors of MFR Advisors, Inc. and Security Benefit Life Insurance Company and
its subsidiaries, which include SMC and SDI.
3. INVESTMENT TRANSACTIONS
Investment transactions for the period ended June 30, 1997, (excluding
overnight investments and short-term debt securities) were as follows:
Global Emerging Global
High Markets Asset
Yield Total Return Allocation
Series Series Series
-----------------------------------------------------------------------
Purchases $4,154,761 $906,451 $911,891
Proceeds from Sales $2,673,030 $ 0 $ 0
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. FEDERAL INCOME TAX MATTERS
The amounts of unrealized appreciation (depreciation) as of June 30, 1997,
were as follows:
Emerging Global Global
Markets Asset High
Total Return Allocation Yield
Series Series Series
----------------------------------------------------------------------------
Gross Unrealized Appreciation $ 43,629 $ 35,653 $ 227,729
Gross Unrealized Depreciation (14,938) (16,187) (239,516)
------ ------- --------
Net Unrealized Appreciation $ 28,691 $ 19,466 $ (11,787)
======= ======= ========
5. FORWARD FOREIGN EXCHANGE CONTRACTS
At June 30, 1997, the following Series had open forward foreign exchange
contracts to sell currency (excluding foreign currency contracts used for
purchase and sale settlements):
<TABLE>
<CAPTION>
Settlement Contract Contract Currency Unrealized
Currency Date Amount Rate Rate Gain (Loss)
- ----------------------------------------------------------------------------------------------------------
GLOBAL ASSET
<S> <C> <C> <C> <C> <C> <C>
ALLOCATION SERIES Aust. Dollar 7/31/97 $22,539 1.331026 1.336199 $ 87
Japanese Yen 7/10/97 $48,161 114.200000 114.430000 61
Can. Dollar 7/28/97 $72,590 1.377600 1.379600 9
-----
$ 157
GLOBAL HIGH
YIELD SERIES Aust. Dollar 7/31/97 $375,650 1.331026 1.336154 $1,442
Aust. Dollar 7/31/97 $187,100 1.336184 1.336154 4
Can. Dollar 7/9/97 $362,845 1.378000 1.379077 283
------
$1,729
</TABLE>
19
<PAGE>
THIS PAGE LEFT BLANK INTENTIONALLY
20
<PAGE>
MFR FUNDS
*Emerging Markets Total Return Fund
*Global Asset Allocation Fund
*Global High Yield 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.
SECURITY FUNDS
OFFICERS AND DIRECTORS
DIRECTORS
- ---------
Donald A. Chubb, Jr.
John D. Cleland
Donald L. Hardesty
Bruce Jensen
Penny A. Lumpkin
Mark L. Morris, Jr., D.V.M.
Jeffrey B. Pantages
Maria Fiorini Ramirez
Hugh L. Thompson, Ph.D.
OFFICERS
- --------
John D. Cleland, President
James R. Schmank, Vice President and Treasurer
Mark E. Young, Vice President
Terry A. Milberger, Vice President, Equity Fund
Jane A. Tedder, Vice President
Cindy L. Shields, Assistant Vice President
Thomas A. Swank, Assistant Vice President
Amy J. Lee, Secretary
Christopher D. Swickard, Assistant Secretary
Brenda M. Harwood, Assistant Treasurer and Assistant Secretary
[SDI LOGO]
SECURITY DISTRIBUTORS, INC. BULK RATE
700 SW Harrison St. U.S. POSTAGE
Topeka, KS 66636-0001 PAID
(800) 643-8188 SECURITY BENEFIT
(888) 743-6432
<PAGE>
SECURITY FUNDS
ANNUAL REPORT
DECEMBER 31, 1996
SECURITY INCOME FUND
- CORPORATE BOND SERIES
- U.S. GOVERNMENT SERIES
- LIMITED MATURITY BOND SERIES
- GLOBAL AGGRESSIVE BOND SERIES
- HIGH YIELD BOND SERIES
SECURITY TAX-EXEMPT FUND
SECURITY CASH FUND
[SDI LOGO]
<PAGE>
PRESIDENT'S LETTER
- --------------------------------------------------------------------------------
SECURITY FUNDS
FEBRUARY 15, 1997
[PHOTO OF JOHN CLELAND]
JOHN CLELAND
Dear Shareholder:
1996 was not a particularly good year for fixed income investors. Interest
rates fluctuated dramatically throughout the year, with the thirty-year Treasury
bond beginning the year at 5.94% and ending it 70 basis points higher at 6.64%.
Only in the global fixed income markets did we see attractive returns. The U.S.
markets continued to be ruled by investors' fears about the reemergence of
inflationary pressures and expectations as to the future rate of economic
growth. Although growth was moderate and inflation remained well under control,
the fear, rather than the fact, dominated bond market movements.
1997 OUTLOOK FOR FIXED INCOME
We believe the fixed income outlook for 1997 is much better. We expect that
last year's moderate inflation levels will remain in place for some time.
Consumer spending, a primary force behind rising inflation, will be restrained
by the high household debt levels now in place. Although many people are
experiencing the "wealth effect" of strong stock markets, these individuals tend
to be savers rather than spenders and are content to watch their earnings grow.
BALANCED BUDGET PROSPECTS IMPROVING
A strong positive for bond markets is the likelihood that a balanced budget
proposal will become reality in 1997. Sentiment is strong on both sides of the
congressional aisle, and since 1997 is not an election year, the possibility of
bipartisan agreement is greater than usual. Should a balanced budget package
become a reality, the promise of reduced Federal spending lowers the potential
for inflation and pleases fixed income investors.
DECLINING GLOBAL INTEREST RATES
An additional plus for fixed income is the outlook for declining global
interest rates as inflation drops in many countries around the world, and as the
European nations work to meet criteria for entry into the European Monetary
Union. Many of these nations have reduced their debt levels, allowing interest
rates to come down in the process. They will continue along this track as the
January, 1998 date for selection of participants in the EMU approaches.
In our opinion, all of these factors combined make an excellent backdrop
for favorable fixed income performance in the year ahead. As always, we invite
your comments and questions.
Sincerely,
John Cleland
President, Security Funds
1
<PAGE>
MANAGERS' COMMENTARY
- --------------------------------------------------------------------------------
SECURITY FUNDS
FEBRUARY 15, 1997
SECURITY INCOME FUND
CORPORATE BOND SERIES
At the beginning of 1996 the Corporate Bond Series' average maturity and
duration were long relative to our benchmark index, anticipating a continuation
of the previous year's low inflation, moderate economic growth and declining
interest rates. At that time the yield on the thirty-year Treasury bond was
5.94%. The first major economic release for the year, the January employment
figures, shocked bond investors when it showed much higher levels of employment
than expected. This set the tone for a year of uncertainty about economic growth
and inflation. The long Treasury bond rose to a high of almost 7.20% in June and
again in July. It closed the year down from that level, but at 6.64%, it
remained well above its opening level for the year.
EARLY STEPS TO READJUST THE PORTFOLIO
In February we began shortening the maturity structure of the portfolio to be
more in line with that of the benchmark index and with our peers. In addition,
we started purchasing issues in three newly-approved asset classes, including
U.S. dollar-denominated foreign bonds ("Yankee" bonds), high yield bonds and
mortgage-backed securities. These proved to be wise moves, as the high yield and
mortgage sectors outperformed corporate bonds throughout the year. For most of
1996 mortgage-backed securities made up about 15% of the portfolio and high
yield issues approximately 17%.
The exposure to Yankee bonds also did well, with about 12% of the portfolio
invested in such issues. The largest of these holdings is Banco Santander, one
of the largest banks in Spain with assets in excess of $132 billion (U.S.
dollars). Others in the Yankee bond sector include Abbey National Bank PLC,
Malayan Bank of New York, Panamerican Beverage Company and Banco Centrale
Hispanoamericano.(1)
HIGH YIELD HOLDINGS IN THE SECOND HALF OF THE YEAR
After we realigned the portfolio's maturity structure early in the year,
performance was strong in the second and third quarters as we outperformed both
our benchmark index and our peer group. The fourth quarter was a different
story. Performance was negatively impacted by our investment in Marvel Holdings,
Inc. bonds, which declined substantially in value after the company announced
poor earnings warning investors of liquidity problems. Another high yield issue,
Home Holdings, also lost considerable value after the company became involved in
litigation surrounding the lease on its Maiden Lane headquarters in New York.
Given the negative contribution of these two high yield bond positions, we have
refined our strategy for using high yield issues in the portfolio.
CORPORATE BOND SERIES
12-31-96
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
LEHMAN BROTHERS MUTUAL FUND
CORPORATE BOND SERIES A RATED CORPORATE INDEX
Dec-86 10,000.00 10,000.00
Mar-87 9,703.81 10,238.19
Jun-87 9,723.63 9,998.72
Sep-87 9,507.70 9,636.25
Dec-87 9,912.07 10,254.88
Mar-88 10,148.80 10,709.96
Jun-88 10,207.11 10,829.28
Sep-88 10,412.20 11,084.10
Dec-88 10,552.90 11,199.96
Mar-89 10,669.88 11,334.85
Jun-89 11,299.14 12,232.34
Sep-89 11,333.50 12,391.71
Dec-89 11,604.98 12,778.23
Mar-90 11,614.62 12,666.49
Jun-90 12,036.94 13,160.90
Sep-90 11,840.35 13,158.24
Dec-90 12,366.74 13,679.94
Mar-91 12,837.14 14,263.89
Jun-91 13,071.20 14,547.56
Sep-91 13,745.07 15,401.42
Dec-91 14,361.26 16,213.50
Mar-92 14,318.75 16,095.03
Jun-92 14,851.65 16,794.18
Sep-92 15,462.72 17,587.34
Dec-92 15,646.32 17,622.01
Mar-93 16,606.87 18,511.92
Jun-93 17,221.42 19,130.69
Sep-93 17,977.33 19,795.61
Dec-93 17,791.61 19,765.82
Mar-94 16,869.03 19,069.77
Jun-94 16,277.95 18,769.78
Sep-94 16,227.66 18,907.48
Dec-94 16,321.15 18,990.13
Mar-95 17,093.77 20,114.83
Jun-95 18,000.28 21,610.95
Sep-95 18,342.75 22,120.25
Dec-95 19,295.99 23,212.59
Mar-96 18,602.69 22,613.56
Jun-96 18,593.95 22,714.57
Sep-96 18,996.48 23,168.14
Dec-96 19,195.17 23,974.49
$10,000 OVER TEN YEARS
This chart assumes a $10,000 investment in Class A shares of Corporate Bond
Series on December 31, 1986, and reflects deduction of the 4.75% sales load. On
December 31, 1996, the value of your investment in the Series' Class A shares
(with dividends reinvested) would have grown to $19,195. By comparison, the same
$10,000 investment would have grown to $23,974 based on the performance of the
Lehman Brothers Mutual Fund A Rated Corporate Index.
The performance illustrated above is based on the performance of Class A shares.
The performance of Class B shares will be greater or less than the performance
shown for Class A shares as a result of the different loads and fees associated
with an investment in Class B shares.
The performance data illustrated above reflects past performance which is not
predictive of future results.
Investments cannot be made directly in an index. The Lehman Brothers Mutual Fund
A Rated Corporate Index includes all corporate debt securities rated A or
higher.
CORPORATE BOND SERIES
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1996
CLASS A SHARES CLASS B SHARES
1 Year -5.69% 1 Year -6.29%
5 Years 4.96% Since Inception -0.28%
10 Years 6.74% (10-19-93)
The performance data above represents past performance which is not predictive
of future results. For Class A shares these figures reflect deduction of the
maximum sales charge of 4.75%. For Class B shares the total return includes
deduction of the maximum contingent deferred sales charge.
2
<PAGE>
MANAGERS' COMMENTARY
- --------------------------------------------------------------------------------
SECURITY FUNDS
FEBRUARY 15, 1997
In order to reduce the impact of negative performance by any one issue, we are
increasing the number of individual investments in the sector while keeping our
overall sector allocation unchanged. This has the effect of limiting the fund's
exposure to any one position to around 1% of portfolio assets.
THOUGHTS ABOUT 1997
We believe the outlook for bonds in 1997 is better than at this time in 1996.
Economic growth should continue at a slow but steady pace, restrained somewhat
by slow consumer spending as individuals concentrate on reducing their debt
burdens. The Federal Reserve Open Market Committee will continue its vigilant
stance against inflation. Aided by falling global inflation and interest rates,
we believe the U.S. bond markets should be able to post a near-average
performance year.
Greg Hamilton
Portfolio Manager
(1) Investing in foreign countries may involve risks, such as non-uniform
accounting practices and political instability, not associated with investing
exclusively in the U.S.
3
<PAGE>
MANAGERS' COMMENTARY
- --------------------------------------------------------------------------------
SECURITY FUNDS
FEBRUARY 15, 1997
U.S. GOVERNMENT SERIES
The U.S. Government securities markets had mixed results in 1996, as the
interest rate on the long Treasury bond rose from 5.94% at the beginning of the
year to 6.64% at its close. Its total return for the year was -2.3%, while over
the same period the two-year Treasury note gained 5.2%. The U.S. Government
Series, which contains issues of varying maturities, fell in between the two
with a total return for the year of 1.26%.(1)
MORTGAGE-BACKED SECURITIES REPRESENTATION
About 30% of the portfolio was invested in mortgage-backed securities (primarily
GNMA's) most of the year. These issues perform well in bear markets because
generally as interest rates rise fewer people refinance their home mortgages.
This reduces prepayments on mortgage-backed securities and helps stabilize their
prices. The issues we hold have coupon rates ranging from 7.5% to 8.5%, adding
an attractive income stream to the portfolio's return.
REALIGNMENT OF MATURITY STRUCTURE
In February and March the yield on the thirty-year Treasury bond rose from 6.02%
to 6.64%, its largest price decline of the year. The U.S. Government Series
contained a number of long-maturity issues at the beginning of February which
hurt portfolio performance at that time. Part of these issues were sold in
March, which helped the balance of the year, but of course could not repair the
damage done before the sales.
PLANS FOR 1997
We believe that interest rates in the first half of 1997 have a good chance of
declining as economic activity slows somewhat and inflation remains well under
control. We may increase the percentage of the portfolio holdings in GNMA
mortgage-backed security issues, as we feel that the greatest portion of total
return in 1997 will come from the income stream provided by the securities. The
duration of the portfolio will probably remain close to its current level of
about five years. Although the year ahead may not be an outstanding one for
fixed income instruments, we believe it will be at least an average one for
total returns.
Steven M. Bowser
Portfolio Manager
(1) Performance figures are based on Class A shares and do not reflect deduction
of the sales charge.
U.S. GOVERNMENT SERIES
12-31-96
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
LEHMAN BROTHERS
U.S. GOVERNMENT FUND GOVERNMENT BOND INDEX
Dec-86 10,000.00 10,000.00
Mar-87 9,695.19 10,117.61
Jun-87 9,651.76 9,941.33
Sep-87 9,536.30 9,673.52
Dec-87 9,888.91 10,219.24
Mar-88 10,127.06 10,556.47
Jun-88 10,291.91 10,656.38
Sep-88 10,454.04 10,836.28
Dec-88 10,505.92 10,938.28
Mar-89 10,615.66 11,054.50
Jun-89 11,225.05 11,943.56
Sep-89 11,372.80 12,042.24
Dec-89 11,746.96 12,495.17
Mar-90 11,737.54 12,339.91
Jun-90 12,139.99 12,771.22
Sep-90 12,296.99 12,877.35
Dec-90 12,897.97 13,585.14
Mar-91 13,219.23 13,879.19
Jun-91 13,441.26 14,066.86
Sep-91 14,080.07 14,870.35
Dec-91 14,677.02 15,667.87
Mar-92 14,495.80 15,393.80
Jun-92 14,921.60 16,002.98
Sep-92 15,248.08 16,792.31
Dec-92 15,401.64 16,799.94
Mar-93 16,112.26 17,558.69
Jun-93 16,728.69 18,066.80
Sep-93 17,281.45 18,652.97
Dec-93 17,209.28 18,590.11
Mar-94 16,534.56 18,030.26
Jun-94 16,135.91 17,823.48
Sep-94 16,015.98 17,899.08
Dec-94 16,083.04 17,963.26
Mar-95 16,790.08 18,808.53
Jun-95 18,023.72 19,975.47
Sep-95 18,538.13 20,327.70
Dec-95 19,598.25 21,256.22
Mar-96 18,947.54 20,775.73
Jun-96 18,968.82 20,873.51
Sep-96 19,346.47 21,226.26
Dec-96 19,845.79 21,845.58
$10,000 OVER TEN YEARS
This chart assumes a $10,000 investment in Class A shares of U.S. Government
Series on December 31, 1986, and reflects deduction of the 4.75% sales load. On
December 31, 1996, the value of your investment in the Series' Class A shares
(with dividends reinvested) would have grown to $19,846. By comparison, the same
$10,000 investment would have grown to $21,846 based on the performance of the
Lehman Brothers Government Bond Index.
The performance illustrated above is based on the performance of Class A shares.
The performance of Class B shares will be greater or less than the performance
shown for Class A shares as a result of the different loads and fees associated
with an investment in Class B shares.
The performance data illustrated above reflects past performance which is not
predictive of future results.
The Lehman Brothers Government Bond Index is made up of all public obligations
of the U.S. Treasury, excluding flower bonds and foreign-targeted issues, all
publicly issued debt of U.S. Government agencies and quasi-federal corporations,
and corporate debt guaranteed by the U.S. Government. Investments cannot be made
directly in an index.
U.S. GOVERNMENT SERIES
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1996
CLASS A SHARES CLASS B SHARES
1 Year -3.59% 1 Year -4.97%
5 Years 5.19% Since Inception 1.95%
10 Years 7.10% (10-19-93)
The performance data above represents past performance which is not predictive
of future results. For Class A shares these figures reflect deduction of the
maximum sales charge of 4.75%. For Class B shares the total return includes
deduction of the maximum contingent deferred sales charge.
4
<PAGE>
MANAGERS' COMMENTARY
- --------------------------------------------------------------------------------
SECURITY FUNDS
FEBRUARY 15, 1997
LIMITED MATURITY BOND SERIES
In its second year of existence the Limited Maturity Bond Series is doing what
it was designed to do--provide lower volatility and downside protection than
longer-maturity funds in periods of rising interest rates. In a year in which
the thirty-year Treasury bond had a total return of -2.3%, the portfolio's total
return of 2.09% looked quite good.(1)
USE OF MORTGAGE-BACKED SECURITIES IN THE PORTFOLIO
One way to reduce volatility without sacrificing the income stream is through
the use of certain mortgage-backed securities, which make up just over 20% of
the portfolio. Our strategy in this portion of the Limited Maturity portfolio
has been to combine seasoned premium mortgage-backed issues having coupons in
the 8% to 9% range with other lower-coupon discounted issues which we consider
to be undervalued. The combination of these two provides both defensive price
movement characteristics in periods of modest interest rate fluctuations and
yields generally 1/2 to 1% higher than Treasury bonds.
CORPORATE HOLDINGS IN THE FUND
In the investment grade corporate bond portion of the portfolio we are using
fewer "Yankee" bonds (dollar-denominated issues of foreign companies) than in
the other fixed income funds, and buying more domestic industrial issues. These
bonds, issued by companies such as Aluminum Company of America and Ford Motor
Company, have historically shown less price volatility than bonds in the finance
and utility sectors of the market.
The high yield portion, currently about 18% of the fund, will generally provide
a substantial income stream to enhance the total return. In the fourth quarter
of 1996, however, performance was hurt by our Marvel Holdings, Inc. bonds which
declined substantially in value after the company announced much lower than
expected earnings, coupled with liquidity problems. We sold the bonds in early
December and the company subsequently filed for bankruptcy protection. Another
high yield issue, Home Holdings, also lost considerable value and hurt overall
performance. The significant performance drag created by these two issues has
led us to take steps to lessen the impact of any future events in the high yield
sector by limiting each holding to 1% or less of the total portfolio. We will
continue to concentrate on the upper-tier rating brackets of the high yield
market.
OUTLOOK FOR 1997
We believe that in 1997 interest rates will continue to fluctuate, although
probably not as widely as in 1996. We plan to continue the volatility-reducing
strategies outlined above, possibly selling some of the longer maturity issues
in the portfolio as well. If 1997 turns out to have total returns in an average
range of 5% to 7%, the strong income component will contribute a greater part of
the return than will price appreciation.
Greg Hamilton, Portfolio Manager
(1) Performance figures are based on Class A shares and do not reflect deduction
of the sales charge.
LIMITED MATURITY BOND SERIES
12-31-96
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
LIMITED MATURITY LEHMAN BROTHERS
BOND SERIES INTERMEDIATE TERM
CORPORATE BOND INDEX
10,000.00 10,000.00
Jan-95 9,552.38 10,192.00
Feb-95 9,748.77 10,464.13
Mar-95 9,798.38 10,533.19
Apr-95 9,932.95 10,695.40
May-95 10,300.75 11,103.97
Jun-95 10,358.89 11,193.91
Jul-95 10,309.05 11,180.47
Aug-95 10,403.62 11,319.11
Sep-95 10,487.92 11,424.38
Oct-95 10,523.63 11,559.19
Nov-95 10,658.84 11,752.23
Dec-95 10,762.43 11,901.48
Jan-96 10,898.96 12,012.16
Feb-96 10,777.01 11,819.97
Mar-96 10,705.57 11,734.86
Apr-96 10,650.01 11,667.98
May-96 10,642.59 11,649.31
Jun-96 10,742.60 11,792.59
Jul-96 10,772.03 11,822.08
Aug-96 10,771.66 11,817.35
Sep-96 10,964.75 12,022.97
Oct-96 11,017.89 12,288.68
Nov-96 11,056.54 12,497.58
Dec-96 10,987.43 12,375.11
$10,000 OVER THE LIFE OF THE SERIES
This chart assumes a $10,000 investment in Class A shares of Limited Maturity
Bond Series on January 17, 1995 (date of inception), and reflects deduction of
the 4.75% sales load. On December 31, 1996, the value of your investment in the
Series' Class A shares (with dividends reinvested) would have grown to $10,987.
By comparison, the same $10,000 investment would have grown to $12,375 based on
the performance of the Lehman Intermediate Term Corporate Bond Index.
The performance illustrated above is based on the performance of Class A shares.
The performance of Class B shares will be greater or less than the performance
shown for Class A shares as a result of the different loads and fees associated
with an investment in Class B shares.
The performance data illustrated above reflects past performance which is not
predictive of future results.
The Lehman Brothers Intermediate Term Corporate Bond Index includes all
corporate debt securities rated A or higher. Investments cannot be made directly
in an index.
LIMITED MATURITY BOND SERIES
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1996
CLASS A SHARES
One Year -2.74%
Since Inception 1-17-95 4.94%
CLASS B SHARES
One Year -3.95%
Since Inception 1-17-95 4.68%
The performance data above represents past performance which is not predictive
of future results. For Class A shares these figures reflect deduction of the
maximum sales charge of 4.75%. For Class B shares the total return includes
deduction of the maximum contingent deferred sales charge.
5
<PAGE>
MANAGERS' COMMENTARY
- --------------------------------------------------------------------------------
SECURITY FUNDS
FEBRUARY 15, 1997
GLOBAL AGGRESSIVE BOND SERIES
1996 was a very rewarding year for our shareholders, particularly during the
second half. While the first six months provided a total return of 2.58%, the
last six months' strong performance brought the total return of the fund for the
year up to 11.56%.(1) This compares favorably with the Lehman Brothers Global
Bond Index return of 5.37% for the year, a 0.2% return for a ten-year U.S.
Treasury note, and 10.4% average for the Lipper peer group.
INTERNATIONAL STRENGTH IN THE SECOND HALF
The second half of 1996 saw an acceleration of the trends which began earlier in
the year. Yields in peripheral European countries such as Spain, Italy, and
Portugal, which had fallen approximately 1% in the first half of the year,
declined a further 2% in the second half. Restrictive fiscal policies by these
governments brought about by their desire not to be left out of the European
Monetary Union process combined with rapidly declining inflation to produce
these dramatic declines in yields. While there is still room for this trend to
continue, we believe the majority of this convergence of yields with "core"
Europe is coming to an end.
Emerging market debt also continued its good performance. With the strongest
concentration of economic growth in the world, the credit quality of many
emerging market countries and companies is increasing and should continue on
that path in 1997.
DOLLAR BLOC PERFORMANCE
One of the differences in the second half of 1996 versus the first half is that
the dollar bloc which includes Australia, Canada, New Zealand and the United
States also performed very well. Interest rates, which had increased in these
countries in the first half on the back of a poor U.S. market, reversed their
upward trend. While longer term rates in the U.S. managed to decline slightly,
yields in the rest of the dollar bloc fell substantially, on the order of 1% to
1.5%. Recognition of the continued trend of low inflation in these countries was
the main contributing factor to the decline in yields.
OUTLOOK FOR 1997
Looking ahead to 1997, we believe that the most rewarding investments will be
those that seek out improving credit quality situations, both on the country and
company level. In particular, the return of strong growth to Latin America
should provide fertile ground for many of these opportunities. We look forward
to the challenges of the new year.
Maria Fiorini Ramirez and Denis P. Jamison
Portfolio Managers
(1) Performance figures are based on Class A shares and do not reflect deduction
of the sales charge.
Investing in foreign countries may involve risks, such as currency fluctuations
and political instability, not associated with investing exclusively in the U.S.
[MFR LOGO] [LEXINGTON LOGO]
GLOBAL AGGRESSIVE BOND SERIES
12-31-96
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
GLOBAL AGGRESSIVE LEHMAN BROTHERS
BOND SERIES GLOBAL BOND INDEX
10,000.00 10,000.00
Jun-95 9,485.71 10,069.00
Jul-95 9,619.05 10,140.49
Aug-95 9,609.52 9,907.26
Sep-95 9,851.18 10,131.16
Oct-95 9,920.00 10,257.80
Nov-95 9,969.16 10,367.56
Dec-95 10,220.30 10,521.00
Jan-96 10,401.55 10,427.36
Feb-96 10,169.96 10,358.54
Mar-96 10,217.42 10,338.86
Apr-96 10,258.45 10,293.37
May-96 10,350.78 10,318.07
Jun-96 10,484.82 10,428.48
Jul-96 10,684.03 10,613.06
Aug-96 10,851.78 10,651.27
Sep-96 10,978.22 10,731.15
Oct-96 11,127.87 10,964.02
Nov-96 11,384.42 11,128.48
Dec-96 11,403.45 11,086.19
$10,000 OVER THE LIFE OF THE SERIES
This chart assumes a $10,000 investment in Class A shares of Global Aggressive
Bond Series on June 1, 1995 (date of inception), and reflects deduction of the
4.75% sales load. On December 31, 1996, the value of your investment in the
Series' Class A shares (with dividends reinvested) would have grown to $11,403.
By comparison, the same $10,000 investment would have grown to $11,086 based on
the performance of the Lehman Brothers Global Bond Index.
The performance illustrated above is based on the performance of Class A shares.
The performance of Class B shares will be greater or less than the performance
shown for Class A shares as a result of the different loads and fees associated
with an investment in Class B shares.
The performance data illustrated above reflects past performance which is not
predictive of future results.
The Lehman Brothers Global Bond Index includes local currency-denominated
sovereign debt of 19 countries plus European Currency Units-denominated debt.
Investment cannot directly be made in an index.
GLOBAL AGGRESSIVE BOND SERIES
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1996
CLASS A SHARES
One Year 6.24%
Since Inception (6-1-95) 8.63%
CLASS B SHARES
One Year 5.67%
Since Inception (6-1-95) 8.78%
The performance data above represents past performance which is not predictive
of future results. For Class A shares these figures reflect deduction of the
maximum sales charge of 4.75%. For Class B shares the total return includes
deduction of the maximum contingent deferred sales charge.
6
<PAGE>
MANAGERS' COMMENTARY
- --------------------------------------------------------------------------------
SECURITY FUNDS
FEBRUARY 15, 1997
HIGH YIELD SERIES
The High Yield Series began operations August 5, 1996 with a primary objective
of seeking high current income with a secondary objective of capital
appreciation. Although the Series may invest in debt issues in any rating
category below investment grade, our current focus is on issues rated BB or B,
in the upper tier of the noninvestment grade range. Given the length of the
current economic expansion in the United States, the possibility is increasing
that we may experience a slowdown in the months to come. If this happens, the
higher-rated high yield issues are likely to outperform their lower-rated
counterparts because of their stronger balance sheets.
LARGEST INDUSTRY REPRESENTATIONS
The largest industry concentration in the portfolio is in consumer goods, both
cyclical and noncyclical. Many of the issuers will be familiar to our
shareholders, including cyclical ones such as sheet and towel manufacturer
Westpoint-Stevens, Inc., cable providers Rogers Cablesystems Ltd. and Century
Communications, and gaming company Showboat, Inc. Others may be less familiar by
name, but their services are well-known: one example is K-III Communications
Corporation, publishers of Weekly Reader, Seventeen magazine, and Funk &
Wagnalls dictionaries, among other products.
Among the consumer noncyclical companies in the portfolio is AMF Group, Inc.,
provider of bowling centers and equipment. AMF is currently designing new
bowling center packages for construction in emerging market countries where
industry penetration is low or nonexistent. Other consumer noncyclicals include
Carrols Corporation, the largest operator of Burger King franchises, and Cott
Corporation, which manufactures private-label soft drinks.
OTHER SECTORS IN THE PORTFOLIO
The portfolio at this time is underweighted in basic industries, especially
those whose assets are subject to commodity pricings, such as steel and paper
companies. The energy sector, where exploration and production companies have
excellent cash flows, is overweighted in the portfolio versus the benchmark
Lehman Brothers High Yield Index, as are nonbank financial services companies.
The High Yield Series has gained a respectable 5.20% since its August
inception.(1) The performance was held back somewhat by our position in Marvel
Holdings, Inc. bonds, which declined substantially in value when the company
announced that they were experiencing liquidity problems. The bonds were sold
out of the portfolio in November, and have dropped considerably further in price
since then.
THE HIGH YIELD OUTLOOK IN 1997
As discussed earlier, our portfolio is higher in quality than many in our high
yield peer group. A number of the peer funds use common stock in their
portfolios, as well. In a bull market like we experienced in 1995 and 1996 those
portfolios may perform better, but with the likelihood of an economic slowdown
in the not-too-distant future, higher-rated issues should hold their value
better. We believe that the high yield bond markets are likely to have a good
year in 1997 relative to other fixed income asset classes, drawing a sizeable
part of their total return from their higher coupons.
Tom Swank
Portfolio Manager
(1) Performance figures are based on Class A shares and do not reflect deduction
of the sales charge.
Investors should remember that while high yield bonds provide potentially higher
yields than many other types of bonds, they also present greater credit risk.
7
<PAGE>
MANAGERS' COMMENTARY
- --------------------------------------------------------------------------------
SECURITY FUNDS
FEBRUARY 15, 1997
SECURITY TAX-EXEMPT FUND
Despite a year in which presidential candidates spoke frequently of tax cuts,
the tax-exempt market actually fared better than its Treasury and corporate
counterparts. Municipal bond investors may be realizing that in a time when a
balanced federal budget is receiving serious consideration, the likelihood of
relevant tax cuts is diminished.
MATURITY RESTRUCTURING EARLY IN 1996
At the beginning of 1996 the average duration of the bonds in the Security
Tax-Exempt Fund was quite long, at about 9.5 years. This hurt performance in
January and February as interest rates rose rapidly. We shortened the
portfolio's average maturity and duration over that time, and for the balance of
the year, it performed well in line with the benchmark index.
In order to lower the volatility of the portfolio, we have reduced the number of
issues that are subject to call risk. Callable bonds are ones which the issuers
can buy back when interest rates decline, replacing them with lower-coupon bonds
and lowering their interest expense. These issues can fluctuate widely in price
as general market levels move above or below the call price, alternately
reducing or increasing the likelihood that they will be called. Because of this
risk, callable bonds can often be purchased at a higher yield than noncallable
issues.
CREDIT RATINGS IN THE PORTFOLIO
To replace this higher yield, we have opted to take a slightly greater credit
risk, purchasing some issues rated in the low-A to high BBB range. Some of these
include bonds issued by colleges and universities, such as dormitory revenue
bonds. We plan to buy smaller block sizes when we purchase these lower-rated
issues, to minimize the impact should any issue experience credit problems. We
plan to keep the average credit rating of the portfolio slightly higher than
that of our peer funds. We believe that as Congress moves to balance the federal
budget, many costs will be pushed down to the state and local government levels,
straining those municipalities' budgets. A higher average credit rating will
afford some degree of protection against unforseen problems.
CONGRESS AND TAX CUTS
As mentioned earlier, the likelihood of significant tax cuts for individuals in
1997 has been reduced by the perception that Congress is intent on presenting a
proposal that will balance the budget in the next five years. It will be easier
in a nonelection year to take politically unpopular steps such as cutting
entitlement programs without granting an offsetting--and
electorate-pleasing--favor such as reduced taxes. A climate in which tax rate
uncertainty is diminished is one which is favorable for performance of
tax-exempt bonds.
Greg Hamilton
Portfolio Manager
TAX-EXEMPT FUND
12-31-96
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
LEHMAN BROTHERS
TAX-EXEMPT FUND MUNICIPAL BOND INDEX
10,000.00 10,000.00
Mar-87 9,784.70 10,241.75
Jun-87 9,321.86 9,963.54
Sep-87 9,211.03 9,716.06
Dec-87 9,400.74 10,150.62
Mar-88 9,679.13 10,499.11
Jun-88 9,910.13 10,702.23
Sep-88 10,104.58 10,975.54
Dec-88 10,364.69 11,179.96
Mar-89 10,184.40 11,254.22
Jun-89 10,568.45 11,920.52
Sep-89 10,562.68 11,928.33
Dec-89 10,821.70 12,387.11
Mar-90 10,834.43 12,442.35
Jun-90 11,076.16 12,733.13
Sep-90 11,097.60 12,740.60
Dec-90 11,491.95 13,290.13
Mar-91 11,733.40 13,589.47
Jun-91 11,941.86 13,880.24
Sep-91 12,393.61 14,420.09
Dec-91 12,840.77 14,904.31
Mar-92 12,845.06 14,949.05
Jun-92 13,284.31 15,516.43
Sep-92 13,567.12 15,929.78
Dec-92 13,776.37 16,219.78
Mar-93 14,187.82 16,821.68
Jun-93 14,729.87 17,372.08
Sep-93 15,257.64 17,958.90
Dec-93 15,475.16 18,210.99
Mar-94 14,359.07 17,211.33
Jun-94 14,465.14 17,401.84
Sep-94 14,449.36 17,520.91
Dec-94 14,193.57 17,269.30
Mar-95 15,150.39 18,490.34
Jun-95 15,301.79 18,936.88
Sep-95 15,642.34 19,481.53
Dec-95 16,390.67 20,284.98
Mar-96 15,978.97 20,040.31
Jun-96 16,050.42 20,193.95
Sep-96 16,396.42 20,656.82
Dec-96 16,802.00 21,183.19
$10,000 OVER TEN YEARS
This chart assumes a $10,000 investment in Class A shares of Tax-Exempt Fund on
December 31, 1986, and reflects deduction of the 4.75% sales load. On December
31, 1996, the value of your investment in the Fund's Class A shares (with
dividends reinvested) would have grown to $16,802. By comparison, the same
$10,000 investment would have grown to $21,183 based on the performance of the
Lehman Brothers Municipal Bond Index.
The performance illustrated above is based on the performance of Class A shares.
The performance of Class B shares will be greater or less than the performance
shown for Class A shares as a result of the different loads and fees associated
with an investment in Class B shares.
The performance data illustrated above reflects past performance which is not
predictive of future results.
The Lehman Brothers Municipal Bond Index is a total return performance benchmark
for the long-term, investment-grade tax-exempt bond market. Returns and
attributes are calculated semi-monthly using approximately 15,000 municipal
bonds. Investments cannot be made directly in an index.
TAX-EXEMPT FUND
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1996
CLASS A SHARES CLASS B SHARES
1 Year -2.40% 1 Year -3.76%
5 Years 4.50% Since Inception 0.27%
10 Years 5.33% (10-19-93)
The performance data above represents past performance which is not predictive
of future results. For Class A shares these figures reflect deduction of the
maximum sales charge of 4.75%. For Class B shares the total return includes
deduction of the maximum contingent deferred sales charge.
8
<PAGE>
MANAGERS' COMMENTARY
- --------------------------------------------------------------------------------
SECURITY FUNDS
FEBRUARY 15, 1997
SECURITY CASH FUND
Money market funds in 1996 became attractive alternatives for fixed-income
investors, outperforming many sectors of the bond market. Security Cash Fund
returned 4.63% over the year, approximating its Lipper peer group average of
4.80%.
AVERAGE MATURITY TARGET RANGE
One of our objectives throughout the year was to keep the average maturity of
the portfolio holdings within ten days of that published weekly in the
IBC/Donoghue Money Fund Report. We avoid the practice of skewing the average
maturity strongly, either shorter or longer than the benchmark average, in order
to try to outguess the Federal Reserve Bank and their interest rate movements.
We believe that a more conservative approach is appropriate in our money market
funds.
SECTOR REPRESENTATION IN THE PORTFOLIO
We have been adding blocks of Small Business Administration mortgage pools with
interest rates which reset monthly or quarterly based on the prime rate. These
AAA-rated issues provide better yields than commercial paper, and they are U.S.
Government securities, so there is no additional credit risk in buying them. The
greatest risk with these instruments is that the mortgages will be prepaid at a
faster-than-anticipated rate. For this reason we choose to only buy issues
priced at par, so that no premium will be lost in the event of escalated
prepayments. Our SBA holdings now make up about 13% of the portfolio.
We have also increased our holdings of government agency issues such as Federal
Farm Credit Banks, Federal Home Loan Banks and Federal National Mortgage
Association securities. These issues, with maturities of one year or less,
provide diversification from the larger position in commercial paper in the
portfolio. The IBC/Donoghue average portfolio position in commercial paper is
about 60%; we have reduced ours from almost 80% to the current 60% in order to
be more in line with that average.
LOOKING AHEAD TO 1997
In 1996 we established an overnight funds account with the Federal Home Loan
Bank in order to maximize our earnings on cash balances. We continue to study
various investment alternatives for the portfolio assets in order to provide
competitive interest rates in the fund.
We expect interest rates on short term fixed income investments to stay within a
narrow band in 1997. When inflation has been modest, as it has for the last two
years, hints of escalating economic growth cause greater fluctuations in the
longer maturities of the bond markets than in the short ones. We continue to
strive to provide a high quality portfolio with a competitive yield for our
shareholders.
Barbara Davison
Fixed Income Team
The Security Cash Fund is neither insured nor guaranteed by the U.S. Government
and there is no assurance that the fund will be able to maintain a stable net
asset value of $1.00 per share.
9
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
SECURITY INCOME FUND
CORPORATE BOND SERIES
PRINCIPAL MARKET
AMOUNT CORPORATE BONDS VALUE
- --------------------------------------------------------------------------------
AIR TRANSPORTATION - 4.6%
$2,000,000 Southwest Airlines Company, 7.875% - 2007 .......... $2,117,500
1,200,000 United Airlines, 11.21% - 2014 ..................... 1,557,000
----------
3,674,500
BANKS - 14.1%
ABN AMRO Bank NV,
1,000,000 7.55% - 2006 ..................................... 1,036,250
1,500,000 7.30% - 2026 ..................................... 1,428,750
1,250,000 Abbey National PLC, 6.69% - 2005 ................... 1,226,563
1,000,000 BCH Cayman Islands, Ltd., 7.70% - 2006 ............. 1,032,500
1,500,000 Bank of New York, Inc., 6.50% - 2003 ............... 1,473,750
2,000,000 Bankers Trust of New York Corporation, 7.125% - 2006 1,997,500
1,000,000 Maylayan Banking Berhad New York, 7.125% - 2005 .... 993,750
2,150,000 Santander Financial Issuances, Ltd., 7.00% - 2006 .. 2,136,563
----------
11,325,626
BROKERS, DEALERS & SERVICES - 6.6%
4,000,000 Bear Stearns Companies, Inc., 5.75% - 2001 ......... 3,860,000
1,450,000 Lehman Brothers, Inc., 7.25% - 2003 ................ 1,457,250
----------
5,317,250
CABLE SYSTEMS - 4.5%
1,750,000 Rogers Cablesystems, Ltd., 9.625% - 2002 ........... 1,833,125
2,000,000 TCI, 7.875% - 2013 ................................. 1,825,000
----------
3,658,125
CONSUMER GOODS & SERVICES - 2.6%
1,000,000 Semi-Tech Corporation, 0% - 2003(4) ................ 657,500
1,500,000 Nike, Inc., 6.375% - 2003 ......................... 1,471,875
----------
2,129,375
ELECTRONICS - 1.9%
1,500,000 Pioneer Standards Electronics, Inc., 8.50% - 2006 .. 1,526,250
ENTERTAINMENT - 5.4%
1,650,000 Harrah's Operating Company, Inc., 8.75% - 2000 ..... 1,685,063
750,000 Showboat, Inc., 13.50% - 2003 ...................... 826,875
1,800,000 Station Casinos, Inc., 10.125% - 2006 .............. 1,804,500
----------
4,316,438
FINANCE - 1.2%
$1,000,000 Countrywide Capital, 8.00% - 2026 .................. $987,500
FOOD & BEVERAGES - 4.2%
1,250,000 Chiquita Brands International, Inc., 10.25% - 2006 . 1,331,250
1,000,000 Coca-Cola Enterprises Inc., 6.70% - 2036(5) ........ 1,010,000
1,000,000 Panamerican Beverages, Inc., 8.125% - 2003 ......... 1,025,000
----------
3,366,250
FUNERAL HOMES - 2.2%
1,750,000 Loewen Group International, Inc., 8.25% - 2003 ..... 1,771,875
INSURANCE - 4.0%
1,250,000 American RE Corporation, 7.45% - 2026 .............. 1,248,438
2,200,000 Home Holdings, Inc., 7.75% - 1998 .................. 968,000
1,050,000 Travelers Capital Trust, 7.75% - 2036 .............. 1,018,500
----------
3,234,938
MEDIA - 3.8%
1,750,000 Time Warner, Inc., 9.125% - 2013 ................... 1,883,438
1,250,000 Viacom, Inc., 8.00% - 2006 ......................... 1,215,625
----------
3,099,063
MISCELLANEOUS - 7.5%
3,575,527 Bear Stearns Mortgage Securities, Inc.,
7.75% - 2024 CMO ................................. 3,460,719
1,322,553 GE Capital Mortgage Services, Inc., 8.30% - 2023 CMO 1,345,113
1,250,000 Securitized Asset Sales, Inc., 7.50% - 2025 CMO .... 1,250,110
----------
6,055,942
MOTOR VEHICLES - 5.0%
2,000,000 Chrysler-Auburn Hills Trust, 12.00% - 2020 ......... 3,017,500
1,000,000 Ford Motor Company, 7.25% - 2008 ................... 1,010,000
----------
4,027,500
NATURAL GAS COMPANIES - 1.2%
1,000,000 El Paso Natural Gas Company, 6.75% - 2003 .......... 992,500
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
10
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
SECURITY INCOME FUND
CORPORATE BOND SERIES (CONTINUED)
PRINCIPAL MARKET
AMOUNT CORPORATE BONDS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
OIL & GAS COMPANIES - 2.6%
$1,000,000 Seagull Energy Corporation, 8.625% - 2005 .......... $1,037,500
1,000,000 Union Pacific Resources, 7.50% - 2026 .............. 1,017,500
----------
2,055,000
PAPER & LUMBER PRODUCTS - 1.7%
1,250,000 Domtar, Inc., 9.50% - 2016 ......................... 1,371,875
PUBLISHING & PRINTING - 2.6%
375,000 Golden Books Publishing, Inc., 7.65% - 2002 ........ 338,438
1,700,000 Valassis Inserts, Inc., 9.375% - 1999 .............. 1,751,000
----------
2,089,438
REAL ESTATE - 1.9%
820,000 Chelsea GCA Realty, Inc., 7.75% - 2001 ............. 837,425
750,000 Simon DeBartolo Group, Ltd., 6.875% - 2006 ......... 729,375
----------
1,566,800
WASTE MANAGEMENT - 1.3%
1,000,000 Waste Management, 7.10% - 2026(5) .................. 1,030,000
STEEL & METAL PRODUCTS - 1.0%
750,000 AK Steel Corporation, 10.75% - 2004 ................ 817,500
TELECOMMUNICATION EQUIPMENT - 3.9%
3,000,000 Comsat Corporation, 8.125% - 2004 .................. 3,168,750
----------
Total corporate bonds--Corporate
Bond Series - 83.8% .............................. 67,582,495
GOVERNMENT & GOVERNMENT AGENCY SECURITIES
-----------------------------------------
U.S. Government Agencies - 8.8%
Federal Home Loan Mortgage Corporation,
1,500,000 7.974% - 2005 .................................... 1,508,940
751,931 8.80% - 2020 CMO ................................. 768,652
750,000 9.00% - 2020 CMO ................................. 763,009
750,000 6.50% - 2021 CMO ................................. 683,749
929,897 7.00% - 2021 CMO ................................. 854,822
Federal National Mortgage Association,
1,500,000 0% - 2004(4) ..................................... 1,472,085
989,433 9.30% - 2019 CMO ................................. 1,011,628
----------
7,062,885
PRINCIPAL
AMOUNT OR
NUMBER OF GOVERNMENT & GOVERNMENT MARKET
SHARES AGENCY SECURITIES VALUE
- --------------------------------------------------------------------------------
U.S. TREASURY NOTES - 1.2%
$1,000,000 5.625% - 1998 .................................... $995,390
----------
Total government & government agency securities -
Corporate Bond Series - 10.0% .................... 8,058,275
PREFERRED STOCK
------------------------------------------
ELECTRIC COMPANIES - 0.1%
3,100 Georgia Power Capital Trust, $1.9375 ............... 77,500
----------
Total preferred stock--Corporate Bond Series - 0.1%. 77,500
----------
Total investments - Corporate Bond Series - 93.9% .. 75,718,270
Cash and other assets, less liabilities - 6.1% ..... 4,945,375
----------
Total net assets - Corporate Bond Series - 100.0% .. $80,663,645
==========
SECURITY INCOME FUND
U.S. GOVERNMENT SERIES
U.S. GOVERNMENT & GOVERNMENT AGENCY SECURITIES
----------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION - 8.2%
$700,000 7.125% - 2001 .................................... $710,731
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 32.3%
$600,000 7.40% - 2004 ..................................... 630,168
$500,000 6.69% - 2011 ..................................... 477,420
$1,000,000 8.10% - 2019 ..................................... 1,121,370
$500,000 8.28% - 2025 ..................................... 578,175
----------
2,807,133
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 34.9%
$680,151 8.50% - 2024 ..................................... 707,105
$694,219 7.75% - 2025 ..................................... 701,371
$819,474 8.00% - 2026 ..................................... 832,013
$264,386 8.25% - 2026 ..................................... 271,822
$522,929 7.50% - 2034 ..................................... 520,494
----------
3,032,805
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
11
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
SECURITY INCOME FUND
U.S. GOVERNMENT SERIES (CONTINUED)
PRINCIPAL U.S. GOVERNMENT & GOVERNMENT MARKET
AMOUNT AGENCY SECURITIES (CONTINUED) VALUE
- --------------------------------------------------------------------------------
U.S. TREASURY NOTES - 15.0%
$810,000 7.25% - 1998 ..................................... $823,090
460,000 8.00% - 1999 ..................................... 481,717
----------
1,304,807
U.S. TREASURY BONDS - 7.7%
600,000 8.75% - 2008 ..................................... 674,448
----------
Total investments - U.S. Government Series - 98.1% . 8,529,924
Cash and other assets, less liabilities - 1.9% ..... 167,475
----------
Total net assets - U.S. Government Series - 100.0% . $8,697,399
==========
SECURITY INCOME FUND
LIMITED MATURITY BOND SERIES
CORPORATE BONDS
------------------------------------------
ALUMINUM - 2.7%
$148,000 Alcan Aluminum, Ltd., 9.20% - 2001 ................. $152,810
AUTOMOBILE REPAIR - 2.8%
150,000 Speedy Muffler King, Inc., 10.875% - 2006 .......... 160,500
BANKS - 2.1%
110,000 First Union Corporation, 8.125% - 2002 ............. 117,563
CABLE - 5.0%
125,000 Paging Network, 10.00% - 2008 ...................... 126,406
150,000 Rogers Cablesystems, Ltd., 9.625% - 2002 ........... 157,125
----------
283,531
CONSUMER GOODS - 2.2%
125,000 Cole National Group, Inc., 9.875% - 2006 ........... 128,750
ELECTRIC COMPANIES - 2.6%
150,000 Consolidated Edison Company of New York,
6.625% - 2002 .................................... 150,000
ELECTRIC & GAS COMPANIES - 2.8%
150,000 Public Service Electric & Gas Company, 8.75% - 1999. 157,875
ELECTRONICS - 3.6%
200,000 Pioneer Standard Electronics, Inc., 8.50% - 2006 ... 203,500
FINANCE - 10.9%
$150,000 Ford Motor Credit Company, 8.375% - 2000 ........... $157,688
150,000 Household Finance Corporation, 8.00% - 2004 ........ 159,750
150,000 International Lease Finance Corporation,
8.25% - 2000 ..................................... 157,125
150,000 MCN Investment Corporation, 6.32% - 2003 ........... 147,000
----------
621,563
FOOD & BEVERAGE TRADE - 1.8%
100,000 FEMSA Fomento Economico Mexicano SA, 9.50% - 1997 .. 101,375
INSURANCE - 3.3%
100,000 Home Holdings, Inc., 7.75% - 1998 .................. 44,000
150,000 Travelers Capital Trust, 7.75% - 2036 .............. 145,500
----------
189,500
MISCELLANEOUS - 4.0%
122,860 GE Capital Mortgage Services, Inc., 8.30% - 2023 CMO 124,956
100,000 Sears Mortgage Securities Corporation,
8.50% - 2022 CMO ................................. 102,959
----------
227,915
NATURAL GAS COMPANIES - 6.3%
200,000 El Paso Natural Gas Company, 6.75% - 2003 .......... 198,500
150,000 Vastar Resources, Inc., 8.75% - 2005 ............... 162,938
----------
361,438
OIL & GAS COMPANIES - 2.7%
150,000 Seagull Energy Corporation, 8.625% - 2005 .......... 155,625
PUBLISHING & PRINTING - 1.8%
100,000 Valassis Inserts, Inc., 9.375% - 1999 .............. 103,000
RETAIL TRADE - 2.7%
150,000 Wal-Mart Stores, Inc., 7.50% - 2004 ................ 156,563
SANITARY SERVICES - 2.8%
150,000 WMX Technologies, Inc., 8.25% - 1999 ............... 157,313
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
12
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
SECURITY INCOME FUND
LIMITED MATURITY BOND SERIES (CONTINUED)
PRINCIPAL MARKET
AMOUNT CORPORATE BONDS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
TOBACCO PRODUCTS - 2.8%
$150,000 Dimon, Inc., 8.875% - 2006 ......................... $156,938
----------
Total corporate bonds - Limited Maturity
Bond Series - 62.9% .............................. 3,585,759
GOVERNMENT & GOVERNMENT AGENCY SECURITIES
------------------------------------------
CANADIAN GOVERNMENT AGENCIES - 2.9%
150,000 Province of Quebec, 8.625% - 2005 .................. 164,813
U.S. GOVERNMENT AGENCIES - 24.0%
Federal Home Loan Mortgage Corporation,
200,000 8.00% - 2020 CMO ................................. 203,089
44,000 8.50% - 2020 CMO ................................. 45,408
186,000 8.00% - 2024 ..................................... 189,348
Federal National Mortgage Association,
200,000 0% - 2004(4) ..................................... 196,278
150,000 8.50% - 2005 ..................................... 157,602
126,040 5.70% - 2008 CMO ................................. 120,672
118,000 7.50% - 2019 CMO ................................. 118,563
100,000 7.00% - 2020 CMO ................................. 98,389
100,000 6.75% - 2021 CMO ................................. 98,703
160,487 6.50% - 2023 CMO ................................. 138,012
----------
1,366,064
----------
Total government & government agency securities -
Limited Maturity Bond Series - 26.9% ............. 1,530,877
----------
Total investments - Limited Maturity
Bond Series - 89.8% .............................. 5,116,636
Cash and other assets, less liabilities - 10.2% .... 582,273
----------
Total net assets - Limited Maturity
Bond Series - 100.0% ............................. $5,698,909
==========
SECURITY INCOME FUND
GLOBAL AGGRESSIVE BOND SERIES
PRINCIPAL MARKET
AMOUNT GOVERNMENT OBLIGATIONS VALUE
- --------------------------------------------------------------------------------
ARGENTINA - 4.5%
$225,000 Republic of Argentina, 9.25% - 2001 ................ $229,219
AUSTRALIA - 8.6%
250,000 Commonwealth of Australia, 9.00% - 2004(3) ......... 218,275
290,000 New South Wales Treasury Corporation,
6.50% - 2006(3) .................................. 213,347
----------
431,622
BRAZIL - 4.0%
$275,342 Government of Brazil C, 4.50% - 2014 ............... 203,496
COSTA RICA - 4.7%
$300,000 Banco Costa Rica, 6.25% - 2010 ..................... 238,500
DOMINICAN REPUBLIC - 3.8%
$250,000 Central Bank of Dominican Republic, 6.375% - 2024 .. 190,625
GREECE - 4.1%
50,000,000 Hellenic Republic, 14.00% - 2003(3) ................ 205,525
HUNGARY - 3.8%
30,000,000 Government of Hungary, 21.00% - 1999(3) ............ 189,372
JORDAN - 2.9%
$250,000 Kingdom of Jordan, 4.00% - 2023 .................... 148,125
NEW ZEALAND - 4.1%
300,000 New Zealand Government, 6.50% - 2000(3) ............ 208,929
POLAND - 7.3%
1,120,000 Government of Poland, 16.00% - 1998(3) ............. 369,024
PORTUGAL - 8.8%
Obrig Do Tes Medio Prazo,
20,000,000 11.875% - 2000(3) ................................ 149,895
35,000,000 11.875% - 2005(3) ................................ 295,546
----------
445,441
SOUTH AFRICA - 3.5%
1,000,000 Republic of South Africa, 12.00% - 2005(3) ......... 174,846
SPAIN - 3.7%
20,000,000 Bonos Y Oblig Del Estado, 10.15% - 2006(3) ......... 187,661
----------
Total government obligations - Global Aggresive
Bond Series - 63.8% .............................. 3,222,385
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
13
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
SECURITY INCOME FUND
GLOBAL AGGRESSIVE BOND SERIES (CONTINUED)
PRINCIPAL MARKET
AMOUNT CORPORATE BONDS VALUE
- --------------------------------------------------------------------------------
CANADA - 9.8%
$237,000 CHC Helicopter, 11.50% - 2002 ...................... $242,925
100,000 Roger's Communication, Inc., 10.50% - 2006(3) ...... 76,161
200,000 Stelco, Inc., 10.40% - 2009(3) ..................... 172,465
----------
491,551
CZECH REPUBLIC - 4.4%
2,500,000 CEZ, A.S., 11.30% - 2005(3) ........................ 92,809
3,500,000 Skofin, S.R.O., A.S., 11.625% - 1998(3) ............ 129,187
----------
221,996
DENMARK - 6.3%
1,000,000 Nykredit, 7.00% - 2026(3) .......................... 159,606
1,000,000 Realkredit Danmark, 7.00% - 2026(3) ................ 158,894
----------
318,500
THAILAND - 4.3%
5,200,000 Italian-Thai Development Company, 12.50% - 2005(3) . 218,374
----------
Total corporate bonds - Global Aggressive
Bond Series - 24.8% .............................. 1,250,421
SHORT-TERM INVESTMENTS
------------------------------------------
INDONESIA - 6.1%
500,000,000 Asia Pulp & Paper, 0% - 4-29-97(3) ................. 201,594
250,000,000 Chase Manhattan Bank Time Deposit,
14.00% - 1-16-97(3) .............................. 105,820
----------
307,414
----------
Total short term investments - Global
Aggressive Bond Series - 6.1% .................... 307,414
----------
Total investments - Global Aggressive
Bond Series - 94.7% .............................. 4,780,220
WRITTEN OPTIONS - (0.1%)
$275,342 Call Option on Government of Brazil
C Bond, strike price 72.75 USD, 1-97
(premium $3,050) ................................. (5,979)
Cash and other assets, less liabilities - 5.4% ..... 273,007
----------
Total net assets - Global Aggressive
Bond Series - 100.0% ............................. $5,047,248
==========
SECURITY INCOME FUND
HIGH YIELD BOND SERIES
PRINCIPAL MARKET
AMOUNT CORPORATE BONDS VALUE
- --------------------------------------------------------------------------------
APPAREL - 3.0%
$150,000 Tultex Corporation, 10.625% - 2005 ................. $163,312
AUTOMOBILES - 3.2%
170,000 Exide Corporation, 10.00% - 2005 ................... 177,225
BANKS & CREDIT - 1.9%
100,000 B.F. Saul Reit, 11.625% - 2002 ..................... 107,500
BEVERAGES - 3.7%
100,000 Cott Corporation, 9.375% - 2005 .................... 103,000
100,000 Delta Beverage Group, 9.75% - 2003 ................. 102,250
----------
205,250
BROADCAST MEDIA - 4.4%
135,000 Allbritton Communications Company, 11.50% - 2004 ... 143,100
100,000 Heritage Media Corporation, 8.75% - 2006 ........... 96,500
----------
239,600
CHEMICALS - 3.3%
170,000 Envirodyne Industries, Inc., 12.00% - 2000 ......... 180,837
CABLE SYSTEMS - 9.5%
100,000 Cablevision Systems Corporation, 10.75% - 2004 ..... 104,000
100,000 Century Communications, 9.50% - 2005 ............... 102,500
135,000 Comcast Corporation, 9.125% - 2006 ................. 138,037
170,000 Rogers Cablesystems, Ltd., 9.625% - 2002 ........... 178,075
----------
522,612
CONSUMER GOODS - 1.2%
100,000 Semi-Tech Corporation, 0% - 2003(4) ................ 65,750
ELECTRIC UTILITIES - 5.5%
135,000 AES Corporation, 10.25% - 2006 ..................... 145,800
150,000 Cal Energy Company Inc., 9.50% - 2006 .............. 154,500
----------
300,300
ENTERTAINMENT - 5.0%
180,000 Showboat, Inc., 9.25% - 2008 ....................... 177,075
100,000 Station Casinos, Inc., 10.125% - 2006 .............. 100,250
----------
277,325
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
14
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
SECURITY INCOME FUND
HIGH YIELD BOND SERIES (CONTINUED)
PRINCIPAL MARKET
AMOUNT CORPORATE BONDS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
FINANCIAL SERVICES - 1.9%
$100,000 Dollar Financial Group, 10.875% - 2006 ............. $103,000
FOOD PROCESSING - 2.6%
135,000 TLC Beatrice International Holdings, 11.50% - 2005 . 143,100
HEALTH CARE SERVICES - 1.8%
100,000 Regency Health Services, 9.875% - 2002 ............. 101,250
MANUFACTURING - 3.8%
100,000 Sequa Corporation, 9.375% - 2003 ................... 101,000
100,000 Shop Vac Corporation, 10.625% - 2003 ............... 105,250
----------
206,250
MEDICAL - 1.9%
100,000 Maxxim Medical, 10.50% - 2006 ...................... 104,500
MISCELLANEOUS - 1.8%
100,000 Jordan Industries, 10.375% - 2003 .................. 98,750
OIL & GAS COMPANIES - 5.3%
135,000 Maxus Energy, 9.50% - 2003 ......................... 136,688
150,000 Seagull Energy Corporation, 8.625% - 2005 .......... 155,625
----------
292,313
PACKAGING & CONTAINERS - 1.9%
100,000 Plastic Containers, Inc., 10.00% - 2006 ............ 103,250
PETROLEUM - 1.9%
100,000 Crown Central Petroleum, 10.875% - 2005 ............ 102,125
PUBLISHING & PRINTING - 6.2%
170,000 Golden Books Publishing, Inc., 7.65% - 2002 ........ 153,425
180,000 KIII Communications Corporation, 10.625% - 2002 .... 189,000
----------
342,425
RECREATION - 1.9%
100,000 AMF Group, Inc., 10.875% - 2006 .................... 105,500
RESTAURANTS - 2.6%
135,000 Carrols Corporation, 11.50% - 2003 ................. 143,438
STEEL & METAL PRODUCTS- 0.9%
50,000 AK Steel Corporation, 9.125% - 2006 ................ 51,375
TEXTILES - 4.4%
$100,000 Pillowtex Corporation, 10.00% - 2006 ............... $104,000
$135,000 Westpoint Stevens, Inc., 9.375% - 2005 ............. 138,713
----------
242,713
TOBACCO PRODUCTS - 2.6%
$135,000 Dimon, Inc., 8.875% - 2006 ......................... 141,244
TRANSPORTATION - 6.0%
$135,000 Teekay Shipping Corporation, 8.32% - 2003 .......... 135,000
$175,000 Atlas Air, Inc., 12.25% - 2002 ..................... 194,031
----------
329,031
----------
Total corporate bonds- High Yield
Bond Series - 88.2% .............................. 4,849,975
PREFERRED STOCK
------------------------------------------
BANKING & CREDIT - 3.6%
1,750 First Nationwide Bank .............................. 200,375
----------
Total preferred stock - High Yield
Bond Series 3.6% ................................. 200,375
----------
Total investments - High Yield Bond Series - 91.8% . 5,050,350
Cash and other assets, less liabilities - 8.2% ..... 448,756
----------
Total net assets - High Yield Bond Series - 100.0% . $5,499,106
==========
SECURITY TAX-EXEMPT FUND
MUNICIPAL BONDS
------------------------------------------
CIVIC CENTER DEVELOPMENT REVENUE - 1.0%
$250,000 District of Columbia Redevelopment Washington D.C.
Sports Arena, 5.40% - 2000 ....................... $251,250
EDUCATION REVENUE - 22.7%
$1,000,000 Illinois Chicago School, Series A, 4.90% - 2005 .... 993,750
$480,000 Iowa Higher Education St. Ambrose, 5.75% - 2011 .... 463,200
$1,000,000 Island County Washington School District
South Whidbey, 6.75% - 2007 ...................... 1,148,750
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
15
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
SECURITY TAX-EXEMPT FUND (CONTINUED)
PRINCIPAL MARKET
AMOUNT MUNICIPAL BONDS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
EDUCATION REVENUE, CONTINUED
$1,000,000 Federal Way, Washington School District,
4.80% - 2007 ..................................... $967,500
500,000 Mukwanago, Wisconsin School District, 5.00% - 2004 . 506,250
1,000,000 North Brunswick Township, New Jersey Board
of Education, 6.30% - 2013 ....................... 1,066,250
500,000 Northfield, Minnesota School District #659,
4.80% - 2007 ..................................... 490,000
----------
5,635,700
ELECTRIC UTILITY REVENUE - 17.5%
1,000,000 Georgia Municipal Electric Authority, 5.25% - 2025 . 941,250
1,200,000 Massachusetts Municipal Wholesale Electric Company
Power Supply System, Series B, 6.625% - 2004 ..... 1,299,000
1,000,000 Nebraska Public Power District Revenue,
Series A, 6.25% - 2022 ........................... 1,032,500
1,000,000 Washington Public Power Supply System Revenue
Nuclear Project #2, 6.30% - 2012 ................. 1,068,750
----------
4,341,500
GENERAL OBLIGATION - 16.7%
1,000,000 Clark County, Nevada School District, Series A,
5.50% - 2016 ..................................... 986,250
1,000,000 Dade County Florida, 5.75% - 2001 .................. 1,050,000
1,000,000 State of Illinois, 6.10% - 2003 .................... 1,073,750
1,000,000 Tulsa, Oklahoma, 5.125% - 2000 ..................... 1,021,250
----------
4,131,250
HIGHWAY REVENUE - 5.9%
1,400,000 Harris County, Texas, Series A, Toll Road & Tax,
6.125% - 2020 .................................... 1,475,250
POLLUTION CONTROL - 4.1%
1,000,000 Kansas City, Kansas General Motors Corporation
Project, 5.45% - 2006 ............................ 1,012,500
PORTS & HARBORS - 2.1%
500,000 Kansas City, Missouri Port Authority
Riverfront Park, 5.75% - 2005 .................... 513,125
SALES TAX REVENUE - 5.2%
1,300,000 Los Angeles, California, 5.625% - 2018 ............. 1,293,500
SEWER REVENUE - 17.1%
$1,000,000 DuPage County, Illinois Stormwater
Project Refunding, 5.60% - 2021 .................. $1,017,500
1,000,000 Houston, Texas Water & Sewer System
Revenue Series A, 6.20% - 2020 ................... 1,046,250
1,000,000 King County Washington Sewer
Revenue Series A, 6.25% - 2034 ................... 1,050,000
1,100,000 Los Angeles, CA Wastewater System
Revenue, 6.00% - 2014 ............................ 1,139,875
----------
4,253,625
VARIOUS PURPOSE REVENUE - 4.0%
1,000,000 Denver Metropolitan Major League Baseball Stadium
Project, 4.00% - 1999 ............................ 988,750
----------
Total investments - Tax-Exempt Fund - 96.3% ........ 23,896,450
Cash and other assets, less liabilities - 3.7% ..... 918,053
----------
Total net assets - Tax-Exempt Fund - 100.0% ........ $24,814,503
==========
SECURITY CASH FUND
COMMERCIAL PAPER
------------------------------------------
BROKERAGE - 2.8%
$1,277,000 Merrill Lynch & Company, Inc.,
5.34%, 1-15-97 ................................... $99,792
5.33%, 1-22-97 ................................... 722,746
5.35%, 2-4-97 .................................... 99,494
5.35%, 2-6-97 .................................... 350,117
----------
1,272,149
COMBINATION GAS & ELECTRIC - 4.7%
440,000 Baltimore Gas & Electric Company, 5.35%, 1-17-97 ... 438,954
700,000 Central Illinois Light Company, 5.85%, 1-13-97 ..... 698,635
1,000,000 Madison Gas & Electric Company, 5.40%, 1-15-97 ..... 997,900
----------
2,135,489
COMPUTER SYSTEMS - 4.0%
1,800,000 International Business Machines Corporation,
5.39%, 1-8-97 .................................... 998,952
5.31%, 2-24-97 ................................... 793,628
----------
1,792,580
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
16
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
SECURITY CASH FUND (CONTINUED)
PRINCIPAL MARKET
AMOUNT COMMERCIAL PAPER (CONTINUED) VALUE
- --------------------------------------------------------------------------------
ELECTRIC UTILITIES - 11.0%
$100,000 Idaho Power Company, 6.15%, 1-16-97 ................ $99,744
1,611,000 Interstate Power Company,
5.37%, 1-14-97 ................................... 210,591
5.40%, 1-15-97 ................................... 399,160
5.55%, 2-19-97 ................................... 992,446
1,301,000 Massachusetts Electric Company,
6.05%, 1-2-97 .................................... 550,907
6.00%, 1-3-97 .................................... 749,750
2,000,000 Southern California Edison Company, 5.35%, 1-13-97 . 1,996,433
----------
4,999,031
ELECTRONICS - 4.4%
2,000,000 Avnet, Inc., 5.42%, 1-6-97 ......................... 1,998,494
ENGINEERING - 4.9%
2,250,000 Fluor Corporation, 5.37%, 1-29-97 .................. 2,240,603
FOOD PROCESSING - 1.5%
700,000 McCormick & Company, Inc., 5.31%, 1-10-97 .......... 699,071
INDUSTRIAL SERVICES - 2.7%
1,250,000 PPG Industries, Inc., 5.32%, 2-10-97 ............... 1,242,611
LEASING - 3.1%
1,400,000 International Lease Finance Corporation,
5.30%, 1-23-97 ................................... 1,395,466
NATURAL GAS - 1.9%
800,000 Bay State Gas Company, 5.35%, 1-24-97 .............. 797,266
POLLUTION CONTROL - 4.4%
2,000,000 Engelhard Corporation, 5.32%, 2-14-97 .............. 1,986,996
RETAIL--GROCERY - 4.5%
2,050,000 Winn-Dixie Stores, 5.38%, 1-28-97 .................. 2,041,728
TOBACCO - 4.4%
2,000,000 B.A.T. Capital Corporation, 5.38%, 1-17-97 ......... 1,995,218
WASTE - 5.9%
2,700,000 WMX Technologies, Inc., 5.40%, 1-24-97 ............. 2,690,685
----------
Total commercial paper - Cash Fund - 60.2% ......... 27,287,387
PRINCIPAL U.S.GOVERNMENT & GOVERNMENT MARKET
AMOUNT AGENCY SECURITIES VALUE
- --------------------------------------------------------------------------------
FEDERAL FARM CREDIT BANKS - 2.2%
$1,000,000 4.95%, 3-3-97 .................................... $997,031
FEDERAL HOME LOAN BANK - 4.4%
2,000,000 5.63%, 12-17-97 .................................. 2,000,000
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 6.6%
3,000,000 4.97%, 3-10-97 ................................... 2,998,077
SBA POOLS - 13.1%
1,853,960 6.50% - 2017(1) .................................. 1,871,455
1,129,571 5.875% - 2018(2) ................................. 1,133,807
944,512 5.875% - 2020(2) ................................. 944,512
989,217 5.75% - 2021(2) .................................. 989,836
976,265 5.75% - 2021(2) .................................. 976,875
----------
5,916,485
----------
Total U.S. government & government agency
securities - Cash Fund - 26.3% ................... 11,911,593
----------
Total investments - Cash Fund - 86.5% .............. 39,198,980
Cash and other assets, less liabilities - 13.5% .... 6,131,744
----------
Total net assets - Cash Fund - 100.0% .............. $45,330,724
==========
The identified cost of investments owned at December 31, 1996, was the same for
federal income tax and book purposes, except for the Corporate Bond Series for
which the identified cost for federal income tax purposes was $75,921,420.
CMO - (Collateralized Mortgage Obligation)
1 Variable rate security which may be reset the first of each month.
2 Variable rate security which may be reset the first of each quarter.
3 Principal amount on foreign bonds is reflected in local currency (e.g.,
Danish krone) while market value is reflected in U.S. dollars.
4 Deferred interest obligation; currently zero coupon under terms of initial
offering.
5 Put bond - a type of specialty bond that gives the holder the right to
redeem to the issuer at certain specified times before maturity.
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
17
<PAGE>
BALANCE SHEETS
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SECURITY INCOME FUND
----------------------------------------------------------------
CORPORATE U.S. LIMITED GLOBAL HIGH SECURITY SECURITY
BOND GOVERNMENT MATURITY AGGRESSIVE YIELD TAX-EXEMPT CASH
SERIES SERIES BOND SERIES BOND SERIES BOND SERIES FUND FUND
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments, at value (identified
cost $75,920,997, $8,368,335,
$5,053,086, $4,636,461, $4,903,283,
$23,444,597 and $11,911,593,
respectively) ..................... $75,718,270 $8,529,924 $5,116,636 $4,780,220 $5,050,350 $23,896,450 $11,911,593
Commercial paper, at amortized cost
which approximates market value ... -- -- -- -- -- -- 27,287,387
Cash ................................ 3,819,126 19,657 480,863 10,832 335,499 470,572 --
Receivables:
Fund shares sold .................. 3,058 2,955 4,664 176 323 226 6,253,739
Securities sold ................... 30,883 -- 1,724 110,392 -- -- 65,162
Interest .......................... 1,376,532 150,717 109,306 162,365 116,259 459,712 136,935
Security Management Company ....... 1,370 427 715 104 158 -- --
Prepaid expense ..................... 2,573 3,798 2,809 -- -- 9,129 13,303
Forward foreign exchange contracts .. -- -- -- 4,917 -- -- --
------------ ----------- ----------- ---------- ----------- ------------ ------------
Total assets ................. $80,951,812 $8,707,478 $5,716,717 $5,069,006 $5,502,589 $24,836,089 $45,668,119
============ =========== =========== ========== =========== ============ ============
LIABILITIES AND NET ASSETS
Liabilities:
Payable for fund shares redeemed .. $201,806 $-- $9,800 $-- $-- $-- $70,126
Dividends payable to shareholders . -- -- -- 1,460 -- -- 163,788
Written call options outstanding .. -- -- -- 5,979 -- -- --
Cash overdraft .................... -- -- -- -- -- -- 41,507
Other liabilities:
Management fees ................. 35,769 -- -- -- -- 10,762 24,897
12b-1 distribution plan fees .... 22,667 2,591 1,694 2,033 2,972 1,180 --
Custodian and transfer agent fees 10,725 4,304 3,165 3,316 80 1,353 11,529
Administration fees ............. 6,438 786 426 188 431 1,937 1,725
Professional fees ............... 4,502 1,094 2,427 942 -- 2,530 5,003
Miscellaneous ................... 6,260 1,304 296 7,840 -- 3,824 18,820
---------- ---------- ---------- ----------- ----------- ---------- ------------
Total liabilities ............ 288,167 10,079 17,808 21,758 3,483 21,586 337,395
Net Assets:
Paid in capital ..................... 93,223,300 9,514,029 5,704,923 4,885,064 5,387,903 25,834,978 45,330,724
Undistributed net investment
income (loss) ..................... -- 158 -- 117,348 721 5,559 --
Accumulated undistributed net realized
loss on sale of investments and
foreign currency transactions ..... (12,356,928) (978,377) (69,564) (99,652) (36,585) (1,477,887) --
Net unrealized appreciation
(depreciation) in value of investments
and translation of assets and
liabilities in foreign currency ... (202,727) 161,589 63,550 144,488 147,067 451,853 --
------------ ---------- ----------- ----------- ------------ ------------ ------------
Net assets ...................... 80,663,645 8,697,399 5,698,909 5,047,248 5,499,106 24,814,503 45,330,724
------------ ---------- ----------- ----------- ------------ ------------ ------------
Total liabilities and
net assets ................. $80,951,812 $8,707,478 $5,716,717 $5,069,006 $5,502,589 $24,836,089 $45,668,119
============ ========== =========== =========== ============ ============ ============
CLASS "A" SHARES
Capital shares outstanding .......... 10,681,022 1,704,844 486,912 338,604 181,468 2,397,740 45,330,724
Net assets .......................... $73,360,359 $8,036,075 $4,937,697 $3,506,595 $2,780,234 $23,304,115 $45,330,724
Net asset value per share (net assets
divided by shares outstanding) .... $6.87 $4.71 $10.14 $10.36 $15.32 $9.72 $1.00
Add: Selling commission
(4.75% of offering price)
(excluding Cash Fund) ............. 0.34 0.23 0.51 .52 .76 0.48 --
------------ ----------- ------------ ------------ ------------ ------------ ------------
Offering price per share
(net asset value
divided by 95.25%) ................ $7.21 $4.94 $10.65 $10.88 $16.08 $10.20 $1.00
============ =========== ============ ============ ============ ============ ============
CLASS "B" SHARES
Capital shares outstanding .......... 1,057,722 140,328 75,091 148,027 177,479 155,270 --
Net assets .......................... $7,303,286 $661,324 $761,212 $1,540,653 $2,718,872 $1,510,388 --
Net asset value per share
(net assets divided
by shares outstanding) ............ $6.90 $4.71 $10.14 $10.41 $15.32 $9.73 --
============ =========== ============ ============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
18
<PAGE>
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SECURITY INCOME FUND
----------------------------------------------------------------
CORPORATE U.S. LIMITED GLOBAL HIGH SECURITY SECURITY
BOND GOVERNMENT MATURITY AGGRESSIVE YIELD TAX-EXEMPT CASH
SERIES SERIES BOND SERIES BOND SERIES BOND SERIES* FUND FUND
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest .......................... $6,648,760 $761,589 $403,999 $575,957 $192,134 $1,362,359 $2,640,745
EXPENSES
Management fees ................... 440,214 55,727 26,161 34,900 12,264 120,946 247,304
Transfer/maintenance fees ......... 106,615 18,012 3,875 1,269 274 16,538 130,682
12b-1 distribution plan fees ...... 263,503 31,385 19,017 22,956 13,262 12,756 --
Administration fees ............... 79,239 9,690 4,638 41,952 1,920 22,530 21,721
Custodian fees .................... 12,146 4,600 4,478 10,519 462 1,345 8,824
Directors' fees ................... 8,940 1,122 520 385 -- 11,241 11,766
Professional fees ................. 1,746 -- 7,514 9,739 3,000 -- 3,131
Registration fees ................. 23,243 16,374 15,016 19,296 20,855 23,076 45,264
Other expenses .................... 14,200 1,267 1,105 1,444 709 4,092 16,556
------------ ----------- ------------ ----------- ------------ ------------ ------------
949,846 138,177 82,324 142,460 52,746 212,524 485,248
Less: Earnings credits applied .... (2,590) (1,365) (1,687) -- -- (1,345) (2,633)
Reimbursement of expenses ....... (10,663) (60,974) (27,868) (38,590) (12,264) (2,358) --
------------ ----------- ------------ ----------- ------------ ------------ ------------
Total expenses ............... 936,593 75,838 52,769 103,870 40,482 208,821 482,615
------------ ----------- ------------ ------------ ------------ ------------ ------------
Net investment income ...... 5,712,167 685,751 351,230 472,087 151,652 1,153,538 2,158,130
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss)
during the period on:
Investments ..................... (1,347,012) 182,946 (46,509) 133,869 (36,585) 56,324 --
Foreign currency transactions ... -- -- -- (174,582) -- -- --
------------ ----------- ------------ ----------- ------------- ------------ ------------
Net realized gain (loss) ...... (1,347,012) 182,946 (46,509) (40,713) (36,585) 56,324 --
Net change in unrealized
appreciation (depreciation)
during the period on:
Investments ................... (5,522,985) (735,463) (186,260) 71,369 147,067 (671,331) --
Translation of assets and
liabilities in foreign
currencies .................. -- -- -- 3,699 -- -- --
------------ ----------- ----------- ---------- ------------ ------------ ------------
Net unrealized appreciation
(depreciation) ................ (5,522,985) (735,463) (186,260) 75,068 147,067 (671,331) --
------------ ----------- ----------- ---------- ------------ ------------ ------------
Net gain (loss) ................. (6,869,997) (552,517) (232,769) 34,355 110,482 (615,007) --
------------ ----------- ----------- ---------- ------------ ------------ ------------
Net increase (decrease)
in net assets resulting
from operations ............. ($1,157,830) $133,234 $118,461 $506,442 $262,134 $538,531 $2,158,130
============ =========== =========== ========== ============ ============ ============
</TABLE>
*Period August 5, 1996 (inception) through December 31, 1996.
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
19
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SECURITY INCOME FUND
----------------------------------------------------------------
CORPORATE U.S. LIMITED GLOBAL HIGH SECURITY SECURITY
BOND GOVERNMENT MATURITY AGGRESSIVE YIELD TAX-EXEMPT CASH
SERIES SERIES BOND SERIES BOND SERIES BOND SERIES* FUND FUND
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS
Net investment income ............. $5,712,167 $685,751 $351,230 $472,087 $151,652 $1,153,538 $2,158,130
Net realized gain (loss) .......... (1,347,012) 182,946 (46,509) (40,713) (36,585) 56,324 --
Unrealized appreciation
(depreciation) during the period (5,522,985) (735,463) (186,260) 75,068 147,067 (671,331) --
----------- --------- ---------- ---------- ---------- ----------- ----------
Net increase (decrease) in
net assets resulting
from operations .............. (1,157,830) 133,234 118,461 506,442 262,134 538,531 2,158,130
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income
Class A ......................... (5,393,982) (655,579) (304,962) (210,236) (79,996) (1,107,445) (2,158,130)
Class B ......................... (343,417) (32,686) (47,156) (85,158) (70,935) (44,319) --
In excess of net realized gain
Class A ......................... -- -- -- (74,660) -- -- --
Class B ......................... -- -- -- (32,900) -- -- --
Tax return of capital
Class A ......................... -- -- (5,684) -- -- -- --
Class B ......................... -- -- (879) -- -- -- --
----------- --------- ---------- ---------- ---------- ----------- ----------
Total distributions to
shareholders ................ (5,737,399) (688,265) (358,681) (402,954) (150,931) (1,151,764) (2,158,130)
CAPITAL SHARE TRANSACTIONS (A):
Proceeds from sale of shares
Class A ......................... 8,731,109 1,930,782 2,444,146 255,854 2,644,208 1,613,431 310,586,017
Class B ......................... 3,464,361 375,419 269,401 79,004 2,611,381 579,929 --
Dividends reinvested
Class A ......................... 4,241,649 543,532 284,749 283,688 79,998 626,193 1,969,086
Class B ......................... 304,987 26,151 47,452 110,636 70,935 31,495 --
Cost of shares redeemed
Class A ......................... (26,834,054) (3,998,800) (913,142) (66,489) (48) (3,379,177) (305,382,279)
Class B ......................... (1,793,517) (286,899) (267,281) (127,192) (18,571) (260,053) --
----------- --------- ---------- ---------- ---------- ----------- ----------
Net increase (decrease) from
capital share transactions .. (11,885,465) (1,409,815) 1,865,325 535,501 5,387,903 (788,182) 7,172,824
----------- --------- ---------- ---------- ---------- ----------- ----------
Total increase (decrease)
in net assets ............ (18,780,694) (1,964,846) 1,625,105 638,989 5,499,106 (1,401,415) 7,172,824
NET ASSETS:
Beginning of period ............... 99,444,339 10,662,245 4,073,804 4,408,259 -- 26,215,918 38,157,900
----------- ---------- ---------- ---------- ---------- ----------- -----------
End of period ..................... $80,663,645 $8,697,399 $5,698,909 $5,047,248 $5,499,106 $24,814,503 $45,330,724
=========== ========== ========== ========== ========== =========== ===========
Undistributed net investment
income .......................... $-- $158 $-- $117,348 $721 $5,559 $--
=========== ========== ========== ========== ========== =========== ===========
(a) Shares issued and redeemed:
Shares sold
Class A ................... 1,257,439 408,653 236,285 24,675 176,201 167,132 310,586,017
Class B ................... 497,238 79,022 25,885 7,907 174,028 59,521 --
Dividends reinvested
Class A ................... 608,432 115,124 27,590 27,930 5,270 65,031 1,969,086
Class B ................... 43,584 5,533 4,593 10,901 4,677 3,268 --
Shares redeemed
Class A ................... (3,860,010) (845,356) (88,496) (6,449) (3) (350,952) (305,382,279)
Class B ................... (256,329) (61,304) (25,864) (12,357) (1,226) (27,117) --
Net increase (decrease) ..... (1,709,646) (298,328) 179,993 52,607 358,947 (83,117) 7,172,824
=========== ========== ========== ========== ========== =========== ===========
</TABLE>
*Period August 5, 1996 (inception) through December 31, 1996.
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
20
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
SECURITY INCOME FUND
---------------------------------------------------------
CORPORATE U.S. LIMITED GLOBAL SECURITY SECURITY
BOND GOVERNMENT MATURITY AGGRESSIVE TAX-EXEMPT CASH
SERIES SERIES BOND SERIES BOND SERIES** FUND FUND
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
FROM OPERATIONS:
Net investment income ............. $6,415,436 $574,999 $211,931 $243,325 $1,281,238 $2,516,770
Net realized gain (loss) .......... 2,922,105 22,802 (23,055) (36,350) 301,901 --
Unrealized appreciation during
the period ...................... 6,960,323 1,209,772 249,810 69,420 2,117,941 --
---------- --------- --------- --------- --------- ----------
Net increase in net assets
resulting from operations .. 16,297,864 1,807,573 438,686 276,395 3,701,080 2,516,770
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A ......................... (6,158,758) (551,577) (177,005) (146,443) (1,241,504) (2,516,770)
Class B ......................... (255,751) (24,133) (34,039) (63,361) (39,808) --
In excess of net realized gain
Class A ......................... -- -- -- (5,311) -- --
Class B ......................... -- -- -- (2,584) -- --
---------- --------- --------- --------- --------- ----------
Total distributions
to shareholders ............. (6,414,509) (575,710) (211,044) (217,699) (1,281,312) (2,516,770)
CAPITAL SHARE TRANSACTIONS (A):
Proceeds from sale of shares
Class A ......................... 7,438,108 2,385,671 3,092,500 4,109,884 2,787,651 347,493,190
Class B ......................... 2,180,877 240,748 681,901 1,354,123 370,386 --
Dividends reinvested
Class A ......................... 4,740,285 434,084 172,699 151,754 712,138 2,479,477
Class B ......................... 209,073 17,062 32,734 64,040 25,374 --
Cost of shares redeemed
Class A ......................... (18,496,662) (2,223,959) (129,283) (1,330,238) (4,896,869) (369,916,482)
Class B ......................... (981,865) (53,363) (4,389) -- (54,635) --
---------- --------- --------- --------- --------- ----------
Net increase (decrease) from
capital share transactions .. (4,910,184) 800,243 3,846,162 4,349,563 (1,055,955) (19,943,815)
---------- --------- --------- --------- --------- ----------
Total increase (decrease)
in net assets ........... 4,973,171 2,032,106 4,073,804 4,408,259 1,363,813 (19,943,815)
NET ASSETS:
Beginning of period ............... 94,471,168 8,630,139 -- -- 24,852,105 58,101,715
---------- ---------- --------- --------- ---------- ----------
End of period ..................... $99,444,339 $10,662,245 $4,073,804 $4,408,259 $26,215,918 $38,157,900
========== ========== ========= ========= ========== ==========
Undistributed net investment income . $19,734 $2,672 $887 ($8,314) $3,785 $--
========== ========== ========= ========= ========== ==========
(a) Shares issued and redeemed:
Shares sold
Class A ..................... 1,055,977 507,582 307,309 406,499 289,991 347,493,190
Class B ..................... 304,780 51,475 67,767 135,204 38,553 --
Dividends reinvested
Class A ..................... 673,772 93,100 16,505 15,098 74,305 2,479,477
Class B ..................... 29,519 3,639 3,127 6,372 2,642 --
Shares redeemed
Class A ..................... (2,613,704) (485,740) (12,281) (129,149) (510,770) (369,916,482)
Class B ..................... (139,145) (11,827) (417) -- (5,598) --
---------- ---------- --------- --------- ---------- ----------
Net increase (decrease) ....... (688,801) 158,229 382,010 434,024 (110,877) (19,943,815)
========== ========== ========= ========= ========== ==========
</TABLE>
* Period January 17, 1995 (inception) through December 31, 1995.
** Period June 1, 1995 (inception) through December 31, 1995.
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
21
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
SELECTED DATA FOR EACH SHARE OF CAPITAL
STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Ratio
of Ratio
Net Divi- expen- of
Net gain Total dends Net Net ses net
Fiscal asset (loss) from (from Distri asset assets to income Port-
period value Net (real- invest- net butions value end of aver- to folio
ended begin- invest- ized & ment invest- (from Return Total end Total period age average turn-
Decem- ning of ment unreal- opera- ment capital of distri- of return (thou- net net over
ber 31 period income ized) tions income) gains) capital butions period (a) sands) assets assets rate
- ------------------------------------------------------------------------------------------------------------------------------------
CORPORATE BOND SERIES (CLASS A)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1992 $7.68 $0.61 $0.044 $0.654 $(0.614) $-- $-- $(0.614) $7.72 9.0% $104,492 1.01% 7.97% 61%
1993 7.72 0.52 0.521 1.041 (0.527) (0.424) -- (0.951) 7.81 13.4% 118,433 1.02% 6.46% 157%
1994 7.81 0.49 (1.127) (0.637) (0.493) -- -- (0.493) 6.68 (8.3%) 90,593 1.01% 6.91% 204%
1995(d)(g) 6.68 0.47 0.708 1.178 (0.468) -- -- (0.468) 7.39 18.2% 93,701 1.02% 6.62% 200%
1996(d)(g) 7.39 0.47 (0.517) (0.047) (0.473) -- -- (0.473) 6.87 (0.5%) 73,360 1.01% 6.54% 292%
CORPORATE BOND SERIES (CLASS B)
1993(b) $8.59 $0.11 $(0.324) $(0.214) $(0.112) $(0.424) $-- $(0.536) $7.84 (2.5%) $1,022 1.88% 5.16% 164%
1994(c) 7.84 0.43 (1.129) (0.699) (0.431) -- -- (0.431) 6.71 (9.0%) 3,878 1.85% 6.08% 204%
1995(c)
(d)(g) 6.71 0.40 0.725 1.125 (0.405) -- -- (0.405) 7.43 17.3% 5,743 1.85% 5.80% 200%
1996(c)
(d)(g) 7.43 0.40 (0.517) (0.117) (0.413) -- -- (0.413) 6.90 (1.4%) 7,303 1.85% 5.70% 292%
U.S. GOVERNMENT SERIES (CLASS A)
1992(c) $5.17 $0.37 $(0.126) $0.244 $(0.366) $-- $(.008) $(0.374) $5.04 5.0% $9,364 1.11% 7.22% 157%
1993(c) 5.04 0.31 0.273 0.583 (0.310) (0.344) -- (0.654) 4.97 10.9% 10,098 1.10% 5.90% 153%
1994(c) 4.97 0.30 (0.621) (0.321) (0.299) -- -- (0.299) 4.35 (6.5%) 8,309 1.10% 6.47% 220%
1995(c)
(d)(g) 4.35 0.30 0.620 0.92 (0.30) -- -- (0.30) 4.97 21.9% 10,080 1.11% 6.41% 81%
1996(c)
(d)(g) 4.97 0.31 (0.256) 0.054 (0.314) -- -- (0.314) 4.71 1.3% 8,036 0.65% 6.44% 75%
U.S. GOVERNMENT SERIES (CLASS A)
1992(c) $5.17 $0.37 $(0.126) $0.244 $(0.366) $-- $(.008) $(0.374) $5.04 5.0% $9,364 1.11% 7.22% 157%
1993(c) 5.04 0.31 0.273 0.583 (0.310) (0.344) -- (0.654) 4.97 10.9% 10,098 1.10% 5.90% 153%
1994(c) 4.97 0.30 (0.621) (0.321) (0.299) -- -- (0.299) 4.35 (6.5%) 8,309 1.10% 6.47% 220%
1995(c)
(d)(g) 4.35 0.30 0.620 0.92 (0.30) -- -- (0.30) 4.97 21.9% 10,080 1.11% 6.41% 81%
1996(c)
(d)(g) 4.97 0.31 (0.256) 0.054 (0.314) -- -- (0.314) 4.71 1.3% 8,036 0.65% 6.44% 75%
U.S. GOVERNMENT SERIES (CLASS B)
1993(b)(c)$5.51 $0.04 $(0.193) $(0.153) $(0.043) $(0.344) $-- $(0.387) $4.97 (1.4%) $140 1.61% 5.54% 114%
1994(c) 4.97 0.26 (0.624) (0.364) (0.256) -- -- (0.256) 4.35 (7.4%) 321 1.85% 5.76% 220%
1995(c)
(d)(g) 4.35 0.26 0.625 0.885 (0.265) -- -- (0.265) 4.97 20.9% 582 1.87% 5.69% 81%
1996(c)
(d)(g) 4.97 0.25 (0.254) (0.004) (0.256) -- -- (0.256) 4.71 (0.02%) 661 1.86% 5.23% 75%
LIMITED MATURITY BOND SERIES (CLASS A)
1995(c)
(d)(e)(g)$10.00 $0.62 $0.652 $1.272 $(0.612) $-- $-- $(0.612) $10.66 13.0% $3,322 0.84% 5.97% 4%
1996(c)
(d)(g) 10.66 0.72 (0.507) 0.213 (0.720) -- (0.013) (0.733) 10.14 2.1% 4,938 0.90% 6.97% 105%
LIMITED MATURITY BOND SERIES (CLASS B)
1995(c)(d)
(e)(g) $10.00 $0.53 $0.664 $1.194 $(0.524) $-- $-- $(0.524) $10.67 12.2% $752 1.71% 5.12% 4%
1996(c)
(d)(g) 10.67 0.63 (0.524) 0.106 (0.624) -- (0.012) (0.636) $10.14 1.1% 761 1.88% 5.99% 105%
GLOBAL AGGRESSIVE BOND SERIES (CLASS A)
1995(c)(d)
(f) $10.00 $0.63 $0.09 $0.72 $(0.55) $(0.02) $-- $(0.57) $10.15 7.3% $2,968 2.00% 11.04% 127%
1996(c)(d)10.15 1.06 0.064 1.124 (0.687) (0.227) -- (0.914) 10.36 11.6% 3,507 1.98% 10.39% 96%
GLOBAL AGGRESSIVE BOND SERIES (CLASS B)
1995(c)
(d)(f) $10.00 $0.56 $0.12 $0.68 $(0.49) $(0.02) $-- $(0.51) $10.17 6.9% $1,440 2.75% 10.24% 127%
1996(c)(d)10.17 0.98 0.06 1.04 (0.573) (0.227) -- (0.80) 10.41 10.7% 1,541 2.75% 9.64% 96%
HIGH YIELD BOND SERIES (CLASS A)
1996(c)(d)
(h)(g) $15.00 $0.45 $0.32 $0.77 $(0.45) $-- $-- $(0.45) $15.32 5.2% $2,780 1.54% 7.47% 168%
HIGH YIELD BOND SERIES (CLASS B)
1996(c)(d)
(h)(g) $15.00 $0.41 $0.32 $0.73 $(0.41) $-- $-- $(0.41) $15.32 4.9% $2,719 2.26% 6.74% 168%
</TABLE>
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
22
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
SELECTED DATA FOR EACH SHARE OF CAPITAL
STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Ratio
of Ratio
Net Divi- expen- of
Net gain Total dends Net Net ses net
Fiscal asset (loss) from (from Distri asset assets to income Port-
period value Net (real- invest- net butions value end of aver- to folio
ended begin- invest- ized & ment invest- (from Return Total end Total period age average turn-
Decem- ning of ment unreal- opera- ment capital of distri- of return (thou- net net over
ber 31 period income ized) tions income) gains) capital butions period (a) sands) assets assets rate
- ------------------------------------------------------------------------------------------------------------------------------------
SECURITY TAX-EXEMPT FUND (CLASS A)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1992 $9.97 $0.61 $0.092 $0.702 $(0.612) $-- $-- $(0.612) $10.06 7.3% 28,608 0.84% 6.07% 91%
1993 10.06 0.51 0.702 1.212 (0.514) (0.388) -- (0.902) 10.37 11.6% 32,115 0.82% 4.92% 118%
1994 10.37 0.47 (1.317) (0.847) (0.473) -- -- (0.473) 9.05 (8.3%) 24,092 0.82% 4.74% 88%
1995 9.05 0.48 0.891 1.371 (0.481) -- -- (0.481) 9.94 15.5% 25,026 0.86% 5.02% 103%
(c)(d)(g)
1996 9.94 0.45 (0.215) 0.235 (0.455) -- -- (0.455) 9.72 2.5% 23,304 0.78% 4.67% 54%
(c)(d)(g)
SECURITY TAX-EXEMPT FUND (CLASS B)
1993(b) $10.88 $0.10 $(0.128) $(0.028) $(0.094) $(0.388) $-- $(0.482) $10.37 (0.2%) $106 2.89% 2.71% 90%
1994(c) 10.37 0.35 (1.321) (0.971) (0.349) -- -- (0.349) 9.05 (9.5%) 760 2.00% 3.50% 88%
1995 9.05 0.37 0.902 1.272 (0.372) -- -- (0.372) 9.95 14.3% 1,190 2.00% 3.90% 103%
(c)(d)(g)
1996 9.95 0.33 (0.215) 0.115 (0.335) -- -- (0.335) 9.73 1.2% 1,510 2.01% 3.44% 54%
(c)(d)(g)
SECURITY CASH FUND
1991 $1.00 $0.051 $-- $0.051 $(0.051) $-- $-- $(0.051) 1.00 5.2% $48,843 0.96% 5.21% --
1992(c) 1.00 0.028 -- 0.028 (0.028) -- -- (0.028) 1.00 2.8% 56,694 1.00% 2.75% --
1993(c) 1.00 0.023 -- 0.023 (0.023) -- -- (0.023) 1.00 2.4% 71,870 1.00% 2.28% --
1994 1.00 0.033 -- 0.033 (0.033) -- -- (0.033) 1.00 3.4% 58,102 0.96% 3.24% --
1995 1.00 0.049 -- 0.049 (0.049) -- -- (0.049) 1.00 5.0% 38,158 1.00% 5.00% --
(c)(d)(g)
1996 1.00 0.045 -- 0.045 (0.045) -- -- (0.045) 1.00 4.6% 45,331 1.01% 4.47% --
(c)(d)(g)
</TABLE>
(a) Total return information does not take into account any charges paid at
time of purchase or contingent deferred sales charges paid at time of
redemption.
(b) Class "B" shares were initially issued on October 19, 1993. Percentage
amounts for the period, except total return, have been annualized.
(c) Fund expenses were reduced by the Investment Manager and expense ratios
absent such reimbursement would have been as follows:
1991 1992 1993 1994 1995 1996
----- ----- ----- ----- ----- -----
Corporate Bond Class B -- -- -- 2.00% 2.19% 2.05%
U.S. Government Class A 1.24% 1.20% 1.20% 1.20% 1.22% 1.17%
Class B -- -- 1.75% 2.91% 3.70% 3.26%
Limited Maturity Class A -- -- -- -- 1.04% 1.40%
Bond Class B -- -- -- -- 2.12% 2.60%
Global Aggressive Class A -- -- -- -- 2.42% 2.73%
Bond Class B -- -- -- -- 3.93% 3.75%
High Yield Class A -- -- -- -- -- 2.11%
Class B -- -- -- -- -- 2.83%
Tax-Exempt Class A -- -- -- -- 0.86% 0.78%
Class B -- -- -- 2.32% 2.45% 2.19%
Cash -- 1.03% 1.03% -- 1.04% 1.01%
(d) Net investment income was computed using the average month-end shares
outstanding throughout the period.
(e) Security Limited Maturity Bond Series was initially capitalized on January
17, 1995, with a net asset value of $10 per share. Percentage amounts for
period have been annualized, except for total return.
(f) Security Global Aggressive Bond Series was initially capitalized on June 1,
1995, with a net asset value of $10 per share. Percentage amounts for
period have been annualized, except for total return.
(g) Expense ratios including reimbursements, were calculated without the
reduction for custodian fees earnings credits beginning February 1, 1995.
Expense ratios with such reductions would have been as follows:
1995 1996
----- -----
Corporate Bond Class A 1.02% 1.01%
Class B 1.85% 1.85%
U.S. Government Class A 1.10% 0.64%
Class B 1.85% 1.85%
Limited Maturity Bond Class A 0.81% 0.87%
Class B 1.65% 1.85%
Tax-Exempt Class A 0.85% 0.77%
Class B 2.00% 2.00%
Cash Fund 1.00% 1.00%
(h) Security High Yield Bond Series was initially capitalized on August 5,
1996, with a net asset value of $15 per share. Percentage amounts for the
period have been annualized, except for total return.
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
23
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
Security Income Fund, Security Tax-Exempt Fund and Security Cash Fund (the
Funds) are registered under the Investment Company Act of 1940, as amended, as
diversified, open-end management investment companies. The shares of Security
Income Fund are currently issued in five Series, the Corporate Bond Series, the
U.S. Government Series, the Limited Maturity Bond Series, the Global Aggressive
Bond Series and the High Yield Bond Series, with each Series, in effect,
representing a separate fund. The Income Fund is required to account for each
Series separately and to allocate general expenses to each Series based upon the
net asset value of each Series. The following is a summary of the significant
accounting policies followed by the Funds in the preparation of their financial
statements. These policies are in conformity with generally accepted accounting
principles.
A. SECURITY VALUATION -- Valuations of Income Fund's and Tax-Exempt Fund's
securities are supplied by pricing services approved by the Board of Directors.
Securities listed or traded on a national securities exchange are valued on the
basis of the last sales price. If there are no sales on a particular day, then
the securities are valued at the last bid price. Securities for which market
quotations are not readily available are valued by a pricing service considering
securities with similar yields, quality, type of issue, coupon, duration and
rating. If there is no bid price or if the bid price is deemed to be
unsatisfactory by the Board of Directors or by the Fund's investment manager,
then the securities are valued in good faith by such method as the Board of
Directors determines will reflect the fair value. The Funds' officers, under the
general supervision of the Board of Directors, regularly review procedures used
by, and valuations provided by, the pricing service.
Cash Fund, by approval of the Board of Directors, utilizes the amortized
cost method for valuing portfolio securities, whereby all investments are valued
by reference to their acquisition cost as adjusted for amortization of premium
or accretion of discount.
Generally, trading in foreign securities markets is substantially completed
each day at various times prior to the close of the New York Stock Exchange. The
values of foreign securities are determined as of the close of such foreign
markets or the close of the New York Stock Exchange if earlier. All investments
quoted in foreign currency are valued in U.S. dollars on the basis of the
foreign currency exchange rate prevailing at the close of business. The Global
Aggressive Bond Series' investments in foreign securities may involve risks not
present in domestic investments. Since foreign securities may be denominated in
a foreign currency and involve settlement and pay interest in foreign
currencies, changes in the relationship of these foreign currencies to the U.S.
dollar can significantly affect the value of the investments and earnings of the
Funds. Foreign investments may also subject the Global Aggressive Bond Series to
foreign government exchange restrictions, expropriation, taxation or other
political, social or economic developments, all of which could affect the market
and/or credit risk of the investments.
B. FOREIGN CURRENCY TRANSACTIONS -- The accounting records of the Funds are
maintained in U. S. dollars. All assets and liabilities initially expressed in
foreign currencies are converted into U.S. dollars at prevailing exchange rates.
Purchases and sales of investment securities, dividend and interest income, and
certain expenses are translated at the rates of exchange prevailing on the
respective dates of such transactions.
The Funds isolate that portion of results of operations resulting from
changes in foreign exchange rates on investments from the fluctuations arising
from changes in the market prices of securities held.
Net realized foreign exchange gains or losses arise from sales of portfolio
securities, sales of foreign currencies, and the difference between asset and
liability amounts initially stated in foreign currencies and the U.S. dollar
value of the amounts actually received or paid. Net unrealized foreign exchange
gains or losses arise from changes in the value of portfolio securities and
other assets and liabilities at the end of the reporting period, resulting from
changes in the exchange rates.
C. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS - Global Aggressive Bond
Series may enter into forward foreign exchange contracts in connection with
foreign currency risk from purchase or sale of securities denominated in foreign
currency. The Series may also enter into such contracts to manage changes in
foreign currency exchange rates on portfolio positions. These contracts are
marked to market daily, by recognizing the difference between the contract
exchange rate and the current market rate as unrealized gains or losses.
Realized gains or losses are recognized when contracts are settled and are
reflected in the statement of operations. These contracts involve market risk in
excess of the amount reflected in the Balance Sheet. The face or contract amount
in U.S. dollars reflects the total exposure the Global Aggressive Bond Series
has in that particular currency contract. Losses may arise due to changes in the
value of the foreign currency or if the counterparty does not perform under the
contract.
D. OPTIONS - The Global Aggressive Bond Series and High Yield Bond Series
may purchase put and call options and write such options on a covered basis on
securities that are traded on recognized securities exchanges and
over-the-counter markets. Call and put options on securities give the holder the
right to purchase or sell, respectively (and the writer the obligation to sell
or purchase), a security at a specified price, on or until a certain date. The
primary risks associate with the use of options are an imperfect correlation
between the change in market value of the securities held by the Series and the
price of the option, the possibility of an illiquid market, and the inability of
the counter-party to meet the terms of the contract.
The premium received for a written option is recorded as an asset, with an
equal liability which is marked to market based on the option's quoted daily
settlement price. Fluctuation in the value of such instruments are recorded as
unrealized appreciation (depreciation) until terminated, at which time realized
gains and losses are recognized. The Global Aggressive Bond Series wrote covered
call options during the year in which the Series received $7,179 in premiums.
E. SECURITY TRANSACTIONS AND INVESTMENT INCOME - Security transactions are
accounted for on the date the securities are purchased or sold. Realized gains
and losses are reported on an identified cost basis. Interest income is
recognized on the accrual basis. Premium and discounts (except original issue
discounts) on debt securities are not amortized, except Security Tax-Exempt Fund
which amortizes premiums.
F. DISTRIBUTIONS TO SHAREHOLDERS - Distributions to shareholders are
recorded on the ex-dividend date. The character of distributions made during the
year from net investment income or net realized gains may differ from their
ultimate characterization for federal income tax purposes. These differences are
primarily due to the recharacterization of foreign currency gains and losses.
G. TAXES - The Funds complied with the requirements of the Internal Revenue
Code applicable to regulated investment companies and distributed all of their
taxable net income and net realized gains sufficient to relieve them from all,
or substantially all, federal income, excise and state income taxes. Therefore,
no provision for federal or state income tax is required.
H. EARNINGS CREDITS - Under the fee schedule with the custodian, the Funds
earn credits based on overnight custody cash balances. These credits are
utilized to reduce related custodial expenses. The custodian fees disclosed in
the statement of operations do not reflect the reduction in expense from the
related earnings credits.
2. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Management fees are payable to Security Management Company, LLC (SMC) under
investment advisory contracts at an annual rate of .50 of 1% of the average net
assets of each fund, except for Global Aggressive Bond Series and the High Yield
Bond Series whose fees are .75 of 1% and .60 of 1% of the average net assets of
each Series, respectively. The investment advisory contract for Income Fund
provides that the total annual expenses
24
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
of each Series of the Fund (including management fees and custodian fees net of
earnings credits, but excluding interest, taxes, brokerage commissions and
extraordinary expenses) will not exceed the level of expenses which Income Fund
is permitted to bear under the most restrictive expense limitation imposed by
any state in which shares of the Fund are then qualified for sale. For the
period ended December 31, 1996, SMC agreed to limit the total expenses of
Corporate Bond Series, U.S. Government Series and Limited Maturity Bond Series
to an annual rate of 1.1% of the average daily net asset value of Class A shares
and 1.85% of Class B shares of each respective Series. SMC also agreed to limit
the total expenses of the Global Aggressive Bond Series and the High Yield Bond
Series to 2.0% for Class A Shares and 2.75% for Class B shares. In addition, SMC
agreed to waive all of the management fees for the U.S. Government Series,
Limited Maturity Bond Series, Global Aggressive Bond Series and the High Yield
Bond Series until December 31, 1996. The investment advisory contract for
Tax-Exempt and Cash Funds provides that the total annual expenses of the Funds
net of custodian fee earnings credits will not exceed an amount equal to an
annual rate of 1.0% of the average net assets of Class A shares and 2.0% of
Class B shares of the Tax-Exempt Fund as calculated on a daily basis.
The Funds have entered into contracts with SMC for transfer agent services
and certain other administrative services which SMC provides to the Funds. SMC
is paid an annual fixed charge per account and shareholder and dividend
transaction fees.
As the administrative agent for the Funds, SMC performs administrative
functions, such as regulatory filings, bookkeeping, accounting and pricing
functions for the Funds. For this service SMC receives on an annual basis, a fee
of .09 percent of the average daily net assets of Corporate Bond Series, U.S.
Government Series, Limited Maturity Bond Series, High Yield Bond Series, and
Tax-Exempt Fund and .045 percent of the average daily net assets of Cash Fund
and Global Aggressive Bond Series, calculated daily and payable monthly. For the
identified administrative services SMC also receives, with respect to the Global
Aggressive Bond Series, an annual fee equal to the greater of .10 percent of its
average net assets or (i) $45,000 in the year ending April 29, 1997; and (ii)
$60,000 thereafter.
SMC pays the Sub-Advisor, Lexington Management Corporation (LMC) an annual
fee in an amount equal to .35% of the average net assets of Global Aggressive
Bond Series, for investment advisory and certain administrative services
provided to the Global Aggressive Bond Series. LMC agreed to waive its
sub-advisory fee until December 31, 1996. The Sub-Advisor has entered into a
sub-advisory contract with MFR Advisors, Inc., ("MFR"), under which MFR will
provide the Global Aggressive Bond Series with investment and economic research
services. For the service provided by MFR, MFR receives from the Sub-Advisor, a
fee equal to .15% of the average daily net assets of the Global Aggressive Bond
Series.
Income and Tax-Exempt Funds have adopted Distribution Plans related to the
offering of Class B shares pursuant to Rule 12b-1 under the Investment Company
Act of 1940. The Plans provide for payments at an annual rate of 1.0% of the
average net assets of Class B shares. Class A shares of Income Fund incur 12b-1
distribution fees at an annual rate of .25% of the average net assets of each
Series.
Security Distributors, Inc. (SDI), a wholly-owned subsidiary of Security
Benefit Group, Inc., a financial services holding company, is national
distributor for Income a nd Tax-Exempt Funds. SDI received net underwriting
commissions on sales of Class A shares and contingent deferred sales charges on
redemptions occurring within 5 years of the date of purchase of Class B shares,
after allowances to brokers and dealers for the period ended December 31, 1996,
in the amounts presented below:
NET UNDERWRITING BROKER/DEALER
COMMISSION ALLOWANCES
-----------------------------------------------------------------
Corporate Bond Series $23,873 $54,353
U.S. Government Series 10,849 21,835
Limited Maturity
Bond Series (377) 7,971
Global Aggressive
Bond Series 4,824 3,686
High Yield Series 283 5,491
Tax-Exempt Fund 13,059 42,066
Certain officers and directors of the Funds are also officers and/or
directors of Security Benefit Life Insurance Company and its subsidiaries, which
include SMC and SDI.
3. INVESTMENT TRANSACTIONS
Investment transactions for the period ended December 31, 1996, (excluding
overnight investments and short-term debt securities) were as follows:
PURCHASES PROCEEDS FROM SALES
-------------------------------------------------------------------
Corporate Bond Series $247,769,817 $261,981,460
U.S. Government Series 7,252,295 8,350,616
Limited Maturity
Bond Series 6,582,167 5,034,918
Global Aggressive
Bond Series 3,601,246 3,337,996
High Yield Series 8,153,564 3,220,588
Tax-Exempt Fund 13,361,690 14,342,980
4. FEDERAL INCOME TAX MATTERS
The amounts of unrealized appreciation (depreciation) as of December 31,
1996, were as follows:
AGGREGATE GROSS AGGREGATE GROSS NET UNREALIZED
UNREALIZED UNREALIZED APPRECIATION
APPRECIATION DEPRECIATION (DEPRECIATION)
- -------------------------------------------------------------------------------
Corporate Bond Series $1,185,689 ($1,388,839) ($203,150)
U.S. Government Series 184,874 (23,285) 161,589
Limited Maturity
Bond Series 115,348 (51,798) 63,550
Global Aggressive
Bond Series 240,819 (96,331) 144,488
High Yield Series 147,567 (500) 147,067
Tax-Exempt Fund 544,263 (92,410) 451,853
At December 31, 1996, the following Funds had accumulated net realized
capital loss carryovers as shown:
CAPITAL LOSS EXPIRATION
CARRYOVER YEAR
Corporate Bond Series $11,009,916 2002
1,347,012 2004
U.S. Government Series 978,377 2002
Limited Maturity Bond Series 23,055 2003
46,509 2004
Global Aggressive Bond Series 48,004 2004
High Yield Series 36,585 2004
Tax-Exempt Fund 1,477,887 2002
5. FORWARD FOREIGN EXCHANGE CONTACTS
At December 31, 1996, Global Aggressive Bond Series had the following open
forward foreign exchange contracts to sell currency (excluding foreign currency
contracts used for purchase and sale settlements):
25
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
SETTLEMENT CONTRACT CONTRACT CURRENT UNREALIZED
CURRENCY DATE AMOUNT RATE RATE GAIN
Canadian
Dollar 1/31/97 $224,215 1.3380 1.368 $4,917
6. TAX STATUS OF DIVIDENDS
Except for tax-exempt dividends, the income dividends paid by the Funds are
taxable as ordinary income on the shareholders' tax returns. None of the amount
taxable as ordinary income for the Funds qualifies for the dividends received
deduction available to corporate shareholders in accordance with the provisions
of the Internal Revenue Code.
None of the exempt-interest dividends paid by Security Tax-Exempt Fund have
been determined to be attributable to interest from specified private activity
bonds. Thus, no portion is required to be reported as a tax preference item on
Form 4626 or 6251, as appropriate.
In some states, the portion of ordinary income dividends attributable to
the Funds' investment in direct obligations of the U.S. Government may not be
subject to state taxation. For the year ended December 31, 1996, interest on
U.S. Government obligations as a percentage of gross investment income was: Cash
Fund, 5%; Corporate Bond Series, 6%; U.S. Government Series, 28%; Limited
Maturity Bond Series, 6%; and Global Aggressive Bond Series, 1%. Since the
qualifications for such exemption vary state by state, we suggest you consult
your tax advisor for applicability.
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
SECURITY INCOME FUND, SECURITY TAX-EXEMPT FUND
AND SECURITY CASH FUND
We have audited the accompanying balance sheets, including the statements
of net assets of Security Income Fund (comprising, respectively, the Corporate
Bond, U.S. Government, Limited Maturity Bond, Global Aggressive Bond and High
Yield Bond Series), Security Tax-Exempt Fund and Security Cash Fund (the Funds)
as of December 31, 1996, the related statements of operations, changes in net
assets and the financial highlights for the periods indicated therein. These
financial statements and the financial highlights are the responsibility of the
Funds' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
investments owned as of December 31, 1996, by correspondence with the custodian.
As to securities relating to uncompleted transactions, we performed other audit
procedures. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
each of the Funds (including each of the Series of Security Income Fund) at
December 31, 1996, and the results of their operations, changes in their net
assets and the financial highlights for the periods indicated therein in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Kansas City, Missouri
January 31, 1997
26
<PAGE>
THE SECURITY GROUP
OF MUTUAL FUNDS
- -------------------
Security Growth and Income Fund
Security Equity Fund
- Equity Series
- Equity Global Series
- Asset Allocation Series
- Social Awareness Series
Security Ultra Fund
Security Income Fund
- Corporate Bond Series
- U.S. Government Series
- Limited Maturity Bond Series
- Global Aggressive Bond Series
- High Yield Bond Series
Security Tax-Exempt Fund
Security Cash Fund
This report is submitted for the general information of the shareholders of the
Funds. The report is not authorized for distribution to prospective investors in
the Funds unless preceded or accompanied by an effective prospectus which
contains details concerning the sales charges and other pertinent information.
SECURITY FUNDS
OFFICERS AND DIRECTORS
DIRECTORS
Willis A. Anton
Donald A. Chubb, Jr.
John D. Cleland
Jack H. Hamilton
Donald L. Hardesty
Penny A. Lumpkin
Mark L. Morris, Jr., D.V.M.
Jeffrey B. Pantages
Hugh L. Thompson, Ph.D.
OFFICERS
John D. Cleland, President
James R. Schmank, Vice President and Treasurer
Jane A. Tedder, Vice President
Mark E. Young, Vice President
Steven M. Bowser, Assistant Vice President
Barbara J. Davison, Assistant Vice President
Greg A. Hamilton, Assistant Vice President
Amy J. Lee, Secretary
Brenda M. Harwood, Assistant Treasurer and Assistant Secretary
Christopher D. Swickard, Assistant Secretary
[SDI LOGO]
<PAGE>
SECURITY INCOME FUND
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
a. Financial Statements
Included in Part A of this Registration Statement:
Per Share Income and Capital Changes
To be included in Part B of this Registration Statement:
The audited financial statements contained in the most recent
Annual Report of Security Income Fund for fiscal year ended
December 31, 1996, the unaudited financial statements
contained in the most recent Semiannual Report of Security
Income Fund for the period ended June 30, 1997, and the
unaudited financial statements of Emerging Markets Total
Return Series and Global Asset Allocation Series for the
period May 19, 1997 (date of inception) to September 30, 1997,
are incorporated by reference in Part B of this Registration
Statement.
b. Exhibits:
(1) Articles of Incorporation.(f)
(2) Corporate Bylaws of Registrant.(a)
(3) Not applicable.
(4) Specimen copy of share certificate for Registrant's shares
of capital stock.(f)
(5) (a) Investment Advisory Contract - SMC, LLC.(e)
(b) Investment Advisory Contract - MFR.(f)
(c) Sub-Advisory Agreement - Lexington.(f)
(d) Sub-Advisory Agreement - SMC, LLC.(f)
(6) (a) Distribution Agreement.(f)
(b) Class B Distribution Agreement.(f)
(c) 1997 Marketing Agreement - MFR
(7) Form of Non-Qualified Deferred Compensation Plan.(f)
(8) (a) Custodian Agreement - UMB.(f)
(b) 1995 Custodian Agreement - Chase(b)
(c) 1997 Custodian Agreement - Chase.(f)
(9) (a) 1987 Administrative Services and Transfer Agency
Agreement.(e)
(b) Sub-Administrative Agreement - Lexington.(b)
(c) 1997 Administrative Services and Transfer Agency
Agreement.(f)
(10) Opinion of counsel as to the legality of the securities
offered.(c)
(11) Consent of Independent Auditors.
(12) Not applicable.
(13) Not applicable.
<PAGE>
(14) Not applicable.
(15) (a) Distribution Plan.(a)
(b) Class B Distribution Plan.(a)
(16) Schedule of Computation of Performance.
(17) Financial Data Schedules.
(18) Multiple Class Plan.(d)
(a) 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).
(b) Incorporated herein by reference to the Exhibits filed with the
Registrant's Post-Effective Amendment No. 52 to Registration Statement No.
2-38414 (November 1, 1995).
(c) 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).
(d) Incorporated herein by reference to the Exhibits filed with the
Registrant's Post-Effective Amendment No. 53 to Registration Statement No.
2-38414 (April 29, 1996).
(e) Incorporated herein by reference to the Exhibits filed with the
Registrant's Post-Effective Amendment No. 56 to Registration Statement No.
2-38414 (February 5, 1997).
(f) Incorporated herein by reference to the Exhibits filed with the
Registrant's Post-Effective Amendment No. 58 to Registration Statement No.
2-38414 (April 30, 1997).
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES AS OF SEPTEMBER 30, 1997.
(1) (2)
NUMBER OF RECORD
TITLE OF CLASS SHAREHOLDERS
-------------- ----------------
Corporate Bond - Shares of Common Stock, Class A...... 4,290
Corporate Bond - Shares of Common Stock, Class B...... 1,149
U.S. Government - Shares of Common Stock, Class A..... 892
U.S. Government - Shares of Common Stock, Class B..... 204
Limited Maturity Bond - Shares of Common Stock,
Class A............................................. 210
Limited Maturity Bond - Shares of Common Stock,
Class B............................................. 210
High Yield - Shares of Common Stock, Class A.......... 312
High Yield - Shares of Common Stock, Class B.......... 498
Global High Yield (formerly Global Aggressive Bond) -
Shares of Common Stock, Class A..................... 151
Global High Yield (formerly Global Aggressive Bond) -
Shares of Common Stock, Class B..................... 31
Emerging Markets Total Return - Shares of Common
Stock, Class A...................................... 10
Emerging Markets Total Return - Shares of Common
Stock, Class B...................................... 4
Global Asset Allocation - Shares of Common Stock,
Class A............................................. 8
Global Asset Allocation - Shares of Common Stock,
Class B............................................. 3
ITEM 27. INDEMNIFICATION.
A policy of insurance covering Security Management Company, LLC, its
affiliate Security Distributors, Inc., and all of the registered
investment companies advised by Security Management Company, LLC
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 30 of the Registrant's Bylaws, as amended February 3, 1995,
provides in relevant part as follows:
30. INDEMNIFICATION AND LIABILITY OF DIRECTORS AND OFFICERS. Each
person who is or was a Director or officer of the Corporation or
is or was serving at the request of the Corporation as a Director
or officer of another corporation (including the heirs,
executors, administrators and estate of such person) shall be
indemnified by the Corporation as of right to the full extent
permitted or authorized by the laws of the State of Kansas, as
now in effect and is hereafter amended, against any liability,
judgment, fine, amount paid in settlement, cost and expense
(including attorney's fees) asserted or threatened against and
incurred by such person in
<PAGE>
his/her capacity as or arising out of his/her status as a
Director or officer of the Corporation or, if serving at the
request of the Corporation, as a Director or officer of another
corporation. The indemnification provided by this bylaw provision
shall not be exclusive of any other rights to which those
indemnified may be entitled under the Articles of Incorporation,
under any other bylaw or under any agreement, vote of
stockholders or disinterested directors or otherwise, and shall
not limit in any way any right which the Corporation may have to
make different or further indemnification with respect to the
same or different persons or classes of persons.
No person shall be liable to the Corporation for any loss,
damage, liability or expense suffered by it on account of any
action taken or omitted to be taken by him/her as a Director or
officer of the Corporation or of any other corporation which
he/she serves as a Director or officer at the request of the
Corporation, if such person (a) exercised the same degree of care
and skill as a prudent man would have exercised under the
circumstances in the conduct of his/her own affairs, or (b) took
or omitted to take such action in reliance upon advice of counsel
for the Corporation, or for such other corporation, or upon
statement made or information furnished by Directors, officers,
employees or agents of the Corporation, or of such other
corporation, which he/she had no reasonable grounds to
disbelieve.
In the event any provision of this section 30 shall be in
violation of the Investment Company Act of 1940, as amended, or
of the rules and regulations promulgated thereunder, such
provisions shall be void to the extent of such violations.
On 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
<PAGE>
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, LLC, investment manager to Corporate
Bond, Limited Maturity Bond, U.S. Government and High Yield Series of
Security Income Fund, 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 acts as
sub-investment adviser to the Global Asset Allocation Series of
Security Income Fund.
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
------------------- ------------------------------------------------
James R. Schmank President, Treasurer, Chief Fiscal Officer and
Managing Member Representative
Security Management Company, LLC
Vice President and Director
Security Distributors, Inc.
Vice President
Security Benefit Group, Inc.
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
<PAGE>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
------------------- ------------------------------------------------
John D. Cleland Senior Vice President and Managing Member
Representative
Security Management Company, LLC
President and Director
Security Cash Fund, Security Income Fund,
Security Tax-Exempt Fund, SBL Fund, Security
Growth and Income Fund, Security Equity Fund,
Security Ultra Fund
Senior Vice President
Security Benefit Life Insurance Company
Security Benefit Group, Inc.
Vice President and Director
Security Distributors, Inc.
Trustee and Treasurer
Mount Hope Cemetery Corporation
4700 SW 17th
Topeka, Kansas
Trustee and Investment Committee Chairman
Topeka Community Foundation
5100 SW 10th
Topeka, Kansas
Donald E. Caum Director (until November 1996)
Security Management Company
Senior Vice President
Security Benefit Life Insurance Company
Security Benefit Group, Inc.
Director
YMCA Metro, Topeka, Kansas
Executive Director
Jayhawk Area Council Boy Scouts of America,
Topeka, Kansas
Metropolitan Ballet, Topeka, Kansas
<PAGE>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
------------------- ------------------------------------------------
Mark E. Young Vice President
Security Growth and Income Fund, Security
Income Fund, Security Cash Fund, Security
Tax-Exempt Fund, Security Ultra Fund,
Security Equity Fund, SBL Fund, Security
Management Company, LLC, Security
Distributors, Inc.
Assistant Vice President
Security Benefit Life Insurance Company First
Security Benefit Life Insurance and Annuity
Company of New York Security Benefit Group,
Inc.
Trustee
Topeka Zoological Foundation, Topeka, Kansas
Terry A. Milberger Senior Portfolio Manager and Senior Vice
President
Security Management Company, LLC
Vice President
Security Equity Fund, SBL Fund
Jane A. Tedder Vice President and Senior Economist
Security Management Company, LLC
Vice President
Security Income Fund, SBL Fund, Security
Equity Fund
Amy J. Lee Vice President and Associate General Counsel
Security Benefit Life Insurance Company
Security Benefit Group, Inc.
Secretary
Security Management Company, LLC, Security
Distributors, Inc., Security Cash Fund,
Security Equity Fund, Security Tax-Exempt
Fund, Security Ultra Fund, SBL Fund, Security
Growth and Income Fund, Security Income Fund
<PAGE>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
------------------- ------------------------------------------------
Brenda M. Harwood Assistant Vice President, Assistant Treasurer
and Assistant Secretary
Security Management Company, LLC
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.
Steven M. Bowser Second Vice President and Portfolio Manager
Security Management Company, LLC
Second Vice President
Security Benefit Life Insurance Company
Security Benefit Group, Inc.
Thomas A. Swank Vice President and Portfolio Manager
Security Management Company, LLC
Vice President
Security Benefit Life Insurance Company
Security Benefit Group, Inc.
Barbara J. Davison Assistant Vice President and Portfolio Manager
Security Management Company, LLC
Assistant Vice President
Security Benefit Life Insurance Company
Security Benefit Group, Inc.
Vice-Chairman
Topeka Chapter American Red Cross
Topeka, Kansas
Cindy L. Shields Assistant Vice President and Portfolio Manager
Security Management Company, LLC
Assistant Vice President
Security Ultra Fund, SBL Fund, Security
Equity Fund
Larry L. Valencia Assistant Vice President and Senior Research
Analyst
Security Management Company, LLC
<PAGE>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
------------------- ------------------------------------------------
James P. Schier Assistant Vice President and Portfolio Manager
Security Management Company, LLC
Assistant Vice President
Security Benefit Life Insurance Company
Security Benefit Group, Inc.
David Eshnaur Assistant Vice President and Portfolio Manager
Security Management Company, LLC
Assistant Vice President
Security Benefit Life Insurance Company,
Security Benefit Group, Inc., SBL Fund,
Security Income Fund
Martha L. Sutherland Second Vice President
Security Management Company, LLC
Vice President
Security Benefit Life Insurance Company
Security Benefit Group, Inc.
*Located at 700 Harrison, Topeka, Kansas 66636-0001
MFR ADVISORS, INC.:
MFR Advisors, Inc. acts as investment adviser to Emerging Markets
Total Return, Global Asset Allocation and Global High Yield (formerly
Global Aggressive Bond) Series of Security Income Fund. MFR Advisors,
Inc. serves as sub-adviser to one investment company other than
Registrant.
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
------------------- ------------------------------------------------
Maria Fiorini Ramirez Chief Executive Officer, President and Director
MFR Advisors, Inc.
Director
Statewide Savings Bank S.L.A. of New Jersey
Arlington Capital-Offshore Investment Company
Dorchester Capital-Offshore Investment
Company
Bruce Jensen Executive Vice President
MFR Advisors, Inc.
Timothy F. Downing Chief Financial Officer
MFR Advisors, Inc.
*Located at One Liberty Plaza, New York, New York 10006
<PAGE>
LEXINGTON MANAGEMENT CORPORATION:
Lexington Management Corporation, sub-adviser to MFR Global High Yield
Series (formerly Global Aggressive Bond Series), MFR Emerging Markets
Total Return Series and MFR Global Asset Allocation Series, acts as
investment adviser, sub-adviser and/or sponsor to 21 investment
companies other than Registrant.
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
------------------- ------------------------------------------------
Robert M. DeMichele President and Director
Lexington Global Asset Managers, Inc.
Chairman and Chief Executive Officer
Lexington Management Corporation, Lexington
Funds Distributor, Inc.
Director
Chartwell Re Corporation, The Navigator's
Insurance Group, Inc., Unione Italiana
Reinsurance, Vanguard Cellular Systems, Inc.
Chairman of the Board
Lexington Group of Investment Companies,
Market Systems Research, Inc.,
Market Systems Research Advisors, Inc.
Richard M. Hisey Executive Vice President and Chief Financial
Officer
Lexington Global Asset Managers, Inc.
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 and General
Manager-Mutual Funds
Lexington Global Asset Managers, Inc.
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
<PAGE>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
------------------- ------------------------------------------------
Stuart S. Richardson Chairman of the Board
Lexington Global Asset Managers, Inc.
Director
Lexington Management Corporation
*Located at P.O. Box 1515, Saddle Brook, New Jersey 07663.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Security Equity Fund
Security Ultra Fund
Security Growth and Income Fund
Security Tax-Exempt Fund
Variflex Variable Annuity Account
Varilife Variable Annuity Account
Parkstone Variable Annuity Account
Security Varilife Separate Account
Variable Annuity Account VIII (Variflex LS)
Variable Annuity Account VIII (Variflex Signature)
(b)
(1) (2) (3)
Name and Principal Position and Offices Position and Offices
BUSINESS ADDRESS* WITH UNDERWRITER WITH REGISTRANT
------------------ -------------------- --------------------
Richard K Ryan President and None
Director
John D. Cleland Vice President President and
and Director Director
James R. Schmank Vice President Vice President
and Director and Treasurer
Mark E. Young Vice President Vice President
Amy J. Lee Secretary Secretary
Brenda M. Harwood Treasurer Assistant Secretary
and Assistant
Treasurer
Daniel J. McNichol Vice President None
Clark A. Anderson Regional Vice None
President
Paul A. Richardson Regional Vice None
President
Jennifer A. Zaat Regional Vice None
President
Kent N. Spillman Regional Vice None
President
<PAGE>
(1) (2) (3)
Name and Principal Position and Offices Position and Offices
BUSINESS ADDRESS* WITH UNDERWRITER WITH REGISTRANT
------------------ -------------------- --------------------
Carla D. Griffin Regional Vice None
President
Anthony Hammock Regional Vice
President None
William G. Mancuso Regional Vice
President None
Marek E. Lakotko Regional Vice
President None
Eric M. Aanes Regional Vice
President None
Susan L. Tully Regional Vice
President None
*700 Harrison, Topeka, Kansas 66636-0001
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
Certain accounts, books and other documents required to be maintained
by Section 31(a) of the 1940 Act and the rules promulgated thereunder
are maintained by Security Management Company, LLC, 700 Harrison,
Topeka, Kansas 66636-0001; MFR Advisors, Inc., One Liberty Plaza, New
York, New York 10006 and Lexington Management Corporation, Park 80
West, Plaza Two, Saddle Brook, New Jersey 07663. 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, 4 Chase MetroTech Center, Brooklyn, New York 11245.
ITEM 31. MANAGEMENT SERVICES.
Not applicable.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) Registrant hereby undertakes to furnish each person, to whom a
prospectus is delivered, a copy of the Registrant's latest report
to shareholders upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant 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 8th day of
October, 1997.
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 8, 1997
---------------------------
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
Hugh L. Thompson Director
- ---------------------
Hugh L. Thompson
Bruce Jensen Director
- ---------------------
Bruce Jensen
Maria Fiorini Ramirez Director
- ---------------------
Maria Fiorini Ramirez
<PAGE>
EXHIBIT INDEX
(1) None
(2) None
(3) None
(4) None
(5) (a) None
(b) None
(c) None
(d) None
(6) (a) None
(b) None
(c) 1997 Marketing Agreement - MFR
(7) None
(8) (a) None
(b) None
(c) None
(9) (a) None
(b) None
(c) None
(10) None
(11) Consent of Independent Auditors
(12) None
(13) None
(14) None
(15) (a) None
(b) None
(16) Schedule of Computation of Performance
(17) Financial Data Schedules
(18) None
<PAGE>
MARKETING AGREEMENT
This Agreement is made as of this 16th day of May, 1997, among Security
Distributors, Inc. ("SDI"), a Kansas corporation, located at 700 SW Harrison
Street, Topeka, Kansas 66636, and MFR Advisors, Inc. ("MFR Advisors"), Maria
Fiorini Ramirez Securities, Inc. ("MFR Securities"), and Maria Fiorini Ramirez,
Inc. ("MFR") (collectively referred to herein as the "MFR Parties" or
individually as an "MFR Party"), each a New York corporation located at One
Liberty Plaza, 46th Floor, New York, New York 10006.
WITNESSETH:
WHEREAS, SDI is registered as a broker-dealer under SEA-34 and is a member
of the National Association of Securities Dealers, Inc. ("NASD");
WHEREAS, MFR Securities is also registered as a broker-dealer under SEA-34
and is a member of the NASD;
WHEREAS, MFR Advisors is an investment adviser registered under the
Investment Advisers Act of 1940;
WHEREAS, MFR is the parent company of MFR Securities and MFR Advisors;
WHEREAS, SDI is the distributor of the following series of Security Income
Fund (the "Fund"): Emerging Markets Total Return Series, Global Asset Allocation
Series and Global High Yield Series (collectively referred to herein as the
"Series");
WHEREAS, MFR Advisors is the investment adviser to each of the Series; and
WHEREAS, SDI desires to engage MFR Securities to market the Series;
NOW, THEREFORE, in consideration of the premises and the mutual promises
hereinafter set forth, the parties hereto agree as follows:
1. ADDITIONAL DEFINITIONS
(a) AFFILIATE -- With respect to a person, any other person controlling,
controlled by, or under common control with, such person.
(b) APPLICATION -- An application to purchase shares of a Series and any
other forms required to be completed in connection with a purchase of
shares.
(c) EFFECTIVE DATE -- The date as of which this Agreement is executed.
(d) ICA-40 -- The Investment Company Act of 1940, as amended.
<PAGE>
(e) PROSPECTUS -- The prospectus and statement of additional information,
if any, included within a Registration Statement, except that, if the
most recently filed prospectus and statement of additional information
filed pursuant to Rule 497 under SA-33 subsequent to the date on which
a Registration Statement became effective differs from the prospectus
and statement of additional information included within such
Registration Statement at the time it became effective, the term
"Prospectus" shall refer to the most recently filed prospectus and
statement of additional information filed under Rule 497 under SA-33,
from and after the date on which they each shall have been filed. For
purposes of Section 12 of this Agreement, the term "any Prospectus"
means any document which is or at any time was a Prospectus within the
meaning of this definition.
(f) REGISTRATION STATEMENT -- At any time that this Agreement is in
effect, each currently effective registration statement, or currently
effective post-effective amendment thereto, relating to the Series,
including financial statements included in, and all exhibits to, such
registration statement or post-effective amendment. For purposes of
Section 12 of this Agreement, the term "Registration Statement" means
any document which is or at any time was a Registration Statement
within the meaning of this definition.
(g) REGULATIONS -- The rules and regulations promulgated by the SEC under
SA-33, SEA-34 and ICA-40.
(h) SA-33 -- The Securities Act of 1933, as amended.
(i) SEA-34 -- The Securities Exchange Act of 1934, as amended.
(j) SEC -- The Securities and Exchange Commission.
(k) SECURITY FUNDS -- The group of mutual funds for which Security
Management Company, LLC is investment adviser.
2. SOLICITATION ACTIVITIES AND APPLICATIONS
MFR Securities agrees that its solicitation activities with respect to the
shares of the Series shall be subject to applicable laws and regulations,
any procedures provided by SDI, and the rules set forth herein:
(a) MFR Securities shall use Applications and other materials approved by
SDI for use in the solicitation activities with respect to shares of
the Series.
(b) During the term of this Agreement, no MFR Party, nor any officer,
director, employee or agent shall intentionally encourage a
broker-dealer to exchange shares of the Security Funds owned by his or
her clients for shares of any other mutual fund, including the Series
except (i) with SDI's written consent or (ii) to comply with
2
<PAGE>
applicable laws, regulations or rules, including but not limited to
the NASD Conduct Rules.
(c) All solicitation and sales activities engaged in by MFR Securities'
registered representatives in regard to the Series shall be in
compliance with all applicable federal and state securities laws and
regulations. No such registered representative shall solicit the sale
of shares of any Series unless at the time of such solicitation such
individual is properly licensed by the NASD and all applicable state
securities regulatory authorities.
(d) Neither MFR Securities nor any registered representative thereof shall
give any written information or make any written or oral
representation in regard to the Series in connection with the offer or
sale of shares thereof that is inconsistent with the then-currently
effective Prospectus for such Series.
(e) Neither MFR Securities nor any registered representative thereof shall
offer, attempt to offer, or solicit Applications for purchases of
shares of the Series in any state or other jurisdiction as to which
SDI has notified MFR Securities that such shares may not legally be
sold or offered for sale.
3. ADMINISTRATION
(a) SDI shall confirm to each applicant for and purchaser of shares of the
Series in accordance with Rule 10b-10 under SEA-34 acceptance of
payments and such other transactions as are required to be confirmed
by Rule l0b-10 or administrative interpretations thereunder, or any
NASD requirements.
(b) SDI shall maintain and preserve such books and records with respect to
the Series in conformity with the requirements of Rules 17a-3 and
17a-4 under SEA-34 including, to the extent such requirements apply,
all books and records with respect to confirmations provided under
Rule 10b-10.
(c) SDI shall report periodically to MFR Securities the amount of
production for each Series in a format mutually acceptable to SDI and
MFR Securities.
4. MARKETING
MFR Securities shall have responsibility for the marketing arrangements,
marketing materials and marketing practices, respecting shares of the
Series, subject to SDI's right to require that MFR Securities discontinue
any marketing arrangement or practice or use of any marketing material. MFR
Securities shall be responsible for hiring and maintaining a group of
wholesalers to promote sales of shares of the Series and the ongoing
supervision of such wholesalers. MFR Securities also shall be responsible
for the design and preparation of all promotional, sales and advertising
material relating to the Series. No promotional, sales or advertising
material may be used by any party without the approval of the other party.
Prior to any use with members of the public, the following procedures shall
be observed:
3
<PAGE>
(a) Each party shall provide to the other party copies of any promotional,
sales and advertising material developed by such party, if any, for
such other party's review and written approval, and each party shall
be given a reasonable amount of time to complete its review.
(b) Each party shall respond on a prompt and timely basis in approving any
such material and shall act reasonably in connection therewith.
(c) SDI shall be responsible for filing all promotional sales or
advertising material, as required, with the NASD, and state securities
regulatory authorities.
(d) SDI shall notify the other party expeditiously of any comments
provided by the NASD or any securities regulatory authority on such
material and will cooperate expeditiously in resolving and
implementing any comments, as applicable.
Each party reserves the right, after having approved a piece of material,
to object to further use of such material and may require the other party
to cease use of such material.
5. COMPENSATION
(a) COMPENSATION OF MFR SECURITIES
SDI shall pay MFR Securities the following amounts in connection with
sales of shares of the Series:
(1) a payment on sales of Class A shares in an amount equal to the
"applicable percentage of the offering price" less the
"percentage reallowable to dealers" as set forth in the Series'
prospectus; and
(2) a payment on sales of Class B shares in the amount of .25% of the
net asset value of each Class B share sold.
Notwithstanding the foregoing, SDI will not compensate MFR Securities
in connection with sales of Class A shares at net asset value, nor
sales of Class A or Class B shares sold through broker/dealers other
than the broker/dealers listed on Schedule A hereto, as it may be
amended by the parties from time to time.
(b) COMPENSATION OF SELLING DEALERS
SDI shall compensate broker-dealers in connection with sales of shares
of the Series according to the fee schedule set forth in the Selling
Agreements between SDI and such broker-dealers. A sample selling
agreement is Exhibit A to this Agreement.
4
<PAGE>
6. EXPENSES
(a) MFR SECURITIES
With respect to this Agreement, MFR Securities shall pay all expenses
in connection with:
(1) the printing of the Prospectus and any supplements thereto and
Semiannual Reports for the Series for distribution to prospective
shareholders of the Series;
(2) the printing of the promotional, sales and advertising material
including Applications relating to the Series;
(3) the fees charged by NSCC with respect to transactions in shares
of the Series;
(4) the compensation of wholesalers and other employees of MFR
Securities who support marketing of the Series;
(5) expenses associated with the registration and training of
wholesalers and other employees of MFR Securities involved in the
distribution of shares of the Series; and
(6) commissions on sales of Class A shares in amounts of $1,000,000
or more.
(b) SDI
With respect to this Agreement, SDI shall pay the administrative
expenses associated with compensating selling broker-dealers and
maintaining selling agreements with such broker-dealers.
(c) BILLING
SDI will pay: (1) the fees of NSCC incurred in connection with sales
of shares of the Series, and (2) commissions on sales of Class A
shares in amounts of $1,000,000 or more. SDI will bill MFR Securities
monthly for such fees and commissions paid, and MFR Securities will
remit payment to SDI within 30 days of receipt of such bill. In
addition, MFR may engage SDI or an Affiliate to design and/or print
promotional materials, Applications and Prospectuses and SDI or such
Affiliate will bill periodically MFR Securities for such services. MFR
Securities will remit payment to SDI promptly upon receipt of such
bill.
(d) OTHER EXPENSES
Other than as specifically provided in this Agreement each party shall
pay all expenses that it incurs in connection with this Agreement.
5
<PAGE>
7. REPRESENTATIONS AND WARRANTIES OF THE MFR PARTIES
(a) Each of the MFR Parties represents and warrants to SDI on the
Effective Date that:
(1) Each MFR Party has been duly organized and is validly existing as
a corporation in good standing under the laws of the State of New
York with full power and authority to own, lease and operate its
properties and conduct its business and is in good standing, in
each state or jurisdiction in which its business so requires.
(2) The execution and delivery of this Agreement and the consummation
of the transactions contemplated herein have been duly authorized
by all necessary corporate action by each MFR Party, and when so
executed and delivered this Agreement shall be the valid and
binding obligation of each such party enforceable in accordance
with its terms.
(3) The consummation of the transactions contemplated herein, and the
fulfillment of the terms of this Agreement, shall not conflict
with, result in any breach in any material respect of any of the
terms and provisions of, or constitute (with or without notice or
lapse of time) a default in any material respect under, the
articles of incorporation or bylaws of any MFR Party, or any
indenture, agreement, mortgage, deed of trust, or other
instrument to which any MFR Party is a party or by which it is
bound, or, to the best of its knowledge, violate in any material
respect any law, any order, rule or regulation applicable to the
MFR Party of any court or of any federal or state regulatory
body, administrative agency or any other governmental
instrumentality having jurisdiction over the MFR Party or any of
its properties.
(b) The MFR Parties further represent and warrant to SDI on the effective
date of the initial Registration Statement for the Series, and
undertake to use their best efforts to ensure as of the effective date
of each subsequent Registration Statement, that:
Neither the Registration Statement nor the Prospectus contains an
untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading, in light of the circumstances in which they
were made; provided, however, that none of the representations and
warranties in this Section 8(b) shall apply to statements or omissions
from a Registration Statement or Prospectus made in reliance upon and
in conformity with information furnished to any MFR Party in writing
by SDI (or any Affiliate thereof) for use in such Registration
Statement or Prospectus.
8. UNDERTAKINGS OF THE MFR PARTIES
The MFR Parties undertake as follows:
(a) The MFR Parties shall notify SDI immediately upon discovery or in any
event as soon as possible under the following circumstances.
6
<PAGE>
(1) Of any event which makes any material statement made in the
Registration Statement or the Prospectus untrue in any material
respect or results in a material omission in the Registration
Statement or the Prospectus;
(2) Of any request by the SEC for any amendment to the Registration
Statement, or any supplement to the Prospectus, or statement of
additional information;
(3) Of the issuance by the SEC of any notice pursuant to Section 8(e)
of ICA-40, any stop order with respect to the Registration
Statement or any amendment thereto, or the initiation of any
proceedings for that purpose or for any other purpose relating to
the registration and/or offering of shares of the Series;
(4) Of any event of the Series' noncompliance with the applicable
requirements of the Internal Revenue Code or regulations,
rulings, or interpretations thereunder that could jeopardize any
Series' status as a regulated investment company;
(5) Of any loss or suspension of the approval of the Series or
distribution of shares thereof by a state securities regulatory
body, administrative agency, or any other governmental
instrumentality of any state or jurisdiction authorizing the sale
of shares of the Series, or any loss or suspension of approval or
clearance in any such state or jurisdiction;
(6) Of any material adverse change in the condition (financial or
otherwise) of any Series that would cause the information in the
Registration Statement to be materially misleading; and
(7) Of any event which causes a representation or warranty of the MFR
Parties contained in this Agreement to no longer be true.
(b) MFR Advisors shall provide SDI access to such records, officers and
employees of MFR Advisors at reasonable times as is necessary to
enable SDI to fulfill its obligation, as the underwriter under SA-33
for shares of the Series and as principal underwriter for the Series
under ICA-40, to perform due diligence and to use reasonable care.
(c) MFR Securities will use its best efforts to maintain its registration
as a broker-dealer under SEA-34 and its membership with the NASD, and
will use its best efforts to maintain its registration as a
broker-dealer with the applicable securities authorities under the
laws of any applicable state or jurisdiction where necessary in
connection with its obligations under this Agreement.
(d) MFR Securities will notify SDI if its SEC broker-dealer registration
or NASD membership is terminated or if it is the subject of any
proceeding that, in its reasonable judgment, is likely to result in
such termination.
7
<PAGE>
9. REPRESENTATIONS AND WARRANTIES OF SDI
SDI represents and warrants to the MFR Parties on the Effective Date as
follows:
(a) SDI has been duly organized and is validly existing as a corporation
in good standing under the laws of the State of Kansas with full power
and authority to own, lease and operate its properties and to conduct
its business, and is in good standing, in each state in which its
business so requires.
(b) The execution and delivery of this Agreement and the consummation of
the transactions contemplated herein have been duly authorized by a
necessary corporate action by SDI, and when so executed and delivered
this Agreement shall be the valid and binding obligation of SDI
enforceable in accordance with its terms.
(c) The consummation of the transactions contemplated herein, and the
fulfillment of the terms of this Agreement, shall not conflict with,
result in any breach in any material respect of any of the terms and
provisions of, or constitute (with or without notice or lapse of time)
a default in any material respect under, the articles of incorporation
or bylaws of SDI, or any indenture, agreement, mortgage, deed of
trust, or other instrument to which SDI is a party or by which it is
bound, or to the best of SDI's knowledge violate in any material
respect any law, or, to the best of SDI's knowledge, any order, rule
or regulation applicable to SDI of any court or of any federal or
state regulatory body, administrative agency or any other governmental
instrumentality having jurisdiction over SDI or any of its properties.
(d) SDI is registered as a broker-dealer under SEA-34, is a member of the
NASD, and is duly registered as a broker-dealer under the securities
laws of the states or jurisdictions to the extent required in
connection with its obligations under this Agreement.
10. UNDERTAKINGS OF SDI
SDI undertakes as follows:
(a) SDI will use its best efforts to maintain its registration as a
broker-dealer under SEA-34 and its membership with the NASD, and will
use its best efforts to maintain its registration as a broker-dealer
with the applicable securities authorities under the laws of any
applicable state or jurisdiction where necessary in connection with
its obligations under this Agreement.
(b) SDI will notify the MFR Parties if its SEC or state broker-dealer
registration or NASD membership is terminated or if it is the subject
of any proceeding that, in its reasonable judgment, is likely to
result in such termination.
(c) SDI shall notify the MFR Parties immediately upon discovery or in any
event as soon as possible under the following circumstances:
8
<PAGE>
(1) Of any material adverse change in the condition (financial or
otherwise) of SDI that would materially affect SDI's obligations
with respect to the distribution of shares of the Series; and
(2) Of any event which causes a representation or warranty of SDI
contained in this Agreement to no longer be true.
11. INVESTIGATIONS AND PROCEEDINGS
(a) COOPERATION
SDI and the MFR Parties shall cooperate fully in any securities
regulatory investigation or proceeding or judicial proceeding to the
extent that such investigation or proceeding is in connection with the
offering, sale or distribution of shares of the Series distributed
under this Agreement. Without limiting the foregoing, SDI and the MFR
Parties shall notify each other promptly of any notice of any
regulatory investigation or proceeding or judicial proceeding, arising
in connection with the offering, sale or distribution of the shares
distributed under this Agreement, received by either party.
(b) CUSTOMER COMPLAINT
SDI and the MFR Parties shall notify each other promptly in the case
of a substantive customer complaint arising in connection with the
offering, sale or distribution of the shares distributed under this
Agreement. In addition, SDI and the MFR Parties shall cooperate in
investigating such complaint and any response by either party to such
complaint shall be sent to the other party for written approval not
less than five business days prior to its being sent to the customer
or any regulatory authority, except that if a more prompt response is
required, the proposed response shall be communicated by telephone or
facsimile. In any event, neither party shall release any such response
without the other party's prior written approval.
12. INDEMNIFICATION
(a) BY SDI
SDI agrees to indemnify and hold harmless the MFR Parties and the
directors and officers thereof and each person, if any, who controls
the MFR Parties within the meaning of Section 15 of SA-33
(collectively, the "Indemnified Parties" for purposes of this Section
12(a)), against any and all losses, claims, expenses, damages,
liabilities (including amounts paid in settlement with the written
consent of SDI) or litigation (including legal and other expenses) to
which the Indemnified Parties may become subject under any statute or
regulation, at common law, or otherwise, insofar as such losses,
claims, expenses, damages, liabilities (or actions in respect thereof)
or settlements:
9
<PAGE>
(1) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact or omission or alleged
omission to state a material fact required to be stated therein
or necessary in order to make the statements therein not
misleading, in light of the circumstances in which they were
made, contained in any Registration Statement or in any
Prospectus; to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon information furnished
by SDI thereto; or
(2) result because of any use by SDI of promotional, sales or
advertising material not authorized by the MFR Parties or any
written or oral misrepresentations by SDI or any unlawful sales
practices concerning the Series by SDI under federal securities
laws or NASD regulations or other applicable law; or
(3) arise out of or result from any material breach by SDI of any
provision of this Agreement.
This indemnification shall be in addition to any liability that SDI
may otherwise have; provided, however, that no Indemnified Party shall
be entitled to indemnification pursuant to this provision if such
loss, claim, expense, damage, liability or litigation is due to the
willful misfeasance, bad faith or gross negligence in the performance
of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this
Agreement.
SDI shall not be liable under this indemnification provision with
respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified SDI in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon
such Indemnified Party (or after such Indemnified Party shall have
received notice of such service on any designated agent), but failure
to notify SDI of any such claim shall not relieve SDI from any
liability which it may have to the Indemnified Party against whom such
action is brought otherwise than on account of this indemnification
provision. In case any such action is brought against the Indemnified
Party, SDI will be entitled to participate, at its own expense, in the
defense thereof. SDI also shall be entitled to assume the defense
thereof, with counsel satisfactory to the party named in the action.
After notice from SDI to such party of SDI's election to assume the
defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional legal counsel retained by it, and SDI will
not be liable to such party under this Agreement for any legal or
other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
SDI agrees to promptly notify the MFR Parties of the commencement of
any litigation or proceedings against it or the Fund or any of SDI's
directors, officers, employees or agents in connection with the sale
of shares of any Series.
10
<PAGE>
(b) BY THE MFR PARTIES
Each MFR Party, jointly and severally, agrees to indemnify and hold
harmless SDI and each of its directors and officers and each person,
if any, who controls SDI within the meaning of Section 15 of SA-33
(collectively, the "Indemnified Parties" for purposes of this Section
12(b)), against any and all losses, claims, expenses, damages,
liabilities (including amounts paid in settlement with the written
consent of each MFR Party) or litigation (including legal and other
expenses) to which the Indemnified Parties may become subject under
any statute or regulation, at common law, or otherwise, insofar as
such losses, claims, expenses, damages, liabilities (or actions in
respect thereof) or settlements:
(1) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact or omission or alleged
omission to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, in
light of the circumstances in which they were made, contained in
any Registration Statement or in any Prospectus; provided that
the MFR Parties shall not be liable in any such case to the
extent that such loss, liability, damage, claim or expense arises
out of, or is based upon, an untrue statement or alleged untrue
statement or omission or alleged omission made in reliance upon
information furnished by SDI for use in the preparation of any
such Registration Statement or any amendment thereof or
supplement thereto; or
(2) result because of any use by any MFR Party or any officer,
director, employee or agent thereof of promotional, sales and/or
advertising material that has not been approved by SDI in
accordance with Section 4 of this Agreement or any written or
oral misrepresentations by any MFR Party or any officer,
director, employee or agent thereof or any unlawful sales
practices concerning shares of the Series by any MFR Party, or
any officer, director, employee, or agent thereof under the
federal securities laws or NASD regulations or other applicable
law; or
(3) arise out of or result from any material breach by any MFR Party
of any provision of this Agreement.
(4) This indemnification shall be in addition to any liability that
any MFR Party may otherwise have; provided, however, that no
Indemnified Party shall be entitled to indemnification pursuant
to this provision if such loss, claim, expense, damage, liability
or litigation is due to the willful misfeasance, bad faith or
gross negligence in the performance of such Indemnified Party's
duties or by reason of such Indemnified Party's reckless
disregard of obligations and duties under this Agreement.
The MFR Parties shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified
Party unless such Indemnified Party shall have notified the MFR
Parties in writing within a reasonable time after the summons or
other first legal process giving information of the nature of
11
<PAGE>
the claim shall have been served upon such Indemnified Party (or
after such Indemnified Party shall have received notice of such
service on any designated agent), but failure to notify the MFR
Parties of any such claim shall not relieve the MFR Parties from
any liability which it may have to the Indemnified Party against
whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought
against the Indemnified Party, the MFR Parties will be entitled
to participate, at their own expense, in the defense thereof. The
MFR Parties also shall be entitled to assume the defense thereof,
with counsel satisfactory to the party named in the action. After
notice from the MFR Parties to such party of the MFR Parties'
election to assume the defense thereof, the Indemnified Party
shall bear the fees and expenses of any additional legal counsel
retained by it, and the MFR Parties will not be liable to such
party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of
investigation.
The MFR Parties agree to promptly notify SDI of the commencement
of any litigation or proceedings against any MFR Party or any of
their directors, officers, employees or agents in connection with
the sale of any shares of the Series.
(c) SURVIVAL OF INDEMNIFICATION
The indemnification provisions contained in this Section 12 shall
remain operative in full force and effect, regardless of (1) any
investigation made by or on behalf of the MFR Parties or SDI or by or
on behalf of any controlling person thereof, and (2) any termination
of this Agreement. A successor by law of SDI or the MFR Parties, as
the case may be, shall be entitled to the benefits of the
indemnification provisions contained in this Section.
13. CONFIDENTIAL AND PROPRIETARY INFORMATION
At all times throughout the term of this Agreement, and following any
termination or expiration of this Agreement, each party and all of its
respective Affiliates, and each officer, director, shareholder, employee or
agent thereof, shall maintain the confidentiality of (i) this Agreement,
(ii) the transactions and other matters contemplated herein, (iii) any
proprietary or other information provided by one party to the other party
to facilitate the transactions contemplated herein, provided that this
obligation of confidentiality shall not apply to: (i) disclosures required
to be made to any regulatory bodies, administrative agencies or other
governmental instrumentalities or disclosures deemed by such party to be
desirable to disclose to any such entity; (ii) disclosures made to
attorneys, accountants and other representatives in order to assist in the
consummation of the transactions and other matters contemplated herein;
(iii) disclosures otherwise required by applicable law; or (iv) disclosures
to which the other party consents; provided further that, with respect to
the immediately foregoing clauses (i) and (iii), any party that makes such
a disclosure shall so notify the other party prior to or simultaneously
with making such disclosure to the extent
12
<PAGE>
reasonably practicable; and provided further that, with respect to the
foregoing clause (ii), a party shall make disclosures regarding this
Agreement and the transactions contemplated herein only to such party's
attorneys, accountants and other third party representatives who agree to
keep such information confidential in accordance with this Section.
14. DURATION AND TERMINATION OF THIS AGREEMENT
(a) TERM
This Agreement shall become effective upon the Effective Date and
shall remain in effect from year to year thereafter, unless terminated
as provided herein.
(b) TERMINATION
This Agreement may be terminated at any time, on 60 days written
notice, without the payment of any penalty, by any party hereto.
(c) ASSIGNMENT
This Agreement will automatically terminate in the event of its
assignment, as such term is defined in ICA-40, without the prior
written consent of the other party.
(d) TERMINATION UPON MATERIAL BREACH
This Agreement may be terminated at the option of either party to this
Agreement upon the other party's material breach of any provision of
this Agreement or of any representation made in this Agreement, unless
such breach has been cured within 10 days after receipt of notice of
breach from the non-breaching party.
(e) EFFECT OF TERMINATION
Upon termination of this Agreement all authorizations, rights and
obligations shall cease except the obligations contained in Sections
7(b), 8(a) and (b), 11, 12 and 13 hereof.
15. AMENDMENT OF THIS AGREEMENT
No provisions of this Agreement may be changed, waived, discharged, or
terminated orally, but only by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge, or termination
is sought.
13
<PAGE>
16. MISCELLANEOUS
(a) CAPTIONS
The captions in this Agreement are included for convenience of
reference only, and in no way define or limit any of the provisions
hereof or otherwise affect their construction or effect.
(b) COUNTERPARTS
This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
(c) RIGHTS, REMEDIES, ETC., ARE CUMULATIVE
The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are
entitled to under state and federal laws. Failure of either party to
insist upon strict compliance with any of the conditions of this
Agreement shall not be construed as a waiver of any of the conditions,
but the same shall remain in full force and effect. No waiver of any
of the provisions of this Agreement shall be deemed, or shall
constitute, a waiver of any other provisions, whether or not similar,
nor shall any waiver constitute a continuing waiver.
(d) INTERPRETATION: JURISDICTION
This Agreement constitutes the whole agreement between the parties
hereto with respect to the subject matter hereof, and supersedes all
prior oral or written understandings, agreements or negotiations
between the parties with respect to such subject matter. No prior
writings by or between the parties with respect to the subject matter
hereof shall be used by either party in connection with the
interpretation of any provision of this Agreement. This Agreement
shall be construed and its provisions interpreted under and in
accordance with the internal laws of the state of Kansas without
giving effect to principles of conflict of laws.
(e) SEVERABILITY
This is a severable Agreement. In the event that any provision of this
Agreement would require a party to take action prohibited by
applicable federal or state law or prohibit a party from taking action
required by applicable federal or state law, then it is the intention
of the parties hereto that such provision shall be enforced to the
extent permitted under the law, and, in any event, that all other
provisions of this Agreement shall remain valid and duty enforceable
as if the provision at issue had never been a part hereof.
14
<PAGE>
(f) REGULATION
This Agreement shall be subject to the provisions of SA-33, SEA-34 and
ICA-40 and the Regulations and the rules and regulations of the NASD,
from time to time in effect, including such exemptions from ICA-40 as
the SEC may grant, and the terms hereof shall be interpreted and
construed in accordance therewith. Without limiting the generality of
the foregoing, the term "assigned" shall not include any transaction
exempted from Section 15(b)(2) of ICA-40.
17. NOTICE, CONSENT AND REQUEST
Any notice, consent or request required or permitted to be given by either
party to the other shall be deemed sufficient if sent by facsimile
transmission followed by Federal Express or other overnight carrier, or if
sent by registered or certified mail, postage prepaid, addressed by the
party giving notice to the other party at the following address (or at such
other address, for a party as shall be specified by like notice):
if to SDI:
Security Distributors, Inc.
Attn: Amy J. Lee, Esq.
700 Harrison Street
Topeka, Kansas 66636
if to MFR:
Maria Fiorini Ramirez, Inc.
Attn: Maria Ramirez
One Liberty Plaza, 46th Floor
New York, New York 10006
if to MFR Securities:
Maria Fiorini Ramirez Securities, Inc.
Attn: Bruce Jensen
One Liberty Plaza, 46th Floor
New York, New York 10006
and if to MFR Advisors:
MFR Advisors, Inc.
Attn: Maria Ramirez
One Liberty Plaza, 46th Floor
New York, New York 10006
15
<PAGE>
IN WITNESS WHEREOF, the parties have each duly executed this Agreement as
of the day and year first above written.
SECURITY DISTRIBUTORS, INC.
By Its Authorized Officer
By: JAMES R. SCHMANK
-----------------------------
Title: James R. Schmank, Vice President
Date: August 21, 1997
MARIA FIORINI RAMIREZ, INC.
By Its Authorized Officer
By: MARIA F. RAMIREZ
-----------------------------
Title: Maria Fiorini Ramirez, President and CEO
Date: 9/15/97
MFR ADVISORS, INC.
By Its Authorized Officer
By: MARIA F. RAMIREZ
-----------------------------
Title: Maria Fiorini Ramirez, President and CEO
Date: 9/15/97
MARIA FIORINI RAMIREZ SECURITIES, INC.
By Its Authorized Officer
By: BRUCE JENSEN
-----------------------------
Title: Bruce Jensen, Chief Executive Officer
Date: 9/15/97
16
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" and "Independent Auditors" and to the incorporation by reference of
our report dated January 31, 1997 in Post-Effective Amendment No. 58 to the
Registration Statement (Form N-1A) and related Prospectus of Security Income
Fund filed with the Securities and Exchange Commission under the Securities Act
of 1933 (Registration No. 2-38414) and under the Investment Company Act of 1940
(Registration No. 811-2120).
Ernst & Young LLP
Kansas City, Missouri
November 7, 1997
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
(CLASS A)
CORPORATE BOND SERIES Yield Calculation As Of December 31, 1996 = 6.30%
[[ (461,121.00 - 61,286.75) ]6 ]
2 [[----------------------------------------- + 1 ] ] - 1
[[ (10,694,969.715)(7.21) ] ]
[(( 399,834.25 ) )6 ]
2 [((-----------------------------) + 1 ) ] - 1
[(( 77,110,731.645 ) ) ]
2[((1.005185196 + 1)6 ) - 1]
2[(1.031517268) - 1]
2(.031517268)
= .063034536 December 31, 1996, Corp. A
U.S. GOVERNMENT SERIES Yield Calculation As Of December 31, 1996 = 6.05%
[[ (52,929.61 + 90.19 - 4,377.87) ]6 ]
2 [[----------------------------------------- + 1 ] ] - 1
[[ (1,938,691.57)(5.04) ] ]
[(( 48,641.93 ) )6 ]
2 [((-----------------------------) + 1 ) ] - 1
[(( 9,771,005.513 ) ) ]
2[((.004978191 + 1)6 ) - 1]
2[(1.030243359) - 1]
2(.030243359)
= .060486719 December 31, 1996, Govt. A
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
(CLASS A)
LIMITED MATURITY BOND SERIES Yield Calculation As Of December 31, 1996 = 5.56%
[[ (28,825.66 - 6,625.59) ]6 ]
2 [[----------------------------------------- + 1 ] ] - 1
[[ (454,949.150)(10.65) ] ]
[(( 22,200.07 ) )6 ]
2 [((-----------------------------) + 1 ) ] - 1
[(( 4,845,208.448 ) ) ]
2[((.00458186 + 1)6 ) - 1]
2[(1.02780799) - 1]
2(.02780799)
= .05561598 December 31, 1996, Limited Maturity Bond Series A
GLOBAL HIGH YIELD SERIES (FORMERLY GLOBAL AGGRESSIVE BOND SERIES)
Yield Calculation As Of December 31, 1996 = 8.21%
[[ (30,547.88 - 6,599.46) ]6 ]
2 [[----------------------------------------- + 1 ] ] - 1
[[ (327,085.385)(10.88) ] ]
[(( 23,948.42 ) )6 ]
2 [((-----------------------------) + 1 ) ] - 1
[(( 3,558,688.9888 ) ) ]
2[((.006729563 + 1) 6 ) - 1]
2[(1.041063) - 1]
2(.041062806)
= .082125613 December 31, 1996, Global High Yield A
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
(CLASS A)
HIGH YIELD SERIES Yield Calculation As Of December 31, 1996 = 7.10%
[[ (20,576.57 - 3,793.26) ]6 ]
2 [[----------------------------------------- + 1 ] ] - 1
[[ (179,028.278)(16.08) ] ]
[(( 16,783.31 ) )6 ]
2 [((-----------------------------) + 1 ) ] - 1
[(( 2,878,775 ) ) ]
2[((.00583002 + 1)6 ) - 1]
2[(1.035494) - 1]
2(.035494)
= .070988 December 31, 1996, High Yield A
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
(CLASS B)
CORPORATE BOND SERIES Yield Calculation As Of December 31, 1996 = 5.59%
[[ (44,970.28 - 11,791.06) ]6 ]
2 [[----------------------------------------- + 1 ] ] - 1
[[ (1,043,014.177)(6.91) ] ]
[(( 33,179.22 ) )6 ]
2 [((-----------------------------) + 1 ) ] - 1
[(( 7,207,227.963 ) ) ]
2[((.004603603 + 1)6 ) - 1]
2[(1.027941473) - 1]
2(.027941473)
= .055882946 December 31, 1996, Corp. B
U.S. GOVERNMENT SERIES Yield Calculation As Of December 31, 1996 = 4.96%
[[ (3,550.32 + 5.06 - 1,000.28) ]6 ]
2 [[----------------------------------------- + 1 ] ] - 1
[[ (130,078.206)(4.80) ] ]
[(( 2,555.10 ) )6 ]
2 [((-----------------------------) + 1 ) ] - 1
[(( 624,375.39 ) ) ]
2[((.004092246 + 1) 6 ) - 1]
2[(1.024806047) - 1]
2(.024806047)
= .049612093 December 31, 1996, Govt. B
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
(CLASS B)
LIMITED MATURITY BOND SERIES Yield Calculation As Of December 31, 1996 = 5.55%
[[ (4,760.21 - 1,256.50) ]6 ]
2 [[----------------------------------------- + 1 ] ] - 1
[[ (75,573.334)(10.14) ] ]
[(( 3,503.71 ) )6 ]
2 [((-----------------------------) + 1 ) ] - 1
[(( 766,313.61 ) ) ]
2[((.004572166 + 1)6 ) - 1]
2[(1.027748483) - 1]
2(.027748483)
= .055496965 December 31, 1996, Limited Maturity B
GLOBAL HIGH YIELD SERIES (FORMERLY GLOBAL AGGRESSIVE BOND SERIES)
Yield Calculation As Of December 31, 1996 = 7.83%
[[ (13,425.11 - 3,738.52) ]6 ]
2 [[----------------------------------------- + 1 ] ] - 1
[[ (149,920.971)(10.41) ] ]
[(( 9,686.59 ) )6 ]
2 [((-----------------------------) + 1 ) ] - 1
[(( 1,508,627.308 ) ) ]
2[((.006420797 + 1)6 ) - 1]
2[(1.039148502) - 1]
2(.039148502)
= .078297005 December 31, 1996, Global High Yield B
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
(CLASS B)
HIGH YIELD SERIES Yield Calculation As Of December 31, 1996 = 6.68%
[[ (20,132.43 - 5,187.94) ]6 ]
2 [[----------------------------------------- + 1 ] ] - 1
[[ (177,692.63)(15.32) ] ]
[(( 14,944.49 ) )6 ]
2 [((-----------------------------) + 1 ) ] - 1
[(( 2,722,251 ) ) ]
2[((.00548975 + 1)6 ) - 1]
2[(1.033394) - 1]
2(.033394)
= .066788 December 31, 1996, High Yield B
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
As Of December 31, 1996
Average Annual Total Return Of CORPORATE BOND SERIES (CLASS A)
1. Average Total Return For 1 Year = -5.69%
1000 (1+T) 1 = 943.10
(1+T) 1 = 0.9431
1+T = 0.9431
T = (.0569)
=======
2. Average Total Return For 5 Years = +4.96%
1000 (1+T) 5 = 1,273.85
(1+T) 5 = 1.273852
((1+T) 5)1/5 = (1.273852)1/5
1+T = 1.0496
T = .0496
=======
3. Average Total Return For 10 Years = +6.74%
1000 (1+T) 10 = 1,919.72
(1+T) 10 = 1,91972
((1+T) 10)1/10 = (1.91972)1/10
1+T = 1.0674
T = .0674
=======
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
As Of December 31, 1996
Average Annual Total Return Of U.S. GOVERNMENT SERIES (CLASS A)
1. Average Total Return For 1 Year = -3.59%
1000 (1+T) 1 = 964.13
(1+T) 1 = 0.96413
T = (0.0359)
=======
2. Average Total Return For 5 Years = +5.19%
1000 (1+T) 5 = 1,288.15
(1+T) 5 = 1.28815
((1+T) 5)1/5 = (1.28815)1/5
1+T = 1.0519
T = .0519
=======
3. Average Total Return For 10 Years = +7.10%
1000 (1+T) 10 = 1,984.72
(1+T) 10 = (1.98472)
((1+T) 10)1/10 = (1.98472)1/10
1+T = 1.0710
T = .0710
=======
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
As Of December 31, 1996
Average Annual Total Return Of LIMITED MATURITY BOND SERIES (CLASS A)
1. Average Total Return For 1 Year = -2.74%
1000 (1+T) 1 = 972.55
(1+T) 1 = 0.97255
T = (.0274)
=======
2. Average Total Return Since Inception (January 17, 1995) = +4.94%
1000 (1+T) 1.953425 = 1,098.74
(1+T) 1.953425 = 1.09874
((1+T) 1.953425)1/1.953425 = (1.0494) 1/1.953425
(1+T) = 1.0494
T = .0494
=======
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
As Of December 31, 1996
Average Annual Total Return Of:
GLOBAL HIGH YIELD SERIES (FORMERLY GLOBAL AGGRESSIVE BOND SERIES) (CLASS A)
1. Average Total Return For 1 Year = +6.24%
1000 (1+T) 1 = 1,062.38
(1+T) 1 = 1.06238
T = (.0624)
=======
2. Average Total Return Since Inception (June 1, 1995) = +8.63%
1000 (1+T) 1.5863 = 1,140.35
(1+T) 1.5863 = 1.14035
((1+T) 1.5863)1/1.5863 = 1.0863
(1+T) = 1.0863
T = .0863
=======
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
As Of December 31, 1996
Average Annual Total Return Of HIGH YIELD SERIES (CLASS A)
1. Average Annual Total Return Since Inception (August 5, 1996) = +.23%
1000 (1+T) .408 = 1,000.95
(1+T) .408 = 1.00095
((1+T) .408)1/.408 = (1.00095)1/.408
(1+T) = 1.0023
T = .0023
=======
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
As Of September 30, 1997
Average Annual Total Return Of EMERGING MARKETS TOTAL RETURN SERIES (CLASS A)
1. Average Annual Total Return Since Inception (May 19, 1997) = +1.03%
1000 (1+T) .370 = 1,003.81
(1+T) .370 = 1.00381
((1+T) .370)1/.370 = (1.00381)1/.370
(1+T) = 1.0103
T = .0103
=======
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
As Of September 30, 1997
Average Annual Total Return Of GLOBAL ASSET ALLOCATION SERIES (CLASS A)
1. Average Annual Total Return Since Inception (May 19, 1997) = +3.64%
1000 (1+T) .370 = 1,013.33
(1+T) .370 = 1.01333
((1+T) .370)1/.370 = (1.01333)1/.370
(1+T) = 1.0364
T = .0364
=======
<PAGE>
Item 24.b. Exhibit (16)
AVERAGE ANNUAL TOTAL RETURN
INCOME FUND-CORPORATE BOND SERIES
B SHARES
Total Return from January 1, 1996, to December 31, 1996. Assuming Initial
Investment of $1,000 at offering price at the beginning of period $1,000 / 7.43
= 134.59 shares.
Ending value of initial investment at December 31, 1996, NAV price = 134.59
shares x 6.91 = $930.02.
Ending value of shares received from reinvestment of all dividends at NAV = 8.16
shares x 6.91 = $56.39.
Contingent deferred sales charge = 986.40 x .05 = $49.32.
Total ending redeemable value: 930.02
56.39
- (49.32)
-------
937.09
Total Return: 937.09 - 1,000 = (62.91)
(62.91) / 1,000 = -6.29%
-----------------------------------------------
Calendar 1996 % change
= value at end of year............... 937.09
less value at beginning.............. 1,000.00
--------
(62.91)
Change (62.91)
------- = -6.29%
Beginning Value 1,000
<PAGE>
Item 24.b. Exhibit (16)
AVERAGE ANNUAL TOTAL RETURN
INCOME FUND-U.S. GOVERNMENT SERIES
B SHARES
Total Return from January 1, 1996, to December 31, 1996. Assuming Initial
Investment of $1,000 at offering price at the beginning of period $1,000 / 4.97
= 201.207 shares.
Ending value of initial investment at December 31, 1996, NAV price = 201.207
shares x 4.71 = $947.68.
Ending value of shares received from reinvestment of all dividends at NAV =
11.168 shares x 4.71 = $52.60.
Contingent deferred sales charge = 1,000 x .05 = $50.00.
Total ending redeemable value: 947.68
52.60
- (50.00)
-------
950.28
Total Return: 950.28 - 1,000 = (49.72)
(49.72) / 1,000 = -4.97%
-----------------------------------------------
Calendar 1996 % change
= value at end of year............... 950.28
less value at beginning.............. 1,000.00
--------
(49.72)
Change (49.72)
------- = -4.97%
Beginning Value 1,000
<PAGE>
Item 24.b. Exhibit (16)
AVERAGE ANNUAL TOTAL RETURN
INCOME FUND-LIMITED MATURITY BOND SERIES
B SHARES
Total Return from January 1, 1996, to December 31, 1996. Assuming Initial
Investment of $1,000 at offering price at the beginning of period $1,000 / 10.67
= 93.7207 shares.
Ending value of initial investment at December 31, 1996, NAV price = 93.7207
shares x 10.14 = $950.33.
Ending value of shares received from reinvestment of all dividends at NAV =
5.9316 shares x 10.14 = $60.15.
Contingent deferred sales charge = 1,000 x .05 = $50.00.
Total ending redeemable value: 950.33
60.15
- (50.00)
-------
960.48
Total Return: 960.48 - 1,000 = (39.52)
(39.52) / 1,000 = -3.95%
-----------------------------------------------
Calendar 1996 % change
= value at end of year............... 960.48
less value at beginning.............. 1,000.00
--------
(39.52)
Change (39.52)
------- = -3.95%
Beginning Value 1,000
<PAGE>
Item 24.b. Exhibit (16)
AVERAGE ANNUAL TOTAL RETURN
INCOME FUND-GLOBAL HIGH YIELD SERIES
(FORMERLY GLOBAL AGGRESSIVE BOND SERIES)
B SHARES
Total Return from January 1, 1996, to December 31, 1996. Assuming Initial
Investment of $1,000 at offering price at the beginning of period $1,000 / 10.17
= 98.32842 shares.
Ending value of initial investment at December 31, 1996, NAV price = 98.32842
shares x 10.41 = $1,023.60.
Ending value of shares received from reinvestment of all dividends at NAV =
7.98538 shares x 10.41 = $83.13.
Contingent deferred sales charge = 1,000 x .05 = $50.00.
Total ending redeemable value: 1,023.60
83.13
- (50.00)
---------
1,056.73
Total Return: 1,056.73 - 1,000 = 56.73
56.73 / 1,000 = 5.67%
-----------------------------------------------
Calendar 1996 % change
= value at end of year............... 1,056.73
less value at beginning.............. 1,000.00
--------
56.73
Change 56.73
----- = 5.67%
Beginning Value 1,000
<PAGE>
Item 24.b. Exhibit (16)
AVERAGE ANNUAL TOTAL RETURN
INCOME FUND-HIGH YIELD SERIES
B SHARES
1. Average Annual Total Return Since Inception (August 5, 1996) = -.24%
1000 (1+T) .408 = 999.03
(1+T) .408 = .99903
((1+T) .408)1/.408 = (.99903)1/.408
(1+T) = .9976
T = -.0024
======
<PAGE>
Item 24.b. Exhibit (16)
AVERAGE ANNUAL TOTAL RETURN
INCOME FUND - EMERGING MARKETS TOTAL RETURN SERIES
AS OF SEPTEMBER 30, 1997
B Shares
1. Average Annual Total Return Since Inception (May 19, 1997) = +.27%
1000 (1+T) .370 = 1,001.00
(1+T) .370 = 1.00100
((1+T) .370)1/.370 = (1.00100)1/.370
(1+T) = 1.0027
T = .0027
======
<PAGE>
Item 24.b. Exhibit (16)
AVERAGE ANNUAL TOTAL RETURN
INCOME FUND - GLOBAL ASSET ALLOCATION SERIES
AS OF SEPTEMBER 30, 1997
B Shares
1. Average Annual Total Return Since Inception (May 19, 1997) = +3.00%
1000 (1+T) .370 = 1,011.00
(1+T) .370 = 1.01100
((1+T) .370)1/.370 = (1.01100)1/.370
(1+T) = 1.0300
T = .0300
======
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
(WITHOUT DEDUCTION OF SALES CHARGE)
As Of December 31, 1996
Average Annual Total Return Of CORPORATE BOND SERIES (CLASS A)
1. Average Total Return For 1 Year = -0.52%
1000 (1+T) 1 = 994.77
(1+T) 1 = 0.99477
1+T = 0.99477
T = (.0052)
======
2. Average Total Return For 5 Years = +5.98%
1000 (1+T) 5 = 1,337.04
(1+T) 5 = 1.33704
((1+T) 5)1/5 = (1.33704)1/5
1+T = 1.0598
T = .0598
======
3. Average Total Return For 10 Years = +7.25%
1000 (1+T) 10 = 2,014.32
(1+T) 10 = 2.01432
((1+T) 10)1/10 = (2.01432)1/10
1+T = 1.0725
T = .0725
======
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
(WITHOUT DEDUCTION OF SALES CHARGE)
As Of December 31, 1996
Average Annual Total Return Of U.S. GOVERNMENT SERIES (CLASS A)
1. Average Total Return For 1 Year = +1.26%
1000 (1+T) 1 = 1,012.63
(1+T) 1 = 1.01263
T = .0126
======
2. Average Total Return For 5 Years = +6.23%
1000 (1+T) 5 = 1,352.94
(1+T) 5 = 1.35294
((1+T) 5)1/5 = (1.35294)1/5
1+T = 1.0623
T = .0623
======
3. Average Total Return For 10 Years = +7.61%
1000 (1+T) 10 = 2,082.27
(1+T) 10 = (2.08227)
((1+T) 10)1/10 = (2.08227)1/10
1+T = 1.0761
T = .0761
======
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
(WITHOUT DEDUCTION OF SALES CHARGE)
As Of December 31, 1996
Average Annual Total Return Of LIMITED MATURITY BOND SERIES (CLASS A)
1. Average Total Return For 1 Year = +2.09%
1000 (1+T) 1 = 1,020.91
(1+T) 1 = 1.0209
T = .0209
======
2. Average Total Return Since Inception (January 17, 1995) = +7.59%
1000 (1+T) 1.953425 = 1,153.68
(1+T) 1.953425 = 1.15368
((1+T) 1.953425)1/1.953425 = 1.0759
(1+T) = 1.0759
T = .0759
======
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
(WITHOUT DEDUCTION OF SALES CHARGE)
As Of December 31, 1996
Average Annual Total Return Of:
GLOBAL HIGH YIELD SERIES (FORMERLY GLOBAL AGGRESSIVE BOND SERIES) (CLASS A)
1. Average Total Return For 1 Year = +11.58%
1000 (1+T) 1 = 1,115.76
(1+T) 1 = 1.11576
T = .1158
======
2. Average Total Return Since Inception (June 1, 1995) = +12.02%
1000 (1+T) 1.5863 = 1,197.36
(1+T) 1.5863 = 1.19736
((1+T) 1.5863)1/1.5863 = 1.1202
(1+T) = 1.1202
T = .1202
======
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
(WITHOUT DEDUCTION OF SALES CHARGE)
As Of December 31, 1996
Average Annual Total Return Of HIGH YIELD SERIES (CLASS A)
1. Average Annual Total Return Since Inception (August 5, 1996) = +5.20%
1000 (1+T) .408 = 1,052.03
(1+T) .408 = 1.05203
((1+T) .408)1/.408 = (1.05203)1/.408
(1+T) = 1.0520
T = .0520
======
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
(WITHOUT DEDUCTION OF SALES CHARGE)
As Of September 30, 1997
Average Annual Total Return Of EMERGING MARKETS TOTAL RETURN SERIES (CLASS A)
1. Average Annual Total Return Since Inception (May 19, 1997) = +15.27%
1000 (1+T) .370 = 1,054.00
(1+T) .370 = 1.05400
((1+T) .370)1/.370 = (1.05400)1/.370
(1+T) = 1.1527
T = .1527
======
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
(WITHOUT DEDUCTION OF SALES CHARGE)
As Of September 30, 1997
Average Annual Total Return Of GLOBAL ASSET ALLOCATION SERIES (CLASS A)
1. Average Annual Total Return Since Inception (May 19, 1997) = +18.25%
1000 (1+T) .370 = 1,064.00
(1+T) .370 = 1.06400
((1+T) .370)1/.370 = (1.0640)1/.370
(1+T) = 1.1825
T = .1825
======
<PAGE>
Item 24.b. Exhibit (16)
AVERAGE ANNUAL TOTAL RETURN
INCOME FUND-CORPORATE BOND SERIES
(WITHOUT CDSC)
B SHARES
Total Return from January 1, 1996, to December 31, 1996. Assuming Initial
Investment of $1,000 at offering price at the beginning of period $1,000 / 7.43
= 134.59 shares.
Ending value of initial investment at December 31, 1996, NAV price = 134.59
shares x 6.91 = $930.02.
Ending value of shares received from reinvestment of all dividends at NAV = 8.16
shares x 6.91 = $56.39.
Total ending redeemable value: 930.02
56.39
------
986.41
Total Return: 986.41 - 1,000 = (13.59)
(13.59) / 1,000 = -1.36%
-----------------------------------------------
Calendar 1996 % change
= value at end of year............... 986.41
less value at beginning.............. 1,000.00
--------
(13.59)
Change (13.59)
------- = -1.36%
Beginning Value 1,000
<PAGE>
Item 24.b. Exhibit (16)
AVERAGE ANNUAL TOTAL RETURN
INCOME FUND-U.S. GOVERNMENT SERIES
(WITHOUT CDSC)
B SHARES
Total Return from January 1, 1996, to December 31, 1996. Assuming Initial
Investment of $1,000 at offering price at the beginning of period $1,000 / 4.97
= 201.207 shares.
Ending value of initial investment at December 31, 1996, NAV price = 201.207
shares x 4.71 = $947.68.
Ending value of shares received from reinvestment of all dividends at NAV =
11.168 shares x 4.71 = $52.60.
Total ending redeemable value: 947.68
52.60
--------
1,000.28
Total Return: 1,000.28 - 1,000 = (0.28)
.28 / 1,000 = .01%
-----------------------------------------------
Calendar 1996 % change
= value at end of year............... 1,000.28
less value at beginning.............. 1,000.00
--------
0.28
Change .28
----- = .01%
Beginning Value 1,000
<PAGE>
Item 24.b. Exhibit (16)
AVERAGE ANNUAL TOTAL RETURN
INCOME FUND-LIMITED MATURITY BOND SERIES
(WITHOUT CDSC)
B SHARES
Total Return from January 1, 1996, to December 31, 1996. Assuming Initial
Investment of $1,000 at offering price at the beginning of period $1,000 / 10.67
= 93.7207 shares.
Ending value of initial investment at December 31, 1996, NAV price = 93.7207
shares x 10.14 = $950.33.
Ending value of shares received from reinvestment of all dividends at NAV =
5.9316 shares x 10.14 = $60.15.
Total ending redeemable value: 950.33
60.15
--------
1,010.48
Total Return: 1,010.48 - 1,000 = 10.48
10.48 / 1,000 = +1.05%
-----------------------------------------------
Calendar 1996 % change
= value at end of year............... 1,010.48
less value at beginning.............. 1,000.00
--------
10.48
Change 10.48
----- = +1.05%
Beginning Value 1,000
<PAGE>
Item 24.b. Exhibit (16)
AVERAGE ANNUAL TOTAL RETURN
INCOME FUND-GLOBAL HIGH YIELD SERIES
(FORMERLY GLOBAL AGGRESSIVE BOND SERIES)
(WITHOUT CDSC)
B SHARES
Total Return from January 1, 1996, to December 31, 1996. Assuming Initial
Investment of $1,000 at offering price at the beginning of period $1,000 / 10.17
= 98.32842 shares.
Ending value of initial investment at December 31, 1996, NAV price = 98.32842
shares x 10.41 = $1,023.60.
Ending value of shares received from reinvestment of all dividends at NAV =
7.98538 shares x 10.41 = $83.13.
Total ending redeemable value: 1,023.60
83.13
--------
1,106.73
Total Return: 1,106.73 - 1,000 = 106.73
106.73 / 1,000 = 10.67%
-----------------------------------------------
Calendar 1996 % change
= value at end of year............... 1,106.73
less value at beginning.............. 1,000.00
--------
106.73
Change 106.73
------ = 10.67%
Beginning Value 1,000
<PAGE>
Item 24.b. Exhibit (16)
AVERAGE ANNUAL TOTAL RETURN
INCOME FUND-HIGH YIELD SERIES
(WITHOUT CDSC)
B SHARES
1. Average Annual Total Return Since Inception (August 5, 1996) = +4.90%
1000 (1+T) .408 = 1,049.03
(1+T) .408 = 1.04903
((1+T) .408)1/.408 = (1.04903)1/.408
(1+T) = .04903
T = .0490
======
<PAGE>
Item 24.b. Exhibit (16)
AVERAGE ANNUAL TOTAL RETURN
INCOME FUND-EMERGING MARKETS TOTAL RETURN SERIES
(WITHOUT CDSC)
B Shares
1. Average Annual Total Return Since Inception (May 19, 1997) = +14.39%
1000 (1+T) .370 = 1,051.00
(1+T) .370 = 1.05100
((1+T) .370)1/.370 = (1.0510)1/.370
(1+T) = 1.1439
T = .1439
======
<PAGE>
Item 24.b. Exhibit (16)
AVERAGE ANNUAL TOTAL RETURN
INCOME FUND-GLOBAL ASSET ALLOCATION SERIES
(WITHOUT CDSC)
B Shares
1. Average Annual Total Return Since Inception (May 19, 1997) = +17.35%
1000 (1+T) .370 = 1,061.00
(1+T) .370 = 1.06100
((1+T) .370)1/.370 = (1.06100)1/.370
(1+T) = 1.1735
T = .1735
======
<PAGE>
Item 24.b. Exhibit (16)
AGGREGATE TOTAL RETURN
CORPORATE BOND SERIES - CLASS A
For the period of December 31, 1986 to December 31, 1996 (with deduction of
sales charge)
Initial Investment = $1,000.00
Ending Value Of Investment = 1,919.72
--------
Net Increase In Value = $ 919.72
Total Return - net increase = 919.72
------------------ -------- = 92.0%
initial investment = 1,000.00
U.S. GOVERNMENT SERIES - CLASS A
For the period of December 31, 1986 to December 31, 1996 (with deduction of
sales charge)
Initial Investment = $1,000.00
Ending Value Of Investment = 1,984.72
--------
Net Increase In Value = $ 984.72
Total Return - net increase = 984.72
------------------ -------- = 98.5%
initial investment = 1,000.00
LIMITED MATURITY BOND SERIES - CLASS A
For the period of January 17, 1995 to December 31, 1996 (with deduction of sales
charge)
Initial Investment = $1,000.00
Ending Value Of Investment = 1,098.74
--------
Net Increase In Value = $ 98.74
Total Return - net increase = 98.74
------------------ -------- = 9.9%
initial investment = 1,000.00
GLOBAL HIGH YIELD SERIES (FORMERLY GLOBAL AGGRESSIVE BOND SERIES) CLASS A
For the period of June 1, 1995 to December 31, 1996 (with deduction of sales
charge)
Initial Investment = $1,000.00
Ending Value Of Investment = 1,140.35
--------
Net Increase In Value = $ 140.35
Total Return - net increase = 140.35
------------------ -------- = 14.0%
initial investment = 1,000.00
<PAGE>
Item 24.b. Exhibit (16)
HIGH YIELD SERIES - CLASS A
For the period of May 5, 1996 to December 31, 1996 (with deduction of sales
charge)
Total Return from August 5, 1996 (inception), to December 31, 1996. Assuming
Initial Investment of $1,000 at offering price at the beginning of period $1,000
/ 15.75 = 63.4921 shares.
Ending value of initial investment at December 31, 1996, NAV price = 63.4921
shares x 15.32 = $972.70.
Ending value of shares received from reinvestment of all dividends at NAV =
1.8443 shares x 15.32 = $28.25.
Total ending redeemable value: 972.70
+ 28.25
--------
1,000.95
Total Return: 1,000.95 - 1,000 = .95
.95 / 1,000 = .001 or .10%
<PAGE>
Item 24.b. Exhibit (16)
EMERGING MARKETS TOTAL RETURN SERIES - CLASS A
For the period of May 19, 1997 to September 30, 1997 (with deduction of sales
charge)
Total Return from May 19, 1997 (inception), to September 30, 1997. Assuming
Initial Investment of $1,000 at offering price at the beginning of period $1,000
/ 10.50 = 95.2381 shares.
Ending value of initial investment at September 30, 1997, NAV price = 95.2381
shares x 10.54 = $1,003.81.
Ending value of shares received from reinvestment of all dividends at NAV = 0
shares x 0 = 0.
Total ending redeemable value: 1,003.81
+ 0
--------
1,003.81
Total Return: 1,003.81 - 1,000 = 3.81
3.81 / 1,000 = .00381 or .38%
<PAGE>
Item 24.b. Exhibit (16)
GLOBAL ASSET ALLOCATION SERIES - CLASS A
For the period of May 19, 1997 to September 30, 1997 (with deduction of sales
charge)
Total Return from May 19, 1997 (inception), to September 30, 1997. Assuming
Initial Investment of $1,000 at offering price at the beginning of period
$1,000 / 10.50 = 95.2381 shares.
Ending value of initial investment at September 30, 1997, NAV price = 95.2381
shares x 10.64 = $1,013.33.
Ending value of shares received from reinvestment of all dividends at NAV = 0
shares x 0 = 0.
Total ending redeemable value: 1,013.33
+ 0
--------
1,013.33
Total Return: 1,013.33 - 1,000 = 13.33
13.33 / 1,000 = .01333 or 1.33%
<PAGE>
Item 24.b. Exhibit (16)
AGGREGATE TOTAL RETURN
CORPORATE BOND SERIES - CLASS B
For the period of October 19, 1993 to December 31, 1996 (with deduction of 3%
CDSC charge)
Initial Investment = $1,000.00
Ending Value Of Investment = 990.99
--------
Net Increase In Value = $ (9.01)
Total Return - net increase = (9.01)
------------------ -------- = (0.9%)
initial investment = 1,000.00
U.S. GOVERNMENT SERIES - CLASS B
For the period of October 19, 1993 to December 31, 1996 (with deduction of 3%
CDSC charge)
Initial Investment = $1,000.00
Ending Value Of Investment = 1,063.97
--------
Net Increase In Value = $ 63.97
Total Return - net increase = 63.97
------------------ -------- = 6.4%
initial investment = 1,000.00
LIMITED MATURITY BOND SERIES - CLASS B
For the period of January 17, 1995 to December 31, 1996 (with deduction of 4%
CDSC charge)
Initial Investment = $1,000.00
Ending Value Of Investment = 1,093.45
--------
Net Increase In Value = $ 93.45
Total Return - net increase = 93.45
------------------ -------- = 9.3%
initial investment = 1,000.00
GLOBAL HIGH YIELD SERIES (FORMERLY GLOBAL AGGRESSIVE BOND SERIES) CLASS B
For the period of June 1, 1995 to December 31, 1996 (with deduction of 4% CDSC
charge)
Initial Investment = $1,000.00
Ending Value Of Investment = 1,142.74
--------
Net Increase In Value = $ 142.74
Total Return - net increase = 142.74
------------------ -------- = 14.27%
initial investment = 1,000.00
<PAGE>
Item 24.b. Exhibit (16)
AGGREGATE TOTAL RETURN
HIGH YIELD SERIES - CLASS B
For the period of August 5, 1996 to December 31, 1996 (with deduction of 5% CDSC
charge)
Total Return from August 5, 1996 (inception), to December 31, 1996. Assuming
Initial Investment of $1,000 at offering price at the beginning of period $1,000
/ 15.00 = 66.667 shares.
Ending value of initial investment at December 31, 1996, NAV price = 66.667
shares x 15.32 = $1,021.34
Ending value of shares received from reinvestment of all dividends at NAV =
1.807 shares x 15.32 = $27.68.
Contingent deferred sales charge = 1,000 x .05 = $50.00.
Total ending redeemable value: 1,021.34
27.68
+ (50.00)
---------
999.02
Total Return: 999.02 - 1,000 = (.98)
(.98) / 1,000 = -.10%
HIGH YIELD SERIES - CLASS B
For the period of August 5, 1996 to December 31, 1996 (without deduction of 5%
CDSC charge)
Ending value of initial investment at December 31, 1996, NAV price = 66.667
shares x 15.32 = $1,021.34
Ending value of shares received from reinvestment of all dividends at NAV =
1.807 shares x 15.32 = $27.68.
Total ending redeemable value: 1,021.34
+ 27.68
--------
1,049.02
Total Return: 1,049.02 - 1,000 = 49.02
49.02 / 1,000 = .04902 or 4.90%
<PAGE>
Item 24.b. Exhibit (16)
AGGREGATE TOTAL RETURN
EMERGING MARKETS TOTAL RETURN SERIES - CLASS B
For the period of May 19, 1997 to September 30, 1997 (with deduction of 5% CDSC
charge)
Total Return from May 19, 1997 (inception), to September 30, 1997. Assuming
Initial Investment of $1,000 at offering price at the beginning of period $1,000
/ 10.00 = 100.00 shares.
Ending value of initial investment at September 30, 1997, NAV price = 100.000
shares x 10.51 = $1,051.00
Ending value of shares received from reinvestment of all dividends at NAV = 0
shares x 0 = 0.
Contingent deferred sales charge = 1,000 x .05 = $50.00.
Total ending redeemable value: 1,051.00
0
+ (50.00)
--------
1,001.00
Total Return: 1,001.00 - 1,000 = 1.00
1.00 / 1,000 = .10%
EMERGING MARKETS TOTAL RETURN SERIES - CLASS B
For the period of May 19, 1997 to September 30, 1997 (without deduction of 5%
CDSC charge)
Ending value of initial investment at September 30, 1997, NAV price = 100.00
shares x 10.51 = $1,051.00
Ending value of shares received from reinvestment of all dividends at NAV = 0
shares x 0 = 0.
Total ending redeemable value: 1,051.00
+ 0
--------
1,051.00
Total Return: 1,051.00 - 1,000 = 51.00
51.00 / 1,000 = .051 or 5.10%
<PAGE>
Item 24.b. Exhibit (16)
AGGREGATE TOTAL RETURN
GLOBAL ASSET ALLOCATION SERIES - CLASS B
For the period of May 19, 1997 to September 30, 1997 (with deduction of 5% CDSC
charge)
Total Return from May 19, 1997 (inception), to September 30, 1997. Assuming
Initial Investment of $1,000 at offering price at the beginning of period $1,000
/ 10.00 = 100.00 shares.
Ending value of initial investment at September 30, 1997, NAV price = 100.00
shares x 10.61 = $1,061.00
Ending value of shares received from reinvestment of all dividends at NAV = 0
shares x 0 = 0.
Contingent deferred sales charge = 1,000 x .05 = $50.00.
Total ending redeemable value: 1,061.00
0
+ (50.00)
--------
1,011.00
Total Return: 1,011.00 - 1,000 = 11.00
11.00 / 1,000 = 1.10%
GLOBAL ASSET ALLOCATION SERIES - CLASS B
For the period of May 19, 1997 to September 30, 1997 (without deduction of 5%
CDSC charge)
Ending value of initial investment at September 30, 1997, NAV price = 100.00
shares x 10.61 = $1,061.00
Ending value of shares received from reinvestment of all dividends at NAV = 0
shares x 0 = 0.
Total ending redeemable value: 1,061.00
+ 0
--------
1,061.00
Total Return: 1,061.00 - 1,000 = 61.00
61.00 / 1,000 = .061 or 6.10%
<PAGE>
Item 24.b. Exhibit (16)
TOTAL RETURN
CORPORATE BOND SERIES (Class A Shares) Quotation of Total Return for the Period
of December 31, 1985, through December 31, 1996 (without deduction of the sales
charge).
Initial Investment = $1,000.00
ENDING BEGINNING INCREASE INCREASE BEGINNING %
VALUE VALUE IN VALUE IN VALUE VALUE INCREASE
------ --------- -------- -------- --------- --------
Year 1 1,040 - 1,000 = 40 40 / 1,000 = 4.0%
Year 2 1,107 - 1,040 = 67 67 / 1,040 = 6.4%
Year 3 1,217 - 1,107 = 110 110 / 1,107 = 9.9%
Year 4 1,297 - 1,217 = 80 80 / 1,217 = 6.6%
Year 5 1,507 - 1,297 = 210 210 / 1,297 = 16.2%
Year 6 1,641 - 1,507 = 134 134 / 1,507 = 8.9%
Year 7 1,867 - 1,641 = 226 226 / 1,641 = 13.8%
Year 8 1,713 - 1,867 = (154) (154) / 1,867 = (8.2%)
Year 9 2,025 1,713 = 312 312 / 1,713 = 18.2%
Year 10 2,014 2,025 = (11) (11) / 2,025 = (0.5%)
Initial Investment = $1,000.00
Ending Value Of Investment = 2,014.00
--------
Net Increase In Value = $1,014.00
Total Return - net increase = 1,014.00
------------------ -------- = 101.4%
initial investment = 1,000.00
<PAGE>
Item 24.b. Exhibit (16)
TOTAL RETURN
U.S. GOVERNMENT SERIES (Class A Shares) Quotation of Total Return for the Period
of December 31, 1986, through December 31, 1996 (without deduction of the sales
charge).
Initial Investment = $1,000.00
ENDING BEGINNING INCREASE INCREASE BEGINNING %
VALUE VALUE IN VALUE IN VALUE VALUE INCREASE
------ --------- -------- -------- --------- --------
Year 1 1,039 - 1,000 = 39 39 / 1,000 = 3.9%
Year 2 1,104 - 1,039 = 65 65 / 1,039 = 6.2%
Year 3 1,234 - 1,104 = 130 130 / 1,104 = 11.8%
Year 4 1,355 - 1,234 = 121 121 / 1,234 = 9.8%
Year 5 1,542 - 1,355 = 187 187 / 1,355 = 13.8%
Year 6 1,619 - 1,542 = 77 77 / 1,542 = 5.0%
Year 7 1,809 - 1,619 = 190 190 / 1,619 = 11.8%
Year 8 1,691 - 1,809 = (118) (118) / 1,809 = (6.5%)
Year 9 2,060 1,691 = 369 369 / 1,691 = 21.8%
Year 10 2,086 2,060 = 26 26 / 2,060 = 1.3%
Initial Investment = $1,000.00
Ending Value Of Investment = 2,086.00
--------
Net Increase In Value = $1,086.00
Total Return - net increase = 1,086.00
------------------ -------- = 108.6%
initial investment = 1,000.00
<PAGE>
Item 24.b. Exhibit (16)
TOTAL RETURN
LIMITED MATURITY BOND SERIES (Class A Shares) Quotation of Total Return for the
Period of January 17, 1995 (date of inception) through December 31, 1996
(without deduction of the sales charge).
Initial Investment = $1,000.00
ENDING BEGINNING INCREASE INCREASE BEGINNING %
VALUE VALUE IN VALUE IN VALUE VALUE INCREASE
------ --------- -------- -------- --------- --------
Year 1 1,130 - 1,000 = 130 130 / 1,000 = 13.0%
Year 2 1,154 - 1,130 = 24 24 / 1,130 = 2.1%
Initial Investment = $1,000.00
Ending Value Of Investment = 1,154.00
--------
Net Increase In Value = $ 154.00
Total Return - net increase = 154
------------------ -------- = 15.4%
initial investment = 1,000.00
<PAGE>
Item 24.b. Exhibit (16)
TOTAL RETURN
GLOBAL HIGH YIELD SERIES (FORMERLY GLOBAL AGGRESSIVE BOND SERIES) (Class A
Shares) Quotation of Total Return for the Period of June 1, 1995, (date of
inception) through December 31, 1996 (without deduction of the sales charge).
Initial Investment = $1,000.00
ENDING BEGINNING INCREASE INCREASE BEGINNING %
VALUE VALUE IN VALUE IN VALUE VALUE INCREASE
------ --------- -------- -------- --------- --------
Year 1 1,073 - 1,000 = 73 73 / 1,000 = 7.3%
Year 2 1,197 - 1,073 = 124 124 / 1,073 = 11.6%
Initial Investment = $1,000.00
Ending Value Of Investment = 1,197.00
--------
Net Increase In Value = $ 197.00
Total Return - net increase = 197
------------------ -------- = 19.7%
initial investment = 1,000.00
<PAGE>
Item 24.b. Exhibit (16)
TOTAL RETURN
CORPORATE BOND SERIES (Class B Shares) Quotation of Total Return for the Period
of October 19, 1993, (date of inception) through December 31, 1996 (without
deduction of the CDSC charge).
Initial Investment = $1,000.00
ENDING BEGINNING INCREASE INCREASE BEGINNING %
VALUE VALUE IN VALUE IN VALUE VALUE INCREASE
------ --------- -------- -------- --------- --------
Year 1 970 - 1,000 = (30) (30) / 1,000 = (3.0%)
Year 2 883 - 970 = (87) (87) / 970 = (9.0%)
Year 3 1,035 - 883 = 152 152 / 883 = 17.2%
Year 4 1,020 - 1,035 = (15) (15) / 1,035 = (1.5%)
Initial Investment = $1,000.00
Ending Value Of Investment = 1,020.00
--------
Net Increase In Value = $ 20.00
Total Return - net increase = 20
------------------ -------- = 2.0%
initial investment = 1,000.00
<PAGE>
Item 24.b. Exhibit (16)
TOTAL RETURN
U.S. GOVERNMENT SERIES (Class B Shares) Quotation of Total Return for the Period
of October 19, 1993, (date of inception) through December 31, 1996 (without
deduction of the CDSC charge).
Initial Investment = $1,000.00
ENDING BEGINNING INCREASE INCREASE BEGINNING %
VALUE VALUE IN VALUE IN VALUE VALUE INCREASE
------ --------- -------- -------- --------- --------
Year 1 977 - 1,000 = (23) (23) / 1,000 = (2.3%)
Year 2 904 - 977 = (73) (73) / 977 = (7.5%)
Year 3 1,094 - 904 = 190 190 / 904 = 21.0%
Year 4 1,094 - 1,094 = 0 0 / 1,094 = 0.0%
Initial Investment = $1,000.00
Ending Value Of Investment = 1,094.00
--------
Net Increase In Value = $ 94.00
Total Return - net increase = 94
------------------ -------- = 9.4%
initial investment = 1,000.00
<PAGE>
Item 24.b. Exhibit (16)
TOTAL RETURN
LIMITED MATURITY BOND SERIES (Class B Shares) Quotation of Total Return for the
Period of October 19, 1993, (date of inception) through December 31, 1996
(without deduction of the CDSC charge).
Initial Investment = $1,000.00
ENDING BEGINNING INCREASE INCREASE BEGINNING %
VALUE VALUE IN VALUE IN VALUE VALUE INCREASE
------ --------- -------- -------- --------- --------
Year 1 1,122 - 1,000 = 122 122 / 1,000 = 12.2%
Year 2 1,133 - 1,122 = 11 11 / 1,122 = 1.1%
Initial Investment = $1,000.00
Ending Value Of Investment = 1,133.00
--------
Net Increase In Value = $ 133.00
Total Return - net increase = 133
------------------ -------- = 13.3%
initial investment = 1,000.00
<PAGE>
Item 24.b. Exhibit (16)
TOTAL RETURN
GLOBAL HIGH YIELD SERIES (FORMERLY GLOBAL AGGRESSIVE BOND SERIES) (Class B
Shares) Quotation of Total Return for the Period of October 19, 1993, (date of
inception) through December 31, 1996 (without deduction of the CDSC charge).
Initial Investment = $1,000.00
ENDING BEGINNING INCREASE INCREASE BEGINNING %
VALUE VALUE IN VALUE IN VALUE VALUE INCREASE
------ --------- -------- -------- --------- --------
Year 1 1,069 - 1,000 = 69 69 / 1,000 = 6.9%
Year 2 1,183 - 1,069 = 114 114 / 1,069 = 10.7%
Initial Investment = $1,000.00
Ending Value Of Investment = 1,183.00
--------
Net Increase In Value = $ 183.00
Total Return - net increase = 183
------------------ -------- = 18.3%
initial investment = 1,000.00
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<NAME> SECURITY INCOME FUND
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