<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. 56 |X|
------
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |_|
Post-Effective Amendment No. 56 |X|
------
(Check appropriate box or boxes)
SECURITY INCOME FUND
(Exact Name of Registrant as Specified in Charter)
700 HARRISON STREET, TOPEKA, KANSAS 66636-0001
(Address of Principal Executive Offices/Zip Code)
Registrant's Telephone Number, including area code:
(913) 295-3127
Copies To:
John D. Cleland, President Amy J. Lee, Secretary
Security Income Fund Security Income Fund
700 Harrison Street 700 Harrison Street
Topeka, KS 66636-0001 Topeka, KS 66636-0001
(Name and address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
|_| immediately upon filing pursuant to paragraph (b)
|X| on February 5, 1997, pursuant to paragraph (b)
|_| 60 days after filing pursuant to paragraph (a)(i)
|_| on February 5, 1997, pursuant to paragraph (a)(i)
|_| 75 days after filing pursuant to paragraph (a)(ii)
|_| on February 5, 1997, pursuant to paragraph (a)(ii) of rule 485
If appropriate, check the following box:
|_| this post-effective amendment designates a new effective date for
a previously filed post-effective amendment
--------------------
Pursuant to regulation 270.24f-2 under the Investment Company Act of 1940, the
Registrant has elected to register an indefinite number of its shares of Common
Stock. The Registrant filed the Notice required by 24f-2 on February 27, 1996.
<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
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
<PAGE>
PART B (Continued) STATEMENT OF ADDITIONAL INFORMATION
19. How to Purchase Shares; Alternative Purchase Options;
Class A Shares; Security Income Fund's Class A
Distribution Plan; Class B Shares; Class B Distribution
Plan; Calculation and Waiver of Contingent Deferred
Sales Charge; Arrangements with Broker/Dealers and
Others; Determination of Net Asset Value; How to Redeem
Shares; Telephone Redemptions; How to Exchange Shares;
Purchases at Net Asset Value; Accumulation Plan;
Systematic Withdrawal Program; Exchange by Telephone;
Retirement Plans; Individual Retirement Accounts
(IRAs); Pension and Profit Sharing Plans; 403(b)
Retirement Plans; Simplified Employee Pension Plans
(SEPPs); Appendix A
20. Dividends and Taxes
21. Distributor
22. Performance Information
23. Financial Statements; Independent Auditors
<PAGE>
Security
Funds
PROSPECTUS
February 5, 1997
* Security Income
Fund
- Corporate Bond
Series
- Limited Maturity
Bond Series
- U.S. Government
Series
- Global Aggressive
Bond Series
- High Yield
Series
* Security Tax-
Exempt Fund
* Security Cash
Fund
* Application
[SDI Logo]
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
SECURITY INCOME FUND
* CORPORATE BOND SERIES PROSPECTUS
* LIMITED MATURITY BOND SERIES FEBRUARY 5, 1997
* U.S. GOVERNMENT SERIES
* GLOBAL AGGRESSIVE BOND SERIES
* HIGH YIELD SERIES
SECURITY TAX-EXEMPT FUND
SECURITY CASH FUND
MEMBERS OF THE SECURITY BENEFIT GROUP OF COMPANIES,
700 HARRISON, TOPEKA, KANSAS 66636-0001
Security Income Fund consists of five diversified series, each of which has
its own identified assets, net asset values and investment objective. The
investment objective of the CORPORATE BOND SERIES ("Corporate Bond Fund") is
conservation of principal while generating interest income by investing
primarily in a diversified portfolio of investment grade corporate debt
securities. The investment objective of the LIMITED MATURITY BOND SERIES
("Limited Maturity Bond Fund") is to seek a high level of income consistent with
moderate price fluctuation by investing primarily in short-and intermediate-term
debt securities. The investment objective of the U.S. GOVERNMENT SERIES ("U.S.
Government Fund") is to provide a high level of interest income with security of
principal by investing primarily in securities which are guaranteed or issued by
the U.S. Government, its agencies or instrumentalities. The investment objective
of the GLOBAL AGGRESSIVE BOND SERIES ("Global Aggressive Bond Fund") is to seek
high current income with capital appreciation as a secondary objective through
investment in a combination of foreign and domestic high-yield, lower rated debt
securities. THE FUND INVESTS PRIMARILY (AND MAY INVEST UP TO 100% OF ITS ASSETS)
IN LOWER RATED AND UNRATED FOREIGN DEBT SECURITIES WHOSE CREDIT QUALITY IS
GENERALLY CONSIDERED THE EQUIVALENT OF U.S. CORPORATE DEBT SECURITIES COMMONLY
KNOWN AS "JUNK BONDS." INVESTMENTS OF THIS TYPE ARE SUBJECT TO A GREATER RISK OF
A LOSS OF PRINCIPAL AND INTEREST, INCLUDING THE RISK OF DEFAULT, AND THEREFORE
SHOULD BE CONSIDERED SPECULATIVE. SEE "INVESTMENT METHODS AND RISK FACTORS" ON
PAGE 13. PURCHASERS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH INVESTING
IN THE GLOBAL AGGRESSIVE BOND FUND. The investment objective of the HIGH YIELD
SERIES ("High Yield Fund") is to seek high current income. Capital appreciation
is a secondary objective. The Fund seeks to achieve its objective by investing
primarily in a broad range of income producing securities, including domestic
and foreign high-yield, lower rated debt securities. THE FUND INVESTS PRIMARILY
(AND MAY INVEST UP TO 100% OF ITS ASSETS) IN LOWER RATED BONDS, COMMONLY KNOWN
AS "JUNK BONDS," THAT ENTAIL GREATER RISKS, INCLUDING DEFAULT RISKS, THAN THOSE
FOUND IN HIGHER RATED SECURITIES. INVESTORS SHOULD CAREFULLY CONSIDER THESE
RISKS BEFORE INVESTING. SEE "INVESTMENT METHODS AND RISK FACTORS" - "RISKS
ASSOCIATED WITH LOWER RATED DEBT SECURITIES" ON PAGE 21.
The investment objective of SECURITY TAX-EXEMPT FUND ("Tax-Exempt Fund") is
to obtain as high a level of interest income exempt from federal income taxes as
is consistent with preservation of stockholders' capital by investing primarily
in debt securities which are exempt from federal income tax. Except at times
when the Fund is invested defensively, at least 80 percent of its total assets
will be invested in securities exempt from federal income taxes, including
alternative minimum tax.
The investment objective of SECURITY CASH FUND ("Cash Fund") is to earn as
high a level of current income as is consistent with preservation of capital and
liquidity through investments in money market instruments with maturities of not
longer than thirteen months. AN INVESTMENT IN CASH FUND IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT CASH FUND
WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
This Prospectus sets forth concisely the information that a prospective
investor should know about the Funds. It should be read and retained for future
reference. Certain additional information is contained in a Statement of
Additional Information about the Funds, dated February 5, 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 (913) 295-3127 or (800) 888-2461.
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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>
SECURITY FUNDS
CONTENTS
================================================================================
Page
Transaction and Operating Expense Table................................... 1
Financial Highlights...................................................... 2
Investment Objective and Policies of the Funds............................ 4
Security Income Fund............................................... 4
Corporate Bond Fund............................................ 4
Limited Maturity Bond Fund..................................... 5
U.S. Government Fund........................................... 6
Global Aggressive Bond Fund.................................... 7
High Yield Fund................................................ 9
Security Tax-Exempt Fund........................................... 11
Security Cash Fund................................................. 12
Investment Methods and Risk Factors....................................... 13
Management of the Funds................................................... 22
Portfolio Management............................................... 23
How to Purchase Shares.................................................... 24
Corporate Bond, Limited Maturity Bond, U.S. Government,
Global Aggressive Bond, High Yield and Tax-Exempt Funds........ 24
Alternative Purchase Options....................................... 24
Class A Shares..................................................... 25
Security Income Fund's Class A Distribution Plan................... 25
Class B Shares..................................................... 26
Class B Distribution Plan.......................................... 26
Calculation and Waiver of Contingent Deferred Sales Charges........ 27
Arrangements with Broker-Dealers and Others........................ 27
Cash Fund.......................................................... 28
Purchases at Net Asset Value.............................................. 28
Trading Practices and Brokerage........................................... 29
How to Redeem Shares...................................................... 29
Telephone Redemptions ............................................. 30
Dividends and Taxes....................................................... 30
Foreign Taxes...................................................... 32
Determination of Net Asset Value.......................................... 32
Performance............................................................... 33
Stockholder Services...................................................... 34
Accumulation Plan.................................................. 34
Systematic Withdrawal Program...................................... 34
Exchange Privilege................................................. 34
Exchange by Telephone.............................................. 35
Retirement Plans................................................... 35
General Information....................................................... 35
Organization....................................................... 35
Stockholder Inquiries.............................................. 36
Appendix A................................................................ 37
Appendix B................................................................ 39
Appendix C................................................................ 41
Security Cash Fund Application............................................ 43
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
TRANSACTION AND OPERATING EXPENSE TABLE
- --------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES CORPORATE BOND,
LIMITED MATURITY BOND,
U.S. GOVERNMENT,
GLOBAL AGGRESSIVE BOND,
HIGH YIELD AND
TAX-EXEMPT FUNDS CASH FUND
---------------------- ---------
CLASS A CLASS B(1)
Maximum Sales Load Imposed
on Purchases (as a percentage
of offering price) 4.75% None None
Maximum Sales Load Imposed on
Reinvested Dividends None None None
Deferred Sales Load (as a percentage
of original purchase price or
redemption proceeds,
whichever is lower) None(2) 5% during None
the first year,
decreasing to 0%
in the sixth and
following years
<TABLE>
<CAPTION>
CORPORATE LIMITED U.S. GLOBAL HIGH
BOND MATURITY GOVERNMENT AGGRESSIVE YIELD TAX-EXEMPT
FUND BOND FUND FUND BOND FUND FUND FUND CASH
ANNUAL FUND OPERATING EXPENSES CLASS CLASS CLASS CLASS CLASS CLASS CLASS CLASS CLASS CLASS CLASS CLASS FUND
A B A B A B A B A B A B
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees (after fee waivers)(3) 0.50% 0.50% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.50% 0.50% 0.50%
12b-1 Fees(4) 0.25% 1.00% 0.25% 1.00% 0.25% 1.00% 0.25% 1.00% 0.25% 1.00% None 1.00% None
Other Expenses (after expense 0.27% 0.35% 0.29% 0.62% 0.47% 0.85% 1.75% 1.75% 0.71% 0.71% 0.36% 0.50% 0.50%
reimbursements)(5) ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total Fund Operating Expenses (after fee 1.02% 1.85% 0.54% 1.62% 0.72% 1.85% 2.00% 2.75% 0.96% 1.71% 0.86% 2.00% 1.00%
waivers and expense reimbursements)(6) ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
EXAMPLE
You would pay the following 1 Year $57 $69 $53 $66 $55 $69 $67 $78 $57 $67 $56 $70 $10
expenses on a $1,000 3 Years 78 88 64 81 69 88 107 115 77 84 74 93 32
investment, assuming 5 Years 101 120 76 108 86 120 93 128 55
(1) 5 percent annual 10 Years 166 217 112 192 133 217 149 233 122
return and (2) redemption
at the end of each time period
EXAMPLE
You would pay the following 1 Year $57 $19 $53 $16 $55 $19 $67 $28 $57 $17 $56 $20 $10
expenses on a $1,000 3 Years 78 58 64 51 69 58 107 85 77 54 74 63 32
investment, assuming 5 Years 101 100 76 88 86 100 93 108 55
(1) 5 percent annual 10 Years 166 217 112 192 133 217 149 233 122
return and (2) no
redemption
</TABLE>
(1) Class B shares convert tax-free to Class A shares automatically after eight
years.
(2) Purchases of Class A shares in amounts of $1,000,000 or more are not
subject to an initial sales load; however, a contingent deferred sales
charge of 1% is imposed in the event of redemption within one year of
purchase. See "Class A Shares" on page 25.
(3) During the fiscal year ended December 31, 1995, the Investment Manager
waived certain of the Management Fees of the Limited Maturity Bond, U.S.
Government, and Global Aggressive Bond Funds and, during the fiscal year
ending December 31, 1996 will waive the investment advisory fees of Limited
Maturity Bond, Global Aggressive Bond, U.S. Government and High Yield
Funds; absent such fee waivers, "Management Fees" would have been as
follows: .5% for each of the Limited Maturity Bond and U.S. Government
Funds, .6% for the High Yield Fund and .75% for the Global Aggressive Bond
Fund.
(4) Long-term holders of shares that are subject to an asset-based sales charge
may pay more than the equivalent of the maximum front-end sales charge
otherwise permitted by NASD Rules.
(5) The amount of "Other Expenses" of Global Aggressive Bond and High Yield
Funds is based on estimated amounts for the fiscal year ending December 31,
1996. During the fiscal year ended December 31, 1995, the Investment
Manager reimbursed certain expenses of the following Funds; absent such
reimbursement, "Other Expenses" would have been as follows: .29% for Class
A shares and .69% for Class B shares of Corporate Bond Fund; .47% for Class
A shares of Limited Maturity Bond Fund; 1.82% for Class A shares and 2.2%
for Class B shares of U.S. Government Fund; 2.58% for Class B shares of
Global Aggressive Bond Fund; .95% for Class B shares of Tax-Exempt Fund;
and .54% for shares of Cash Fund.
(6) During the fiscal year ended December 31, 1995, the Investment Manager
waived and/or reimbursed certain expenses of the Funds and, during the
fiscal year ending December 31, 1996 will waive the investment advisory
fees of Limited Maturity Bond, U.S. Government, Global Aggressive Bond and
High Yield Funds; absent such reimbursement and waiver, "Total Fund
Operating Expenses" would have been as follows: 1.04% for Class A shares
and 2.19% for Class B shares of Corporate Bond Fund; 1.22% for Class A
shares and 2.12% for Class B shares of Limited Maturity Bond Fund; 2.82%
for Class A shares and 3.70% for Class B shares of U.S. Government Fund;
4.33% for Class B shares of Global Aggressive Bond Fund; 1.56% for Class A
shares and 2.30% for Class B shares of High Yield Fund; 2.45% for Class B
shares of Tax-Exempt Fund; and 1.04% for shares of Cash Fund.
THE ABOVE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES AS ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN. THE
ASSUMED FIVE PERCENT ANNUAL RETURN IS HYPOTHETICAL AND SHOULD NOT BE CONSIDERED
A REPRESENTATION OF PAST OR FUTURE ANNUAL RETURN. THE ACTUAL RETURN MAY BE
GREATER OR LESSER THAN THE ASSUMED AMOUNT.
The purpose of the foregoing fee table is to assist the investor in
understanding the various costs and expenses that an investor in Corporate Bond,
Limited Maturity Bond, U.S. Government, Global Aggressive Bond, High Yield,
Tax-Exempt or Cash Funds will bear directly or indirectly. For a more detailed
discussion of the Funds' fees and expenses, see the discussion under "Management
of the Funds," page 22. Information on the Funds' 12b-1 Plans may be found under
the headings "Security Income Fund's Class A Distribution Plan" on page 25 and
"Class B Distribution Plan" on page 26. See "How to Purchase Shares," page 24,
for more information concerning the sales load. Also, see Appendix C for a
discussion of "Rights of Accumulation" and "Statement of Intention," which
options may serve to reduce the front-end sales load on purchase of Class A
Shares.
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1
<PAGE>
SECURITY FUNDS
FINANCIAL HIGHLIGHTS
================================================================================
The following financial highlights for each of the years in the period ended
December 31, 1995, have been audited by Ernst & Young LLP. Such information for
each of the five years in the period ended December 31, 1995, should be read in
conjunction with the financial statements of the Funds and the report of Ernst &
Young LLP, the Funds' independent auditors, appearing in the December 31, 1995
Annual Report which is incorporated by reference in this Prospectus. The Funds'
Annual Report also contains additional information about the performance of the
Funds and may be obtained without charge by calling Security Distributors, Inc.
at 1-800-888-2461. The information for each of the periods preceding and
including the year ended December 31, 1990, is not covered by the report of
Ernst & Young LLP.
<TABLE>
<CAPTION>
Net
gains Ratio
Net (losses) Divi- of Ratio
asset on sec- Total dends Net expenses of net
value urities from (from Distri- Net assets to income Port-
begin- Net (real- invest- net butions Return asset end of aver- to folio
Fiscal ning invest- ized & ment invest- (from of Total value Total period age average turn-
year of ment unreal- opera- ment capital capi- distri- end of return (thou- net net over
end period income ized) tions income) gains) tal butions period (a) sands) assets assets rate
- ------------------------------------------------------------------------------------------------------------------------------------
CORPORATE BOND FUND (CLASS A)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1986 $8.40 $.82 $.05 $.87 $(.95) $--- $--- $(.95) $8.32 11.0% $49,025 1.04% 10.09% 77%
1987 8.32 .79 (.48) .31 (.85) --- --- (.85) 7.78 4.0% 44,093 1.00% 9.73% 127%
1988 7.78 .77 (.292) .478 (.778) --- --- (.778) 7.48 6.5% 52,296 1.02% 10.04% 83%
1989 7.48 .74 (.031) .709 (.739) --- --- (.739) 7.45 9.9% 56,184 1.04% 9.83% 57%
1990 7.45 .69 (.232) .458 (.688) --- --- (.688) 7.22 6.6% 65,962 1.10% 9.42% 87%
1991 7.22 .65 .458 1.108 (.648) --- --- (.648) 7.68 16.1% 85,824 1.03% 8.75% 32%
1992 7.68 .61 .044 .654 (.614) --- --- (.614) 7.72 9.0% 104,492 1.01% 7.97% 61%
1993 7.72 .52 .521 1.041 (.527) (.424) --- (.951) 7.81 13.4% 118,433 1.02% 6.46% 157%
1994 7.81 .49 (1.127) (.637) (.493) --- --- (.493) 6.68 (8.3%) 90,593 1.01% 6.91% 204%
1995(d)(h)6.68 .47 0.708 1.178 (.468) --- --- (.468) 7.39 18.2% 93,701 1.02% 6.62% 200%
CORPORATE BOND FUND (CLASS B)
1993(b) $8.59 $.11 $(.324) $(.214) $(.112) $(.424) $--- $(.536) $7.84 (2.5%) $1,022 1.88%* 5.16%* 164%
1994(c) 7.84 .43 (1.129) (.699) (.431) --- --- (.431) 6.71 (9.0%) 3,878 1.85% 6.08% 204%
1995 6.71 .40 .725 1.125 (.405) --- --- (.405) 7.43 17.3% 5,743 1.85% 5.80% 200%
(c)(d)(h)
LIMITED MATURITY BOND FUND (CLASS A)
1995 $10.00 $.62 $.652 $1.272 $(.612) $--- $--- $(.612) $10.66 13.0% $3,322 0.84%* 5.97%* 4%*
(c)(d)(e)
LIMITED MATURITY BOND FUND (CLASS B)
1995 $10.00 $.53 $.664 $1.194 $(.524) $--- $--- $(.524) $10.67 12.2% $752 1.71%* 5.12%* 4%*
(c)(d)(e)
U.S. GOVERNMENT FUND (CLASS A)
1986(c) $5.32 $.47 $--- $.47 $(.50) $--- $--- $(.50) $5.29 9.1% $2,716 1.00% 9.23% 48%
1987(c) 5.29 .45 (.265) .185 (.475) --- --- (.475) 5.00 3.7% 4,467 1.00% 8.78% 166%
1988(c) 5.00 .48 (.18) .30 (.49) --- --- (.49) 4.81 6.2% 4,229 1.00% 9.83% 107%
1989(c) 4.81 .46 .078 .538 (.458) --- --- (.458) 4.89 11.8% 4,551 1.11% 9.46% 52%
1990(c) 4.89 .42 .032 .452 (.412) --- --- (.412) 4.93 9.8% 6,017 1.11% 8.60% 22%
1991(c) 4.93 .40 .248 .648 (.404) --- (.004) (.408) 5.17 13.8% 7,319 1.11% 7.94% 41%
1992(c) 5.17 .37 (.126) .244 (.366) --- (.008) (.374) 5.04 5.0% 9,364 1.11% 7.22% 157%
1993(c) 5.04 .31 .273 .583 (.310) (.344) --- (.654) 4.97 10.9% 10,098 1.10% 5.90% 153%
1994(c) 4.97 .30 (.621) (.321) (.299) --- --- (.299) 4.35 (6.5%) 8,309 1.10% 6.47% 220%
1995 4.35 .30 .620 .920 (.30) --- --- (.30) 4.97 21.9% 10,080 1.11% 6.41% 81%
(c)(d)(h)
U.S. GOVERNMENT FUND (CLASS B)
1993 $5.51 $.04 $(.193) $(.153) $(.043) $(.344) $--- $(.387) $4.97 (1.4%) $140 1.61%* 5.54%* 114%
(b)(c)
1994(c) 4.97 .26 (.624) (.364) (.256) --- --- (.256) 4.35 (7.4%) 321 1.85% 5.76% 220%
1995 4.35 .26 .625 .885 (.265) --- --- (.265) 4.97 20.9% 582 1.87% 5.69% 81%
(c)(d)(h)
GLOBAL AGGRESSIVE BOND FUND (CLASS A)
1995 $10.00 $.63 $.09 $.72 $(.55) $(.02) $--- $(.57) $10.15 7.3% $2,968 2.00%* 11.04%* 127%*
(c)(d)(f)
GLOBAL AGGRESSIVE BOND FUND (CLASS B)
1995 $10.00 $.56 $.12 $.68 $(.49) $(.02) $--- $(.51) $10.17 6.9% $1,440 2.75%* 10.24%* 127%*
(c)(d)(f)
TAX-EXEMPT FUND (CLASS A)
1986(c) $9.47 $.85 $.55 $1.40 $(.87) $--- $--- $(.87) $10.00 15.6% $8,901 1.00% 8.83% 35%
1987(c) 10.00 .82 .78 1.60 (.82) (.02) --- (.84) 10.76 15.5% 16,297 1.00% 7.79% 23%
1988(c) 10.76 .76 (.656) .104 (.774) (.12) --- (.894) 9.97 1.3% 17,814 1.00% 7.60% 83%
1989 9.97 .73 (.257) .473 (.723) --- --- (.723) 9.72 4.9% 19,898 .98% 7.47% 33%
1989(g) 9.72 .61 (.106) .504 (.624) --- --- (.624) 9.60 4.1% 20,426 .97%* 6.97%* 75%*
1990 9.60 .64 (.072) .568 (.638) --- --- (.638) 9.53 6.2% 20,566 .96% 6.75% 74%
1991 9.53 .63 .446 1.076 (.636) --- --- (.636) 9.97 11.7% 23,218 .89% 6.55% 38%
1992 9.97 .61 .092 .702 (.612) --- --- (.612) 10.06 7.3% 28,608 .84% 6.07% 91%
1993 10.06 .51 .702 1.212 (.514) (.388) --- (.902) 10.37 11.6% 32,115 .82% 4.92% 118%
1994 10.37 .47 (1.317) (.847) (.473) --- --- (.473) 9.05 (8.3%) 24,092 .82% 4.74% 88%
1995 9.05 .48 .891 1.371 (.481) --- --- (.481) 9.94 15.5% 25,026 .86% 5.02% 103%
(c)(d)(h)
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
2
<PAGE>
SECURITY FUNDS
FINANCIAL HIGHLIGHTS (CONTINUED)
================================================================================
<TABLE>
<CAPTION>
Net
gains Ratio
Net (losses) Divi- of Ratio
asset on sec- Total dends Net expenses of net
value urities from (from Distri- Net assets to income Port-
begin- Net (real- invest- net butions Return asset end of aver- to folio
Fiscal ning invest- ized & ment invest- (from of Total value Total period age average turn-
year of ment unreal- opera- ment capital capi- distri- end of return (thou- net net over
end period income ized) tions income) gains) tal butions period (a) sands) assets assets rate
- ------------------------------------------------------------------------------------------------------------------------------------
TAX-EXEMPT FUND (CLASS B)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1993(b) $10.88 $.10 $(.128) $(.02) $(.094) $(.38) $--- $(.48) $10.37 (.2%) $106 2.89%* 2.71%* 90%
1994(c) 10.37 .35 (1.321) (.971) (.349) --- --- (.349) 9.05 (9.5%) 760 2.00% 3.50% 88%
1995 9.05 .37 .902 1.272 (.372) --- --- (.372) 9.95 14.3% 1,190 2.00% 3.90% 103%
(c)(d)(h)
CASH FUND
1986(c) $1.00 $.073 $--- $.073 $(.073) $--- $--- $(.073) $1.00 7.5% $47,292 1.00% 7.26% ---
1987(c) 1.00 .057 --- .057 (.057) --- --- (.057) 1.00 5.8% 37,773 1.00% 5.68% ---
1988(c) 1.00 .061 --- .061 (.061) --- --- (.061) 1.00 6.3% 43,038 1.00% 6.10% ---
1989(c) 1.00 .070 --- .070 (.070) --- --- (.070) 1.00 7.3% 46,625 1.00% 7.09% ---
1989(c)(g)1.00 .069 --- .069 (.069) --- --- (.069) 1.00 7.1% 54,388 1.00%* 8.26%* ---
1990(c) 1.00 .073 --- .073 (.073) --- --- (.073) 1.00 7.6% 65,018 1.00% 7.31% ---
1991 1.00 .051 --- .051 (.051) --- --- (.051) 1.00 5.2% 48,843 .96% 5.21% ---
1992(c) 1.00 .028 --- .028 (.028) --- --- (.028) 1.00 2.8% 56,694 1.00% 2.75% ---
1993(c) 1.00 .023 --- .023 (.023) --- --- (.023) 1.00 2.4% 71,870 1.00% 2.28% ---
1994 1.00 .033 --- .033 (.033) --- --- (.033) 1.00 3.4% 58,102 .96% 3.24% ---
1995(c)(d)1.00 .049 --- .049 (.049) --- --- (.049) 1.00 5.0% 38,158 1.00% 5.00% ---
</TABLE>
(a) Total return information does not reflect deduction of any sales charge
imposed at the time of purchase for Class A shares or upon redemption for
Class B shares.
(b) Class "B" shares were initially offered on October 19, 1993. Percentage
amounts for the period, except total return, have been annualized.
(c) Fund expenses were reduced by the Investment Manager during the period, and
expense ratios absent such reimbursement would have been as follows:
<TABLE>
<CAPTION>
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Corporate Bond Class A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Class B N/A N/A N/A N/A N/A N/A N/A N/A 2.00% 2.19%
U.S. Government Class A 1.60% 1.80% 1.31% 1.37% 1.34% 1.24% 1.20% 1.20% 1.20% 1.22%
Class B N/A N/A N/A N/A N/A N/A N/A 1.75% 2.91% 3.70%
Limited Maturity Bond Class A N/A N/A N/A N/A N/A N/A N/A N/A N/A 1.04%
Class B N/A N/A N/A N/A N/A N/A N/A N/A N/A 2.12%
Global Aggressive Bond Class A N/A N/A N/A N/A N/A N/A N/A N/A N/A 2.42%
Class B N/A N/A N/A N/A N/A N/A N/A N/A N/A 3.93%
Tax-Exempt Class A 1.62% 1.16% 1.03% N/A N/A N/A N/A N/A N/A 0.86%
Class B N/A N/A N/A N/A N/A N/A N/A N/A 2.32% 2.45%
Cash 1.17% 1.07% 1.04% 1.13%** 1.01% N/A 1.03% 1.03% N/A 1.04%
1.03%***
</TABLE>
(d) Net investment income was computed using the average month-end shares
outstanding throughout the period.
(e) Security Limited Maturity Bond Fund was initially capitalized on January 17,
1995, with a net asset value of $10 per share. Percentage amounts for the
period have been annualized, except for total return.
(f) Security Global Aggressive Bond Fund 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.
(g) Effective December 31, 1989, the fiscal year ends of Tax-Exempt and Cash
Funds were changed from January 31 and February 28, respectively, to
December 31. The information presented in the table above for the fiscal
year ended December 31 represents 11 months of performance for Tax-Exempt
Fund and 10 months of performance for Cash Fund. The data for years 1985
through 1989, are for the fiscal year ended January 31 for Tax-Exempt Fund
and for the fiscal year ended February 28 for Cash Fund.
(h) Expense ratios were calculated without the reduction for custodian fees
earnings credits. Expense ratios with such reductions would have been as
follows:
1995
Corporate Bond Class A 1.02%
Class B 1.85%
U.S. Government Class A 1.10%
Class B 1.85%
Limited Maturity Bond Class A 0.81%
Class B 1.65%
Tax-Exempt Class A 0.85%
Class B 2.00%
*Percentage amounts for the period, except total return, have been annualized.
**This information represents the expense ratio absent reimbursements for the
period February 1, 1989 through December 31, 1989.
***This information represents the expense ratio absent reimbursements for the
fiscal year ended February 28, 1989.
- --------------------------------------------------------------------------------
3
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
INVESTMENT OBJECTIVES AND
POLICIES OF THE FUNDS
Security Income, Tax-Exempt and Cash Funds are diversified open-end
management investment companies, which were organized as Kansas corporations on
September 9, 1970, July 14, 1981, and March 21, 1980, respectively. Each of the
Corporate Bond Fund, Limited Maturity Bond Fund, U.S. Government Fund, Global
Aggressive Bond Fund and High Yield Fund, series of Security Income Fund, and
Security Tax-Exempt Fund and Cash Fund (collectively, "the Funds") has its own
investment objective and policies which are described below. There, of course,
can be no assurance that such investment objectives will be achieved. While
there is no present intention to do so, the investment objective and policies of
each Fund may be changed by the Board of Directors of the Funds without the
approval of stockholders. However, stockholders will be given 30 days written
notice of any such change. If a change in investment objective is made,
stockholders should consider whether the Fund remains an appropriate investment
in light of their then current financial position and needs.
Each of the Funds is also subject to certain investment policy limitations,
which may not be changed without stockholder approval. Among these limitations,
some of the more important ones are that each Fund will not invest more than 5
percent of the value of its assets in any one issuer other than the U.S.
Government or its instrumentalities (for each of Cash, Global Aggressive Bond
and High Yield Funds, this limitation applies only with respect to 75 percent of
the value of its total assets), purchase more than 10 percent of the outstanding
voting securities of any one issuer or invest 25 percent or more of its total
assets in any one industry. The full text of the investment policy limitations
of each Fund is set forth in the Funds' Statement of Additional Information.
Each of the Funds may borrow money from banks as a temporary measure for
emergency purposes or to facilitate redemption requests. See "Investment Methods
and Risk Factors" for a discussion of borrowing. Pending investment in
securities or to meet potential redemptions, each of the Funds may invest in
certificates of deposit, bank demand accounts, repurchase agreements and high
quality money market instruments.
SECURITY INCOME FUND
Security Income Fund ("Income Fund") consists of five diversified series,
each of which represents a different investment objective and has its own
identified assets and net asset values. The investment objective of each series
is described below.
CORPORATE BOND FUND
The investment objective of Corporate Bond Fund is to preserve capital
while generating interest income. In pursuing its investment objective, the Fund
will invest in a broad range of debt securities, including (i) securities issued
by U.S. and Canadian corporations; (ii) securities issued or guaranteed by the
U.S. Government or any of its agencies or instrumentalities, including Treasury
bills, certificates of indebtedness, notes and bonds; (iii) securities issued or
guaranteed by the Dominion of Canada or provinces thereof; (iv) securities
issued by foreign governments, their agencies and instrumentalities, and foreign
corporations, provided that such securities are denominated in U.S. dollars; (v)
higher yielding, high risk debt securities (commonly referred to as "junk
bonds"); (vi) certificates of deposit issued by a U.S. branch of a foreign bank
("Yankee CDs"); and (vii) investment grade mortgage backed securities ("MBSs").
Under normal circumstances, at least 65 percent of the Fund's total assets will
be invested in corporate debt securities which at the time of issuance have a
maturity greater than one year.
Corporate Bond Fund will invest primarily in corporate debt securities
rated Baa or higher by Moody's Investors Service, Inc. ("Moody's") or BBB or
higher by Standard & Poor's Corporation ("S&P") at the time of purchase, or if
unrated, of equivalent quality as determined by the Investment Manager. See
Appendix A to this Prospectus for a description of corporate bond ratings.
Included in such securities may be convertible bonds or bonds with warrants
attached which are rated at least Baa or BBB at the time of purchase, or if
unrated, of equivalent quality as determined by the Investment Manager. A
"convertible bond" is a bond, debenture or preferred share which may be
exchanged by the owner for common stock or another security, usually of the same
company, in accordance with the terms of the issue. A "warrant" confers upon its
holder the right to purchase an amount of securities at a particular time and
price. Securities rated Baa by Moody's or BBB by S&P have speculative
characteristics. See "Investment Methods and Risk Factors" for a discussion of
the risks associated with such securities.
Corporate Bond Fund may invest up to 25 percent of its net assets in higher
yielding debt securities in the lower rating (higher risk) categories of the
recognized rating services (commonly referred to as "junk bonds"). Such
securities include securities rated Ba or lower by Moody's or BB or lower by S&P
and are regarded as predominantly
- --------------------------------------------------------------------------------
No dealer, salesperson, or other person has been authorized to give any
information or to make any representations, other than those contained in this
Prospectus and in the Statement of Additional Information in connection with the
offer contained in this Prospectus, and, if given or made, such other
information or representations must not be relied upon as having been authorized
by the Funds, the Investment Manager, or the Distributor.
- --------------------------------------------------------------------------------
4
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
speculative with respect to the ability of the issuer to meet principal and
interest payments. The Fund will not invest in junk bonds which are rated in
default at the time of purchase. See "Investment Methods and Risk Factors" for a
discussion of the risks associated with investing in such securities.
The Fund may purchase securities which are obligations of, or guaranteed
by, the Dominion of Canada or provinces thereof and debt securities issued by
Canadian corporations. Canadian securities will not be purchased if subject to
the foreign interest equalization tax and unless payable in U.S. dollars.
The Fund may invest in Yankee CDs which are certificates of deposit issued
by a U.S. branch of a foreign bank denominated in U.S. dollars and held in the
U.S. Yankee CDs are subject to somewhat different risks than are the obligations
of domestic banks. The Fund also may invest in debt securities issued by foreign
governments, their agencies and instrumentalities and foreign corporations,
provided that such securities are denominated in U.S. dollars. The Fund's
investment in foreign securities, including Canadian securities, will not exceed
25 percent of the Fund's net assets. See "Investment Methods and Risk Factors"
for a discussion of the risks associated with investing in foreign securities.
The Fund may invest in investment grade mortgage backed securities (MBSs),
including mortgage pass-through securities and collateralized mortgage
obligations (CMOs). The Fund may invest up to 10 percent of its net assets in
securities known as "inverse floating obligations," "residual interest bonds,"
or "interest-only" (IO) or "principal-only" (PO) bonds, the market values of
which generally will be more volatile than the market values of most MBSs. The
Fund will hold less than 25 percent of its net assets in MBSs. For a discussion
of MBSs and the risks associated with such securities, see "Investment Methods
and Risk Factors."
Corporate Bond Fund may purchase securities on a "when-issued" or "delayed
delivery" basis in excess of customary settlement periods for the types of
security involved. For a discussion of such securities, see "Investment Methods
and Risk Factors." It is anticipated that securities invested in by this Fund
will be held by the Fund on an average from one and a half to three years and
that the average weighted maturity of the Fund's portfolio will range from 5 to
15 years under normal circumstances.
LIMITED MATURITY BOND FUND
The investment objective of the Limited Maturity Bond Fund is to seek a
high level of income consistent with moderate price fluctuation by investing
primarily in short- and intermediate-term bonds. As used herein the term "short-
and intermediate-term bonds" is used to describe any debt security with a
maturity of 15 years or less. In pursuing its investment objective, the Fund
will invest in a broad range of debt securities, including (i) securities issued
by U.S. and Canadian corporations; (ii) securities issued or guaranteed by the
U.S. Government or any of its agencies or instrumentalities, including Treasury
bills, certificates of indebtedness, notes and bonds; (iii) securities issued or
guaranteed by, the Dominion of Canada or provinces thereof; (iv) securities
issued by foreign governments, their agencies and instrumentalities, and foreign
corporations, provided that such securities are denominated in U.S. dollars; (v)
higher yielding, high risk debt securities (commonly referred to as "junk
bonds"); (vi) certificates of deposit issued by a U.S. branch of a foreign bank
("Yankee CDs"); (vii) investment grade mortgage backed securities ("MBSs"); and
(viii) investment grade asset-backed securities. High yield debt securities,
Yankee CDs, MBSs and asset-backed securities are described in further detail
under "Investment Methods and Risk Factors." Under normal circumstances, the
Fund will invest at least 65 percent of the value of its total assets in short-
and intermediate-term bonds. It is anticipated that the dollar weighted average
maturity of the Fund's portfolio will range from 2 to 10 years. It will not
exceed 10 years.
Limited Maturity Bond Fund will invest primarily in debt securities rated
Baa or higher by Moody's or BBB or higher by S&P at the time of purchase, or if
unrated, of equivalent quality as determined by the Investment Manager. See
Appendix A to this Prospectus for a description of corporate bond ratings.
Included in such securities may be convertible bonds or bonds with warrants
attached which are rated at least Baa or BBB at the time of purchase, or if
unrated, of equivalent quality as determined by the Investment Manager. A
"convertible bond" is a bond, debenture or preferred share which may be
exchanged, by the owner, for common stock or another security, usually of the
same company, in accordance with the terms of the issue. A "warrant" confers
upon its holder the right to purchase an amount of securities at a particular
time and price. Securities rated Baa by Moody's or BBB by S&P have speculative
characteristics as described under "Investment Methods and Risk Factors"--"Baa
or BBB Securities."
The Fund may invest in higher yielding debt securities in the lower rating
(higher risk) categories of the recognized rating services (commonly referred to
as "junk bonds"); however, the Fund will not hold more than 25 percent of its
net assets in junk bonds. This includes securities rated Ba or lower by Moody's
or BB or lower by S&P, and such securities are regarded as predominantly
speculative with respect to the ability of the issuer to meet principal and
interest payments. The Fund will not invest in junk bonds which are rated in
default at the time of purchase. See "Investment Methods and Risk Factors" for a
discussion of the risks associated with investing in such securities.
For the period January 17, 1995 (date of inception) to December 31, 1995, the
dollar weighted average of Limited
- --------------------------------------------------------------------------------
5
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
Maturity Bond Fund's holdings (excluding equities) had the following credit
quality characteristics.
PERCENT OF
INVESTMENT NET ASSETS
U.S. Government and
Government Agency Securities....................... 29.0%
Cash and other Assets, Less Liabilities............... 7.4%
Rated Fixed Income Securities
AA................................................. 7.9%
A.................................................. 43.1%
Baa/BBB............................................ 8.5%
Ba/BB.............................................. 4.1%
B.................................................. 0%
Caa/CCC............................................ 0%
---
100%
The foregoing table is intended solely to provide disclosure about Limited
Maturity Bond Fund's asset composition for the period January 17, 1995 (date of
inception) to December 31, 1995. The asset composition after this may or may not
be approximately the same as shown above.
The Fund may purchase securities which are obligations of, or guaranteed
by, the Dominion of Canada or provinces thereof and debt securities issued by
Canadian corporations. Canadian securities will not be purchased if subject to
the foreign interest equalization tax and unless payable in U.S.
currency.
The Fund may invest in Yankee CDs which are certificates of deposit issued
by a U.S. branch of a foreign bank denominated in U.S. dollars and held in the
United States. Yankee CDs are subject to somewhat different risks than are the
obligations of domestic banks. The Fund may also invest in debt securities
issued by foreign governments, their agencies and instrumentalities, and foreign
corporations, provided that such securities are denominated in U.S. dollars. The
Fund's investment in foreign securities, including Canadian securities, will not
exceed 25 percent of the Fund's net assets. For a discussion of the risks
associated with foreign securities, see "Investment Methods and Risk Factors."
The Fund may invest in U.S. Government securities. U.S. Government
securities include bills, certificates of indebtedness, notes and bonds issued
by the Treasury or by agencies or instrumentalities of the U.S. Government. For
a discussion of the varying levels of guarantee associated with particular types
of U.S. Government Securities, see "Investment Methods and Risk Factors" --
"U.S. Government Securities."
Limited Maturity Bond Fund may acquire certain securities that are
restricted as to disposition under the federal securities laws, provided that
such securities are eligible for resale to qualified institutional investors
pursuant to Rule 144A under the Securities Act of 1933, and subject to the
Fund's policy that not more than 15 percent of the Fund's net assets will be
invested in illiquid assets. See "Investment Methods and Risk Factors" for a
discussion of Rule 144A Securities.
The Fund may invest in investment grade mortgage backed securities (MBSs),
including mortgage pass-through securities and collateralized mortgage
obligations (CMOs). The Fund may invest up to 10 percent of its net assets in
securities known as "inverse floating obligations," "residual interest bonds,"
and "interest-only" (IO) and "principal-only" (PO) bonds, the market values of
which will generally be more volatile than the market values of most MBSs. The
Fund will hold less than 25 percent of its net assets in MBSs, including CMOs
and mortgage pass-through securities. For a discussion of MBSs and the risks
associated with such securities, see "Investment Methods and Risk Factors."
The Fund may also invest in investment grade "asset-backed securities."
These include secured debt instruments backed by automobile loans, credit card
loans, home equity loans, manufactured housing loans and other types of secured
loans providing the source of both principal and interest. Asset-backed
securities are subject to risks similar to those discussed with respect to MBSs.
See "Investment Methods and Risk Factors."
Limited Maturity Bond Fund may purchase securities on a "when-issued" or
"delayed delivery" basis in excess of customary settlement periods for the type
of security involved. See "Investment Methods and Risk Factors."
From time to time, Limited Maturity Bond Fund may invest part or all of its
assets in commercial notes or money market instruments.
U.S. GOVERNMENT FUND
The investment objective of the U.S. Government Fund is to provide a high
level of interest income with security of principal by investing primarily in
U.S. Government securities. U.S. Government securities include bills,
certificates of indebtedness, notes and bonds issued by the Treasury or by
agencies or instrumentalities of the U.S. Government. Under normal
circumstances, the Fund will invest at least 80 percent of the value of its
total assets in U.S. Government securities. For a discussion of the varying
levels of guarantee associated with particular types of U.S. Government
Securities, see "Investment Methods and Risk Practices" --"U.S. Government
Securities."
From time to time the portfolio of the U.S. Government Fund may consist
primarily of Government National Mortgage Association ("GNMA") certificates, or
"Ginnie Maes," which are mortgage-backed securities representing part ownership
of a pool of mortgage loans on which timely payment of interest and principal is
guaranteed by GNMA and backed by the full faith and credit of the U.S.
Government. These loans, issued by lenders such as mortgage bankers, commercial
banks and savings and loan
- --------------------------------------------------------------------------------
6
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
associations, are either insured by the Federal Housing Administration or
guaranteed by the Veterans' Administration. A "pool" or group of such mortgages
is assembled and, after being approved by GNMA, is offered to investors through
securities dealers. Once approved by GNMA, the timely payment of interest and
principal on each mortgage is guaranteed by GNMA and backed by the full faith
and credit of the U.S. Government. Ginnie Mae certificates differ from bonds in
that principal is paid back monthly by the borrower over the term of the loan
rather than returned in a lump sum at maturity. Ginnie Mae certificates are
called "pass through" securities because both interest and principal payments
(including prepayments) are passed through to the holder of the certificate.
Upon receipt, principal payments generally will be used to purchase additional
Ginnie Mae certificates or other U.S. Government securities. Although the Fund
invests in securities guaranteed by GNMA and backed by the U.S. Government,
neither the value of the Fund's portfolio nor the value or yield of its shares
is so guaranteed. The Fund may, for defensive purposes, temporarily invest part
or all of its assets in money market instruments, including deposits and
bankers' acceptances in depository institutions insured by the FDIC, and
short-term U.S. Government and agency securities. If the deposits in a
depository institution are not fully insured by the FDIC, the Fund will analyze
the credit quality of the issuing institution prior to making any such deposit
and will retain a record of that analysis.
The potential for appreciation in GNMAs, which might otherwise be expected
to occur as a result of a decline in interest rates, may be limited or negated
by increased principal prepayments of the underlying mortgages. Prepayments of
GNMA certificates occur with increasing frequency when mortgage rates decline
because, among other reasons, mortgagors may be able to refinance their
outstanding mortgages at lower interest rates or prepay their existing
mortgages. Such prepayments would then be reinvested by the Fund at the lower
current interest rates.
While mortgages underlying GNMA certificates have a stated maturity of up
to 30 years, it has been the experience of the mortgage industry that the
average life of comparable mortgages, owing to prepayments, refinancings and
payments from foreclosures, is considerably less. Yield tables utilize a 12 year
average life assumption for GNMA pools of 26-30 year mortgages, and GNMAs
continue to be traded based on this assumption. Recently it has been observed
that mortgage pools issued at high interest rates have experienced accelerated
prepayment rates as interest rates declined, which would result in a shorter
average life than 12 years.
The Fund may invest in other mortgage backed securities (MBSs) as discussed
under "Investment Methods and Risk Factors" -- "Mortgage Backed Securities and
Collateralized Mortgage Obligations." MBSs include certain securities issued by
the United States government or one of its agencies or instrumentalities, such
as GNMAs, and securities issued by private issuers. The Fund may not invest more
than 20 percent of the value of its total assets in MBSs issued by private
issuers.
The Fund will attempt to maximize the return on its portfolio by taking
advantage of market developments and yield disparities, which may include use of
the following strategies:
1. Shortening the average maturity of its portfolio in anticipation of a
rise in interest rates so as to minimize depreciation of principal;
2. Lengthening the average maturity of its portfolio in anticipation of a
decline in interest rates so as to maximize appreciation of principal;
3. Selling one type of U.S. Government obligation and buying another when
disparities arise in the relative values of each; and
4. Changing from one U.S. Government obligation to an essentially similar
U.S. Government obligation when their respective yields are distorted due
to market factors.
These strategies may result in increases or decreases in the Fund's current
income available for distribution to Fund stockholders, and the Fund may hold
obligations which sell at moderate to substantial premiums or discounts from
face value. It is anticipated that securities invested in by this Fund will be
held by the Fund on the average from one to three years.
GLOBAL AGGRESSIVE BOND FUND
The Global Aggressive Bond Fund seeks to provide high current income.
Capital appreciation is a secondary objective. As used herein the term "bond" is
used to describe any type of debt security. Under normal circumstances the Fund
will invest at least 65 percent of its total assets in bonds as defined herein.
The Fund under normal circumstances seeks its investment objective of providing
a high level of current income by investing substantially all of its assets in a
portfolio of debt securities of issuers in three separate investment areas: (i)
the United States; (ii) developed foreign countries; and (iii) emerging markets.
The Fund may also 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 Fund selects
particular debt securities in each sector based on their relative investment
merits. Within each area, the Fund selects debt securities from those issued by
governments, their agencies and instrumentalities; central banks; commercial
banks and other corporate entities. Debt securities in which the Fund may invest
consist of bonds, notes, debentures and other similar instruments. The Fund may
invest up to 100 percent of its total assets in U.S. and
- --------------------------------------------------------------------------------
7
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
foreign debt securities and other fixed income securities that, at the time of
purchase, are rated below investment grade ("high yield securities" or "junk
bonds"), which involve a high degree of risk and are predominantly speculative.
The Fund may also invest in securities that are in default as to payment of
principal and/or interest. A description of debt ratings is included as Appendix
A to this Prospectus. See "Investment Methods and Risk Factors" for a discussion
of the risks associated with investing in junk bonds. Many emerging market debt
securities are not rated by United States rating agencies such as Moody's and
S&P. The Fund's ability to achieve its investment objectives is thus more
dependent on the manager's credit analysis than would be the case if the Fund
were to invest in higher quality bonds. INVESTORS SHOULD PURCHASE SHARES ONLY AS
A SUPPLEMENT TO AN OVERALL INVESTMENT PROGRAM AND ONLY IF WILLING TO UNDERTAKE
THE RISKS INVOLVED.
For the period June 1, 1995 (date of inception) to December 31, 1995, the
dollar weighted average of Global Aggressive Bond Fund's holdings (excluding
equities) had the following credit quality characteristics.
PERCENT OF
INVESTMENT NET ASSETS
U.S. Government and
Government Agency Securities....................... 0%
Cash and other Assets, Less Liabilities............... 2.4%
Rated Fixed Income Securities
AAA................................................ 5.1%
AA................................................. 7.9%
A.................................................. 14.8%
Baa/BBB............................................ 21.7%
Ba/BB.............................................. 17.9%
B.................................................. 13.8%
Caa/CCC............................................ 0%
Unrated Securities Comparable in Quality to
A.................................................. 6.4%
Baa/BBB............................................ 2.2%
Ba/BB.............................................. 0%
B.................................................. 7.8%
Caa/CCC............................................ 0%
---
100%
The foregoing table is intended solely to provide disclosure about Global
Aggressive Bond Fund's asset composition for the period June 1, 1995 (date of
inception) to December 31, 1995. The asset composition after this 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 or may involve political risks.
Accordingly, Lexington Management Corporation, the Sub-Adviser to the Global
Aggressive Bond Fund (the "Sub-Adviser"), currently intends to consider
investments only in those countries in which it believes investing is feasible.
The list of acceptable countries will be reviewed by the Sub-Adviser and MFR
Advisers, Inc. ("MFR") and approved by the Board of Directors on a periodic
basis and any additions or deletions with respect to such list will be made in
accordance with changing economic and political circumstances involving such
countries. An issuer in an emerging market is an entity: (i) for which the
principal securities trading market is an emerging market, as defined above;
(ii) that (alone or on a consolidated basis) derives 50 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 Fund's investments in emerging market securities consist substantially
of high yield, lower-rated debt securities of foreign corporations, "Brady
Bonds" and other sovereign debt securities issued by emerging market
governments. The Fund may invest in debt securities of emerging market issuers
without regard to ratings. Currently, the substantial majority of emerging
market debt securities are considered to have a credit quality below investment
grade. The Fund may invest in bank loan participations and assignments, which
are fixed and floating rate loans arranged through private negotiations between
foreign entities. The Fund may also invest up to 5 percent of its total assets
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 Fund intends to retain the flexibility to
respond promptly to changes in market and economic conditions. Accordingly, in
the interest of preserving shareholders' capital and consistent with the Fund's
investment objectives, the Sub-Adviser and MFR may employ a temporary defensive
investment strategy if they determine such a strategy to be warranted. Pursuant
to such a defensive strategy, the Fund temporarily may hold cash (U.S. dollars,
foreign currencies or multinational currency units) and/or invest up to 100
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 the Sub-Adviser or MFR. For
commercial paper, this includes securities rated, at the time of purchase, at
least A-2 by S&P or Prime-2 by Moody's, or if unrated, determined to be of
comparable quality by the Sub-Adviser or MFR. It is impossible to predict
whether, when or for how long the Fund will employ defensive strategies. To the
extent the Fund adopts a temporary
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SECURITY FUNDS
PROSPECTUS
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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. The Fund may from time to time invest in shares of
other investment companies as discussed under "Investment Methods and Risk
Factors," below.
INVESTMENT TECHNIQUE. The Fund invests in debt obligations allocated among
diverse markets and denominated in various currencies, including U.S. dollars,
or in multinational currency units such as European Currency Units. The Fund may
purchase securities that are issued by the government or a company or financial
institution of one country but denominated in the currency of another country
(or a multinational currency unit). The Fund is designed for investors who wish
to accept the risks entailed in such investments, which are different from those
associated with a portfolio consisting entirely of securities of U.S. issuers
denominated in U.S. dollars. See "Investment Methods and Risk Factors" for a
discussion of the risks associated with securities denominated in foreign
currencies.
The Sub-Adviser and MFR will seek to allocate the assets of the Fund in
securities of issuers in countries and in currency denominations where the
combination of fixed income market returns, the price appreciation potential of
fixed income securities and currency exchange rate movements will present
opportunities primarily for high current income and secondarily for capital
appreciation. In so doing, the Sub-Adviser and MFR intend to take full advantage
of the different yield, risk and return characteristics that investment in the
fixed income markets of different countries can provide for U.S. investors.
Fundamental economic strength, credit quality and currency and interest rate
trends will be the principal determinants of the emphasis given to various
country, geographic and industry sectors within the Fund. Securities held by the
Fund may be invested in without limitation as to maturity. The Sub-Adviser and
MFR evaluate currencies on the basis of fundamental economic criteria (e.g.,
relative inflation and interest rate levels and trends, growth rate forecasts,
balance of payments status and economic policies) as well as technical and
political data. If the currency in which a security is denominated appreciates
against the U.S. dollar, the dollar value of the security will increase.
Conversely, if the exchange rate of the foreign currency declines, the dollar
value of the security will decrease. The Fund may seek to protect itself against
such negative currency movements through the use of sophisticated investment
techniques although the Fund is not committed to using such techniques and may
be fully exposed to changes in currency exchange rates. See "Investment Methods
and Risk Factors" for a discussion of such techniques.
The Fund may purchase securities on a "when-issued" basis and may purchase
or sell securities on a "forward commitment" basis in order to hedge against
anticipated changes in interest rates and prices. See the discussion of
when-issued and forward commitment securities under "Investment Methods and Risk
Factors." The Fund may enter into repurchase agreements, reverse repurchase
agreements and "dollar rolls" which are discussed under "Investment Methods and
Risk Factors."
HIGH YIELD FUND
The investment objective of the High Yield Fund is to seek high current
income. Capital appreciation is a secondary objective. Under normal
circumstances, the Fund will seek its investment objective by investing
primarily in a broad range of income producing securities, including (i) higher
yielding, higher risk, debt securities (commonly referred to as "junk bonds");
(ii) preferred stock; (iii) securities issued by foreign governments, their
agencies and instrumentalities, and foreign corporations, provided that such
securities are denominated in U.S. dollars; (iv) mortgage-backed securities
("MBSs"); (v) asset-backed securities; (vi) securities issued or guaranteed by
the U.S. Government or any of its agencies or instrumentalities, including
Treasury bills, certificates of indebtedness, notes and bonds; (vii) securities
issued or guaranteed by, the Dominion of Canada or provinces thereof; and (viii)
zero coupon securities. The Fund may also invest up to 35 percent of its assets
in common stocks (which may include ADRs), warrants and rights. Under normal
circumstances, at least 65 percent of the Fund's total assets will be invested
in high-yielding, high risk debt securities.
High Yield Fund may invest up to 100 percent of its assets in debt
securities that, at the time of purchase, are rated below investment grade
("high yield securities" or "junk bonds"), which involve a high degree of risk
and are predominantly speculative. A description of debt ratings is included as
Appendix A to this Prospectus. See "Investment Methods and Risk Factors" for a
discussion of the risks associated with investing in junk bonds. Included in the
debt securities which the High Yield Fund may purchase are convertible bonds, or
bonds with warrants attached. A "convertible bond" is a bond, debenture, or
preferred share which may be exchanged by the owner for common stock or another
security, usually of the same company, in accordance with the terms of the
issue. A "warrant" confers upon the holder the right to purchase an amount of
securities at a particular time and price. See "Investment Methods and Risk
Factors" for a discussion of the risks associated with such securities.
For the period August 5, 1996 (date of inception) to December 31, 1996, the
dollar weighted average of High
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SECURITY FUNDS
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Yield Fund's holdings (excluding equities) had the following credit quality
characteristics.
PERCENT OF
INVESTMENT NET ASSETS
U.S. Government Securities............................ 0%
Cash and other Assets, Less Liabilities............... 11.4%
Rated Fixed Income Securities
Ba/BB.............................................. 38.2%
B.................................................. 49.4%
D.................................................. 1.0%
-----
100.0%
The foregoing table is intended solely to provide disclosure about High Yield
Fund's asset composition for the period August 5, 1996 (date of inception) to
December 31, 1996. The asset composition after this may or may not be
approximately the same as shown above.
The Fund may purchase securities which are obligations of, or guaranteed
by, the Dominion of Canada or provinces thereof and debt securities issued by
Canadian corporations. Canadian securities will not be purchased if subject to
the foreign interest equalization tax and unless payable in U.S. dollars. The
Fund may also invest in debt securities issued by foreign governments (including
Brady Bonds), their agencies and instrumentalities and foreign corporations
(including those in emerging markets), provided such securities are denominated
in U.S. dollars. The Fund's investment in foreign securities, excluding Canadian
securities, will not exceed 25 percent of the Fund's net assets. See "Investment
Method and Risk Factors" for a discussion of the risks associated with investing
in foreign securities, Brady Bonds and emerging markets.
The Fund may invest in MBSs, including mortgage pass-through securities and
collateralized mortgage obligations (CMO's). The Fund may invest in securities
known as "inverse floating obligations," "residual interest bonds," or "interest
only" (IO) or "principal only" (PO) bonds, the market values of which generally
will be more volatile that the market values of most MBSs. This is due to the
fact that such instruments are more sensitive to interest rate changes and to
the rate of principal prepayments than are most other MBSs. The Fund will hold
less than 25 percent of its net assets in MBSs. For a discussion of MBSs and the
risks associated with such securities, see "Investment Methods and Risk
Factors."
The Fund may also invest in asset-backed securities. These include secured
debt instruments backed by automobile loans, credit card loans, home equity
loans, manufactured housing loans and other types of secured loans providing the
source of both principal and interest payments. Asset-backed securities are
subject to risks similar to those discussed with respect to MBSs. See
"Investment Methods and Risk Factors."
The Fund may invest in U.S. Government securities. U.S. Government
securities include bills, certificates of indebtedness, notes and bonds issued
by the Treasury or by agencies or instrumentalities of the U.S. Government. For
a discussion of the varying levels of guarantee associated with particular types
of U.S. Government Securities, see "Investment Methods and Risk Factors" - "U.S.
Government Securities."
The Fund may invest in zero coupon securities which are debt securities
that pay no cash income but are sold at substantial discounts from their face
value. Certain zero coupon securities also provide for the commencement of
regular interest payments at a deferred date. See "Investment Methods and Risk
Factors" for a discussion of zero coupon securities.
The High Yield Fund may acquire certain securities that are restricted as
to disposition under federal securities laws, including securities eligible for
resale to qualified institutional investors pursuant to Rule 144A under the
Securities Act of 1933, subject to the Fund's policy that not more than 10
percent of the Fund's net assets will be invested in illiquid assets. See
"Investment Methods and Risk Factors" for a discussion of restricted securities.
The High Yield Fund may purchase securities on "when issued" or "delayed
delivery" basis in excess of customary settlement periods for the type of
security involved. The Fund may also purchase or sell securities on a "forward
commitment" basis and may enter into "repurchase agreements," "reverse
repurchase agreements" and "roll transactions." The Fund may lend securities to
broker-dealers, other institutions or other persons to earn additional income.
The value of loaned securities may not exceed 33 1/3 percent of the Fund's total
assets. In addition, the Fund may purchase loans, loan participations and other
types of direct indebtedness. See "Investment Methods and Risk Factors" for a
discussion of the risks associated with these investment practices.
The Fund may enter into futures contracts (a type of derivative) (or
options thereon) to hedge all or a portion of its portfolio, as a hedge against
changes in prevailing levels of interest rates or as an efficient means of
adjusting its exposure to the bond market. The Fund will not use futures
contracts for leveraging purposes. The Fund will limit its use of futures
contracts so that initial margin deposits or premiums on such contracts used for
non-hedging purposes will not equal more than 5 percent of the Funds net asset
value. The Fund may purchase call and put options and write such options on a
"covered" basis. The Fund may also enter into interest rate and index swaps and
purchase or sell related caps, floors and collars. The aggregate market value of
the Fund's portfolio securities covering call or put options will not exceed 25
percent of the Fund's net assets. See the discussion of "Options, Futures and
Forward Currency
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SECURITY FUNDS
PROSPECTUS
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Transactions," and "Swaps, Caps, Floors and Collars" under "Investment Methods
and Risk Factors."
From time to time, the High Yield Fund may invest part or all of its assets
in U.S. Government securities, commercial notes or money market instruments. It
is anticipated that the dollar weighted average maturity of the Fund's portfolio
will range from 5 to 15 years under normal circumstances.
SECURITY TAX-EXEMPT FUND
The investment objective of Tax-Exempt Fund is to obtain as high a level of
interest income exempt from federal income taxes as is consistent with
preservation of stockholders' capital. Tax-Exempt Fund attempts to achieve its
objective by investing primarily in debt securities, the interest on which is
exempt from federal income taxes, including the alternative minimum tax. Under
normal circumstances, at least 80 percent of the Fund's net assets will be
invested in such tax-exempt securities.
The securities in which the Fund invests include debt obligations issued by
or on behalf of the states, territories and possessions of the United States,
the District of Columbia, and their political subdivisions, agencies,
authorities and instrumentalities, including multi-state agencies or authorities
(and may include certain private activity bonds the interest on which is subject
to the alternative minimum tax). These securities are referred to as "municipal
securities" and are described in more detail in the Funds' Statement of
Additional Information.
The Fund's investments in municipal securities are limited to securities of
"investment grade" quality, that is, securities rated within the four highest
rating categories of Moody's (Aaa, Aa, A, Baa) or S&P (AAA, AA, A, BBB), except
that the Fund may purchase unrated municipal securities (i) where the securities
are guaranteed as to principal and interest by the full faith and credit of the
U.S. Government or are short-term municipal securities (those having a maturity
of less than one year) of issuers having outstanding at the time of purchase an
issue of municipal bonds having one of the four highest ratings, or (ii) where,
in the opinion of the Investment Manager, the unrated municipal securities are
comparable in quality to those within the four highest ratings. However,
Tax-Exempt Fund will not purchase an unrated municipal security (other than a
security described in (i) above) if, after such purchase, more than 20 percent
of the Fund's total assets would be invested in such unrated municipal
securities.
With respect to rated securities, there is no percentage limitation on the
amount of the Fund's assets which may be invested in securities within any
particular rating classification, but the Fund anticipates that it will invest
no more than 25 percent of its total assets in securities rated Baa by Moody's
or BBB by Standard & Poor's. A description of the ratings is contained in
Appendix B to this Prospectus. Such securities have speculative characteristics
as discussed under "Investment Methods and Risk Factors."
If the Fund holds a security whose rating drops below Baa or BBB, the
Investment Manager will reevaluate the credit risk presented by the security in
light of current market conditions and determine whether to retain or dispose of
such security. The Fund will not retain securities rated below Baa or BBB in an
amount that exceeds 5 percent of its net assets.
Tax-Exempt Fund invests primarily in municipal bonds with maturities
greater than one year. It is expected that the Fund's average portfolio maturity
under normal circumstances will be in the 15- to 25-year range. Tax-Exempt Fund
also will invest for various purposes in short-term (maturity equal to or less
than one year) securities which, to the extent practicable will be short-term
municipal securities. Short-term investments may be made, pending investment of
funds in municipal bonds, in order to maintain liquidity, to meet redemption
requests, or to maintain a temporary "defensive" investment position when, in
the opinion of the Investment Manager, it is advisable to do so on account of
current or anticipated market conditions. Except when in a temporary defensive
position, investments in short-term municipal securities will represent less
than 20 percent of the Fund's total assets.
From time to time, on a temporary basis, Tax-Exempt Fund may invest in
fixed income obligations on which the interest is subject to federal income tax.
Except when the Fund is in a temporary "defensive" investment position, it will
not purchase a taxable security if, as a result, more than 20 percent of its
total assets would be invested in taxable securities. This limitation is a
fundamental policy of Tax-Exempt Fund, and may not be changed without a majority
vote of the Fund's outstanding shares. Temporary taxable investments of the Fund
may consist of obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities, commercial paper rated A-1 by S&P or Prime-1 by
Moody's, corporate obligations rated AAA or AA by S&P or Aaa or Aa by Moody's,
certificates of deposit or bankers' acceptances of domestic banks or thrifts
with at least $2 billion in assets, or repurchase agreements with such banks or
with broker-dealers.
Tax-exempt interest on private activity bonds and exempt-interest dividends
attributable to private activity bonds generally are treated as tax preference
items for purposes of the alternative minimum tax. The Fund may purchase private
activity bonds, such as industrial development bonds, when other bonds are not
available and when the yield differential between private activity bonds and
other municipal bonds justifies their purchase.
From time to time, Tax-Exempt Fund may purchase municipal securities on a
when-issued or delayed delivery basis. The Fund does not believe that its net
asset value or income will be adversely affected by its purchase of
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SECURITY FUNDS
PROSPECTUS
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municipal securities on a when-issued or delayed delivery basis. For further
information regarding when-issued purchases, see "Investment Methods and Risk
Factors" and the Funds' Statement of Additional Information.
Tax-Exempt Fund may also purchase from banks or broker/dealers, municipal
securities together with the right to resell the securities to the seller at an
agreed-upon price or yield within a specified period prior to the maturity date
of the securities. Such a right to resell is commonly known as a "put" and is
also referred to as a "stand-by commitment" on the part of the seller. The price
which Tax-Exempt Fund pays for the municipal securities with puts generally is
higher than the price which otherwise would be paid for the municipal securities
alone. The Fund uses puts for liquidity purposes in order to permit it to remain
more fully invested in municipal securities than would otherwise be the case by
providing a ready market for certain municipal securities in its portfolio at an
acceptable price. The put generally is for a shorter term than the maturity of
the municipal security and does not restrict in any way the Fund's ability to
dispose of (or retain) the municipal security. In order to ensure that the
interest on municipal securities subject to puts is tax-exempt to the Fund, it
will limit its use of puts in accordance with current interpretations or rulings
of the Internal Revenue Service. Because it is difficult to evaluate the
likelihood of exercise or the potential benefit of a put, puts will be
determined to have a "value" of zero, regardless of whether any direct or
indirect consideration was paid. There is a risk that the seller of the put may
not be able to repurchase the security upon exercise of the put by Tax-Exempt
Fund. For further information regarding puts and stand-by commitments, see the
Funds' Statement of Additional Information.
SECURITY CASH FUND
The investment objective of Cash Fund is to seek as high a level of current
income as is consistent with preservation of capital and liquidity. Cash Fund
will attempt to achieve its objective by investing at least 95 percent of its
total assets, measured at the time of investment, in a diversified portfolio of
highest quality money market instruments. Cash Fund may also invest up to 5
percent of its total assets, measured at the time of investment, in money market
instruments that are in the second-highest rating category for short-term debt
obligations. Money market instruments in which the Fund may invest consist of
the following:
U.S. Government Securities -- Obligations issued or guaranteed (as to
principal or interest) by the United States Government or its agencies (such as
the Small Business Administration and Government National Mortgage Association)
or instrumentalities (such as Federal Home Loan Banks and Federal Land Banks)
and instruments fully collateralized with such obligations.
Bank Obligations -- Obligations of banks or savings and loan associations
that are members of the Federal Deposit Insurance Corporation and instruments
fully collateralized with such obligations.
Corporate Obligations -- Commercial paper issued by corporations and rated
Prime-1 or Prime-2 by Moody's or A-1 or A-2 by S&P, or other corporate debt
instruments rated Aaa or Aa or better by Moody's or AAA or AA or better by S&P,
subject to the limitations on investment in instruments in the second-highest
rating category, discussed below.
Cash Fund may invest only in U.S. dollar denominated money market
instruments that present minimal credit risk and, with respect to 95 percent of
its total assets, measured at the time of investment, that are of the highest
quality. The Investment Manager will determine whether a security presents
minimal credit risk under procedures adopted by Cash Fund's Board of Directors.
A security will be considered to be highest quality (1) if rated in the highest
category, (e.g., Aaa or Prime-1 by Moody's or AAA or A-1 by S&P) by (i) any two
nationally recognized statistical rating organizations ("NRSROs") or, (ii) if
rated by only one NRSRO, by that NRSRO, and whose acquisition is approved or
ratified by the Board of Directors; (2) if issued by an issuer that has
short-term debt obligations of comparable maturity, priority, and security and
that are rated in the highest rating category by (i) any two NRSROs or, (ii) if
rated by only one NRSRO, by that NRSRO, and whose acquisition is approved or
ratified by the Board of Directors; or (3) an unrated security that is of
comparable quality to a security in the highest rating category as determined by
the Investment Manager and whose acquisition is approved or ratified by the
Board of Directors. With respect to 5 percent of its total assets, measured at
the time of investment, Cash Fund may also invest in money market instruments
that are in the second-highest rating category for short-term debt obligations
(e.g., rated Aa or Prime 2 by Moody's or AA or A-2 by S&P). A money market
instrument will be considered to be in the second-highest rating category under
the criteria described above with respect to investments considered highest
quality, as applied to instruments in the second-highest rating category. See
Appendix A to this Prospectus for a description of the principal types of
securities and instruments in which Cash Fund will invest as well as a
description of the above mentioned ratings.
Cash Fund may not invest more than 5 percent of its total assets, measured
at the time of investment, in the securities of any one issuer that are of the
highest quality or more than the greater of 1 percent of its total assets or
$1,000,000, measured at the time of investment, in securities of any one issuer
that are in the second-highest rating category, except that these limitations
shall not apply to U.S. Government securities. The Fund may exceed the 5 percent
limitation for up to three business days after the purchase of the securities of
any one issuer that are of the
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SECURITY FUNDS
PROSPECTUS
================================================================================
highest quality, provided that the Fund has outstanding at any time not more
than one such investment. In the event that an instrument acquired by Cash Fund
ceases to be of the quality that is eligible for the Fund, the Fund shall
promptly dispose of the instrument in an orderly manner unless the Board of
Directors determines that this would not be in the best interests of the Fund.
Cash Fund will invest in money market instruments of varying maturities
(but no longer than thirteen months) in an effort to earn as high a level of
current income as is consistent with preservation of capital and liquidity. Cash
Fund intends to maintain a dollar-weighted average maturity in its portfolio of
not more than 90 days. The Fund seeks to maintain a stable net asset value of
$1.00 per share, although there can be no assurance that it will be able to do
so.
Cash Fund may acquire one or more of the types of securities listed above
subject to repurchase agreement. Not more than 10 percent of the Fund's total
assets may be invested in illiquid assets, which include repurchase agreements
with maturities of over seven days. Cash Fund may invest in instruments having
rates of interest that are adjusted periodically according to a specified market
rate for such investments ("Variable Rate Instruments"). The interest rate on a
Variable Rate Instrument is ordinarily determined by reference to, or is a
percentage of, an objective standard such as a bank's prime rate or the 91-day
U.S. Treasury Bill rate. Generally, the changes in the interest rate on Variable
Rate Instruments reduce the fluctuation in the market value of such securities.
Accordingly, as interest rates decrease or increase, the potential for capital
appreciation or depreciation is less than for fixed-rate obligations. Cash Fund
determines the maturity of Variable Rate Instruments in accordance with Rule
2a-7 under the Investment Company Act of 1940 which allows the Fund to consider
the maturity date of such instruments to be the period remaining until the next
readjustment of the interest rate rather than the maturity date on the face of
the instrument.
Cash Fund may acquire certain securities that are restricted as to
disposition under the federal securities laws, provided that such securities are
eligible for resale to qualified institutional investors pursuant to Rule 144A
under the Securities Act of 1933, and subject to the Fund's policy that not more
than 10 percent of the Fund's total assets will be invested in illiquid assets.
See "Investment Methods and Risk Factors" for a discussion of Rule 144A
Securities.
INVESTMENT METHODS AND RISK FACTORS
Some of the risk factors related to certain securities, instruments and
techniques that may be used by one or more of the Funds are described in the
"Investment Objective and Policies" section of this Prospectus and in the
"Investment Objectives and Policies" and "Investment Policy Limitations"
sections of the Funds' Statement of Additional Information. The following is a
description of certain additional risk factors related to various securities,
instruments and techniques. The risks so described only apply to those Funds
which may invest in such securities and instruments or use such techniques. Also
included is a general description of some of the investment instruments,
techniques and methods which may be used by one or more of the Funds. The
methods described only apply to those Funds which may use such methods.
INVESTMENT VEHICLES
BAA OR BBB SECURITIES -- Certain of the Funds may invest in medium grade
debt securities (debt securities rated Baa by Moody's or BBB by S&P at the time
of purchase, or if unrated, of equivalent quality as determined by the
Investment Manager). Baa securities are considered to be "medium grade"
obligations by Moody's and BBB is the lowest classification which is still
considered an "investment grade" rating by S&P. Bonds rated Baa by Moody's or
BBB by S&P have speculative characteristics and may be more susceptible than
higher grade bonds to adverse economic conditions or other adverse circumstances
which may result in a weakened capacity to make principal and interest payments.
Corporate Bond, Limited Maturity Bond, Global Aggressive Bond and High Yield
Funds may invest in higher yield debt securities in the lower rating (higher
risk) categories of the recognized rating services (commonly referred to as
"junk bonds"). See Appendix A to this Prospectus for a complete description of
corporate bond ratings and see "Risks Associated with Lower-Rated Debt
Securities (Junk Bonds)."
U.S. GOVERNMENT SECURITIES -- Each of the Funds may invest in U.S.
Government securities which include obligations issued or guaranteed (as to
principal and interest) by the United States Government or its agencies (such as
the Small Business Administration, the Federal Housing Administration, and
Government National Mortgage Association), or instrumentalities (such as Federal
Home Loan Banks and Federal Land Banks), and instruments fully collateralized
with such obligations such as repurchase agreements. Some U.S. Government
securities, such as Treasury bills and bonds, are supported by the full faith
and credit of the U.S. Treasury; others are supported by the right of the issuer
to borrow from the Treasury; others, such as those of the Federal National
Mortgage Association, are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; still others, such as those of
the Student Loan Marketing Association, are supported only by the credit of the
instrumentality. Government National Mortgage Association (GNMA) certificates
are mortgage-backed securities representing part ownership of a pool of mortgage
loans on which timely payment of interest and principal is guaranteed
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SECURITY FUNDS
PROSPECTUS
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by the full faith and credit of the U.S. Government. Although U.S. Government
securities are guaranteed by the U.S. Government, its agencies or
instrumentalities, shares of the Funds are not so guaranteed in any way.
SHARES OF OTHER INVESTMENT COMPANIES -- The Global Aggressive Bond Fund may
invest in shares of other investment companies. A Fund's investment in shares of
other investment companies may not exceed immediately after purchase 10 percent
of the Fund's 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.
CONVERTIBLE SECURITIES AND WARRANTS -- Certain of the Funds may invest in
debt or preferred equity securities convertible into or exchangeable for equity
securities. Traditionally, convertible securities have paid dividends or
interest at rates higher than common stocks but lower than non-convertible
securities. They generally participate in the appreciation or depreciation of
the underlying stock into which they are convertible, but to a lesser degree. In
recent years, convertibles have been developed which combine higher or lower
current income with options and other features. Warrants are options to buy a
stated number of shares of common stock at a specified price any time during the
life of the warrants (generally two or more years).
MORTGAGE BACKED SECURITIES AND COLLATERALIZED MORTGAGE OBLIGATIONS --
Certain of the Funds may invest in mortgage-backed securities (MBSs), including
mortgage pass through securities and collateralized mortgage obligations (CMOs).
MBSs include certain securities issued or guaranteed by the United States
government or one of its agencies or instrumentalities, such as the Government
National Mortgage Association (GNMA), Federal National Mortgage Association
(FNMA), or Federal Home Loan Mortgage Corporation (FHLMC); securities issued by
private issuers that represent an interest in or are collateralized by
mortgage-backed securities issued or guaranteed by the U.S. government or one of
its agencies or instrumentalities; and securities issued by private issuers that
represent an interest in or are collateralized by mortgage loans. A mortgage
pass through security is a pro rata interest in a pool of mortgages where the
cash flow generated from the mortgage collateral is passed through to the
security holder. CMOs are obligations fully collateralized by a portfolio of
mortgages or mortgage-related securities. Certain of the Funds may invest in
securities known as "inverse floating obligations," "residual interest bonds,"
and "interest only" (IO) and "principal only" (PO) bonds, the market values of
which will generally be more volatile than the market values of most MBSs. An
inverse floating obligation is a derivative adjustable rate security with
interest rates that adjust or vary inversely to changes in market interest
rates. The term "residual interest" bond is used generally to describe those
instruments in collateral pools, such as CMOs, which receive any excess cash
flow generated by the pool once all other bondholders and expenses have been
paid. IOs and POs are created by separating the interest and principal payments
generated by a pool of mortgage-backed bonds to create two classes of
securities. Generally, one class receives interest only payments (IOs) and the
other class principal only payments (POs). MBSs have been referred to as
"derivatives" because the performance of MBSs is dependent upon and derived from
underlying securities.
Investment in MBSs poses several risks, including prepayment, market and
credit risks. PREPAYMENT RISK reflects the chance that borrowers may prepay
their mortgages faster than expected, thereby affecting the investment's average
life and perhaps its yield. Borrowers are most likely to exercise their
prepayment options at a time when it is least advantageous to investors,
generally prepaying mortgages as interest rates fall, and slowing payments as
interest rates rise. Certain classes of CMOs may have priority over others with
respect to the receipt of prepayments on the mortgages and the Fund may invest
in CMOs which are subject to greater risk of prepayment. MARKET RISK reflects
the chance that the price of the security may fluctuate over time. The price of
MBSs may be particularly sensitive to prevailing interest rates, the length of
time the security is expected to be outstanding and the liquidity of the issue.
In a period of unstable interest rates, there may be decreased demand for
certain types of MBSs, and a fund invested in such securities wishing to sell
them may find it difficult to find a buyer, which may in turn decrease the price
at which they may be sold. CREDIT RISK reflects the chance that the Fund may not
receive all or part of its principal because the issuer or credit enhancer has
defaulted on its obligations. Obligations issued by U.S. Government-related
entities are guaranteed by the agency or instrumentality, and some, such as GNMA
certificates, are supported by the full faith and credit of the U.S. Treasury;
others are supported by the right of the issuer to borrow from the Treasury;
others, such as those of the FNMA, are supported by the discretionary authority
of the U.S. Government to purchase the agency's obligations; still others, are
supported only by the credit of the instrumentality. Although securities issued
by U.S. Government-related agencies are guaranteed by the U.S. Government, its
agencies or instrumentalities, shares of the Fund are not so guaranteed in any
way. The performance of private label MBSs, issued by private institutions, is
based on the financial health of those institutions.
ASSET-BACKED SECURITIES -- Certain of the Funds may also invest in
"asset-backed securities." These include secured debt instruments backed by
automobile loans, credit card loans, home equity loans, manufactured housing
loans and other types of secured loans providing the source
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of both principal and interest. Asset-backed securities are subject to risks
similar to those discussed above with respect to MBSs.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES -- Certain of the Funds may
purchase securities on a "when-issued" basis and may purchase or sell securities
on a "forward commitment" basis in order to hedge against anticipated changes in
interest rates and prices. The price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery and payment for
the securities take place at a later date. When-issued securities and forward
commitments may be sold prior to the settlement date, but the Funds will enter
into when-issued and forward commitments only with the intention of actually
receiving or delivering the securities, as the case may be. No income accrues on
securities which have been purchased pursuant to a forward commitment or on a
when-issued basis prior to delivery of the securities. If a Fund disposes of the
right to acquire a when-issued security prior to its acquisition or disposes of
its right to deliver or receive against a forward commitment, it may incur a
gain or loss. At the time a Fund enters into a transaction on a when-issued or
forward commitment basis, a segregated account consisting of cash or liquid
securities equal to the value of the when-issued or forward commitment
securities will be established and maintained with its custodian and will be
marked to market daily. There is a risk that the securities may not be delivered
and that the Fund may incur a loss.
RESTRICTED SECURITIES (RULE 144A SECURITIES) -- Certain of the Funds may
invest in restricted securities which are securities that are restricted as to
disposition under the federal securities laws, provided that such securities are
eligible for resale to qualified institutional investors pursuant to Rule 144A
under the Securities Act of 1933.
The Global Aggressive Bond Fund and High Yield Fund may purchase restricted
securities, including securities that are not eligible for resale pursuant to
Rule 144A. These Funds may acquire such securities through private placement
transactions, directly from the issuer or from security holders, generally at
higher yields or on terms more favorable to investors than comparable publicly
traded securities. However, the restrictions on resale of such securities may
make it difficult for the Fund to dispose of such securities at the time
considered most advantageous, and/or may involve expenses that would not be
incurred in the sale of securities that were freely marketable. Risks associated
with restricted securities include the potential obligation to pay all or part
of the registration expenses in order to sell certain restricted securities. A
considerable period of time may elapse between the time of the decision to sell
a security and the time the Fund may be permitted to sell it under an effective
registration statement. If, during a period, adverse conditions were to develop,
the Fund might obtain a less favorable price than prevailing when it decided to
sell.
The Funds' Board of Directors is responsible for developing and
establishing guidelines and procedures for determining the liquidity of Rule
144A securities. As permitted by Rule 144A, the Board of Directors has delegated
this responsibility to the Investment Manager. In making the determination
regarding the liquidity of Rule 144A securities, the Investment Manager will
consider trading markets for the specific security taking into account the
unregistered nature of a Rule 144A security. In addition, the Investment Manager
may consider: (1) the frequency of trades and quotes; (2) the number of dealers
and potential purchasers; (3) dealer undertakings to make a market; and (4) the
nature of the security and of the market place trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
transfer). Investing in Rule 144A securities could have the effect of increasing
the amount of a Fund's assets invested in illiquid securities to the extent that
qualified institutional buyers become uninterested, for a time, in purchasing
these securities.
SOVEREIGN DEBT. The Global Aggressive Bond Fund may invest in sovereign
debt securities of emerging market governments, including Brady Bonds. The High
Yield Fund may also invest in such securities provided they are denominated in
U.S. dollars. Sovereign debt securities are those issued by emerging market
governments that are traded in the markets of developed countries or groups of
developed countries. Investments in such securities involve special risks. The
issuer of the debt or the governmental authorities that control the repayment of
the debt may be unable or unwilling to repay principal or interest when due in
accordance with the terms of such debt. Periods of economic uncertainty may
result in the volatility of market prices of sovereign debt, and in turn the
Fund's net asset value, to a greater extent than the volatility inherent in
domestic fixed income securities. A sovereign debtor's willingness or ability to
repay principal and pay interest in a timely manner may be affected by, among
other factors, its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of the debt service burden to the economy as a whole, the
sovereign debtor's policy toward principal international lenders and the
political constraints to which a sovereign debtor may be subject. Emerging
market governments could default on their sovereign debt. Such sovereign debtors
also may be dependent on expected disbursements from foreign governments,
multilateral agencies and other entities abroad to reduce principal and interest
arrearages on their debt. The commitment on the part of these governments,
agencies and others to make such disbursements may be conditioned on a sovereign
debtor's implementation of economic reforms and/or economic performance and the
timely service of
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such debtor's obligations. Failure to implement such reforms, achieve such
levels of economic performance or repay principal or interest when due, may
result in the cancellation of such third parties' commitments to lend funds to
the sovereign debtor, which may further impair such debtor's ability or
willingness to timely service its debt.
The occurrence of political, social or diplomatic changes in one or more of
the countries issuing sovereign debt could adversely affect the Fund's
investments. Emerging markets are faced with social and political issues and
some of them have experienced high rates of inflation in recent years and have
extensive internal debt. Among other effects, high inflation and internal debt
service requirements may adversely affect the cost and availability of future
domestic sovereign borrowing to finance governmental programs, and may have
other adverse social, political and economic consequences. Political changes or
a deterioration of a country's domestic economy or balance of trade may affect
the willingness of countries to service their sovereign debt. Although the
Investment Manager, in the case of the High Yield Fund or the Sub-Adviser and
MFR, in the case of the Global Aggressive Bond Fund, intend to manage the Funds
in a manner that will minimize the exposure to such risks, there can be no
assurance that adverse political changes will not cause a Fund to suffer a loss
of interest or principal on any of its holdings.
In recent years, some of the emerging market countries in which the Global
Aggressive Bond Fund expects to invest have encountered difficulties in
servicing their sovereign debt obligations. Some of these countries have
withheld payments of interest and/or principal of sovereign debt. These
difficulties have also led to agreements to restructure external debt
obligations -- in particular, commercial bank loans, typically by rescheduling
principal payments, reducing interest rates and extending new credits to finance
interest payments on existing debt. In the future, holders of emerging market
sovereign debt securities may be requested to participate in similar
rescheduling of such debt. Certain emerging market countries are among the
largest debtors to commercial banks and foreign governments. At times certain
emerging market countries have declared a moratorium on the payment of principal
and interest on external debt; such a moratorium is currently in effect in
certain emerging market countries. There is no bankruptcy proceeding by which a
creditor may collect in whole or in part sovereign debt on which an emerging
market government has defaulted.
The ability of emerging market governments to make timely payments on their
sovereign debt securities is likely to be influenced strongly by a country's
balance of trade and its access to trade and other international credits. A
country whose exports are concentrated in a few commodities could be vulnerable
to a decline in the international prices of one or more of such commodities.
Increased protectionism on the part of a country's trading partners could also
adversely affect its exports. Such events could diminish a country's trade
account surplus, if any. To the extent that a country receives payment for its
exports in currencies other than hard currencies, its ability to make hard
currency payments could be affected.
Investors should also be aware that certain sovereign debt instruments in
which a Fund may invest involve great risk. As noted above, sovereign debt
obligations issued by emerging market governments generally are deemed to be the
equivalent in terms of quality to securities rated below investment grade by
Moody's and S&P. Such securities are regarded as predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligations and involve major risk exposure to
adverse conditions. Some of such securities, with respect to which the issuer
currently may not be paying interest or may be in payment default, may be
comparable to securities rated D by S&P or C by Moody's. The Fund may have
difficulty disposing of and valuing certain sovereign debt obligations because
there may be a limited trading market for such securities. Because there is no
liquid secondary market for many of these securities, the Fund anticipates that
such securities could be sold only to a limited number of dealers or
institutional investors. Certain sovereign debt securities may be illiquid.
BRADY BONDS. Certain of the Funds may invest in "Brady Bonds," which are
debt restructurings that provide for the exchange of cash and loans for newly
issued bonds. Brady Bonds are securities created through the exchange of
existing commercial bank loans to public and private entities in certain
emerging markets for new bonds in connection with debt restructuring under a
debt restructuring plan introduced by former U.S. Secretary of the Treasury,
Nicholas F. Brady. Brady Bonds recently have been issued by the governments of
Argentina, Brazil, Bulgaria, Costa Rica, Dominican Republic, Jordan, Mexico,
Nigeria, The Philippines, Uruguay, Venezuela, Ecuador and Poland and are
expected to be issued by other emerging market countries. Approximately $150
billion in principal amount of Brady Bonds has been issued to date. Fund
investors should recognize that Brady Bonds have been issued only recently and,
accordingly, do not have a long payment history. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (primarily
the U.S. dollar) and are actively traded in the secondary market for Latin
American debt. The Salomon Brothers Brady Bond Index provides a benchmark that
can be used to compare returns of emerging market Brady Bonds with returns in
other bond markets, e.g., the U.S. bond market.
The Global Aggressive Bond Fund may invest in either collateralized or
uncollateralized Brady Bonds in various currencies. The High Yield Fund may
invest only in collateralized Brady Bonds, denominated in U.S. dollars.
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U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed rate par
bonds or floating rate discount bonds, are collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Interest payments on such bonds generally are collateralized by cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least one year of rolling interest payments or, in the case of floating rate
bonds, initially is equal to at least one year's rolling interest payments based
on the applicable interest rate at the time and is adjusted at regular intervals
thereafter.
LOAN PARTICIPATIONS AND ASSIGNMENTS. The Global Aggressive Bond Fund and
the High Yield Fund may invest in fixed and floating rate loans ("Loans")
arranged through private negotiations between a corporate or foreign entity and
one or more financial institutions ("Lenders"). The majority of Global
Aggressive Bond Fund's investments in Loans in emerging markets is expected to
be in the form of participations in Loans ("Participations") and assignments of
portions of Loans from third parties ("Assignments"). Participations typically
will result in the Fund having a contractual relationship only with the Lender,
not with the borrower. The Fund will have the right to receive payments of
principal, interest and any fees to which it is entitled only from the Lender
selling the Participation and only upon receipt by the Lender of the payments
from the borrower. In connection with purchasing Participations, the Fund
generally will have no right to enforce compliance by the borrower with the
terms of the loan agreement relating to the Loan ("Loan Agreement"), nor any
rights of set-off against the borrower, and the Fund may not directly benefit
from any collateral supporting the Loan in which it has purchased the
Participation. As a result, the Fund will assume the credit risk of both the
borrower and the Lender that is selling the Participation.
In the event of the insolvency of the Lender selling a Participation, the
Fund may be treated as a general creditor of the Lender and may not benefit from
any set-off between the Lender and the borrower. The Fund will acquire
Participations only if the Lender interpositioned between the Fund and the
borrower is determined by the Investment Manager, in the case of the High Yield
Fund, or Sub-Adviser and MFR, in the case of the Global Aggressive Bond Fund, to
be creditworthy. When the Fund purchases Assignments from Lenders, the Fund will
acquire direct rights against the borrower on the Loan. However, since
Assignments are arranged through private negotiations between potential
assignees and assignors, the rights and obligations acquired by the Fund as the
purchaser of an Assignment may differ from, and be more limited than, those held
by the assigning Lender.
The Fund may have difficulty disposing of Assignments and Participations.
The liquidity of such securities is limited and the Fund anticipates that such
securities could be sold only to a limited number of institutional investors.
The lack of a liquid secondary market could have an adverse impact on the value
of such securities and on the Fund's ability to dispose of particular
Assignments or Participations when necessary to meet the Fund's liquidity needs
or in response to a specific economic event, such as a deterioration in the
creditworthiness of the borrower. The lack of a liquid secondary market for
Assignments and Participations also may make it more difficult for the fund to
assign a value to those securities for purposes of valuing the Fund's portfolio
and calculating its net asset value.
ZERO COUPON SECURITIES -- Global Aggressive Bond Fund and High Yield Fund
may invest in certain zero coupon securities that are "stripped" U.S. Treasury
notes and bonds. These Funds also may invest in zero coupon and other deep
discount securities issued by foreign governments and domestic and foreign
corporations, including certain Brady Bonds and other foreign debt and
payment-in-kind securities. Zero coupon securities pay no interest to holders
prior to maturity, and payment-in-kind securities pay interest in the form of
additional securities. However, a portion of the original issue discount on zero
coupon securities and the "interest" on payment-in-kind securities will be
included in the investing Fund's income. Accordingly, for the Fund to qualify
for tax treatment as a regulated investment company and to avoid certain taxes
(see "Taxes" in the Statement of Additional Information), the Fund may be
required to distribute an amount that is greater than the total amount of cash
it actually receives. These distributions must be made from the Fund's cash
assets or, if necessary, from the proceeds of sales of portfolio securities. The
Fund will not be able to purchase additional income-producing securities with
cash used to make such distributions and its current income ultimately may be
reduced as a result. Zero coupon and payment-in-kind securities usually trade at
a deep discount from their face or par value and will be subject to greater
fluctuations of market value in response to changing interest rates than debt
obligations of comparable maturities that make current distributions of interest
in cash.
REPURCHASE AGREEMENTS, REVERSE REPURCHASE AGREEMENTS AND ROLL TRANSACTIONS
- -- Each of the Funds may enter into repurchase agreements. Repurchase agreements
are transactions in which the purchaser buys a debt security from a bank or
recognized securities dealer and simultaneously commits to resell that security
to the bank or dealer at an agreed upon price, date and market rate of interest
unrelated to the coupon rate or maturity of the purchased security. Repurchase
agreements are considered to be loans which must be fully collateralized
including interest earned thereon during the entire term of the agreement. If
the institution defaults on the repurchase agreement, the Fund will retain
possession of the underlying securities. If bankruptcy proceedings are commenced
with
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respect to the seller, realization on the collateral by the Fund may be delayed
or limited and the Fund may incur additional costs. In such case, the Fund will
be subject to risks associated with changes in market value of the collateral
securities. The Fund intends to enter into repurchase agreements only with banks
and broker/dealers believed to present minimal credit risks.
The Global Aggressive Bond Fund and the High Yield Fund may also enter into
reverse repurchase agreements with the same parties with whom they may enter
into repurchase agreements. Under a reverse repurchase agreement, a Fund would
sell securities and agree to repurchase them at a particular price at a future
date. Reverse repurchase agreements involve the risk that the market value of
the securities retained in lieu of sale by a Fund may decline below the price of
the securities the Fund has sold but is obligated to repurchase. In the event
the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Fund's
obligation to repurchase the securities, and the Fund's use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending such
decision.
The Global Aggressive Bond Fund and the High Yield Fund also may enter into
"dollar rolls," in which the Fund sells fixed income securities for delivery in
the current month and simultaneously contracts to repurchase substantially
similar (same type, coupon and maturity) securities on a specified future date.
During the roll period, the Fund would forego principal and interest paid on
such securities. The Fund would be compensated by the difference between the
current sales price and the forward price for the future purchase, as well as by
the interest earned on the cash proceeds of the initial sale. See "Investment
Objectives and Policies" in the Statement of Additional Information.
INVESTMENT METHODS
BORROWING -- Each of the Funds may borrow money from banks as a temporary
measure for emergency purposes, or to facilitate redemption requests.
From time to time, it may be advantageous for the Funds to borrow money
rather than sell existing portfolio positions to meet redemption requests.
Accordingly, the Funds may borrow from banks and the Global Aggressive Bond Fund
and the High Yield Fund may borrow through reverse repurchase agreements and
"roll" transactions, in connection with meeting requests for the redemption of
Fund shares. High Yield Fund may borrow up to 33 1/3 percent; Limited Maturity
Bond, Tax-Exempt and Cash Funds may each borrow up to 10 percent and Corporate
Bond, U.S. Government and Global Aggressive Bond Funds may each borrow up to 5
percent of total Fund assets. To the extent that a Fund purchases securities
while it has outstanding borrowings, it is using leverage, i.e., using borrowed
funds for investment. Leveraging will exaggerate the effect on net asset value
of any increase or decrease in the market value of a Fund's portfolio. Money
borrowed for leveraging will be subject to interest costs that may or may not be
recovered by appreciation of the securities purchased; in certain cases,
interest costs may exceed the return received on the securities purchased. A
Fund also may be required to maintain minimum average balances in connection
with such borrowing or to pay a commitment or other fee to maintain a line of
credit; either of these requirements would increase the cost of borrowing over
the stated interest rate. It is not expected that Cash Fund would purchase
securities while it had borrowings outstanding.
OPTIONS, FUTURES AND FORWARD CURRENCY TRANSACTIONS -- In seeking to protect
against interest rate changes and currency exchange rate changes that are
adverse to its present or prospective positions, certain of the Funds may employ
certain risk management practices involving the use of forward currency
contracts and options contracts, futures contracts and options on futures
contracts on U.S. and foreign government securities and currencies. The Funds
also may enter into interest rate, currency and index swaps and purchase or sell
related caps, floors and collars. The Fund's investment in derivative securities
will be utilized for hedging purposes and not for speculation. See "Swaps, Caps,
Floors and Collars" below. See also "Derivative Instruments: Options, Futures
and Forward Currency Strategies" in the Statement of Additional Information.
There can be no assurance that a Fund's risk management practices will succeed.
Only a limited market, if any, currently exists for forward currency contracts
and options and futures instruments relating to currencies of most emerging
markets, to securities denominated in such currencies or to securities of
issuers domiciled or principally engaged in business in such emerging markets.
To the extent that such a market does not exist, the Fund may not be able to
effectively hedge its investment in such emerging markets.
To attempt to hedge against adverse movements in exchange rates between
currencies, certain Funds 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. Such Funds may enter into
forward currency contracts either with respect to specific transactions or with
respect to its portfolio positions. For example, when a Fund anticipates making
a purchase or sale of a security, it may enter into a forward currency contract
in order to set the rate (either relative to the U.S. dollar or another
currency) at which a currency exchange transaction related to the purchase or
sale will be made. Further, when it is anticipated that a particular currency
may decline compared
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to the U.S. dollar or another currency, the Fund 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 Fund denominated in a foreign currency.
In addition, certain Funds may purchase put and call options and write such
options on a "covered" basis on securities that are traded on recognized
securities exchanges and over-the-counter ("OTC") markets. The Fund will cause
its custodian to segregate cash or liquid securities having a value sufficient
to meet the Fund's obligations under the option. The Funds also may enter into
interest rate futures contracts and purchase and write options to buy and sell
such futures contracts, to the extent permitted under regulations of the
Commodities Futures Trading Commission ("CFTC"). The Funds will not employ these
practices for speculation; however, these practices may result in the loss of
principal under certain conditions. In addition, certain provisions of the
Internal Revenue Code of 1986, as amended ("Code"), limit the extent to which a
Fund may enter into forward contracts or futures contracts or engage in options
transactions. See "Taxes" in the Statement of Additional Information. Certain
Funds also may purchase put or call options or futures contracts on currencies
for the same purposes as it may use forward currency contracts.
A Fund's 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 Fund's currency risks are
different from those needed to select the securities in which a Fund invests.
The Fund also may conduct its foreign currency exchange transactions on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign currency exchange
market.
SWAPS, CAPS, FLOORS AND COLLARS -- Certain Funds may enter into interest
rate, index and currency swaps, and the purchase or sale of related caps, floors
and collars. The Fund expects to enter into these transactions primarily to
preserve a return or spread on a particular investment or portion of its
portfolio, to protect against currency fluctuations as a technique for managing
the portfolio's duration (i.e., the price sensitivity to changes in interest
rates) or to protect against any increase in the price of securities the Fund
anticipates purchasing at a later date. The Funds intend to use these
transactions as hedges and not as speculative investments, and will not sell
interest rate caps or floors if it does not own securities or other instruments
providing the income the Fund may be obligated to pay.
Interest rate swaps involve the exchange by the Fund with another party of
their respective commitments to pay or receive interest (for example, an
exchange of floating rate payments for fixed rate payments) with respect to a
notional amount of principal. A currency swap is an agreement to exchange cash
flows on a notional amount based on changes in the values of the reference
indices.
The purchase of a cap entitles the purchaser to receive payments on a
notional principal amount from the party selling the cap to the extent that a
specified index exceeds a predetermined interest rate. The purchase of an
interest rate floor entitles the purchaser to receive payments on a notional
principal amount from the party selling the floor to the extent that a specified
index falls below a predetermined interest rate or amount. A collar is a
combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
AMERICAN DEPOSITARY RECEIPTS (ADRS) -- The High Yield Fund may invest in
sponsored ADRs. ADRs are dollar-denominated receipts issued generally by U.S.
banks and which represent the deposit with the bank of a foreign company's
securities. ADRs are publicly traded on exchanges or over-the-counter in the
United States. Investors should consider carefully the substantial risks
involved in investing in securities issued by companies of foreign nations,
which are in addition to the usual risks inherent in domestic investments. See
"Foreign Investment Risks," below.
LENDING OF PORTFOLIO SECURITIES -- Certain Funds may lend securities to
broker-dealers, institutional investors, or other persons to earn income. The
principal risk is the potential insolvency of the broker-dealer or other
borrower. In this event, the Fund could experience delays in recovering its
securities and possibly capital losses. Any loan will be continuously secured by
collateral at least equal to the value of the security loaned. Such lending
could result in delays in receiving additional collateral or in the recovery of
the securities or possible loss of rights in the collateral should the borrower
fail financially.
RISK FACTORS
GENERAL RISK FACTORS -- Each Fund's net asset value will fluctuate,
reflecting fluctuations in the market value of its portfolio positions and, if
applicable, its net currency exposure. The value of fixed income securities held
by the Funds generally fluctuates inversely with interest rate movements. In
other words, bond prices generally fall as interest rates rise and generally
rise as interest rates fall. Longer term bonds held by the Funds are subject to
greater interest rate risk. There is no assurance that any Fund will achieve its
investment objective.
FOREIGN INVESTMENT RISK -- Investment in foreign securities involves risks
and considerations not present in domestic investments. Foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards, practices and requirements comparable
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to those applicable to U.S. companies. The securities of non-U.S. issuers
generally are not registered with the SEC, nor are the issuers thereof usually
subject to the SEC's reporting requirements. Accordingly, there may be less
publicly available information about foreign securities and issuers than is
available with respect to U.S. securities and issuers. A Fund's income and gains
from foreign issuers may be subject to non-U.S. withholding or other taxes,
thereby reducing their income and gains. In addition, with respect to some
foreign countries, there is the increased possibility of expropriation or
confiscatory taxation, limitations on the removal of funds or other assets of
the Fund, political or social instability, or diplomatic developments which
could affect the investments of the Fund in those countries. Moreover,
individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national product, rate of inflation,
rate of savings and capital reinvestment, resource self-sufficiency and balance
of payments positions.
CURRENCY RISK -- Since the Global Aggressive Bond Fund normally invests
substantially in securities denominated in currencies other than the U.S.
dollar, and since it may hold foreign currencies, the value of such securities
will be affected favorably or unfavorably by exchange control regulations or
changes in the exchange rates between such currencies and the U.S. dollar.
Changes in currency exchange rates will influence the value of the Fund's
shares, and also may affect the value of dividends and interest earned by the
Fund and gains and losses realized by the Fund. Currencies generally are
evaluated on the basis of fundamental economic criteria (e.g., relative
inflation and interest rate levels and trends, growth rate forecasts, balance of
payments status and economic policies) as well as technical and political data.
The exchange rates between the U.S. dollar and other currencies are determined
by supply and demand in the currency exchange markets, the international balance
of payments, governmental intervention, speculation and other economic and
political conditions.
If the currency in which a security is denominated appreciates against the
U.S. dollar, the dollar value of the security will increase. Conversely, a
decline in the exchange rate of the currency would adversely affect the value of
the security expressed in U.S. dollars.
RISKS ASSOCIATED WITH INVESTMENT IN EMERGING MARKETS -- Certain of the
Funds may invest in emerging markets. Because of the special risks associated
with investing in emerging markets, an investment in a Fund making such
investments should be considered speculative. Investors are strongly advised to
consider carefully the special risks involved in emerging markets, which are in
addition to the usual risks of investing in developed foreign markets around the
world. Investing in emerging markets involves risks relating to potential
political economic instability within such markets and the risks of
expropriation, nationalization, confiscation of assets and property or the
imposition of restrictions on foreign investment and on repatriation of capital
invested. In the event of such expropriation, nationalization or other
confiscation in any emerging market, the Fund could lose its entire investment
in that market. Many emerging market countries have experienced substantial, and
in some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had and may continue to have negative
effects on the economies and securities markets of certain emerging market
countries. Economies in emerging markets generally are dependent heavily upon
international trade and, accordingly, have been and may continue to be affected
adversely by trade barriers, exchange controls, managed adjustments in relative
currency values and other protectionist measures imposed or negotiated by the
countries with which they trade. These economies also have been and may continue
to be affected adversely by economic conditions in the countries with which they
trade.
The securities markets of emerging countries are substantially smaller,
less developed, less liquid and more volatile than the securities markets of the
United States and other more developed countries. Disclosure and regulatory
standards in many respects are less stringent than in the United States and
other major markets. There also may be a lower level of monitoring and
regulation of emerging securities markets and the activities of investors in
such markets, and enforcement of existing regulations has been extremely
limited. Investments may also be made in former communist countries. There is a
possibility that these countries may revert to communism. In addition, brokerage
commissions, custodial services and other costs relating to investment in
foreign markets generally are more expensive than in the United States,
particularly with respect to emerging markets. Such markets have different
settlement and clearance procedures. In certain markets there have been times
when settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. The inability of
a Fund to make intended securities purchases due to settlement problems could
cause it to forego attractive investment opportunities. Inability to dispose of
a portfolio security caused by settlement problems could result either in losses
to a Fund due to subsequent declines in value of the portfolio security or, if a
Fund has entered into a contract to sell the security, could result in possible
liability to the purchaser.
The risk also exists that an emergency situation may arise in one or more
emerging markets as a result of which trading of securities may cease or may be
substantially curtailed and prices for a Fund's portfolio securities in such
markets may not be readily available. Section 22(e) of the
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1940 Act permits a registered investment company to suspend redemption of its
shares for any period during which an emergency exists, as determined by the
SEC. Accordingly, when a Fund believes that appropriate circumstances warrant,
it will promptly apply to the SEC for a determination that an emergency exists
within the meaning of Section 22(e) of the 1940 Act. During the period
commencing from a Fund's identification of such conditions until the date of SEC
action, the portfolio securities of a Fund in the affected markets will be
valued at fair value as determined in good faith by or under the direction of
the Fund's Board of Directors.
RISKS ASSOCIATED WITH LOWER-RATED DEBT SECURITIES (JUNK BONDS) -- Certain
of the Funds may invest in higher yielding debt securities in the lower rating
(higher risk) categories of the recognized rating services (commonly referred to
as "junk bonds"). Debt rated BB, B, CCC, CC and C by S&P and rated Ba, B, Caa,
Ca and C by Moody's, is regarded, on balance, as predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. For S&P, BB indicates the lowest
degree of speculation and C the highest degree of speculation. For Moody's, Ba
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions. Similarly, debt rated Ba or BB and below is
regarded by the relevant rating agency as speculative. Debt rated C by Moody's
or S&P is the lowest quality debt that is not in default as to principal or
interest and such issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing. Such securities are
also generally considered to be subject to greater risk than higher quality
securities with regard to a deterioration of general economic conditions. The
Global Aggressive Bond Fund may invest in debt securities rated below C, which
are in default as to principal and/or interest. Ratings of debt securities
represent the rating agency's opinion regarding their quality and are not a
guarantee of quality. Rating agencies attempt to evaluate the safety of
principal and interest payments and do not evaluate the risks of fluctuations in
market value. Also, rating agencies may fail to make timely changes in credit
quality in response to subsequent events, so that an issuer's current financial
condition may be better or worse than a rating indicates.
The market value of lower quality debt securities tend to reflect
individual developments of the issuer to a greater extent than do higher quality
securities, which react primarily to fluctuations in the general level of
interest rates. In addition, lower quality debt securities tend to be more
sensitive to economic conditions and generally have more volatile prices than
higher quality securities. Issuers of lower quality securities are often highly
leveraged and may not have available to them more traditional methods of
financing. For example, during an economic downturn or a sustained period of
rising interest rates, highly leveraged issuers of lower quality securities may
experience financial stress. During such periods, such issuers may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations may also be adversely affected by
specific developments affecting the issuer, such as the issuer's inability to
meet specific projected business forecasts or the unavailability of additional
financing. Similarly, certain emerging market governments that issue lower
quality debt securities are among the largest debtors to commercial banks,
foreign governments and supranational organizations such as the World Bank and
may not be able or willing to make principal and/or interest repayments as they
come due. The risk of loss due to default by the issuer is significantly greater
for the holders of lower quality securities because such securities are
generally unsecured and are often subordinated to other creditors of the issuer.
Lower quality debt securities of corporate issuers frequently have call or
buy-back features which would permit an issuer to call or repurchase the
security from the Fund. If an issuer exercises these provisions in a declining
interest rate market, the Fund may have to replace the security with a lower
yielding security, resulting in a decreased return for investors. In addition,
the Fund may have difficulty disposing of lower quality securities because there
may be a thin trading market for such securities. There may be no established
retail secondary market for many of these securities, and the Fund anticipates
that such securities could be sold only to a limited number of dealers or
institutional investors. The lack of a liquid secondary market also may have an
adverse impact on market prices of such instruments and may make it more
difficult for the Fund to obtain accurate market quotations for purposes of
valuing the securities in the portfolio of the Fund.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may also decrease the values and liquidity of lower
quality securities, especially in a thinly traded market. The Global Aggressive
Bond Fund and the High Yield Fund also may acquire lower quality debt securities
during an initial underwriting or may acquire lower quality debt securities
which are sold without registration under applicable securities laws. Such
securities involve special considerations and risks.
Factors having an adverse effect on the market value of lower rated
securities or their equivalents purchased by the Fund will adversely impact net
asset value of the Fund. See "Risk Factors" in the Statement of Additional
Information. In addition to the foregoing, such factors may include: (i)
potential adverse publicity; (ii) heightened sensitivity to general economic or
political conditions; and (iii) the likely adverse impact of a major economic
recession. The Fund
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also may incur additional expenses to the extent it is required to seek recovery
upon a default in the payment of principal or interest on its portfolio
holdings, and the Fund may have limited legal recourse in the event of a
default. Debt securities issued by governments in emerging markets can differ
from debt obligations issued by private entities in that remedies from defaults
generally must be pursued in the courts of the defaulting government, and legal
recourse is therefore somewhat diminished. Political conditions, in terms of a
government's willingness to meet the terms of its debt obligations, also are of
considerable significance. There can be no assurance that the holders of
commercial bank debt may not contest payments to the holders of debt securities
issued by governments in emerging markets in the event of default by the
governments under commercial bank loan agreements.
The Investment Manager and, with respect to the Global Aggressive Bond
Fund, the Sub-Adviser and MFR, will attempt to minimize the speculative risks
associated with investments in lower quality securities through credit analyses
and by carefully monitoring current trends in interest rates, political
developments and other factors. Nonetheless, investors should carefully review
the investment objectives and policies of the Funds and consider their ability
to assume the investment risks involved before making an investment in the
Funds.
MANAGEMENT OF THE FUNDS
The management of the Funds' business and affairs is the responsibility of
the Board of Directors. Security Management Company, LLC (the "Investment
Manager"), 700 Harrison Street, Topeka, Kansas, is responsible for selection and
management of the Funds' portfolio investments. The Investment Manager is a
limited liability company which is ultimately controlled by Security Benefit
Life Insurance Company, a mutual life insurance company with over $15.5 billion
of insurance in force. The Investment Manager also acts as investment adviser to
Security Equity, Growth and Income, and Ultra Funds and SBL Fund. The Investment
Manager currently manages approximately $3.5 billion in assets.
The Investment Manager has engaged Lexington Management Corporation (the
"Sub-Adviser"), Park 80 West Plaza Two, Saddle Brook, New Jersey 07663, to
provide certain investment advisory services to Global Aggressive Bond Fund. The
Sub-Adviser is a wholly-owned subsidiary of 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. The Sub-Adviser was
established in 1938 and currently manages over $3.8 billion in assets.
The Sub-Adviser has entered into a sub-advisory contract with MFR Advisors,
Inc., ("MFR"), One World Financial Center, 200 Liberty Street, New York, New
York 10281, under which MFR will provide the Global Aggressive Bond Fund with
investment and economic research services. MFR currently acts as Sub-Adviser to
the Lexington Ramirez Global Income Fund and also serves as an institutional
manager for private clients. MFR is a subsidiary of Maria Fiorini Ramirez, Inc.
("Ramirez"), which was established in August of 1992 to provide global economic
consulting, investment advisory and broker-dealer services. Ramirez is the
successor firm to Maria Ramirez Capital Consultants, Inc. ("MRCC"). MRCC was
formed in April 1990 as a subsidiary of John Hancock Freedom Securities
Corporation and offered in-depth economic consulting services to clients.
Subject to the supervision and direction of the Funds' Board of Directors,
the Investment Manager, and, with respect to Global Aggressive Bond Fund, the
Sub-Adviser and MFR, manage the Fund portfolios in accordance with each Fund's
stated investment objective and policies and make all investment decisions. The
Investment Manager has agreed that total annual expenses of the respective Funds
(including for any fiscal year, the management fee, but excluding interest,
taxes, brokerage commissions, extraordinary expenses and Class B distribution
fees) shall not for the Corporate Bond, Limited Maturity Bond, U.S. Government,
Global Aggressive Bond and High Yield Funds exceed the level of expenses which
the Funds are permitted to bear under the most restrictive expense limitation
imposed by any state in which shares of the Fund are then qualified for sale and
shall not for Tax-Exempt and Cash Funds exceed one percent of each Fund's
average net assets for the year. The Investment Manager will contribute such
funds to the Funds or waive such portion of its compensation as may be necessary
to insure that such total annual expenses do not exceed any such limitation. As
compensation for its management services, the Investment Manager receives on an
annual basis, .5 percent of the average daily net assets of Corporate Bond,
Limited Maturity Bond, U.S. Government, Tax-Exempt and Cash Funds; .6 percent of
the average daily net assets of the High Yield Fund and .75 percent of the
average daily net assets of Global Aggressive Bond Fund, computed on a daily
basis and payable monthly. As compensation for the services provided to the
Global Aggressive Bond Fund, the Investment Manager pays the Sub-Adviser, on an
annual basis, a fee equal to .35 percent of the average daily net assets of such
Fund, calculated daily and payable monthly. For the services provided by MFR,
MFR receives from the Sub-Adviser, on an annual basis, a fee equal to .15
percent
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of the average daily net assets of the Global Aggressive Bond Fund, calculated
daily and payable monthly.
The Investment Manager also acts as the administrative agent for the Funds,
and as such performs administrative functions, and the bookkeeping, accounting
and pricing functions for the Funds. For this service the Investment Manager
receives on an annual basis, a fee of .09 percent of the average daily net
assets of Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield and
Tax-Exempt Funds and .045 percent of the average daily net assets of Cash and
Global Aggressive Bond Funds, calculated daily and payable monthly. For the
identified administrative services the Investment Manager also receives, with
respect to the Global Aggressive Bond Fund, an annual fee equal to the greater
of .10 percent of its average net assets or (i) $30,000 in the year ended April
29, 1996; (ii) $45,000 in the year ending April 29, 1997; and (iii) $60,000
thereafter. The Investment Manager also acts as the transfer agent and dividend
disbursing agent for the Funds. The Investment Manager has arranged for the
Sub-Adviser to provide certain administrative services to Global Aggressive Bond
Fund including performing certain accounting and pricing functions. The Funds'
expenses include fees paid to the Investment Manager as well as expenses of
brokerage commissions, interest, taxes, Class B distribution fees and
extraordinary expenses approved by the Board of Directors of the Funds.
For the year ended December 31, 1995, the total expenses, as a percentage
of average net assets, were 1.02 percent for Class A and 1.85 percent for Class
B shares of Corporate Bond Fund; 1.11 percent for Class A and 1.87 percent for
Class B shares of U.S. Government Fund; .86 percent for Class A and 2.00 percent
for Class B shares of Tax-Exempt Fund; and 1.00 percent for Cash Fund. For the
period January 17, 1995 (date of inception) to December 31, 1995 and the period
June 1, 1995 (date of inception) to December 31, 1995, the total expenses were
.84 percent for Class A shares and 1.71 percent for Class B shares of Limited
Maturity Bond Fund and 2.00 percent for Class A shares and 2.75 percent for
Class B shares of Global Aggressive Bond Fund, respectively. Expense information
is not yet available for the High Yield Fund as it did not begin operations
until August of 1996.
PORTFOLIO MANAGEMENT
Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield,
Tax-Exempt and Cash Funds will be managed by the Fixed Income Team of the
Investment Manager consisting of John Cleland, Chief Investment Strategist, Jane
Tedder, Tom Swank, Steve Bowser, Barb Davison, Greg Hamilton and Elaine Miller.
Greg Hamilton, Second Vice President of the Investment Manager, has had
day-to-day responsibility for managing Corporate Bond, Limited Maturity Bond and
Tax-Exempt Funds since January 1996. Steve Bowser, Assistant Vice President and
Portfolio Manager of the Investment Manager, has had day-to-day responsibility
for managing U.S. Government Fund since 1995. Tom Swank, Second Vice President
and Portfolio Manager for the Investment Manager, has had day-to-day
responsibility for managing the High Yield Fund since its inception in 1996.
Mr. Hamilton has been in the investment field since 1983. He received his
Bachelor of Arts degree in Business from Washburn University in 1984. Prior to
joining Security Management Company in January of 1993, he was First Vice
President, Treasurer and Portfolio Manager with Mercantile National Bank, Los
Angeles, California, from 1990 to 1993. From 1986 to 1990, he was Managing
Director of Consulting Services for Sendero Corporation, Scottsdale, Arizona.
Prior to Sendero Corporation, he was employed as Fixed Income Research Analyst
at Peoples Heritage Savings and Loan from 1983 to 1986.
Mr. Bowser joined the Investment Manager in 1992. Prior to joining the
Investment Manager, he was Assistant Vice President and Portfolio Manager with
the Federal Home Loan Bank of Topeka from 1989 to 1992. He was employed at the
Federal Reserve Bank of Kansas City in 1988 and began his career with the Farm
Credit System from 1982 to 1987, serving as a Senior Financial Analyst and
Assistant Controller. He graduated with a Bachelor of Science degree from Kansas
State University in 1982.
Tom Swank has over ten years of experience in the investment field. He is a
Chartered Financial Analyst. Prior to joining the Investment Manager in 1992, he
was an Investment Underwriter and Portfolio Manager for U.S. West Financial
Services, Inc. from 1986 to 1992. From 1984 to 1986, he was a Commercial Credit
Officer for United Bank of Denver. From 1982 to 1984, he was employed as a Bank
Holding Company examiner for the Federal Reserve Bank of Kansas City - Denver
Branch. Mr. Swank graduated from Miami University in Ohio with a Bachelor of
Science degree in finance in 1982 and earned a Master of Business Administration
degree from the University of Colorado.
Global Aggressive Bond Fund is managed by an investment management team of
the Sub-Adviser and MFR. Denis P. Jamison and Maria Fiorini Ramirez have been
the lead managers since the Fund's inception in June 1995.
Mr. Jamison, C.F.A., Senior Vice President, Director Fixed Income Strategy
of the Sub-Adviser, is responsible for fixed-income portfolio management. He is
a member of the New York Society of Security Analysts. Mr. Jamison has more than
20 years investment experience. Prior to joining the Sub-Adviser in 1981, Mr.
Jamison spent nine years at Arnold Bernhard & Company, an investment counseling
and financial services organization. At Bernhard, he was a Vice President
supervising the security analyst staff and managing investment portfolios. He is
a specialist in government,
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corporate and municipal bonds. Mr. Jamison is a graduate of the City College of
New York with a B.A. in Economics.
Maria Fiorini Ramirez, President and Chief Executive Officer of MFR, began
her career as a credit analyst with American Express International Banking
Corporation in 1968. In 1972, she moved to Banco Nazionale De Lavoro in New
York. The following year, she started a ten year association with Merrill Lynch,
serving as Vice President and Senior Money Market Economist. She joined Becker
Paribas in 1984 as Vice President and Senior Money Market Economist before
joining Drexel Burnham Lambert that same year as First Vice President and Money
Market Economist. She was promoted to Managing Director of Drexel in 1986. From
April 1990 to August 1992, Ms. Ramirez was the President and Chief Executive
Officer of Maria Ramirez Capital Consultants, Inc., a subsidiary of John Hancock
Freedom Securities Corporation. Ms. Ramirez established MFR in August 1992. She
is known in international financial, banking and economic circles for her
assessment of the interaction between global economic policy and political
trends and their effect on investments. Ms. Ramirez holds a B.A. in Business
Administration/ Economics from Pace University.
HOW TO PURCHASE SHARES
As discussed below, shares of Corporate Bond, Limited Maturity Bond, U.S.
Government, Global Aggressive Bond, High Yield and Tax-Exempt Funds may be
purchased with either a front-end or contingent deferred sales charge. Shares of
Cash Fund are offered by the Fund without a sales charge. Each of the Funds
reserves the right to withdraw all or any part of the offering made by this
prospectus and to reject purchase orders.
As a convenience to investors and to save operating expenses, the Funds do
not issue certificates for Fund shares except upon written request by the
stockholder.
CORPORATE BOND, LIMITED MATURITY BOND, U.S. GOVERNMENT,
GLOBAL AGGRESSIVE BOND, HIGH YIELD AND TAX-EXEMPT FUNDS
Security Distributors, Inc. (the "Distributor"), a wholly-owned subsidiary
of Security Benefit Group, Inc., is principal underwriter for Corporate Bond,
Limited Maturity Bond, U.S. Government, Global Aggressive Bond, High Yield and
Tax-Exempt Funds. Shares of these Funds may be purchased through authorized
investment dealers. In addition, banks and other financial institutions that
have an agreement with the Distributor may make shares of these Funds available
to their customers. The minimum initial purchase must be $100 and subsequent
purchases must be $100 unless made through an Accumulation Plan which allows
subsequent purchases of $20.
Orders for the purchase of shares of Corporate Bond, Limited Maturity Bond,
U.S. Government, Global Aggressive Bond, High Yield and Tax-Exempt Funds will be
confirmed at an offering price equal to the net asset value per share next
determined after receipt of the order in proper form by the Distributor
(generally as of the close of the Exchange on that day) plus the sales charge in
the case of Class A shares. Orders received by dealers or other firms prior to
the close of the Exchange and received by the Distributor prior to the close of
its business day will be confirmed at the offering price effective as of the
close of the Exchange on that day.
Orders for shares received by broker/dealers prior to that day's close of
trading on the New York Stock Exchange and transmitted to the Fund prior to its
close of business that day will receive the offering price equal to the net
asset value per share computed at the close of trading on the Exchange on the
same day plus, in the case of Class A shares, the sales charge. Orders received
by broker/dealers after that day's close of trading on the Exchange and
transmitted to the Fund prior to the close of business on the next business day
will receive the next business day's offering price.
ALTERNATIVE PURCHASE OPTIONS
Corporate Bond, Limited Maturity Bond, U.S. Government, Global Aggressive
Bond, High Yield and Tax-Exempt Funds offer two classes of shares:
CLASS A SHARES - FRONT-END LOAD OPTION. Class A shares are sold with a
sales charge at the time of purchase. Class A shares are not subject to a sales
charge when they are redeemed (except that shares sold in an amount of
$1,000,000 or more without a front-end sales charge will be subject to a
contingent deferred sales charge for one year.) See Appendix C on page 41 for a
discussion of possible reductions in the front-end sales charge.
CLASS B SHARES - BACK-END LOAD OPTION. Class B shares are sold without a
sales charge at the time of purchase, but are subject to a deferred sales charge
if they are redeemed within five years of the date of purchase. Class B shares
will automatically convert tax-free to Class A shares at the end of eight years
after purchase.
The decision as to which class is more beneficial to an investor depends on
the amount and intended length of the investment. Investors who would rather pay
the entire cost of distribution at the time of investment, rather than spreading
such cost over time, might consider Class A shares. Other investors might
consider Class B shares, in which case 100 percent of the purchase price is
invested immediately, depending on the amount of the purchase and the intended
length of investment. The Funds will not normally accept any purchase of Class B
shares in the amount of $250,000 or more.
Dealers or others receive different levels of compensation depending on
which class of shares they sell.
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CLASS A SHARES
Class A shares of Corporate Bond, Limited Maturity Bond, U.S. Government,
Global Aggressive Bond, High Yield and Tax-Exempt Funds are offered at net asset
value plus an initial sales charge as follows:
SALES CHARGE
--------------------------------------------
Amount of Applicable Percentage of Percentage
Purchases at Percentage of Net Amount Reallowable
Offering Price Offering Price Invested to Dealers
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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 of the Corporate Bond, Limited Maturity Bond,
U.S. Government, Global Aggressive Bond, High Yield and Tax-Exempt Funds in
amounts of $1,000,000 or more are made at net asset value (without a sales
charge), but are subject to a contingent deferred sales charge of one percent in
the event of redemption within one year following purchase. For a discussion of
the contingent deferred sales charge, see "Calculation and Waiver of Contingent
Deferred Sales Charges" on page 27.
The Distributor will pay a commission to dealers on such purchases of
$1,000,000 or more as follows: 1.00 percent on sales up to $5,000,000, plus .50
percent on sales of $5,000,000 or more up to $10,000,000 and .10 percent on any
amount of $10,000,000 or more.
The Investment Manager may, at its expense, pay a service fee to dealers
who satisfy certain criteria established by the Investment Manager from time to
time relating to the volume of their sales of Class A shares of Tax-Exempt Fund
and certain other Security Funds during prior periods and certain other factors,
including providing certain services to their clients who are stockholders of
such Funds. Such services include assisting stockholders in changing account
options or enrolling in specific plans, and providing stockholders with
information regarding the Funds and related developments.
Currently, service fees are paid on the aggregate value of accounts opened
after July 31, 1990, in Security Tax-Exempt, Equity, Asset Allocation, Global,
Ultra and Growth and Income Funds at the following annual rates: .25 percent of
aggregate net asset value for amounts of $100,000 but less than $5 million and
.30 percent for amounts of $5,000,000 or more.
SECURITY INCOME FUND'S
CLASS A DISTRIBUTION PLAN
In addition to the sales charge deducted from Class A shares at the time of
purchase, each of Corporate Bond, Limited Maturity Bond, U.S. Government, Global
Aggressive Bond and High Yield Funds is authorized, under a Distribution Plan
pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the "Class A
Distribution Plan"), to use its assets to finance certain activities relating to
the distribution of its shares to investors. This Plan permits payments to be
made by these Funds to the Distributor, to finance various activities relating
to the distribution of their Class A shares to investors, including, but not
limited to, the payment of compensation (including incentive compensation to
securities dealers and other financial institutions and organizations) to obtain
various distribution-related and/or administrative services for the Funds.
Under the Class A Distribution Plan, a monthly payment is made to the
Distributor in an amount computed at an annual rate of .25 percent of the
average daily net asset value of Corporate Bond, Limited Maturity Bond, U.S.
Government, Global Aggressive Bond and High Yield Funds' Class A shares. The
distribution fee is charged to each Fund in proportion to the relative net
assets of their Class A shares. The distribution fees collected may be used by
Corporate Bond, Limited Maturity Bond, U.S. Government, Global Aggressive Bond
and High Yield Funds to finance joint distribution activities, for example joint
advertisements, and the costs of such joint activities will be allocated among
the Funds on a fair and equitable basis, including on the basis of the relative
net assets of their Class A shares.
The Class A Distribution Plan authorizes payment by the Class A shares of
these Funds of the cost of preparing, printing and distributing prospectuses and
Statements of Additional Information to prospective investors and of
implementing and operating the Plan.
In addition, compensation to securities dealers and others is paid from
distribution fees at an annual rate of .25 percent of the average daily net
asset value of Class A shares sold by such dealers and remaining outstanding on
the Fund's books to obtain certain administrative services for the Funds' Class
A stockholders. The services include, among other things, processing new
stockholder account applications and serving as the primary source of
information to customers in answering questions concerning the Funds and their
transactions with the Funds. The Distributor is also authorized to engage in
advertising, the preparation and distribution of sales literature and other
promotional activities on behalf of Corporate Bond, Limited Maturity Bond, U.S.
Government, Global Aggressive Bond and High Yield Funds. Other promotional
activities which may be financed pursuant to the Plan include (i) informational
meetings concerning these Funds for registered representatives interested in
selling shares of the Funds and (ii) bonuses or incentives offered to all or
specified dealers on the basis of sales of a specified minimum dollar amount of
Class A shares of these Funds by the registered representatives employed by such
dealer(s). The expenses associated with the foregoing activities will include
travel expenses, including lodging. Additional
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information may be obtained by referring to the Funds' Statement of Additional
Information.
Corporate Bond, Limited Maturity Bond, U.S. Government, Global Aggressive
Bond and High Yield Funds' Class A Distribution Plan may be terminated at any
time by vote of the directors of Income Fund, who are not interested persons of
the Fund as defined in the 1940 Act or by vote of a majority of the outstanding
Class A shares. In the event the Class A Distribution Plan is terminated by the
Funds' Class A stockholders or the Board of Directors, the payments made to the
Distributor pursuant to the Plan up to that time would be retained by the
Distributor. Any expenses incurred by the Distributor in excess of those
payments would be absorbed by the Distributor.
CLASS B SHARES
Class B shares of Corporate Bond, Limited Maturity Bond, U.S. Government,
Global Aggressive Bond, High Yield and Tax-Exempt Funds are offered at net asset
value, without an initial sales charge. With certain exceptions, these Funds may
impose a deferred sales charge on Class B shares redeemed within five years of
the date of purchase. No deferred sales charge is imposed on amounts redeemed
thereafter. If imposed, the deferred sales charge is deducted from the
redemption proceeds otherwise payable. The deferred sales charge is retained by
the Distributor.
Whether a contingent deferred sales charge is imposed and the amount of the
charge will depend on the number of years since the stockholder made a purchase
payment from which an amount is being redeemed, according to the following
schedule:
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 the Investment Manager.) All shares purchased through
reinvestment of dividends and other distributions paid with respect to Class B
shares ("reinvestment shares") will be considered to be held in a separate
subaccount. Each time any Class B shares (other than those held in the
subaccount) convert to Class A shares, a pro rata portion of the reinvestment
shares held in the subaccount will also convert to Class A shares. Class B
shares so converted will no longer be subject to the higher expenses borne by
Class B shares. Because the net asset value per share of the Class A shares may
be higher or lower than that of the Class B shares at the time of conversion,
although the dollar value will be the same, a stockholder may receive more or
less Class A shares than the number of Class B shares converted. Under current
law, it is the Funds' opinion that such a conversion will not constitute a
taxable event under federal income tax law. In the event that this ceases to be
the case, the Board of Directors will consider what action, if any, is
appropriate and in the best interests of the Class B stockholders.
CLASS B DISTRIBUTION PLAN
Each of Corporate Bond, Limited Maturity Bond, U.S. Government, Global
Aggressive Bond, High Yield and Tax-Exempt Funds bears some of the costs of
selling its Class B shares under a Distribution Plan adopted with respect to its
Class B shares ("Class B Distribution Plan") pursuant to Rule 12b-1 under the
Investment Company Act of 1940 ("1940 Act"). Each Fund's Plan provides for
payments at an annual rate of 1.00 percent of the average daily net asset value
of its Class B shares. Amounts paid by the Funds are currently used to pay
dealers and other firms that make Class B shares available to their customers
(1) a commission at the time of purchase normally equal to 4.00 percent of the
value of each share sold and (2) a service fee payable for the first year,
initially, and for each year thereafter, quarterly, in an amount equal to .25
percent annually of the average daily net asset value of Class B shares sold by
such dealers and other firms and remaining outstanding on the books of the
Funds.
NASD Rules limit the aggregate amount that each of the Funds may pay
annually in distribution costs for the sale of its Class B shares to 6.25
percent of gross sales of Class B shares since the inception of the Distribution
Plan, plus interest at the prime rate plus one percent on such amount (less any
contingent deferred sales charges paid by Class B stockholders to the
Distributor). The Distributor intends, but is not obligated, to continue to
apply or accrue distribution charges incurred in connection with the Class B
Distribution Plan which exceed current annual payments permitted to be received
by the Distributor from the Funds. The Distributor intends to seek full payment
of such charges from the Fund (together with annual interest thereon at the
prime rate plus one percent) at such time in the future as, and to the extent
that, payment thereof by the Funds would be within permitted limits.
Each Fund's Class B Distribution Plan may be terminated at any time by vote
of its directors who are not
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interested persons of the Fund as defined in the 1940 Act or by vote of a
majority of the outstanding Class B shares. In the event the Class B
Distribution Plan is terminated by the Class B stockholders or the Funds' Board
of Directors, the payments made to the Distributor pursuant to the Plan up to
that time would be retained by the Distributor. Any expenses incurred by the
Distributor in excess of those payments would be absorbed by the Distributor.
The Funds make no payments in connection with the sale of their Class B shares
other than the distribution fee paid to the Distributor.
CALCULATION AND WAIVER OF
CONTINGENT DEFERRED SALES CHARGES
Any contingent deferred sales charge imposed upon redemption of Class A
shares (purchased in an amount of $1,000,000 or more) and Class B shares is a
percentage of the lesser of (1) the net asset value of the shares redeemed or
(2) the net cost of such shares. No contingent deferred sales charge is imposed
upon redemption of amounts derived from (1) increases in the value above the net
cost of such shares due to increases in the net asset value per share of the
Fund; (2) shares acquired through reinvestment of income dividends and capital
gain distributions; or (3) Class A shares (purchased in an amount of $1,000,000
or more) held for more than one year or Class B shares held for more than five
years. Upon request for redemption, shares not subject to the contingent
deferred sales charge will be redeemed first. Thereafter, shares held the
longest will be the first to be redeemed.
The contingent deferred sales charge is waived: (1) following the death of
a stockholder if redemption is made within one year after death; (2) upon the
disability (as defined in Section 72(m)(7) of the Internal Revenue Code) of a
stockholder prior to age 65 if redemption is made within one year after the
disability, provided such disability occurred after the stockholder opened the
account; (3) in connection with required minimum distributions in the case of an
IRA, SAR-SEP or Keogh or any other retirement plan qualified under section
401(a), 401(k) or 403(b) of the Code; and (4) in the case of distributions from
retirement plans qualified under section 401(a) or 401(k) of the Internal
Revenue Code due to (i) returns of excess contributions to the plan, (ii)
retirement of a participant in the plan, (iii) a loan from the plan (repayment
of loans, however, will constitute new sales for purposes of assessing the
contingent deferred sales charge, (iv) "financial hardship" of a participant in
the plan, as that term is defined in Treasury Regulation section
1.401(k)1(d)(2), as amended from time to time, (v) termination of employment of
a participant in the plan, (vi) any other permissible withdrawal under the terms
of the plan. The contingent deferred sales charge will also be waived in the
case of redemptions of Class B shares of the Funds pursuant to a systematic
withdrawal program. See "Systematic Withdrawal Program," page 34 for details.
ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS
The Distributor, from time to time, will provide promotional incentives or
pay a bonus to certain dealers whose representatives have sold or are expected
to sell significant amounts of the Corporate Bond, Limited Maturity Bond, U.S.
Government, Global Aggressive Bond, High Yield and Tax-Exempt Funds and/or
certain other Funds managed by the Investment Manager. Such promotional
incentives will include payment for attendance (including travel and lodging
expenses) by qualifying registered representatives (and members of their
families) at sales seminars at luxury resorts within or outside the United
States. Bonus compensation may include reallowance of the entire sales charge
and may also include, with respect to Class A shares, an amount which exceeds
the entire sales charge and, with respect to Class B shares, an amount which
exceeds the maximum commission. The Distributor, or the Investment Manager, may
also provide financial assistance to certain dealers in connection with
conferences, sales or training programs for their employees, seminars for the
public, advertising, sales campaigns, and/or shareholder services and programs
regarding one or more of the funds managed by the Investment Manager. Certain of
the promotional incentives or bonuses may be financed by payments to the
Distributor under a Rule 12b-1 Distribution Plan. The payment of promotional
incentives and/or bonuses will not change the price an investor will pay for
shares or the amount that the Funds will receive from such sale. No compensation
will be offered to the extent it is prohibited by the laws of any state or
self-regulatory agency, such as the National Association of Securities Dealers,
Inc. ("NASD"). A Dealer to whom substantially the entire sales charge on Class A
shares is reallowed may be deemed to be an "underwriter" under federal
securities laws.
The Distributor also may pay banks and other financial services firms that
facilitate transactions in shares of the Funds for their clients a transaction
fee up to the level of the payments made allowable to dealers for the sale of
such shares as described above. Banks currently are prohibited under the
Glass-Steagall Act from providing certain underwriting or distribution services.
If banking firms were prohibited from acting in any capacity or providing any of
the described services, the Funds' Board of Directors would consider what
action, if any, would be appropriate.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
The Investment Manager or Distributor also may pay a marketing allowance to
dealers who meet certain eligibility criteria. This allowance is paid with
reference to new sales
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of shares of Corporate Bond, Limited Maturity Bond, U.S. Government, Global
Aggressive Bond, High Yield and Tax-Exempt Funds in a calendar year. To be
eligible for this allowance in any given year, the dealer must sell a minimum of
$2,000,000 of Class A and Class B shares during that year. The marketing
allowance ranges from .15 percent to .75 percent of aggregate new sales
depending upon the volume of shares sold. See the Funds' Statement of Additional
Information for more detailed information about the marketing allowance.
CASH FUND
Shares of Cash Fund are offered at net asset value next determined after an
order is accepted. There is no sales charge or load. The minimum initial
investment in Cash Fund is $100 for each account. Subsequent investments may be
made in any amount of $20 or more. Cash Fund purchases may be made in any of the
following ways:
1. BY MAIL
(a) A check or negotiable bank draft should be sent to:
Security Cash Fund
P.O. Box 2548
Topeka, Kansas 66601
(b) Make check or draft payable to "SECURITY CASH FUND."
(c) For initial investment include a completed investment application found
on page 43 of this prospectus.
2. BY WIRE
(a) Call the Fund to advise of the investment. The Fund will supply an
account number at the time of the initial investment and provide
instructions for having your bank wire federal funds.
(b) Wire federal funds to:
Bank IV of Topeka
Security Distributors, Inc.
Topeka, Kansas 66603
Include investor's name and the Cash Fund account number.
(c) For initial investment, send a completed investment application to the
Fund at the above address.
3. THROUGH BROKER/DEALERS
Investors may, if they wish, invest in Cash Fund by purchasing shares
through registered broker/dealers. Such broker/dealers who process orders on
behalf of their customers may charge a fee for their services. Investments made
directly without the assistance of a broker/dealer are without charge.
Since Cash Fund invests in money market securities which require immediate
payment in federal funds, monies received from the sales of its shares must be
monies held by a commercial bank and be on deposit at one of the Federal Reserve
Banks. A record date for each stockholder's investment is established each
business day and used to distribute the following day's dividend. If federal
funds are received prior to 2:00 p.m. (Central time) the investment will be made
on that day and the investor will receive the following day's dividend. Federal
funds received after 2:00 p.m. on any business day will not be invested until
the following business day. The Fund will not be responsible for any delays in
the wire transfer system. All checks are accepted subject to collection at full
face value in United States funds and must be drawn in United States dollars on
a United States bank.
The Investment Manager may, at its expense, pay a service fee to dealers
who satisfy certain criteria established by the Investment Manager from time to
time relating to the volume of their sales of Cash Fund during prior periods and
certain other factors, including providing certain services to their clients who
are stockholders of the Fund. Currently, service fees are paid on the aggregate
value of Cash Fund accounts opened after July 31, 1990, at the following annual
rate: .25 percent of aggregate net asset value for amounts of $1,000,000 or
more.
PURCHASES AT NET ASSET VALUE
Class A shares of Corporate Bond, Limited Maturity Bond Fund, U.S.
Government, Global Aggressive Bond, High Yield and Tax-Exempt Funds may be
purchased at net asset value by (1) directors, officers and employees of the
Funds, the Funds' Investment Manager or Distributor; directors, officers and
employees of Security Benefit Life Insurance Company and its subsidiaries;
agents licensed with Security Benefit Life Insurance Company; spouses or minor
children of any such agents; as well as the following relatives of any such
directors, officers and employees (and their spouses): spouses, grandparents,
parents, children, grandchildren, siblings, nieces and nephews; (2) any trust,
pension, profit sharing or other benefit plan established by any of the
foregoing corporations for persons described above; (3) retirement plans where
third party administrators of such plans have entered into certain arrangements
with the Distributor or its affiliates provided that no commission is paid to
dealers; and (4) officers, directors, partners or registered representatives
(and their spouses and minor children) of broker/dealers who have a selling
agreement with the Distributor. Such sales are made upon the written assurance
of the purchaser that the purchase is made for investment purposes and that the
securities will not be transferred or resold except through redemption or
repurchase by or on behalf of the Funds.
Class A shares of Corporate Bond, Limited Maturity Bond, U.S. Government,
Global Aggressive Bond, High Yield and Tax-Exempt Funds may also be purchased at
net asset value when the purchase is made on the recommendation of (i) a
registered investment adviser, trustee or financial intermediary who has
authority to make
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investment decisions on behalf of the investor; or (ii) a certified financial
planner or registered broker-dealer who either charges periodic fees to its
customers for financial planning, investment advisory or asset management
services, or provides such services in connection with the establishment of an
investment account for which a comprehensive "wrap fee" is imposed. The
Distributor must be notified when a purchase is made that qualifies under this
provision.
TRADING PRACTICES AND BROKERAGE
The portfolio turnover rate for the Corporate Bond, U.S. Government and
Tax-Exempt Funds, respectively, for the fiscal year ended December 31, 1995, was
as follows: Corporate Bond Fund - 200 percent; U.S. Government Fund - 81
percent; and Tax-Exempt Fund - 103 percent. The annualized portfolio turnover
rate for the Limited Maturity Bond Fund for the period January 17, 1995 (date of
inception) to December 31, 1995, and the Global Aggressive Bond Fund for the
period June 1, 1995 (date of inception) to December 31, 1995, was as follows:
Limited Maturity Bond - 4 percent; and Global Aggressive Bond - 127 percent.
Portfolio turnover information is not yet available for the High Yield Fund as
it did not begin operations until August of 1996. The Corporate Bond and Limited
Maturity Bond Funds' portfolio turnover rate generally is expected to be less
than 100 percent, and that of the U.S. Government and Global Aggressive Bond
Funds may exceed 100 percent, but is not expected to do so. The portfolio
turnover rate for the High Yield Fund may exceed 100 percent but it is generally
not expected to exceed 150 percent. Higher portfolio turnover subjects a fund to
increased brokerage costs and may, in some cases, have adverse tax effects on a
fund or its stockholders.
Cash Fund is expected to have a high portfolio turnover rate due to the
short maturities of its portfolio securities; this should not, however, affect
the Fund's income or net asset value since brokerage commissions are not
normally paid in connection with the purchase or sale of money market
instruments.
Transactions in portfolio securities are effected in the manner deemed to
be in the best interests of each Fund. In selecting a broker or dealer to
execute a specific transaction, all relevant factors will be considered.
Portfolio transactions may be directed to brokers who furnish investment
information or research services to the Investment Manager or who sell shares of
the Funds. The Investment Manager may, consistent with the NASD Rules of Fair
Practice, consider sales of shares of the Fund in the selection of a broker.
Securities held by the Funds may also be held by other investment advisory
clients of the Investment Manager, including other investment companies, and by
the Investment Manager's parent company, Security Benefit Life Insurance Company
("SBL"). Purchases or sales of the same security occurring on the same day
(which may include orders from SBL) may be aggregated and executed as a single
transaction, subject to the Investment Manager's obligation to seek best
execution. Aggregated purchases or sales are generally effected at an average
price and on a pro rata basis (transaction costs will also be shared on a pro
rata basis) in proportion to the amounts desired to be purchased or sold. See
the Funds' Statement of Additional Information for a more detailed description
of aggregated transactions.
HOW TO REDEEM SHARES
A stockholder may redeem shares at the net asset value next determined
after the time when such shares are tendered for redemption.
Shares will be redeemed on request of the stockholder in proper order to
the Funds' Investment Manager, Security Management Company, LLC, which serves as
the Funds' transfer agent. A request is made in proper order by submitting the
following items to the Investment Manager: (1) a written request for redemption
signed by all registered owners exactly as the account is registered, including
fiduciary titles, if any, and specifying the account number and the dollar
amount or number of shares to be redeemed; (2) a guarantee of all signatures on
the written request or on the share certificate or accompanying stock power; (3)
any share certificates issued for any of the shares to be redeemed; and (4) any
additional documents which may be required by the Investment Manager for
redemption by corporations or other organizations, executors, administrators,
trustees, custodians or the like. Transfers of shares are subject to the same
requirements. The signature guarantee must be provided by an eligible guarantor
institution, such as a bank, broker, credit union, national securities exchange
or savings association. A signature guarantee is not required for redemptions of
$10,000 or less, requested by and payable to all stockholders of record for an
account, to be sent to the address of record. The Investment Manager reserves
the right to reject any signature guarantee pursuant to its written procedures
which may be revised in the future. To avoid delay in redemption or transfer,
stockholders having questions should contact the Investment Manager by calling
1-800-888-2461, extension 3127.
The redemption price will be the net asset value of the shares next
computed after the redemption request in proper order is received by the
Investment Manager. In addition, stockholders of Cash Fund will receive any
undistributed dividends, including any dividend declared on the day of the
redemption. Payment of the amount due on redemption, less any applicable
deferred sales charge, will be made by check, or by wire at the sole discretion
of the Investment Manager, within seven days after receipt of the redemption
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request in proper order. If a wire transfer is requested, the Investment Manager
must be provided with the name and address of the stockholder's bank as well as
the account number to which payment is to be wired. Checks will be mailed to the
stockholder's registered address (or as otherwise directed). Remittance by wire
(to a commercial bank account in the same name(s) as the shares are registered),
by certified or cashier's check, or by express mail, if requested, will be at a
charge of $15, which will be deducted from the redemption proceeds.
Cash Fund offers redemption by check and Corporate Bond, Limited Maturity
Bond, U.S. Government and Tax-Exempt Funds offer redemption by check on Class A
shares only. The Global Aggressive Bond Fund and the High Yield Fund do not
offer checkwriting privileges. If blank checks are requested on the Checking
Privilege Request Form, the Fund will make a supply available. Such checks for
Corporate Bond, Limited Maturity Bond, U.S. Government and Tax-Exempt Funds may
be drawn payable to the order of any payee (not to cash) in any amount of $250
or more, if the account value is $1,000 or more. Such checks for Cash Fund may
be drawn in any amount of $100 or more. When a check is presented to the Fund
for payment, it will redeem sufficient full and fractional shares to cover the
check. Such shares will be redeemed at the price next calculated following
receipt of any check which does not exceed the value of the account. The price
of Fund shares fluctuates from day-to-day and the price at the time of
redemption, by check or otherwise, may be less than the amount invested.
Redemption by check is not available if any shares are held in certificate form
or if shares being redeemed have not been on the Fund's books for at least 15
days. The availability of checkwriting privileges may encourage multiple
redemptions on an account. Whenever multiple redemptions occur, the difficulty
of monitoring the shareholder's cost basis in his or her investment increases.
In addition to the foregoing redemption procedures, the Funds repurchase
shares from broker/dealers at the price determined as of the close of business
on the day such offer is confirmed. Dealers may charge a commission on the
repurchase of shares.
At various times, requests may be made to redeem shares for which good
payment has not yet been received. Accordingly, payment of redemption proceeds
may be delayed until such time as good payment has been collected for the
purchase of the shares in question, which may take up to 15 days from the
purchase date.
Requests may also be made to redeem shares in an account for which the
stockholder's tax identification number has not been provided. To the extent
permitted by law, the redemption proceeds from such an account will be reduced
by $50 to reimburse for the penalty imposed by the Internal Revenue Service for
failure to report the tax identification number.
TELEPHONE REDEMPTIONS
Stockholders may redeem uncertificated shares in amounts up to $10,000 by
telephone request, provided that the stockholder has completed the Telephone
Redemption section of the application or a Telephone Redemption form which may
be obtained from the Investment Manager. The proceeds of a telephone redemption
will be sent to the stockholder at his or her address as set forth in the
application or in a subsequent written authorization with a signature guarantee.
Once authorization has been received by the Investment Manager, a stockholder
may redeem shares by calling the Funds at (800) 888-2461, extension 3127, on
weekdays (except holidays) between the hours of 7:00 a.m. and 6:00 p.m. Central
time. Redemption requests received by telephone after the close of the New York
Stock Exchange (normally 3 p.m. Central time) will be treated as if received on
the next business day. A stockholder who authorizes telephone redemptions
authorizes the Investment Manager to act upon the instructions of any person
identifying themselves as the owner of the account or the owner's broker. The
Investment Manager has established procedures to confirm that instructions
communicated by telephone are genuine and will be liable for any losses due to
fraudulent or unauthorized instructions if it fails to comply with its
procedures. The Investment Manager's procedures require that any person
requesting a telephone redemption provide the account registration and number
and the owner's tax identification number, and such instructions must be
received on a recorded line. Neither the Fund, the Investment Manager, nor the
Distributor shall be liable for any loss, liability, cost or expense arising out
of any telephone redemption request, provided the Investment Manager complied
with its procedures. Thus, a stockholder who authorizes telephone redemptions
may bear the risk of loss from a fraudulent or unauthorized request. The
telephone redemption privilege may be changed or discontinued at any time by the
Investment Manager or the Funds.
During periods of severe market or economic conditions, telephone
redemptions may be difficult to implement and stockholders should make
redemptions by mail as described in "How to Redeem Shares" on page 29.
DIVIDENDS AND TAXES
It is the policy of Corporate Bond, Limited Maturity Bond, U.S. Government,
High Yield and Tax-Exempt Funds to pay dividends from net investment income
monthly and for the Global Aggressive Bond Fund to pay dividends from net
investment income quarterly. It is the policy of Corporate Bond, Limited
Maturity Bond, U.S. Government, Global Aggressive Bond, High Yield and
Tax-Exempt Funds to distribute realized capital gains (if any) in excess of any
capital losses and capital loss carryovers, at least once a
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year. Because Class A shares of Corporate Bond, Limited Maturity Bond, U.S.
Government, Global Aggressive Bond, High Yield and Tax-Exempt Funds bear most of
the costs of distribution of such shares through payment of a front-end sales
charge, while Class B shares of these Funds bear such costs through a higher
distribution fee, expenses attributable to Class B shares, generally, will be
higher and as a result, income distributions paid by these Funds with respect to
Class B shares generally will be lower than those paid with respect to Class A
shares. Any such dividend payment or capital gains distribution will result in a
decrease of the net asset value of the shares in an amount equal to the payment
or distribution. All dividends and distributions are automatically reinvested on
the payable date in shares of the Funds at net asset value as of the record date
(reduced by an amount equal to the amount of the dividend or distribution)
unless the Investment Manager is previously notified in writing by the
stockholder that such dividends or distributions are to be received in cash. A
stockholder may also request that such dividends or distributions be directly
deposited to the stockholder's bank account. Dividends or distributions paid
with respect to Class A shares and received in cash may, within 30 days of the
payment date, be reinvested without a sales charge.
Each of Corporate Bond, Limited Maturity Bond, U.S. Government, Global
Aggressive Bond and High Yield Funds (series of Income Fund), is to be treated
separately in determining the amounts of income and capital gains distributions.
For this purpose, each series will reflect only the income and gains, net of
losses, of that series.
Certain requirements relating to the qualification of a Fund as a regulated
investment company may limit the extent to which a Fund will be able to engage
in certain investment practices, including transactions in options, futures
contracts, forwards, swaps and other types of derivative securities
transactions. In addition, if a Fund were unable to dispose of portfolio
securities due to settlement problems relating to foreign investments or due to
the holding of illiquid securities, the Fund's ability to qualify as a regulated
investment company might be affected.
Cash Fund's policy is to declare daily dividends of all of its net income
each day the Fund is open for business, increased or decreased by any realized
capital gains or losses. Such dividends are automatically credited to
stockholder accounts. Unless stockholders elect to receive cash, they will
receive such dividends in additional shares on the last business day of each
month at the net asset value on that date. If cash payment of dividends is
desired, investors may so indicate in the appropriate section of the Cash Fund
application and checks will be mailed within five business days after the
beginning of the month. Confirmation of Cash Fund dividends will be sent
quarterly, and confirmations of purchases and redemptions will be sent monthly.
The amount of dividends may fluctuate from day to day. If on any day net
realized or unrealized losses on portfolio securities exceed Cash Fund's income
for that day and results in a decline of net asset value per share below $1.00,
the dividend for that day will be omitted until the net asset value per share
subsequently returns to $1.00 per share.
The Funds will not pay dividends or distributions of less than $25 in cash
but will automatically reinvest them.
Each of the Funds intends to qualify as a "regulated investment company"
under the Internal Revenue Code. Such qualification generally removes the
liability for federal income taxes from the Fund, and makes federal income tax
upon income and capital gains generated by a Fund's investments, the sole
responsibility of its stockholders provided the Fund continues to so qualify and
distributes all of its net investment income and net realized capital gain to
its stockholders. Furthermore, the Funds generally will not be subject to excise
taxes imposed on certain regulated investment companies provided that each Fund
distributes 98 percent of its ordinary income and 98 percent of its net capital
gain income each year.
Tax-Exempt Fund intends to qualify to pay "exempt interest dividends" to
its stockholders. Tax-Exempt Fund will be so qualified if, at the close of each
quarter of its taxable year, at least 50 percent of the value of its total
assets consists of securities on which the interest payments are exempt from
federal tax. To the extent that Tax-Exempt Fund's dividends distributed to
stockholders are derived from earnings on interest income exempt from federal
tax and are designated as "exempt-interest dividends" by the Fund, they will be
excludable from a stockholder's gross income for federal income tax purposes.
The Fund will inform stockholders annually as to the portion of that year's
distributions from the Fund which constituted "exempt-interest dividends." To
the extent that Tax-Exempt Fund's dividends are derived from interest on its
temporary taxable investments or from an excess of net short-term capital gain
over net long-term capital loss, they are considered taxable ordinary income for
federal income tax purposes. Such dividends do not qualify for the
dividends-received deduction for corporations. Distributions by Tax-Exempt Fund,
if any, of net long-term capital gains in excess of net short-term capital
losses from the sale of securities are taxable to stockholders as long-term
capital gain regardless of the length of time the stockholder has owned Fund
shares. Furthermore, a loss realized by a stockholder on the redemption, sale or
exchange of shares of Tax-Exempt Fund with respect to which exempt-interest
dividends have been paid will be disallowed to the extent of the amount of such
exempt-interest dividends if such shares have been held by the stockholder for
six months or less.
Distributions of net investment income and realized net short-term capital
gain by Corporate Bond, Limited Maturity
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Bond, U.S. Government, Global Aggressive Bond, High Yield and Cash Funds are
taxable to stockholders as ordinary income whether received in cash or
reinvested in additional shares. Distributions (designated by Corporate Bond,
Limited Maturity Bond, U.S. Government, Global Aggressive Bond and High Yield
Funds as "capital gain dividends") of the excess, if any, of net long-term
capital gains over net short-term capital losses are taxable to stockholders as
long-term capital gain regardless of how long a stockholder has held the Fund's
shares and regardless of whether received in cash or reinvested in additional
shares. Since Cash Fund normally will not invest in securities having a maturity
of more than one year, it should not realize any long-term capital gains or
losses.
At December 31, 1995, Corporate Bond, Limited Maturity Bond, U.S.
Government, Global Aggressive Bond and Tax-Exempt Funds, respectively, had
accumulated net realized losses on sales of investments in the following
amounts: $11,009,916, $23,055, $1,161,323, $2,410 and $1,534,211.
Certain dividends declared in October, November or December of a calendar
year are taxable to stockholders as though received on December 31 of that year
if paid to stockholders during January of the following calendar year.
Advice as to each year's taxable dividends and distributions, if
applicable, will be mailed on or before January 31 of the following year.
Stockholders should consult their tax adviser to determine the effect of
federal, state and local tax consequences to them from an investment in the
Funds.
The Funds are required by law to withhold 31 percent of taxable dividends
and distributions (including redemption proceeds) to stockholders who do not
furnish their correct taxpayer identification numbers, or are otherwise subject
to the backup withholding provisions of the Internal Revenue Code.
FOREIGN TAXES
Investment income and gains received from sources within foreign countries
may be subject to foreign income and other taxes. In this regard, withholding
tax rates in countries with which the United States does not have a tax treaty
are often as high as 30 percent or more. The United States has entered into tax
treaties with many foreign countries which entitle certain investors to a
reduced tax rate (generally ten to fifteen percent) or to exemptions from tax.
If applicable, the Funds will operate so as to qualify for such reduced tax
rates or tax exemptions whenever possible. While stockholders of the Funds will
indirectly bear the cost of any foreign tax withholding, they will not be able
to claim foreign tax credit or deduction for taxes paid by the Funds.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Fund is determined as of the close of
regular trading hours on the New York Stock Exchange (normally 3 p.m. Central
time) on each day that the Exchange is open for trading. The determination is
made by dividing the value of the portfolio securities of each Fund plus any
cash or other assets, less all liabilities, by the number of shares outstanding
of the Fund.
Securities which are listed or traded on a national securities exchange are
valued at the last sale price. If there are no sales on a particular day, then
the securities are valued at the last bid price. All other securities for which
market quotations are readily available are valued on the basis of the last
current bid price. If there is no bid price or if the bid price is deemed to be
unsatisfactory by the Board of Directors or by the Investment Manager, then the
securities are valued in good faith by such method as the Board of Directors
determines will reflect the fair market value.
Valuations of Tax-Exempt Fund's municipal securities are supplied by a
pricing service approved by the Board of Directors. Valuations furnished by the
pricing service are based upon appraisals from recognized municipal securities
dealers derived from information concerning market transactions and quotations.
Securities for which market quotations are not readily available (which are
expected to constitute the majority of Tax-Exempt Fund's portfolio securities)
are valued by the pricing service considering such factors as yields or prices
of municipal bonds of comparable quality, type of issue, coupon, maturity and
rating, indications as to value from dealers, and general market conditions. The
Fund's officers, under the general supervision of its Board of Directors, will
regularly review procedures used by, and valuations provided by, the pricing
service.
U.S. Government Fund values U.S. Government securities at market value, if
available. If market quotations are not available, the Fund will value
securities, other than securities with 60 days or less to maturity as discussed
below, at fair prices based on market quotations for securities of similar type,
yield, quality and duration.
The securities held by Cash Fund are valued on the basis of the amortized
cost valuation technique which does not take into account unrealized gains or
losses. The amortized cost valuation technique involves valuing an instrument at
its cost and thereafter assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the instrument. A similar procedure may be used for valuing
securities held by the U.S. Government and Tax-Exempt Funds having 60 days or
less remaining to maturity, with the value of the security on the 61st day being
used rather than cost.
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32
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
Because the expenses of distribution are borne by Class A shares of
Corporate Bond, Limited Maturity Bond, U.S. Government, Global Aggressive Bond,
High Yield and Tax-Exempt Funds through a front-end sales charge and by Class B
shares of such Funds through an ongoing distribution fee, the expenses
attributable to each class of shares will differ, resulting in different net
asset values. The net asset value of Class B shares will generally be lower than
the net asset value of Class A shares as a result of the distribution fee
charged to Class B shares. It is expected, however, that the net asset value per
share will tend to converge immediately after the payment of dividends which
will differ in amount for Class A and B shares by approximately the amount of
the different distribution expenses attributable to Class A and B shares.
PERFORMANCE
The Funds may, from time to time, include performance data in
advertisements or reports to stockholders or prospective investors. Such
performance data may include quotations of "yield" for each of the Funds,
"effective yield" for Cash Fund, "taxable-equivalent yield" for Tax-Exempt Fund
and "average annual total return" and "aggregate total return" for Corporate
Bond, Limited Maturity Bond, U.S. Government, Global Aggressive Bond, High Yield
and Tax-Exempt Funds.
For Cash Fund, yield is calculated by measuring the income generated by a
hypothetical investment in the Fund over a seven-day period. This income is then
annualized by assuming that the amount of income generated over the seven-day
period is generated each week over a 52-week period and is shown as a percentage
of the investment.
Cash Fund's effective yield will be calculated similarly but, when
annualized, income earned by an investment in the Fund is assumed to be
reinvested. The effective yield will be slightly higher than the yield because
of the compounding effect of this assumed reinvestment.
With respect to Corporate Bond, Limited Maturity Bond, U.S. Government,
Global Aggressive Bond, High Yield and Tax-Exempt Funds, yield is based on the
investment income per share earned during a particular 30-day period (including
dividends and interest), less expenses accrued during the period ("net
investment income"), and will be computed by dividing net investment income per
share by the maximum public offering price per share on the last day of the
period.
Tax-Exempt Fund's taxable-equivalent yield begins with that portion of the
Fund's yield which is tax-exempt (determined using the same general formula used
to calculate yield), which is then adjusted by an amount necessary to give the
taxable yield equivalent to the tax-exempt yield at a stated income tax rate,
and added to that portion of the Fund's yield, if any, which is not tax-exempt.
Average annual total return will be expressed in terms of the average
annual compounded rate of return of a hypothetical investment in Corporate Bond,
Limited Maturity Bond, U.S. Government, Global Aggressive Bond, High Yield or
Tax-Exempt Fund over periods of one, five and ten years (up to the life of the
Fund). Such average annual total return figures will reflect the deduction of
the maximum sales charge and a proportional share of Fund expenses on an annual
basis, and will assume that all dividends and distributions are reinvested when
paid.
Aggregate total return will be calculated for any specified period by
assuming a hypothetical investment in Corporate Bond, Limited Maturity Bond,
U.S. Government, Global Aggressive Bond, High Yield or Tax-Exempt Fund on the
date of the commencement of the period and assuming that all dividends and
distributions are reinvested when paid. The net increase or decrease in the
value of the investment over the period will be divided by its beginning value
to arrive at aggregate total return.
In addition, total return may also be calculated for several consecutive
one-year periods, expressing the total return as a percentage increase or
decrease in the value of the investment for each year relative to the ending
value for the previous year. Corporate Bond, Limited Maturity Bond, U.S.
Government, Global Aggressive Bond, High Yield and Tax-Exempt Funds may from
time to time quote total return that does not reflect deduction of any
applicable sales charge, which charges, if reflected, would reduce the total
return quoted.
Quotations of performance reflect only the performance of a hypothetical
investment in a Fund during the particular time period on which the calculations
are based. Such quotations for the Funds will vary based on changes in market
conditions and the level of the Fund's expenses, and no reported performance
figure should be considered an indication of performance which may be expected
in the future.
In connection with communicating performance to current or prospective
stockholders, the Funds also may compare these figures to the performance of
other mutual funds tracked by mutual fund rating services or other unmanaged
indexes which may assume reinvestment of dividends but generally do not reflect
deductions for administrative and management costs and expenses. Corporate Bond,
Limited Maturity Bond, U.S. Government, Global Aggressive Bond, High Yield and
Tax-Exempt Funds will include performance data for both Class A and Class B
shares of the Funds in any advertisement or report including performance data of
the Fund.
For a more detailed description of the methods used to calculate
performance, see the Funds' Statement of Additional Information.
- --------------------------------------------------------------------------------
33
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
STOCKHOLDER SERVICES
ACCUMULATION PLAN
An investor in Corporate Bond, Limited Maturity Bond, U.S. Government,
Global Aggressive Bond, High Yield or Tax-Exempt Fund may choose to begin a
voluntary Accumulation Plan. This allows for an initial investment of $100
minimum and subsequent investments of $20 minimum at any time. An Accumulation
Plan involves no obligation to make periodic investments and is terminable at
will.
Payments are made by sending a check to the Distributor who (acting as an
agent for the dealer) will purchase whole and fractional Fund shares as of the
close of business on such day as the payment is received. The investor will
receive a confirmation and statement after each investment. Investors may choose
to use "Secur-O-Matic" (automatic bank draft) to make their Fund purchases.
There is no additional charge for choosing to use Secur-O-Matic. An application
may be obtained by writing Security Distributors, Inc., 700 SW Harrison Street,
Topeka, Kansas 66636-0001 or by calling (913) 295-3127 or (800) 888-2461,
extension 3127.
SYSTEMATIC WITHDRAWAL PROGRAM
Stockholders who wish to receive regular payments of $25 or more may
establish a Systematic Withdrawal Program. Liquidation in this manner will only
be allowed if shares with a current offering price of $5,000 or more are
deposited with the Investment Manager, which will act as agent for the
stockholder under the program. Payments are available on a monthly, quarterly,
semiannual or annual basis. Shares are liquidated at net asset value. The
stockholder will receive a confirmation following each transaction. The program
may be terminated on written notice, or it will terminate automatically if all
shares are liquidated or withdrawn from the account.
A stockholder may establish a Systematic Withdrawal Program with respect to
Class B shares without the imposition of any applicable contingent deferred
sales charge, provided that such withdrawals do not in any 12-month period,
beginning on the date the Program is established, exceed 10 percent of the value
of the account on that date ("Free Systematic Withdrawals"). Free Systematic
Withdrawals are not available if a Program established with respect to Class B
shares provides for withdrawals in excess of 10 percent of the value of the
account in any Program year and, as a result, all withdrawals under such a
Program would be subject to any applicable contingent deferred sales charge.
Free Systematic Withdrawals will be made first by redeeming those shares that
are not subject to the contingent deferred sales charge and then by redeeming
shares held the longest. The contingent deferred sales charge applicable to a
redemption of Class B shares requested while Free Systematic Withdrawals are
being made will be calculated as described under "Calculation and Waiver of
Contingent Deferred Sales Charges," page 27. A Systematic Withdrawal form may be
obtained from the Funds.
EXCHANGE PRIVILEGE
Stockholders who own shares of the Funds may exchange those shares for
shares of another of the Funds, Security Growth and Income, Equity, Global,
Asset Allocation or Ultra Funds. Exchanges may be made only in those states
where shares of the fund into which an exchange is to be made are qualified for
sale. No service fee is presently imposed on such an exchange. Class A and Class
B shares of the Funds may be exchanged for Class A and Class B shares,
respectively, of another fund or for shares of Cash Fund, which offers a single
class of shares. Any applicable contingent deferred sales charge will be
calculated from the date of the initial purchase without regard to the time
shares were held in Cash Fund.
For tax purposes, an exchange is a sale of shares which may result in a
taxable gain or loss. Special rules may apply to determine the amount of gain or
loss on an exchange occurring within ninety days after the exchanged shares were
acquired.
Exchanges of Class A shares from Corporate Bond, Limited Maturity Bond,
U.S. Government, Global Aggressive Bond, High Yield and Tax-Exempt Funds are
made at net asset value without a front-end sales charge if (1) the shares have
been owned for not less than 90 consecutive days prior to the exchange, (2) the
shares were acquired pursuant to a prior exchange from a Security Fund which
assessed a sales charge on the original purchase, or (3) the shares were
acquired as a result of the reinvestment of dividends or capital gains
distributions. Exchanges of Class A shares from Corporate Bond, Limited Maturity
Bond, U.S. Government, Global Aggressive Bond, High Yield and Tax-Exempt Funds,
other than those described above, are made at net asset value plus the sales
charge described in the prospectus of the other Security Fund being acquired,
less the sales charge paid on the shares of these Funds at the time of original
purchase.
Because Cash Fund does not impose a sales charge or commission in
connection with sales of its shares, any exchange of Cash Fund shares acquired
through direct purchase or reinvestment of dividends will be based on the
respective net asset values of the shares involved and a sales charge will be
imposed equal to the sales charge that would be charged such stockholder if he
or she were purchasing for cash.
Stockholders should contact the Fund before requesting an exchange in order
to ascertain whether any sales charges are applicable to the shares to be
exchanged. In effecting the exchanges of Fund shares, the Investment Manager
will first
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34
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
cause to be exchanged those shares which would not be subject to any sales
charges.
Exchanges are made upon receipt of a properly completed Exchange
Authorization form. This privilege may be changed or discontinued at any time at
the discretion of the management of the Funds upon 60 days' notice to
stockholders. A current prospectus of the fund into which an exchange is made
will be given to each stockholder exercising this privilege.
EXCHANGE BY TELEPHONE
To exchange shares by telephone, a stockholder must hold shares in
non-certificate form and must either have completed the Telephone Exchange
section of the application or a Telephone Transfer Authorization form which may
be obtained from the Investment Manager. Once authorization has been received by
the Investment Manager, a stockholder may exchange shares by telephone by
calling the Funds at (800) 888-2461, extension 3127, on weekdays (except
holidays) between the hours of 7:00 a.m. and 6:00 p.m. Central time. Exchange
requests received by telephone after the close of the New York Stock Exchange
(normally 3 p.m. Central time) will be treated as if received on the next
business day.
A stockholder who authorizes telephone exchanges authorizes the Investment
Manager to act upon the instructions of any person by telephone to exchange
shares between any identically registered accounts with the Funds listed above.
The Investment Manager has established procedures to confirm that instructions
communicated by telephone are genuine and will be liable for any losses due to
fraudulent or unauthorized instructions if it fails to comply with its
procedures. The Investment Manager's procedures require that any person
requesting an exchange by telephone provide the account registration and number
and the owner's tax identification number and such instructions must be received
on a recorded line. Neither the Fund, the Investment Manager nor the Distributor
will be liable for any loss, liability, cost or expense arising out of any
request, including any fraudulent request, provided the Investment Manager
complied with its procedures. Thus, a stockholder who authorizes telephone
exchanges may bear the risk of loss from a fraudulent or unauthorized request.
In periods of severe market or economic conditions, the telephone exchange
of shares may be difficult to implement and stockholders should make exchanges
by writing to Security Distributors, Inc., 700 Harrison Street, Topeka, Kansas
66636-0001. The telephone exchange privilege may be changed or discontinued at
any time at the discretion of the management of the Funds.
RETIREMENT PLANS
The Funds have available tax-qualified retirement plans for individuals,
prototype plans for the self-employed, pension and profit sharing plans for
corporations and custodial accounts for employees of public school systems and
organizations meeting the requirements of Section 501(c)(3) of the Internal
Revenue Code. Further information concerning these plans is contained in the
Funds' Statement of Additional Information.
GENERAL INFORMATION
ORGANIZATION
The Articles of Incorporation of Income and Tax-Exempt Funds provide for
the issuance of an indefinite number of shares of capital stock in one or more
classes or series, and the Articles of Incorporation of Cash Fund provide for
the issuance of an indefinite number of shares of capital stock in one or more
series.
Income Fund has authorized capital stock of $1.00 par value. Its shares are
currently issued in five series, Corporate Bond Fund, Limited Maturity Bond
Fund, Global Aggressive Bond Fund, U.S. Government Fund and High Yield Fund. The
shares of each series represent a pro rata beneficial interest in that series'
net assets and in the earnings and profits or losses derived from the investment
of such assets.
Tax-Exempt and Cash Funds have authorized capital stock of $0.10 par value
per share.
Each of the Corporate Bond, Limited Maturity Bond, U.S. Government, Global
Aggressive Bond, High Yield and Tax-Exempt Funds currently issues two classes of
shares which participate proportionately based on their relative net asset
values in dividends and distributions and have equal voting, liquidation and
other rights except that (i) expenses related to the distribution of each class
of shares or other expenses that the Board of Directors may designate as class
expenses from time to time, are borne solely by each class; (ii) each class of
shares has exclusive voting rights with respect to any Distribution Plan adopted
for that class; (iii) each class has different exchange privileges; and (iv)
each class has a different designation.
When issued and paid for, each Fund's shares will be fully paid and
nonassessable by the Funds. Shares may be exchanged as described above under
"Exchange Privilege," but will have no other preference, conversion, exchange or
preemptive rights. Shares are transferable, redeemable and assignable and have
cumulative voting privileges for the election of directors.
On certain matters, such as the election of directors, all shares of each
series of Income Fund vote together, with each share having one vote. On other
matters affecting a particular series, such as the Investment Advisory Contract
or the fundamental investment policies, only shares of that series are entitled
to vote, and a majority vote of the shares of that series is required for
approval of the proposal.
The Funds do not generally hold annual meetings of stockholders and will do
so only when required by law.
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35
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
Stockholders may remove directors from office by votes cast in person or by
proxy at a meeting of stockholders. Such a meeting will be called at the written
request of the holders of 10 percent of a Fund's outstanding shares.
Although each Fund offers only its own shares, it is possible one Fund
might become liable for any misstatement, inaccuracy or incomplete disclosure in
this prospectus relating to another of the Funds. The Board of Directors of the
Funds has considered this risk and has approved the use of a combined
prospectus.
STOCKHOLDER INQUIRIES
Stockholders who have questions concerning their account or wish to obtain
additional information may write to the Security Funds at 700 SW Harrison
Street, Topeka, Kansas 66636-0001, or call (913) 295-3127 or 1-800-888-2461,
extension 3127.
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36
<PAGE>
SECURITY FUNDS
PROSPECTUS APPENDIX A
================================================================================
APPENDIX A
DESCRIPTION OF SHORT-TERM INSTRUMENTS
The types of instruments that will form the major part of Cash Fund's
investments are described below:
U.S. GOVERNMENT SECURITIES. Federal agency securities are debt obligations
which principally result from lending programs of the U.S. Government. Housing
and agriculture have traditionally been the principal beneficiaries of federal
credit programs, and agencies involved in providing credit to agriculture and
housing account for the bulk of the outstanding agency securities.
Some U.S. Government securities, such as Treasury bills and bonds, are
supported by the full faith and credit of the U.S. Treasury; others are
supported by the right of the issuer to borrow from the Treasury; others, such
as those of the Federal National Mortgage Association, are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; still others such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality.
U.S. Treasury bills are issued with maturities of any period up to one
year. Three-month bills are currently offered by the Treasury on a 13-week cycle
and are auctioned each week by the Treasury. Bills are issued in bearer form
only and are sold only on a discount basis, and the difference between the
purchase price and the maturity value (or the resale price if they are sold
before maturity) constitutes the interest income for the investor.
CERTIFICATES OF DEPOSIT. A certificate of deposit is a negotiable receipt
issued by a bank or savings and loan association in exchange for the deposit of
funds. The issuer agrees to pay the amount deposited plus interest to the bearer
of the receipt on the date specified on the certificate.
COMMERCIAL PAPER. Commercial paper is generally defined as unsecured
short-term notes issued in bearer form by large well-known corporations and
finance companies. Maturities on commercial paper range from a few days to nine
months. Commercial paper is also sold on a discount basis.
BANKER'S ACCEPTANCES. A banker's acceptance generally arises from a
short-term credit arrangement designed to enable businesses to obtain funds to
finance commercial transactions. Generally, an acceptance is a time draft drawn
on a bank by an exporter or an importer to obtain a stated amount of funds to
pay for specific merchandise. The draft is then "accepted" by a bank that, in
effect, unconditionally guarantees to pay the face value of the instrument on
its maturity date.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
A Prime rating is the highest commercial paper rating assigned by Moody's
Investors Service, Inc. ("Moody's"). Issuers rated Prime are further referred to
by use of numbers 1, 2 and 3 to denote relative strength within this highest
classification. Among the factors considered by Moody's in assigning ratings are
the following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by management of
obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations.
Commercial paper rated "A" by Standard & Poor's Corporation ("S&P") has the
highest rating and is regarded as having the greatest capacity for timely
payment. Commercial paper rated A-1 by S&P has the following characteristics:
(1) liquidity ratios are adequate to meet cash requirements; (2) long-term
senior debt is rated "A" or better; (3) the issuer has access to at least two
additional channels of borrowing; (4) basic earnings and cash flow have an
upward trend with allowance made for unusual circumstances; (5) typically, the
issuer's industry is well established and the issuer has a strong position
within the industry; and (6) the reliability and quality of management are
unquestioned. Relative strength or weakness of the above factors determine
whether the issuer's commercial paper is rated A-1, A-2 or A-3.
DESCRIPTION OF CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
AAA -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
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37
<PAGE>
SECURITY FUNDS
PROSPECTUS APPENDIX A (CONTINUED)
================================================================================
which make the long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
BAA -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
BA -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
CAA -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
CA -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other market
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category. The modifier 2 indicates
a mid-range ranking, and modifier 3 indicates that the issue ranks in the lower
end of its generic rating category.
STANDARD & POOR'S CORPORATION
AAA -- Bonds rated AAA have the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA -- Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
BB, B, CCC, CC -- Bonds rated BB, B, CCC and CC are regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C -- The rating C is reserved for income bonds in which no interest is
being paid. D -- Debt rated D is in default and payment of interest and/or
repayment of principal is in arrears.
NOTE: Standard & Poor's ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
categories.
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38
<PAGE>
SECURITY FUNDS
PROSPECTUS APPENDIX B
================================================================================
APPENDIX B
DESCRIPTION OF MUNICIPAL BOND RATINGS
The following are summaries of the ratings used by Moody's and Standard &
Poor's applicable to permitted investments of Tax-Exempt Fund:
MOODY'S INVESTORS SERVICE, INC.*
AAA -- Municipal bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
AA -- Municipal bonds which are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Municipal bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
BAA -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. Although
Industrial Revenue Bonds and Environmental Control Revenue Bonds are tax-exempt
issues, they are included in the corporate bond rating system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category. The modifier 2 indicates a mid-range ranking, and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category. Moody's
does not apply numerical modifiers other than Aa1, A1 and Baa1 in its municipal
bond rating system, which offer the maximum security within the Aa, A and Baa
groups, respectively.
STANDARD & POOR'S CORPORATION**
AAA -- Municipal bonds rated AAA are highest grade obligations. They
possess the ultimate degree of protection as to principal and interest.
AA -- Municipal bonds rated AA also qualify as high grade obligations, and
in the majority of instances differ from AAA issues only in small degree.
A -- Municipal bonds rated A are regarded as upper medium grade. They have
considerable investment strength but are not entirely free from adverse effects
of changes in economic and trade conditions.
Interest and principal are regarded as safe.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
NOTE: Standard & Poor's ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
categories.
RATINGS OF SHORT-TERM SECURITIES
MOODY'S INVESTORS SERVICE
The following ratings apply to short-term municipal notes and loans:
MIG 1 -- Loans bearing this designation are of the best quality, enjoying
strong protection from established cash flows for their servicing or from
established and broadbased access to the market for refinancing, or both.
MIG 2 -- Loans bearing this designation are of high quality with margins of
protection ample although not so large as in the preceding group.
The following ratings apply to both commercial paper and municipal paper:
PRIME-1: Issuers receiving this rating have a superior capacity for
repayment of short-term promissory obligations.
PRIME-2: Issuers receiving this rating have a strong capacity for repayment
of short-term promissory obligations.
STANDARD & POOR'S CORPORATION
The following ratings apply to short-term municipal notes:
AAA: This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to repay principal and pay interest.
AA: Notes rated AA have a very strong capacity to repay principal and pay
interest and differ from AAA issues only in small degree.
The following ratings apply both to commercial paper and municipal paper:
A-1: This designation indicates that the degree of safety regarding timely
payment is very strong.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
- --------------------------------------------------------------------------------
39
<PAGE>
SECURITY FUNDS
PROSPECTUS APPENDIX B (CONTINUED)
================================================================================
* Moody's Investors Service, Inc. rates bonds of issuers which have $600,000 or
more of debt, except bonds of educational institutions, projects under
construction, enterprises without established earnings records and situations
where current financial data is unavailable.
** Standard & Poor's Corporation rates all governmental bodies having $1,000,000
or more of debt outstanding unless adequate information is not available.
- --------------------------------------------------------------------------------
40
<PAGE>
SECURITY FUNDS
PROSPECTUS APPENDIX C
================================================================================
APPENDIX C
REDUCED SALES CHARGES
CLASS A SHARES
Initial sales charges may be reduced or eliminated for persons or
organizations purchasing Class A shares of the Corporate Bond, Limited Maturity
Bond, U.S. Government, Global Aggressive Bond, High Yield and Tax-Exempt Funds
alone or in combination with Class A shares of certain other Security Funds.
For purposes of qualifying for reduced sales charges on purchases made
pursuant to Rights of Accumulation or a Statement of Intention (also referred to
as a "Letter of Intent"), the term "Purchaser" includes the following persons:
an individual; an individual, his or her spouse and children under the age of
21; a trustee or other fiduciary of a single trust estate or single fiduciary
account established for their benefit; an organization exempt from federal
income tax under Section 501(c)(3) or (13) of the Internal Revenue Code; or a
pension, profit-sharing or other employee benefit plan whether or not qualified
under Section 401 of the Internal Revenue Code.
RIGHTS OF ACCUMULATION
To reduce sales charges on purchases of Class A shares of Corporate Bond,
Limited Maturity Bond, U.S. Government, Global Aggressive Bond, High Yield or
Tax-Exempt Fund, a Purchaser may combine all previous purchases of the Fund with
a contemplated current purchase and receive the reduced applicable front end
sales charge. The Distributor must be notified when a sale takes place which
might qualify for the reduced charge on the basis of previous purchases.
Rights of accumulation also apply to purchases representing a combination
of the Class A shares of Corporate Bond, Limited Maturity Bond, U.S. Government,
Global Aggressive Bond, High Yield, Tax-Exempt, Growth and Income, Equity,
Global, Asset Allocation or Ultra Fund in those states where shares of the Fund
being purchased are qualified for sale.
STATEMENT OF INTENTION
A Purchaser of Corporate Bond, Limited Maturity Bond, U.S. Government,
Global Aggressive Bond, High Yield or Tax-Exempt Fund may choose to sign a
Statement of Intention within 90 days after the first purchase to be included
thereunder, which will cover future purchases of Class A shares of those Funds,
Security Equity, Global, Asset Allocation, Growth and Income or Ultra Fund. The
amount of these future purchases shall be specified and must be made within a
13-month period (or 36-month period for purchases of $1 million or more) to
become eligible for the reduced front-end sales charge applicable to the actual
amount purchased under the statement. Five percent (5%) of the amount specified
in the Statement of Intention will be held in escrow shares until the Statement
is completed or terminated. These shares may be redeemed by the Fund if the
Purchaser is required to pay additional sales charges. Any dividends paid by the
Fund will be payable with respect to escrow shares. The Purchaser bears the risk
that the escrow shares may decrease in value.
A Statement of Intention may be revised during the 13-month (or, if
applicable, 36-month) period. Additional shares received from reinvestment of
income dividends and capital gains distributions are included in the total
amount used to determine reduced sales charges.
REINSTATEMENT PRIVILEGE
Stockholders who redeem their Class A shares of Corporate Bond, Limited
Maturity Bond, U.S. Government, Global Aggressive Bond, High Yield or Tax-Exempt
Fund have a one-time privilege (1) to reinstate their accounts by purchasing
shares without a sales charge up to the dollar amount of the redemption
proceeds; or (2) to the extent the redeemed shares would have been eligible for
the exchange privilege, to purchase shares of another of the Funds, Security
Growth and Income, Equity, Global, Asset Allocation, or Ultra Fund, without a
sales charge up to the dollar amount of the redemption proceeds. To exercise
this privilege, a stockholder must provide written notice and the amount to be
reinvested to the Fund within 30 days after the redemption request.
The reinstatement or exchange will be made at the net asset value next
determined after the reinvestment is received by the Fund.
- --------------------------------------------------------------------------------
41
<PAGE>
THIS PAGE LEFT BLANK INTENTIONALLY
- --------------------------------------------------------------------------------
42
<PAGE>
SECURITY FUNDS
SECURITY CASH FUND APPLICATION
================================================================================
For IRA/KEOGH/Corporate Plans, complete this Application along with other plan
documents.
MAIL APPLICATION TO: Security Cash Fund, P.O. Box 2548, Topeka, KS 66601
- --------------------------------------------------------------------------------
INITIAL INVESTMENT (CHECK ONE BOX)
[ ] Enclosed is my check for $ made payable to Security Cash Fund.
--------------
[ ] On I/we wired $ through
--------------- --------------- ---------------------
Date Name of Bank
MINIMUM $100
for Fund account number
- ----------------------------- -------------------------
City State
SUBSEQUENT INVESTMENTS OF $20 CAN BE MADE AT ANY TIME
When investing by wire, call the Fund to advise of the investment. The Fund will
supply a control number for initial investment. Wire federal funds to Bank IV of
Topeka, Trust Department, Topeka, Kansas.
Attn:
----------------------------------------------------------
(Include investor's name and account number)
- --------------------------------------------------------------------------------
DIVIDENDS (CHECK ONE BOX)
[ ] Reinvest automatically all daily dividends and other distributions.
[ ] Cash payment of all dividends each month and send proceeds to investor.
- --------------------------------------------------------------------------------
CHECKING ACCOUNT PRIVILEGE
[ ] Please send a supply of checks permitting me/us to redeem shares in this
account by writing checks for $100 or more made payable to any person.
COMPLETE SIGNATURE CARD ON REVERSE SIDE. Allow three weeks for delivery of
check supply.
- --------------------------------------------------------------------------------
SPECIAL OPTIONS (CHECK APPLICABLE BOXES)
[ ] Telephone Exchange
[ ] Telephone Redemption
By checking the applicable boxes and signing this Application, Applicant
authorizes the Investment Manager to honor any telephone request for the
exchange and/or redemption of Fund shares (maximum telephone redemption is
$10,000), subject to the terms of the Fund's prospectus. The Investment Manager
has established reasonable procedures to confirm that instructions communicated
by telephone are genuine and may be liable for any losses due to fraudulent or
unauthorized instructions if it fails to comply with its procedures. The
procedures require that any person requesting a telephone redemption or exchange
provide the account registration and number and owner's tax identification
number and such request must be received on a recorded line.
THE AUTHORIZATION ON REVERSE SIDE FOR CORPORATION, PARTNERSHIP, TRUST, ETC.,
MUST BE COMPLETED AND RETURNED WITH THIS FORM.
- --------------------------------------------------------------------------------
[ ] Systematic Withdrawal Program (Minimum account $5,000)
Beginning , 19 , you are hereby authorized and
----------------------- -------
instructed to send a check for $
-----------------------
(minimum $25) drawn on approximately [ ] 11th day [ ] 26th day of the month.
Draw payment [ ]monthly [ ]quarterly [ ]semianually [ ]annually
- --------------------------------------------------------------------------------
ACCOUNT REGISTRATION (PLEASE PRINT)
[ ] Individual
[ ] Corporate
[ ] Non-Profit
[ ] Profit-Sharing
- ---------------------------------------------- --------------------------------
First Middle Last Owner's Taxpayer Identification
No. or Social Security No.
- ----------------------------------------------
First Middle Last
Industry Type
- ---------------------------------------------- ------------------
Name of Corporation, Trust, Partnership, etc. (Farming, Mgf., Sales, etc.)
Telephone
Business ( )
- ---------------------------------------------- -----------------
Street Address
Home ( )
- ---------------------------------------------- -----------------
City State Zip
If address is outside U.S. please indicate if U.S. Citizen [ ] Yes [ ] No
- --------------------------------------------------------------------------------
TAX WITHHOLDING
TAXPAYER IDENTIFICATION CERTIFICATION: Under the penalties of perjury, I (1)
certify that the number provided on this form is my correct taxpayer
identification number and (2),* that I am not subject to backup withholding
either because I have not been notified that I am subject to backup withholding
as a result of a failure to report all interest or dividends, or the Internal
Revenue Service has notified me that I am no longer subject to backup
withholding.
*The owner must strike out the language certifying that they are not subject to
backup withholding due to notified underreporting IF THE INTERNAL REVENUE
SERVICE NOTIFIED THEM THAT THEY ARE SUBJECT TO BACKUP WITHHOLDING, and they have
not received notice from the service advising that backup withholding has
terminated.
- --------------------------------------------------------------------------------
SIGNATURE(S) OF APPLICANTS
The Internal Revenue Service does not require your consent to any provision of
this document other than the certifications to avoid backup withholding.
- ------------------------------------------- -----------------------------------
Owner Joint Owner
- ------------------------------------------- -----------------------------------
Corporate Officer, Trustee, etc. Title
Date In case of joint ownership, both
--------------------------------------- must sign. If no form of ownership
is designated, then it will be
INVESTMENT DEALER assumed the ownership is "as
joint tenants, with right of
- ------------------------------------------- survivorship, and not as tenants
Name of Firm in common."
- ------------------------------------------- -----------------------------------
Street Dealer Authorized
- ------------------------------------------- -----------------------------------
City State Zip Account Representative
- --------------------------------------------------------------------------------
43
<PAGE>
SECURITY FUNDS
SECURITY CASH FUND APPLICATION (CONTINUED)
================================================================================
Checking Account Privilege - If you have elected this option, the following card
must be completed. This card is similar to one which must be signed when opening
any checking account. All joint owners named in the account registration must
sign this card. Names must be signed exactly as they appear in the account
registration. All persons eligible to sign checks for corporate accounts,
partnerships, trusts, etc. must sign this card.
- --------------------------------------------------------------------------------
The payment of funds on the conditions set forth below and on the reverse side
is authorized by the signature(s) appearing on the signature card. Security
Management Company, LLC, the Fund's Transfer Agent, is hereby appointed agent by
the person(s) signing this card and will cause the Fund to redeem a sufficient
number of shares from the account to cover checks presented for payment without
requiring signature guarantees. The Fund and its agents will not be liable for
any loss, expense or cost arising out of check redemptions or checks returned
without payment. SHARES OUTSTANDING IN THE ACCOUNT FOR LESS THAN 15 DAYS WILL
NOT BE LIQUIDATED TO PAY CHECKS PRESENTED UNLESS THE TRANSFER AGENT IS ASSURED
THAT GOOD PAYMENT HAS BEEN COLLECTED THROUGH NORMAL BANKING CHANNELS. The
Transfer Agent has the right not to honor checks that are for less than $100 or
checks in an amount exceeding the value of the account at the time the check is
presented for payment. This privilege is subject to the provisions of the
current prospectus of the Fund as amended from time to time. This agreement may
be modified or terminated at any time by the Fund or the Transfer Agent upon
notification mailed to the shareholder's address of record.
- --------------------------------------------------------------------------------
SECURITY CASH FUND SIGNATURE CARD
- --------------------------------------------------------------------------------
-------------------------------------------
Account Number
Authorized Signatures:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[ ] Check here if two signatures are required on checks
[ ] Check here if only one signature required on checks.
In signing this card each signatory agrees to be subject to the customary rules
and regulations governing checking accounts and to the conditions set forth on
the reverse side. If the Checking Account Privilege is established after the
opening of the account, or if any change is made in the above information, all
signatures will have to be guaranteed.
- --------------------------------------------------------------------------------
AUTHORIZATION FOR REDEMPTION
CORPORATE RESOLUTION
I, , duly elected and acting Secretary of
---------------------------------------
, a corporation
- -----------------------------------------------------------------
organized and existing under the laws of
--------------------------------------,
certify that the following resolution is a true and correct copy of the
resolution adopted by the Board of Directors at its regular meeting held on
, which resolution is currently in
- ----------------------------------------------
full force and effect:
RESOLVED, That the below named individual(s) of this corporation are hereby
authorized to give notice, instructions, complete necessary forms, execute
withdrawals, and to transact any other business necessary on this corporation's
account invested in shares of Security Cash Fund. FURTHER RESOLVED, That this
corporation assumes entire responsibility for, and agrees to indemnify and hold
harmless Security Cash Fund and/or its agents against any and all claims,
liabilities, damages, actions, charges and expense sustained by action of the
below named individual(s).
- --------------------------------------- ---------------------------------------
(Print or type) Name and Title Signature(s)
- --------------------------------------- ---------------------------------------
- --------------------------------------------------------------------------------
IN WITNESS WHEREOF, I hereunto set my
hand and the seal of this corporation
this day of , 19
------ ------------ ----.
(CORPORATE SEAL) SECRETARY
-----------------------------
- --------------------------------------------------------------------------------
AUTHORIZATION FOR PARTNERSHIP, TRUST, OR RETIREMENT PLAN
We, the undersigned, being the principal partners or the trustees of the
- --------------------------------------------------------------------------------
(Partnership or Trust/Plan)
hereby state that we are authorized to invest the assets of the partnership or
trust/plan in Security Cash Fund. We also agree that
- --------------------------------------------------------------------------------
or -----------------------------------------------------------------------------
have individual authority to purchase, sell, assign, and transfer securities and
to sign checks issuable by the partnership or the trust/plan redeeming shares of
the Fund. We further state that this individual authority shall continue to be
honored until revoked by written notice from either of us and is received by the
Transfer Agent (Security Management Company, LLC). By signing this
authorization, we agree that Security Cash Fund, Security Management Company,
LLC, and Security Distributors, Inc., shall be indemnified and held harmless
from any loss, damage, cost or claim that may arise from any authorized or
unauthorized use of the assets or checks of the partnership or trust/plan in
connection with the holdings of the Fund.
- --------------------------------------- ---------------------------------------
Print or type name Signature(s)
- --------------------------------------------------------------------------------
SIGNATURE GUARANTEED BY
- --------------------------------------------------------------------------------
44
<PAGE>
SECURITY FUNDS
APPLICATION
1. ACCOUNT REGISTRATION (THE OWNER(S) MUST COMPLETE SECTION 10 "CERTIFICATION
AND SIGNATURE" TO ESTABLISH AN ACCOUNT.)
I hereby authorize the establishment of the account marked below and acknowledge
receipt of the Fund's current prospectus. Check is enclosed for
$ (minimum $100) payable to SECURITY DISTRIBUTORS, INC. as
------------------
an initial investment. I am of legal age in the state of my residence and wish
to purchase shares of the Fund indicated below. By the execution of this
application, the undersigned represents and warrants that the investor has full
right, power and authority to make this investment and the undersigned is duly
authorized to sign this application and to purchase or redeem shares of the Fund
on behalf of the investor. No stock certificate is to be issued unless I so
request. See the prospectus for information about an Accumulation Plan which
allows a minimum investment of $100 and subsequent investments of $20.
- -------------------------------------------------------------
Owner/Custodian/Trustee Name (Print)
- -------------------------------------------------------------
Social Security Number Date of Birth
- -------------------------------------------------------------
Joint Owner/Minor Name (Print) [ ] Check if UGMA/UTMA Account
- -------------------------------------------------------------
Social Security Number Date of Birth
2. ADDRESS AND TELEPHONE NUMBER
- ------------------------------ -----------------------------------------------
Street Address Daytime Telephone
(for first individual)
- ------------------------------ Citizenship [ ] U.S. [ ] Other
City, State, Zip Code ----------------
Indicate Country
3. INITIAL INVESTMENT
CLASS OF SHARES (MUST SELECT ONE ONLY) ( ) A SHARES ( ) B SHARES (IF NO CLASS IS
SELECTED, PURCHASE(S) WILL BE MADE OF A SHARES)
<TABLE>
<S> <C> <C> <C>
SECURITY EQUITY FUND $ SECURITY LIMITED MATURITY BOND FUND $
------ ------
SECURITY GLOBAL FUND $ SECURITY U.S. GOVERNMENT FUND $
------ ------
SECURITY ASSET ALLOCATION FUND $ SECURITY GLOBAL AGGRESSIVE BOND FUND $
------ ------
SECURITY GROWTH & INCOME FUND $ SECURITY HIGH YIELD FUND $
------ ------
SECURITY ULTRA FUND $ SECURITY TAX-EXEMPT FUND $
------ ------
SECURITY CASH FUND $ SECURITY SOCIAL AWARENESS FUND $
------ ------
SECURITY CORPORATE BOND FUND $
------
</TABLE>
4. DIVIDEND OPTION (CHECK ONE ONLY)
(If no option is selected, distributions will be reinvested into the Fund that
pays them.)
[ ] Reinvest all dividends and capital gains
[ ] Reinvest only capital gains and pay dividends in cash
[ ] Cash payment of dividends and capital gains
[ ] Invest dividends and capital gains into another Security Fund account
(must be same class of shares; if new account, number will be assigned)
Fund Name Account Number
------------------------------------ ------------------
[ ] Send distributions to third party below
Account No. (if applicable)
----------------------------------------------------
Name
---------------------------------------------------------------------------
Address
------------------------------------------------------------------------
5. SYSTEMATIC WITHDRAWAL PROGRAM (FOR ACCOUNTS OF $5,000 OR MORE)
You are hereby authorized to send a check(s) beginning:
Month Day [ ] 11th or [ ] 26th 19
---------------- ----
(if no date is selected withdrawal will be made on the 26th)
Payable: [ ] monthly [ ] quarterly [ ] semi-annually [ ] annually
Fund Name Fund Name
----------------------------- ------------------------------
Account No. (if known) Account No. (if known)
---------------- ---------------
(if 3 or more funds, please send written instructions)
Level Payment $ ($25 minimum) Level Payment $ ($25 minimum)
-------- --------
Variable Payment based on fixed number Variable Payment based on fixed number
of shares or a percentage of account of shares or a percentage of account
value ($25 minimum) value ($25 minimum)
Number of shares: or Number of shares: or
----------- -----------
Percentage of account value: Percentage of account value:
--------- ---------
Note: For Class B shares, annual withdrawals in excess of 10% of value of
account at time program is established may be subject to a contingent deferred
sales charge.
Complete this section only if you want check payable and sent to another address
(please print):
Name Signature(s) of all registered owners required
----------------------------
Address Individual Signature
------------------------- -------------------------
City, State, Zip Code Joint Owner Signature
------------ ------------------------
6. SECUR-O-MATIC[Registration Mark] BANK DRAFT PLAN
I wish to make investments directly from my checking account. (Please attach a
voided check to this application.)
Fund Name Account Number (if known) Amount $
------------------ ------- -------
Fund Name Account Number (if known) Amount $
------------------ ------- -------
Date: [ ] 7th Day of Month [ ] 14th Day of Month [ ] 21st Day of Month
[ ] 28th Day of Month
(if no date is selected investment will be made on the 21st)
Mode: [] Monthly ($20 minimum) [] Bi-Monthly ($40 minimum)
[] Quarterly ($50 minimum) [] Semiannually ($100 minimum)
[] Annually ($200 minimum)
You should notify your bank that you are going to use this service to ensure
they accept preauthorized electronic drafts.
(continued on back)
<PAGE>
7. RIGHTS OF ACCUMULATION
I own shares in other Security Funds which may entitle this purchase to have a
reduced sales charge under the provisions in the Fund Prospectus.
- -------------------------------- --------------------------- -----------------
Current Account Registration Fund Name Account Number(s)
- -------------------------------- --------------------------- -----------------
- -------------------------------- --------------------------- -----------------
8. STATEMENT OF INTENTION
[ ] Please check here if you wish to receive a Statement of Intention. This form
allows you to purchase shares at reduced sales charges if you plan to invest
more than: (Please check one) [ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $500,000
[ ] $1,000,000 in installments during the next 13 months (36 months for
purchases of $1 million or more). See the current prospectus for more
information.
9. TELEPHONE EXCHANGE AND REDEMPTION PRIVILEGE
If you would like to have telephone exchange and/or redemption privileges,
please mark one or more of the boxes below:
Yes, I want [ ] telephone exchange [ ] telephone redemption privileges.
By checking the applicable box(es) and signing this Application, you authorize
the Investment Manager to honor any telephone request for the exchange and/or
redemption of Fund shares (maximum telephone redemption is $10,000), subject to
the terms of the Fund prospectus. The Investment Manager has established
reasonable procedures to confirm that instructions communicated by telephone are
genuine and may be liable for any losses due to fraudulent or unauthorized
instructions if it fails to comply with its procedures. The procedures require
that any person requesting a telephone redemption or exchange provide the
account registration and number and owner's tax identification number and such
request must be received on a recorded line. Neither the Fund, the Investment
Manager nor the Underwriter will be liable for any loss, liability, cost or
expense arising out of any telephone request, provided that the Investment
Manager complied with its procedures. Thus, a stockholder may bear the risk of
loss from a fraudulent or unauthorized request.
10. CERTIFICATION AND SIGNATURE
TAX IDENTIFICATION NUMBER CERTIFICATION
UNDER PENALTIES OF PERJURY I CERTIFY THAT:
1. The number shown on this form is my correct taxpayer identification number
(or I am waiting for a number to be issued to me); and
2. I am not subject to backup withholding because: (a) I am exempt from backup
withholding, or (b) I have not been notified by the Internal Revenue Service
(IRS) that I am subject to backup withholding as a result of a failure to
report all interest or dividends, or (c) the IRS has notified me that I am no
longer subject to backup withholding.
The Internal Revenue Service does not require your consent to any provision of
this document other than the certifications required to avoid backup
withholding.
- --------------------------------------------------------------------------------
Signature of Owner Date
- --------------------------------------------------------------------------------
Signature of Joint Owner Date
In case of joint ownership, both must sign. If no form of ownership is indicated
then it will be assumed the ownership is as "joint tenants, with right of
survivorship" and not as "tenants in common."
CERTIFICATION INSTRUCTIONS - You must cross out item (2) to the left if you have
been notified by IRS that you are currently subject to backup withholding
because of underreporting interest or dividends on your tax return.
11. INVESTMENT DEALER
I (we) agree to act as dealer under this account in accordance with the
provisions of the Dealer Agreement and appoint Security Distributors, Inc. to
act as my (our) agent pursuant thereto. I (we) represent that the appropriate
prospectus was delivered to the above indicated owner(s).
- --------------------------------------------------------------------------------
Name of Firm (Print)
- --------------------------------------------------------------------------------
Business Address
- --------------------------------------------------------------------------------
City, State, Zip Code
- --------------------------------------------------------------------------------
Signature of Authorized Dealer
- ----------------------------------------------------- ------------------------
Representative's Name Account Executive Number
- --------------------------------------------------------------------------------
Business Address
- --------------------------------------------------------------------------------
City, State, Zip Code
- --------------------------------------------------------------------------------
Representative's Telephone Number
SEND COMPLETED APPLICATION TO SECURITY DISTRIBUTORS, INC., 700 SW HARRISON ST.,
TOPEKA, KS 66636-0001
1-800-888-2461, EXT. 3127
Attach Voided Check Here
(Check must be preprinted with the bank account registration)
<PAGE>
[SDI LOGO}
700 SW Harrison St.
Topeka, KS 66636-0001
(913) 295-3127
(800) 888-2461
<PAGE>
SECURITY INCOME FUND
CORPORATE BOND SERIES
LIMITED MATURITY BOND SERIES
U.S. GOVERNMENT SERIES
GLOBAL AGGRESSIVE BOND SERIES
HIGH YIELD SERIES
SECURITY TAX-EXEMPT FUND
SECURITY CASH FUND
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 5, 1997
RELATING TO THE PROSPECTUS DATED FEBRUARY 5, 1997,
AS IT MAY BE SUPPLEMENTED FROM TIME TO TIME
(913) 295-3127
(800) 888-2461
INVESTMENT MANAGER
Security Management Company, LLC
700 SW Harrison Street
Topeka, Kansas 66636-0001
DISTRIBUTOR
Security Distributors, Inc.
700 SW Harrison Street
Topeka, Kansas 66636-0001
CUSTODIAN
UMB Bank, N.A.
928 Grand Avenue
Kansas City, Missouri 64106
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
<PAGE>
SECURITY INCOME FUND
SECURITY TAX-EXEMPT FUND
SECURITY CASH FUND
Members of The Security Benefit Group of Companies
700 SW Harrison, Topeka, Kansas 66636-0001
STATEMENT OF
ADDITIONAL INFORMATION
February 5, 1997
(RELATING TO THE PROSPECTUS DATED FEBRUARY 5, 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 February 5, 1997, as it may be
supplemented from time to time. A Prospectus may be obtained by writing or
calling Security Distributors, Inc., 700 SW Harrison, Topeka, Kansas 66636-0001,
or by calling (913) 295-3127 or (800) 888-2461, ext. 3127.
TABLE OF CONTENTS
Page
General Information........................................................ 1
Investment Objectives and Policies of the Funds............................ 2
Security Income Fund..................................................... 2
Corporate Bond Fund.................................................... 2
Limited Maturity Bond Fund............................................. 3
U.S. Government Fund................................................... 5
Global Aggressive Bond Fund............................................ 6
High Yield Fund........................................................ 9
Security Tax-Exempt Fund................................................. 10
Security Cash Fund....................................................... 14
Investment Methods and Risk Factors........................................ 16
Investment Policy Limitations.............................................. 30
Income Fund's Fundamental Policies....................................... 30
Tax-Exempt Fund's Fundamental Policies................................... 32
Cash Fund's Fundamental Policies......................................... 33
Officers and Directors..................................................... 34
Remuneration of Directors and Others....................................... 36
How to Purchase Shares..................................................... 36
Corporate Bond, Limited Maturity Bond, U.S. Government,
Global Aggressive Bond, High Yield and Tax-Exempt Funds................ 36
Alternative Purchase Options............................................. 37
Class A Shares........................................................... 37
Security Income Fund's Class A Distribution Plan......................... 38
Class B Shares........................................................... 39
Class B Distribution Plan................................................ 39
Calculation and Waiver of Contingent Deferred Sales Charges ............. 40
Arrangements With Broker/Dealers and Others ........................... 40
Cash Fund............................. ................................ 41
Purchases at Net Asset Value.............. ................................ 42
Accumulation Plan......................... ................................ 42
Systematic Withdrawal Program............. ................................ 43
Investment Management..................... ................................ 43
Portfolio Management.................... ................................ 46
Code of Ethics.......................... ................................ 47
Distributor............................... ................................ 48
Allocation of Portfolio Brokerage......... ................................ 48
Determination of Net Asset Value.......... ................................ 49
How to Redeem Shares...................... ................................ 50
Telephone Redemptions................... ................................ 52
How to Exchange Shares..................................................... 52
Exchange by Telephone................... ................................ 53
Dividends and Taxes........................................................ 54
Organization............................................................... 58
Custodian, Transfer Agent and Dividend-Paying Agent ....................... 58
Independent Auditors....................................................... 59
Performance Information.................................................... 59
Retirement Plans........................................................... 61
Individual Retirement Accounts (IRAs)...................................... 62
SIMPLE IRAs................................................................ 62
Pension and Profit-Sharing Plans........................................... 62
403(b) Retirement Plans.................................................... 62
Simplified Employee Pension Plans (SEPPs).................................. 63
Financial Statements....................................................... 63
Tax-Exempt vs. Taxable Income.............................................. 63
Appendix A................................................................. 64
<PAGE>
GENERAL INFORMATION
Security Income Fund, Security Tax-Exempt Fund and Security Cash Fund,
which were organized as Kansas corporations on April 20, 1965, July 14, 1981 and
March 21, 1980, respectively, are registered with the Securities and Exchange
Commission as investment companies. Such registration does not involve
supervision by the Securities and Exchange Commission of the management or
policies of the Funds. The Funds are diversified, open-end management investment
companies that, upon the demand of the investor, must redeem their shares and
pay the investor the current net asset value thereof. ( See "How to Redeem
Shares," page 50.)
Each of the Corporate Bond Series ("Corporate Bond Fund"), Limited Maturity
Bond Series ("Limited Maturity Bond Fund"), U.S. Government Series ("U.S.
Government Fund"), Global Aggressive Bond Series ("Global Aggressive Bond Fund")
and High Yield Series ("High Yield Fund") of Security Income Fund, Security
Tax-Exempt Fund ("Tax-Exempt Fund"), and Security Cash Fund ("Cash Fund") (the
"Funds") has its own investment objective and policies which are described
below. While there is no present intention to do so, the investment objective
and policies of each Fund, unless otherwise noted, may be changed by its Board
of Directors without the approval of stockholders. Each of the Funds is also
required to operate within limitations imposed by its fundamental investment
policies which may not be changed without stockholder approval. These
limitations are set forth below under "Investment Policy Limitations," page 30.
An investment in one of the Funds does not constitute a complete investment
program.
The value of the shares of each Fund fluctuates with the value of the
portfolio securities. Each Fund may realize losses or gains when it sells
portfolio securities and will earn income to the extent that it receives
dividends or interest from its investments. (See "Dividends and Taxes," page
54.)
The shares of Corporate Bond, Limited Maturity Bond, U.S. Government,
Global Aggressive Bond, High Yield and Tax-Exempt Funds are sold to the public
at net asset value, plus a sales commission which is divided between the
principal distributor and dealers who sell the shares ("Class A shares"), or at
net asset value with a contingent deferred sales charge ("Class B shares"). The
shares of Cash Fund are sold to the public at net asset value. There is no sales
charge or load when purchasing shares of Cash Fund. (See "How to Purchase
Shares," page 36.)
The Funds receive investment advisory, administrative, accounting, and
transfer agency services from Security Management Company, LLC (the "Investment
Manager") for a fee. The Investment Manager has guaranteed that the aggregate
annual expenses (including the management compensation but excluding brokerage
commissions, interest, taxes, extraordinary expenses and Class B distribution
fees) shall not for Corporate Bond, Limited Maturity Bond, U.S. Government,
Global Aggressive Bond and High Yield Funds exceed any expense limitation
imposed by any state and shall not for Tax-Exempt and Cash Funds exceed 1% of
the average net assets of the Fund for the year. (See page 43 for a discussion
of the Investment Manager and the Investment Advisory Contract.)
Each Fund will pay all its expenses not assumed by the Investment Manager
or Security Distributors, Inc. (the "Distributor") including organization
expenses; directors' fees; fees of custodian; taxes and governmental fees;
interest charges; any membership dues; brokerage commissions; expenses of
preparing and distributing reports to stockholders; costs of stockholder and
other meetings; and legal, auditing and accounting expenses. Each Fund will also
pay for the preparation and distribution of the prospectus to its stockholders
and all expenses in connection with its registration under the Investment
Company Act of 1940 and the registration of its capital stock under federal and
state securities laws. Each Fund will pay nonrecurring expenses as may arise,
including litigation expenses affecting it.
Under a Distribution Plan adopted with respect to the Class A shares of
Corporate Bond, Limited Maturity Bond, U.S. Government, Global Aggressive Bond
and High Yield Funds pursuant to Rule 12b-1 under the Investment Company Act of
1940 (the "1940 Act"), these Funds are authorized to pay to the Distributor, an
annual fee of .25% of the average daily net assets of the Class A shares of the
Corporate Bond, Limited Maturity Bond, U.S. Government, Global Aggressive Bond
and High Yield Funds to finance various distribution-related activities. (See
"Security Income Fund's Class A Distribution Plan," page 38.)
Under Distribution Plans adopted with respect to the Class B shares of
Corporate Bond, Limited Maturity Bond, U.S. Government, Global Aggressive Bond,
High Yield and Tax-Exempt Funds pursuant to Rule 12b-1 under the 1940 Act, each
Fund is authorized to pay to the Distributor, an annual fee of 1.00% of the
average daily
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net assets of the Class B Shares of the respective Funds to finance various
distribution-related activities. (See "Class B Distribution Plan," page 39.)
The Funds may utilize short-term trading to a limited extent in order to
take advantage of differentials in bond yields consistent with their respective
investment objectives. The portfolio turnover rate for the Funds' Class A and B
shares of Corporate Bond, U.S. Government and Tax-Exempt Funds for the fiscal
year ended December 31, 1995, was: Corporate Bond - 200%; U.S. Government - 81%;
and Tax-Exempt - 103%. The portfolio turnover rate for the Funds' Class A and B
shares for the fiscal year ended December 31, 1994 was: Corporate Bond - 204%;
U.S. Government - 220%; and Tax-Exempt - 88%. The annualized portfolio turnover
rate for the Class A and B shares of Limited Maturity Bond Fund for the period
January 17, 1995 (date of inception) to December 31, 1995, and the Global
Aggressive Bond Fund for the period June 1, 1995 (date of inception) to December
31, 1995 was: Limited Maturity Bond - 4%; and Global Aggressive Bond - 127%.
Portfolio turnover is the percentage of the lower of security sales or purchases
to the average portfolio value and would be 100% if all securities in the Fund
were replaced within a period of one year. Portfolio turnover information is not
yet available for the High Yield Fund as it did not begin operations until
August of 1996.
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
SECURITY INCOME FUND
Security Income Fund ("Income Fund") consists of five diversified Series
(Corporate Bond, Limited Maturity Bond, U.S. Government, Global Aggressive Bond
and High Yield Funds), each of which represents a different investment objective
and which has its own identified assets and net asset values. The investment
objective of each Series is described below. There are risks inherent in the
ownership of any security and there can be no assurance that such investment
objectives will be achieved. Some of the risks are described below.
Corporate Bond, Limited Maturity Bond and U.S. Government Funds will
purchase solely debt securities and will not invest in securities which are not
publicly traded or marketable. Short-term obligations may be purchased in any
amount as the Investment Manager deems appropriate for defensive or liquidity
purposes. Each Fund's portfolio may include a significant amount of debt
securities which sell at discounts from their face amount as a result of current
market conditions. For example, debt securities with fixed-rate coupons are
generally sold at a discount from their face amount during periods of rising
interest rates.
Income Fund makes no representation that the stated investment objective of
any Series will be achieved. Although there is no present intention to do so,
the investment objective of any Series of the Fund may be altered by the Board
of Directors without the approval of stockholders of the Series.
CORPORATE BOND FUND
The investment objective of the Corporate Bond Fund is to conserve capital
while generating interest income. In pursuing its investment objective, the Fund
will invest in a broad range of debt securities, including (i) securities issued
by U.S. and Canadian corporations; (ii) securities issued or guaranteed by the
U.S. Government or any of its agencies or instrumentalities, including Treasury
bills, certificates of indebtedness, notes and bonds; (iii) securities issued or
guaranteed by the Dominion of Canada or provinces thereof; (iv) securities
issued by foreign governments, their agencies and instrumentalities, and foreign
corporations, provided that such securities are denominated in U.S. dollars; (v)
higher yielding, high risk debt securities (commonly referred to as "junk
bonds"); (vi) certificates of deposit issued by a U.S. branch of a foreign bank
("Yankee CDs"); and (vii) investment grade mortgage-backed securities ("MBSs").
Under normal circumstances, at least 65% of the Fund's total assets will be
invested in corporate debt securities which at the time of issuance have a
maturity greater than one year.
Corporate Bond Fund will invest primarily in corporate debt securities
rated Baa or higher by Moody's Investors Service, Inc. ("Moody's") or BBB or
higher by Standard & Poor's Corporation ("S&P") at the time of purchase, or if
unrated, of equivalent quality as determined by the Investment Manager. See
Appendix A to the Prospectus for a description of corporate bond ratings.
Included in such securities may be convertible bonds or bonds with warrants
attached which are rated at least Baa or BBB at the time of purchase, or if
unrated, of equivalent quality as determined by the Investment Manager. A
"convertible bond" is a bond, debenture or preferred share which may be
exchanged by the owner for common stock or another security, usually of the same
company, in accordance with the terms of the issue. A "warrant" confers upon its
holder the right to purchase an amount of securities at a particular time and
price. Securities rated Baa by Moody's or BBB by S&P have
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speculative characteristics. See "Investment Methods and Risk Factors" for a
discussion of the risks associated with such securities.
Corporate Bond Fund may invest up to 25% of its net assets in higher
yielding debt securities in the lower rating (higher risk) categories of the
recognized rating services (commonly referred to as "junk bonds"). Such
securities include securities rated Ba or lower by Moody's or BB or lower by S&P
and are regarded as predominantly speculative with respect to the ability of the
issuer to meet principal and interest payments. The Fund will not invest in junk
bonds which are rated in default at the time of purchase. See "Investment
Methods and Risk Factors" for a discussion of the risks associated with
investing in such securities.
The Fund may purchase securities which are obligations of, or guaranteed
by, the Dominion of Canada or provinces thereof and debt securities issued by
Canadian corporations. Canadian securities will not be purchased if subject to
the foreign interest equalization tax and unless payable in U.S. dollars.
The Fund may invest in Yankee CDs which are certificates of deposit issued
by a U.S. branch of a foreign bank denominated in U.S. dollars and held in the
U.S. Yankee CDs are subject to somewhat different risks than are the obligations
of domestic banks. The Fund also may invest in debt securities issued by foreign
governments, their agencies and instrumentalities and foreign corporations,
provided that such securities are denominated in U.S. dollars. The Fund's
investment in foreign securities, including Canadian securities, will not exceed
25% of the Fund's net assets. See "Investment Methods and Risk Factors" for a
discussion of the risks associated with investing in foreign securities.
The Fund may invest in investment grade mortgage-backed securities (MBSs),
including mortgage pass-through securities and collateralized mortgage
obligations (CMOs). The Fund may invest up to 10% of its net assets in
securities known as "inverse floating obligations," "residual interest bonds,"
or "interest-only" (IO) or "principal-only" (PO) bonds, the market values of
which generally will be more volatile than the market values of most MBSs. The
Fund will hold less than 25% of its net assets in MBSs. For a discussion of MBSs
and the risks associated with such securities, see "Investment Methods and Risk
Factors."
Corporate Bond Fund may purchase securities on a "when issued" or "delayed
delivery" basis in excess of customary settlement periods for the types of
security involved. For a discussion of such securities, see "Investment Methods
and Risk Factors." It is anticipated that securities invested in by this Fund
will be held by the Fund on an average from one and a half to three years and
that the average weighted maturity of the Fund's portfolio will range from 10 to
25 years under normal circumstances.
Corporate Bond Fund may invest in repurchase agreements on an overnight
basis. See the discussion of repurchase agreements under "Investment Methods and
Risk Factors." The Fund may borrow money from banks as a temporary measure for
emergency purposes or to facilitate redemption requests. Borrowing is discussed
in more detail under "Investment Methods and Risk Factors." Pending investment
in securities or to meet potential redemptions, the Fund may invest in
certificates of deposit, bank demand accounts and high quality money market
instruments.
LIMITED MATURITY BOND FUND
The investment objective of the Limited Maturity Bond Fund is to seek a
high level of income consistent with moderate price fluctuation by investing
primarily in short- and intermediate-term bonds. As used herein the term "short-
and intermediate-term bonds" is used to describe any debt security with a
maturity of 15 years or less. In pursuing its investment objective, the Fund
will invest in a broad range of debt securities, including (i) securities issued
by U.S. and Canadian corporations; (ii) securities issued or guaranteed by the
U.S. Government or any of its agencies or instrumentalities, including Treasury
bills, certificates of indebtedness, notes and bonds; (iii) securities issued or
guaranteed by, the Dominion of Canada or provinces thereof; (iv) securities
issued by foreign governments, their agencies, and instrumentalities, and
foreign corporations, provided that such securities are denominated in U.S.
dollars; (v) higher yielding, high risk debt securities (commonly referred to as
"junk bonds"); (vi) certificates of deposit issued by a U.S. branch of a foreign
bank ("Yankee CDs"); (vii) mortgage-backed securities ("MBSs"); and (viii)
investment grade asset-backed securities. High yield debt securities, Yankee
CDs, MBSs and asset-backed securities are described in further detail under
"Investment Methods and Risk Factors." Under normal circumstances, the Fund will
invest at least 65% of the value of its total assets in short- and
intermediate-term bonds. It is anticipated that the Fund's dollar weighted
average maturity will range from 2 to 10 years. It will never exceed 10 years.
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Limited Maturity Bond Fund will invest primarily in debt securities rated
Baa or higher by Moody's or BBB or higher by S&P at the time of purchase, or if
unrated, of equivalent quality as determined by the Investment Manager. Baa
securities are considered to be "medium grade" obligations by Moody's and BBB is
the lowest classification which is still considered an "investment grade" rating
by S&P. Included in such securities may be convertible bonds or bonds with
warrants attached which are rated at least Baa or BBB at the time of purchase,
or if unrated, of equivalent quality as determined by the Investment Manager. A
"convertible bond" is a bond, debenture or preferred share which may be
exchanged, by the owner, for common stock or another security, usually of the
same company, in accordance with the terms of the issue. A "warrant" confers
upon its holder the right to purchase an amount of securities at a particular
time and price. Bonds rated Baa by Moody's or BBB by S&P have speculative
characteristics and may be more susceptible than higher grade bonds to adverse
economic conditions or other adverse circumstances which may result in a
weakened capacity to make principal and interest payments. See Appendix A to the
Prospectus for a description of corporate bond ratings.
The Fund may invest in higher yielding debt securities in the lower rating
(higher risk) categories of the recognized rating services (commonly referred to
as "junk bonds"); however, the Fund will never hold more than 25% of its net
assets in junk bonds. This includes securities rated Ba or lower by Moody's or
BB or lower by S&P and are regarded as predominantly speculative with respect to
the ability of the issuer to meet principal and interest payments. The Fund will
not invest in junk bonds which are in default at the time of purchase. However,
the Investment Manager will not rely principally on the ratings assigned by the
rating services. Because the Fund may invest in lower rated or unrated
securities of comparable quality, the achievement of the Fund's investment
objective may be more dependent on the Investment Manager's own credit analysis
than would be true if investing in higher rated securities.
The Fund may purchase securities which are obligations of, or guaranteed by,
the Dominion of Canada or provinces thereof and debt securities issued by
Canadian corporations. Canadian securities will not be purchased if subject to
the foreign interest equalization tax and unless payable in U.S. currency.
The Fund may invest in Yankee CDs which are Certificates of Deposit issued
by a U.S. branch of a foreign bank denominated in U.S. dollars and held in the
United States. Yankee CDs are subject to somewhat different risks than are the
obligations of domestic banks. The Fund may also invest up to 25% of its net
assets in debt securities issued by foreign governments, their agencies and
instrumentalities, and foreign corporations, provided that such securities are
denominated in U.S. dollars. The Fund's investment in foreign securities,
including Canadian securities will not exceed 25% of the Fund's net assets.
Investment in securities of foreign issuers presents certain risks, including
future political and economic developments and the possible imposition of
foreign governmental laws and restrictions, reduced availability of public
information concerning issuers, and the fact that foreign issuers are not
generally subject to uniform accounting, auditing and financial reporting
standards or to other regulatory practices and requirements comparable to those
applicable to domestic issuers.
The Fund may invest in U.S. Government securities. Some U.S. Government
securities, such as Treasury bills and bonds, are supported by the full faith
and credit of the U.S. Treasury; others, such as those of the Federal National
Mortgage Association, are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; still others such as those of
the Student Loan Marketing Association, are supported only by the credit of the
instrumentality. U.S. Government securities include bills, certificates of
indebtedness, notes and bonds issued by the Treasury or by agencies or
instrumentalities of the U.S. Government.
Limited Maturity Bond Fund may acquire certain securities that are
restricted as to disposition under the federal securities laws, provided that
such securities are eligible for resale to qualified institutional investors
pursuant to Rule 144A under the Securities Act of 1933, and subject to the
Fund's policy that not more than 15% of the Fund's total assets will be invested
in illiquid assets. See "Investment Methods and Risk Factors" for a discussion
of Rule 144A Securities.
The Fund may invest in investment grade mortgage-backed securities (MBSs),
including mortgage pass-through securities and collateralized mortgage
obligations (CMOs). The Fund may invest up to 10% of its net assets in
securities known as "inverse floating obligations," "residual interest bonds,"
or "interest-only" (IO) and "principal-only" (PO) bonds, the market values of
which will generally be more volatile than the market values of most MBSs. The
Fund will hold less than 25% of its net assets in MBSs, including CMOs and
mortgage pass-through securities.
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The Fund may also invest in investment grade "asset-backed securities."
These include secured debt instruments backed by automobile loans, credit card
loans, home equity loans, manufactured housing loans and other types of secured
loans providing the source of both principal and interest.
Limited Maturity Bond Fund may purchase securities on a "when issued" or
"delayed delivery" basis in excess of customary settlement periods for the type
of security involved. Securities purchased on a when issued basis are subject to
market fluctuations and no interest or dividends accrue to the Fund prior to the
settlement date. The Fund will establish a segregated account with its custodian
bank in which it will maintain cash, U.S. Government securities, or other
appropriate high grade, liquid debt obligations equal in value to commitments
for such when issued securities.
Limited Maturity Bond Fund may invest in repurchase agreements on an
overnight basis. See the discussion of repurchase agreements under "Investment
Methods and Risk Factors." The Fund may borrow money from banks as a temporary
measure for emergency purposes or to facilitate redemption requests. Borrowing
is discussed in more detail under "Investment Methods and Risk Factors." Pending
investment in securities or to meet potential redemptions, the Fund may invest
in certificates of deposit, bank demand accounts and high quality money market
instruments.
From time to time, Limited Maturity Bond Fund may invest part or all of its
assets in commercial notes or money market instruments.
U.S. GOVERNMENT FUND
The investment objective of the U.S. Government Fund is to provide a high
level of interest income with security of principal by investing primarily in
U.S. Government securities. U.S. Government securities are obligations of, or
guaranteed (as to principal and interest) by, the U.S. Government, its agencies
(such as the Federal Housing Administration and Government National Mortgage
Association) or instrumentalities (such as Federal Home Loan Banks and Federal
Land Banks), and instruments fully collateralized with such obligations such as
repurchase agreements. U.S. Government securities include bills, Certificates of
Indebtedness, notes and bonds issued by the Treasury or by agencies or
instrumentalities of the U.S. Government. The Fund may, for defensive purposes,
temporarily invest part or all of its assets in money market instruments
including deposits and bankers acceptances in depository institutions insured by
the FDIC, and short-term U.S. Government and agency securities. If the deposits
of the Fund in a depository institution are not fully insured by the FDIC, the
Fund will analyze the credit quality of the issuing institution prior to making
any such deposit and will retain a record of that analysis.
Some U.S. Government securities, such as treasury bills and bonds, are
supported by the full faith and credit of the U.S. Treasury, others are
supported by the right of the issuer to borrow from the Treasury, others, such
as those of the Federal National Mortgage Association, are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; still others such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. Under
normal circumstances, the Fund will invest at least 80% of the value of its
total assets in U.S.
Government securities.
U.S. Government Fund may invest in repurchase agreements on an overnight
basis. See the discussion of repurchase agreements under "Investment Methods and
Risk Factors." The Fund may borrow money from banks as a temporary measure for
emergency purposes or to facilitate redemption requests. Borrowing is discussed
in more detail under "Investment Methods and Risk Factors." Pending investment
in securities or to meet potential redemptions, the Fund may invest in
certificates of deposit, bank demand accounts and high quality money market
instruments.
From time to time the portfolio of the U.S. Government Fund may consist
primarily of Government National Mortgage Association (GNMA) certificates. GNMA
certificates are mortgage-backed securities representing part ownership of a
pool of mortgage loans. These loans, issued by lenders such as mortgage bankers,
commercial banks and savings and loan associations, are either issued by the
Federal Housing Administration or guaranteed by the Veterans Administration. A
"pool" or group of such mortgages is assembled and, after being approved by
GNMA, is offered to investors through securities dealers. Once approved by GNMA,
the timely payment of interest and principal on each mortgage is guaranteed by
GNMA and backed by the full faith and credit of the U.S. Government. GNMA
certificates differ from bonds in that principal is paid back monthly by the
borrower over the term of the loan rather than returned in a lump sum at
maturity. GNMA certificates are called "pass through"
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securities because both interest and principal payments (including prepayments)
are passed through to the holder of the certificate.
The Fund may invest in other mortgage-backed securities (MBSs) as discussed
under "Investment Methods and Risk Factors - Mortgage-Backed Securities and
Collateralized Mortgage Obligations" in the Prospectus. MBSs include certain
securities issued by the United States government or one of its agencies or
instrumentalities, such as GNMAs, or securities issued by private issuers. The
Fund may not invest more than 20% of the value of its total assets in MBSs
issued by private issuers. The Fund will not invest in any stripped
mortgage-backed securities.
The Fund will attempt to maximize the return on its portfolio by taking
advantage of market developments and yield disparities, which may include use of
the following strategies:
1. Shortening the average maturity of its portfolio in anticipation of a rise
in interest rates so as to minimize depreciation of principal;
2. Lengthening the average maturity of its portfolio in anticipation of a
decline in interest rates so as to maximize appreciation of principal;
3. Selling one type of U.S. Government obligation and buying another when
disparities arise in the relative values of each; and
4. Changing from one U.S. Government obligation to an essentially similar U.S.
Government obligation when their respective yields are distorted due to
market factors.
These strategies may result in increases or decreases in the Fund's current
income available for distribution to Fund shareholders, and the Fund may hold
obligations which sell at moderate to substantial premiums or discounts from
face value. Moreover, if the Fund's expectations of changes in interest rates or
its evaluation of the normal yield relationship between two obligations proves
to be incorrect, the Fund's income, net asset value per share and potential
capital gain may be decreased or its potential capital loss may be increased. It
is anticipated that securities invested in by this Fund will be held by the Fund
on an average from three to five years.
While there is minimal credit risk involved in the purchase of U.S.
Government securities, as with any fixed income security the market value is
generally affected by changes in the level of interest rates. An increase in
interest rates will tend to reduce the market value of fixed income investments,
and a decline in interest rates will tend to increase their value. In addition,
while debt securities with longer maturities normally produce higher yields,
they are subject to potentially greater capital changes in market value than
obligations with shorter maturities.
The potential for appreciation in GNMAs and other MBSs, which might
otherwise be expected to occur as a result of a decline in interest rates, may
be limited or negated by increased principal prepayments of the underlying
mortgages. Prepayments of MBSs occur with increasing frequency when mortgage
rates decline because, among other reasons, mortgagors may be able to refinance
their outstanding mortgages at lower interest rates or prepay their existing
mortgages. Such prepayments would then be reinvested by the Fund at the lower
current interest rates.
While mortgages underlying GNMA certificates have a stated maturity of up to
30 years, it has been the experience of the mortgage industry that the average
life of comparable mortgages, owing to prepayments, refinancings and payments
from foreclosures, is considerably less. Yield tables, published in 1981,
utilize a 12-year average life assumption for GNMA pools of 26-30 year
mortgages, and GNMA certificates continue to be traded based on this assumption.
Recently it has been observed that mortgage pools issued at high interest rates
have experienced accelerated prepayment rates as interest rates decline, which
would result in a shorter average life than 12 years.
GLOBAL AGGRESSIVE BOND FUND
The investment objective of the Global Aggressive Bond Fund is to seek high
current income. Capital appreciation is a secondary objective. The Fund, under
normal circumstances, invests substantially all of its assets in debt securities
of issuers in the United States, developed foreign countries and emerging
markets. For purposes of its investment objective, Global Aggressive Bond Fund
considers an emerging country to be any country whose economy and market the
World Bank or United Nations considers to be emerging or developing. The Fund
may also invest in debt securities traded in any market, of companies that
derive 50% or more of their total revenue from either goods or services produced
in such emerging countries and emerging markets or sales
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made in such countries. Determinations as to eligibility will be made by
Lexington Management Corporation (the "Sub-Adviser") and MFR Advisors, Inc.
("MFR"), based on publicly available information and inquiries made to the
companies. It is possible in the future that sufficient numbers of emerging
country or emerging market debt securities would be traded on securities markets
in industrialized countries so that a major portion, if not all, of the Fund's
assets would be invested in securities traded on such markets, although such a
situation is unlikely at present.
Currently, investing in many of the emerging countries and emerging markets
is not feasible or may involve political risks. Accordingly, the Sub-Adviser
currently intends to consider investments only in those countries in which it
believes investing is feasible. The list of acceptable countries will be
reviewed by the Sub-Adviser and MFR and approved by the Board of Directors of
the Fund on a periodic basis and any additions or deletions with respect to such
list will be made in accordance with changing economic and political
circumstances involving such countries. The Fund may also 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
Aggressive Bond Fund, the Sub-Adviser and MFR ordinarily consider the following
factors: prospects for relative economic growth among the different countries in
which the Fund may invest; expected levels of inflation; government policies
influencing business conditions; the outlook for currency relationships; and the
range of the individual investment opportunities available to international
investors.
Although Global Aggressive Bond Fund values assets daily in terms of U.S.
dollars, the Fund does not intend to convert holdings of foreign currencies into
U.S. dollars on a daily basis. Global Aggressive Bond Fund will do so from time
to time, and investors should be aware of the costs of currency conversion.
Although foreign exchange dealers do not charge a fee for conversion, they do
realize a profit based on the difference ("spread") between the prices at which
they are buying and selling various currencies. Thus, a dealer may offer to sell
a foreign currency to the Global Aggressive Bond Fund at one rate, while
offering a lesser rate of exchange should the Fund desire to sell that currency
to the dealer.
Global Aggressive Bond Fund may invest in the following types of money
market instruments (i.e., debt instruments with less than 12 months remaining
until maturity) denominated in U.S. dollars or other currencies: (a) obligations
issued or guaranteed by the U.S. or foreign governments, their agencies,
instrumentalities or municipalities; (b) obligations of international
organizations designed or supported by multiple foreign governmental entities to
promote economic reconstruction or development; (c) finance company obligations,
corporate commercial paper and other short-term commercial obligations; (d) bank
obligations (including certificates of deposit, time deposits, demand deposits
and bankers' acceptances), subject to the restriction that the Fund may not
invest 25% or more of its total assets in bank securities; (e) repurchase
agreements with respect to the foregoing; and (f) other substantially similar
short-term debt securities with comparable characteristics.
SAMURAI AND YANKEE BONDS. Subject to its fundamental investment
restrictions, Global Aggressive Bond Fund may invest in yen-denominated bonds
sold in Japan by non-Japanese issuers ("Samurai bonds"), and may invest in
dollar-denominated bonds sold in the United States by non-U.S. issuers ("Yankee
bonds"). It is the policy of Global Aggressive Bond Fund to invest in Samurai or
Yankee bond issues only after taking into account considerations of quality and
liquidity, as well as yield.
COMMERCIAL BANK OBLIGATIONS. For the purposes of Global Aggressive Bond
Fund's investment policies with respect to bank obligations, obligations of
foreign branches of U.S. banks and of foreign banks are obligations of the
issuing bank and may be general obligations of the parent bank. Such
obligations, however, may be limited by the terms of a specific obligation and
by government regulation. As with investment in non-U.S. securities in general,
investments in the obligations of foreign branches of U.S. banks and of foreign
banks may subject Global Aggressive Bond Fund to investment risks that are
different in some respect from those of investments in obligations of domestic
issuers. Although Global Aggressive Bond Fund typically will acquire obligations
issued and supported by the credit of U.S. or foreign banks having total assets
at the time of purchase in excess of $1 billion, this $1 billion figure is not a
fundamental investment policy or restriction of the Fund. For the purposes of
calculation with respect to the $1 billion figure, the assets of a bank will be
deemed to include the assets of its U.S. and non-U.S. branches.
REPURCHASE AGREEMENTS, REVERSE REPURCHASE AGREEMENTS AND ROLL TRANSACTIONS.
Global Aggressive Bond Fund may invest in repurchase agreements which are
agreements by which a purchaser acquires a security
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and simultaneously commits to resell that security to the seller (a bank or
broker/dealer) at an agreed upon price on an agreed upon date within a number of
days (usually not more than seven) from the date of purchase. Global Aggressive
Bond Fund will not enter into a repurchase agreement with a maturity of more
than seven days if, as a result, more than 15% of the value of its total net
assets would be invested in such repurchase agreements and other illiquid
investments and securities for which no readily available market exists.
Repurchase agreements are discussed in more detail under "Investment Methods and
Risk Factors."
Global Aggressive Bond Fund may enter into reverse repurchase agreements. A
reverse repurchase agreement is a borrowing transaction in which the Fund
transfers possession of a security to another party, such as a bank or
broker/dealer, in return for cash, and agrees to repurchase the security in the
future at an agreed upon price, which includes an interest component. Global
Aggressive Bond Fund also may engage in "roll" borrowing transactions which
involve the Fund's sale of fixed income securities together with a commitment
(for which the Fund may receive a fee) to purchase similar, but not identical,
securities at a future date. Global Aggressive Bond Fund will maintain, in a
segregated account with a custodian, cash, U.S. government securities or other
high grade, liquid debt securities in an amount sufficient to cover its
obligation under "roll" transactions and reverse repurchase agreements.
BORROWING. Global Aggressive Bond Fund is prohibited from borrowing money in
order to purchase securities. Global Aggressive Bond Fund may borrow up to 5% of
its total assets for temporary or emergency purposes other than to meet
redemptions. See the discussion of borrowing under "Investment Methods and Risk
Factors."
SHORT SALES. Global Aggressive Bond Fund is authorized to make short sales
of securities, although it has no current intention of doing so. A short sale is
a transaction in which the Fund sells a security in anticipation that the market
price of that security will decline. Global Aggressive Bond Fund may make short
sales as a form of hedging to offset potential declines in long positions in
securities it owns and in order to maintain portfolio flexibility. Global
Aggressive Bond Fund only may make short sales "against the box." In this type
of short sale, at the time of the sale, Global Aggressive Bond Fund owns the
security it has sold short or has the immediate and unconditional right to
acquire the identical security at no additional cost.
In a short sale, the seller does not immediately deliver the securities sold
and does not receive the proceeds from the sale. To make delivery to the
purchaser, the executing broker borrows the securities being sold short on
behalf of the seller. The seller is said to have a short position in the
securities sold until it delivers the securities sold, at which time it receives
the proceeds of the sale. To secure its obligation to deliver securities sold
short, Global Aggressive Bond Fund will deposit in a separate account with its
custodian an equal amount of the securities sold short or securities convertible
into or exchangeable for such securities at no cost. Global Aggressive Bond Fund
could close out a short position by purchasing and delivering an equal amount of
the securities sold short, rather than by delivering securities already held by
the Fund, because the Fund might want to continue to receive interest and
dividend payments on securities in its portfolio that are convertible into the
securities sold short.
Global Aggressive Bond Fund might make a short sale "against the box" in
order to hedge against market risks when the Sub-Adviser and MFR believes that
the price of a security may decline, causing a decline in the value of a
security owned by the Fund or a security convertible into or exchangeable for
such security, or when the Sub-Adviser and MFR want to sell the security the
Fund owns at a current attractive price, but also wishes to defer recognition or
gain or loss for federal income tax purposes and for purposes of satisfying
certain tests applicable to regulated investment companies under the Internal
Revenue Code of 1986, as amended (the "Code"). In such case, any future losses
in Global Aggressive Bond Fund's long position should be reduced by a gain in
the short position. Conversely, any gain in the long position should be reduced
by a loss in the short position. The extent to which such gains or losses in the
long position are reduced will depend upon the amount of the securities sold
short relative to the amount of the securities Global Aggressive Bond Fund owns,
either directly or indirectly, and, in the case where a Fund owns convertible
securities, changes in the investment values or conversion premiums of such
securities. There will be certain additional transaction costs associated with
short sales "against the box," but Global Aggressive Bond Fund will endeavor to
offset these costs with income from the investment of the cash proceeds of short
sales.
ILLIQUID SECURITIES. Global Aggressive Bond Fund may invest up to 15% of
total net assets in illiquid securities. Securities may be considered illiquid
if Global Aggressive Bond Fund cannot reasonably expect to receive approximately
the amount at which the Fund values such securities within seven days. The sale
of illiquid
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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 the Investment
Manager in accordance with procedures approved by the Fund's Board of Directors.
The Investment Manager takes into account a number of factors in reaching
liquidity decisions, including, but not limited to: (i) the frequency of trades
and quotes; (ii) the number of dealers and potential purchasers; (iii) the
number of dealers that have undertaken to make a market in the security; and
(iv) the nature of the security and how trading is effected (e.g., the time
needed to sell the security, how offers are solicited and the mechanics of
transfer). The Investment Manager will monitor the liquidity of securities held
by the Fund and report periodically on such decisions to the Board of Directors.
HIGH YIELD FUND
The investment objective of High Yield Fund is to seek high current income.
Capital appreciation is a secondary objective. Under normal circumstances, the
Fund will seek its investment objective by investing primarily in a broad range
of income producing securities, including (i) higher yielding, higher risk, debt
securities (commonly referred to as "junk bonds"); (ii) preferred stock; (iii)
securities issued by foreign governments, their agencies and instrumentalities,
and foreign corporations, provided that such securities are denominated in U.S.
dollars; (iv) mortgage-backed securities ("MBSs"); (v) asset-backed securities;
(vi) securities issued or guaranteed by the U.S. Government or any of its
agencies or instrumentalities, including Treasury bills, certificates of
indebtedness, notes and bonds; (vii) securities issued or guaranteed by, the
Dominion of Canada or provinces thereof; and (viii) zero coupon securities. The
Fund may also invest up to 35% of its assets in common stock (which may include
ADRs), warrants and rights. Under normal circumstances, at least 65% of the
Fund's total assets will be invested in high-yielding, high risk debt
securities.
High Yield Fund may invest up to 100% of its assets in debt securities that,
at the time of purchase, are rated below investment grade ("high yield
securities" or "junk bonds"), which involve a high degree of risk and are
predominantly speculative. For a description of debt ratings and a discussion of
the risks associated with investing in junk bonds, see "Investment Methods and
Risk Factors." Included in the debt securities which the Fund may purchase are
convertible bonds, or bonds with warrants attached. A "convertible bond" is a
bond, debenture, or preferred share which may be exchanged by the owner for
common stock or another security, usually of the same company, in accordance
with the terms of the issue. A "warrant" confers upon the holder the right to
purchase an amount of securities at a particular time and price. See "Investment
Methods and Risk Factors" for a discussion of the risks associated with such
securities.
High Yield Fund may purchase securities which are obligations of, or
guaranteed by, the Dominion of Canada or provinces thereof and debt securities
issued by Canadian corporations. Canadian securities will not be purchased if
subject to the foreign interest equalization tax and unless payable in U.S.
dollars. The Fund may also invest in debt securities issued by foreign
governments (including Brady Bonds), their agencies and instrumentalities and
foreign corporations (including those in emerging markets), provided such
securities are denominated in U.S. dollars. The Fund's investment in foreign
securities, excluding Canadian securities, will not exceed 25% of the Fund's net
assets. See "Investment Method and Risk Factors" for a discussion of the risks
associated with investing in foreign securities and emerging markets.
High Yield Fund may invest in MBSs, including mortgage pass-through
securities and collateralized mortgage obligations (CMO's). The Fund may invest
in securities known as "inverse floating obligations," "residual interest
bonds," and "interest only" (IO) and "principal only" (PO) bonds, the market
values of which generally will be more volatile than the market values of most
MBSs. This is due to the fact that such instruments are more sensitive to
interest rate changes and to the rate of principal prepayments than are most
other MBSs. See the discussion of such instruments under "Investment Methods and
Risk Factors." The Fund will hold less than 25% of its net assets in MBSs. For a
discussion of MBSs and the risks associated with such securities, see
"Investment Methods and Risk Factors."
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The Fund may also invest in "asset-backed securities." These include secured
debt instruments backed by automobile loans, credit card loans, home equity
loans, manufactured housing loans and other types of secured loans providing the
source of both principal and interest. Asset-backed securities are subject to
risks similar to those discussed with respect to MBSs. See "Investment Methods
and Risk Factors."
The Fund may invest in U.S. Government securities. U.S. Government
securities include bills, certificates of indebtedness, notes and bonds issued
by the Treasury or by agencies or instrumentalities of the U.S. Government. High
Yield Fund may also invest in zero coupon securities which are debt securities
that pay no cash income but are sold at substantial discounts from their face
value. Certain zero coupon securities also provide for the commencement of
regular interest payments at a deferred date.
High Yield Fund may acquire certain securities that are restricted as to
disposition under federal securities laws, including securities eligible for
resale to qualified institutional investors pursuant to Rule 144A under the
Securities Act of 1933, subject to the Fund's policy that not more than 10% of
the Fund's net assets will be invested in illiquid assets. See "Investment
Methods and Risk Factors" for a discussion of restricted securities.
The Fund may purchase securities on "when issued" or "delayed delivery"
basis in excess of customary settlement periods for the type of security
involved. The Fund may also purchase or sell securities on a "forward
commitment" basis and may enter into "repurchase agreements", "reverse
repurchase agreements" and "roll transactions." The Fund may lend securities to
broker-dealers, other institutions or other persons to earn additional income.
The value of loaned securities may not exceed 33 1/3% of the Fund's total
assets. In addition, the Fund may purchase loans, loan participations and other
types of direct indebtedness.
High Yield Fund may enter into futures contracts (a type of derivative) (or
options thereon) to hedge all or a portion of its portfolio, as a hedge against
changes in prevailing levels of interest rates or as an efficient means of
adjusting its exposure to the bond market. The Fund will not use futures
contracts for leveraging purposes. The Fund will limit its use of futures
contracts so that initial margin deposits or premiums on such contracts used for
non-hedging purposes will not equal more than 5% of the Fund's net asset value.
The Fund may purchase call and put options and write such options on a "covered"
basis. The Fund may also enter into interest rate and index swaps and purchase
or sell related caps, floors and collars. The aggregate market value of the
Fund' portfolio securities covering call or put options will not exceed 25% of
the Fund's net assets. See "Investment Methods and Risk Factors" for a
discussion of the risks associated with these types of investments.
As an operating policy, the Fund will not purchase securities on margin. The
Fund may, however, obtain such short-term credits as are necessary for the
clearance of purchases and sales of securities. In addition, the Fund may enter
into certain derivative transactions, consistent with its investment program,
which require the deposit of "margin" or a premium to initiate such a
transaction. As an operating policy, the Fund will not loan its assets to any
person or individual, except by the purchase of bonds or other debt obligations
customarily sold to institutional investors. The Fund may, however, lend
portfolio securities as described in the prospectus and this statement of
additional information. In addition, the Fund does not interpret this
restriction as prohibiting investment in loan participations and assignments as
described in the prospectus. As an operating policy, the Fund will not engage in
short sales.
The Fund's investment in warrants, valued at the lower of cost or market,
will not exceed 5% of the Fund's net assets. Included within this amount, but
not to exceed 2% of the Fund's net assets, may be warrants which are not listed
on the New York or American Stock Exchange. Warrants acquired by the Fund in
units or attached to securities may be deemed to be without value.
From time to time, High Yield Fund may invest part or all of its assets in
U.S. Government securities, commercial notes or money market instruments. It is
anticipated that the dollar weighted average maturity of the Fund will range
from 5 to 15 years under normal circumstances.
SECURITY TAX-EXEMPT FUND
The investment objective of Tax-Exempt Fund is to obtain as high a level of
interest income exempt from federal income taxes as is consistent with
preservation of stockholders' capital. Tax-Exempt Fund attempts to achieve its
objective by investing primarily in debt securities, the interest on which is
exempt from federal income taxes under the Internal Revenue Code including the
alternative minimum tax. There is no assurance that Tax-Exempt Fund's objective
will be achieved. Although there is no present intention to do so, the Fund's
investment objective may be changed by the Board of Directors without
stockholder approval.
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The tax-exempt securities in which Tax-Exempt Fund invests include debt
obligations issued by or on behalf of the states, territories and possessions of
the United States, the District of Columbia, and their political subdivisions,
agencies, authorities and instrumentalities, including multi-state agencies or
authorities. These securities are referred to as "municipal securities" and are
described in more detail below.
Tax-Exempt Fund's investments in municipal securities are limited to
securities of "investment grade" quality, that is securities rated within the
four highest rating categories of Moody's (Aaa, Aa, A, Baa) or S&P (AAA, AA, A,
BBB), except that the Fund may purchase unrated municipal securities (i) where
the securities are guaranteed as to principal and interest by the full faith and
credit of the U.S. government or are short-term municipal securities (those
having a maturity of less than one year) of issuers having outstanding at the
time of purchase an issue of municipal bonds having one of the four highest
ratings, or (ii) where, in the opinion of the Investment Manager, the unrated
municipal securities are comparable in quality to those within the four highest
ratings. However, Tax-Exempt Fund will not purchase an unrated municipal
security (other than a security described in (i) above) if, after such purchase,
more than 20% of the Fund's total assets would be invested in such unrated
municipal securities.
With respect to rated securities, there is no percentage limitation on the
amount of Tax-Exempt Fund's assets which may be invested in securities within
any particular rating classification. A description of the ratings is contained
in Appendix B to the Prospectus. Baa securities are considered "medium grade"
obligations by Moody's, and BBB is the lowest classification which is still
considered an "investment grade" rating by S&P. Baa securities are described by
Moody's as obligations on which "interest payments and principal security appear
adequate for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time." According to
Moody's, "such bonds lack outstanding investment characteristics and in fact
have speculative characteristics as well." The ratings of Moody's and S&P
represent their respective opinions of the quality of the securities they
undertake to rate and such ratings are general and are not absolute standards of
quality.
Although Tax-Exempt Fund invests primarily in municipal bonds with
maturities greater than one year, it also will invest for various purposes in
short-term (maturity equal to or less than one year) securities which, to the
extent practicable, will be short-term municipal securities. (See "Municipal
Securities," below.) Short-term investments may be made, pending investment of
funds in municipal bonds, in order to maintain liquidity to meet redemption
requests, or to maintain a temporary "defensive" investment position when, in
the opinion of the Investment Manager, it is advisable to do so on account of
current or anticipated market conditions. Except when in a temporary "defensive"
position, investments in short-term municipal securities will represent less
than 20% of the Fund's total assets.
From time to time, on a temporary basis, Tax-Exempt Fund may invest in
fixed-income obligations on which the interest is subject to federal income tax.
Except when the Fund is in a temporary "defensive" investment position, it will
not purchase a taxable security if, as a result, more than 20% of its total
assets would be invested in taxable securities. This limitation is a fundamental
policy of Tax-Exempt Fund, and may not be changed without a majority vote of the
Fund's outstanding securities. Temporary taxable investments of the Fund may
consist of obligations issued or guaranteed by the U.S. government or its
agencies or instrumentalities, commercial paper rated A-1 by S&P or Prime-1 by
Moody's, corporate obligations rated AAA or AA by S&P or Aaa or Aa by Moody's,
certificates of deposit or bankers' acceptances of domestic banks or thrifts
with at least $2 billion in assets, or repurchase agreements with such banks or
with broker/dealers. Tax-Exempt Fund may invest its assets in bank demand
accounts, pending investment in other securities or to meet potential
redemptions or expenses. Repurchase agreements may be entered into with respect
to any securities eligible for investment by the Fund, including municipal
securities.
Tax-Exempt Fund may invest in repurchase agreements which are agreements by
which a purchaser (e.g., Tax-Exempt Fund) acquires a security and simultaneously
commits to resell that security to the seller (a bank or broker/dealer) at an
agreed upon price on an agreed upon date within a number of days (usually not
more than seven) from the date of purchase. Income earned by the Fund on
repurchase agreements is not exempt from federal income tax even if the
transaction involves municipal securities. Tax-Exempt Fund may not enter into a
repurchase agreement having more than seven days remaining to maturity if, as a
result, such agreements, together with any other securities which are illiquid
or not readily marketable, would exceed 10% of the net assets of the Fund. See
the discussion of repurchase agreements under "Investment Methods and Risk
Factors."
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Tax-Exempt Fund may borrow money from banks as a temporary measure for
emergency purposes or to facilitate redemption requests. Borrowing is discussed
in more detail under "Investment Methods and Risk Factors." Pending investment
in securities or to meet potential redemptions, the Fund may invest in
certificates of deposit, bank demand accounts and high quality money market
instruments.
See Appendix B to the prospectus for a further description of Moody's and
S&P ratings relating to municipal securities. As noted earlier, when Tax-Exempt
Fund is in a temporary "defensive" position, there is no limit on its
investments in short-term municipal securities and taxable securities.
MUNICIPAL SECURITIES
MUNICIPAL BONDS. Municipal bonds are debt obligations which generally have a
maturity at the time of issue in excess of one year. They are issued to obtain
funds for various public purposes, including construction of a wide range of
public facilities such as bridges, highways, housing, hospitals, mass
transportation, schools, streets, and water and sewer works. Other public
purposes for which municipal bonds may be issued include the refunding of
outstanding obligations, obtaining funds for general operating expenses and
obtaining funds to loan to other public institutions and facilities. In
addition, certain types of industrial development bonds and other private
activity bonds are issued by or on behalf of public authorities to obtain funds
to provide for privately-operated housing facilities, and certain facilities for
water supply, gas, electricity or sewage or solid waste disposal.
The two principal classifications of municipal bonds are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable only from the revenues derived
from a particular facility or class of facilities, or, in some cases, from the
proceeds of a special excise or specific revenue source. Industrial development
bonds which pay tax-exempt interest are in most cases revenue bonds and do not
generally carry the pledge of the full faith and credit of the issuer of such
bonds. The payment of the principal and interest on such industrial development
bonds depends solely on the ability of the user of the facilities financed by
the bonds to meet its financial obligations and the pledge, if any, of real and
personal property so financed as security for such payment. Tax-Exempt Fund will
not invest more than 5% of its net assets in securities where the principal and
interest are the responsibility of an industrial user which has, including
predecessors, less than three years' operational history.
There are, depending on numerous factors, variations in the risks involved
in holding municipal securities, both within a particular rating classification
and between classifications. The market values of outstanding municipal bonds
will vary as a result of the rating of the issue and changing evaluations of the
ability of the issuer to meet interest and principal payments. Such market
values will also change in response to changes in the interest rates payable on
new issues of municipal bonds. Should such interest rates rise, the values of
outstanding bonds, including those held in Tax-Exempt Fund's portfolio, would
decline; should such interest rates decline, the values of outstanding bonds
would increase.
As a result of litigation or other factors, the power or ability of issuers
of municipal securities to pay principal and/or interest might be adversely
affected. Municipal securities are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Code, and laws, if any, which may be enacted by
Congress or state legislatures extending the time for payment of principal or
interest or both, or imposing other constraints upon enforcement of such
obligations or upon the power of municipalities to levy taxes.
Tax-Exempt Fund may invest without percentage limitations in issues of
municipal securities which have similar characteristics, such as the location of
their issuers in the same geographic region or the derivation of interest
payments from revenues on similar projects (for example, electric utility
systems, hospitals, or housing finance agencies). Thus, Tax-Exempt Fund may
invest more than 25% of its total assets in securities issued in a single state.
However, it may not invest more than 25% of its total assets in one industry.
(See "Investment Policy Limitations," page 30.) Consequently, the Fund's
portfolio of municipal securities may be more susceptible to the risks of
adverse economic, political, or regulatory developments than would be the case
with a portfolio of securities required to be more diversified as to geographic
region and/or source of revenue.
Interest on certain types of private activity bonds (for example,
obligations to finance certain exempt facilities which may be leased to or used
by persons other than the issuer) will not be exempt from federal income tax
when received by "substantial users" or persons related to "substantial users"
as defined in the Internal Revenue Code. The term "substantial user" generally
includes any "non-exempt person" who regularly uses in trade or business a
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part of a facility financed from the proceeds of private activity bonds.
Tax-Exempt Fund may invest periodically in private activity bonds and,
therefore, may not be an appropriate investment for entities which are
substantial users of facilities financed by those bonds or "related persons" of
substantial users. Generally, an individual will not be a related person of a
substantial user under the Code unless the person or his immediate family
(spouse, brothers, sisters and lineal descendants) directly or indirectly owns
in the aggregate more than 50% in value of the equity of the substantial user.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on future issues of municipal securities. It can be expected that
similar proposals may be introduced in the future. If such a proposal were
enacted, the availability of municipal securities for investment by Tax-Exempt
Fund and the value of the Fund's portfolio would be affected. In that event, the
Directors would reevaluate the Fund's investment objective and policies.
WHEN-ISSUED PURCHASES. From time to time, in the ordinary course of
business, Tax-Exempt Fund may purchase municipal securities on a when-issued or
delayed delivery basis--i.e., delivery and payment can take place a month or
more after the date of the transactions. Securities so purchased are subject to
market fluctuation and no interest accrues to the purchaser during this period.
At the time the Fund makes the commitment to purchase a municipal security on a
when-issued or delayed delivery basis, it will record the transaction and
thereafter reflect the value, each day, of the security in determining its net
asset value. Tax-Exempt Fund will also establish a segregated account with its
custodian bank in which it will maintain cash or liquid securities equal in
value to commitments for such when-issued or delayed delivery securities.
Tax-Exempt Fund does not believe that its net asset value or income will be
adversely affected by its purchase of municipal securities on a when-issued or
delayed delivery basis. Upon the settlement date of the when-issued securities,
the Fund ordinarily will meet its obligation to purchase the securities from
available cash flow, use of the cash (or liquidation of securities) held in the
segregated account or sale of other securities. Although it would not normally
expect to do so, the Fund also may meet its obligation from the sale of the
when-issued securities themselves (which may have a current market value greater
or less than the Fund's payment obligation). Sale of securities to meet such
obligations carries with it a greater potential for the realization of net
capital gains, which are not exempt from federal income tax.
PUTS OR STAND-BY COMMITMENTS. Tax-Exempt Fund may purchase, from banks or
broker/dealers, municipal securities together with the right to resell the
securities to the seller at an agreed-upon price or yield within a specified
period prior to the maturity date of the securities. Such a right to resell is
commonly known as a "put" and is also referred to as a "stand-by commitment" on
the part of the seller. The price which the Fund pays for the municipal
securities with puts generally is higher than the price which otherwise would be
paid for the municipal securities alone. Tax-Exempt Fund uses puts for liquidity
purposes in order to permit it to remain more fully invested in municipal
securities than would otherwise be the case by providing a ready market for
certain municipal securities in its portfolio at an acceptable price. The put
generally is for a shorter term than the maturity of the municipal security and
does not restrict in any way the Fund's ability to dispose of (or retain) the
municipal security.
In order to ensure that the interest on municipal securities subject to puts
is tax-exempt to the Fund, it will limit its use of puts in accordance with
current interpretations or rulings of the Internal Revenue Service (IRS). The
IRS has issued a ruling (Rev. Rul. 82-144) in which it determined that a
regulated investment company was the owner, for tax purposes, of municipal
securities subject to puts (with the result that interest on those securities
would not lose its tax-exempt status when paid to the company). The IRS position
in Rev. Rul. 82-144 relates to a particular factual situation, in which (i) the
price paid for the puts was in addition to the price of the municipal securities
subject to the puts, (ii) the puts established the price at which the seller
must repurchase the securities, (iii) the puts were nonassignable and terminated
upon disposal of the underlying securities by the Fund, (iv) the puts were for
periods substantially less than the terms of the underlying securities, (v) the
puts did not include call arrangements or restrict the disposal of the
underlying securities by the Fund and gave the seller no rights in the
underlying securities, and (vi) the securities were acquired by the Fund for its
own account and not as security for a loan from the seller.
Because it is difficult to evaluate the likelihood of exercise or the
potential benefit of a put, puts will be determined to have a "value" of zero,
regardless of whether any direct or indirect consideration was paid. Amounts
paid by Tax-Exempt Fund for a put will be reflected as unrealized depreciation
in the underlying security for the period during which the commitment is held,
and therefore will reduce any potential gains on the sale of
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the underlying security by the cost of the put. There is a risk that the seller
of the put may not be able to repurchase the security upon exercise of the put
by the Fund.
SHORT-TERM MUNICIPAL SECURITIES. Although Tax-Exempt Fund's portfolio
generally will consist primarily of municipal bonds, for liquidity purposes, and
from time to time for defensive purposes, a portion of its assets may be
invested in short-term municipal securities (i.e., those with less than one year
remaining to maturity).
Short-term municipal securities consist of short-term municipal notes and
short-term municipal loans and obligations, including municipal paper, master
demand notes and variable-rate demand notes. Short-term municipal notes include
tax anticipation notes (notes issued in anticipation of the receipt of tax
funds), bond anticipation notes (notes issued in anticipation of receipt of the
proceeds of bond placements), revenue anticipation notes (notes issued in
anticipation of the receipt of revenues other than taxes or bond placements),
and project notes (obligations of municipal housing agencies on which the
payment of principal and interest ordinarily is backed by the full faith and
credit of the U.S. government). Municipal paper typically consists of the very
short-term unsecured negotiable promissory notes of municipal issuers.
The Fund may invest in tax-exempt master demand notes. A municipal master
demand note is an arrangement under which the Fund participates in a note
agreement between a bank acting on behalf of its clients and a municipal
borrower, whereby amounts maintained by the Fund in an account with the bank are
provided to the municipal borrower and payments of interest and principal on the
note are credited to the Fund's account. Interest rates on master demand notes
typically are tied to market interest rates, and therefore may fluctuate daily.
The amounts borrowed under these notes may be repaid at any time by the borrower
without penalty, and must be repaid upon the demand of Tax-Exempt Fund.
Tax-Exempt Fund may also invest in variable-rate demand notes. Variable-rate
demand notes are tax-exempt obligations which are payable by the municipal
issuer at par value plus accrued interest on demand by the Fund (generally with
three to ten days' notice). If no demand is made, the note will mature on a
specified date from one to thirty years from its issuance. Payment on the note
may be backed by a stand-by letter of credit. The yield on a variable rate
demand note is adjusted automatically to reflect a particular market rate (which
may not be the same market rate as that applicable to a master demand note).
Variable-rate demand notes typically are callable by the issuer prior to
maturity.
Where short-term municipal securities are rated, the Tax-Exempt Fund will
limit its investments to "high quality" short-term securities. For short-term
municipal notes this includes ratings of AA or better by S&P or MIG 2 or better
by Moody's; for municipal paper this includes A-2 or better by S&P or Prime-2 or
better by Moody's. Unrated short-term municipal securities will be included
within the Fund's overall limitation on investments in unrated municipal
securities. This limitation provides that not more than 20% of Tax-Exempt Fund's
total assets may be invested in unrated municipal securities, exclusive of
unrated securities which are guaranteed as to principal and interest by the full
faith and credit of the U.S. government or are issued by an issuer having
outstanding an issue of municipal bonds within one of the four highest ratings
classifications.
Tax-Exempt Fund also may engage to a limited extent in portfolio trading
consistent with its investment objective. Securities may be sold in anticipation
of a market decline (a rise in interest rates) or purchased in anticipation of a
market rise (a decline in interest rates) and later sold. In addition, a
security may be sold and another of comparable quality purchased at
approximately the same time to take advantage of what the Fund believes to be a
temporary disparity in the normal yield relationship between the two securities.
These yield disparities may occur for reasons not directly related to the
investment quality of a particular issue or the general movement of interest
rates, such as changes in the overall demand for, or supply of, various types of
municipal securities.
SECURITY CASH FUND
The investment objective of Cash Fund is to seek as high a level of current
income as is consistent with preservation of capital and liquidity. No
assurances can be given that Cash Fund will achieve its objective. The Fund will
attempt to achieve its objective by investing at least 95% of its total assets,
measured at the time of investment, in a diversified portfolio of highest
quality money market instruments. Cash Fund may also invest up to 5% of its
total assets, measured at the time of investment, in money market instruments
that are in the second-highest rating category for short-term debt obligations.
Money market instruments in which Cash Fund may invest consist of the following:
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U.S. GOVERNMENT SECURITIES. Obligations issued or guaranteed (as to
principal or interest) by the United States Government or its agencies (such as
the Small Business Administration, the Federal Housing Administration and
Government National Mortgage Association) or instrumentalities (such as Federal
Home Loan Banks and Federal Land Banks) and instruments fully collateralized
with such obligations.
BANK OBLIGATIONS. Obligations of banks or savings and loan associations that
are members of the Federal Deposit Insurance Corporation and instruments fully
collateralized with such obligations.
CORPORATE OBLIGATIONS. Commercial paper issued by corporations and rated
Prime-1 or Prime-2 by Moody's, or A-1 or A-2 by S&P, or other corporate debt
instruments rated Aaa or Aa or better by Moody's or AAA or AA or better by S&P,
subject to the limitations on investment in instruments in the second-highest
rating category, discussed below.
Cash Fund may invest in certificates of deposit issued by banks or other
bank demand accounts, pending investment in other securities or to meet
potential redemptions or expenses.
Cash Fund may invest only in U.S. dollar denominated money market
instruments that present minimal credit risk and, with respect to 95% of its
total assets, measured at the time of investment, that are of the highest
quality. The Investment Manager will determine whether a security presents
minimal credit risk under procedures adopted by the Fund's Board of Directors. A
security will be considered to be highest quality (1) if rated in the highest
rating category, (e.g., Aaa or Prime-1 by Moody's or AAA or A-1 by S&P) by (i)
any two nationally recognized statistical rating organizations ("NRSRO's") or,
(ii) if rated by only one NRSRO, by that NRSRO; (2) if issued by an issuer that
has short-term debt obligations of comparable maturity, priority, and security
and that are rated in the highest rating category by (i) any two NRSRO's or,
(ii) if rated by only one NRSRO, by that NRSRO; or (3) an unrated security that
is of comparable quality to a security in the highest rating category as
determined by the Investment Manager and whose acquisition is approved or
ratified by the Board of Directors. With respect to 5% of its total assets,
measured at the time of investment, Cash Fund may also invest in money market
instruments that are in the second-highest rating category for short-term debt
obligations (e.g., rated Aa or Prime-2 by Moody's or AA or A-2 by S&P). A money
market instrument will be considered to be in the second-highest rating category
under the criteria described above with respect to instruments considered
highest quality, as applied to instruments in the second-highest rating
category. See Appendix A to the Prospectus for a description of the principal
types of securities and instruments in which the Fund will invest as well as a
description of the above mentioned ratings.
Cash Fund may not invest more than 5% of its total assets, measured at the
time of investment, in the securities of any one issuer that are of the highest
quality or more than the greater of 1% of its total assets or $1,000,000,
measured at the time of investment, in securities of any one issuer that are in
the second-highest rating category, except that these limitations shall not
apply to U.S. Government securities. The Fund may exceed the 5% limitation for
up to three business days after the purchase of the securities of any one issuer
that are of the highest quality, provided that the Fund does not have
outstanding at any time more than one such investment. In the event that an
instrument acquired by Cash Fund is downgraded, the Investment Manager, under
procedures approved by the Board of Directors, (or the Board of Directors itself
if the Investment Manager becomes aware that a security has been downgraded
below the second-highest rating category and the Investment Manager does not
dispose of the security within five business days) shall promptly reassess
whether such security presents minimal credit risk and determine whether or not
to retain the instrument. In the event that an instrument acquired by Cash Fund
ceases to be of the quality that is eligible for the Fund, the Fund shall
promptly dispose of the instrument in an orderly manner unless the Board of
Directors determines that this would not be in the best interests of the Fund.
Cash Fund may acquire one or more of the above types of securities subject
to repurchase agreements. A repurchase transaction involves a purchase by the
Fund of a security from a selling financial institution, such as a bank, savings
and loan association or broker/dealer, which agrees to repurchase such security
at a specified price and at a fixed time in the future, usually not more than
seven days from the date of purchase. Not more than 10% of Cash Fund's total
assets will be invested in illiquid assets, which include repurchase agreements
with maturities of over seven days. See the discussion of repurchase agreements
under "Investment Methods and Risk Factors."
Cash Fund may borrow money from banks as a temporary measure for emergency
purposes or to facilitate redemption requests. Borrowing is discussed in more
detail under "Investment Methods and Risk Factors." Pending investment in
securities or to meet potential redemptions, the Fund may invest in certificates
of deposit, bank demand accounts and high quality money market instruments.
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RULE 144A SECURITIES. Certain of the securities acquired by Cash Fund may be
restricted as to disposition under federal securities laws, provided that such
restricted securities are eligible for resale to qualified institutional
investors pursuant to Rule 144A under the Securities Act of 1933. Rule 144A was
adopted by the Securities and Exchange Commission (the "SEC") under the
Securities Act of 1933, as amended (the "Securities Act") in 1990. It provides a
nonexclusive safe harbor exemption from the registration requirements of the
Securities Act for the resale of certain securities to certain qualified buyers.
One of the primary purposes of the Rule is to create some resale liquidity for
certain securities that would otherwise be treated as illiquid investments. In
accordance with Cash Fund's policies, the Fund is not permitted to invest more
than 10% of its total net assets in illiquid securities. See the discussion of
Rule 144A Securities under "Investment Methods and Risk Factors."
VARIABLE RATE INSTRUMENTS. Cash Fund may invest in instruments having rates
of interest that are adjusted periodically according to a specified market rate
for such investments ("Variable Rate Instruments"). The interest rate on a
Variable Rate Instrument is ordinarily determined by reference to, or is a
percentage of, an objective standard such as a bank's prime rate or the 91-day
U.S. Treasury Bill rate. Cash Fund does not purchase certain Variable Rate
Instruments that have a preset cap above which the rate of interest may not
rise. Generally, the changes in the interest rate on Variable Rate Instruments
reduce the fluctuation in the market value of such securities. Accordingly, as
interest rates decrease or increase, the potential for capital appreciation or
depreciation is less than for fixed-rate obligations. Cash Fund determines the
maturity of Variable Rate Instruments in accordance with Rule 2a-7 under the
Investment Company Act of 1940 which allows the Fund to consider the maturity
date of such instruments to be the period remaining until the next readjustment
of the interest rate rather than the maturity date on the face of the
instrument.
While Cash Fund does not intend to engage in short-term trading, portfolio
securities may be sold without regard to the length of time that they have been
held. A portfolio security could be sold prior to maturity to take advantage of
new investment opportunities or yield differentials, or to preserve gains or
limit losses due to changing economic conditions or the financial condition of
the issuer, or for other reasons. While Cash Fund is expected to have a high
portfolio turnover due to the short maturities of its portfolio securities, this
should not affect the Fund's income or net asset value since brokerage
commissions are not normally paid in connection with the purchase or sale of
money market instruments.
Cash Fund will invest in money market instruments of varying maturities (but
no longer than 13 months) in an effort to earn as high a level of current income
as is consistent with preservation of capital and liquidity. The Fund intends to
maintain a weighted average maturity in its portfolio of not more than 90 days.
In addition to general market risks, Fund investments in nongovernment
obligations are subject to the ability of the issuer to satisfy its obligations.
Cash Fund also intends to maintain a net asset value per share of $1.00,
although there can be no assurance it will be able to do so. It is the Fund's
policy to declare dividends on a daily basis of an amount equal to the net
income plus or minus any realized capital gains or losses. (See "Dividends and
Taxes," page 54.)
INVESTMENT METHODS AND RISK FACTORS
Some of the risk factors related to certain securities, instruments and
techniques that may be used by one or more of the Funds are described in the
"Investment Objectives and Policies" and "Investment Methods and Risk Factors"
sections of the Prospectus and in this Statement of Additional Information. The
following is a description of certain additional risk factors related to various
securities, instruments and techniques. The risks so described only apply to
those Funds which may invest in such securities and instruments or which use
such techniques. Also included is a general description of some of the
investment instruments, techniques and methods which may be used by one or more
of the Funds. The methods described only apply to those Funds which may use such
methods. Although a Fund may employ the techniques, instruments and methods
described below, consistent with its investment objective and policies and any
applicable law, no Fund will be required to do so.
SHARES OF OTHER INVESTMENT COMPANIES. The Global Aggressive Bond Fund may
invest in shares of other investment companies. A Fund's investment in shares of
other investment companies may not exceed immediately after purchase 10 percent
of the Fund's 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.
GENERAL RISK FACTORS. Each Fund's net asset value will fluctuate, reflecting
fluctuations in the market value of its portfolio positions and, if applicable,
its net currency exposure. The value of fixed income securities held by
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the Funds generally fluctuates inversely with interest rate movements. In other
words, bond prices generally fall as interest rates rise and generally rise as
interest rates fall. Longer term bonds held by the Funds are subject to greater
interest rate risk. There is no assurance that any Fund will achieve its
investment objective.
REPURCHASE AGREEMENTS, REVERSE REPURCHASE AGREEMENTS AND ROLL TRANSACTIONS.
Each of the Funds may enter into repurchase agreements. Repurchase agreements
are transactions in which the purchaser buys a debt security from a bank or
recognized securities dealer and simultaneously commits to resell that security
to the bank or dealer at an agreed upon price, date and market rate of interest
unrelated to the coupon rate or maturity of the purchased security. Repurchase
agreements are considered to be loans which must be fully collateralized
including interest earned thereon during the entire term of the agreement. If
the institution defaults on the repurchase agreement, the Fund will retain
possession of the underlying securities. If bankruptcy proceedings are commenced
with respect to the seller, realization on the collateral by the Fund may be
delayed or limited and the Fund may incur additional costs. In such case, the
Fund will be subject to risks associated with changes in market value of the
collateral securities. The Fund intends to enter into repurchase agreements only
with banks and broker/dealers believed to present minimal credit risks.
Accordingly, the Funds will enter into repurchase agreements only with (a)
brokers having total capitalization of at least $40 million and a ratio of
aggregate indebtedness to net capital of no more than 4 to 1, or, alternatively,
net capital equal to 6% of aggregate debit balances, or (b) banks having at
least $1 billion in assets and a net worth of at least $100 million as of its
most recent annual report. In addition, the aggregate repurchase price of all
repurchase agreements held by the Fund with any broker shall not exceed 15% of
the total assets of the Fund or $5 million, whichever is greater.
Certain of the Funds may also enter into reverse repurchase agreements with
the same parties with whom they may enter into repurchase agreements. Under a
reverse repurchase agreement, a Fund would sell securities and agree to
repurchase them at a particular price at a future date. Reverse repurchase
agreements involve the risk that the market value of the securities retained in
lieu of sale by a Fund may decline below the price of the securities the Fund
has sold but is obligated to repurchase. In the event the buyer of securities
under a reverse repurchase agreement files for bankruptcy or becomes insolvent,
such buyer or its trustee or receiver may receive an extension of time to
determine whether to enforce the Fund's obligation to repurchase the securities,
and the Fund's use of the proceeds of the reverse repurchase agreement may
effectively be restricted pending such decision.
Certain of the Funds also may enter into "dollar rolls," in which the Fund
sells fixed income securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar (same type, coupon
and maturity) securities on a specified future date. During the roll period, the
Fund would forego principal and interest paid on such securities. The Fund would
be compensated by the difference between the current sales price and the forward
price for the future purchase, as well as by the interest earned on the cash
proceeds of the initial sale.
BORROWING. Each of the Funds may borrow money from banks as a temporary
measure for emergency purposes, or to facilitate redemption requests.
From time to time, it may be advantageous for the Funds to borrow money
rather than sell existing portfolio positions to meet redemption requests.
Accordingly, the Funds may borrow from banks and the Global Aggressive Bond and
High Yield Funds may borrow through reverse repurchase agreements and "roll"
transactions, in connection with meeting requests for the redemption of Fund
shares. High Yield Fund may borrow up to 33 1/3%, Limited Maturity Bond,
Tax-Exempt and Cash Funds may each borrow up to 10% and Corporate Bond, U.S.
Government and Global Aggressive Bond Funds may each borrow up to 5% of total
Fund assets. To the extent that a Fund purchases securities while it has
outstanding borrowings, it is using leverage, i.e. using borrowed funds for
investment. Leveraging will exaggerate the effect on net asset value of any
increase or decrease in the market value of a Fund's portfolio. Money borrowed
for leveraging will be subject to interest costs that may or may not be
recovered by appreciation of the securities purchased; in certain cases,
interest costs may exceed the return received on the securities purchased. A
Fund also may be required to maintain minimum average balances in connection
with such borrowing or to pay a commitment or other fee to maintain a line of
credit; either of these requirements would increase the cost of borrowing over
the stated interest rate. It is not expected that Cash Fund would purchase
securities while it had borrowings outstanding.
LENDING OF PORTFOLIO SECURITIES. For the purpose of generating income,
certain of the Funds may make secured loans of Fund securities amounting to not
more than 33 1/3% of its total assets. Securities loans are made to
broker/dealers, institutional investors, or other persons pursuant to agreements
requiring that the loans be
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continuously secured by collateral at least equal at all times to the value of
the securities lent marked to market on a daily basis. The collateral received
will consist of cash, U.S. Government securities, letters of credit or such
other collateral as may be permitted under its investment program. While the
securities are being lent, the Fund will continue to receive the equivalent of
the interest or dividends paid by the issuer on the securities, as well as
interest on the investment of the collateral or a fee from the borrower. The
Fund has a right to call each loan and obtain the securities on five business
days' notice or, in connection with securities trading on foreign markets,
within such longer period of time which coincides with the normal settlement
period for purchases and sales of such securities in such foreign markets. The
Fund will not have the right to vote securities while they are being lent, but
it will call a loan in anticipation of any important vote. The risks in lending
portfolio securities, as with other extensions of secured credit, consist of
possible delay in receiving additional collateral or in the recovery of the
securities or possible loss of rights in the collateral should the borrower fail
financially. Loans will only be made to persons deemed by the Investment Manager
or relevant Sub-Adviser to be of good standing and will not be made unless, in
the judgment of the Investment Manager or relevant Sub-Adviser, the
consideration to be earned from such loans would justify the risk.
RESTRICTED SECURITIES (RULE 144A SECURITIES). Certain of the Funds may
invest in restricted securities which are securities that are restricted as to
disposition under the federal securities laws, provided that such securities are
eligible for resale to qualified institutional investors pursuant to Rule 144A
under the Securities Act of 1933. Rule 144A permits the resale to "qualified
institutional buyers" of "restricted securities" that, when issued, were not of
the same class as securities listed on a U.S. securities exchange or quoted in
the National Association of Securities Dealers Automated Quotation System (the
"Rule 144A Securities"). A "qualified institutional buyer" is defined by Rule
144A generally as an institution, acting for its own account or for the accounts
of other qualified institutional buyers, that in the aggregate owns and invests
on a discretionary basis at least $100 million in securities of issuers not
affiliated with the institution. A dealer registered under the Securities
Exchange Act of 1934 (the "Exchange Act"), acting for its own account or the
accounts of other qualified institutional buyers, that in the aggregate owns and
invests on a discretionary basis at least $10 million in securities of issuers
not affiliated with the dealer may also qualify as a qualified institutional
buyer, as well as an Exchange Act registered dealer acting in a riskless
principal transaction on behalf of a qualified institutional buyer.
The Funds' Board of Directors is responsible for developing and establishing
guidelines and procedures for determining the liquidity of Rule 144A Securities.
As permitted by Rule 144A, the Board of Directors has delegated this
responsibility to the Investment Manager. In making the determination regarding
the liquidity of Rule 144A Securities, the Investment Manager will consider
trading markets for the specific security taking into account the unregistered
nature of a Rule 144A security. In addition, the Investment Manager may
consider: (1) the frequency of trades and quotes; (2) the number of dealers and
potential purchasers; (3) dealer undertakings to make a market; and (4) the
nature of the security and of the market place trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
transfer). Investing in Rule 144A Securities could have the effect of increasing
the amount of a Fund's assets invested in illiquid securities to the extent that
qualified institutional buyers become uninterested, for a time, in purchasing
these securities.
The Global Aggressive Bond Fund and the High Yield Fund also may purchase
restricted securities that are not eligible for resale pursuant to Rule 144A.
These Funds may acquire such securities through private placement transactions,
directly from the issuer or from security holders, generally at higher yields or
on terms more favorable to investors than comparable publicly traded securities.
However, the restrictions on resale of such securities may make it difficult for
the Fund to dispose of such securities at the time considered most advantageous,
and/or may involve expenses that would not be incurred in the sale of securities
that were freely marketable. Risks associated with restricted securities include
the potential obligation to pay all or part of the registration expenses in
order to sell certain restricted securities. A considerable period of time may
elapse between the time of the decision to sell a security and the time the Fund
may be permitted to sell it under an effective registration statement. If,
during a period, adverse conditions were to develop, the Fund might obtain a
less favorable price than prevailing when it decided to sell.
RISKS ASSOCIATED WITH LOWER-RATED DEBT SECURITIES (JUNK BONDS). Certain of
the Funds may invest in higher yielding debt securities in the lower rating
(higher risk) categories of the recognized rating services (commonly referred to
as "junk bonds"). Debt rated BB, B, CCC, CC and C by S&P and rated Ba, B, Caa,
Ca and C by Moody's, is regarded, on balance, as predominantly speculative with
respect to the issuer's capacity to pay
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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. The
Global Aggressive Bond Fund may invest in debt securities rated below C, which
are in default as to principal and/or interest. Ratings of debt securities
represent the rating agency's opinion regarding their quality and are not a
guarantee of quality. Rating agencies attempt to evaluate the safety of
principal and interest payments and do not evaluate the risks of fluctuations in
market value. Also, rating agencies may fail to make timely changes in credit
quality in response to subsequent events, so that an issuer's current financial
condition may be better or worse than a rating indicates.
The market value of lower quality debt securities tend to reflect individual
developments of the issuer to a greater extent than do higher quality
securities, which react primarily to fluctuations in the general level of
interest rates. In addition, lower quality debt securities tend to be more
sensitive to economic conditions and generally have more volatile prices than
higher quality securities. Issuers of lower quality securities are often highly
leveraged and may not have available to them more traditional methods of
financing. For example, during an economic downturn or a sustained period of
rising interest rates, highly leveraged issuers of lower quality securities may
experience financial stress. During such periods, such issuers may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations may also be adversely affected by
specific developments affecting the issuer, such as the issuer's inability to
meet specific projected business forecasts or the unavailability of additional
financing. Similarly, certain emerging market governments that issue lower
quality debt securities are among the largest debtors to commercial banks,
foreign governments and supranational organizations such as the World Bank and
may not be able or willing to make principal and/or interest repayments as they
come due. The risk of loss due to default by the issuer is significantly greater
for the holders of lower quality securities because such securities are
generally unsecured and are often subordinated to other creditors of the issuer.
Lower quality debt securities of corporate issuers frequently have call or
buy-back features which would permit an issuer to call or repurchase the
security from the Fund. If an issuer exercises these provisions in a declining
interest rate market, the Fund may have to replace the security with a lower
yielding security, resulting in a decreased return for investors. In addition,
the Fund may have difficulty disposing of lower quality securities because there
may be a thin trading market for such securities. There may be no established
retail secondary market for many of these securities, and the Fund anticipates
that such securities could be sold only to a limited number of dealers or
institutional investors. The lack of a liquid secondary market also may have an
adverse impact on market prices of such instruments and may make it more
difficult for the Fund to obtain accurate market quotations for purposes of
valuing the securities in the portfolio of the Fund.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may also decrease the values and liquidity of lower
quality securities, especially in a thinly traded market. The Global Aggressive
Bond Fund and the High Yield Fund also may acquire lower quality debt securities
during an initial underwriting or may acquire lower quality debt securities
which are sold without registration under applicable securities laws. Such
securities involve special considerations and risks.
Factors having an adverse effect on the market value of lower rated
securities or their equivalents purchased by the Fund will adversely impact net
asset value of the Fund. See "Risk Factors" in the Prospectus. In addition to
the foregoing, such factors may include: (i) potential adverse publicity; (ii)
heightened sensitivity to general economic or political conditions; and (iii)
the likely adverse impact of a major economic recession. The Fund also may incur
additional expenses to the extent it is required to seek recovery upon a default
in the payment of principal or interest on its portfolio holdings, and the Fund
may have limited legal recourse in the event of a default. Debt securities
issued by governments in emerging markets can differ from debt obligations
issued by private entities in that remedies from defaults generally must be
pursued in the courts of the defaulting government, and legal recourse is
therefore somewhat diminished. Political conditions, in terms of a government's
willingness to meet the terms of its debt obligations, also are of considerable
significance. There can be no assurance that the
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holders of commercial bank debt may not contest payments to the holders of debt
securities issued by governments in emerging markets in the event of default by
the governments under commercial bank loan agreements.
The Investment Manager and, with respect to the Global Aggressive Bond Fund,
the Sub-Adviser and MFR, will attempt to minimize the speculative risks
associated with investments in lower quality securities through credit analyses
and by carefully monitoring current trends in interest rates, political
developments and other factors. Nonetheless, investors should carefully review
the investment objectives and policies of the Funds and consider their ability
to assume the investment risks involved before making an investment in the
Funds.
CONVERTIBLE SECURITIES AND WARRANTS. Certain of the Funds may invest in debt
or preferred equity securities convertible into or exchangeable for equity
securities. Traditionally, convertible securities have paid dividends or
interest at rates higher than common stocks but lower than nonconvertible
securities. They generally participate in the appreciation or depreciation of
the underlying stock into which they are convertible, but to a lesser degree. In
recent years, convertibles have been developed which combine higher or lower
current income with options and other features. Warrants are options to buy a
stated number of shares of common stock at a specified price any time during the
life of the warrants (generally two or more years).
MORTGAGE-BACKED SECURITIES AND COLLATERALIZED MORTGAGE OBLIGATIONS. Certain
of the Funds may invest in mortgage-backed securities (MBSs), including mortgage
pass-through securities and collateralized mortgage obligations (CMOs). MBSs
include certain securities issued or guaranteed by the United States Government
or one of its agencies or instrumentalities, such as the Government National
Mortgage Association (GNMA), Federal National Mortgage Association (FNMA), or
Federal Home Loan Mortgage Corporation (FHLMC); securities issued by private
issuers that represent an interest in or are collateralized by mortgage-backed
securities issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities; and securities issued by private issuers that represent an
interest in or are collateralized by mortgage loans. A mortgage pass-through
security is a pro rata interest in a pool of mortgages where the cash flow
generated from the mortgage collateral is passed through to the security holder.
CMOs are obligations fully collateralized by a portfolio of mortgages or
mortgage-related securities. Certain of the Funds may invest in securities known
as "inverse floating obligations," "residual interest bonds," or "interest-only"
(IO) and "principal-only" (PO) bonds, the market values of which will generally
be more volatile than the market values of most MBSs. An inverse floating
obligation is a derivative adjustable rate security with interest rates that
adjust or vary inversely to changes in market interest rates. The term "residual
interest" bond is used generally to describe those instruments in collateral
pools, such as CMOs, which receive any excess cash flow generated by the pool
once all other bondholders and expenses have been paid. IOs and POs are created
by separating the interest and principal payments generated by a pool of
mortgage-backed bonds to create two classes of securities. Generally, one class
receives interest only payments (IOs) and the other class principal only
payments (POs). MBSs have been referred to as "derivatives" because the
performance of MBSs is dependent upon and derived from underlying securities.
CMOs may be issued in a variety of classes and the Funds may invest in
several CMO classes, including, but not limited to Floaters, Planned
Amortization Classes (PACs), Scheduled Classes (SCHs), Sequential Pay Classes
(SEQs), Support Classes (SUPs), Target Amortization Classes (TACs) and Accrual
Classes (Z Classes). CMO classes vary in the rate and time at which they receive
principal and interest payments. SEQs, also called plain vanilla, clean pay, or
current pay classes, sequentially receive principal payments from underlying
mortgage securities when the principal on a previous class has been completely
paid off. During the months prior to their receipt of principal payments, SEQs
receive interest payments at the coupon rate on their principal. PACs are
designed to produce a stable cash flow of principal payments over a
predetermined period of time. PACs guard against a certain level of prepayment
risk by distributing prepayments to SUPs, also called companion classes. TACs
pay a targeted principal payment schedule, as long as prepayments are not made
at a rate slower than an expected constant prepayment speed. If prepayments
increase, the excess over the target is paid to SUPs. SEQs may have a less
stable cash flow than PACs and TACs and, consequently, have a greater potential
yield. PACs generally pay a lower yield than TACs because of PACs' lower risk.
Because SUPs are directly affected by the rate of prepayment of underlying
mortgages, SUPs may experience volatile cash flow behavior. When prepayment
speeds fluctuate, the average life of a SUP will vary. SUPs, therefore, are
priced at a higher yield than less volatile classes of CMOs. Z Classes do not
receive payments, including interest payments, until certain other classes are
paid off. At that time, the Z Class begins to receive the accumulated interest
and principal payments. A Floater has a coupon rate that adjusts periodically
(usually monthly) by adding a spread to a
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benchmark index subject to a lifetime maximum cap. The yield of a Floater is
sensitive to prepayment rates and the level of the benchmark index.
Investment in MBSs poses several risks, including prepayment, market and
credit risks. Prepayment risk reflects the chance that borrowers may prepay
their mortgages faster than expected, thereby affecting the investment's average
life and perhaps its yield. Borrowers are most likely to exercise their
prepayment options at a time when it is least advantageous to investors,
generally prepaying mortgages as interest rates fall, and slowing payments as
interest rates rise. Certain classes of CMOs may have priority over others with
respect to the receipt of prepayments on the mortgages and the Fund may invest
in CMOs which are subject to greater risk of prepayment as discussed above.
Market risk reflects the chance that the price of the security may fluctuate
over time. The price of MBSs may be particularly sensitive to prevailing
interest rates, the length of time the security is expected to be outstanding
and the liquidity of the issue. In a period of unstable interest rates, there
may be decreased demand for certain types of MBSs, and a Fund invested in such
securities wishing to sell them may find it difficult to find a buyer, which may
in turn decrease the price at which they may be sold. Credit risk reflects the
chance that the Fund may not receive all or part of its principal because the
issuer or credit enhancer has defaulted on its obligations. Obligations issued
by U.S. Government-related entities are guaranteed by the agency or
instrumentality, and some, such as GNMA certificates, are supported by the full
faith and credit of the U.S. Treasury; others are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the FNMA, are
supported by the discretionary authority of the U.S. Government to purchase the
agency's obligations; still others, are supported only by the credit of the
instrumentality. Although securities issued by U.S. Government-related agencies
are guaranteed by the U.S. Government, its agencies or instrumentalities, shares
of the Fund are not so guaranteed in any way. The performance of private label
MBSs, issued by private institutions, is based on the financial health of those
institutions.
ASSET-BACKED SECURITIES. Certain of the Funds may also invest in
"asset-backed securities." These include secured debt instruments backed by
automobile loans, credit card loans, home equity loans, manufactured housing
loans and other types of secured loans providing the source of both principal
and interest. Asset-backed securities are subject to risks similar to those
discussed above with respect to MBSs.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES. Certain of the Funds may
purchase securities on a "when-issued" basis and may purchase or sell securities
on a "forward commitment" basis in order to hedge against anticipated changes in
interest rates and prices. The price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery and payment for
the securities take place at a later date. When-issued securities and forward
commitments may be sold prior to the settlement date, but the Funds will enter
into when-issued and forward commitments only with the intention of actually
receiving or delivering the securities, as the case may be. No income accrues on
securities which have been purchased pursuant to a forward commitment or on a
when-issued basis prior to delivery of the securities. If a Fund disposes of the
right to acquire a when-issued security prior to its acquisition or disposes of
its right to deliver or receive against a forward commitment, it may incur a
gain or loss. At the time a Fund enters into a transaction on a when-issued or
forward commitment basis, a segregated account consisting of cash or liquid
securities equal to the value of the when-issued or forward commitment
securities will be established and maintained with its custodian and will be
marked to market daily. There is a risk that the securities may not be delivered
and that the Fund may incur a loss.
DERIVATIVE INSTRUMENTS: OPTIONS, FUTURES AND FORWARD CURRENCY STRATEGIES
WRITING COVERED CALL OPTIONS. Certain of the Funds may write (sell) covered
call options. Covered call options generally will be written on securities and
currencies which, in the opinion of the Investment Manager or the Sub-Adviser
and MFR, 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 may be assigned an exercise notice by the broker/dealer
through whom such option was sold, requiring him to deliver the underlying
security or currency against payment of the exercise price. This obligation
terminates upon the expiration of the call option, or such earlier time at which
the writer effects a closing purchase transaction by purchasing an option
identical to that previously sold. The Investment Manager, Sub-Adviser and MFR
believe that writing covered call options is less risky than writing uncovered
or "naked" options, which the Funds will not do.
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Portfolio securities or currencies on which call options may be written will
be purchased solely on the basis of investment considerations consistent with
that Fund's investment objectives. When writing a covered call option, the Fund
in return for the premium gives up the opportunity for profit from a price
increase in the underlying security 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 Fund
has no control over when it may be required to sell the underlying securities or
currencies, since the option may be exercised at any time prior to the option's
expiration. If a call option which a Fund has written expires, the Fund will
realize a gain in the amount of the premium; however, such gain may be offset by
a decline in the market value of the underlying security or currency during the
option period. If the call option is exercised, a Fund will realize a gain or
loss from the sale of the underlying security or currency.
The premium which a Fund receives for writing a call option is deemed to
constitute the market value of an option. The premium the Fund will receive from
writing a call option will reflect, among other things, the current market price
of the underlying security or currency, the relationship of the exercise price
to such market price, the historical price volatility of the underlying security
or currency, and the length of the option period. In determining whether a
particular call option should be written on a particular security or currency,
the Investment Manager or Sub-Adviser and MFR, 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 Fund
for writing covered call options will be recorded as a liability in the Fund's
statement of assets and liabilities. This liability will be adjusted daily to
the option's current market value, which will be the latest sales price at the
time which the net asset value per share of the Fund is computed at the close of
regular trading on the NYSE (currently, 3:00 p.m. Central time, unless weather,
equipment failure or other factors contribute to an earlier closing time), or,
in the absence of such sale, the latest asked price. The liability will be
extinguished upon expiration of the option, the purchase of an identical option
in a closing transaction, or delivery of the underlying security 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 Fund to write another
call option on the underlying security or currency with either a different
exercise price, expiration date or both. If the Fund desires to sell a
particular security or currency from its portfolio on which it has written a
call option, or purchased a put option, it will seek to effect a closing
transaction prior to, or concurrently with, the sale of the security or
currency. There is no assurance that the Fund will be able to effect such
closing transactions at favorable prices. If the Fund cannot enter into such a
transaction, it may be required to hold a security 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 Fund will pay transaction costs in connection with the writing of
options and in entering into closing purchase contracts. Transaction costs
relating to options activity normally are higher than those applicable to
purchases and sales of portfolio securities.
Call options written by the Fund normally will have expiration dates of less
than nine months from the date written. The exercise price of the options may be
below, equal to or above the current market values of the underlying securities
or currencies at the time the options are written. From time to time, the Fund
may purchase an underlying security or currency for delivery in accordance with
the exercise of an option, rather than delivering such security or currency from
its portfolio. In such cases, additional costs will be incurred.
The Fund will realize a profit or loss from a closing purchase transaction
if the cost of the transaction is less or more, respectively, than the premium
received from the writing of the option. Because increases in the market price
of a call option generally will reflect increases in the market price of the
underlying security or currency, any loss resulting from the repurchase of a
call option is likely to be offset in whole or in part by appreciation of the
underlying security or currency owned by the Fund.
WRITING COVERED PUT OPTIONS. Certain of the Funds may write covered put
options. A put option gives the purchaser of the option the right to sell, and
the writer (seller) the obligation to buy, the underlying security or currency
at the exercise price during the option period. The option may be exercised at
any time prior to its expiration date. The operation of put options in other
respects, including their related risks and rewards, is substantially identical
to that of call options.
The Fund would write put options only on a covered basis, which means that
the Fund would either (i) set aside cash or liquid securities in an amount not
less than the exercise price at all times while the put option is
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outstanding (the rules of the Options Clearing Corporation currently require
that such assets be deposited in escrow to secure payment of the exercise
price), (ii) sell short the security or currency underlying the put option at
the same or higher price than the exercise price of the put option, or (iii)
purchase a put option, if the exercise price of the purchased put option is the
same or higher than the exercise price of the put option sold by the Fund. The
Fund generally would write covered put options in circumstances where the
Investment Manager or Sub-Adviser and MFR as applicable, wish to purchase the
underlying security or currency for the Fund's portfolio at a price lower than
the current market price of the security or currency. In such event, the Fund
would write a put option at an exercise price which, reduced by the premium
received on the option, reflects the lower price it is willing to pay. Since the
Fund also would receive interest on debt securities 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. Certain of the Funds may purchase put options. As
the holder of a put option, the Fund would have the right to sell the underlying
security or currency at the exercise price at any time during the option period.
The Fund may enter into closing sale transactions with respect to such options,
exercise them or permit them to expire.
The Fund may purchase a put option on an underlying security or currency
("protective put") owned by the Fund as a hedging technique in order to protect
against an anticipated decline in the value of the security or currency. Such
hedge protection is provided only during the life of the put option when the
Fund, as the holder of the put option, is able to sell the underlying security
or currency at the put exercise price regardless of any decline in the
underlying security's market price or currency's exchange value. For example, a
put option may be purchased in order to protect unrealized appreciation of a
security or currency when the Investment Manager or the Sub-Adviser and MFR as
applicable, deem it desirable to continue to hold the security or currency
because of tax considerations. The premium paid for the put option and any
transaction costs would reduce any capital gain otherwise available for
distribution when the security or currency eventually is sold.
Certain Funds also may purchase put options at a time when the Fund does not
own the underlying security or currency. By purchasing put options on a security
or currency it does not own, the Fund seeks to benefit from a decline in the
market price of the underlying security or currency. If the put option is not
sold when it has remaining value, and if the market price of the underlying
security or currency remains equal to or greater than the exercise price during
the life of the put option, the Fund will lose its entire investment in the put
option. In order for the purchase of a put option to be profitable, the market
price of the underlying security 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 Fund when purchasing a put option will be recorded
as an asset in the Fund' statement of assets and liabilities. This asset will be
adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the net asset value per share of the Fund is
computed (at the close of regular trading on the NYSE), or, in the absence of
such sale, the latest bid price. The asset will be extinguished upon expiration
of the option, the writing of an identical option in a closing transaction, or
the delivery of the underlying security or currency upon the exercise of the
option.
PURCHASING CALL OPTIONS. Certain Funds may purchase call options. As the
holder of a call option, the Fund would have the right to purchase the
underlying security or currency at the exercise price at any time during the
option period. The Fund may enter into closing sale transactions with respect to
such options, exercise them or permit them to expire. Call options may be
purchased by the Fund for the purpose of acquiring the underlying security or
currency for its portfolio. Utilized in this fashion, the purchase of call
options would enable the Fund to acquire the security or currency at the
exercise price of the call option plus the premium paid. At times, the net cost
of acquiring the security or currency in this manner may be less than the cost
of acquiring the security or currency directly. This technique also may be
useful to a Fund in purchasing a large block of securities that would be more
difficult to acquire by direct market purchases. So long as it holds such a call
option rather than the underlying security or currency itself, the Fund is
partially protected from any unexpected decline in the market price of the
underlying security or currency and in such event could allow the call option to
expire, incurring a loss only to the extent of the premium paid for the option.
The Fund also may purchase call options on underlying securities or
currencies it owns in order to protect unrealized gains on call options
previously written by it. A call option would be purchased for this purpose
where
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tax considerations make it inadvisable to realize such gains through a closing
purchase transaction. Call options also may be purchased at times to avoid
realizing losses that would result in a reduction of the Fund's current return.
For example, the Fund has written a call option on an underlying security or
currency having a current market value below the price at which such security or
currency was purchased by the Fund, an increase in the market price could result
in the exercise of the call option written by the Fund and the realization of a
loss on the underlying security or currency with the same exercise price and
expiration date as the option previously written.
Aggregate premiums paid for put and call options will not exceed 5% of the
Fund's total assets at the time of purchase.
Global Aggressive Bond Fund may attempt to accomplish objectives similar to
those involved in using Forward Contracts (defined below), as described in the
Prospectus, by purchasing put or call options on currencies. A put option gives
Global Aggressive Bond Fund as purchaser the right (but not the obligation) to
sell a specified amount of currency at the exercise price until the expiration
of the option. A call option gives Global Aggressive Bond Fund as purchaser the
right (but not the obligation) to purchase a specified amount of currency at the
exercise price until its expiration. The Fund might purchase a currency put
option, for example, to protect itself during the contract period against a
decline in the dollar value of a currency in which it holds or anticipates
holding securities. If the currency's value should decline against the dollar,
the loss in currency value should be offset, in whole or in part, by an increase
in the value of the put. If the value of the currency instead should rise
against the dollar, any gain to Global Aggressive Bond Fund would be reduced by
the premium it had paid for the put option. A currency call option might be
purchased, for example, in anticipation of, or to protect against, a rise in the
value against the dollar of a currency in which the Fund anticipates purchasing
securities.
Currency options may be either listed on an exchange or traded
over-the-counter ("OTC options"). Listed options are third-party contracts
(i.e., performance of the obligations of the purchaser and seller is guaranteed
by the exchange or clearing corporation), and have standardized strike prices
and expiration dates. OTC options are two-party contracts with negotiated strike
prices and expiration dates. The Securities and Exchange Commission ("SEC")
staff considers OTC options and their cover to be illiquid securities. OTC
options will not be purchased unless the Fund believes that daily valuations for
such options are readily obtainable. OTC options differ from exchange-traded
options in that OTC options are transacted with dealers directly and not through
a clearing corporation (which guarantees performance). Consequently, there is a
risk of non-performance by the dealer. Since no exchange is involved, OTC
options are valued on the basis of a quote provided by the dealer. In the case
of OTC options, there can be no assurance that a liquid secondary market will
exist for any particular option at any specific time.
INTEREST RATE AND CURRENCY FUTURES CONTRACTS. Certain Funds may enter into
interest rate or currency futures contracts ("Futures" or "Futures Contracts")
as a hedge against changes in prevailing levels of interest rates or currency
exchange rates in order to establish more definitely the effective return on
securities or currencies held or intended to be acquired by the Fund. A Fund's
hedging may include sales of Futures as an offset against the effect of expected
increases in interest rates or currency exchange rates, and purchases of Futures
as an offset against the effect of expected declines in interest rates or
currency exchange rates.
The Funds will not enter into Futures Contracts for speculation and will
only enter into Futures Contracts which are traded on national futures exchanges
and are standardized as to maturity date and underlying financial instrument.
The principal interest rate 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 Fund may be able to hedge exposure more effectively and
at a lower cost through using Futures Contracts.
The Fund will not enter into a Futures Contract if, as a result thereof,
more than 5% of the Fund's total assets (taken at market value at the time of
entering into the contract) would be committed to "margin" (down payment)
deposits on such Futures Contracts.
A Futures Contract provides for the future sale by one party and purchase by
another party of a specified amount of a specific financial instrument (debt
security or currency) for a specified price at a designated date, time and
place. Brokerage fees are incurred when a Futures Contract is bought or sold,
and margin deposits must be maintained at all times the Futures Contract is
outstanding.
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Although Futures Contracts typically require future delivery of and payment
for financial instruments or currencies, Futures Contracts usually are closed
out before the delivery date. Closing out an open Futures Contract sale or
purchase is effected by entering into an offsetting Futures Contract purchase or
sale, respectively, for the same aggregate amount of the identical financial
instrument or currency and the same delivery date. If the offsetting purchase
price is less than the original sale price, the Fund realizes a gain; if it is
more, the Fund realizes a loss. Conversely, if the offsetting sale price is more
than the original purchase price, the Fund realizes a gain; if it is less, the
Fund realizes a loss. The transaction costs also must be included in these
calculations. There can be no assurance, however, that the Fund will be able to
enter into an offsetting transaction with respect to a particular Futures
Contract at a particular time. If the Fund is not able to enter into an
offsetting transaction, the Fund will continue to be required to maintain the
margin deposits on the Futures Contract.
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 Fund.
Persons who trade in Futures Contracts may be broadly classified as
"hedgers" and "speculators." Hedgers, such as the Funds, whose business activity
involves investment or other commitment in securities or other obligations, use
the Futures markets primarily to offset unfavorable changes in value that may
occur because of fluctuations in the value of the securities and obligations
held or expected to be acquired by them 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 Fund's Futures transactions will be entered into for traditional hedging
purposes; that is, Futures Contracts will be sold to protect against a decline
in the price of securities or currencies that the Fund owns, or Futures
Contracts will be purchased to protect the Fund against an increase in the price
of securities or currencies it has committed to purchase or expects to purchase.
"Margin" with respect to Futures Contracts is the amount of funds that must
be deposited by the Fund, in a segregated account with the Fund's custodian, in
order to initiate Futures trading and to maintain the Fund's open positions in
Futures Contracts. A margin deposit made when the Futures Contract is entered
into ("initial margin") is intended to assure the Fund's performance of the
Futures Contract. The margin required for a particular Futures Contract is set
by the exchange on which the Futures Contract is traded, and may be modified
significantly from time to time by the exchange during the term of the Futures
Contract. Futures Contracts customarily are purchased and sold on margins that
may range upward from less than 5% of the value of the Futures Contract being
traded.
If the price of an open Futures Contract changes (by increase in the case of
a sale or by decrease in the case of a purchase) so that the loss on the Futures
Contract reaches a point at which the margin on deposit does not satisfy margin
requirements, the broker will require an increase in the margin deposit ("margin
variation"). If the value of a position increases because of favorable price
changes in the Futures Contract so that the margin deposit exceeds the required
margin, however, the broker will pay the excess to the Fund. In computing daily
net asset values, the Fund will mark to market the current value of its open
Futures Contracts. The Fund expects to earn interest income on its margin
deposits.
RISKS OF USING FUTURES CONTRACTS. The prices of Futures Contracts are
volatile and are influenced, among other things, by actual and anticipated
changes in interest rates, which in turn are affected by fiscal and monetary
policies and national and international political and economic events.
There is a risk of imperfect correlation between changes in prices of
Futures Contracts and prices of the securities or currencies in the Fund's
portfolio being hedged. The degree of imperfection of correlation depends upon
circumstances such as: variations in speculative market demand for Futures and
for debt securities or currencies, including technical influences in Futures
trading; and differences between the financial instruments being hedged and the
instruments underlying the standard Futures Contracts available for trading,
with respect to interest rate levels, maturities, and creditworthiness of
issuers. A decision of whether, when, and how to hedge
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involves skill and judgment, and even a well-conceived hedge may be unsuccessful
to some degree because of unexpected market behavior or interest rate trends.
Because of the low margin deposits required, Futures trading involves an
extremely high degree of leverage. As a result, a relatively small price
movement in a Futures Contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10% of
the value of the Futures Contract is deposited as margin, a subsequent 10%
decrease in the value of the Futures Contract would result in a total loss of
the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss of 150% of
the original margin deposit, if the Contract were closed out. Thus, a purchase
or sale of a Futures Contract may result in losses in excess of the amount
invested in the Futures Contract. However, the Fund presumably would have
sustained comparable losses if, instead of the Futures Contract, it had invested
in the underlying financial instrument and sold it after the decline.
Furthermore, in the case of a Futures Contract purchase, in order to be
certain that the Fund has sufficient assets to satisfy its obligations under a
Futures Contract, the Fund sets aside and commits to back the Futures Contract
an amount of cash, cash equivalents, U.S. Government securities and other liquid
securities equal in value to the current value of the underlying instrument less
margin deposit.
In the case of a Futures contract sale, the Fund either will set aside
amounts, as in the case of a Futures Contract purchase, own the security
underlying the contract or hold a call option permitting the Fund to purchase
the same Futures Contract at a price no higher than the contract price. Assets
used as cover cannot be sold while the position in the corresponding Futures
Contract is open, unless they are replaced with similar assets. As a result, the
commitment of a significant portion of the Fund's assets to cover could impede
portfolio management or the Fund's ability to meet redemption requests or other
current obligations.
Most U.S. Futures exchanges limit the amount of fluctuation permitted in
Futures Contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a Futures Contract may vary either up or
down from the previous day's settlement price at the end of a trading session.
Once the daily limit has been reached in a particular type of Futures Contract,
no trades may be made on that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and therefore does
not limit potential losses, because the limit may prevent the liquidation of
unfavorable positions. Futures Contract prices occasionally have moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of Futures positions and subjecting some
Futures traders to substantial losses.
OPTIONS ON FUTURES CONTRACTS. Options on Futures Contracts are similar to
options on securities 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 Fund
may purchase call and put options on the underlying securities or currencies
themselves. Such options would be used in a manner identical to the use of
options on Futures Contracts.
To reduce or eliminate the leverage then employed by the Fund, or to reduce
or eliminate the hedge position then currently held by the Fund, the Fund may
seek to close out an option position by selling an option covering the same
securities or contract and having the same exercise price and expiration date.
Trading in options on Futures Contracts began relatively recently. The ability
to establish and close out positions on such options will be subject to the
development and maintenance of a liquid secondary market. It is not certain that
this market will develop.
FORWARD CURRENCY CONTRACTS AND OPTIONS ON CURRENCY. Global Aggressive Bond
Fund 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
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another currency at a future date and price as agreed upon by the parties.
Global Aggressive Bond Fund may accept or make delivery of the currency at the
maturity of the Forward Contract or, prior to maturity, enter into a closing
transaction involving the purchase or sale of an offsetting contract. Global
Aggressive Bond Fund will utilize Forward Contracts only on a covered basis.
Global Aggressive Bond Fund engages in forward currency transactions in
anticipation of, or to protect itself against, fluctuations in exchange rates.
Global Aggressive Bond Fund might sell a particular foreign currency forward,
for example, when it holds bonds denominated in a foreign currency but
anticipates, and seeks to be protected against, a decline in the currency
against the U.S. dollar. Similarly, Global Aggressive Bond Fund might sell the
U.S. dollar forward when it holds bonds denominated in U.S. dollars but
anticipates, and seeks to be protected against, a decline in the U.S. dollar
relative to other currencies. Further, Global Aggressive Bond Fund might
purchase a currency forward to "lock in" the price of securities denominated in
that currency which it anticipates purchasing.
Forward Contracts are transferable in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A Forward Contract generally has no deposit requirement, and no
commissions are charged at any stage for trades. Global Aggressive Bond Fund
will enter into such Forward Contracts with major U.S. or foreign banks and
securities or currency dealers in accordance with guidelines approved by the
Fund's Board of Directors.
Global Aggressive Bond Fund may enter into Forward Contracts either with
respect to specific transactions or with respect to the Fund's portfolio
positions. The precise matching of the Forward Contract amounts and the value of
specific securities generally will not be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the Forward Contract
is entered into and the date it matures. Accordingly, it may be necessary for
Global Aggressive Bond Fund to purchase additional foreign currency on the spot
(i.e., cash) market (and bear the expense of such purchase) if the market value
of the security is less than the amount of foreign currency the Fund is
obligated to deliver and if a decision is made to sell the security and make
delivery of the foreign currency. Conversely, it may be necessary to sell on the
spot market some of the foreign currency Global Aggressive Bond Fund is
obligated to deliver. The projection of short-term currency market movements is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. Forward Contracts involve the risk that
anticipated currency movements will not be predicted accurately, causing Global
Aggressive Bond Fund to sustain losses on these Contracts and transaction costs.
Forward Contracts may be considered illiquid investments.
At or before the maturity of a Forward Contract requiring the Fund to sell a
currency, Global Aggressive Bond Fund either may sell a portfolio security and
use the sale proceeds to make delivery of the currency or retain the security
and offset its contractual obligation to deliver the currency by purchasing a
second contract pursuant to which the Fund will obtain, on the same maturity
date, the same amount of the currency which it is obligated to deliver.
Similarly, Global Aggressive Bond Fund may close out a Forward Contract
requiring it to purchase a specified currency by entering into a second Contract
entitling it to sell the same amount of the same currency on the maturity date
of the first Contract. Global Aggressive Bond Fund would realize a gain or loss
as a result of entering into such an offsetting Forward Contract under either
circumstance to the extent the exchange rate or rates between the currencies
involved moved between the execution dates of the first Contract and the
offsetting Contract.
The cost to Global Aggressive Bond Fund of engaging in Forward Contracts
varies with factors such as the currencies involved, the length of the contract
period and the market conditions then prevailing. Because Forward Contracts
usually are entered into on a principal basis, no fees or commissions are
involved. The use of Forward Contracts does not eliminate fluctuations in the
prices of the underlying securities the Fund owns or intends to acquire, but it
does establish a rate of exchange in advance. In addition, while Forward
Contracts limit the risk of loss due to a decline in the value of the hedged
currencies, they also limit any potential gain that might result should the
value of the currencies increase. Although Forward Contracts presently are not
regulated by the CFTC, the CFTC, in the future, may assert authority to regulate
Forward Contracts. In that event, Global Aggressive Bond Fund's ability to
utilize Forward Contracts in the manner set forth above may be restricted.
INTEREST RATE AND CURRENCY SWAPS. Certain of the Funds may enter into
interest rate, index and currency swaps and the purchase or sale of related
caps, floors and collars. A Fund usually will enter into interest rate swaps on
a net basis if the contract so provides, that is, the two payment streams are
netted out in a cash settlement on the payment date or dates specified in the
instrument, with the Fund receiving or paying, as the
27
<PAGE>
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 Funds,
the Investment Manager, the Sub-Adviser and MFR, 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 Fund's borrowing
restrictions. A Fund will not enter into any swap, cap, floor, collar or other
derivative transaction unless, at the time of entering into the transaction, the
unsecured long-term debt rating of the counterparty combined with any credit
enhancements is rated at least A by Moody's or S&P or has an equivalent rating
from a nationally recognized statistical rating organization or is determined to
be of equivalent credit quality by the Investment Manager, Sub-Adviser and MFR,
as applicable. If a counterparty defaults, the Fund may have contractual
remedies pursuant to the agreements related to the transactions. The swap market
has grown substantially in recent years, with a large number of banks and
investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and, for that
reason, they are less liquid than swaps.
EMERGING COUNTRIES. Certain of the Funds may invest in debt securities in
emerging markets. Investing in securities in emerging countries may entail
greater risks than investing in debt securities in developed countries. These
risks include (i) less social, political and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict the
Fund's investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (iv) foreign taxation; and
(v) the absence of developed structures governing private or foreign investment
or allowing for judicial redress for injury to private property.
FOREIGN INVESTMENT RESTRICTIONS. Certain countries prohibit or impose
substantial restrictions on investments in their capital markets, particularly
their equity markets, by foreign entities such as the Funds. As illustrations,
certain countries require governmental approval prior to investments by foreign
persons, or limit the amount of investment by foreign persons in a particular
company, or limit the investments by foreign persons to only a specific class of
securities of a company that may have less advantageous terms than securities of
the company available for purchase by nationals. Moreover, the national policies
of certain countries may restrict investment opportunities in issuers or
industries deemed sensitive to national interests. In addition, some countries
require governmental approval for the repatriation of investment income, capital
or the proceeds of securities sales by foreign investors. A Fund could be
adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation, as well as by the application to it of
other restrictions on investments.
CURRENCY FLUCTUATIONS. Because Global Aggressive Bond Fund, under normal
circumstances, may invest substantial portions of its total assets in the
securities of foreign issuers which are denominated in foreign currencies, the
strength or weakness of the U.S. dollar against such foreign currencies will
account for part of the Fund's investment performance. A decline in the value of
any particular currency against the U.S. dollar will cause a decline in the U.S.
dollar value of Global Aggressive Bond Fund's holdings of securities denominated
in such currency and, therefore, will cause an overall decline in the Fund's net
asset value and any net investment income and capital gains to be distributed in
U.S. dollars to shareholders of the Fund.
The rate of exchange between the U.S. dollar and other currencies is
determined by several factors including the supply and demand for particular
currencies, central bank efforts to support particular currencies, the movement
of interest rates, the pace of business activity in certain other countries and
the U.S., and other economic and financial conditions affecting the world
economy.
Although Global Aggressive Bond Fund values its assets daily in terms of
U.S. dollars, the Fund does not intend to convert holdings of foreign currencies
into U.S. dollars on a daily basis. Global Aggressive Bond Fund will do so from
time to time, and investors should be aware of the costs of currency conversion.
Although foreign exchange dealers do not charge a fee for conversion, they do
realize a profit based on the difference ("spread") between the prices at which
they are buying and selling various currencies. Thus, a dealer may offer to sell
a foreign currency to Global Aggressive Bond Fund at one rate, while offering a
lesser rate of exchange should the Fund desire to sell that currency to the
dealer.
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
28
<PAGE>
event of such expropriation, nationalization or other confiscation by any
country, a Fund could lose its entire investment in any such country.
An investment in a Fund which invests in non-U.S. companies is subject to
the political and economic risks associated with investments in foreign markets.
Even though opportunities for investment may exist in emerging markets, any
change in the leadership or policies of the governments of those countries or in
the leadership or policies of any other government which exercises a significant
influence over those countries, may halt the expansion of or reverse the
liberalization of foreign investment policies now occurring and thereby
eliminate any investment opportunities which may currently exist.
Investors should note that upon the accession to power of authoritarian
regimes, the governments of a number of emerging market countries previously
expropriated large quantities of real and personal property similar to the
property which will be represented by the securities purchased by a Fund. The
claims of property owners against those governments were never finally settled.
There can be no assurance that any property represented by securities purchased
by a Fund will not also be expropriated, nationalized, or otherwise confiscated.
If such confiscation were to occur, the Fund could lose a substantial portion of
its investments in such countries. The Fund's investments would similarly be
adversely affected by exchange control regulation in any of those countries.
RELIGIOUS AND ETHNIC INSTABILITY. Certain countries in which a Fund may
invest may have vocal minorities that advocate radical religious or
revolutionary philosophies or support ethnic independence. Any disturbance on
the part of such individuals could carry the potential for wide-spread
destruction or confiscation of property owned by individuals and entities
foreign to such country and could cause the loss of the Fund's investment in
those countries.
NON-UNIFORM CORPORATE DISCLOSURE STANDARDS AND GOVERNMENTAL REGULATION.
Foreign companies are subject to accounting, auditing and financial standards
and requirements that differ, in some cases significantly, from those applicable
to U.S. companies. In particular, the assets, liabilities and profits appearing
on the financial statements of such a company may not reflect its financial
position or results of operations in the way they would be reflected had such
financial statements been prepared in accordance with U.S. generally accepted
accounting principles. Most of the foreign securities held by a Fund will not be
registered with the SEC or regulators of any foreign country, nor will the
issuers thereof be subject to the SEC's reporting requirements. Thus, there will
be less available information concerning foreign issuers of securities held by
the Fund than is available concerning U.S. issuers. In instances where the
financial statements of an issuer are not deemed to reflect accurately the
financial situation of the issuer, the Investment Manager and relevant
Sub-Adviser will take appropriate steps to evaluate the proposed investment,
which may include on-site inspection of the issuer, interviews with its
management and consultations with accountants, bankers and other specialists.
There is substantially less publicly available information about foreign
companies than there are reports and ratings published about U.S. companies and
the U.S. Government. In addition, where public information is available, it may
be less reliable than such information regarding U.S. issuers.
ADVERSE MARKET CHARACTERISTICS. Securities of many foreign issuers may be
less liquid and their prices more volatile than securities of comparable U.S.
issuers. In addition, foreign securities exchanges and brokers generally are
subject to less governmental supervision and regulation than in the U.S., and
foreign securities exchange transactions usually are subject to fixed
commissions, which generally are higher than negotiated commissions on U.S.
transactions. In addition, foreign securities exchange transactions may be
subject to difficulties associated with the settlement of such transactions.
Delays in settlement could result in temporary periods when assets of the Fund
are uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause it to
miss attractive opportunities. Inability to dispose of a portfolio security due
to settlement problems either could result in losses to the Fund due to
subsequent declines in value of the portfolio security or, if the Fund has
entered into a contract to sell the security, could result in possible liability
to the purchaser. The Investment Manager and relevant Sub-Adviser will consider
such difficulties when determining the allocation of the Fund's assets.
NON-U.S. WITHHOLDING TAXES. A Fund's investment income and gains from
foreign issuers may be subject to non-U.S. withholding and other taxes, thereby
reducing the Fund's investment income and gains.
COSTS. Investors should understand that the expense ratio of the Funds that
invest in foreign securities can be expected to be higher than investment
companies investing in domestic securities since the cost of maintaining the
custody of foreign securities and the rate of advisory fees paid by the Funds
are higher.
29
<PAGE>
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 to
investment in Eastern Europe and Russia.
AMERICAN DEPOSITARY RECEIPTS (ADRS). Certain of the Funds may invest in
ADRs. ADRs are dollar-denominated receipts issued generally by U.S. banks and
which represent the deposit with the bank of a foreign company's securities.
ADRs are publicly traded on exchanges or over-the-counter in the United States.
Investors should consider carefully the substantial risks involved in investing
in securities issued by companies of foreign nations, which are in addition to
the usual risks inherent in domestic investments. See "Foreign Investment
Restrictions," above.
INVESTMENT POLICY LIMITATIONS
Each of the Funds operate within certain fundamental investment policy
limitations. These limitations may not be changed for the Funds without approval
of the lesser of (i) 67% or more of the voting securities present at a meeting
if the holders of more than 50% of the outstanding voting securities of that
Fund are present or represented by proxy, or (ii) more than 50% of the
outstanding voting securities of that Fund.
INCOME FUND'S FUNDAMENTAL POLICIES
The fundamental investment policies of the Income Fund, which are
applicable to each of the Corporate Bond, Limited Maturity Bond, U.S.
Government, Global Aggressive Bond and High Yield Funds are:
1. Not to invest in companies having a record of less than three years'
continuous operation, which may include the operations of predecessor
companies; provided, however, that this investment policy does not apply to
Global Aggressive Bond and High Yield Funds.
2. Not to invest in the securities of an issuer if the officers and directors
of the Fund, Underwriter or Manager own more than 1/2 of 1% of such
securities or if all such persons together own more than 5% of such
securities.
3. Not to invest more than 5% of its assets in the securities of any one
issuer (other than securities of the U.S. Government, its agencies or
instrumentalities); provided, however, that for the Global Aggressive Bond
and High Yield Funds, this limitation applies only with respect to 75% of
the value of its total assets.
4. Not to purchase more than 10% of the outstanding voting securities (or of
any class of outstanding securities) of any one issuer (other than
securities of the U.S. Government, its agencies or instrumentalities).
5. Not to invest in companies for the purpose of exercising control of
management.
6. Not to act as underwriter of securities of other issuers.
7. Not to invest in an amount equal to, or in excess of, 25% of its total
assets in any particular industry (other than securities of the U.S.
Government, its agencies or instrumentalities).
8. Not to purchase or sell real estate. (This policy shall not prevent the
Fund from investing in securities or other instruments backed by real
estate or in securities of companies engaged in the real estate business.)
9. Not to buy or sell commodities or commodity contracts; provided, however,
that the Funds may, to the extent appropriate under their investment
programs, purchase securities of companies engaged in such activities, may
enter into transactions in financial futures contracts and related options
for hedging purposes, may
30
<PAGE>
engage in transactions on a when-issued or forward commitment basis and may
enter into forward currency contracts.
10. Not to make loans to other persons other than for the purchase of publicly
distributed debt securities and U.S. Government obligations or by entry
into repurchase agreements; provided, however, that this investment
limitation does not apply to the High Yield Fund.
11. Not to invest its assets in puts, calls, straddles, spreads, or any
combination thereof; provided, however, that this investment policy does
not apply to Global Aggressive Bond Fund and High Yield Fund.
12. Not to invest in limited partnerships or similar interests in oil, gas,
mineral lease, mineral exploration or development programs; provided,
however, that the Fund may invest in the securities of other corporations
whose activities include such exploration and development.
13. With respect to each of the Corporate Bond and U.S. Government Funds, not
to borrow money except for emergency purposes, and then not in excess of 5%
of its total assets at the time the loan is made. (Any such borrowings will
be made on a temporary basis from banks and will not be made for investment
purposes.) With respect to the Limited Maturity Bond Fund, not to borrow
money in excess of 10% of its total assets at the time the loan is made,
and then only as a temporary measure for emergency purposes, to facilitate
redemption requests, or for other purposes consistent with the Fund's
investment objectives and policies. With respect to Global Aggressive Bond
Fund and the High Yield Fund, not to borrow money, except that (a) the
Funds may enter into certain futures contracts and options related thereto;
(b) the Funds may enter into commitments to purchase securities in
accordance with the Fund's investment program, including delayed delivery
and when-issued securities and reverse repurchase agreements, and (c) for
temporary emergency purposes, the Global Aggressive Bond Fund may borrow
money in amounts not exceeding 5% and the High Yield Fund may borrow in
amounts not exceeding 33 1/3% of the value of its total assets at the time
when the loan is made.
14. Not to purchase securities of any other investment company; provided,
however that Limited Maturity Bond Fund and the High Yield Fund may
purchase securities of any investment company if in compliance with the
Investment Company Act of 1940; and Global Aggressive Bond Fund may
purchase securities of another investment company or investment trust, if
purchased in the open market and then only if no profit, other than the
customary broker's commission, results to a sponsor or dealer, or by merger
or other reorganization.
15. With respect to each of the Corporate Bond and U.S. Government Funds, not
to issue senior securities; provided, however, that Limited Maturity Bond
Fund and the High Yield Fund may issue senior securities if in compliance
with the Investment Company Act of 1940; and Global Aggressive Bond Fund
may issue senior securities (as defined in the 1940 Act) as follows: (a)
the Fund may enter into commitments to purchase securities in accordance
with the Fund's investment program, including reverse repurchase
agreements, delayed delivery and when-issued securities, which may be
considered the issuance of senior securities to the extent permitted under
applicable regulations; (b) the Fund may engage in transactions that may
result in the issuance of a senior security to the extent permitted under
applicable regulations, the interpretation of the 1940 Act or an exemptive
order; (c) the Fund may engage in short sales of securities to the extent
permitted in its investment program and other restrictions; (d) the
purchase or sale of futures contracts and related options shall not be
considered to involve the issuance of senior securities; and (e) subject to
fundamental restrictions, the Fund may borrow money as authorized by the
1940 Act.
16. With respect to Corporate Bond and U.S. Government Funds, not to invest in
restricted securities (restricted securities are securities for which an
active and substantial market does not exist at the time of purchase or
upon subsequent valuation, or for which there are legal or contractual
restrictions as to disposition); provided, however that Limited Maturity
Bond Fund may invest in restricted securities if those securities are
eligible for resale to qualified institutional investors pursuant to Rule
144A under the Securities Act of 1933; and Global Aggressive Bond Fund and
High Yield Fund, may not invest more than 15% of its total assets in
illiquid securities.
The Global Aggressive Bond Fund will not purchase securities on margin
except as provided below. The following investment policy of Global Aggressive
Bond Fund is not a fundamental policy and may be changed by a vote of a majority
of the Fund's Board of Directors without shareholder approval. Global Aggressive
Bond Fund may purchase and sell futures contracts and related options under the
following conditions: (a) the then current aggregate futures market prices of
financial instruments required to be delivered and purchased under open
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<PAGE>
futures contracts shall not exceed 30% of the Fund's total assets, at market
value; and (b) no more than 5% of the Fund's total assets, at market value at
the time of entering into a contract, shall be committed to margin deposits in
relation to futures contracts.
With respect to Fundamental Policy (1), the Global Aggressive Bond Fund and
the High Yield Fund have entered into undertakings with the Arkansas and Arizona
Securities Departments respectively, pursuant to which the Funds have agreed to
limit the purchase of securities of issuers in operation for less than three
years ("unseasoned issuers") to 5% of total Fund assets. The Funds may exceed
the 5% limit if, in the future, such Departments permit a larger percentage of
assets to be invested in unseasoned issuers. With respect to Fundamental Policy
(16), the High Yield Fund has agreed with the Arkansas Securities Department to
limit its investment in securities which it is restricted from selling to the
public without registration under the Securities Act of 1933 to 10% of Fund
assets. The Fund may invest up to 15% of Fund assets in such securities if the
Arkansas Department changes its position on this matter in the future or if the
Fund's investment policies, at some time in the future, are no longer subject to
the jurisdiction of such Department.
The above limitations, other than those relating to borrowing, are
applicable at the time of investment, and later increases or decreases in
percentages resulting from changes in value of net assets will not result in
violation of such limitations. The Fund interprets Fundamental Policy (8) to
prohibit the purchase of real estate limited partnerships.
TAX-EXEMPT FUND'S FUNDAMENTAL POLICIES
Tax-Exempt Fund's fundamental investment policies are:
1. Not to invest more than 20% of its assets in securities which are not
tax-exempt securities, except for temporary defensive purposes;
2. Not to borrow money, except that borrowings from banks for temporary or
emergency purposes may be made in an amount up to 10% of the Fund's total
assets at the time the loan is made;
3. Not to issue senior securities as defined in the Investment Company Act of
1940 except insofar as the Fund may be deemed to have issued senior
securities by reason of borrowing money for temporary or emergency purposes
or purchasing securities on a when-issued or delayed delivery basis;
4. Not to purchase any securities on margin (except for such short-term
credits as are necessary for the clearance of purchases and sales of
portfolio securities) or sell any securities short;
5. Not to make loans, except that this does not prohibit the purchase of a
portion of an issue of publicly distributed bonds, debentures, notes or
other debt securities, or entry into a repurchase agreement;
6. Not to engage in the business of underwriting securities issued by other
persons except to the extent that the Fund may technically be deemed to be
an underwriter under the Securities Act of 1933 in purchasing and selling
portfolio securities;
7. Not to invest in real estate, real estate mortgage loans, commodities,
commodity futures contracts or interests in oil, gas or other mineral
exploration or development programs, provided that this limitation shall
not prohibit the purchase of securities issued by companies, including real
estate investment trusts, which invest in real estate or interests therein;
8. Not to invest more than 5% of its total assets in securities of any one
issuer, except securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities;
9. Not to purchase securities of other investment companies, or acquire voting
securities, except in connection with a merger, consolidation, acquisition
or reorganization;
10. Not to invest more than 25% of its total assets in securities the issuers
of which are in the same industry. For purposes of this limitation, the
U.S. government, its agencies or instrumentalities, and state or municipal
governments and their political subdivisions are not considered members of
any industry;
11. Not to pledge, mortgage or hypothecate its assets, except to secure
borrowings permitted by fundamental investment policy number (2) above;
12. Not to write, purchase or sell put or call options or combinations thereof,
except that it may purchase and hold puts or "stand-by commitments"
relating to municipal securities, as described in this prospectus;
13. Not to invest in securities which are not readily marketable, securities
the disposition of which is restricted under federal securities laws or
repurchase agreements maturing in more than seven days (collectively
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<PAGE>
"illiquid securities") if, as a result, more than 10% of the Fund's net
assets would be invested in illiquid securities.
For purposes of restrictions (8) and (10) above, each governmental
subdivision, i.e., state, territory, possession of the United States or any
political subdivision of any of the foregoing, including agencies, authorities,
instrumentalities, or similar entities, or of the District of Columbia shall be
considered a separate issuer if its assets and revenues are separate from those
of the governmental body creating it and the security is backed only by its own
assets and revenues. Further, in the case of an industrial development bond, if
the security is backed only by the assets and revenues of a non-governmental
user, then such non-governmental user will be deemed to be the sole issuer. If
an industrial development bond or government issued security is guaranteed by a
governmental or other entity, such guarantee would be considered a separate
security issued by the guarantor.
The above limitations are applicable at the time of investment, and later
increases or decreases in percentages resulting from changes in value or net
assets will not result in violation of such limitations.
CASH FUND'S FUNDAMENTAL POLICIES
Cash Fund's fundamental investment policies are:
1. Not to purchase any securities other than those referred to under "Security
Cash Fund," page 14;
2. Not to borrow money, except that the Fund may borrow for temporary purposes
or to meet redemption requests which might otherwise require the untimely
disposition of a security (not for leveraging) in amounts not exceeding 10%
of the current value of its total assets (including the amount borrowed)
less liabilities (not including the amount borrowed) at the time the
borrowing is made. It is intended that any such borrowing will be
liquidated before additional portfolio securities are purchased;
3. Not to pledge its assets or otherwise encumber them in excess of 10% of its
net assets (taken at market value at the time of pledging) and then only to
secure borrowings effected within the limitations set forth in restriction
2;
4. Not to make loans of money or securities, except (a) by the purchase of
debt obligations in which the Fund may invest consistent with its
investment objectives and policies or (b) by investment in repurchase
agreements, subject to limitations described under "Security Cash Fund,"
page 14;
5. Not to invest in the securities of an issuer if the officers and directors
of the Fund or Manager own more than 1/2 of 1% of such securities, or if
all such persons together own more than 5% of such securities;
6. Not to purchase a security if, as a result, with respect to 75% of the
value of the Fund's total assets, more than 5% of the value of its total
assets would be invested in the securities of any one issuer (other than
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities);
7. Not to purchase more than 10% of any class of securities of any issuer.
(For purposes of this restriction, all outstanding debt securities of any
issuer are considered one class.)
8. Not to invest more than 25% of the market or other fair value of its total
assets in the securities of issuers, all of which conduct their principal
business activities in the same industry. (For purposes of this
restriction, utilities will be divided according to their services; for
example, gas, gas transmission, electric, water and telephone utilities
will each be treated as being a separate industry. This restriction does
not apply to investment in bank obligations or obligations issued or
guaranteed by the United States Government or its agencies or
instrumentalities.)
9. Not to purchase securities on margin, except for such short-term credits as
are necessary for the clearance of purchases and sales of portfolio
securities;
10. Not to invest more than 5% of the market or other fair value of its total
assets in securities of companies having a record, together with
predecessors, of less than three years of continuous operation. (This
restriction shall not apply to banks or any obligation of the United States
Government, its agencies or instrumentalities.)
11. Not to engage in the underwriting of securities except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in disposing
of a portfolio security;
12. Not to make short sales of securities;
13. Not to purchase or sell real estate, although it may purchase securities of
issuers which engage in real estate operations, securities which are
secured by interests in real estate, or securities representing interests
in real estate;
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<PAGE>
14. Not to invest for the purpose of exercising control of management of
another company;
15. Not to purchase oil, gas or other mineral leases, rights, or royalty
contracts or exploration or development programs, except that the Fund may
invest in the securities of companies which invest in or sponsor such
programs;
16. Not to purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets;
17. Not to write, purchase or sell puts, calls, or combinations thereof; 18.
Not to purchase or sell commodities or commodity futures contracts; 19. Not
to issue senior securities as defined in the Investment Company Act of
1940.
In order to permit the sale of shares of Cash Fund in certain states, the
Fund may make commitments more restrictive than the fundamental restrictions
described above. Should the Fund determine that any such commitment is no longer
in the best interest of the Fund and its stockholders, it will revoke the
commitment by terminating sales of its shares in the state(s) involved.
Any investment restriction except restriction 2, which involves a maximum or
minimum percentage of securities or assets shall not be considered to be
violated unless an excess over or a deficiency under the percentage occurs
immediately after, and is caused by, an acquisition or disposition of securities
or utilization of assets by Cash Fund.
OFFICERS AND DIRECTORS
The officers and directors of the Funds and their principal occupations for
at least the last five years are as follows. Unless otherwise noted, the address
of each officer and director is 700 Harrison Street, Topeka, Kansas 66636-0001.
<TABLE>
<CAPTION>
- ------------------------------------------------------------ ----------------------------------------------------------
NAME, ADDRESS AND POSITIONS HELD WITH THE FUNDS PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- ------------------------------------------------------------ ----------------------------------------------------------
<S> <C>
JOHN D. CLELAND,* President and Director Senior Vice President and Managing Member Representative,
Security Management Company, LLC; Senior Vice President,
Security Benefit Group, Inc. and Security Benefit Life
Insurance Company.
WILLIS A. ANTON, JR., Director Partner, Classic Awning & Design. Prior to October 1991,
3616 Yorkway President, Classic Awning & Design.
Topeka, Kansas 66604
DONALD A. CHUBB, JR.,** Director Business broker, Griffith & Blair Realtors. Prior to 1997,
2222 SW 29th Street President, Neon Tube Light Company, Inc.
Topeka, Kansas 66611
DONALD L. HARDESTY, Director President, Central Research Corporation.
900 Bank IV Tower
Topeka, Kansas 66603
PENNY A. LUMPKIN,** Director Vice President, Palmer News, Inc. Prior to October 1991,
3616 Canterbury Town Road Secretary and Director, Palmer Companies, Inc. (Wholesale
Topeka, Kansas 66610 Periodicals).
MARK L. MORRIS, JR.,** Director President, Mark Morris Associates (Veterinary Research and
5500 SW 7th Street Education).
Topeka, Kansas 66606
JEFFREY B. PANTAGES,* Director Senior Vice President, Security Benefit Group, Inc. and
1266 South Street Security Benefit Life Insurance Company. Prior to June
Needham, MA 02192 1996, President, Chief Investment Officer and Director,
Security Management Company. Prior to April 1992, Managing
Director, Prudential Life.
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------- ----------------------------------------------------------
NAME, ADDRESS AND POSITIONS HELD WITH THE FUNDS PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- ---------------------------------------------------- ----------------------------------------------------------
<S> <C>
HUGH L. THOMPSON, Director President, Washburn University.
1700 College
Topeka, KS 66621
JAMES R. SCHMANK, Vice President and Treasurer President (Interim), Treasurer, Chief Fiscal Officer and
Managing Member Representative, Security Management
Company, LLC; Vice President and Interim Chief Investment
Officer, 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 Portfolio Manager, 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.
BRENDA M. HARWOOD, Assistant Treasurer Assistant Vice President, Assistant Treasurer and Assistant
and 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 Assistant Vice President and Portfolio Manager, Security
(Income Fund) Management Company, LLC; Assistant 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.
GREGORY A. HAMILTON, Assistant Vice President Second Vice President, Security Management Company, LLC,
(Income and Tax-Exempt Funds) Security Benefit Group, Inc. and Security Benefit Life
Insurance Company. Prior to December 1992, First Vice
President and Manager of Investments Division, Mercantile
National Bank.
BARBARA J. DAVISON, Assistant Vice President Compliance Officer, Assistant Vice President and Portfolio
(Cash Fund) Manager, Security Management Company, LLC; Assistant Vice
President, Security Benefit Group, Inc. and Security
Benefit Life Insurance Company. Prior to 1996, Assistant
Vice President-Operations, Security Benefit Life Insurance
Company.
CHRISTOPHER D. SWICKARD, Assistant Secretary Assistant Counsel, Security Benefit Group, Inc. and
Security Benefit Life Insurance Company. Prior to June
1992, student at Washburn University School of Law.
</TABLE>
- --------------------------------------------------------------------------------
* These directors are deemed to be "interested persons" of the Funds under the
Investment Company Act of 1940, as amended.
** These directors serve on the Funds' audit committee, the purpose of which is
to meet with the independent auditors, to review the work of the auditors,
and to oversee the handling by Security Management Company, LLC of the
accounting functions for the Funds.
- --------------------------------------------------------------------------------
The officers of the Funds hold identical offices with each of the other
Funds managed by the Investment Manager, except Ms. Tedder who is also Vice
President of SBL Fund and Security Equity Fund and Mr. Hamilton who is also
Assistant Vice President of SBL Fund and Security Equity Fund. The directors of
the Funds also serve as directors of each of the other Funds managed by the
Investment Manager. See the table under "Investment Management," page 43, for
positions held by such persons with the Investment Manager. Mr. Young and Ms.
Lee
35
<PAGE>
hold identical offices for the Distributor (Security Distributors, Inc.).
Messrs. Cleland and Schmank are also directors and Vice Presidents of the
Distributor and Ms. Harwood is Treasurer of the Distributor.
REMUNERATION OF DIRECTORS AND OTHERS
The Funds' directors, except those directors who are "interested persons" of
the Funds, receive from each Fund an annual retainer of $1,042 and a fee of $133
per meeting, plus reasonable travel costs, for each meeting of the board
attended. In addition, certain directors who are members of the Funds' joint
audit committee receive a fee of $100 per hour and reasonable travel costs for
each meeting of the Funds' audit committee attended.
The Funds do not pay any fees to, or reimburse expenses of, their directors
who are considered "interested persons" of the Fund. The aggregate compensation
paid by the Fund to each of the directors during the fiscal year ended December
31, 1996, and the aggregate compensation paid to each of the directors during
calendar year 1996 by all seven of the registered investment companies to which
the Adviser provides investment advisory services (collectively, the "Security
Fund Complex"), are set forth in the accompanying chart. Each of the directors
is a director of each of the other registered investment companies in the
Security Fund Complex.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
PENSION OR RETIREMENT
AGGREGATE COMPENSATION BENEFITS ACCRUED AS
PART OF FUND EXPENSES ESTIMATED TOTAL
----------------------------- --------------------------------- ANNUAL COMPENSATION FROM
NAME OF TAX- TAX- BENEFITS THE SECURITY FUND
DIRECTOR OF INCOME EXEMPT CASH INCOME EXEMPT CASH UPON COMPLEX, INCLUDING
THE FUND FUND FUND FUND FUND FUND FUND RETIREMENT THE FUNDS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Willis A. Anton, Jr. $1,442 $1,442 $1,442 $ 0 $0 $0 $0 $17,300
Donald A. Chubb, Jr. 1,458 1,458 1,458 0 0 0 0 17,500
John D. Cleland 0 0 0 0 0 0 0 0
Donald L. Hardesty 1,442 1,442 1,442 0 0 0 0 17,300
Penny A. Lumpkin 1,483 1,483 1,483 0 0 0 0 17,800
Mark L. Morris, Jr. 1,483 1,483 1,483 0 0 0 0 17,800
Jeffrey B. Pantages 0 0 0 0 0 0 0 0
Harold G. Worswick* 0 0 0 0 0 0 0 17,800
Hugh L. Thompson 0 0 0 0 0 0 0 0
Jack H. Hamilton 721 721 721 0 0 0 0 8,950
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Each of the Security Income, Tax-Exempt and Cash Funds have accrued deferred
compensation in the amount of $1,483 for Mr. Worswick as of December 31, 1995.
- --------------------------------------------------------------------------------
On January 31, 1997, the Funds' officers and directors (as a group)
beneficially owned 44,346; 229; 532; 0 and 27,615 of Class A shares of Corporate
Bond, Limited Maturity Bond, U.S. Government, Global Aggressive Bond and
Tax-Exempt Funds, respectively, which represented approximately .434%, .046%,
.032%, 0% and 1.181% of the total outstanding Class A shares on that date. Cash
Fund's officers and directors (as a group) beneficially owned 341,669 shares
which represented approximately .776% of the total outstanding shares on January
31, 1997.
HOW TO PURCHASE SHARES
As discussed below, shares of Corporate Bond, Limited Maturity Bond, U.S.
Government, Global Aggressive Bond, High Yield and Tax-Exempt Funds may be
purchased with either a front-end or contingent deferred sales charge. Shares of
Cash Fund are offered by the Fund without a sales charge. Each of the Funds
reserves the right to withdraw all or any part of the offering made by this
prospectus and to reject purchase orders.
As a convenience to investors and to save operating expenses, the Funds do
not issue certificates for Fund shares except upon written request by the
stockholder.
CORPORATE BOND, LIMITED MATURITY BOND, U.S. GOVERNMENT, GLOBAL AGGRESSIVE BOND,
HIGH YIELD AND TAX-EXEMPT FUNDS
Security Distributors, Inc. (the "Distributor"), 700 SW Harrison, Topeka,
Kansas, a wholly-owned subsidiary of Security Benefit Group, Inc., is principal
underwriter for Corporate Bond, Limited Maturity Bond, U.S. Government, Global
Aggressive Bond, High Yield and Tax-Exempt Funds. Investors may purchase shares
of these Funds through authorized dealers who are members of the National
Association of Securities Dealers, Inc. In addition,
36
<PAGE>
banks and other financial institutions may make shares of the Funds available to
their customers. (Banks and other financial institutions that make shares of the
Funds available to their customers in Texas must be registered with that state
as securities dealers.) The minimum initial purchase must be $100 and subsequent
purchases must be $100 unless made through an Accumulation Plan which allows a
minimum initial purchase of $100 and subsequent purchases of $20. (See
"Accumulation Plan," page 42.) An application may be obtained from the
Distributor.
Orders for the purchase of shares of the Funds will be confirmed at an
offering price equal to the net asset value per share next determined after
receipt of the order in proper form by the Distributor (generally as of the
close of the Exchange on that day) plus the sales charge in the case of Class A
shares of the Funds. Orders received by dealers or other firms prior to the
close of the Exchange and received by the Distributor prior to the close of its
business day will be confirmed at the offering price effective as of the close
of the Exchange on that day. Dealers and other financial services firms are
obligated to transmit orders promptly.
ALTERNATIVE PURCHASE OPTIONS
Corporate Bond, Limited Maturity Bond, U.S. Government, Global Aggressive
Bond, High Yield and Tax-Exempt Funds offer two classes of shares:
CLASS A SHARES - FRONT-END LOAD OPTION. Class A shares are sold with a sales
charge at the time of purchase. Class A shares are not subject to a sales charge
when they are redeemed (except that shares sold in an amount of $1,000,000 or
more without a front-end sales charge will be subject to a contingent deferred
sales charge of 1% for one year). See Appendix A for a discussion of "Rights of
Accumulation" and "Statement of Intention," which options may serve to reduce
the front-end sales charge.
CLASS B SHARES - BACK-END LOAD OPTION. Class B shares are sold without a
sales charge at the time of purchase, but are subject to a deferred sales charge
if they are redeemed within five years of the date of purchase. Class B shares
will automatically convert tax-free to Class A shares at the end of eight years
after purchase.
The decision as to which class is more beneficial to an investor depends on
the amount and intended length of the investment. Investors who would rather pay
the entire cost of distribution at the time of investment, rather than spreading
such cost over time, might consider Class A shares. Other investors might
consider Class B shares, in which case 100% of the purchase price is invested
immediately, depending on the amount of the purchase and the intended length of
investment. The Funds will not normally accept any purchase of Class B shares in
the amount of $250,000 or more.
Dealers or others may receive different levels of compensation depending on
which class of shares they sell.
CLASS A SHARES
Class A shares of Corporate Bond, Limited Maturity Bond, U.S. Government,
Global Aggressive Bond, High Yield and Tax-Exempt Funds are offered at net asset
value plus an initial sales charge as follows:
<TABLE>
<CAPTION>
- ----------------------------------------- -----------------------------------------------------------------------
SALES CHARGE
-----------------------------------------------------------------------
APPLICABLE PERCENTAGE
AMOUNT OF PURCHASE PERCENTAGE OF PERCENTAGE OF NET REALLOWABLE
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 these Funds in amounts of $1,000,000 or more
are at net asset value (without a sales charge), but are subject to a contingent
deferred sales charge of 1% in the event of redemption within one year following
purchase. For a discussion of the contingent deferred sales charge, see
"Calculation and Waiver of Contingent Deferred Sales Charges" page 40. The
Distributor will pay a commission to dealers on purchases of
37
<PAGE>
$1,000,000 or more as follows: 1.00% on sales up to $5,000,000, plus .50% on
sales of $5,000,000 or more up to $10,000,000, and .10% on any amount of
$10,000,000 or more.
The Investment Manager may, at its expense, pay a service fee to dealers who
satisfy certain criteria established by the Investment Manager from time to time
relating to the volume of their sales of Class A shares of Tax-Exempt Fund and
certain other Security Funds during prior periods and certain other factors,
including providing to their clients who are stockholders of the Funds certain
services, which include assisting in maintaining records, processing purchase
and redemption requests and establishing shareholder accounts, assisting
shareholders in changing account options or enrolling in specific plans, and
providing shareholders with information regarding the Funds and related
developments. Service fees are paid quarterly and may be discontinued at any
time.
SECURITY INCOME FUND'S CLASS A DISTRIBUTION PLAN
As discussed in the prospectus, each of Corporate Bond, Limited Maturity
Bond, U.S. Government, Global Aggressive Bond and High Yield Funds has a
Distribution Plan for its Class A shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The Plan authorizes these Funds to pay an annual
fee to the Distributor of .25% of the average daily net asset value of the Class
A shares of each Fund to finance various activities relating to the distribution
of such shares of the Funds to investors. These expenses include, but are not
limited to, the payment of compensation (including compensation to securities
dealers and other financial institutions and organizations) to obtain various
administrative services for each Fund. These services include, among other
things, processing new shareholder account applications and serving as the
primary source of information to customers in answering questions concerning
each Fund and their transactions with the Fund. The Distributor is also
authorized to engage in advertising, the preparation and distribution of sales
literature and other promotional activities on behalf of each Fund. The
Distributor is required to report in writing to the Board of Directors of Income
Fund and the board will review at least quarterly the amounts and purpose of any
payments made under the Plan. The Distributor is also required to furnish the
board with such other information as may reasonably be requested in order to
enable the board to make an informed determination of whether the Plan should be
continued.
The Plan became effective on August 15, 1985, and was renewed by the
directors of Income Fund on February 2, 1996, as to each of Corporate Bond and
U.S. Government Funds. The Plan was adopted with respect to Limited Maturity
Bond and Global Aggressive Bond Funds on October 21, 1994 and February 3, 1995,
respectively and was renewed by the directors of Income Fund on February 2,
1996. The Plan was adopted with respect to the High Yield Fund on May 3, 1996.
The Plan will continue from year to year, provided that such continuance is
approved at least annually by a vote of a majority of the Board of Directors of
each Fund, including a majority of the independent directors cast in person at a
meeting called for the purpose of voting on such continuance. The Plan can also
be terminated at any time on 60 days' written notice, without penalty, if a
majority of the disinterested directors or the Class A shareholders vote to
terminate the Plan. Any agreement relating to the implementation of the Plan
terminates automatically if it is assigned. The Plan may not be amended to
increase materially the amount of payments thereunder without approval of the
Class A shareholders of the Funds.
Because all amounts paid pursuant to the Distribution Plan are paid to the
Distributor, the Investment Manager and its officers, directors and employees,
including Messrs. Cleland and Pantages (directors of the Fund), Messrs. Young,
Schmank, Hamilton and Swickard, Ms. Tedder, Ms. Lee and Ms. Harwood (officers of
the Fund), all may be deemed to have a direct or indirect financial interest in
the operation of the Distribution Plan. None of the independent directors have a
direct or indirect financial interest in the operation of the Distribution Plan.
Benefits from the Distribution Plan may accrue to the Funds and their
stockholders from the growth in assets due to sales of shares to the public
pursuant to the Distribution Agreement with the Distributor. Increases in the
Corporate Bond, Limited Maturity Bond, U.S. Government, Global Aggressive Bond
and High Yield Funds' net assets from sales pursuant to its Distribution Plan
and Agreement may benefit shareholders by reducing per share expenses,
permitting increased investment flexibility and diversification of Corporate
Bond, Limited Maturity Bond, U.S. Government, Global Aggressive Bond and High
Yield Funds' assets, and facilitating economies of scale (e.g., block purchases)
in the Funds' securities transactions.
Distribution fees paid by Class A stockholders of Corporate Bond, Limited
Maturity Bond, U.S. Government, and Global Aggressive Bond Funds to the
Distributor under the Plan for the year ended December 31, 1995,
38
<PAGE>
totaled $263,631. Approximately $138,788 of this amount was paid as a service
fee to broker/dealers and $29,413 was spent on promotions. The amount spent on
promotions consists primarily of amounts reimbursed to dealers for expenses
(primarily travel, meals and lodging) incurred in connection with attendance by
their representatives at educational meetings concerning Corporate Bond and U.S.
Government Funds. The Distributor may engage the services of an affiliated
advertising agency for advertising, preparation of sales literature and other
distribution-related activities.
CLASS B SHARES
Class B shares of Corporate Bond, Limited Maturity Bond, U.S. Government,
Global Aggressive Bond, High Yield and Tax-Exempt Funds are offered at net asset
value, without an initial sales charge. With certain exceptions, these Funds may
impose a deferred sales charge on shares redeemed within five years of the date
of purchase. No deferred sales charge is imposed on amounts redeemed thereafter.
If imposed, the deferred sales charge is deducted from the redemption proceeds
otherwise payable to the stockholder. The deferred sales charge is retained by
the Distributor.
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 CONTINGENT DEFERRED
PAYMENT 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 with respect to Class B shares) will
automatically convert on the eighth anniversary of the date such shares were
purchased to Class A shares which are subject to a lower, or in the case of
Tax-Exempt Fund, no distribution fee. This automatic conversion of Class B
shares will take place without imposition of a front-end sales charge or
exchange fee. (Conversion of Class B shares represented by stock certificates
will require the return of the stock certificates to the Investment Manager.)
All shares purchased through reinvestment of dividends and other distributions
with respect to Class B shares ("reinvestment shares") will be considered to be
held in a separate subaccount. Each time any Class B shares (other than those
held in the subaccount) convert to Class A shares, a pro rata portion of the
reinvestment shares held in the subaccount will also convert to Class A shares.
Class B shares so converted will no longer be subject to the higher expenses
borne by Class B shares. Because the net asset value per share of the Class A
shares may be higher or lower than that of the Class B shares at the time of
conversion, although the dollar value will be the same, a shareholder may
receive more or less Class A shares than the number of Class B shares converted.
Under current law, it is the Funds' opinion that such a conversion will not
constitute a taxable event under federal income tax law. In the event that this
ceases to be the case, the Board of Directors will consider what action, if any,
is appropriate and in the best interests of the Class B stockholders.
CLASS B DISTRIBUTION PLAN
Each of Corporate Bond, Limited Maturity Bond, U.S. Government, Global
Aggressive Bond, High Yield and Tax-Exempt Funds bear some of the costs of
selling its Class B shares under a Distribution Plan adopted with respect to its
Class B shares ("Class B Distribution Plan") pursuant to Rule 12b-1 under the
Investment Company Act of 1940 ("1940 Act"). This Plan was adopted by the Board
of Directors of Corporate Bond, U.S. Government and Tax-Exempt Funds on July 23,
1993 and was renewed on February 2, 1996. The Plan was adopted with respect to
Limited Maturity Bond and Global Aggressive Bond Funds on October 21, 1994 and
February 3, 1995, respectively and was renewed on February 2, 1996. The Plan was
adopted with respect to the High Yield Fund on May 3, 1996. The Plan provides
for payments at an annual rate of 1.00% of the average daily net asset value of
Class B shares. Amounts paid by the Funds are currently used to pay dealers and
other firms that make Class B
39
<PAGE>
shares available to their customers (1) a commission at the time of purchase
normally equal to 4.00% of the value of each share sold and (2) a service fee
payable for the first year, initially, and for each year thereafter, quarterly,
in an amount equal to .25% annually of the average daily net asset value of
Class B shares sold by such dealers and other firms and remaining outstanding on
the books of the Funds.
Rules of the National Association of Securities Dealers, Inc. ("NASD") limit
the aggregate amount that each Fund may pay annually in distribution costs for
the sale of its Class B shares to 6.25% of gross sales of Class B shares since
the inception of the Distribution Plan, plus interest at the prime rate plus 1%
on such amount (less any contingent deferred sales charges paid by Class B
shareholders to the Distributor). The Distributor intends, but is not obligated,
to continue to pay or accrue distribution charges incurred in connection with
the Class B Distribution Plan which exceed current annual payments permitted to
be received by the Distributor from the Funds. The Distributor intends to seek
full payment of such charges from the Fund (together with annual interest
thereon at the prime rate plus 1%) at such time in the future as, and to the
extent that, payment thereof by the Funds would be within permitted limits.
Each Fund's Class B Distribution Plan may be terminated at any time by vote
of its directors who are not interested persons of the Fund as defined in the
1940 Act or by vote of a majority of the outstanding Class B shares. In the
event the Class B Distribution Plan is terminated by the Class B stockholders or
the Funds' Board of Directors, the payments made to the Distributor pursuant to
the Plan up to that time would be retained by the Distributor. Any expenses
incurred by the Distributor in excess of those payments would be absorbed by the
Distributor. Distribution fees paid by Class B stockholders of Corporate Bond,
Limited Maturity Bond, U.S. Government, Global Aggressive Bond and Tax-Exempt
Funds to the Distributor under the Plan for the year ended December 31, 1995,
totaled $62,827. The Funds make no payments in connection with the sales of
their Class B shares other than the distribution fee paid to the Distributor.
CALCULATION AND WAIVER OF CONTINGENT DEFERRED SALES CHARGES
Any contingent deferred sales charge imposed upon redemption of Class A
shares (purchased in an amount of $1,000,000 or more) and Class B shares is a
percentage of the lesser of (1) the net asset value of the shares redeemed or
(2) the net cost of such shares. No contingent deferred sales charge is imposed
upon redemption of amounts derived from (1) increases in the value above the net
cost of such shares due to increases in the net asset value per share of the
Fund; (2) shares acquired through reinvestment of income dividends and capital
gain distributions; or (3) Class A shares (purchased in an amount of $1,000,000
or more) held for more than one year or Class B shares held for more than five
years. Upon request for redemption, shares not subject to the contingent
deferred sales charge will be redeemed first. Thereafter, shares held the
longest will be the first to be redeemed.
The contingent deferred sales charge is waived: (1) following the death of a
stockholder if redemption is made within one year after death, (2) upon the
disability (as defined in Section 72(m)(7) of the Internal Revenue Code) of a
stockholder prior to age 65 if redemption is made within one year after the
disability, provided such disability occurred after the stockholder opened the
account; (3) in connection with required minimum distributions in the case of an
IRA, SAR-SEP or Keogh or any other retirement plan qualified under Section
401(a), 401(k) or 403(b) of the Code; and (4) in the case of distributions from
retirement plans qualified under Section 401(a) or 401(k) of the Internal
Revenue Code due to (i) returns of excess contributions to the plan, (ii)
retirement of a participant in the plan, (iii) a loan from the plan (repayment
of loans, however, will constitute new sales for purposes of assessing the
CDSC), (iv) "financial hardship" of a participant in the plan, as that term is
defined in Treasury Regulation Section 1.401(k)-1(d)(2), as amended from time to
time, (v) termination of employment of a participant in the plan, (vi) any other
permissible withdrawal under the terms of the plan. The contingent deferred
sales charge will also be waived in the case of redemptions of shares of the
Funds pursuant to a Systematic Withdrawal Program (refer to page 43 for
details).
ARRANGEMENTS WITH BROKER/DEALERS AND OTHERS
The Investment Manager or Distributor, from time to time, will provide
promotional incentives or pay a bonus to certain dealers whose representatives
have sold or are expected to sell significant amounts of the Funds and/or
certain other Funds managed by the Investment Manager. Such promotional
incentives will include payment for attendance (including travel and lodging
expenses) by qualifying registered representatives (and members of their
families) to sales seminars at luxury resorts within or without the United
States. Bonus compensation may include
40
<PAGE>
reallowance of the entire sales charge and may also include, with respect to
Class A shares, an amount which exceeds the entire sales charge and, with
respect to Class B shares, an amount which exceeds the maximum commission. The
Distributor, or the Investment Manager, may also provide financial assistance to
certain dealers in connection with conferences, sales or training programs for
their employees, seminars for the public, advertising, sales campaigns, and/or
shareholder services and programs regarding one or more of the funds managed by
the Investment Manager. Certain of the promotional incentives or bonuses may be
financed by payments to the Distributor under a Rule 12b-1 Distribution Plan.
The payment of promotional incentives and/or bonuses will not change the price
an investor will pay for shares or the amount that the Funds will receive from
such sale. No compensation will be offered to the extent it is prohibited by the
laws of any state or self-regulatory agency, such as the National Association of
Securities Dealers, Inc. ("NASD"). A Dealer to whom substantially the entire
sales charge of Class A shares is reallowed may be deemed to be an "underwriter"
under federal securities laws.
The Distributor also may pay banks and other financial services firms that
facilitate transactions in shares of the funds for their clients a transaction
fee up to the level of the payments made allowable to dealers for the sale of
such shares as described above. Banks currently are prohibited under the
Glass-Steagall Act from providing certain underwriting or distribution services.
If banking firms were prohibited from acting in any capacity or providing any of
the described services, the Fund's Board of Directors would consider what
action, if any, would be appropriate.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
The Investment Manager or Distributor also may pay a marketing allowance to
dealers who meet certain eligibility criteria. This allowance is paid with
reference to new sales of Fund shares (except shares of Cash Fund) in a calendar
year and may be discontinued at any time. To be eligible for this allowance in
any given year, the dealer must sell a minimum of $2,000,000 of Class A and
Class B shares during that year. The applicable marketing allowance factors are
set forth below.
- -------------------------------------------------------------------------------
APPLICABLE MARKETING
AGGREGATE NEW SALES ALLOWANCE FACTOR*
- -------------------------------------------------------------------------------
Less than $2 million................................. .00%
$2 million but less than $5 million.................. .15%
$5 million but less than $10 million................. .25%
$10 million but less than $15 million................ .35%
$15 million but less than $20 million................ .50%
$20 million or more.................................. .75%
- -------------------------------------------------------------------------------
*The maximum marketing allowance factor applicable per this schedule will be
applied to all new sales in the calendar year to determine the marketing
allowance payable for such year.
- -------------------------------------------------------------------------------
For the calendar year ended December 31, 1995, Legend Equities Corporation
received a marketing allowance in the amount of $11,302.
CASH FUND
Cash fund offers a single class of shares which is offered at net asset
value next determined after an order is accepted. There is no sales charge or
load. The minimum initial investment in Cash Fund is $100 for each account.
Subsequent investments may be made in any amount of $20 or more. Cash Fund
purchases may be made in any of the following ways:
1. BY MAIL.
(a) A check or negotiable bank draft should be sent to:
Security Cash Fund
P.O. Box 2548
Topeka, Kansas 6660l-2548
(b) Make check or draft payable to "Security Cash Fund."
(c) For initial investment include a completed investment application found
at the back of the prospectus.
41
<PAGE>
2. BY WIRE.
(a) Call the Fund to advise of the investment. The Fund will supply an
account number at the time of the initial investment and provide
instructions for having your bank wire federal funds.
(b) Wire federal funds to: Bank IV of Topeka
Attention Security Distributors, Inc.
Topeka, Kansas 66603
Include investor's name and the account number.
(c) For initial investment, send a completed investment application to the
Fund at the above address.
3. THROUGH BROKER/DEALERS. Investors may, if they wish, invest in Cash Fund by
purchasing shares through registered broker/dealers. Such broker/dealers
who process orders on behalf of their customers may charge a fee for their
services. Investments made directly without the assistance of a
broker/dealer are without charge.
Since Cash Fund invests in money market securities which require immediate
payment in federal funds, monies received from the sales of its shares must be
monies held by a commercial bank and be on deposit at one of the Federal Reserve
Banks. A record date for each stockholder's investment is established each
business day and used to distribute the following day's dividend. If federal
funds are received prior to 2:00 p.m. (Central time) the investment will be made
on that day and the investor will receive the following day's dividend. Federal
funds received after 2:00 p.m. on any business day will not be invested until
the following business day. Cash Fund will not be responsible for any delays in
the wire transfer system. All checks are accepted subject to collection at full
face value in United States funds and must be drawn in United States dollars on
a United States bank.
PURCHASES AT NET ASSET VALUE
Class A shares of Corporate Bond, Limited Maturity Bond, U.S. Government,
Global Aggressive Bond, High Yield and Tax-Exempt Funds may be purchased at net
asset value by (1) directors, officers and employees of the Funds, the Funds'
Investment Manager or Distributor; directors, officers and employees of Security
Benefit Life Insurance Company and its subsidiaries; agents licensed with
Security Benefit Life Insurance Company; spouses or minor children of any such
agents; as well as the following relatives of any such directors, officers and
employees (and their spouses): spouses, grandparents, parents, children,
grandchildren, siblings, nieces and nephews; (2) any trust, pension, profit
sharing or other benefit plan established by any of the foregoing corporations
for persons described above; (3) retirement plans where third party
administrators of such plans have entered into certain arrangements with the
Distributor or its affiliates provided that no commission is paid to dealers;
and (4) officers, directors, partners or registered representatives (and their
spouses and minor children) of broker/dealers who have a selling agreement with
the Distributor. Such sales are made upon the written assurance of the purchaser
that the purchase is made for investment purposes and that the securities will
not be transferred or resold except through redemption or repurchase by or on
behalf of the Funds.
Life agents and associated personnel of broker/dealers must obtain a special
application from their employer or from the Distributor, in order to qualify for
such purchases.
Class A shares of Corporate Bond, Limited Maturity Bond, U.S. Government,
Global Aggressive Bond, High Yield and Tax-Exempt Funds may also be purchased at
net asset value when the purchase is made on the recommendation of (i) a
registered investment adviser, trustee or financial intermediary who has
authority to make investment decisions on behalf of the investor; or (ii) a
certified financial planner or registered broker-dealer who either charges
periodic fees to its customers for financial planning, investment advisory or
asset management services, or provides such services in connection with the
establishment of an investment account for which a comprehensive "wrap fee" is
imposed. The Distributor must be notified when a purchase is made that qualifies
under this provision.
ACCUMULATION PLAN
Investors in Corporate Bond, Limited Maturity Bond, U.S. Government, Global
Aggressive Bond, High Yield or Tax-Exempt Fund may purchase shares on a periodic
basis under an Accumulation Plan which provides for an initial investment of
$100 minimum, and subsequent investments of $20 minimum at any time. An
Accumulation Plan is a voluntary program, involving no obligation to make
periodic investments, and is terminable at will. Payments are made by sending a
check to the Distributor who (acting as an agent for the dealer) will purchase
42
<PAGE>
whole and fractional shares of the Funds as of the close of business on the day
such payment is received. A confirmation and statement of account will be sent
to the investor following each investment. Certificates for whole shares will be
issued upon request. No certificates will be issued for fractional shares which
may be withdrawn only by redemption for cash.
Investors may choose to use "Secur-O-Matic" (automatic bank draft) to make
their Fund purchases. There is no additional charge for using Secur-O-Matic. An
application may be obtained from the Funds.
SYSTEMATIC WITHDRAWAL PROGRAM
A Systematic Withdrawal Program may be established by stockholders who wish
to receive regular monthly, quarterly, semiannual or annual payments of $25 or
more. A Program may also be based upon the liquidation of a fixed or variable
number of shares provided that the minimum amount is withdrawn. However, the
Funds do not recommend this (or any other amount) as an appropriate withdrawal.
Shares with a current offering price of $5,000 or more must be deposited with
the Investment Manager acting as agent for the stockholder under the Program.
There is no service charge on the Program as the Investment Manager pays the
costs involved.
Sufficient shares will be liquidated at net asset value to meet the
specified withdrawals. Liquidation of shares may deplete or possibly use up the
investment, particularly in the event of a market decline. Payments cannot be
considered as actual yield or income since part of such payments is a return of
capital and may constitute a taxable event to the stockholder. The maintenance
of a Withdrawal Program concurrently with purchases of additional shares of
Corporate Bond, Limited Maturity Bond, U.S. Government, Global Aggressive Bond,
High Yield or Tax-Exempt Fund would be disadvantageous because of the sales
commission payable in respect to such purchases. During the withdrawal period,
no payments will be accepted under an Accumulation Plan. Income dividends and
capital gains distributions are automatically reinvested at net asset value. If
an investor has an Accumulation Plan in effect, it must be terminated before a
Systematic Withdrawal Program may be initiated.
The stockholder receives confirmation of each transaction showing the source
of the payment and the share balance remaining in the Program. A Program may be
terminated on written notice by the stockholder or the Funds, and it will
terminate automatically if all shares are liquidated or withdrawn from the
account.
A stockholder may establish a Systematic Withdrawal Program with respect to
Class B shares without the imposition of any applicable contingent deferred
sales charge, provided that such withdrawals do not in any 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 40. A Systematic Withdrawal form may be obtained from the
Funds.
INVESTMENT MANAGEMENT
Security Management Company, LLC (the "Investment Manager"), 700 Harrison
Street, Topeka, Kansas, has served as investment adviser to Income Fund,
Tax-Exempt Fund and Cash Fund, respectively, since September 14, 1970, October
7, 1983 and June 23, 1980. The current Investment Advisory Contracts for Income
Fund, Tax-Exempt Fund and Cash Fund, respectively, are dated March 27, 1987,
October 7, 1983 and June 23, 1980, and were renewed by the Funds' Board of
Directors at a regular meeting held February 2, 1996. The Investment Manager
also acts as investment adviser to Security Equity Fund, Security Growth and
Income Fund, Security Ultra Fund and SBL Fund. The Investment Manager is a
limited liability company controlled by its members, Security Benefit Life
Insurance Company and Security Benefit Group, Inc. ("SBG"). SBG is an insurance
and financial services holding company wholly-owned by Security Benefit Life
Insurance Company, 700 Harrison Street, Topeka, Kansas 66636-0001. Security
Benefit Life, a mutual life insurance company with over $15.5 billion of
insurance in force, is incorporated under the laws of Kansas.
Pursuant to the Investment Advisory Contracts, the Investment Manager
furnishes investment advisory, statistical and research services to the Funds,
supervises and arranges for the purchase and sale of securities on behalf of the
Funds, provides for the maintenance and compilation of records pertaining to the
investment advisory
43
<PAGE>
functions, and also makes certain guarantees with respect to the Funds' annual
expenses. The Investment Manager guarantees that the aggregate annual expenses
of the respective Funds (including for any fiscal year, the management fee, but
excluding interest, taxes, brokerage commissions, extraordinary expenses and
Class B distribution fees) shall not for Corporate Bond, Limited Maturity Bond,
U.S. Government, Global Aggressive Bond and High Yield Funds exceed the level of
expenses which the Fund is permitted to bear under the most restrictive expense
limitation imposed by any state in which shares of the Fund are then qualified
for sale and shall not for Tax-Exempt and Cash Funds exceed 1% of the Fund's
average net assets for the year. The Investment Manager will contribute such
funds or waive such portion of its management fee as may be necessary to insure
that the aggregate expenses of the Funds will not exceed the guaranteed maximum.
The most restrictive expense limitation currently imposed by state
securities regulation, of which the Investment Manager is aware, provides that
the aggregate annual expenses of an investment company shall not exceed 2 1/2%
of the first $30 million of the average net assets, 2% of the next $70 million
of the average net assets, and 1 1/2% of the remaining average net assets of the
investment company for any fiscal year, determined at least monthly. For this
limitation, "aggregate annual expenses" include management fees, but exclude
interest, taxes, brokerage commissions, extraordinary expenses (such as
litigation) and distribution fees.
The Investment Manager has retained Lexington Management Corporation (the
"Sub-Adviser") to furnish certain advisory services to Global Aggressive Bond
Fund pursuant to a Sub-Advisory Agreement, effective May 1, 1995. Pursuant to
this agreement, the Sub-Adviser furnishes investment advisory, statistical and
research facilities, supervises and arranges for the purchase and sale of
securities on behalf of Global Aggressive Bond Fund and provides for the
compilation and maintenance of records pertaining to such investment advisory
services, subject to the control and supervision of the Board of Directors of
Security Income Fund and the Investment Manager. For such services, the
Investment Manager pays the Sub-Adviser an amount equal to .35% of the average
net assets of Global Aggressive Bond Fund, computed on a daily basis and payable
monthly. The Sub-Advisory Agreement may be terminated without penalty at any
time by either party on 60 days' written notice and is automatically terminated
in the event of its assignment or in the event that the Investment Advisory
Contract between the Investment Manager and the Fund is terminated, assigned or
not renewed.
The Sub-Adviser is a wholly-owned subsidiary of 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. The Sub-Adviser was
established in 1938 and currently manages over $3.8 billion in assets.
The Sub-Adviser has entered into a Sub-Advisory Agreement with MFR Advisors,
Inc. ("MFR") to provide investment and economic research services to Global
Aggressive Bond Fund, subject to the control and supervision of the Board of
Directors of Security Income Fund. For such services, the Sub-Adviser pays MFR
an amount equal to .15% of the average net assets of Global Aggressive Bond
Fund, computed on a daily basis and payable monthly.
MFR is a subsidiary of Maria Fiorini Ramirez, Inc. ("Ramirez") which was
established in August of 1992 to provide global economic consulting, investment
advisory and broker-dealer services. Ramirez is the successor firm to Maria
Ramirez Capital Consultants, Inc. ("MRCC"). MRCC was formed in April 1990 as a
subsidiary of John Hancock Freedom Securities Corporation and offered in-depth
economic consulting services to clients. MFR currently acts as sub-adviser to
the Lexington Ramirez Global Income Fund and also serves as an institutional
manager for private clients.
For its services, the Investment Manager is entitled to receive compensation
on an annual basis equal to .5% of the average daily closing value of the
Corporate Bond, Limited Maturity Bond, U.S. Government, Tax-Exempt and Cash
Fund's net assets; .60% of the average daily closing value of the High Yield
Fund and .75% of the average daily closing value of Global Aggressive Bond
Fund's net assets, each computed on a daily basis and payable monthly. During
the fiscal years ended December 31, 1995, 1994 and 1993, the Funds paid the
following amounts to the Investment Manager for its services: 1995 - $566,013;
1994 - $560,388; and 1993 - $638,559 for Income Fund; 1995 - $128,492; 1994 -
$146,469; and 1993 - $156,664 for Tax-Exempt Fund; and 1995 - $254,139; 1994 -
$285,251; and 1993 - $238,198 for Cash Fund. For the years ended December 31,
1995, 1994 and 1993, the Investment Manager agreed to limit the total expenses
(including its compensation, but excluding interest, taxes and extraordinary
expenses and Class B distribution fees) of Corporate Bond and U.S. Government
Funds to 1.1% of the average daily net assets of the respective Funds.
Accordingly, the Investment Manager
44
<PAGE>
reimbursed the U.S. Government Fund in the following amounts: 1995 - $16,803;
1994 - $11,684; and 1993 - $10,364; and Corporate Bond Fund: 1995 - $15,121 and
1994 - $4,276. For the years ended December 31, 1995 and 1993, expenses incurred
by Cash Fund exceeded 1% of the average net assets and accordingly, the
Investment Manager reimbursed Cash Fund in the following amounts: 1995 - $12,968
and 1993 - $9,761. For the year ended December 31, 1995 and 1994, expenses
incurred by Tax-Exempt Fund exceeded 1% of the average net assets and
accordingly, the Investment Manager reimbursed Tax-Exempt Fund 1995 - $4,504 and
1994 - $1,505. For the period June 1, 1995 (date of inception) through December
31, 1995, expenses incurred by Global Aggressive Bond Fund exceeded 2.0% of the
average net assets and accordingly, the Investment Manager reimbursed Global
Aggressive Bond Fund $15,172. The Investment Manager agreed to waive all of the
management fees for the Limited Maturity Bond Fund through July 1, 1995 and .40%
of the management fees for Global Aggressive Bond Fund to December 31, 1995. In
addition, the Investment Manager agreed to waive the investment advisory fees of
Limited Maturity Bond, U.S. Government, Global Aggressive Bond and High Yield
Funds for the fiscal year ended December 31, 1996.
Each Fund will pay all of its expenses not assumed by the Investment Manager
or the Distributor including organization expenses; directors' fees; fees and
expenses of custodian; taxes and governmental fees; interest charges; membership
dues; brokerage commissions; reports; proxy statements; costs of stockholder and
other meetings; Class B distribution fees; and legal, auditing and accounting
expenses. Each Fund will also pay for the preparation and distribution of the
prospectus to its stockholders and all expenses in connection with its
registration under federal and state securities laws. Each Fund will pay
nonrecurring expenses as may arise, including litigation affecting it.
The Investment Advisory Contracts between Security Management Company, LLC
and Income Fund, Tax-Exempt Fund and Cash Fund, dated March 27, 1987, October 7,
1983 and June 23, 1980, respectively, expire on April 1, 1997, May 1, 1997 and
June 1, 1997. The contracts are renewable annually by the Funds' Board of
Directors or by a vote of a majority of a Fund's outstanding securities and, in
either event, by a majority of the board who are not parties to the contract or
interested persons of any such party. The contracts provide that they may be
terminated without penalty at any time by either party on 60 days' notice and
are automatically terminated in the event of assignment.
Pursuant to Administrative Services Agreements with the Funds dated April 1,
1987, the Investment Manager also acts as the administrative agent for the Funds
and as such performs administrative functions and the bookkeeping, accounting
and pricing functions for the Funds. For these services the Investment Manager
receives, on an annual basis, a fee of .09% of the average net assets of
Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield and
Tax-Exempt Funds and .045% of the average net assets of Cash and Global
Aggressive Bond Funds, calculated daily and payable monthly. In addition, the
Investment Manager receives, with respect to Global Aggressive Bond Fund, an
annual fee equal to the greater of .10% of its average daily net assets or (i)
$30,000 in the year ended April 29, 1996; (ii) $45,000 in the year ending April
29, 1997; or (iii) $60,000 thereafter. During the fiscal years ended December
31, 1995, 1994 and 1993, the Funds paid the following amounts for administrative
services: 1995 - $117,029; 1994 - $100,870; and 1993 - $114,940 for Income Fund;
1995 - $23,129; 1994 - $26,364; and 1993 - $28,199 for Tax-Exempt Fund; and 1995
- - $22,898; 1994 - $25,703; and 1993 - $21,674 for Cash Fund.
The Investment Manager has arranged for the Sub-Adviser to provide certain
administrative services to the Global Aggressive Bond Fund, pursuant to a
Sub-Administrative Agreement, dated September 10, 1993, as amended effective May
1, 1995. Pursuant to this agreement the Sub-Adviser provides certain accounting
functions, the pricing function and related recordkeeping for Global Aggressive
Bond Fund and certain other mutual funds for which the Investment Manager acts
as fund administrator. For such services the Investment Manager pays the
Sub-Adviser annual compensation which consists of an annual base fee of $9,000
per fund (or series of a fund) per contract year, plus the greater of (i) a
minimum fee of $47,000 per fund (or series of a fund) per contract year or (ii)
an amount equal to the following percentages of the aggregate average daily net
assets of the funds/series:
AVERAGE DAILY NET ASSETS OF THE COMBINED FUNDS/SERIES COMPENSATION
- ----------------------------------------------------- ------------
Less than $500 million.......................... .07%, plus
$500 million but less than $1 billion........... .045%, plus
$1 billion or more.............................. .025%
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<PAGE>
Under the Administrative Services Agreements identified above, the
Investment Manager also acts as the transfer agent for the Funds. As such, the
Investment Manager performs all shareholder servicing functions, including
transferring record ownership, processing purchase and redemption transactions,
answering inquiries, mailing stockholder communications and acting as the
dividend disbursing agent. For these services, the Investment Manager receives
an annual maintenance fee of $8.00 per account, a fee of $1.00 per shareholder
transaction, and a fee of $1.00 ($.50 for Cash Fund) per dividend transaction.
During the fiscal years ended December 31, 1995, 1994, and 1993, the Funds paid
the following amounts for transfer agency services: 1995 - $127,477; 1994 -
$122,198; and 1993 - $115,313 for Income Fund; 1995 - $16,716; 1994 - $18,811;
and 1993 - $19,044 for Tax-Exempt Fund; and 1995 - $152,798; 1994 - $139,429;
and 1993 - $140,300 for Cash Fund.
The total expenses of the Corporate Bond, Limited Maturity Bond, U.S.
Government, Global Aggressive Bond, Tax-Exempt and Cash Funds for the fiscal
year ended December 31, 1995 were $1,028,682; $35,014; $102,085; $50,770;
$231,904; and $503,338; respectively. The expense ratio for fiscal year 1995 was
1.02% and 1.85%, respectively of the average net assets of Class A and B shares
of the Corporate Bond Fund and 1.11% and 1.87%, respectively, of the average net
assets of Class A and Class B shares of U.S. Government Fund. The expense ratio
for the fiscal year was .86%, 2.00% and 1.00% respectively, of the average net
assets of the Class A and Class B shares of Tax-Exempt Fund and Cash Fund. The
expense figures quoted are net of expense reimbursements and by fees paid
indirectly as a result of earnings credits earned on overnight cash balances.
For the period January 17, 1995 (date of inception) to December 31, 1995 and the
period June 1, 1995 (date of inception) to December 31, 1995, the expense ratios
were .84% for Class A shares and 1.71% for Class B shares of Limited Maturity
Bond Fund and 2.00% for Class A shares and 2.75% for Class B shares of Global
Aggressive Bond Fund, respectively. Expense information is not yet available for
the High Yield Fund as it did not begin operations until August of 1996.
The following persons are affiliated with the Funds and also with the
Investment Manager in these capacities:
<TABLE>
<CAPTION>
- --------------------- -------------------------------------------- ----------------------------------------------------
NAME POSITIONS WITH THE FUNDS POSITIONS WITH SECURITY MANAGEMENT COMPANY
- --------------------- -------------------------------------------- ----------------------------------------------------
<S> <C> <C>
James R. Schmank Vice President and Treasurer President (Interim), Treasurer, Chief Fiscal Officer
and Managing Member Representative
John D. Cleland President and Director Senior Vice President and
Managing Member Representative
Jane A. Tedder Vice President Vice President and Senior Portfolio Manager
Mark E. Young Vice President Vice President-Operations
Amy J. Lee Secretary Secretary
Brenda M. Harwood Assistant Treasurer and Assistant Secretary Assistant Vice President, Assistant Treasurer
and Assistant Secretary
Steven M. Bowser Assistant Vice President Assistant Vice President and Portfolio Manager
Gregory A. Hamilton Assistant Vice President Second Vice President
Barbara J. Davison Assistant Vice President Compliance Officer, Assistant Vice President
and Portfolio Manager
- --------------------- -------------------------------------------- ----------------------------------------------------
</TABLE>
PORTFOLIO MANAGEMENT
Corporate Bond, Limited Maturity Bond, U.S. Government, High Yield,
Tax-Exempt and Cash Funds will be managed by the Fixed Income Team of the
Investment Manager consisting of John Cleland, Chief Investment Strategist, Greg
Hamilton, Jane Tedder, Tom Swank, Steve Bowser, Barb Davison and Elaine Miller.
Greg Hamilton, Second Vice President of the Investment Manager has day-to-day
responsibility for managing Corporate Bond, Limited Maturity Bond and Tax-Exempt
Funds and has managed the Funds since January 1996. Steve Bowser, Assistant Vice
President and Portfolio Manager of the Investment Manager, has day-to-day
responsibility for managing U.S. Government Fund since 1995. Tom Swank, Second
Vice President and Portfolio Manager for the Investment Manager has had
day-to-day responsibility for managing High Yield Fund since its inception in
1996.
Greg Hamilton has been in the investment field since 1983. He received his
Bachelor of Arts degree in Business from Washburn University in 1984. Prior to
joining Security Management Company in January of 1993,
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<PAGE>
he was First Vice President, Treasurer and Portfolio Manager with Mercantile
National Bank, Los Angeles, California, from 1990 to 1993. From 1986 to 1990, he
was Managing Director of Consulting Services for Sendero Corporation,
Scottsdale, Arizona. Prior to Sendero Corporation, he was employed as Fixed
Income Research Analyst at Peoples Heritage Savings and Loan from 1983 to 1986.
Mr. Bowser joined the Investment Manager in 1992 and has managed the U.S.
Government Fund since 1995. Prior to joining the Investment Manager, he was
Assistant Vice President and Portfolio Manager with the Federal Home Loan Bank
of Topeka from 1989 to 1992. He was employed at the Federal Reserve Bank of
Kansas City in 1988 and began his career with the Farm Credit System from 1982
to 1987, serving as a Senior Financial Analyst and Assistant Controller. He
graduated with a Bachelor of Science degree from Kansas State University in
1982.
Tom Swank, Portfolio Manager of the Investment Manager, has over ten years
of experience in the investment field. He is a Chartered Financial Analyst.
Prior to joining the Investment Manager in 1992, he was an Investment
Underwriter and Portfolio Manager for U.S. West Financial Services, Inc. from
1986 to 1992. From 1984 to 1986, he was a Commercial Credit Officer for United
Bank of Denver. From 1982 to 1984, he was employed as a Bank Holding Company
examiner for the Federal Reserve Bank of Kansas City - Denver Branch. Mr. Swank
graduated from Miami University in Ohio with a Bachelor of Science degree in
finance in 1982 and earned a Master of Business Administration degree from the
University of Colorado.
Global Aggressive Bond Fund is managed by an investment management team of
the Sub-Adviser and MFR. Denis P. Jamison and Maria Fiorini Ramirez are the lead
managers.
Denis P. Jamison, C.F.A., Senior Vice President, Director Fixed Income
Strategy of the Sub-Adviser is responsible for fixed-income portfolio
management. He is a member of the New York Society of Security Analysts. Mr.
Jamison has more than 20 years investment experience. Prior to joining the
Sub-Adviser in 1981, Mr. Jamison had spent nine years at Arnold Bernhard &
Company, an investment counseling and financial services organization. At
Bernhard, he was a Vice President supervising the security analyst staff and
managing investment portfolios. He is a specialist in government, corporate and
municipal bonds. Mr. Jamison is a graduate of the City College of New York with
a B.A. in Economics.
Maria Fiorini Ramirez, President and Chief Executive Officer of MFR, began
her career as a credit analyst with American Express International Banking
Corporation in 1968. In 1972, she moved to Banco Nazionale De Lavoro in New
York. The following year, she started a ten year association with Merrill Lynch,
serving as Vice President and Senior Money Market Economist. She joined Becker
Paribas in 1984 as Vice President and Senior Money Market Economist before
joining Drexel Burnham Lambert that same year as First Vice President and Money
Market Economist. She was promoted to Managing Director of Drexel in 1986. 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 Funds, the Investment Manager and the Distributor have a written Code of
Ethics which requires all access persons to obtain prior clearance before
engaging in any personal securities transactions. Access persons include
officers and directors of the Funds and Investment Manager and employees that
participate in, or obtain information regarding, the purchase or sale of
securities by the Funds or whose job relates to the making of any
recommendations with respect to such purchases or sales. All access persons must
report their personal securities transactions within ten days of the end of each
calendar quarter. Access persons will not be permitted to effect transactions in
a security if it: (a) is being considered for purchase or sale by one or more of
the Funds; (b) is being purchased or sold by one or more of the Funds; or (c) is
being offered in an initial public offering. In addition, portfolio managers are
prohibited from purchasing or selling a security within seven calendar days
before or after a Fund that he or she manages trades in that security. Any
material violation of the Code of Ethics is reported to the Board of the Funds.
The Board also reviews the administration of the Code of Ethics on an annual
basis.
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<PAGE>
DISTRIBUTOR
Security Distributors, Inc. (the "Distributor"), a Kansas corporation and
wholly-owned subsidiary of Security Benefit Group, Inc., serves as the principal
underwriter for shares of Corporate Bond, Limited Maturity Bond, U.S.
Government, Global Aggressive Bond, High Yield and Tax-Exempt Funds pursuant to
Distribution Agreements dated March 27, 1984, as amended, and October 7, 1983,
respectively. The Distributor also acts as principal underwriter for the
following investment companies: Security Equity Fund, Security Growth and Income
Fund, Security Ultra Fund, Variflex Variable Annuity Account, Variflex LS
Variable Annuity, the Parkstone Variable Annuity Account and Security Varilife
Separate Account.
The Distributor receives a maximum commission on Class A Shares of 4.75% and
allows a maximum discount of 4.0% from the offering price to authorized dealers
on Fund shares sold. The discount is alike for all dealers, but the Distributor
may increase it for specific periods at its discretion. Salespersons employed by
dealers may also be licensed to sell insurance with Security Benefit Life.
The Distributor received gross underwriting commissions on sales of Class A
shares of $83,035, $244,043, and $506,142 for Income Fund and $20,691, $64,008,
and $148,622 for Tax-Exempt Fund and retained net underwriting commissions of
$10,289, $48,307, and $92,668 for Income Fund and $4,103, $13,009, and $15,186
for Tax-Exempt Fund for the fiscal years ended December 31, 1995, 1994 and 1993,
respectively.
The Distributor, on behalf of the Funds, may act as a broker in the purchase
and sale of securities not effected on a securities exchange, provided that any
such transactions and any commissions shall comply with requirements of the
Investment Company Act of 1940 and all rules and regulations of the Securities
and Exchange Commission. The Distributor has not acted as a broker.
Each Fund's Distribution Agreement is renewable annually either by the
Funds' Board of Directors or by a vote of a majority of the Fund's outstanding
securities, and, in either event, by a majority of the board who are not parties
to the agreement or interested persons of any such party. The agreements may be
terminated by either party upon 60 days' written notice.
ALLOCATION OF PORTFOLIO BROKERAGE
Transactions in portfolio securities shall be effected in such manner as
deemed to be in the best interest of each respective Fund. In reaching a
judgment relative to the qualifications of a broker or dealer to obtain the best
execution of a particular transaction, all relevant factors and circumstances
will be taken into account by the Investment Manager, including consideration of
the overall reasonableness of commissions paid to a broker, the firm's general
execution and operational capabilities, and its reliability and financial
condition. The Funds do not anticipate that they will incur a significant amount
of brokerage commissions because fixed income securities are generally traded on
a "net" basis--that is, in principal amount without the addition or deduction of
a stated brokerage commission, although the net price usually includes a profit
to the dealer. The Funds will deal directly with the selling or purchasing
principal without incurring charges for the services of a broker on its behalf
unless it is determined that a better price or execution may be obtained by
utilizing the services of a broker. The Funds also may purchase portfolio
securities in underwritings where the price includes a fixed underwriter's
concession or discount. Money market instruments may be purchased directly from
the issuer at no commission or discount.
Portfolio transactions that require a broker may be directed to brokers who
furnish investment information or research services to the Investment Manager.
Such investment information and research services include advice as to the value
of securities, the advisability of investing in, purchasing or selling
securities and the availability of securities and purchasers or sellers of
securities, and furnishing analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy, and performance of
accounts. Such investment information and research services may be furnished by
brokers in many ways, including: (1) on-line data base systems, the equipment
for which is provided by the broker, that enable registrant to have real-time
access to market information, including quotations; (2) economic research
services, such as publications, chart services and advice from economists
concerning macroeconomic information; and (3) analytical investment information
concerning particular corporations. If a transaction is directed to a broker
supplying such information or services, the commission paid for such transaction
may be in excess of the commission another broker would have charged for
effecting that transaction, provided that the Investment Manager shall have
determined in good faith that the commission is reasonable in relation to the
value of the investment information or the research services provided, viewed in
terms of either that particular transaction or the overall responsibilities of
the
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<PAGE>
Investment Manager with respect to all accounts as to which it exercises
investment discretion. The Investment Manager may use all, none, or some of such
information and services in providing investment advisory services to each of
the mutual funds under its management, including the Funds.
In addition, brokerage transactions may be placed with broker/dealers who
sell shares of the Funds managed by the Investment Manager who may or may not
also provide investment information and research services. The Investment
Manager may, consistent with the NASD Rules of Fair Practice, consider sales of
Fund shares in the selection of a broker/dealer.
Securities held by the Funds may also be held by other investment advisory
clients of the Investment Manager, including other investment companies. In
addition, the Investment Manager's parent company, Security Benefit Life
Insurance Company ("SBL"), may also hold some of the same securities as the
Funds. When selecting securities for purchase or sale for a Fund, the Investment
Manager may at the same time be purchasing or selling the same securities for
one or more of such other accounts. Subject to the Investment Manager's
obligation to seek best execution, such purchases or sales may be executed
simultaneously or "bunched." It is the policy of the Investment Manager not to
favor one account over the other. Any purchase or sale orders executed
simultaneously (which may also include orders from SBL) are allocated at the
average price and as nearly as practicable on a pro rata basis (transaction
costs will also generally be shared on a pro rata basis) in proportion to the
amounts desired to be purchased or sold by each account. In those instances
where it is not practical to allocate purchase or sale orders on a pro rata
basis, then the allocation will be made on a rotating or other equitable basis.
While it is conceivable that in certain instances this procedure could adversely
affect the price or number of shares involved in the Fund's transaction, it is
believed that the procedure generally contributes to better overall execution of
the Funds' portfolio transactions. The Board of Directors of the Funds has
adopted guidelines governing this procedure and will monitor the procedure to
determine that the guidelines are being followed and that the procedure
continues to be in the best interest of the Fund and its stockholders. With
respect to the allocation of initial public offerings ("IPOs"), the Investment
Manager may determine not to purchase such offerings for certain of its clients
(including investment company clients) due to the limited number of shares
typically available to the Investment Manager in an IPO. No brokerage
commissions were paid by the Funds for the years ended December 31, 1995, 1994
and 1993.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Fund is determined as of the close of
regular trading hours on the New York Stock Exchange (normally 3:00 p.m. Central
time) on each day that the Exchange is open for trading, which is Monday through
Friday except for the following dates when the Exchange is closed in observance
of Federal holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
July Fourth, Labor Day, Thanksgiving Day and Christmas Day. The determination is
made by dividing the total value of the portfolio securities of each Fund, plus
any cash or other assets (including dividends accrued but not collected), less
all liabilities, by the number of shares outstanding of the Fund.
Securities listed or traded on a national securities exchange are valued at
the last sale price. If there are no sales on a particular day, then the
securities are valued at the last bid price. All other securities, held by
Corporate Bond, Limited Maturity Bond, U.S. Government, Global Aggressive Bond
and High Yield Funds, for which market quotations are readily available, are
valued on the basis of the last current bid price. If there is no bid price, or
if the bid price is deemed to be unsatisfactory by the Board of Directors, then
the securities shall be valued in good faith by such method as the Board of
Directors determines will reflect fair market value. Valuations of the Funds'
securities are supplied by a pricing service approved by the Board of Directors.
U.S. Government Fund will generally value securities at market value, if
available. If market value is not available, the Fund will value securities,
other than securities with 60 days or less to maturity as discussed below, at
prices based on market quotations for securities of similar type, yield, quality
and duration.
Valuations furnished by the pricing service with respect to Tax-Exempt
Fund's municipal securities are based upon appraisals from recognized municipal
securities dealers derived from information concerning market transactions and
quotations. Securities for which market quotations are readily available are
valued at the last reported sale price, or, if no sales are reported on that
day, at the mean between the latest available bid and asked prices. Securities
for which market quotations are not readily available (which are expected to
constitute the majority of Tax-Exempt Fund's portfolio securities) are valued at
the best available current bid price by the pricing service, considering such
factors as yields or prices of municipal bonds of comparable quality, type of
issue,
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coupon, maturity and rating, indications as to value from dealers, and general
market conditions. The Fund's officers, under the general supervision of the
Board of Directors, will regularly review procedures used by, and valuations
provided by, the pricing service. Tax-Exempt Fund's taxable short-term
securities for which market quotations are readily available will be valued at
market value, which is the last reported sale price or, if no sales are reported
on that day, at the mean between the latest available bid and asked prices
except that securities having 60 days or less remaining to maturity may be
valued at their amortized cost as discussed below.
Cash Fund's securities are valued by the amortized cost valuation technique
which does not take into consideration unrealized gains or losses. The amortized
cost valuation technique involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price Cash Fund would receive if it sold the
instrument.
During periods of declining interest rates, the daily yield on shares of
Cash Fund computed as described above may tend to be higher than a like
computation made by a fund with identical investments utilizing a method of
valuation based upon market prices and estimates of market prices for all of its
portfolio instruments. Thus, if the use of amortized cost by Cash Fund resulted
in lower aggregate portfolio value on a particular day, a prospective investor
in the Fund would be able to obtain a somewhat higher yield than would result
from investment in a fund utilizing solely market values and existing investors
in Cash Fund would receive less investment income. The converse would apply in a
period of rising interest rates.
The use of amortized cost and the maintenance of Cash Fund's per share net
asset value at $1.00 is based on its election to operate under the provisions of
Rule 2a-7 under the Investment Company Act of 1940. As a condition of operating
under that rule, the Fund must maintain a dollar-weighted average portfolio
maturity of 90 days or less, purchase only instruments having remaining
maturities of thirteen months or less, and invest only in securities which are
determined by the Board of Directors to present minimal credit risks and which
are of high quality as determined by any major rating service, or in the case of
any instrument not so rated, considered by the Board of Directors to be of
comparable quality.
The Board of Directors has established procedures designed to maintain Cash
Fund's price per share, as computed for the purpose of sales and redemptions, at
$1.00. These procedures include a review of the Fund's holdings by the Board of
Directors at such intervals as they deem appropriate to determine whether the
Fund's net asset value calculated by using available market quotations deviates
from $1.00 per share based on amortized cost. If any deviation exceeds 1/2 of
1%, the Board of Directors will promptly consider what action, if any, will be
initiated. In the event the Board of Directors determines that a deviation
exists which may result in material dilution or other unfair results to
investors or existing shareholders, they have agreed to take such corrective
action as they regard as necessary and appropriate, including the sale of Cash
Fund instruments prior to maturity to shorten average Fund maturity or
withholding dividends. Cash Fund will use its best efforts to maintain a
constant net asset value per share of $1.00. See "Security Cash Fund," page 14,
and "Dividends and Taxes," page 54. Since dividends from net investment income
will be accrued daily and paid monthly, the net asset value per share of Cash
Fund will ordinarily remain at $1.00, but the Fund's daily dividends will vary
in amount.
U.S. Government Fund and Tax-Exempt Fund may use the amortized cost
valuation technique utilized by Cash Fund for securities with maturities of 60
days or less. In addition, U.S. Government and Tax-Exempt Funds may use a
similar procedure for securities having 60 days or less remaining to maturity
with the value of the security on the 61st day being used rather than the cost.
The Funds will accept orders from dealers on each business day up to 4:30
p.m. (Central time).
HOW TO REDEEM SHARES
A stockholder may redeem shares at the net asset value next determined after
such shares are tendered for redemption. The amount received may be more or less
than the investor's cost, depending upon the market value of the portfolio
securities at the time of redemption.
Shares will be redeemed on request of the stockholder in proper order to the
Investment Manager, which serves as the Funds' transfer agent. A request is made
in proper order by submitting the following items to the Investment Manager: (1)
a written request for redemption signed by all registered owners exactly as the
account is registered, including fiduciary titles, if any, and specifying the
account number and the dollar amount or number of shares to be redeemed; (2) a
guarantee of all signatures on the written request or on the share certificate
or
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accompanying stock power; (3) any share certificates issued for any of the
shares to be redeemed; and (4) any additional documents which may be required by
the Investment Manager for redemption by corporations or other organizations,
executors, administrators, trustees, custodians or the like. Transfers of share
ownership are subject to the same requirements. A signature guarantee is not
required for redemptions of $10,000 or less, requested by and payable to all
stockholders of record for an account, to be sent to the address of record. The
signature guarantee must be provided by an eligible guarantor institution, such
as a bank, broker, credit union, national securities exchange or savings
association. The Investment Manager reserves the right to reject any signature
guarantee pursuant to its written procedures which may be revised in the future.
To avoid delay in redemption or transfer, stockholders having questions should
contact the Investment Manager.
The amount due on redemption, will be the net asset value of the shares next
computed after the redemption request in proper order is received by the
Investment Manager less any applicable deferred sales charge. In addition,
stockholders of Cash Fund will receive any undistributed dividends, including
any dividend declared on the day of the redemption. Payment of the redemption
price will be made by check (or by wire at the sole discretion of the Investment
Manager if wire transfer is requested, including name and address of the bank
and the stockholder's account number to which payment is to be wired) within
seven days after receipt of the redemption request in proper order. The check
will be mailed to the stockholder's registered address (or as otherwise
directed). Remittance by wire (to a commercial bank account in the same name(s)
as the shares are registered) or by express mail, if requested, will be at a
charge of $15, which will be deducted from the redemption proceeds.
Cash Fund offers redemption by check and Corporate Bond, Limited Maturity
Bond, U.S. Government and Tax-Exempt Funds offer redemption by check on Class A
shares only. The Global Aggressive Bond Fund and the High Yield Fund do not
offer redemption by check. If blank checks are requested on the Check Writing
Request form, the Fund will make a supply available. Such checks for Corporate
Bond, Limited Maturity Bond, U.S. Government and Tax-Exempt Funds may be drawn
payable to the order of any payee (not to cash) in any amount of $250, if the
account value is $1,000 or more. Such checks for Cash Fund may be drawn in any
amount of $100 or more. Checks of each of the Funds may be cashed or deposited
like any other check drawn on a bank. When a check is presented to the Fund for
payment, it will redeem sufficient full and fractional shares to cover the
check. Such shares will be redeemed at the price next calculated following
receipt of any check which does not exceed the value of the account. The price
of Fund shares fluctuates from day-to-day and the price at the time of
redemption, by check or otherwise, may be less than the amount invested. Any
check presented for payment which is more than the value of the account will be
returned without payment, marked "Insufficient Funds." Each new stockholder will
initially receive twelve checks free of charge and such additional checks as may
be required. Since the amount available for withdrawal fluctuates daily, it is
not practical for a stockholder to attempt to withdraw the entire investment by
check. The Fund reserves the right to terminate this service at any time with
respect to existing as well as future stockholders. Redemption by check is not
available if any shares are held in certificate form or if shares being redeemed
have not been on the Fund's books for at least 15 days.
When investing in the Funds, stockholders are required to furnish their tax
identification number and to state whether or not they are subject to
withholding for prior underreporting, certified under penalties of perjury as
prescribed by the Internal Revenue Code. To the extent permitted by law, the
redemption proceeds of stockholders who fail to furnish this information will be
reduced by $50 to reimburse for the IRS penalty imposed for failure to report
the tax identification number on information reports.
Payment in cash of the amount due on redemption, less any applicable
deferred sales charge, for shares redeemed will be made within seven days after
tender, except that the Funds may suspend the right of redemption during any
period when trading on the New York Stock Exchange is restricted or such
Exchange is closed for other than weekends or holidays, or any emergency is
deemed to exist by the Securities and Exchange Commission. When a redemption
request is received, the redemption proceeds are deposited into a redemption
account established by the Distributor and the Distributor sends a check in the
amount of redemption proceeds to the stockholder. The Distributor earns interest
on the amounts maintained in the redemption account. Conversely, the Distributor
causes payments to be made to the Funds in the case of orders for purchase of
Fund shares before it actually receives federal funds.
In addition to the foregoing redemption procedure, the Funds repurchase
shares from broker/dealers at the price determined as of the close of business
on the day such offer is confirmed. Dealers may charge a commission on the
repurchase of shares.
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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 61.)
At various times the Funds may be requested to redeem shares for which they
have not yet received good payment. Accordingly, the Funds may delay the mailing
of a redemption check until such time as they have assured themselves that good
payment (e.g., cash or certified check on a U.S. bank) has been collected for
the purchase of such shares, which may take up to 15 days from the purchase
date.
Tax-Exempt Fund's Articles of Incorporation provide that, in order to
minimize expenses, the Fund may, pursuant to a resolution of the Board of
Directors, adopt a procedure whereby it would redeem stockholder accounts in
which there are fewer than 50 shares (or such lesser amount as the board
determines) after having given the stockholders at least 60 days' written notice
and an opportunity to increase the account to at least 50 shares. This procedure
can be implemented only after six months' prior notice to all stockholders that
the procedure will be put into effect. The Board of Directors has no present
plan to implement an involuntary redemption procedure.
TELEPHONE REDEMPTIONS
Stockholders of the Funds may redeem uncertificated shares in amounts up to
$10,000 by telephone request, provided that the stockholder has completed the
Telephone Redemption section of the application or a Telephone Redemption form
which may be obtained from the Investment Manager. The proceeds of a telephone
redemption will be sent to the stockholder at his or her address as set forth in
the application or in a subsequent written authorization. Once authorization has
been received by the Investment Manager, a stockholder may redeem shares by
calling the Funds at (800) 888-2461, extension 3127, on weekdays (except
holidays) between the hours of 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. A stockholder who authorizes telephone redemptions authorizes the
Investment Manager to act upon the instructions of any person identifying
themselves as the owner of the account or the owner's broker. The Investment
Manager has established procedures to confirm that instructions communicated by
telephone are genuine and will be liable for any losses due to fraudulent or
unauthorized instructions if it fails to comply with its procedures. The
Investment Manager's procedures require that any person requesting a redemption
by telephone provide the account registration and number, the owner's tax
identification number, and the dollar amount or number of shares to be redeemed,
and such instructions must be received on a recorded line. Neither the Fund, the
Investment Manager, nor the Distributor will be liable for any loss, liability,
cost or expense arising out of any redemption request provided that the
Investment Manager complied with its procedures. Thus, a stockholder who
authorizes telephone redemptions may bear the risk of loss from a fraudulent or
unauthorized request. The telephone redemption privilege may be changed or
discontinued at any time by the Investment Manager or the Funds.
During periods of severe market or economic conditions, telephone
redemptions may be difficult to implement and stockholders should make
redemptions by mail as described under "How to Redeem Shares," page 50.
HOW TO EXCHANGE SHARES
Pursuant to arrangements with the Distributor (which also acts as principal
underwriter for Security Equity, Growth and Income and Ultra Funds),
stockholders of the Funds may exchange their shares for shares of another of the
Funds, Security Equity Fund, Security Growth and Income Fund or Security Ultra
Fund (the "Security Funds"). Such transactions generally have the same tax
consequences as ordinary sales and purchases and are not tax-free exchanges.
Class A and Class B shares of the Funds may be exchanged for Class A and
Class B shares, respectively, of another of the Security Funds or for shares of
Cash Fund, which offers a single class of shares. Any applicable contingent
deferred sales charge will be calculated from the date of the initial purchase
without regard to the time shares were held in Cash Fund.
Because Cash Fund does not impose a sales charge in connection with sales of
its shares, any exchange of Cash Fund shares acquired through direct purchase or
reinvestment of dividends will be based upon the respective net asset values of
the shares involved next determined after the exchange is accepted, and a sales
charge will be imposed equal to the sales charge that would be applicable if the
stockholder were purchasing shares of the other Security Fund(s) for cash. The
amount of such sales charge will be paid by Cash Fund on
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behalf of the exchanging stockholder directly to the Distributor and the net
asset value of the shares being exchanged will be reduced by a like amount.
Stockholders making such exchanges must provide the Investment Manager with
sufficient information to permit verification of their prior ownership of shares
of one of the other Security Funds. Shares of Cash Fund begin earning dividends
on the day after the date an exchange into such shares is effected. Any such
exchange is subject to the minimum investment and eligibility requirements of
each Fund. No service fee is presently imposed on such an exchange.
Exchanges may be accomplished by submitting a written request to the
Investment Manager, 700 Harrison Street, Topeka, Kansas 66636-0001.
Broker/dealers who process exchange orders on behalf of their customers may
charge a fee for their services. Such fee would be in addition to any of the
sales or other charges referred to above but may be avoided by making exchange
requests directly to the Investment Manager. Due to the high cost of exchange
activity and the maintenance of accounts having a net value of less than $100,
Cash Fund reserves the right to totally convert the account if at any time an
exchange request results in an account being lowered below the $100 minimum.
An exchange of shares, as described above, may result in the realization of
a capital gain or loss for federal income tax purposes, depending on the cost or
other value of the shares exchanged. No representation is made as to whether
gain or loss would result from any particular exchange or as to the manner of
determining the amount of gain or loss. (See "Dividends and Taxes," page 54.)
Before effecting any exchange described herein, the investor may wish to seek
the advice of a financial or tax adviser.
Exchanges of shares of the Funds may be made only in jurisdictions where
shares of the fund being acquired may lawfully be sold. More complete
information about the Security Funds, including charges and expenses, are
contained in the current prospectus describing each Fund. Stockholders are
advised to obtain and review carefully, the applicable prospectus prior to
effecting any exchange. A copy of such prospectus will be given any requesting
stockholder by the Distributor.
The exchange privilege may be changed or discontinued any time at the
discretion of the management of the Funds upon 60 days' notice to stockholders.
It is contemplated, however, that this privilege will be extended in the absence
of objection by regulatory authorities and provided that shares of the various
funds are available and may be lawfully sold in the jurisdiction in which the
stockholder resides.
EXCHANGE BY TELEPHONE
To exchange shares by telephone, a stockholder must have completed either
the Telephone Exchange section of the application or a Telephone Transfer
Authorization form which may be obtained from the Investment Manager.
Authorization must be on file with the Investment Manager before exchanges may
be made by telephone. Once authorization has been received by the Investment
Manager, a stockholder may exchange shares by telephone by calling the Funds at
(800) 888-2461, extension 3127, on weekdays (except holidays) between the hours
of 7:00 a.m. and 6:00 p.m. Central time. Exchange requests received by telephone
after the close of the New York Stock Exchange (normally 3:00 p.m. Central time)
will be treated as if received on the next business day. Shares which are held
in certificate form may not be exchanged by telephone. The telephone exchange
privilege is only permitted between accounts with identical registration. The
Investment Manager has established procedures to confirm that instructions
communicated by telephone are genuine and will be liable for any losses due to
fraudulent or unauthorized instructions, if it fails to comply with its
procedures. The Investment Manager's procedures require that any person
requesting an exchange by telephone provide the account registration and number,
the tax identification number, the dollar amount or number of shares to be
exchanged, and the names of the Security Funds from which and into which the
exchange is to be made, and such instructions must be received on a recorded
line. Neither the Funds, the Investment Manager, nor the Distributor will be
liable for any loss, liability, cost or expense arising out of any request,
including any fraudulent request provided the Investment Manager complied with
its procedures. Thus, a stockholder who authorizes telephone exchanges may bear
the risk of loss from a fraudulent or unauthorized request. This telephone
exchange privilege may be changed or discontinued at any time at the discretion
of the management of the Funds. In particular, the Funds may set limits on the
amount and frequency of such exchanges, in general or as to any individual who
abuses such privilege.
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DIVIDENDS AND TAXES
Each Fund intends to qualify annually and to elect to be treated as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"). To qualify as a regulated investment company, each Fund must,
among other things: (i) derive in each taxable year at least 90% of its gross
income from dividends, interest, payments with respect to certain securities
loans, and gains from the sale or other disposition of stock, securities or
foreign currencies, or other income derived with respect to its business of
investing in such stock, securities, or currencies ("Qualifying Income Test");
(ii) derive in each taxable year less than 30% of its gross income from the sale
or other disposition of certain assets held less than three months (namely (a)
stock or securities, (b) options, futures and forward contracts (other than
those on foreign currencies), and (c) foreign currencies (including options,
futures, and forward contracts on such currencies) not directly related to a
Fund's principal business of investing in stocks or securities (or options and
futures with respect to stocks and securities)); (iii) diversify its holdings so
that, at the end of each quarter of the taxable year, (a) at least 50% of the
market value of the Fund's assets is represented by cash, cash items, U.S.
Government securities, the securities of other regulated investment companies,
and other securities, with such other securities of any one issuer limited for
the purposes of this calculation to an amount not greater than 5% of the value
of the Fund's total assets and 10% of the outstanding voting securities of such
issuer, and (b) not more than 25% of the value of its total assets is invested
in the securities of any one issuer (other than U.S. Government securities or
the securities of other regulated investment companies), or of two or more
issuers which the Fund controls (as that term is defined in the relevant
provisions of the Code) and which are determined to be engaged in the same or
similar trades or businesses or related trades or businesses; and (iv)
distribute at least 90% of the sum of its investment company taxable income
(which includes, among other items, dividends, interest, and net short-term
capital gains in excess of any net long-term capital losses) and its net
tax-exempt interest each taxable year. The Treasury Department is authorized to
promulgate regulations under which foreign currency gains would constitute
qualifying income for purposes of the Qualifying Income Test only if such gains
are directly related to investing in securities (or options and futures with
respect to securities). To date, no such regulations have been issued.
A Fund qualifying as a regulated investment company generally will not be
subject to U.S. federal income tax on its investment company taxable income and
net capital gains (any net long-term capital gains in excess of the net
short-term capital losses), if any, that it distributes to shareholders. Each
Fund intends to distribute to its stockholders, at least annually, substantially
all of its investment company taxable income and any net capital gains.
Generally, regulated investment companies, like the Funds, must distribute
amounts on a timely basis in accordance with a calendar year distribution
requirement in order to avoid a nondeductible 4% excise tax. Generally, to avoid
the tax, a regulated investment company must distribute during each calendar
year, (i) at least 98% of its ordinary income (not taking into account any
capital gains or losses) for the calendar year, (ii) at least 98% of its capital
gains in excess of its capital losses (adjusted for certain ordinary losses) for
the 12-month period ending on October 31 of the calendar year, and (iii) all
ordinary income and capital gains for previous years that were not distributed
during such years. To avoid application of the excise tax, each Fund intends to
make its distributions in accordance with the calendar year distribution
requirement. A distribution, including an "exempt-interest dividend," will be
treated as paid on December 31 of the calendar year if it is declared by a Fund
in October, November or December of that year to shareholders of record on a
date in such a month and paid by the Fund during January of the following
calendar year. Such distributions are taxable to shareholders in the calendar
year in which the distributions are declared, rather than the calendar year in
which the distributions are received.
If, as a result of exchange controls or other foreign laws or restrictions
regarding repatriation of capital, a Fund were unable to distribute an amount
equal to substantially all of its investment company taxable income (as
determined for U.S. tax purposes) within applicable time periods, the Fund would
not qualify for the favorable federal income tax treatment afforded regulated
investment companies, or, even if it did so qualify, it might become liable for
federal taxes on undistributed income. In addition, the ability of a Fund to
obtain timely and accurate information relating to its investments is a
significant factor in complying with the requirements applicable to regulated
investment companies in making tax-related computations. Thus, if a Fund were
unable to obtain accurate information on a timely basis, it might be unable to
qualify as a regulated investment company, or its tax computations might be
subject to revisions (which could result in the imposition of taxes, interest
and penalties).
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It is the policy of Corporate Bond, Limited Maturity Bond, U.S. Government,
High Yield and Tax-Exempt Funds to pay dividends from net investment income
monthly. It is the policy of the Global Aggressive Bond Fund to pay dividends
from net investment income quarterly. It is the policy of the Funds to make
distributions of realized capital gains (if any) in excess of any capital losses
and capital loss carryovers at least once a year. Because Class A shares of the
Funds bear most of the costs of distribution of such shares through payment of a
front-end sales charge, while Class B shares of the Funds bear such costs
through a higher distribution fee, expenses attributable to Class B shares,
generally will be higher and as a result, income distributions paid by the Funds
with respect to Class B shares generally will be lower than those paid with
respect to Class A shares. All dividends and distributions are automatically
reinvested on the payable date in shares of the Fund at net asset value, as of
the record date (reduced by an amount equal to the amount of the dividend or
distribution), unless the Investment Manager is previously notified in writing
by the stockholder that such dividends or distributions are to be received in
cash. A stockholder may request that such dividends or distributions be directly
deposited to the stockholder's bank account. A stockholder who elected not to
reinvest dividends or distributions paid with respect to Class A shares may, at
any time within thirty days after the payment date, reinvest the dividend check
without imposition of a sales charge.
Cash Fund's policy is to declare daily dividends of all of its net
investment income each day the Fund is open for business, increased or decreased
by any realized capital gains or losses. Such dividends are automatically
credited to stockholder accounts. Unless stockholders elect to receive cash,
they will receive such dividends in additional shares on the first business day
of each month at the net asset value on that date. If cash is desired, investors
may indicate so in the appropriate section of the application and checks will be
mailed within five business days after the beginning of the month. The amount of
dividend may fluctuate from day to day. If on any day net realized or unrealized
losses on portfolio securities exceed Cash Fund's income for that day and
results in a decline of net asset value per share below $1.00, the dividend for
that day will be omitted until the net asset value per share subsequently
returns to $1.00 per share.
The Funds will not pay dividends or distributions of less than $25 in cash
but will automatically reinvest them. Distributions of net investment income and
any short-term capital gains by Income Fund or Cash Fund are taxable as ordinary
income whether received in cash or reinvested in additional shares. To the
extent that Tax-Exempt Fund's dividends are derived from interest on its
temporary taxable investments or from an excess of net short-term capital gain
over net long-term capital loss, its dividends are taxable as ordinary income
whether received in cash or reinvested in additional shares. Such dividends do
not qualify for the dividends-received deduction for corporations.
Stockholders will report as long-term capital gains income any realized net
long-term capital gains in excess of any capital loss carryover which is
distributed to them, and designated by the Fund as a capital gain dividend
whether received in cash or reinvested in additional shares, and regardless of
the period of time such shares have been owned by the stockholder. Because Cash
Fund normally will not invest in securities having a maturity of more than one
year, it should not realize any long-term capital gains or losses. Advice as to
the tax status of each year's dividends and distributions will be mailed
annually.
Tax-Exempt Fund intends to qualify to pay "exempt-interest dividends" to its
stockholders. The Fund will be so qualified if, at the close of each quarter of
its taxable year, at least 50% of the value of its total assets consists of
securities on which the interest payments are exempt from federal tax. To the
extent that Tax-Exempt Fund's dividends distributed to stockholders are derived
from earnings on interest income exempt from federal tax and are designated as
"exempt-interest dividends" by the Fund, they will be excludable from a
stockholder's gross income for federal income tax purposes. Tax-Exempt Fund will
inform stockholders annually as to the portion of that year's distributions from
the Fund which constituted "exempt-interest dividends."
To the extent that Tax-Exempt Fund's interest income is attributable to
private activity bonds, dividends allocable to such income, while exempt from
the regular federal income tax, may constitute an item of tax preference for
purposes of the alternative minimum tax. In addition, for corporate stockholders
of Tax-Exempt Fund, exempt interest may comprise part or all of an adjustment to
alternative minimum taxable income.
Stockholders of the Funds who redeem their shares generally will realize
gain or loss upon the sale or redemption (including the exchange of shares for
shares of another fund) which will be capital gain or loss if the shares are
capital assets in the stockholder's hands, and will be long-term capital gain or
loss if the shares have been held for more than one year. Investors should be
aware that any loss realized upon the sale or redemption of shares held for six
months or less will be treated as a long-term capital loss to the extent of any
distribution of
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long-term capital gain to the stockholder with respect to such shares. In
addition, any loss realized on a sale or exchange of shares will be disallowed
to the extent the shares disposed of are replaced within a period of 61 days,
beginning 30 days before and ending 30 days after the date the shares are
disposed of, such as pursuant to the reinvestment of dividends. In such case,
the basis of the shares acquired will be adjusted to reflect the disallowed
loss.
Under certain circumstances, the sales charge incurred in acquiring Class A
shares of a Fund may not be taken into account in determining the gain or loss
on the disposition of those shares. This rule applies in circumstances when
shares of the Fund are exchanged within 90 days after the date they were
purchased and new shares in a regulated investment company are acquired without
a sales charge or at a reduced sales charge. In that case, the gain or loss
recognized on the exchange will be determined by excluding from the tax basis of
the shares exchanged all or a portion of the sales charge incurred in acquiring
those shares. This exclusion applies to the extent that the otherwise applicable
sales charge with respect to the newly acquired shares is reduced as a result of
having incurred the sales charge initially. Instead, the portion of the sales
charge affected by this rule will be treated as an amount paid for the new
shares.
Up to 85% of an individual's Social Security benefits and certain railroad
retirement benefits may be subject to federal income tax. Along with other
factors, total tax-exempt income, including any exempt-interest dividends
received from Tax-Exempt Fund, is used to calculate the portion of Social
Security benefits that is taxed.
Under the Internal Revenue Code, a stockholder may not deduct all or a
portion of interest on indebtedness incurred or continued to purchase or carry
shares of an investment company paying exempt-interest dividends. In addition,
under rules issued by the Internal Revenue Service for determining when borrowed
funds are considered used for the purposes of purchasing or carrying particular
assets, the purchase of shares may be considered to have been made with borrowed
funds even though the borrowed funds are not directly traceable to the purchase
of shares.
A deductible "environmental tax" of 0.12% is imposed on a corporation's
modified alternative minimum taxable income in excess of $2 million. The
environmental tax will be imposed even if the corporation is not required to pay
an alternative minimum tax because the corporation's regular income tax
liability exceeds its minimum tax liability. To the extent that exempt-interest
dividends paid by Tax-Exempt Fund are included in alternative minimum taxable
income, corporate stockholders may be subject to the environmental tax.
Opinions relating to the validity of municipal securities and the exemption
of interest thereon from federal income tax are rendered by bond counsel to the
issuer. Neither the Investment Manager nor Tax-Exempt Fund's counsel makes any
review of proceedings relating to the issuance of municipal securities or the
bases of such opinions.
The Funds are required by law to withhold 31% of taxable dividends and
distributions to stockholders who do not furnish their correct taxpayer
identification numbers, or are otherwise subject to the backup withholding
provisions of the Internal Revenue Code.
Each of Corporate Bond Fund, Limited Maturity Bond Fund, U.S. Government
Fund, Global Aggressive Bond and High Yield Fund (the Series of Income Fund)
will be treated separately in determining the amounts of income and capital
gains distributions. For this purpose, each Fund will reflect only the income
and gains, net of losses of that Fund.
A purchase of shares shortly before payment of a dividend or distribution
would be disadvantageous because the dividend or distribution to the purchaser
would have the effect of reducing the per share net asset value of his or her
shares by the amount of the dividends or distributions. In addition all or a
portion of such dividends or distributions, although in effect a return of
capital, are subject to taxes, which may be at ordinary income tax rates.
OPTIONS, FUTURES AND FORWARD CONTRACTS AND SWAP AGREEMENTS. Certain options,
futures contracts, and forward contracts in which a Fund may invest may be
"Section 1256 contracts." Gains or losses on Section 1256 contracts generally
are considered 60% long-term and 40% short-term capital gains or losses;
however, foreign currency gains or losses arising from certain Section 1256
contracts may be treated as ordinary income or loss. Also, Section 1256
contracts held by a Fund at the end of each taxable year (and at certain other
times as prescribed pursuant to the Code) are "marked to market" with the result
that unrealized gains or losses are treated as though they were realized.
Generally, the hedging transactions undertaken by a Fund may result in
"straddles" for U.S. federal income tax purposes. The straddle rules may affect
the character of gains (or losses) realized by a Fund. In addition, losses
realized by a Fund on positions that are part of a straddle may be deferred
under the straddle rules, rather than
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being taken into account in calculating the taxable income for the taxable year
in which such losses are realized. Because only a few regulations implementing
the straddle rules have been promulgated, the tax consequences of transactions
in options, futures, forward contracts, swap agreements and other financial
contracts to a Fund are not entirely clear. The transactions may increase the
amount of short-term capital gain realized by a Fund which is taxed as ordinary
income when distributed to shareholders.
A Fund may make one or more of the elections available under the Code which
are applicable to straddles. If a Fund makes any of the elections, the amount,
character and timing of the recognition of gains or losses from the affected
straddle positions will be determined under rules that vary according to the
election(s) made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of gains
or losses, defer losses and/or accelerate the recognition of gains or losses
from the affected straddle positions, the amount which must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased as compared to a fund that
did not engage in such hedging transactions.
Because only a few regulations regarding the treatment of swap agreements,
and related caps, floors and collars, have been implemented, the tax
consequences of such transactions are not entirely clear. The Funds intend to
account for such transactions in a manner deemed by them to be appropriate, but
the Internal Revenue Service might not necessarily accept such treatment. If it
did not, the status of a Fund as a regulated investment company might be
affected.
The requirements applicable to a Fund's qualification as a regulated
investment company may limit the extent to which a Fund will be able to engage
in transactions in options, futures contracts, forward contracts, swap
agreements and other financial contracts.
FOREIGN TAXATION. Income received by a Fund from sources within a foreign
country may be subject to withholding and other taxes imposed by that country.
Tax conventions between certain countries and the U.S. may reduce or eliminate
such taxes.
FOREIGN CURRENCY TRANSACTIONS. Under the Code, gains or losses attributable
to fluctuations in exchange rates which occur between the time a Fund accrues
income or other receivables or accrues expenses or other liabilities denominated
in a foreign currency and the time that Fund actually collects such receivables
or pays such liabilities generally are treated as ordinary income or ordinary
loss. Similarly, on disposition of debt securities denominated in a foreign
currency and on disposition of certain futures contracts, forward contracts and
options, gains or losses attributable to fluctuations in the value of foreign
currency between the date of acquisition of the security or contract and the
date of disposition also are treated as ordinary gain or loss. These gains or
losses, referred to under the Code as "Section 988" gains or losses, may
increase or decrease the amount of a Fund's investment company taxable income to
be distributed to its shareholders as ordinary income.
ORIGINAL ISSUE DISCOUNT. Debt securities purchased by a Fund (such as zero
coupon bonds) may be treated for U.S. federal income tax purposes as having
original issue discount. Original issue discount is treated as interest for
federal income tax purposes and can generally be defined as the excess of the
stated redemption price at maturity over the issue price. Original issue
discount, whether or not cash payments actually are received by a Fund, is
treated for federal income tax purposes as income earned by the Fund, and
therefore is subject to the distribution requirements of the Code. Generally,
the amount of original issue discount included in the income of the Fund each
year is determined on the basis of a constant yield to maturity which takes into
account the compounding of accrued interest.
In addition, debt securities may be purchased by a Fund at a discount which
exceeds the original issue discount remaining on the securities, if any, at the
time the Fund purchased the securities. This additional discount represents
market discount for income tax purposes. Treatment of market discount varies
depending upon the maturity of the debt security. Generally, in the case of any
debt security having a fixed maturity date of more than one year from the date
of issue and having market discount, the gain realized on disposition will be
treated as ordinary income to the extent it does not exceed the accrued market
discount on the security (unless the Fund elects for all its debt securities
having a fixed maturity date of more than one year from the date of issue to
include market discount in income in tax years to which it is attributable).
Generally, market discount accrues on a daily basis. For any debt security
having a fixed maturity date of not more than one year from the date of issue,
special rules apply which may require in some circumstances the ratable
inclusion of income attributable to discount at which the bond was acquired as
calculated under the Code. A Fund may be required to capitalize,
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rather than deduct currently, part or all of any net direct interest expense on
indebtedness incurred or continued to purchase or carry any debt security having
market discount (unless the Fund makes the election to include market discount
currently).
OTHER TAXES. The foregoing discussion is general in nature and is not
intended to provide an exhaustive presentation of the tax consequences of
investing in a Fund. Distributions may also be subject to additional state,
local and foreign taxes, depending on each shareholder's particular situation.
Depending upon the nature and extent of a Fund's contacts with a state or local
jurisdiction, the Fund may be subject to the tax laws of such jurisdiction if it
is regarded under applicable law as doing business in, or as having income
derived from, the jurisdiction. Persons who may be "substantial users" (or
"related persons" of substantial users) of facilities financed by private
activity bonds should consult their tax adviser before purchasing Tax-Exempt
Fund shares. (See "Municipal Securities," page 12.) Shareholders are advised to
consult their own tax advisers with respect to the particular tax consequences
to them of an investment in a Fund.
ORGANIZATION
The Articles of Incorporation of Income and Tax-Exempt Funds provide for the
issuance of shares of common stock in one or more classes or series and the
Articles of Cash Fund provide for the issuance of stock in one or more series.
Income Fund has authorized the issuance of an indefinite number of shares of
capital stock of $1.00 par value and currently issues its shares in five series,
Corporate Bond Fund, Limited Maturity Bond Fund, U.S. Government Fund, Global
Aggressive Bond and High Yield Fund. The shares of each Series of Income Fund
represent a pro rata beneficial interest in that Series' net assets and in the
earnings and profits or losses derived from the investment of such assets.
Tax-Exempt and Cash Funds have not issued shares in any additional series at the
present time. Tax-Exempt and Cash Funds have authorized the issuance of an
indefinite number of shares of capital stock of $0.10 par value.
Each of Corporate Bond, Limited Maturity Bond, U.S. Government, Global
Aggressive Bond, High Yield and Tax-Exempt Funds currently issues two classes of
shares which participate proportionately based on their relative net asset
values in dividends and distributions and have equal voting, liquidation and
other rights except that (i) expenses related to the distribution of each class
of shares or other expenses that the Board of Directors may designate as class
expenses from time to time, are borne solely by each class; (ii) each class of
shares has exclusive voting rights with respect to any Distribution Plan adopted
for that class; (iii) each class has different exchange privileges; and (iv)
each class has a different designation. When issued and paid for, the shares of
Corporate Bond, Limited Maturity Bond, U.S. Government, Global Aggressive Bond,
High Yield, Tax-Exempt and Cash Funds will be fully paid and nonassessable by
the Funds. Shares may be exchanged as described above under "Exchange
Privilege," but will have no other preference, conversion, exchange or
preemptive rights. Shares are transferable, redeemable and assignable and have
cumulative voting privileges for the election of directors.
On certain matters, such as the election of directors, all shares of the
Series of Income Fund vote together with each share having one vote. On other
matters affecting a particular Series, such as the investment advisory contract
or the fundamental policies, only shares of that Series are entitled to vote,
and a majority vote of the shares of that Series is required for approval of the
proposal.
The Funds do not generally hold annual meetings of stockholders and will do
so only when required by law. Stockholders may remove directors from office by
vote cast in person or by proxy at a meeting of stockholders. Such a meeting
will be called at the written request of 10% of a Fund's outstanding shares.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND-PAYING AGENT
UMB Bank, N.A., 928 Grand Avenue, Kansas City, Missouri 64106 acts as the
custodian for the portfolio securities of Corporate Bond Fund, Limited Maturity
Bond Fund, U.S. Government Fund, High Yield, Tax-Exempt Fund and Cash Fund.
Chase Manhattan Bank, 4 Chase MetroTech Center, Brooklyn, New York, acts as
custodian for the portfolio securities of Global Aggressive Bond Fund, including
those held by foreign banks and foreign securities depositories which qualify as
eligible foreign custodians under the rules adopted by the Securities and
Exchange Commission. Security Management Company acts as the Funds' transfer and
dividend-paying agent.
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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 each Fund to serve as the independent auditors of the Funds, and as
such, the firm will perform the annual audit of each Fund's financial
statements.
PERFORMANCE INFORMATION
The Funds may, from time to time, include performance information in
advertisements, sales literature or reports to stockholders or prospective
investors. Performance information in advertisements or sales literature may be
expressed as yield for each of the Funds, effective yield for Cash Fund, taxable
equivalent yield for Tax-Exempt Fund and average annual total return and
aggregate total return for Tax-Exempt and Income Funds.
For Cash Fund, the current yield will be based upon the seven calendar days
ending on the date of calculation ("the base period"). The total net investment
income earned, exclusive of realized capital gains and losses or unrealized
appreciation and depreciation, during the base period, on a hypothetical
pre-existing account having a balance of one share will be divided by the value
of the account at the beginning of that period. The resulting figure ("the base
period return") will then be multiplied by 365/7 to obtain the current yield.
Cash Fund's current yield for the seven-day period ended December 31, 1995 was
5.08%.
Cash Fund's effective (or compound) yield for the same period was 5.21%. The
effective yield reflects the compounding of the current yield by reinvesting all
dividends and will be computed by compounding the base period return by adding 1
to the base period return, raising the sum to a power equal to 365 divided by 7,
and subtracting 1 from the result.
The yield of the Fund may be obtained by calling the Fund.
Investors should recognize that investment in Cash Fund is not guaranteed or
insured by any state, federal or government agency or by any other person.
With respect to Income Fund and Tax-Exempt Fund, quotations of yield will be
based on the investment income per share earned during a particular 30-day
period, less expenses per share accrued during the period ("net investment
income") and will be computed by dividing net investment income by the maximum
offering price per share on the last day of the period, according to the
following formula:
YIELD = 2 ((A-B )6
--- + 1 ) - 1)
(( CD )
where A = dividends and interest earned during the period, B = expenses accrued
for the period (net of any reimbursements), C = the average daily number of
shares outstanding during the period that were entitled to receive dividends,
and D = the maximum offering price per share on the last day of the period.
Tax-Exempt Fund's tax-equivalent yield, like yield, is based on a 30-day
period and is computed by dividing that portion of the Fund's yield (computed as
described above) which is tax-exempt by one minus a stated income tax rate and
adding the resulting figure to that portion of the Fund's yield, if any, that is
not tax-exempt.
For the 30-day period ended December 31, 1995, the yield for the Class A
shares of the following Funds was 5.26% for Corporate Bond Fund, 4.86% for
Limited Maturity Bond Fund, 5.68% for the U.S. Government Fund, and 4.60% for
Tax-Exempt Fund. For the same period, the tax equivalent yield for the Class A
shares of Tax-Exempt Fund assuming a 15% income tax rate and a 28% income tax
rate, respectively, was 5.41% and 6.39%. For the 30-day period ended December
31, 1996, the yield for the Class A shares of the High Yield Fund was 7.10%.
For the 30-day period ended December 31, 1995, the yield for the Class B
shares of the following Funds was 4.73% for the Corporate Bond Fund, 4.43% for
Limited Maturity Bond Fund, 5.25% for the U.S. Government Fund, and 3.72% for
Tax-Exempt Fund. For the same period, the tax equivalent yield for the Class B
shares of Tax-Exempt Fund assuming a 15% income tax rate and a 28% income tax
rate, respectively, was 4.38% and 5.17%. For the 30-day period ended December
31, 1996, the yield for the Class B shares of the High Yield Fund was 6.68%.
There is no assurance that a yield quoted will remain in effect for any
period of time. Inasmuch as certain estimates must be made in computing average
daily yield, actual yields may vary and will depend upon such factors as the
type of instruments in the Fund's portfolio, the portfolio quality and average
maturity of such instruments, changes in interest rates and the actual Fund
expenses. Yield computations will reflect the expense limitations described in
this Prospectus under "Investment Manager."
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Quotations of average annual total return will be expressed in terms of the
average annual compounded rate of return of a hypothetical investment in Income
Fund or Tax-Exempt Fund over periods of 1, 5 and 10 years (up to the life of the
Fund), calculated pursuant to the following formula:
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 Fund expenses on an
annual basis, and assume that all dividends and distributions are reinvested
when paid.
For the 1-, 5- and 10-year periods ended December 31, 1995, the average
annual total return for Class A shares of the Corporate Bond Fund was 12.67%,
8.26% and 7.91%, respectively. For the 1-year period ended December 31, 1995,
the average annual total return for Class B shares of Corporate Bond Fund was
12.26%. For the period October 19, 1993 (date of inception) to December 31,
1995, the average annual total return for Class B shares of the Corporate Bond
Fund was -.22%.
For the 1-, 5- and 10-year periods ended December 31, 1995, the average
annual total return for Class A shares of the U.S. Government Fund was 15.99%,
7.67% and 7.86%, respectively. For the 1-year period ended December 31, 1995,
the average annual total return for Class B shares of U.S. Government Fund was
15.94%. For the period October 19, 1993 (date of inception) to December 31,
1995, the average annual total return for Class B shares of the U.S. Government
Fund was 2.40%.
For the 1-, 5- and 10-year periods ended December 31, 1995, the average
annual total return for Class A shares of Tax-Exempt Fund was 10.01%, 6.31% and
6.56%, respectively. For the 1-year period ended December 31, 1995, the average
annual total return for Class B shares of Tax-Exempt Fund was 9.29%. For the
period October 19, 1993 (date of inception) to December 31, 1995, the average
annual total return for Class B shares of Tax-Exempt Fund was -.64%.
For the period January 17, 1995 (date of inception) to December 31, 1995,
the average annual total return for Class A and B shares of Limited Maturity
Bond Fund was 7.63% and 7.18%, respectively.
For the period June 1, 1995 (date of inception) to December 31, 1995, the
average annual total return for Class A and B shares of Global Aggressive Bond
Fund was 2.20% and 1.87%, respectively.
For the period August 5, 1996 (date of inception) to December 31, 1996, the
average annual total return for Class A and B shares of High Yield Fund was .23%
and -.24%, respectively. The aggregate total return for Income and Tax-Exempt
Funds 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 Funds may, from
time to time, include quotations of total return that do not reflect deduction
of the sales load which, if reflected, would reduce the total return data
quoted.
The aggregate total return on an investment made in Class A shares of the
Corporate Bond Fund, the U.S. Government Fund and Tax-Exempt Fund calculated as
described above for the period from December 31, 1985, for the Corporate Bond
Fund, U.S. Government Fund and Tax-Exempt Fund, through December 31, 1995 was
114.1%, 113.7% and 88.8%, respectively. These figures reflect deduction of the
maximum initial sales load.
The aggregate total return on an investment made in Class B shares of the
Corporate Bond Fund, the U.S. Government Fund and Tax-Exempt Fund calculated as
described above for the period October 19, 1993 through December 31, 1995 was
- -.5%, 5.4% and -1.4%, respectively. These figures reflect deduction of the
maximum contingent deferred sales charge.
The aggregate total return on an investment made in Class A and B shares of
the Limited Maturity Bond Fund for the period January 17, 1995 through December
31, 1995 was 7.63% and 7.18%, respectively. These figures reflect deduction of
the maximum initial sales load and deduction of the maximum contingent deferred
sales charge, respectively.
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The aggregate total return on an investment made in Class A and B shares of
the Global Aggressive Bond Fund for the period June 1, 1995 through December 31,
1995 was 2.20% and 1.87%, respectively. These figures reflect deduction of the
maximum initial sales load and deduction of the maximum contingent deferred
sales charge, respectively.
The aggregate total return on an investment made in Class A and B shares of
the High Yield Fund for the period August 5, 1996 (date of inception) through
December 31, 1996, was .10% and -.10%, respectively. These figures reflect
deduction of the maximum initial sales load and deduction of the maximum
contingent deferred sales charge, respectively.
In addition, quotations of aggregate total return will also be calculated
for several consecutive one-year periods expressing the total return as a
percentage increase or decrease in the value of the investment for each year
relative to the ending value for the previous year.
Quotations of yield, tax-equivalent yield, average annual total return and
aggregate total return will reflect only the performance of a hypothetical
investment during the particular time period shown. Such quotations will vary
based on changes in market conditions and the level of the Fund's expenses, and
no reported performance figure should be considered an indication of performance
which may be expected in the future.
In connection with communicating its yield, tax-equivalent yield, average
annual total return or aggregate total return to current or prospective
stockholders, each Fund also may compare these figures to the performance of
other mutual funds tracked by mutual fund rating services or to other unmanaged
indexes which may assume reinvestment of dividends but generally do not reflect
deductions for administrative and management costs. Each Fund will include
performance data for both Class A and Class B shares of the Fund in any
advertisement or report including performance data of the Fund. Such mutual fund
rating services include the following: Lipper Analytical Services; Morningstar,
Inc.; Investment Company Data; Schabacker Investment Management; Wiesenberger
Investment Companies Service; Computer Directions Advisory (CDA); and Johnson
Charts.
RETIREMENT PLANS
Corporate Bond, Limited Maturity Bond, U.S. Government, Global Aggressive
Bond, High Yield and Cash Funds offer tax-qualified retirement plans for
individuals (Individual Retirement Accounts, known as IRAs), several prototype
retirement plans for the self-employed (Keogh plans), pension and profit-sharing
plans for corporations, and custodial account plans for employees of public
school systems and organizations meeting the requirements of Section 50l(c)(3)
of the Internal Revenue Code. Actual documents and detailed materials about the
plans will be provided upon request to the Distributor.
Purchases of Corporate Bond, Limited Maturity Bond, U.S. Government, Global
Aggressive Bond, High Yield and Cash Fund shares under any of these plans are
made at the public offering price next determined after contributions are
received by the Distributor. Shares owned under any of the plans have full
dividend, voting and redemption privileges. Depending upon the terms of the
particular plan, retirement benefits may be paid in a lump sum or in installment
payments over a specified period. There are possible penalties for premature
distributions from such plans.
Security Management Company, LLC is available to act as custodian for the
plans on a fee basis. For IRAs, SIMPLE IRAs, Section 403(b) Retirement Plans,
and Simplified Employee Pension Plans (SEPPs), service fees for such custodial
services currently are: (1) $10 for annual maintenance of the account, and (2)
benefit distribution fee of $5 per distribution. Service fees for other types of
plans will vary. These fees will be deducted from the plan assets. Optional
supplemental services are available from Security Benefit Life Insurance Company
for additional charges.
Retirement investment programs involve commitments covering future years. It
is important that the investment objective and structure of Corporate Bond,
Limited Maturity Bond, U.S. Government, Global Aggressive Bond, High Yield and
Cash Funds be considered by the investors for such plans. Investments in
insurance and annuity contracts also may be purchased in addition to shares of
the Funds.
A brief description of the available tax-qualified retirement plans is
provided below. However, the tax rules applicable to such qualified plans vary
according to the type of plan and the terms and conditions of the plan itself.
Therefore, no attempt is made to provide more than general information about the
various types of qualified plans. Because Tax-Exempt Fund's investment objective
is to obtain a high level of interest income exempt from federal taxes,
Tax-Exempt Fund is not an appropriate investment for retirement plans.
Investors are urged to consult their own attorneys or tax advisers when
considering the establishment and maintenance of any such plans.
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INDIVIDUAL RETIREMENT ACCOUNTS (IRAS)
Individual Retirement Account Custodial Agreements are available to provide
investment in shares of Corporate Bond, Limited Maturity Bond, U.S. Government,
Global Aggressive Bond, High Yield or Cash Fund, or in other Funds in the
Security Group. An individual may initiate an IRA through the Distributor by
executing the custodial agreement and making a minimum initial investment of at
least $100. A $10 annual fee is charged for maintaining the account.
An individual may make a contribution to an IRA each year of up to the
lesser of $2,000 or 100% of earned income under current tax law. If
contributions are also made to an IRA of a nonworking spouse, the maximum is
raised to a total for the two accounts of $2,250; the taxpayers may choose how
to allocate the $2,250 between the accounts, as long as no more than $2,000 is
contributed to either account. If both husband and wife work, each may establish
his or her own IRA and contribute up to the maximum allowed for individuals.
Deductions for IRA contributions are limited for taxpayers who are covered
by an employer-sponsored retirement plan. However, these limitations do not
apply to a single taxpayer with adjusted gross income of $25,000 or less or
married taxpayers with adjusted gross income of $40,000 or less (if they file a
joint tax return). Taxpayers with adjusted gross income less than $10,000 in
excess of these amounts may deduct a portion of their IRA contributions. The
nondeductible portion is calculated by reference to the amount of the taxpayer's
income above $25,000 (single) or $40,000 (married) as a percentage of $10,000.
Contributions must be made in cash no later than April 15 following the
close of the tax year. No annual contribution is permitted for the year in which
the investor reaches age 70 1/2 or any year thereafter.
In addition to annual contributions, total distributions and certain partial
distributions from certain employer-sponsored retirement plans may be eligible
to be reinvested into an IRA if the reinvestment is made within 60 days of
receipt of the distribution by the taxpayer. Such rollover contributions are not
subject to the limitations on annual IRA contributions described above.
SIMPLE IRAS
The Small Business Job Protection Act of 1996 created a new retirement plan,
the Savings Incentive Match Plan for Employees of Small Employers (SIMPLE
Plans). SIMPLE Plan participants must establish a SIMPLE IRA into which plan
contributions will be deposited.
The Investment Manager makes available SIMPLE IRAs to provide investment in
shares of the Funds. Contributions to a SIMPLE IRA may be either salary deferral
contributions or employer contributions. Contributions must be made in cash and
cannot exceed the maximum amount allowed under the Internal Revenue Code. On a
pre-tax basis, up to $6,000 of compensation (through salary deferrals) may be
contributed to a SIMPLE IRA. In addition, employers are required to make either
(1) a dollar-for-dollar matching contribution or (2) a nonelective contribution
to each participant's account each year. In general, matching contributions must
equal up to 3% of compensation, but under certain circumstances, employers may
make lower matching contributions. Instead of the match, employers may make a
nonelective contribution equal to 2% of compensation (compensation for purposes
of any nonelective contribution is limited to $160,000, as indexed).
Distributions from a SIMPLE IRA are (1) taxed as ordinary income; (2)
includable in gross income; and (3) subject to applicable state tax laws.
Distributions prior to age 59 1/2 may be subject to a 10% penalty tax which
increases to 25% for distributions made before a participant has participated in
the SIMPLE Plan for at least two years. An annual fee of $10 is charged for
maintaining the SIMPLE IRA.
PENSION AND PROFIT-SHARING PLANS
Prototype corporate pension or profit-sharing prototype plans meeting the
requirements of Internal Revenue Code Section 401(a) are available. Information
concerning these plans may be obtained from Security Distributors, Inc.
403(B) RETIREMENT PLANS
Employees of public school systems and tax-exempt organizations meeting the
requirements of Internal Revenue Code Section 501(c)(3) may purchase custodial
account plans funded by their employers with shares of Corporate Bond, Limited
Maturity Bond, U.S. Government, Global Aggressive Bond, High Yield or Cash Fund
or
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other Funds in the Security Group in accordance with Code Section 403(b).
Section 403(b) plans are subject to numerous restrictions on the amount that may
be contributed, the persons who are eligible to participate and on the time when
distributions may commence.
SIMPLIFIED EMPLOYEE PENSION PLANS (SEPPS)
A prototype SEPP is available for corporations, partnerships or sole
proprietors desiring to adopt such a plan for purchases of IRAs for their
employees. Employers establishing a SEPP may contribute a maximum of $30,000 a
year to an IRA for each employee. This maximum is subject to a number of
limitations.
FINANCIAL STATEMENTS
The audited financial statements of the Funds (except High Yield Fund),
which are contained in the Funds' Annual Report dated December 31, 1995, and the
unaudited financial statements of the High Yield Fund for the period August 5,
1996 (date of inception) to December 31, 1996, are incorporated herein by
reference. Copies of the Annual Report and the unaudited financial statements of
High Yield Fund are provided to every person requesting the Statement of
Additional Information.
TAX-EXEMPT VS. TAXABLE INCOME
The following table shows the approximate taxable yields for individuals
that are equivalent to tax-exempt yields using the 1996 tax rates contained in
the Internal Revenue Code as modified by the Tax Reform Act of 1986. Beginning
in 1989, federal income brackets will be indexed each year to reflect changes in
the Consumer Price Index. The table illustrates what you would have to earn on
taxable investments to equal a given tax-exempt yield in your income tax
bracket. Locate your income (after deductions and exemptions), then locate your
tax bracket based on joint or single tax filing. Read across to the equivalent
taxable yield you would need to match a given tax-free yield. There is, of
course, no assurance that an investment in Tax-Exempt Fund will result in the
realization of any particular return.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Your
income
tax
If your taxable income is: bracket And a tax-free yield of:
Joint Return Single Return 5% 6% 7% 8% 9% 10% 11% 12%
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996
0 - 40,100 0 - 215.0% 5.88 7.06 8.24 9.41 10.59 11.76 12.94 14.12
40,100 - 96,900 24,000 - 528.00 6.94 8.33 9.72 11.11 12.50 13.89 15.28 16.67
96,900 - 147,700 58,150 - 1231.00 7.25 8.70 10.14 11.59 13.04 14.49 15.94 17.39
147,700 - 263,750 121,300 - 2636.00 7.81 9.38 10.94 12.50 14.06 15.63 17.19 18.75
263,750 and over 263,750 and 39.6 8.28 9.93 11.59 13.25 14.90 16.56 18.21 19.87
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
63
<PAGE>
APPENDIX A
CLASS A SHARES OF CORPORATE BOND, LIMITED MATURITY BOND, U.S. GOVERNMENT, GLOBAL
AGGRESSIVE BOND, HIGH YIELD AND TAX-EXEMPT FUNDS
REDUCED SALES CHARGES
Initial sales charges may be reduced or eliminated for persons or
organizations purchasing Class A shares of Corporate Bond, Limited Maturity
Bond, U.S. Government, Global Aggressive Bond, High Yield and Tax-Exempt Funds
alone or in combination with Class A shares of other Security Funds.
For purposes of qualifying for reduced sales charges on purchases made
pursuant to Rights of Accumulation, a Statement of Intention or Letters of
Intent, the term "Purchaser" includes the following persons: an individual; his
or her spouse and children under the age 21; a trustee or other fiduciary of a
single trust estate or single fiduciary account established for their benefit;
an organization exempt from federal income tax under Section 501(c)(3) or (13)
of the Internal Revenue Code; or a pension, profit-sharing or other employee
benefit plan whether or not qualified under Section 401 of the Internal Revenue
Code.
RIGHTS OF ACCUMULATION
To reduce sales charges on purchases of Corporate Bond Fund, Limited
Maturity Bond Fund, U.S. Government Fund, Global Aggressive Bond Fund, High
Yield or Tax-Exempt Fund, a Purchaser may combine all previous purchases with a
contemplated current purchase of Class A shares of a Fund for the purpose of
determining the sales charge applicable to the current purchase. For example, an
investor who already owns Class A shares of a Fund either worth $30,000 at the
applicable current offering price or purchased for $30,000 and who invests an
additional $25,000, is entitled to a reduced sales charge of 3.75% on the latter
purchase. The Distributor must be notified when a sale takes place which would
qualify for the reduced charge on the basis of previous purchases subject to
confirmation of the investor's holdings through the Fund's records. Rights of
accumulation apply also to purchases representing a combination of the Class A
shares of Corporate Bond Fund, Limited Maturity Bond Fund, U.S. Government Fund,
Global Aggressive Bond Fund, High Yield, Tax-Exempt Fund, Security Growth and
Income, Security Ultra Fund, or Security Equity Fund in those states where
shares of the Funds being purchased are qualified for sale.
STATEMENT OF INTENTION
A Purchaser in Corporate Bond, Limited Maturity Bond, U.S. Government,
Global Aggressive Bond, High Yield or Tax-Exempt Funds may sign a Statement of
Intention, which may be signed within 90 days after the first purchase to be
included thereunder, in the form provided by the Distributor covering purchases
of Corporate Bond Fund, Limited Maturity Bond Fund, U.S. Government Fund, Global
Aggressive Bond Fund, High Yield, Tax-Exempt Fund, Security Equity Fund,
Security Growth and Income Fund, or Security Ultra Fund to be made within a
period of 13 months (or a 36-month period for purchases of $1 million or more)
and thereby become eligible for the reduced front-end sales charge applicable to
the actual amount purchased under the Statement. Five percent of the amount
specified in the Statement of Intention will be held in escrow shares until the
Statement is completed or terminated. The shares so held may be redeemed by the
Fund if the investor is required to pay additional sales charge which may be due
if the amount of purchases made by the investor during the period the Statement
is effective is less than the total specified in the Statement of Intention.
A Statement of Intention may be revised during the 13-month period (or, if
applicable, 36-month period). Additional Class A shares received from
reinvestment of income dividends and capital gains distributions (if any are
realized) are included in the total amount used to determine reduced sales
charges. The Statement is not a binding obligation upon the investor to purchase
or any Fund to sell the full indicated amount. An investor considering signing
such an agreement should read the Statement of Intention carefully. A Statement
of Intention form may be obtained from the Investment Manager.
64
<PAGE>
REINSTATEMENT PRIVILEGE
Stockholders who redeem their Class A shares of Corporate Bond Fund, Limited
Maturity Bond Fund, U.S. Government Fund, Global Aggressive Bond Fund, High
Yield Fund or Tax-Exempt Fund have a one-time privilege (1) to reinstate their
accounts by purchasing shares of the Fund without a sales charge up to the
dollar amount of the redemption proceeds, or (2) to the extent the redeemed
shares would have been eligible for the exchange privilege, to purchase Class A
shares of another of the Funds, Security Equity Fund, Security Ultra Fund, or
Security Growth and Income Fund up to the dollar amount of the redemption
proceeds at a sales charge equal to the additional sales charge, if any, which
would have been applicable had the redeemed shares been exchanged pursuant to
the exchange privilege. Written notice and a check in the amount of the
reinvestment from eligible stockholders wishing to exercise this reinstatement
privilege must be received by the Fund within thirty days after the redemption
request was received (or such longer period as may be permitted by rules and
regulations promulgated under the Investment Company Act of 1940). The net asset
value used in computing the amount of shares to be issued upon reinstatement or
exchange will be the net asset value on the day that notice of the exercise of
the privilege is received. Stockholders making use of the reinstatement
privilege should note that any gains realized upon the redemption will be
taxable while any losses may be deferred under the "wash sale" provision of the
Internal Revenue Code.
65
<PAGE>
December 31, 1996
(Unaudited)
SECURITY INCOME FUND (HIGH YIELD SERIES)
PRINCIPAL/ MARKET VALUE
# OF SHARES SECURITY DESCRIPTION (U.S. DOLLARS)
- -------------------------------------------------------------------------------
CORPORATE BONDS
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 Delta Beverage Group, 9.75% - 2003 102,250
$100,000 Cott Corporation, 9.375% - 2005 103,000
------------------
205,250
BROADCAST MEDIA - 4.4%
$100,000 Heritage Media Corporation, 8.75% - 2006 96,500
$135,000 Allbritton Communications Company 11.50%, 2004 143,100
------------------
239,600
CHEMICALS - 3.3%
$170,000 Envirodyne Industries, Inc., 12.00% - 2000 180,837
COMMUNICATION SERVICES - 9.5%
$170,000 Rogers Cablesystems, 9.625% - 2002 178,075
$135,000 Comcast Corporation, 9.125% - 2006 138,037
$100,000 Century Communications, 9.50% - 2005 102,500
$100,000 Cablevision Systems Corporation, 10.75% - 2004 104,000
------------------
522,612
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%
$100,000 Station Casinos Inc., 10.125% - 2006 100,250
$180,000 Showboat, Inc., 9.25% - 2008 177,075
------------------
277,325
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
HOUSEHOLD PRODUCTS - 1.2%
$100,000 Semi-Tech Corporation, 0% - 2003 65,750
See accompanying notes.
<PAGE>
December 31, 1996
(Unaudited)
PRINCIPAL/ MARKET VALUE
# OF SHARES SECURITY DESCRIPTION (U.S. DOLLARS)
- -------------------------------------------------------------------------------
MANUFACTURING - 3.8%
$100,000 Shop Vac Corporation, 10.625% - 2003 105,250
$100,000 Sequa Corporation, 9.375% - 2003 101,000
------------------
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 - 5.3%
$150,000 Seagull Energy Corporation, 8.625% - 2005 155,625
$135,000 Maxus Energy, 9.50% - 2003 136,688
------------------
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 - 6.2%
$180,000 KIII Communications Corporation, 10.625% - 2002 189,000
$170,000 Golden Books Publishing, 7.65% - 2002 153,425
------------------
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 - 0.9%
$50,000 AK Steel Corporation, 9.125% - 2006 51,375
TEXTILES - 4.4%
$135,000 Westpoint Stevens Inc., 9.375% - 2005 138,713
$100,000 Pillowtex Corporation, 10.00% - 2006 104,000
------------------
242,713
TOBACCO - 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 (cost $4,711,221) - 88.2% 4,849,975
See accompanying notes.
<PAGE>
December 31, 1996
(Unaudited)
PRINCIPAL/ MARKET VALUE
# OF SHARES SECURITY DESCRIPTION (U.S. DOLLARS)
- -------------------------------------------------------------------------------
PREFERRED STOCK
1,750 First Nationwide Bank - 3.6% $ 200,375
Total preferred stock (cost $192,062) - 3.6% 200,375
Total investments (cost $4,903,283) - 91.8% 5,050,350
Cash and other assets, less liabilities - 8.2% 448,756
------------------
Total net assets - 100.0% $5,499,106
==================
<PAGE>
UNAUDITED
BALANCE SHEET
DECEMBER 31, 1996
HIGH YIELD
BOND SERIES
ASSETS
Investments, at value (identified cost $4,903,283).................. $5,050,350
Cash................................................................ 335,499
Receivables:
Fund shares sold................................................ 323
Interest........................................................ 116,259
Security Management Company, LLC................................ 158
---------
Total assets.............................................. $5,502,589
=========
LIABILITIES AND NET ASSETS
Liabilities:
12b-1 distribution plan fees.................................... 2,972
Custodian and transfer agent fees............................... 80
Administration fees............................................. 431
---------
Total liabilities......................................... 3,483
Net Assets:
Paid in capital................................................. 5,387,902
Undistributed net investment income............................. 721
Accumulated undistributed net realized (loss)
on sale of investments and foreign currency
transactions................................................. (36,585)
Net unrealized appreciation in value of investments
and translation of assets and
liabilities in foreign currency.............................. 147,067
---------
Net assets................................................ 5,499,106
---------
Total liabilities and net assets...................... $5,502,589
=========
CLASS "A" SHARES
Capital shares outstanding.......................................... 181,468
Net assets.......................................................... $2,780,234
Net asset value per share
(net assets divided by shares outstanding)....................... 15.32
Add: Selling commission (4.75% of offering price).................. .76
---------
Offering price per share (net asset
value divided by 95.25%)......................................... $16.08
=========
CLASS "B" SHARES
Capital shares outstanding.......................................... 177,479
Net assets.......................................................... $2,718,872
---------
Net asset value per share (net assets
divided by shares outstanding)................................... $15.32
=========
<PAGE>
UNAUDITED
STATEMENT OF OPERATIONS
FOR THE PERIOD AUGUST 5, 1996 (INCEPTION) TO DECEMBER 31, 1996
HIGH YIELD
BOND SERIES
INVESTMENT INCOME:
Interest............................................................ $192,134
EXPENSES:
Management fees..................................................... 12,264
Transfer/maintenance fees........................................... 274
12b-1 distribution plan fees........................................ 13,262
Administration fees................................................. 1,920
Custodian fees...................................................... 462
Professional fees................................................... 3,000
Registration fees................................................... 20,855
Other expenses...................................................... 709
Reimbursement of expenses........................................... (12,264)
---------
Total expenses............................................... 40,482
---------
Net investment income..................................... 151,652
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized (loss) during the period on investments................ (36,585)
---------
Net realized (loss).......................................... (36,585)
Net change in unrealized appreciation during
the period on investments........................................ 147,067
----------
Net unrealized appreciation.................................. 147,067
---------
Net gain.................................................. 110,482
---------
Net increase in net assets resulting from operations.. $262,134
=========
<PAGE>
UNAUDITED
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD AUGUST 5, 1996 (INCEPTION) TO DECEMBER 31, 1996
HIGH YIELD
BOND SERIES
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS:
Net investment income........................................... $151,652
Net realized (loss)............................................. (36,585)
Unrealized appreciation during the period....................... 147,067
---------
Net increase in net assets resulting from operations........ 262,134
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A..................................................... (79,995)
Class B..................................................... (70,935)
---------
Total distributions to shareholders................... (150,930)
CAPITAL SHARE TRANSACTIONS (A):
Proceeds from sale of shares
Class A..................................................... 2,644,208
Class B..................................................... 2,611,381
Dividends reinvested
Class A..................................................... 79,998
Class B..................................................... 70,935
Cost of shares redeemed
Class A..................................................... (48)
Class B..................................................... (18,571)
---------
Net increase from capital share transactions................ 5,387,903
---------
Total increase in net assets.......................... 5,499,106
NET ASSETS:
Beginning of period............................................. ---
End of period $5,499,106
=========
Undistributed net investment income............................. $ 722
=========
(a) Shares issued and redeemed
Shares sold
Class A............................................... 176,201
Class B............................................... 174,028
Dividends reinvested
Class A............................................... 5,270
Class B............................................... 4,677
Shares redeemed
Class A............................................... (3)
Class B............................................... (1,226)
----------
Net increase...................................... 358,947
==========
<PAGE>
UNAUDITED
FINANCIAL HIGHLIGHTS
HIGH YIELD BOND SERIES
----------------------
CLASS A CLASS B
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD(d):
Net asset value beginning of period............. $15.00 $15.00
Net investment income(c)........................ 0.45 0.41
Net realized and unrealized gain................ 0.32 0.32
Total from investment operations................ 0.77 0.73
Dividends (from net investment income).......... (0.45) (0.41)
Distributions (from capital gains).............. --- ---
Return of capital............................... --- ---
Total distributions............................. (0.45) (0.41)
Net asset value end of period................... 15.32 15.32
Total return (a)................................ 5.2% 4.9%
Net assets end of period (thousands)............ $2,780 $2,719
Ratio of expenses to average net assets(b)...... 1.53% 2.26%
Ratio of net income to average net assets(b).... 7.44% 6.71%
Portfolio turnover rate......................... 169% 169%
(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) Fund expenses were reduced by the Investment Manager and expense ratios
absent such reimbursement would have been as follows:
1996
High Yield Class A 2.13%
Class B 2.86%
(c) Net investment income was computed using the average month-end shares
outstanding throughout the period.
(d) 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.
<PAGE>
NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
Security Income Fund is registered under the Investment Company Act of 1940,
as amended, as a diversified, open-end management investment company. 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 Fund in the preparation of its financial statements.
A. SECURITIES VALUATION - Valuations of Income Fund's securities are
supplied by a pricing service approved by the Board of Directors.
Securities listed or traded on a national securities exchange are valued
on the basis of the last sales price. If there are no sales on a
particular day, then the securities are valued at the 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. The Funds'
officers, under the general supervision of the Board of Directors,
regularly review procedures used by, and valuations provided by, the
pricing service.
B. 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.
C. 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 recharacterization of
foreign currency gains and losses.
D. TAXES - The Fund complied with the requirements of the Internal Revenue
Code applicable to regulated investment companies and distributed all of
its taxable net income and net realized gains sufficient to relieve it
from all, or substantially all, federal income, excise and state income
taxes. Therefore, no provision for federal or state income tax is
required.
E. EARNINGS CREDITS - Under the fee schedule with the custodian, the Fund
earns credits based on overnight custody cash balances. These credits
are utilized to reduce related custodial expenses. The custodian expense
disclosed in the Statement of Operations does not reflect the reduction
in expense from the related earnings credits.
<PAGE>
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 .60 of 1% of the average
net assets. The investment advisory contract for Income Fund provides that
the total annual expenses of each Series of the Fund (including management
fees, but excluding interest, taxes, brokerage commissions and extraordinary
expenses) will not exceed the level of expenses which Income Fund is
permitted to bear under the most restrictive expense limitation imposed by
any state in which shares of the Fund are then qualified for sale. SMC
agreed to waive all of the management fees for the High Yield Bond Series
until December 31, 1996.
The Fund has entered into contracts with SMC for transfer agent services and
certain other administrative services which SMC provides to the Fund. SMC is
paid an annual fixed charge per account and shareholder and dividend
transaction fees.
As the administrative agent for the Fund, SMC performs administrative
functions, such as regulatory filings, bookkeeping, accounting and pricing
functions for the Fund. For this service, SMC receives on an annual basis, a
fee of .09% of the average daily net assets.
Income Fund has 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. and the national distributor for Income Fund, received
net underwriting commissions after allowances to brokers and dealers for the
period ended December 31, 1996, in the amounts presented below:
HIGH YIELD SERIES
SDI Underwriter........................... 283
Broker/Dealer............................. 1,529
Certain officers and directors of the Fund 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 August 5, 1996 (inception) to
December 31, 1996, (excluding overnight investments and short-term debt
securities) were as follows:
HIGH YIELD SERIES
Purchases................................... $8,153,564
Proceeds from sales......................... 3,220,588
<PAGE>
4. FEDERAL INCOME TAX MATTERS
The amounts of unrealized appreciation (depreciation) as of December 31,
1996, were as follows:
HIGH YIELD SERIES
Gross unrealized appreciation............... $147,567
Gross unrealized depreciation............... (500)
----------
Net unrealized appreciation................. $147,067
5. TAX STATUS OF DIVIDENDS
Except for tax-exempt dividends, the income dividends paid by the Fund are
taxable as ordinary income on the shareholders' tax returns. None of the
amount taxable as ordinary income for the Fund qualifies for the dividends
received deduction available to corporate shareholders in accordance with
the provisions of the Internal Revenue Code.
<PAGE>
Security
Funds
Annual
Report
December 31, 1995
* Security Income
Fund
- Corporate Bond
Series
- U.S. Government
Series
- Limited Maturity
Bond Series
* Security Tax-
Exempt Fund
* Security Cash
Fund
[SDI Logo]
<PAGE>
PRESIDENT'S LETTER
- --------------------------------------------------------------------------------
February 15, 1996
SECURITY
FUNDS
To Our Shareholders:
We have just completed one of the best years in history for the combined
equity and fixed income markets. The Standard and Poor's 500 Index rose an
amazing 37.58%, and the bellwether thirty-year Treasury bond declined almost two
full percentage points from 7.87% to 5.94% over the course of the year. These
gains are evidence of the rewards reaped by patient investors who stood pat and
even continued to invest during the distressing markets of 1994.*
REASONS BEHIND THE OUTSTANDING PERFORMANCE IN 1995
The Federal Reserve Board deserves much of the credit for the success of
the markets during the year. The board's chairman, Alan Greenspan, has done a
commendable job of assessing the condition of the nation's economy and deftly
applying the brakes in the form of restrictive monetary policy as needed to keep
inflation in check. The resulting slow, steady economic growth and stable prices
were an unbeatable combination. Bond market investors' fears of surging
inflation dissipated, and long-term bond rates fell to levels not seen in
several years.
Technology was the year's primary equity market theme, reflective of an
increased focus on productivity in our nation's factories and offices. We have
seen extraordinary technological gains attributable to rapid development of
computer applications in every field from word processing to assembly line
production. These gains have led to more rapid decision making processes and
substitutions for labor which have in turn reduced costs, contributing to
diminished inflation pressures.
CAN THE EUPHORIA CONTINUE?
At the close of 1995 the nation's politicians were locked in combat over an
attempt to agree on a balanced budget, bringing the federal government to an
abrupt halt and creating immeasurable noise in the financial markets. Investors
must keep their eyes focused on the big picture--the economic fundamentals which
continue to augur well for the long-term outlook. Inflation remains well under
control, the economy continues to move at a slow, sustainable rate of growth,
and the Federal Reserve Open Market Committee is likely to recognize that
additional cuts in short-term interest rates are justified.
We believe that earnings comparisons for the fourth quarter of 1995 will,
on balance, be sufficient to support current market valuations. Earnings are not
likely to be as robust as they were a year ago; however, they should be strong
enough to sustain the markets at their present levels. There will be some
earnings disappointments, as there always are, generating daily volatility in
individual stock prices which we have come to consider routine. As we move
through the first half of 1996, the focus will be on the extended slow growth of
the economy and the ability of corporations to continue productivity improvement
in order to generate earnings gains in that slow-growth climate.
[Upper Right Hand Corner, Photo of John Cleland]
JOHN CLELAND
THE LONGER TERM GLOBAL VIEW
In the United States we see an opportunity for the economy to benefit from
the national movement toward less government involvement in all aspects of our
lives. It is clearly possible that in the future the government will get a
smaller share of our total resources, with the greater part going toward
economic growth. The implications of this are enormously positive for financial
markets--lower interest rates due to a smaller government hand in our
pocketbook. Having a greater share of available resources dedicated to economic
growth bodes well for sustained rises in stock and bond prices.
Globally the same trends are at work. European countries are beginning to
recognize that their social welfare systems have grown beyond the capacity of
the people to support them. Growth of the free market system and the elimination
of communism as a viable political structure are strong pluses for global
economic growth. Reallocation of resources to the free market system improves
the lives of citizens and further enhances economic growth and positive
financial markets.
In the following pages our portfolio managers review the factors
influencing the performance of their respective funds in 1995. They also present
their management philosophies and outlooks for the year ahead. Our goal is to
provide you with positive investment results over time and the highest quality
service in the industry. We invite your questions and comments at any time.
Sincerely,
/s/ John D. Cleland
John D. Cleland
President, Security Funds
*Although we have just experienced a very rewarding year, investors should
remember that past performance is not a guarantee of future results, and that
you may have a gain or a loss at redemption.
1
<PAGE>
MANAGERS' COMMENTARY
------------------------------------------------------------------------
SECURITY February 15, 1996
FUNDS
SECURITY INCOME FUND
CORPORATE BOND SERIES
U.S. GOVERNMENT SERIES
LIMITED MATURITY BOND SERIES
SECURITY TAX-EXEMPT FUND
SECURITY CASH FUND
Dear Shareholder:
What a difference a year makes! In 1994 bonds took the worst beating since the
Depression years, but investors who kept long term goals in mind rode out the
storm. In the first five months of 1995 those patient investors had recouped all
of their 1994 losses, and enjoyed continuing gains throughout the balance of the
year. Both the taxable and tax-exempt sectors of the fixed income markets
performed extremely well as the thirty-year Treasury bond declined in yield
almost two full percentage points.
Perhaps the single most important factor behind the 1995 bond market rally was
investors' realization that inflation was indeed under control. The Federal
Reserve's Open Market Committee remained steadfast in their fight, holding short
term interest rates at or above 5-1/2% throughout the year. Long term bonds once
again became attractive, and investor demand drove their prices higher.
PERFORMANCE OF THE CORPORATE BOND SERIES
The Corporate Bond Series with its long term orientation capitalized on rising
bond prices, returning 18.2% to its shareholders in 1995.* As usual the bulk of
the portfolio was invested in corporate issues, with generally 5% to 10% of the
assets in government or federal agency securities for liquidity purposes. The
largest percentage of corporate bonds was rated in the single-A category,
because these issues tend to outperform higher rated bonds in rising markets.
The best performing sector of the corporate bond market was industrials,
represented in our portfolio by names such as Lockheed Corporation, Ralston
Purina Company, and Southwest Airlines Company. Industrials as a group were up
nearly 23% in 1995. Financial issues were excellent performers as well, rising
over 20% during the year. This sector of our portfolio includes banks such as
BankAmerica Corporation and Wachovia Corporation, finance companies like General
Motors Acceptance Corporation, and brokerage firms including Lehman Brothers
Holdings, Inc. and Bear Stearns.
The utility sector of the corporate bond market also did very well, increasing
over 22% in value. Our portfolio was underweighted in this area because of our
fear of the impact of changing regulatory restrictions. International issues
were strong performers in the index, but again were underrepresented in our
portfolio because of prospectus limitations which allowed us to invest outside
of the United States only in Canadian issues.
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
CORPORATE BOND SERIES
12-31-95
CORPORATE LEHMAN BROTHERS LEHMAN BROTHERS MUTUAL FUND
BOND SERIES CORPORATE BOND INDEX A RATED CORPORATE INDEX
----------- -------------------- -----------------------
March 1986 $10,048 $10,812 $10,806
June 1986 $10,176 $10,953 $10,953
September 1986 $10,396 $11,195 $11,198
December 1986 $10,571 $11,651 $11,651
March 1987 $10,763 $11,929 $11,928
June 1987 $10,785 $11,650 $11,644
September 1987 $10,546 $11,227 $11,200
December 1987 $10,994 $11,948 $11,940
March 1988 $11,257 $12,478 $12,471
June 1988 $11,322 $12,617 $12,588
September 1988 $11,549 $12,914 $12,887
December 1988 $11,705 $13,049 $12,988
March 1989 $11,835 $13,206 $13,136
June 1989 $12,533 $14,252 $14,183
September 1989 $12,571 $14,438 $14,368
December 1989 $12,872 $14,888 $14,826
March 1990 $12,882 $14,758 $14,700
June 1990 $13,351 $15,334 $15,298
September 1990 $13,133 $15,331 $15,297
December 1990 $13,717 $15,939 $15,915
March 1991 $14,238 $16,619 $16,626
June 1991 $14,498 $16,950 $16,965
September 1991 $15,245 $17,944 $17,946
December 1991 $15,929 $18,891 $18,888
March 1992 $15,882 $18,753 $18,754
June 1992 $16,473 $19,567 $19,598
September 1992 $17,150 $20,491 $20,523
December 1992 $17,354 $20,532 $20,554
March 1993 $18,420 $21,569 $21,577
June 1993 $19,101 $22,289 $22,279
September 1993 $19,940 $23,064 $23,072
December 1993 $19,734 $23,029 $23,021
March 1994 $18,710 $22,219 $22,176
June 1994 $18,055 $21,869 $21,777
September 1994 $17,999 $22,029 $21,940
December 1994 $18,103 $22,126 $22,024
March 1995 $18,959 $23,436 $23,541
June 1995 $19,965 $25,179 $25,596
September 1995 $20,345 $25,773 $26,285
December 1995 $21,402 $27,045 $27,825
$10,000 OVER TEN YEARS
This chart references a change in Corporate Bond Series' Index. The Series' new
index is the Lehman Brothers Mutual Fund, A Rated Corporate Index. We believe
the makeup of this index more closely resembles the composition of Corporate
Bond Series' portfolio.
This chart assumes a $10,000 investment in Class A shares of Corporate Bond
Series on December 31, 1985, and reflects deduction of the 4.75% sales load. On
December 31, 1995, the value of your investment in the Series' Class A shares
(with dividends reinvested) would have grown to $21,402. By comparison, the same
$10,000 investment would have grown to $27,045 based on the performance of the
Lehman Corporate Bond Index and to $27,825 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.
The Lehman Brothers Corporate Bond Index includes all publicly issued,
fixed-rate, non-convertible investment grade dollar denominated, and
SEC-registered corporate debt. 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, 1995
CLASS A SHARES CLASS B SHARES
1 Year 12.67% 1 Year 12.26%
5 Years 8.26% Since Inception -0.22%
10 Years 7.91% (10-19-93)
The performance data above represents past performance which is not predictive
of future results. For Class A shares these figures reflect deduction of the
maximum sales charge of 4.75%. For Class B shares the total return includes
deduction of the maximum contingent deferred sales charge.
- --------------------------------------------------------------------------------
2
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MANAGERS' COMMENTARY
------------------------------------------------------------------------
SECURITY February 15, 1996
FUNDS
The Corporate Bond Series in times of rising bond prices will frequently
maintain an average duration up to one year longer than its benchmark index. We
carefully monitor economic activity and other information that affects long-term
interest rates. When we believe it is appropriate, we adjust the duration and
quality to best position the portfolio for current market conditions.
PERFORMANCE OF THE U.S. GOVERNMENT SERIES
The U.S. Government Series had a particularly stellar year in 1995, returning
21.9% to its shareholders.* This Series, like the Corporate Bond Series,
capitalized on the benefits gained from long maturity bonds. The decision was
made early in the year to extend the maturities of many of the portfolio
holdings out beyond twenty years. Now at year's end, the timeliness of this
decision is apparent.
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
U.S. GOVERNMENT SERIES
12-31-95
LEHMAN BROTHERS
U.S. GOVERNMENT SERIES GOVERNMENT BOND INDEX
---------------------- ---------------------
March 1986 $9,864.07 $10,866.04
June 1986 $9,910.88 $11,009.41
September 1986 $10,287.67 $11,224.60
December 1986 $10,384.37 $11,531.09
March 1987 $10,562.63 $11,666.80
June 1987 $10,515.27 $11,463.43
September 1987 $10,389.52 $11,154.62
December 1987 $10,773.69 $11,783.90
March 1988 $11,033.09 $12,172.76
June 1988 $11,212.67 $12,287.96
September 1988 $11,389.33 $12,495.40
December 1988 $11,445.82 $12,613.03
March 1989 $11,565.41 $12,747.04
June 1989 $12,229.29 $13,772.22
September 1989 $12,390.30 $12,886.01
December 1989 $12,797.95 $14,408.29
March 1990 $12,787.69 $14,229.26
June 1990 $13,226.12 $14,726.60
September 1990 $13,397.18 $14,848.98
December 1990 $14,051.97 $15,665.14
March 1991 $14,401.92 $16,004.21
June 1991 $14,643.82 $16,220.62
September 1991 $15,339.74 $17,147.12
December 1991 $15,990.08 $18,066.76
March 1992 $15,792.61 $17,750.73
June 1992 $16,256.51 $18,453.17
September 1992 $16,612.21 $19,363.36
December 1992 $16,779.51 $19,372.16
March 1993 $17,553.72 $20,247.08
June 1993 $18,225.25 $20,832.98
September 1993 $18,827.45 $21,508.90
December 1993 $18,748.77 $21,436.41
March 1994 $18,013.67 $20,790.85
June 1994 $17,579.45 $20,552.41
September 1994 $17,448.78 $20,639.58
December 1994 $17,521.79 $20,713.59
March 1995 $18,292.01 $21,688.27
June 1995 $19,635.99 $23,033.88
September 1995 $20,196.41 $23,440.04
December 1995 $21,351.36 $24,510.73
$10,000 OVER TEN YEARS
This chart assumes a $10,000 investment in Class A shares of U.S. Government
Series on December 31, 1985, and reflects deduction of the 4.75% sales load. On
December 31, 1995, the value of your investment in the Series' Class A shares
(with dividends reinvested) would have grown to $21,351. By comparison, the same
$10,000 investment would have grown to $24,511 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, 1995
CLASS A SHARES CLASS B SHARES
1 Year 15.99% 1 Year 15.94%
5 Years 7.67% Since Inception 2.40%
10 Years 7.86% (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.
- --------------------------------------------------------------------------------
The bonds in this portfolio are all of the highest credit quality, as all are
issued by the U.S. Government, its agencies or instrumentalities.** At the close
of December about 28% of the assets were invested in GNMA mortgage pass-through
securities, on which the timely payment of principal and interest is guaranteed.
These issues were carefully selected to attempt to minimize prepayment risk.
Slightly over 22% of the holdings were U. S. Treasury bonds with maturities
ranging from thirteen to twenty-one years. The balance of the portfolio holdings
were issues of other federal agencies with maturities from twenty to thirty
years.
As with the Corporate Bond Series, the performance of the Government Series is
dependent on economic conditions and interest rate movements. We continue to
monitor reports carefully in order to adjust the holdings in the portfolio to
best serve the long-term investment objectives of its shareholders.
PERFORMANCE OF THE LIMITED MATURITY BOND SERIES
On January 17, 1995, the Limited Maturity Bond Series was introduced to fill a
gap that existed in our family of fixed income funds. With maturities generally
under ten years, it is an intermediate term fund with less volatility than
longer term funds, but with greater return potential under normal circumstances
than money market funds. Indeed, we noted at year end that the Limited Maturity
Bond Series' net asset value range from low to high was only half that of the
Corporate Bond Series. However, its total return of 13% was over 70% of the
longer fund's and well over twice that of the Security Cash Fund.*
This portfolio was managed in a "laddered" style; that is, the assets were
divided so that approximately 10% will mature in each of the next ten years.
This allows the portfolio manager to reinvest each year at then current interest
rates, which reduces volatility by spreading the maturity risk.
The assets of the Limited Maturity Bond Series were spread among U.S. Treasury
and government agency securities as well as investment grade and high yield
corporate bonds. The corporate
3
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MANAGERS' COMMENTARY
------------------------------------------------------------------------
SECURITY February 15, 1996
FUNDS
portion included issues in the financial, industrial, and utility sectors as
well as U. S. dollar-denominated Canadian bonds. The Treasury and agency
holdings made up nearly 32% of the portfolio, investment grade corporates 63%,
and high yield corporates the remaining 5%.
PERFORMANCE OF THE SECURITY TAX-EXEMPT FUND
Yields on municipal securities generally followed the thirty-year Treasury bond
yield's dramatic descent throughout the year. Tax-exempt issues underperformed
taxables to some extent, however, as politicians kept tax reform proposals
active in the news media. Despite lagging the taxable sector a bit, the Security
Tax-Exempt Fund returned 15.5% to its shareholders, the second-best total return
in its history.* All of the income distributions during the year are exempt from
Federal taxes; the portfolio contained no issues in 1995 that were subject to
the alternative minimum tax.
- --------------------------------------------------------------------------------
LIMITED MATURITY BOND SERIES
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1995
CLASS A SHARES
Since Inception 1-17-95 7.63%*
CLASS B SHARES
Since Inception 1-17-95 7.18%*
*The percentage amounts are from inception and are not annualized.
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.
- --------------------------------------------------------------------------------
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
LIMITED MATURITY BOND SERIES
12-31-95
LEHMAN BROTHERS
INTERMEDIATE TERM
LIMITED MATURITY BOND SERIES CORPORATE BOND INDEX
---------------------------- --------------------
January 1995 $9,552 $10,192
February 1995 $9,749 $10,464
March 1995 $9,798 $10,533
April 1995 $9,933 $10,695
May 1995 $10,301 $11,104
June 1995 $10,359 $11,194
July 1995 $10,309 $11,180
August 1995 $10,404 $11,319
September 1995 $10,488 $11,424
October 1995 $10,524 $11,559
November 1995 $10,659 $11,752
December 1995 $10,762 $11,901
$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, 1995, the value of your investment in the
Series' Class A shares (with dividends reinvested) would have grown to $10,762.
By comparison, the same $10,000 investment would have grown to $11,901 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.
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
TAX-EXEMPT FUND
12-31-95
LEHMAN BROTHERS
TAX-EXEMPT FUND MUNICIPAL BOND INDEX
--------------- --------------------
March 1986 $10,141 $10,540
June 1986 $10,286 $10,758
September 1986 $10,591 $10,995
December 1986 $10,972 $11,350
March 1987 $11,269 $11,583
June 1987 $10,736 $11,454
September 1987 $10,608 $11,280
December 1987 $10,827 $11,795
March 1988 $11,147 $12,279
June 1988 $11,413 $12,404
September 1988 $11,637 $12,671
December 1988 $11,937 $12,736
March 1989 $11,729 $12,885
June 1989 $12,172 $13,730
September 1989 $12,165 $13,946
December 1989 $12,463 $14,385
March 1990 $12,478 $14,357
June 1990 $12,756 $14,857
September 1990 $12,781 $15,009
December 1990 $13,235 $15,482
March 1991 $13,513 $16,061
June 1991 $13,753 $16,407
September 1991 $14,273 $17,236
December 1991 $14,788 $18,054
March 1992 $14,793 $18,001
June 1992 $15,299 $18,770
September 1992 $15,625 $19,619
December 1992 $15,866 $19,532
March 1993 $16,340 $20,474
June 1993 $16,964 $21,070
September 1993 $17,572 $21,659
December 1993 $17,822 $21,706
March 1994 $16,537 $21,113
June 1994 $16,659 $20,948
September 1994 $16,641 $21,165
December 1994 $16,437 $21,131
March 1995 $17,449 $22,258
June 1995 $17,623 $23,654
September 1995 $18,015 $24,141
December 1995 $18,877 $25,159
$10,000 OVER TEN YEARS
This chart assumes a $10,000 investment in Class A shares of Tax-Exempt Fund on
December 31, 1985, and reflects deduction of the 4.75% sales load. On December
31, 1995, the value of your investment in the Fund's Class A shares (with
dividends reinvested) would have grown to $18,877. By comparison, the same
$10,000 investment would have grown to $25,693 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.
4
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MANAGERS' COMMENTARY
------------------------------------------------------------------------
SECURITY February 15, 1996
FUNDS
- --------------------------------------------------------------------------------
TAX-EXEMPT FUND
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1995
CLASS A SHARES CLASS B SHARES
1 Year 10.01% 1 Year 9.29%
5 Years 6.31% Since Inception -0.64%
10 Years 6.56% (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.
- --------------------------------------------------------------------------------
Among the strongest sectors in the tax-exempt market during the year were
electric revenue and water and sewer revenue issues. Our portfolio had
approximately 40% of its assets invested in these combined sectors throughout
the year. Utility-related tax- exempt bonds appeal to investors because they
"pay their own way" -- that is, the revenue streams from utility bill payments
provide the funds to repay the bondholders. Another sector that is similarly
defeased and that also performed well in 1995 is transportation, consisting
primarily of turnpike and toll road revenue bonds.
The duration of the Security Tax-Exempt Fund stayed quite close to that of its
benchmark index throughout the year, ending December at 7.79 years. Maturities
of individual issues in the portfolio ranged generally from ten to thirty years.
As with our taxable funds, the longer maturities in the fund tend to appreciate
more rapidly in climates of falling interest rates. The average quality of the
bonds ranged from A+ to AA most of the year.
We will continue to closely monitor tax reform proposals in the months ahead.
Many municipal bond analysts feel that we will probably have tax reform of some
sort, but that the likelihood of a pure flat tax is low. In the meantime,
uncertainty is keeping prices on tax-exempt bonds weaker than those on taxables,
and this creates attractive buying opportunities for municipal bond investors.
PERFORMANCE OF SECURITY CASH FUND
Money market funds in 1995 provided interest rates that were competitive with
those of many longer-maturity bonds. Security Cash Fund returned 5.0% for the
year on a high quality portfolio that invested only in top-tier commercial paper
and government agency securities.***
The main tool of the Federal Reserve Open Market Committee in its fight against
inflation is short-term interest rates. Through-out the year they kept the
target rate on Federal Funds, the excess funds banks loan each other overnight,
between 5.50% and 5.75%. This kept interest rates on short-term investments used
in money market funds at very attractive levels, considering that inflation
remained around 3% throughout the year.
Security Cash Fund, like other money market funds, must invest its assets in
accordance with strict regulatory requirements. These regulations require that
we invest at least 95% of the Fund's assets in commercial paper that is rated in
the highest bracket by standard rating agencies. These include names such as
Coca Cola, General Electric, Wal-Mart, Winn Dixie Stores, Inc., and other major
corporations. Additionally we purchase short-term paper issued by agencies of
the Federal government, considered to be of the highest credit quality. As with
other money market funds, safety of principal is our utmost concern.
LOOKING AHEAD TO 1996
The fixed income team at Security Management Company is optimistic about bonds
in the months ahead. Although we don't expect a repeat of the outstanding
returns achieved in 1995, we believe there is still room for interest rates to
decline further. At this writing, the debate over a balanced Federal budget is
unresolved, and short term interest rates remain at historically high levels.
Once uncertainty over these two issues is removed, we believe bonds could stage
another rally taking long-term interest rates again below 6%. In our view it is
possible that rates could even go another 50 basis points lower to 5-1/2%.
Combining this upward price movement with a steady coupon interest stream, we
believe total returns for 1996 will once again reward patient long-term
investors.
Jane Tedder
Senior Portfolio Manager
Steve Bowser
Portfolio Manager
U.S. Government Series
*Performance figures are based on Class A shares and do not reflect deduction of
the sales charge.
**Although the securities purchased by the U.S. Government Series are guaranteed
as to the timely payment of principal and interest by the U. S. Government, its
agencies or instrumentalities, the shares of the Series itself are not so
guaranteed.
***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.
5
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MANAGERS' COMMENTARY
------------------------------------------------------------------------
SECURITY February 15, 1996
FUNDS
SECURITY INCOME FUND
GLOBAL AGGRESSIVE BOND SERIES
[MFR ADVISORS, INC. AND LEXINGTON MANAGEMENT CORPORATION]
SUBADVISORS - MFR ADVISORS, INC., AND LEXINGTON MANAGEMENT CORPORATION
PORTFOLIO MANAGERS, MARIA FIORINI RAMIREZ AND DENIS JAMISON
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
GLOBAL AGGRESSIVE BOND SERIES
12-31-95
GLOBAL AGGRESSIVE LEHMAN BROTHERS
BOND SERIES GLOBAL BOND INDEX
----------- -----------------
$10,000 $10,000
June 1995 $9,486 $10,069
July 1995 $9,619 $10,140
August 1995 $9,610 $9,907
September 1995 $9,851 $10,131
October 1995 $9,920 $10,245
November 1995 $9,969 $10,355
December 1995 $10,185 $10,508
$10,000 OVER THE LIFE OF THE SERIES
The Lehman Brothers Global Bond Index includes local currency-denominated
sovereign debt of 19 countries plus European Currency Units-denominated debt.
Investment cannot directly by made in an index.
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, 1995, the value of your investment in the
Series' Class A shares (with dividends reinvested) would have grown to $10,220.
By comparison, the same $10,000 investment would have grown to $10,508 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.
- --------------------------------------------------------------------------------
GLOBAL AGGRESSIVE BOND SERIES
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1995
CLASS A SHARES
Since Inception (6-1-95) 2.20%*
CLASS B SHARES
Since Inception (6-1-95) 1.87%*
*The percentage amounts are from inception and are not annualized.
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.
- --------------------------------------------------------------------------------
Dear Shareholder:
The Global Aggressive Bond Series enjoyed an excellent first seven months. The
Series boasts a 7.3% total return for its seven months of operation in 1995.*
The Series is off to a fast start in the new year and we are optimistic about
the prospects for all of 1996.
Investors in the Series haven't seen a decline in its income despite a drop in
U. S. interest rates. Yields overseas, particularly in certain transitional
economies, are much higher than those at home. The Series ended 1995 with a
standardized yield well in excess of 9%. We believe this level will be
maintained in the quarters ahead.
THE GLOBAL VIEW
Global bond investing often requires taking some less traveled roads. Over the
years, money managers have sold global and international bond funds as a way of
diversifying investment portfolios and reducing overall risk. They reasoned that
bond price movements in one country--the United States, for example--would move
independently of those in another country, such as Germany. Unfortunately, the
ongoing globalization of the world's economies, the ease with which capital
moves, and the flow of readily accessible financial information help to ensure
greater correlation of returns among the world's developed bond markets.
Therefore, we think investors need to expand their investment parameters and
seek out markets that offer the possibility of noncorrelated returns.
Fortunately, many of these markets offer high current income and profit
potential as well. Of course, many of these markets also present additional
risks.
PORTFOLIO POSITIONING IN 1995
The Global Aggressive Bond Series currently stresses bonds in certain
transitional markets, particularly in Eastern Europe and South Africa. We think
the U.S. bond market, and by extension most of the world's developed markets,
are fully priced. Meanwhile the economies of Eastern Europe and South Africa
need to attract capital and are offering yields and investor incentives to
assure that the capital keeps flowing.
6
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MANAGERS' COMMENTARY
------------------------------------------------------------------------
SECURITY February 15, 1996
FUNDS
We closed 1995 with major positions in Portugal, Poland, and South Africa.
Together they totaled 26% of the Series' assets. All three economies have strong
growth potential, relatively stable currencies, and governments committed to
fiscal restraint as well as pro-investor economic policies. Moreover, their bond
markets currently provide huge income advantages over those of the traditional
developed markets.
EMPHASIS ON DIVERSIFICATION
Aside from our concentration on transitional economies, the Series seeks to
strike a balance between developed market and LDC (less developed country) debt.
This diversification tends to mitigate volatility. Although the past volatility
of the Series is not necessarily indicative of future volatility, over the last
seven months the price volatility of the Series has been comparable to that of
ten-year U. S. Treasury notes.
We thank our investors for their continued loyalty and support.
Maria Fiorini Ramirez
Portfolio Manager
Denis P. Jamison
Portfolio Manager
*This performance figure is based on Class A shares, does not reflect deduction
of the sales charge and is not annualized.
Investing in foreign countries may involve risks, such as currency fluctuations
and political instability, not associated with investing exclusively in the U.S.
7
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
December 31, 1995
SECURITY INCOME FUND
CORPORATE BOND SERIES
PRINCIPAL MARKET
AMOUNT CORPORATE BONDS VALUE
- --------------------------------------------------------------------------------
AEROSPACE & DEFENSE - 5.4%
$4,900,000 Lockheed Corporation,
7.875% - 2023...................... $ 5,396,125
AIR TRANSPORTATION - 5.0%
4,500,000 Southwest Airlines Company, 7.875%
- 2007............................ 4,995,000
BANKS - 13.0%
4,000,000 BankAmerica Corporation, 7.20% - 2006 4,255,000
3,500,000 Norwest Financial, Inc., 6.75% - 2005 3,640,000
4,800,000 Wachovia Corporation, 6.80% - 2005 5,004,000
-----------
12,899,000
BROKERS, DEALERS & SERVICES - 4.5%
4,000,000 Lehman Brothers Holdings, Inc.,
8.50% - 2007....................... 4,500,000
COMPUTER EQUIPMENT - 5.0%
4,500,000 IBM Corporation, 7.50% - 2013....... 4,921,875
DRUG STORES - 5.3%
4,800,000 Rite Aid Corporation,
7.625% - 2005...................... 5,226,000
FINANCE - 9.0%
4,700,000 Ford Motor Credit Company,
6.85% - 2000....................... 4,858,625
4,000,000 General Motors Acceptance Corporation,
6.625% - 2005...................... 4,095,000
-----------
8,953,625
FOOD & BEVERAGES - 9.7%
4,500,000 Ralston Purina Company, 7.875% - 2025 4,921,875
4,500,000 Seagram Company, Ltd., 7.00% - 2008 4,719,375
-----------
9,641,250
INFORMATION PROCESSING - 4.2%
4,000,000 First Data Corporation, 6.75% - 2005 4,175,000
PAPER & LUMBER PRODUCTS - 10.2%
4,500,000 Georgia Pacific Company,
9.125% - 2022...................... 5,045,625
4,600,000 International Paper Products,
7.625% - 2007...................... 5,123,250
-----------
10,168,875
PRINCIPAL MARKET
AMOUNT CORPORATE BONDS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
TELECOMMUNICATIONS EQUIPMENT - 3.4%
3,000,000 Comsat Corporation, 8.125% - 2004... 3,360,000
UTILITIES - ELECTRIC & GAS - 4.8%
$4,750,000 Pacific Gas & Electric Company,
6.25% - 2003....................... $ 4,767,813
-----------
Total corporate bonds -
Corporate Bond Series
(cost $74,268,608) - 79.5%......... 79,004,563
GOVERNMENT & GOVERNMENT
AGENCY SECURITIES
------------------------
CANADIAN GOVERNMENT AGENCIES- 5.1%
4,750,000 Province of Ontario, 7.00% - 2005... 5,058,750
U.S. GOVERNMENT AGENCIES - 6.7%
1,500,000 Federal Home Loan Mortgage
Corporation, 7.974% - 2005 1,560,240
5,000,000 Federal National Mortgage Association,
6.85% - 2005....................... 5,105,400
-----------
6,665,640
U.S. TREASURY NOTES - 6.7%
6,500,000 6.25% - 2023........................ 6,686,484
-----------
Total government & government
agency securities - Corporate Bond
Series (cost $17,826,571) - 18.5%.. 18,410,874
-----------
Total investments - Corporate Bond
Series (cost $92,095,179) - 98.0%.. 97,415,437
Cash and other assets, less
liabilities - 2.0%................. 2,028,902
-----------
Total net assets - Corporate Bond
Series - 100.0%.................... $99,444,339
===========
SECURITY INCOME FUND
U.S. GOVERNMENT SERIES
U.S. GOVERNMENT & GOVERNMENT
AGENCY SECURITIES
---------------------------
FEDERAL NATIONAL MORTGAGE
ASSOCIATION- 47.3%
$ 500,000 8.20% - 2016....................... $ 606,335
1,000,000 8.10% - 2019....................... 1,211,240
1,000,000 9.05% - 2021....................... 1,077,110
1,250,000 7.93% - 2025....................... 1,514,700
500,000 8.28% - 2025....................... 629,735
-----------
5,039,120
See accompanying notes.
- --------------------------------------------------------------------------------
8
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
December 31, 1995
SECURITY INCOME FUND
U.S. GOVERNMENT SERIES (CONTINUED)
PRINCIPAL U.S. GOVERNMENT & GOVERNMENT MARKET
AMOUNT AGENCY SECURITIES (CONTINUED) VALUE
- --------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION - 27.6%
$ 680,665 9.50% - 2009....................... $ 726,787
5,103 11.00% - 2015...................... 5,681
908,946 8.50% - 2024....................... 947,225
700,217 7.75% - 2025....................... 724,940
525,170 7.50% - 2034....................... 540,261
-----------
2,944,894
U.S. TREASURY BONDS - 22.9%
600,000 8.75% - 2008....................... 714,312
1,000,000 7.25% - 2016....................... 1,141,270
500,000 7.50% - 2016....................... 586,240
-----------
2,441,822
-----------
Total investments -U.S. Government
Series (cost $9,528,784) - 97.8% .. 10,425,836
Cash and other assets, less
liabilities - 2.2%................. 236,409
-----------
Total net assets - U.S. Government
Series - 100.0%.................... $10,662,245
===========
SECURITY INCOME FUND
LIMTED MATURITY BOND SERIES
CORPORATE BONDS
----------------
AEROSPACE & DEFENSE - 2.6%
$100,000 Allied Signal, 6.75% - 2000......... $103,750
ALUMINUM - 3.9%
148,000 Alcan Aluminum, Ltd., 9.20% - 2001.. 157,990
BANKS - 6.7%
110,000 First Union Corporation,
8.125% - 2002...................... 121,688
150,000 Nationsbank Corporation, 6.50%- 2003 151,688
-----------
273,376
ELECTRIC COMPANIES - 7.7%
150,000 Consolidated Edison Company,
6.625% - 2002...................... 154,313
150,000 Texas Utilities Electric Company,
7.375% - 2001...................... 159,000
-----------
313,313
ELECTRIC & GAS COMPANIES - 4.0%
150,000 Public Service Electric & Gas
Company, 8.75% - 1999.............. 163,688
SECURITY INCOME FUND
LIMITED MATURITY BOND SERIES (CONTINUED)
PRINCIPAL MARKET
AMOUNT CORPORATE BONDS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
FINANCE - 12.1%
$150,000 Ford Motor Credit Company,
8.375% - 2000...................... $162,563
150,000 Household Finance Corporation,
8.00% - 2004....................... 167,438
150,000 International Lease Finance Corporation,
8.25% - 2000....................... 162,000
-----------
492,001
GROCERY STORES - 3.5%
150,000 Penn Traffic Company,
10.65% - 2004...................... 143,625
OIL & GAS EXPLORATION COMPANIES - 4.2%
150,000 Vastar Resources, Inc.,
8.75% - 2005....................... 171,000
PETROLEUM REFINING & PRODUCTS - 4.2%
150,000 BP America, Inc. 8.75% - 2003....... 172,500
RETAIL TRADE - 4.0%
150,000 Wal-Mart Stores, Inc., 7.50% - 2004. 163,875
SANITARY SERVICES - 4.0%
150,000 WMX Technologies, Inc.,
8.25% - 1999....................... 162,375
TOBACCO PRODUCTS - 3.9%
150,000 Philip Morris Companies, Inc.,
7.625% - 2002...................... 160,313
-----------
Total corporate bonds -Limited Maturity
Bond Series (cost $2,293,147) - 60.8% 2,477,806
GOVERNMENT & GOVERNMENT
AGENCY SECURITIES
-----------------------
CANADIAN GOVERNMENT AGENCIES - 4.3%
150,000 Province of Quebec, 8.625% - 2005... 173,063
U.S. GOVERNMENT AGENCIES - 16.7%
Federal Home Loan Bank,
150,000 7.69% - 1996....................... 153,220
100,000 7.17% - 2000....................... 105,833
100,000 Federal Home Loan Mortgage
Corporation, 7.69% - 1996.......... 102,119
Federal National Mortgage Association,
150,000 7.05% - 1998....................... 156,347
150,000 8.50% - 2005....................... 163,477
-----------
680,996
See accompanying notes.
- --------------------------------------------------------------------------------
9
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
December 31, 1995
SECURITY INCOME FUND
LIMITED MATURITY BOND SERIES (CONTINUED)
PRINCIPAL GOVERNMENT & GOVERNMENT MARKET
AMOUNT AGENCY SECURITIES (CONTINUED) VALUE
- --------------------------------------------------------------------------------
U.S. TREASURY NOTES - 11.4%
$ 150,000 7.375% - 1997...................... $ 155,619
150,000 7.50% - 1997....................... 153,570
150,000 7.25% - 1998....................... 156,022
-----------
465,211
-----------
Total government & government
agency securities -Limited Maturity
Bond Series (cost $1,254,119)- 32.4% 1,319,270
-----------
Total investments - Limited Maturity
Bond Series (cost $3,547,266) - 93.2% 3,797,076
Cash and other assets,
less liabilities - 6.8%............ 276,728
-----------
Total net assets - Limited Maturity
Bond Series - 100.0%............... $4,073,804
===========
SECURITY INCOME FUND
GLOBAL AGGRESSIVE BOND SERIES
GOVERNMENT OBLIGATIONS
----------------------
ARGENTINA - 4.5%
$ 350,000 Republic of Argentina,
5.00% - 2023..................... 200,156
AUSTRALIA - 4.0%
210,000 Treasury Corporation of Victoria,
10.25% - 2006(2)................. 174,879
BRAZIL - 4.9%
350,000 Republic of Brazil,
7.25% - 2024..................... 215,250
CANADA - 3.6%
200,000 Stelco, Inc.,
10.40% - 2009(2)................. 157,682
ECUADOR - 4.1%
500,000 Republic of Ecuador,
3.00% - 2025..................... 181,875
GERMANY - 4.9%
300,000 Bundesrepublic Deutschland,
6.50% - 2005(2).................. 215,687
ITALY - 4.7%
340,000,000 Buoni Poliennali Del Tes,
8.50% - 2009(2).................. 206,249
SECURITY INCOME FUND
GLOBAL AGGRESSIVE BOND SERIES (CONTINUED)
PRINCIPAL MARKET
AMOUNT GOVERNMENT OBLIGATIONS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
PHILIPPINES - 4.2%
$ 250,000 Central Bank of Philippines,
5.75% - 2017..................... $186,250
PORTUGAL - 9.3%
22,500,000 Obrig Do Tes Medio Prazo,
8.875% - 1997(2)................. 150,170
35,000,000 Obrig Do Tes Medio Prazo,
11.875% - 2005(2)................ 261,753
-----------
411,923
SOUTH AFRICA - 8.1%
500,000 Electricity Supply Commission,
11.00% - 2008(2)................. 111,798
1,000,000 Republic of South Africa,
12.00% - 2005(2)................. 243,682
-----------
355,480
SPAIN - 3.5%
20,000,000 Bonos Y Oblig Del Estado,
7.40% - 1999(2).................. 155,419
-----------
Total government obligations -
Global Aggressive Bond Series
(cost $2,392,436) - 55.8%........ 2,460,850
CORPORATE BONDS
---------------
BRAZIL - 3.2%
$ 150,000 Centrais Electricas Bras
8.875% - 2002.................... 140,250
CZECH REPUBLIC - 2.1%
2,500,000 CEZ, a.s., 11.30% - 2005(2)........ 93,770
DENMARK - 6.1%
898,000 Nykredit,
8.00% - 2026(2).................. 156,606
750,000 Realkredit Danmark,
6.00% - 2026(2).................. 112,264
-----------
268,870
MEXICO - 3.3%
150,000 Cemex S.A.,
8.875% - 1998.................... 144,375
UNITED STATES - 3.5%
150,000 Chiquita Brands International, Inc.,
11.50% - 2001.................... 156,750
-----------
Total corporate bonds -
Global Aggressive Bond Series
(cost $787,781) - 18.2%.......... 804,015
See accompanying notes.
- --------------------------------------------------------------------------------
10
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
December 31, 1995
SECURITY INCOME FUND
GLOBAL AGGRESSIVE BOND SERIES (CONTINUED)
PRINCIPAL MARKET
AMOUNT SHORT TERM INVESTMENTS VALUE
- --------------------------------------------------------------------------------
GREECE - 4.2%
50,000,000 Hellenic Treasury Bills,
0% - 12-18-96(2)................ $ 185,713
HUNGARY - 3.9%
30,000,000 Government of Hungary Treasury Bill,
0% - 12-20-96(2)................ 169,552
MEXICO - 2.0%
700,000 Cetes, 0% - 1-25-96(2)........... 89,260
POLAND - 8.2%
500,000 Government of Poland Treasury Bill,
0% - 2-28-96(2)................. 195,867
500,000 Government of Poland Treasury Bill,
0% - 11-15-96(2)................ 167,450
-----------
363,317
UNITED STATES - 2.3%
$ 100,000 U.S. Treasury Bill,
4.90% - 3-07-96................. 99,102
-----------
Total short-term investments -
Global Aggressive Bond Series
(cost $922,131) - 20.6%......... 906,944
-----------
Total investments -
Global Aggressive Bond Series
(cost $4,102,348) - 94.6% ...... 4,171,809
Cash and other assets, less
liabilities - 5.4%.............. 236,450
-----------
Total net assets -
Global Aggressive Bond Series
- 100.0%........................ $4,408,259
===========
SECURITY TAX-EXEMPT FUND
MUNICIPAL BONDS
---------------
EDUCATION REVENUE - 12.6%
1,000,000 Florida State Board of Education
Capital Outlay Refunding,
Series A, 5.50% - 2014............. $1,010,000
1,200,000 Fulton County Georgia School District,
5.625% - 2021...................... 1,216,500
1,000,000 North Brunswick Township, N.J.
Board of Education,
6.30% - 2013....................... 1,085,000
-----------
3,311,500
SECURITY TAX-EXEMPT FUND (CONTINUED)
PRINCIPAL MARKET
AMOUNT MUNICIPAL BONDS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
ELECTRIC UTILITY REVENUE - 17.3%
$1,200,000 Massachusetts Municipal Wholesale
Electric Company Power Supply
System, Series B, 6.625% - 2004.... $ 1,347,000
1,000,000 Nebraska Public Power District Revenue,
Series A, 6.25% - 2022............. 1,045,000
1,000,000 Salt River Project, Arizona Agriculture
Improvement & Power District
Electric System, 6.625% - 2012..... 1,082,500
1,000,000 Washington Public Power Supply
System, Nuclear Project #2,
6.30% - 2012....................... 1,071,250
-----------
4,545,750
GENERAL OBLIGATION - 12.9%
1,000,000 Clark County, Nevada School District,
Series A, 5.50% - 2016............. 1,005,000
1,250,000 Commonwealth of Massachusetts
Series A, 6.50% - 2011............. 1,351,563
1,000,000 State of Washington,
5.80% - 2020....................... 1,016,250
-----------
3,372,813
HIGHWAY REVENUE - 10.7%
1,400,000 Harris County, TX, Series A,
Toll Road & Tax, 6.125% - 2020..... 1,489,250
1,300,000 Florida State Turnpike Authority,
Series A, 5.50% - 2021............. 1,306,500
-----------
2,795,750
SEWER REVENUE - 16.4%
1,000,000 DuPage County, IL Stormwater Project
Refunding, 5.60% - 2021............ 1,030,000
1,000,000 Houston, TX Water & Sewer Revenue
Series A, 6.20% - 2020............. 1,061,250
1,000,000 King County, WA Sewer
Revenue, Series A, 6.25% - 2034.... 1,042,500
1,100,000 Los Angeles, CA Wastewater System
Revenue, Series A, 6.00% - 2014.... 1,159,125
-----------
4,292,875
TRANSPORTATION - 18.3%
1,000,000 Illinois Regional Transportation,
6.25% - 2024....................... 1,057,500
1,300,000 Los Angeles County, CA Metropolitan
Transit, 5.625% - 2018............. 1,322,750
1,300,000 Metropolitan Transit Authority of
New York Service Contract
Refunding Series 5, 7.00% - 2012... 1,418,625
1,000,000 Michigan State Truck Line, Series A
5.70% - 2015....................... 1,012,500
-----------
4,811,375
See accompanying notes.
- --------------------------------------------------------------------------------
11
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
December 31, 1995
SECURITY TAX-EXEMPT FUND (CONTINUED)
PRINCIPAL MARKET
AMOUNT MUNICIPAL BONDS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
VARIOUS PURPOSE REVENUE - 4.1%
$1,000,000 New York State Local Government
Assistance Corporation, Series A,
6.50% - 2020....................... $ 1,065,000
WATER SUPPLY REVENUE - 5.0%
1,250,000 New York City Municipal Water
Finance Authority, 6.00% - 2025.... 1,309,375
-----------
Total investments - Tax-Exempt Fund
(cost $24,381,254) - 97.3%......... 25,504,438
Cash and other assets - less
liabilities - 2.7%................. 711,480
-----------
Total net assets - Tax-Exempt Fund -
100.0%............................. $26,215,918
===========
SECURITY CASH FUND
PRINCIPAL MARKET
AMOUNT COMMERCIAL PAPER RATING VALUE
- --------------------------------------------------------------------------------
AIR TRANSPORTATION - 2.6%
$1,000,000 Harper Group, Inc., (The), A1
5.595%, 3-14-96............. $ 988,344
BUSINESS SERVICES - 9.9%
2,000,000 AI Credit Corporation, A1+
5.63%, 2-02-96.............. 1,989,366
1,800,000 Penney (J.C.)Funding Corporation, A1
5.65%, 2-15-96.............. 1,786,722
-----------
3,776,088
CONSTRUCTION - 5.2%
2,000,000 Stanley Works, 5.54%, 3-11-96 A1 1,977,840
DRUGS & TOILETRIES - 7.6%
2,000,000 Allergan, Inc., A1
5.68%, 2-06-96.............. 994,004
5.67%, 2-13-96.............. 992,912
900,000 Schering Corporation, A1+
5.66%, 2-08-96.............. 894,340
-----------
2,881,256
ELECTRIC COMPANIES & SYSTEMS - 10.4%
1,000,000 Allegheny Generating Company, A1
5.55%, 1-31-96.............. 995,067
1,500,000 Allegheny Power System, Inc., A1
5.59%, 2-28-96.............. 1,486,025
1,500,000 Georgia Power Company, A1
5.61%, 3-06-96.............. 1,484,339
-----------
3,965,431
ELECTRONICS - 7.0%
1,700,000 Avnet, Inc., A1
5.67%, 2-12-96.............. 695,149
5.67%, 2-16-96.............. 992,440
1,000,000 TDK U.S.A. Corporation, A1+
5.53%, 4-22-96.............. 982,488
-----------
2,670,077
FOOD PROCESSING - 2.6%
1,000,000 Philip Morris Companies, Inc., A1
5.55%, 1-26-96.............. 995,838
GAS & ELECTRIC COMPANIES - 7.8%
1,000,000 Central Illinois Light Company, A1+
5.70%, 2-06-96.............. 993,983
2,000,000 Madison Gas & Electric Company, A1+
5.67%, 2-15-96.............. 1,985,195
-----------
2,979,178
See accompanying notes.
- --------------------------------------------------------------------------------
12
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
December 31, 1995
SECURITY CASH FUND (CONTINUED)
PRINCIPAL MARKET
AMOUNT COMMERCIAL PAPER (CONTINUED) RATING VALUE
- --------------------------------------------------------------------------------
GAS COMPANIES & SYSTEMS - 6.2%
$2,400,000 Michigan Consolidated Gas
Company, A1
5.61%, 2-26-96.............. $ 2,378,308
GROCERY STORES - 1.3%
500,000 Winn Dixie Stores, Inc., A1
5.63%, 2-08-96.............. 496,872
PETROLEUM COMPANIES - 2.3%
900,000 Atlantic Richfield Company, A1
5.63%, 2-02-96.............. 895,214
PRINTING - 5.2%
2,000,000 McGraw Hill, Inc., A1
5.53%, 3-11-96.............. 1,977,880
TELEPHONE & TELEGRAPH - 14.3%
1,500,000 Bell Atlantic Network Funding, A1+
5.51%, 2-23-96.............. 1,487,373
2,000,000 Bellsouth Telecommunications, A1+
5.66%, 2-13-96.............. 1,985,850
2,000,000 GTE Northwest, Inc., A1
5.62%, 3-11-96.............. 1,977,520
-----------
5,450,743
-----------
Total commercial paper -
(cost $31,433,069) - 82.4%.. 31,433,069
U.S. GOVERNMENT & GOVERNMENT
AGENCY SECURITIES
----------------------------
FEDERAL FARM CREDIT BANKS - 15.7%
2,000,000 5.70%, 01-02-96............. N/A 2,000,000
2,000,000 5.73%, 03-01-96............. N/A 2,000,000
1,000,000 5.70%, 04-01-96............. N/A 1,000,000
1,000,000 5.52%, 06-03-96............. N/A 1,000,000
-----------
6,000,000
PRINCIPAL U.S. GOVERNMENT & GOVERNMENT MARKET
AMOUNT AGENCY SECURITIES (CONTINUED)RATING VALUE
- --------------------------------------------------------------------------------
SBA POOLS - 5.0%
$1,895,540 SBA Pool GCS # 501 927, NA
7.00%, 7-25-17(1)........... $ 1,913,428
-----------
Total U.S. government and
government agency securities
- (cost $7,913,428) - 20.7%. 7,913,428
-----------
Total investments - Cash Fund (cost
$39,346,497) - 103.1%....... 39,346,497
Liabilities, less cash and
other assets - (3.1%)....... (1,188,597)
-----------
Total net assets - Cash Fund-100.0% $38,157,900
===========
The identified cost of investments owned at December 31, 1995, was the same for
federal income tax and book purposes, except for Global Aggressive Bond Series
for which the identified cost of investments for federal income tax purposes was
$4,129,436.
Ratings were provided by Moody's Investor Services and Standard & Poor's
Corporation and are not covered by the report of independent auditors.
(1)Variable rate security which may be reset the first of each month.
(2)Principal amount on foreign bonds is reflected in local currency (e.g.
Japanese yen) while market value is reflected in U.S. dollars.
See accompanying notes.
- --------------------------------------------------------------------------------
13
<PAGE>
BALANCE SHEETS
- --------------------------------------------------------------------------------
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>
ASSETS
Investments, at value (identified cost
$92,095,179, $9,528,784, $3,547,266,
$4,102,348, $24,381,254 and
$7,913,428, respectively)................ $ 97,415,437 $10,425,836 $3,797,076 $4,171,809 $25,504,438 $ 7,913,428
Commercial paper, at amortized cost
which approximates market value.......... -- -- -- -- -- 31,433,069
Cash........................................ 447,059 91,358 193,963 87,507 171,131 457,662
Receivables:
Fund shares sold......................... 9,366 160 70 153 25,000 612,336
Securities sold.......................... -- -- -- 1,261,781 -- 3,330
Interest................................. 1,735,684 155,273 85,443 97,065 541,460 149,617
Security Management Company.............. 1,802 553 -- 1,889 436 9,995
Prepaid expense............................. 2,657 3,943 1,365 -- 9,244 23,426
------------ ----------- ----------- ----------- ----------- -----------
Total assets....................... $ 99,612,005 $10,677,123 $4,077,917 $5,620,204 $26,251,709 $40,602,863
============ =========== =========== =========== =========== ===========
LIABILITIES AND NET ASSETS
Liabilities:
Payable for fund shares redeemed......... $ 65,567 $ -- $ -- $ -- $ 10,277 $ 2,377,988
Dividends payable to shareholders........ -- -- -- -- -- 13,346
Payable for securities purchased......... -- -- -- 1,202,178 -- --
Other liabilities:
Management fees........................ 38,830 4,210 1,585 1,197 10,375 16,655
12b-1 distribution plan fees........... 22,563 2,438 1,238 1,762 921 --
Custodian and transfer agent fees...... 10,457 1,431 163 3,471 1,456 14,457
Administration fees.................... 6,989 758 285 158 1,868 1,499
Professional fees...................... 14,062 3,521 842 899 8,815 7,140
Miscellaneous.......................... 9,198 2,520 -- 2,280 2,079 13,878
------------ ----------- ----------- ----------- ----------- -----------
Total liabilities.................. 167,666 14,878 4,113 1,211,945 35,791 2,444,963
Net Assets:
Paid in capital.......................... 105,114,263 10,923,844 3,846,162 4,349,563 26,623,160 38,157,900
Undistributed net investment income...... 19,734 2,672 887 (8,314) 3,785 --
Accumulated net realized loss on
sale of investments and foreign
currency transactions.................. (11,009,916) (1,161,323) (23,055) (2,410) (1,534,211) --
Net unrealized appreciation in value
of investments and translation of assets
and liabilities in foreign currency ... 5,320,258 897,052 249,810 69,420 1,123,184 --
------------ ----------- ----------- ----------- ----------- -----------
Net assets........................... 99,444,339 10,662,245 4,073,804 4,408,259 26,215,918 38,157,900
------------ ----------- ----------- ----------- ----------- -----------
Total liabilities and net assets... $ 99,612,005 $10,677,123 $4,077,917 $5,620,204 $26,251,709 $40,602,863
============ =========== =========== =========== =========== ===========
CLASS "A" SHARES
Capital shares outstanding.................. 12,675,161 2,026,423 311,533 292,448 2,516,529 38,157,900
Net assets.................................. $93,701,138 $10,079,971 $3,322,071 $2,968,493 $25,025,572 $38,157,900
Net asset value per share (net assets
divided by shares outstanding)........... $7.39 $4.97 $10.66 $10.15 $9.94 $1.00
Add:Selling commission (4.75% of
offering price) (excluding Cash Fund).... .37 0.25 0.53 .51 0.50 --
------------ ----------- ----------- ----------- ----------- -----------
Offering price per share (net asset
value divided by 95.25%)................. $7.76 $5.22 $11.19 $10.66 $10.44 $1.00
============ =========== =========== =========== =========== ===========
CLASS "B" SHARES
Capital shares outstanding.................. 773,229 117,077 70,477 141,576 119,598 --
Net assets.................................. $5,743,201 $582,274 $751,733 $1,439,766 $1,190,346 --
Net asset value per share (net assets
divided by shares outstanding)........... $7.43 $4.97 $10.67 $10.17 $9.95 --
============ =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
14
<PAGE>
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
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>
INVESTMENT INCOME:
Interest................................. $ 7,444,118 $ 677,084 $246,945 $294,095 $ 1,513,142 $3,020,108
EXPENSES:
Management fees.......................... 485,863 44,970 18,243 16,937 128,492 254,139
Transfer/maintenance fees................ 108,743 17,120 1,364 250 16,716 152,798
12b-1 distribution plan fees............. 276,169 25,637 13,401 11,253 10,152 --
Administration fees...................... 87,455 8,094 3,118 18,362 23,129 22,898
Custodian fees........................... 6,613 1,879 1,261 3,471 1,171 6,473
Directors' fees.......................... 8,900 755 245 78 10,015 9,892
Professional fees........................ 19,517 2,680 2,367 2,058 12,779 10,568
Registration............................. 25,688 13,926 2,839 21,627 26,669 39,455
Other expenses........................... 27,575 5,119 2,077 939 8,456 24,386
------------ ----------- ----------- ----------- ----------- -----------
1,046,523 120,180 44,915 74,975 237,579 520,609
Less: Fees paid indirectly............... (2,720) (1,292) (1,261) -- (1,171) --
Reimbursement of expenses............... (15,121) (16,803) (8,640) (24,205) (4,504) (12,968)
------------ ----------- ----------- ----------- ----------- -----------
Total expenses......................... 1,028,682 102,085 35,014 50,770 231,904 503,338
------------ ----------- ----------- ----------- ----------- -----------
Net investment income.............. 6,415,436 574,999 211,931 243,325 1,281,238 2,516,770
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) during the period on:
Investments............................ 2,922,105 22,802 (23,055) 8,070 301,901 --
Foreign currency transactions.......... -- -- -- (44,420) -- --
------------ ----------- ----------- ----------- ----------- -----------
Net realized gain (loss)............. 2,922,105 22,802 (23,055) (36,350) 301,901 --
Net change in unrealized appreciation
(depreciation) during period on:
Investments............................ 6,960,323 1,209,772 249,810 69,461 2,117,941 --
Translation of assets and liabilities
in foreign currencies................ -- -- -- (41) -- --
------------ ----------- ----------- ----------- ----------- -----------
Net unrealized appreciation.......... 6,960,323 1,209,772 249,810 69,420 2,117,941 --
------------ ----------- ----------- ----------- ----------- -----------
Net gain........................... 9,882,428 1,232,574 226,755 33,070 2,419,842 --
------------ ----------- ----------- ----------- ----------- -----------
Net increase in net
assets resulting from operations $16,297,864 $1,807,573 $438,686 $276,395 $3,701,080 $2,516,770
</TABLE>
* Period January 17, 1995 (inception) through December 31, 1995.
** Period June 1, 1995 (inception) through December 31, 1995.
See accompanying notes.
- --------------------------------------------------------------------------------
15
<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.
- --------------------------------------------------------------------------------
16
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
For the Year Ended December 31, 1994
<TABLE>
<CAPTION>
SECURITY INCOME FUND
-----------------------------
CORPORATE U.S. SECURITY SECURITY
BOND GOVERNMENT TAX-EXEMPT CASH
SERIES SERIES FUND FUND
------ ------ ---- ----
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income............................... $ 7,115,246 $ 590,335 $1,432,309 $ 1,855,864
Net realized loss .................................. (13,932,021) (1,181,780) (1,836,112) --
Unrealized depreciation during the year............. (2,419,117) (67,508) (2,221,295) --
------------ ----------- ----------- -----------
Net increase (decrease) in net assets resulting
from operations............................... (9,235,892) (658,953) (2,625,098) 1,855,864
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A........................................... (6,917,267) (572,250) (1,408,315) (1,855,864)
Class B........................................... (183,907) (16,526) (19,759) --
------------ ----------- ----------- -----------
Total distributions to shareholders............. (7,101,174) (588,776) (1,428,074) (1,855,864)
CAPITAL SHARE TRANSACTIONS (A):
Proceeds from sale of shares
Class A........................................... 24,783,087 2,812,392 12,166,067 301,350,492
Class B........................................... 4,319,121 262,697 780,435 --
Dividends reinvested
Class A........................................... 5,297,609 445,310 841,591 1,707,488
Class B........................................... 151,234 7,183 12,160 --
Cost of shares redeemed
Class A........................................... (41,957,570) (3,833,454) (17,034,040) (316,825,978)
Class B........................................... (1,240,487) (54,497) (81,117) --
------------ ----------- ----------- -----------
Net decrease from capital share
transactions.................................... (8,647,006) (360,369) (3,314,904) (13,767,998)
------------ ----------- ----------- -------------
Total decrease in net assets.................. (24,984,072) (1,608,098) (7,368,076) (13,767,998)
NET ASSETS:
Beginning of year................................... 119,455,240 10,238,237 32,220,181 71,869,713
------------ ----------- ----------- -------------
End of year......................................... $ 94,471,168 $8,630,139 $24,852,105 $ 58,101,715
============ =========== =========== =============
Undistributed net investment income.................... $18,807 $3,383 $3,859 --
============ =========== =========== =============
(a) Shares issued and redeemed:
Shares sold
Class A....................................... 3,430,737 603,088 1,239,726 301,350,492
Class B....................................... 604,793 55,933 80,986 --
Dividends reinvested
Class A....................................... 747,626 97,587 88,532 1,707,488
Class B....................................... 21,813 1,631 1,306 --
Shares redeemed
Class A....................................... (5,789,251) (820,118) (1,762,983) (316,825,978)
Class B....................................... (179,031) (11,973) (8,499) --
------------ ----------- ----------- -------------
Net decrease.................................... (1,163,313) (73,852) (360,932) (13,767,998)
============ =========== =========== =============
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
17
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Net Net
Fiscal asset Total Dividends Distri- assets Ratio of Ratio of Port-
period value Net Net gain from (from net butions Net asset end of expenses net in- folio
ended begin- invest- (loss) invest- invest- (from Return Total value period to aver- come to turn-
Decem- ning of ment (realized & ment ment capital of distribu- end of Total (thou- age net average over
ber 31 period income unrealized)operations income) gains) capital tions period return(a) sands) assets net assets rate
- ------------------------------------------------------------------------------------------------------------------------------------
CORPORATE BOND SERIES (CLASS A)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1991 $7.22 $0.65 $0.458 $1.108 $(0.648) $ -- $ -- $(0.648) $7.68 16.1% $85,824 1.03% 8.75% 32%
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) 6.68 0.47 0.708 1.178 (0.468) -- -- (0.468) 7.39 18.2% 93,701 1.02% 6.62% 200%
CORPORATE BOND SERIES (CLASS B)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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) 6.71 0.40 0.725 1.125 (0.405) -- -- (0.405) 7.43 17.3% 5,743 1.85% 5.80% 200%
U.S. GOVERNMENT SERIES (CLASS A)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1991(c) $4.93 $0.40 $0.248 $0.648 $(0.404) $ -- $(.004) $(0.408) $5.17 13.8% $7,319 1.11% 7.94% 41%
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) 4.35 0.30 0.620 0.92 (0.30) -- -- (0.30) 4.97 21.9% 10,080 1.11% 6.41% 81%
U.S. GOVERNMENT SERIES (CLASS B)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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) 4.35 0.26 0.625 0.885 (0.265) -- -- (0.265) 4.97 20.9% 582 1.87% 5.69% 81%
LIMITED MATURITY BOND SERIES (CLASS A)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995(c)(d)(e)$10.00 $0.62 $0.652 $1.272 $(0.612) $ -- $ -- $(0.612) $10.66 13.0% $3,322 0.84% 5.97% 4%
LIMITED MATURITY BOND SERIES (CLASS B)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995(c)(d)(e)$10.00 $0.53 $0.664 $1.194 $(0.524) $ -- $ -- $(0.524) $10.67 12.2% $752 1.71% 5.12% 4%
GLOBAL AGGRESSIVE BOND SERIES (CLASS A)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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%
GLOBAL AGGRESSIVE BOND SERIES(CLASS B)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
18
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Net Net
Fiscal asset Total Dividends Distri- assets Ratio of Ratio of Port-
period value Net Net gain from (from net butions Net asset end of expenses net in- folio
ended begin- invest- (loss) invest- invest- (from Return Total value period to aver- come to turn-
Decem- ning of ment (realized & ment ment capital of distribu- end of Total (thou- age net average over
ber 31 period income unrealized)operations income) gains) capital tions period return(a) sands) assets net assets rate
- ------------------------------------------------------------------------------------------------------------------------------------
SECURITY TAX-EXEMPT FUND (CLASS A)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1991 $9.53 $0.63 $0.446 $1.076 $(0.636) $ -- $ -- $(0.636) $9.97 11.7% $23,218 0.89% 6.55% 38%
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(d) 9.05 0.48 0.891 1.371 (0.481) -- -- (0.481) 9.94 15.5% 25,026 0.86% 5.02% 103%
SECURITY TAX-EXEMPT FUND (CLASS B)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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(c)(d) 9.05 0.37 0.902 1.272 (0.372) -- -- (0.372) 9.95 14.3% 1,190 2.00% 3.90% 103%
SECURITY CASH FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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(c)(d) 1.00 0.049 -- 0.049 (0.049) -- -- (0.049) 1.00 5.0% 38,158 1.00% 5.00% --
</TABLE>
(a) Total return information does not take into account any charges paid at time
of purchase or contingent deferred sales charges paid at time of redemption.
(b) Class "B" shares were initially issued on October 19, 1993. Percentage
amounts for the period, except total return, have been annualized.
(c) Fund expenses were reduced by the Investment Manager and expense ratios
absent such reimbursement would have been as follows:
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
Corporate Bond Class B -- -- -- 2.00% 2.19%
U.S. Government Class A 1.24% 1.20% 1.20% 1.20% 1.22%
Class B -- -- 1.75% 2.91% 3.70%
Limited Maturity Class A -- -- -- -- 1.04%
Bond Class B -- -- -- -- 2.12%
Global Aggressive Class A -- -- -- -- 2.42%
Bond Class B -- -- -- -- 3.93%
Tax-Exempt Class A -- -- -- -- 0.86%
Class B -- -- -- 2.32% 2.45%
Cash -- 1.03% 1.03% -- 1.04%
(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 were calculated without the reduction for custodian fees
earnings credits. Expense ratios with such reductions would have been as
follows:
1995
Corporate Bond Class A 1.02%
Class B 1.85%
U.S. Government Class A 1.10%
Class B 1.85%
Limited Maturity Bond Class A 0.81%
Class B 1.65%
Tax-Exempt Class A 0.85%
Class B 2.00%
See accompanying notes.
- --------------------------------------------------------------------------------
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 1995
1. SIGNIFICANT ACCOUNTING POLICIES
Security Income Fund, Security Tax-Exempt Fund and Security Cash Fund (the
Funds) are registered under the Investment Company Act of 1940, as amended, as
diversified, open-end management investment companies. The shares of Security
Income Fund are currently issued in four Series, the Corporate Bond Series, the
U.S. Government Series, the Limited Maturity Bond Series and the Global
Aggressive Bond Series, with each Series, in effect, representing a separate
fund. The Income Fund is required to account for each series separately and to
allocate general expenses to each series based upon the net asset value of each
Series. The following is a summary of the significant accounting policies
followed by the Funds in the preparation of their financial statements.
A. SECURITY VALUATION -- Valuations of Income Fund's and Tax-Exempt Fund's
securities are supplied by a pricing service approved by the Board of Directors.
Securities listed or traded on a national securities exchange are valued on the
basis of the last sales price. If there are no sales on a particular day, then
the securities are valued at the mean between the bid and the asked prices. If a
mean cannot be determined, then the securities for which market quotations are
available are valued on the basis of the current bid price. Securities for which
market quotations are not readily available are valued by a pricing service
considering securities with similar yields, quality, type of issue, coupon,
duration and rating. The Funds' officers, under the general supervision of the
Board of Directors, regularly review procedures used by, and valuations provided
by, the pricing service.
Cash Fund, by approval of the Board of Directors, utilizes the amortized
cost method for valuing portfolio securities, whereby all investments are valued
by reference to their acquisition cost as adjusted for amortization of premium
or accretion of discount.
Generally, trading in foreign securities markets is substantially completed
each day at various times prior to the close of the New York Stock Exchange. The
values of foreign securities are determined as of the close of such foreign
markets or the close of the New York Stock Exchange if earlier. All investments
quoted in foreign currency are valued in U.S. dollars on the basis of the
foreign currency exchange rate prevailing at the close of business. 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. 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.
E. 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.
F. 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.
G. EARNINGS CREDITS - Under the fee schedule with the custodian, Security
Income Fund, Security Tax-Exempt Fund and Security Cash Fund (the Funds) earn
credits based on overnight custody cash balances. These credits are utilized to
reduce related custodial expenses. The custodian expense disclosed in the
statement of operations does 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 (SMC) under
investment advisory contracts at an annual rate of 1/2 of 1% of the average net
assets of each fund, except for Global Aggressive Bond Series which the fee is
at an annual rate of 3/4 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, 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 year ended December 31, 1995, SMC
agreed to limit the total expenses of Corporate Bond Series, U.S. Government
Series and Limited Maturity Bond Series to an annual rate of 1.1% of the average
See accompanying notes.
- --------------------------------------------------------------------------------
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
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 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 Limited
Maturity Bond Series to July 1, 1995 and .40% of the management fees for the
Global Aggressive Bond Series to December 31, 1995. The investment advisory
contract for Tax-Exempt and Cash Funds provide that the total annual expenses of
the Funds will not exceed an amount equal to an annual rate of 1.0% of the
average net assets of Class A shares and 2.0% of Class B shares of the
Tax-Exempt Fund as calculated on a daily basis.
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, Limited
Maturity Bond Series, U.S. Government 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) $30,000 in the year ending April 29, 1996; (ii) $45,000 in the year ending
April 29, 1997; and (iii) $60,000 thereafter.
SMC pays the Sub-Advisor, Lexington Management Corporation (LMC) an annual
fee in an amount equal to .35% of the average net assets of Global Aggressive
Bond Series, for investment advisory and certain administrative services
provided to the Global Aggressive Bond Series. The Sub-Advisor has entered into
a sub-advisory contract with MFR Advisors, Inc., ("MFR"), under which MFR will
provide the Global Aggressive Bond 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 SMC and the
national distributor for Income and Tax-Exempt Funds, received net underwriting
commissions after allowances to brokers and dealers for the period ended
December 31, 1995, in the amounts presented below:
LIMITED GLOBAL
CORPORATE U.S. MATURITY AGGRESSIVE TAX-
BOND GOVERNMENT BOND BOND EXEMPT
SERIES SERIES SERIES SERIES FUND
---------------------------------------------------------------
SDI Underwriting $ 6,246 $ 2,934 $ 730 $ 379 $ 4,103
Broker/Dealer 49,895 14,400 6,663 1,788 16,588
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, 1995, (excluding
overnight investments and short-term debt securities) were as follows:
LIMITED GLOBAL
CORPORATE U.S. MATURITY AGGRESSIVE TAX-
BOND GOVERNMENT BOND BOND EXEMPT
SERIES SERIES SERIES SERIES FUND
--------------------------------------------------------------
Purchases $183,877,123 $7,939,142 $3,702,247 $5,494,083 $25,894,338
Proceeds
from sales 188,363,506 6,842,750 131,925 2,386,219 26,751,388
4. FEDERAL INCOME TAX MATTERS
The amounts of unrealized appreciation (depreciation) as of December 31,
1995, were as follows:
LIMITED GLOBAL
CORPORATE U.S. MATURITY AGGRESSIVE TAX-
BOND GOVERNMENT BOND BOND EXEMPT
SERIES SERIES SERIES SERIES FUND
--------------------------------------------------------------
Aggregate gross
unrealized
appreciation $5,320,258 $909,637 $254,685 $69,245 $1,123,184
Aggregate gross
unrealized
depreciation -- (12,585) (4,875) (26,872) --
--------------------------------------------------------------
Net unrealized
appreciation $5,320,258 $897,052 $249,810 $42,373 $1,123,184
--------------------------------------------------------------
5. OTHER INFORMATION
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 Corporate Bond Series, U.S. Government Series,
Limited Maturity Bond Series, Global Aggressive Bond Series, Tax-Exempt Fund or
Cash Fund 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.
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, 1995, interest on
U.S. Government obligations was 6%, 5%, 34% and 19% of Cash Fund, Corporate Bond
Series, U.S. Government Series and Limited Maturity Series gross investment
income, respectively. Since the qualifications for such exemption vary by state,
we suggest you consult your tax advisor for applicability.
See accompanying notes.
- --------------------------------------------------------------------------------
21
<PAGE>
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 and statements of net
assets of Security Income Fund (comprised of the Corporate Bond, U.S.
Government, Limited Maturity Bond and Global Aggressive Bond Series), Security
Tax-Exempt Fund and Security Cash Fund (the Funds) as of December 31, 1995, the
related statements of operations for the year then ended, statement of changes
in net assets for each of the two years in the period then ended and the
financial highlights for each of the five years in the period then ended of
Security Income Fund -- Corporate Bond Series, Security Income Fund -- U.S.
Government Series, Security Tax-Exempt Fund and Security Cash Fund; the related
statements of operations, changes in net assets and financial highlights for the
period from January 17, 1995 (commencement of operations) to December 31, 1995
of Security Income Fund -- Limited Maturity Bond Series and the related
statements of operations, changes in net assets and financial highlights for the
period from June 1, 1995 (commencement of operations) to December 31, 1995 of
Security Income Fund -- Global Aggressive Bond Series. 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 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. Our procedures included confirmation of investments owned as of
December 31, 1995, by correspondence with the custodian. As to securities
relating to uncompleted transactions, we performed other auditing 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, 1995, and the results of their operations, changes in their net
assets and the financial highlights for the periods indicated above in
conformity with generally accepted accounting principles.
Kansas City, Missouri
January 26, 1996
See accompanying notes.
- --------------------------------------------------------------------------------
22
<PAGE>
THE SECURITY GROUP
OF MUTUAL FUNDS
- ---------------
SECURITY GROWTH AND INCOME FUND
SECURITY EQUITY FUND
* EQUITY SERIES
* EQUITY GLOBAL SERIES
* ASSET ALLOCATION SERIES
SECURITY ULTRA FUND
SECURITY INCOME FUND
* CORPORATE BOND SERIES
* U.S. GOVERNMENT SERIES
* LIMITED MATURITY BOND SERIES
* GLOBAL AGGRESSIVE BOND SERIES
SECURITY TAX-EXEMPT FUND
SECURITY CASH FUND
This report is submitted for the general information of the shareholders of the
Funds. The report is not authorized for distribution to prospective investors in
the Funds unless preceded or accompanied by an effective prospectus which
contains details concerning the sales charges and other pertinent information.
SECURITY FUNDS
OFFICERS AND DIRECTORS
- ----------------------
DIRECTORS
- ---------
Willis A. Anton
Donald A. Chubb, Jr.
John D. Cleland
Donald L. Hardesty
Penny A. Lumpkin
Mark L. Morris, Jr., D.V.M.
Jeffrey B. Pantages
Harold G. Worswick
OFFICERS
- --------
John D. Cleland, President
James R. Schmank, Vice President and Treasurer
Jane A. Tedder, Vice President
Mark E. Young, Vice President
Greg A. Hamilton, Assistant Vice President
Amy J. Lee, Secretary
Brenda M. Luthi, Assistant Treasurer and Assistant Secretary
[SDI LOGO}
700 SW Harrison St.
Topeka, KS 66636-0001
(913) 295-3127
(800) 888-2461
<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 end
December 31, 1995, and the unaudited financial statements of
High Yield Series for the period ended December 31, 1996, are
incorporated by reference in Part B of this Registration
Statement.
b. Exhibits:
(1) Articles of Incorporation. (a)
(2) Corporate Bylaws of Registrant. (b)
(3) Not applicable.
(4) Specimen copy of share certificate for Registrant's shares
of capital stock. (b)
(5) (a) Investment Advisory Contract.
(b) Sub-Advisory Agreement-Lexington.(c)
(c) Sub-Advisory Agreement-MFR.(c)
(6) (a) Distribution Agreement. (a)
(b) Class B Distribution Agreement. (a)
(7) Not applicable.
(8) (a) Custodian Agreement-UMB.
(b) Custodian Agreement-Chase.(c)
(9) (a) Administrative Services and Transfer Agency Agreement
(b) Sub-Administrative Agreement.(c)
(10) Opinion of counsel as to the legality of the securities
offered.(d)
(11) Consent of Independent Auditors.
(12) Not applicable.
(13) Not applicable.
(14) Not applicable.
(15) (a) Distribution Plan. (b)
(b) Class B Distribution Plan. (b)
(16) Schedule of Computation of Performance.
(17) Financial Data Schedules.
(18) Multiple Class Plan.(e)
(a) Incorporated herein by reference to the Exhibits filed with the
Registrant's Post-Effective Amendment No. 55 to Registration Statement No.
2-38414 (August 5, 1996).
(b) 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).
(c) 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).
(d) 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).
(e) 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).
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES AS OF JANUARY 31, 1997.
(1) (2)
NUMBER
OF RECORD
TITLE OF CLASS SHAREHOLDERS
Corporate Bond - Shares of Common Stock, Class A 4,770
Corporate Bond - Shares of Common Stock, Class B 835
U.S. Government - Shares of Common Stock, Class A 881
U.S. Government - Shares of Common Stock, Class B 146
Limited Maturity Bond - Shares of Common Stock, Class A 224
Limited Maturity Bond - Shares of Common Stock, Class B 23
Global Aggressive Bond - Shares of Common Stock, Class A 100
Global Aggressive Bond - Shares of Common Stock, Class B 20
ITEM 27. INDEMNIFICATION.
A policy of insurance covering Security Management Company, LLC, its
subsidiary (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 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.
<PAGE>
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 opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
<PAGE>
ITEM 28. BUSINESS OR OTHER CONNECTIONS OF INVESTMENT ADVISER
Security Management Company, LLC also acts as investment manager to
Security Equity Fund, Security Ultra Fund, Security Growth and Income
Fund, Security Cash Fund, SBL Fund, and Security Tax-Exempt Fund.
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
-------------------- ------------------------------------------------
James R. Schmank President (Interim), Treasurer, Chief Fiscal
Officer and Managing Member Representative
Security Management Company, LLC
Vice President and Director
Security Distributors, Inc.
Vice President and Interim Chief Investment
Officer
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
Jeffrey B. Pantages President, Chief Investment Officer and Director
Security Management Company (until June 1996)
Director
Security Cash Fund, Security Income Fund,
Security Tax-Exempt Fund, SBL Fund, Security
Growth and Income Fund, Security Equity Fund,
Security Ultra Fund
Senior Vice President and Chief Investment
Officer
Security Benefit Life Insurance Company,
Security Benefit Group, Inc.
Director
Mulvane Art Center
Mulvane Art Museum
Washburn University
17th & Jewell
Topeka, Kansas
United Way of Greater Topeka
P.O. Box 4188
Topeka, Kansas
<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
James W. Lammers Senior Vice President and Director
Security Management Company, LLC
Security Distributors, Inc.
Director (until November 1996)
Security Management Company
Donald E. Caum Director (until November 1996)
Security Management Company
Senior Vice President
Security Benefit Life Insurance Company
Security Benefit Group
Director
YMCA Metro, Topeka, Kansas
Executive Director
Jayhawk Area Council Boy Scouts of America,
Topeka, Kansas
Metropolitan Ballet, Topeka, Kansas
James L. Woods Senior Vice President
Security Management Company, LLC
Security Benefit Life Insurance Company
Security Benefit Group, Inc.
<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 Vice President
Security Management Company, LLC
Vice President
Security Equity Fund, SBL Fund
Jane A. Tedder Vice President and Senior Portfolio Manager
Security Management Company, LLC
Vice President
Security Income Fund, SBL Fund, Security
Equity Fund
Gregory A. Hamilton Second Vice President
Security Management Company, LLC
Assistant Vice President
Security Income Fund, SBL Fund, Security
Equity Fund, Security Tax-Exempt Fund
Director
Downtown Topeka, Inc., Topeka, Kansas
Trustee
Kansas State University Foundation, Manhattan,
Kansas
<PAGE>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
-------------------- ------------------------------------------------
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
Director
Everywoman's Resource Center
1002 SW Garfield Avenue
Topeka, Kansas
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 Assistant Vice President and Portfolio Manager
Security Management Company, LLC
Assistant Vice President
Security Benefit Life Insurance Company,
Security Benefit Group, Inc.
Thomas A. Swank Second Vice President and Portfolio Manager
Security Management Company, LLC
Second Vice President
Security Benefit Life Insurance Company,
Security Benefit Group, Inc.
<PAGE>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
-------------------- ------------------------------------------------
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
Larry L. Valencia Assistant Vice President and Senior Research
Analyst
Security Management Company, LLC
James P. Schier Assistant Vice President and Senior Research
Analyst
Security Management Company, LLC
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
LEXINGTON MANAGEMENT CORPORATION:
Lexington Management Corporation, sub-adviser to Global Aggressive
Bond Series, acts as investment adviser, sub-adviser and/or sponsor to
21 investment companies other than Registrant.
<PAGE>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
-------------------- ------------------------------------------------
Robert M. DeMichele President, Chief Executive Officer and Director
Lexington Global Asset Managers, Inc.
Chairman and Chief Executive Officer
Lexington Management Corporation, Lexington
Funds Distributor, Inc.
Director
Chartwell Recorporation, Navigator's Insurance
Group, Vanguard Cellular Systems, Inc.
Chairman of the Board
Lexington Group of Investment Companies,
Market Systems Research, Inc., Market Systems
Research Advisors, Inc.,
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
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.
<PAGE>
MFR ADVISORS, INC.:
Lexington Management Corporation contracts with MFR Advisors, Inc.
which provides advisory services for Global Aggressive Bond Series.
MFR Advisors, Inc. serves as advisor to no investment companies other
than Registrant.
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
-------------------- ------------------------------------------------
Maria Fiorini Ramirez Chief Executive Officer and President
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 World Financial Center, 200 Liberty Street, New York,
New York 10281
ITEM 29. PRINCIPAL UNDERWRITERS
(a) SBL Fund
Security Equity Fund
Security Ultra Fund
Security Growth and Income Fund
Security Tax-Exempt Fund
Variflex Variable Annuity Account
Varilife Variable Annuity Account
Parkstone Variable Annuity Account
Security Varilife Separate Account
Variflex LS Variable Annuity Account
(b)
<TABLE>
<CAPTION>
(1) (2) (3)
NAME AND PRINCIPAL POSITION AND OFFICES POSITION AND OFFICES
BUSINESS ADDRESS* WITH UNDERWRITER WITH REGISTRANT
<S> <C> <C>
Richard K Ryan President and Director None
John D. Cleland Vice President and Director President and Director
<PAGE>
James W. Lammers Senior Vice President and Director None
Louis R. Jicha Vice President and Director None
James R. Schmank Vice President and Director Vice President and Treasurer
Mark E. Young Vice President Vice President
Amy J. Lee Secretary Secretary
Brenda M. Harwood Treasurer Assistant Secretary and Assistant Treasurer
Daniel J. McNichol Vice President None
Clark A. Anderson Regional Vice President None
Robert L. Kirchner Regional Vice President None
Paul Richardson Regional Vice President None
Ronald V. Vermillion Regional Vice President None
Jennifer A. Zaat Regional Vice President None
Kent N. Spillman Regional Vice President None
Carla D. Griffin Regional Vice President None
Anthony Hammock Regional Vice President None
William G. Mancuso Regional Vice President None
Marek E. Lakotko Regional Vice President None
</TABLE>
*700 Harrison, Topeka, Kansas 66636-0001
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
Certain accounts, books and other documents required to be maintained
by Section 31(a) of the 1940 Act and the rules promulgated thereunder
are maintained by Security Management Company, LLC, 700 Harrison,
Topeka, Kansas 66636-0001. Records relating to the duties of the
Registrant's custodian are maintained by UMB Bank, n.a., 928 Grand
Avenue, Kansas City, Missouri 64106 and Chase Manhattan Bank, 1211
Avenue of the Americas, New York, New York 10036.
<PAGE>
ITEM 31. MANAGEMENT SERVICES.
Not applicable.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) Registrant hereby undertakes to furnish each person, to whom a
prospectus is delivered, a copy of the Registrant's latest report
to shareholders upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Topeka, and State of Kansas on the 29th day of January, 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: January 29, 1997
-----------------------------------
WILLIS A. ANTON, JR. Director
- ------------------------------
Willis A. Anton, Jr.
DONALD A. CHUBB, JR. Director
- ------------------------------
Donald A. Chubb, Jr.
JOHN D. CLELAND President and Director
- ------------------------------
John D. Cleland
DONALD L. HARDESTY Director
- ------------------------------
Donald L. Hardesty
PENNY A. LUMPKIN Director
- ------------------------------
Penny A. Lumpkin
MARK L. MORRIS, JR. Director
- ------------------------------
Mark L. Morris, Jr.
JEFFREY B. PANTAGES Director
- ------------------------------
Jeffrey B. Pantages
HUGH L. THOMPSON Director
- ------------------------------
Hugh L. Thompson
<PAGE>
EXHIBIT INDEX
(1) None
(2) None
(3) None
(4) None
(5) (a) Investment Advisory Contract
(b) None
(c) None
(6) (a) None
(b) None
(7) None
(8) (a) Custodian Agreement - UMB
(b) None
(9) (a) Administrative Services and Transfer Agency Agreement
(b) 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>
INVESTMENT ADVISORY CONTRACT
THIS AGREEMENT, made this 27th day of March, 1987, between SECURITY INCOME FUND,
a Kansas corporation (hereinafter referred to as the "Fund"), and SECURITY
MANAGEMENT COMPANY, a Kansas corporation (hereinafter referred to as the
"Management Company"),
WITNESSETH:
WHEREAS, the Fund is engaged in business as an open-end management investment
company registered under the Federal Investment Company Act of 1940; and
WHEREAS, the Fund is authorized to issue shares of capital stock in separate
Series, with each such Series representing interests in a separate portfolio of
securities and other assets; and
WHEREAS, the Fund currently offers shares in three separate series designated
the Corporate Bond Series, the U.S. Government Series, and the High Yield Series
(the "Series"), such series together with all other series subsequently
established by the Fund with respect to which the Fund desires to retain the
Management Company to render investment advisory services hereunder and with
respect to which the Management Company is willing so to do, being herein
collectively referred to as the "Series", and
WHEREAS, the Management Company is willing to provide investment research and
advice to the Fund on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and mutual agreements made
herein, the parties hereto agree as follows:
1. EMPLOYMENT OF MANAGEMENT COMPANY. The Fund hereby employs the Management
Company to act as investment adviser to each Series of the Fund with respect
to the investment of its assets, and to supervise and arrange the purchase
of securities for and the sale of securities held in the portfolios of the
Series of the Fund, subject always to the supervision of the Board of
Directors of the Fund, during the period and upon and subject to the terms
and conditions herein set forth. The Management Company hereby accepts such
employment and agrees to perform the services required by this Agreement for
the compensation herein provided.
In the event the Fund establishes additional series with respect to which it
desires to retain the Management Company to render investment advisory
services hereunder, it shall notify the Management Company in writing. If
the Management Company is willing to render such services it shall notify
the Fund in writing, whereupon such series shall become a Series subject to
the terms and conditions hereunder, and to such amended or additional
provisions as shall be specifically agreed to by the Fund and the Management
Company in accordance with applicable law.
<PAGE>
2. INVESTMENT ADVISORY DUTIES. The Management Company shall regularly provide
each Series of the Fund with investment research, advice and supervision,
continuously furnish an investment program and recommend that securities
shall be purchased and sold and what portion of the assets of each series
shall be held uninvested and shall arrange for the purchase of securities
and other investments for and the sale of securities and other investments
held in the portfolio of each Series. All investment advice furnished by the
Management Company to each Series under this Section 2 shall at all times
conform to any requirements imposed by the provisions of the Fund's Articles
of Incorporation and Bylaws, the Investment Company Act of 1940 and the
rules and regulations promulgated thereunder, any other applicable
provisions of law, and the terms of the registration statements of the Fund
under the Securities Act of 1933 and the Investment Company Act of 1940, all
as from time to time amended. The Management Company shall advise and assist
the officers or other agents of the Fund in taking such steps as are
necessary or appropriate to carry out the decisions of the Fund's Board of
Directors (and any duly appointed committee thereof) with regard to the
foregoing matters and the general conduct of the Fund's business.
3. PORTFOLIO TRANSACTIONS AND BROKERAGE.
(a) Transactions in portfolio securities shall be effected by the
Management Company, through brokers or otherwise, in the manner
permitted in this Section 3 and in such manner as the Management
Company shall deem to be in the best interests of the Fund after
consideration is given to all relevant factors.
(b) In reaching a judgment relative to the qualification of a broker to
obtain the best execution of a particular transaction, the Management
Company may take into account all relevant factors and circumstances,
including the size of any contemporaneous market in such securities;
the importance to the Fund of speed and efficiency of execution;
whether the particular transaction is part of a larger intended change
in portfolio position in the same securities; the execution
capabilities required by the circumstances of the particular
transaction; the capital required by the transaction; the overall
capital strength of the broker; the broker's apparent knowledge of or
familiarity with sources from or to whom such securities may be
purchased or sold; as well as the efficiency, reliability and
confidentiality with which the broker has handled the execution of
prior similar transactions.
(c) Subject to any statements concerning the allocation of brokerage
contained in the Fund's prospectus or statement of additional
information, the Management Company is authorized to direct the
execution of portfolio transactions for the Fund to brokers who furnish
investment information or research service to the Management Company.
Such allocation shall be in such amounts and proportions as the
Management Company may determine. If the transaction is directed to a
broker providing brokerage and research services to the Management
Company, the commission paid for such transaction may be in excess of
the commission another broker would have charged for effecting that
transaction, if the Management Company shall have determined in good
faith that the commission is reasonable in relation to the value of
<PAGE>
the brokerage and research services provided, viewed in terms of either
that particular transaction or the overall responsibilities of the
Management Company with respect to all accounts as to which it now or
hereafter exercises investment discretion. For purposes of the
immediately preceding sentence, "providing brokerage and research
services" shall have the meaning generally given such terms or similar
terms under Section 28(e)(3) of the Securities Exchange Act of 1934, as
amended.
(d) In the selection of a broker for the execution of any transaction not
subject to fixed commission rates, the Management Company shall have no
duty or obligation to seek advance competitive bidding for the most
favorable negotiated commission rate to be applicable to such
transaction, or to select any broker solely on the basis of its
purported or "posted" commission rates.
(e) In connection with transactions on markets other than national or
regional securities exchanges, the Fund will deal directly with the
selling principal or market maker without incurring charges for the
services of a broker on its behalf unless, in the best judgment of the
Management Company, better price or execution can be obtained in
utilizing the services of a broker.
4. ALLOCATION OF EXPENSES AND CHARGES. The Management Company shall provide
investment advisory, statistical and research facilities and all clerical
services relating to research, statistical and investment work, and shall
provide for the compilation and maintenance of such records relating to
these functions as shall be required under applicable law and the rules and
regulations of the Securities and Exchange Commission. The Management
Company will also provide the Fund with a president, a chief financial
officer, and a secretary, subject to the approval of the Board of Directors,
and will pay the salaries and expenses of such officers of the Fund who are
also directors, officer or employees of the Management Company.
Other than as specifically indicated in the preceding sentences, the
Management Company shall not be required to pay any expenses of the Fund,
and in particular, but without limiting the generality of the foregoing, the
Management Company shall not be required to pay office rental or general
administrative expenses; Board of Directors' fees; legal, auditing and
accounting expenses; insurance premiums; broker's commissions; taxes and
governmental fees and any membership dues; fees of custodian, transfer
agent, registrar and dividend disbursing agent (if any); expenses of
obtaining quotations on the Fund's portfolio securities and pricing of the
Fund's shares; cost of stock certificates and any other expenses (including
clerical expenses) of issue, sale, repurchase or redemption of shares of the
Fund's capital stock; costs and expenses in connection with the registration
of the Fund's capital stock under the Securities Act of 1933 and
qualification of the Fund's capital stock under the Blue Sky laws of the
states where such stock is offered; costs and expenses in connection with
the registration of the Fund under the Investment Company Act of 1940 and
all periodic and other reports required thereunder; expenses of preparing,
printing and distributing reports, proxy statements, prospectuses,
statements or additional information, notices and distributions to
stockholders; costs of stationery; costs of stockholder and other meetings;
<PAGE>
expenses of maintaining the Fund's corporate existence; and such
nonrecurring expenses as may arise including litigation affecting the Fund
and the legal obligations the Fund may have to indemnify its officers and
directors.
5. COMPENSATION OF MANAGEMENT COMPANY.
(a) As compensation for the services rendered by the Management Company as
provided herein, for each of the Fund's fiscal years this Agreement is
in effect, the Fund shall pay the Management Company an annual fee
equal to .5 percent of the average daily closing value of the net
assets of each Series computed on a daily basis. Such fee shall be
adjusted and payable monthly. If this Agreement shall be effective for
only a portion of a year in which a fee is owed for any Series, then
the Management Company's compensation for said year shall be prorated
for such portion. For purposes of this Section 5, the value of the net
assets of the Series shall be computed in the same manner as the value
of such net assets is computed in connection with the determination of
the net asset value of the shares of the Fund as described in the
Fund's Prospectus and Statement of Additional Information. The net
asset value of each Series shall be included in and comprise a part of
the net assets of the Fund for purposes of determining said fee under
this Section.
(b) For each of the Fund's full fiscal years this Agreement remains in
force, the Management Company agrees that if the total annual expenses
of each Series of the Fund, exclusive of interest and taxes and
extraordinary expenses (such as litigation), but inclusive of the
Management Company's compensation, exceed any expense limitation
imposed by state securities law or regulation in any state in which
shares of the Fund are then qualified for sale, as such regulations may
be amended from time to time, the Management Company will contribute to
such Series such funds or to waive such portion of its fee, adjusted
monthly as may be requisite to insure that such annual expenses will
not exceed any such limitation. If this Contract shall be effective for
only a portion of one of the Series' fiscal years, then the maximum
annual expenses shall be prorated for such portion. Brokerage fees and
commissions incurred in connection with the purchase or sale of any
securities by a Series shall not be deemed to be expenses with the
meaning of this paragraph (b).
6. MANAGEMENT COMPANY NOT TO RECEIVE COMMISSIONS. In connection with the
purchase or sale of portfolio securities for the account of the Fund,
neither the Management Company nor any officer or director of the Management
Company shall act as principal or receive any compensation from the Fund
other than its compensation as provided for in Section 5 above. If the
Management Company, or any "affiliated person" (as defined in the Investment
Company Act of 1940) receives any cash, credits, commissions or tender fees
from any person in connection with transactions in the Fund's portfolio
securities (including but not limited to the tender or delivery of any
securities held in the Fund's portfolio), the Management Company shall
immediately pay such amount to the Fund in cash or as a credit against any
then earned but unpaid management fees due by the Fund to the Management
Company.
<PAGE>
7. LIMITATION OF LIABILITY OF MANAGEMENT COMPANY. So long as the Management
Company shall give the Fund the benefit of its best judgment and effort in
rendering services hereunder, the Management Company shall not be liable for
any errors of judgment or mistake of law, or for any loss sustained by
reason of the adoption of any investment policy or the purchase, sale or
retention of any security on its recommendation, whether or not such
recommendation shall have been based upon its own investigation and research
or upon investigation and research made by any other individual, firm or
corporation, if such recommendation shall have been made and such other
individual, firm or corporation shall have been selected with due care and
in good faith. Nothing herein contained shall, however, be construed to
protect the Management Company against any liability to the Fund or its
security holders by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of its reckless
disregard of its obligations and duties under this Agreement. As used in
this Section 7, "Management Company" shall include directors, officers and
employees of the Management Company, as well as that corporation itself.
8. OTHER ACTIVITIES NOT RESTRICTED. Nothing in this Agreement shall prevent the
Management Company or any officer thereof from acting as investment adviser
for any other person, firm, or corporation, nor shall it in any way limit or
restrict the Management Company or any of its directors, officers,
stockholders or employees from buying, selling, or trading any securities
for its own accounts or for the accounts of others for whom it may be
acting; provided, however, that the Management Company expressly represents
that it will undertake no activities which, in its judgment, will conflict
with the performance of its obligations to the Fund under this Agreement.
The Fund acknowledges that the Management Company acts as investment adviser
to other investment companies, and it expressly consents to the Management
Company acting as such; provided, however, that if in the opinion of the
Management Company, particular securities are consistent with the investment
objectives of, and are desirable purchases or sales for the portfolios of
one or more Series and one or more of such other investment companies or
series of such companies at approximately the same time, such purchases or
sales will be made on a proportionate basis if feasible, and if not
feasible, then on a rotating or other equitable basis.
9. DURATION AND TERMINATION OF AGREEMENT. This Agreement shall become effective
on March 27, 1987, provided that on that date it is approved by the holders
of a majority of the outstanding voting securities of each Series of the
Fund. This Agreement shall continue in force until April 1, 1988, and for
successive 12-month periods thereafter, unless terminated, provided each
such continuance is specifically approved at least annually by (a) the vote
of a majority of the entire Board of Directors of the Fund, and the vote of
a majority of the directors of the Fund who are not parties to this
Agreement or interested persons (as such terms are defined in the Investment
Company Act of 1940) of any such party cast in person at a meeting of such
directors called for the purpose of voting upon such approval, or (b) by the
vote of the holders of a majority of the outstanding voting securities of
each series of the Fund (as defined in the Investment Company Act of 1940).
In the event a majority of the outstanding shares of one series vote for
continuance of the Advisory Contract, it will be continued for that series
even though the Advisory Contract is not approved by either a
<PAGE>
majority of the outstanding shares of any other series or by a majority of
outstanding shares of the Fund. Upon this Agreement becoming effective, any
previous agreement between the Fund and the Management Company providing for
investment advisory and management services shall concurrently terminate,
except that such termination shall not affect fees accrued and guarantees of
expenses with respect to any period prior to termination.
This Agreement may be terminated at any time as to any series of the Fund,
without payment of any penalty, by vote of the Board of Directors of the
Fund or by vote of the holders of a majority of the outstanding voting
securities of that series of the Fund, or by the Management Company, upon 60
days' written notice to the other party.
This Agreement shall automatically terminate in the event of its
"assignment" (as defined in the Investment Company Act of 1940).
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their respective corporate officers thereto duly authorized on the
day, month and year first above written.
ATTEST: SECURITY INCOME FUND
Amy J. Lee By: Michael J. Provines
- ----------------------------------- -----------------------------------
Title: Secretary President
ATTEST: SECURITY MANAGEMENT COMPANY
Amy J. Lee By: Michael J. Provines
- ----------------------------------- -----------------------------------
Title: Secretary President
Please note that this Agreement was re-executed October 21, 1991, to correct a
typographical error.
<PAGE>
AMENDMENT TO INVESTMENT ADVISORY CONTRACT
WHEREAS, Security Income Fund (the "Fund") and Security Management Company (the
"Management Company") are parties to an Investment Advisory Contract dated March
27, 1987 (the "Agreement"), under which the Management Company agrees to provide
investment research and advice to the Fund in return for the compensation
specified in the Agreement;
WHEREAS, Security Income Fund currently offers its shares in two series, the
Corporate Bond Series and the U.S. Government Series (hereinafter collectively
referred to as the "Series");
WHEREAS, effective October 19, 1993, the Fund will offer its shares in two
Classes, Class A shares, which are currently being offered, and a new class,
Class B shares;
WHEREAS, the Fund has adopted a Distribution Plan with respect to its Class B
shares and, as a result, such shares are subject to distribution fees to which
Class A shares are not subject;
WHEREAS, the distribution fees associated with Class B shares require the
amendment of the Agreement relative to that class of shares;
WHEREAS, on October 1, 1993, the initial Class B shareholder of each Series of
the Fund approved such amendment to this Agreement;
WHEREAS, the changes to the Agreement which are contemplated by this Amendment
do not affect the interests of Class A shareholders of the Fund;
NOW, THEREFORE, the Fund and the Management Company hereby amend the Investment
Advisory Contract, dated March 27, 1987, effective October 1, 1993, as follows:
A. The Management Company agrees to provide investment research and advice, to
the Fund pursuant to the terms and conditions set forth in the Agreement, as
amended in section B below.
B. Section 5(b) of the Agreement shall be amended by deleting it in its
entirety and replacing it with the following:
(b) For each of the Fund's full fiscal years this Agreement remains in
force, the Management Company agrees that if the total annual expenses
of each Series of the Fund, exclusive of interest and taxes,
extraordinary expenses (such as litigation), and distribution fees paid
under the Fund's Class B Distribution Plan, but inclusive of the
Management Company's compensation, exceed any expense limitation
imposed by state securities law or regulation in any state in which
shares of the Fund are then qualified for sale, as such regulations may
be amended from time to time, the Management Company will contribute to
such Series such funds or waive such portion of its fee, adjusted
monthly as may be requisite to insure that such annual expenses will
not exceed any such limitation. If this Contract shall be effective for
only a portion of
<PAGE>
one of the Series' fiscal years, then the maximum annual expenses shall
be prorated for such portion. Brokerage fees and commissions incurred
in connection with the purchase or sale of any securities by a Series
shall not be deemed to be expenses with the meaning of this paragraph
(b).
IN WITNESS WHEREOF, the parties hereto have made this Amendment to the
Investment Advisory Contract this 1st day of October 1993.
ATTEST: SECURITY INCOME FUND
Amy J. Lee By: Michael J. Provines
- ----------------------------------- -----------------------------------
Amy J. Lee, Secretary President
ATTEST: SECURITY MANAGEMENT COMPANY
Amy J. Lee By: Michael J. Provines
- ----------------------------------- -----------------------------------
Amy J. Lee, Secretary President
<PAGE>
AMENDMENT TO INVESTMENT ADVISORY CONTRACT
WHEREAS, Security Income Fund (the "Fund") and Security Management Company (the
"Management Company") are parties to an Investment Advisory Contract dated March
27, 1987, as amended (the "Advisory Contract"), under which the Management
Company agrees to provide investment research, advice and supervision and
business management services to the Fund in return for the compensation
specified in the Advisory Contract:
WHEREAS, on October 21, 1994, the Board of Directors of the Fund authorized the
Fund to offer its common stock in a new series designated as the Limited
Maturity Bond Series, in addition to its presently offered series of common
stock of Corporate Bond Series and U.S. Government Series;
WHEREAS, on October 21, 1994, the Board of Directors of the Fund further
authorized the Fund to offer shares of the Limited Maturity Bond Series in two
classes, designated Class A shares and Class B shares;
WHEREAS, on October 21, 1994, the Board of Directors of the Fund approved the
amendment of the Advisory Contract to provide that the Management Company would
provide investment advisory and business management services to each class of
common stock of the Limited Maturity Bond Series of the Fund under the terms and
conditions of the Advisory Contract; and
WHEREAS, on December 30, 1994, the initial shareholder of the Limited Maturity
Bond Series approved such amendment to the Advisory Contract;
NOW, THEREFORE BE IT RESOLVED, that the Fund and the Management Company hereby
amend the Advisory Contract, to provide that the Management Company shall
provide all investment advisory services, and each of the Management Company and
the Fund shall fulfill all of their respective obligations under the Advisory
Contract, as to each Series of the Fund, including the Limited Maturity Bond
Series.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to the
Investment Advisory Contract this 30th day of December 1994.
ATTEST: SECURITY INCOME FUND
Amy J. Lee By: John D. Cleland
- ----------------------------------- -----------------------------------
Amy J. Lee, Secretary John D. Cleland, President
ATTEST: SECURITY MANAGEMENT COMPANY
Amy J. Lee By: Jeffrey B. Pantages
- ----------------------------------- -----------------------------------
Amy J. Lee, Secretary Jeffrey B. Pantages, President
<PAGE>
AMENDMENT TO INVESTMENT ADVISORY CONTRACT
WHEREAS, Security Income Fund (the "Fund") and Security Management Company (the
"Management Company") are parties to an Investment Advisory Contract dated March
27, 1987, as amended (the "Advisory Contract"), under which the Management
Company agrees to provide investment research, advice and supervision and
business management services to the Fund in return for the compensation
specified in the Advisory Contract;
WHEREAS, on February 3, 1995, the Board of Directors of the Fund authorized the
Fund to offer its common stock in a new series designated as the Global
Aggressive Bond Series, in addition to its presently offered series of common
stock of Corporate Bond Series, Limited Maturity Bond Series and U.S. Government
Series;
WHEREAS, on February 3, 1995, the Board of Directors of the Fund further
authorized the Fund to offer shares of the Global Aggressive Bond Series in two
classes, designated Class A shares and Class B shares;
WHEREAS, on February 3, 1995, the Board of Directors of the Fund approved the
amendment of the Advisory Contract to provide that the Management Company would
provide investment advisory and business management services to each class of
common stock of the Global Aggressive Bond Series of the Fund under the terms
and conditions of the Advisory Contract; and
WHEREAS, on April 18, 1995, the initial shareholder of the Global Aggressive
Bond Series approved such amendment to the Advisory Contract;
NOW, THEREFORE BE IT RESOLVED, that the Fund and the Management Company hereby
amend the Advisory Contract, dated March 27, 1987, as follows, effective May 1,
1995:
<PAGE>
Paragraph 5(a) shall be amended as follows (new language underlined):
5. COMPENSATION OF MANAGEMENT COMPANY
a) As compensation for the services to be rendered by the Management
Company as provided for herein, for each of the years this Agreement is
in effect, the Fund shall pay the Management Company an annual fee equal
to .75 PERCENT OF THE AVERAGE DAILY CLOSING VALUE OF THE NET ASSETS OF
GLOBAL AGGRESSIVE BOND SERIES OF THE FUND, and .50 percent of the
average daily closing value of the net assets of Corporate Bond Series,
Limited Maturity Bond Series, and U.S. Government Series of the Fund,
computed on a daily basis. Such fee shall be adjusted and payable
monthly. If this Agreement shall be effective for only a portion of a
year, then the Management Company's compensation for said year shall be
prorated for such portion. For purposes of this Section 5, the value of
the net assets of each such Series shall be computed in the same manner
at the end of the business day as the value of such net assets is
computed in connection with the determination of the net asset value of
the Fund's shares as described in the Fund's prospectus.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to the
Investment Advisory Contract this 28 day of April, 1995.
ATTEST: SECURITY INCOME FUND
Amy J. Lee By: John D. Cleland
- ----------------------------------- -----------------------------------
Amy J. Lee, Secretary John D. Cleland, President
ATTEST: SECURITY MANAGEMENT COMPANY
Amy J. Lee By: Jeffrey B. Pantages
- ----------------------------------- -----------------------------------
Amy J. Lee, Secretary Jeffrey B. Pantages, President
<PAGE>
AMENDMENT TO INVESTMENT ADVISORY CONTRACT
WHEREAS, Security Income Fund (the "Fund") and Security Management Company (the
"Management Company") are parties to an Investment Advisory Contract dated March
27, 1987, as amended (the "Advisory Contract"), under which the Management
Company agrees to provide investment research, advice and supervision and
business management services to the Fund in return for the compensation
specified in the Advisory Contract;
WHEREAS, on May 3, 1996, the Board of Directors of the Fund authorized the Fund
to offer its common stock in a new series designated as the High Yield Series,
in addition to its presently offered series of common stock of Corporate Bond
Series, U.S. Government Series, Limited Maturity Bond Series, and Global
Aggressive Bond Series;
WHEREAS, on May 3, 1996, the Board of Directors of the Fund further authorized
the Fund to offer shares of the High Yield Series in two classes, designated
Class A shares and Class B shares;
WHEREAS, on May 3, 1996, the Board of Directors of the Fund approved the
amendment of the Advisory Contract to provide that the Management Company would
provide investment advisory and business management services to each class of
common stock of the High Yield Series of the Fund under the terms and conditions
of the Advisory Contract; and
WHEREAS, this amendment to the Advisory Contract is subject to the approval of
the initial shareholder of the High Yield Series.
NOW, THEREFORE BE IT RESOLVED, that the Fund and the Management Company hereby
amend the Advisory Contract, dated March 27, 1987, as amended as follows,
effective July 1, 1996:
<PAGE>
Paragraph 5(a) shall be amended as follows (new language underlined):
5. COMPENSATION OF MANAGEMENT COMPANY
a) As compensation for the services to be rendered by the Management Company
as provided for herein, for each of the years this Agreement is in effect,
the Fund shall pay the Management Company an annual fee equal to .60 PERCENT
OF THE AVERAGE DAILY CLOSING VALUE OF THE NET ASSETS OF HIGH YIELD SERIES OF
THE FUND, .75 percent of the average daily closing value of the net assets
of Global Aggressive Bond Series of the Fund, and .50 percent of the average
daily closing value of the net assets of Corporate Bond Series, Limited
Maturity Bond Series, and U.S. Government Series of the Fund, computed on a
daily basis. Such fee shall be adjusted and payable monthly. If this
Agreement shall be effective for only a portion of a year, then the
Management Company's compensation for said year shall be prorated for such
portion. For purposes of this Section 5, the value of the net assets of each
such Series shall be computed in the same manner at the end of the business
day as the value of such net assets is computed in connection with the
determination of the net asset value of the Fund's shares as described in
the Fund's prospectus.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to the
Investment Advisory Contract this 13th day of May, 1996.
SECURITY INCOME FUND
By: John D. Cleland
-----------------------------------
John D. Cleland, President
ATTEST:
Amy J. Lee
- -----------------------------------
Amy J. Lee, Secretary
SECURITY MANAGEMENT COMPANY
By: Jeffrey B. Pantages
-----------------------------------
Jeffrey B. Pantages, President
ATTEST:
Amy J. Lee
- -----------------------------------
Amy J. Lee, Secretary
<PAGE>
AMENDMENT TO INVESTMENT ADVISORY CONTRACT
WHEREAS, Security Income Fund (the "Fund") and Security Management Company (the
"Management Company") are parties to an Investment Advisory Contract, dated
March 27, 1987, as amended (the "Advisory Contract"), under which the Management
Company agrees to provide investment research, advice and supervision and
business management services to the Fund in return for the compensation
specified in the Advisory Contract;
WHEREAS, on October 31, 1996, the operations of the Management Company, a Kansas
corporation, will be transferred to Security Management Company, LLC ("SMC,
LLC"), a Kansas limited liability company; and
WHEREAS, SMC, LLC desires to assume all rights, duties and obligations of the
Management Company under the Advisory Contract.
NOW THEREFORE, in consideration of the premises and mutual agreements made
herein, the parties hereto agree as follows:
1. The Advisory Contract is hereby amended to substitute SMC, LLC for Security
Management Company, with the same effect as though SMC, LLC were the
originally named management company, effective November 1, 1996;
2. SMC, LLC agrees to assume the rights, duties and obligations of Security
Management Company pursuant to the terms of the Advisory Contract.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to Advisory
Contract this 1st day of November, 1996.
SECURITY INCOME FUND SECURITY MANAGEMENT COMPANY, LLC
By: JOHN D. CLELAND By: JAMES R. SCHMANK
------------------------------ -----------------------------------
John D. Cleland, President James R. Schmank, President
ATTEST: ATTEST:
AMY J. LEE AMY J. LEE
- ----------------------------------- ----------------------------------------
Amy J. Lee, Secretary Amy J. Lee, Secretary
<PAGE>
CUSTODY AGREEMENT
DATED JANUARY 1, 1995
BETWEEN
UMB BANK, N.A.
AND
SECURITY MANAGEMENT COMPANY
FAMILY OF FUNDS
<PAGE>
TABLE OF CONTENTS
SECTION PAGE
1. APPOINTMENT OF CUSTODIAN 1
2. DEFINITIONS 1
(a) Securities 1
(b) Assets 1
(c) Instructions and Special Instructions 1
3. DELIVERY OF CORPORATE DOCUMENTS 2
4. POWERS AND DUTIES OF CUSTODIAN AND DOMESTIC SUBCUSTODIAN 3
(a) Safekeeping 3
(b) Manner of Holding Securities 4
(c) Free Delivery of Assets 6
(d) Exchange of Securities 6
(e) Purchases of Assets 6
(f) Sales of Assets 7
(g) Options 8
(h) Futures Contracts 8
(i) Segregated Accounts 9
(j) Depository Receipts 9
(k) Corporate Actions, Put Bonds, Called Bonds, Etc. 10
(l) Interest Bearing Deposits 10
(m) Foreign Exchange Transactions Other than as Principal 11
(n) Pledges or Loans of Securities 11
(o) Stock Dividends, Rights, Etc. 12
(p) Routine Dealings 12
(q) Collections 12
(r) Bank Accounts 13
(s) Dividends, Distributions and Redemptions 13
(t) Proceeds from Shares Sold 13
(u) Proxies and Notices; Compliance with the Shareholders
Communication Act of 1985 14
(v) Books and Records 14
(w) Opinion of Fund's Independent Certified Public Accountants 14
(x) Reports by Independent Certified Public Accountants 14
(y) Bills and Other Disbursements 15
<PAGE>
5. SUBCUSTODIANS 15
(a) Domestic Subcustodians 15
(b) Foreign Subcustodians 15
(c) Interim Subcustodians 16
(d) Special Subcustodians 17
(e) Termination of a Subcustodian 17
(f) Certification Regarding Foreign Subcustodians 17
6. STANDARD OF CARE 17
(a) General Standard of Care 17
(b) Actions Prohibited by Applicable Law, Events Beyond Custodian's
Control, Armed Conflict, Sovereign Risk, Etc. 18
(c) Liability for Past Records 18
(d) Advice of Counsel 18
(e) Advice of the Fund and Others 19
(f) Instructions Appearing to be Genuine 19
(g) Exceptions from Liability 19
7. LIABILITY OF THE CUSTODIAN FOR ACTIONS OF OTHERS 20
(a) Domestic Subcustodians 20
(b) Liability for Acts and Omissions of Foreign Subcustodians 20
(c) Securities Systems, Interim Subcustodians, Special
Subcustodians, Securities Depositories and Clearing Agencies 20
(d) Defaults or Insolvencies of Brokers, Banks, Etc. 20
(e) Reimbursement of Expenses 20
8. INDEMNIFICATION 21
(a) Indemnification by Fund 21
(b) Indemnification by Custodian 21
9. ADVANCES 21
10. LIENS 22
11. COMPENSATION 22
12. POWERS OF ATTORNEY 22
13. TERMINATION AND ASSIGNMENT 23
14. ADDITIONAL FUNDS 23
15. NOTICES 23
16. MISCELLANEOUS 24
<PAGE>
CUSTODY AGREEMENT
This agreement made as of this 1st day of January, 1995, between UMB Bank, n.a.,
a national banking association with its principal place of business located at
Kansas City, Missouri (hereinafter "Custodian"), and each of the Funds which
have executed the signature page hereof together with such additional Funds
which shall be made parties to this Agreement by the execution of a separate
signature page hereto (individually, a "Fund" and collectively, the "Funds").
WITNESSETH:
WHEREAS, each Fund is registered as an open-end management investment company
under the Investment Company Act of 1940, as amended; and
WHEREAS, each Fund desires to appoint Custodian as its custodian for the custody
of Assets (as hereinafter defined) owned by such Fund which Assets are to be
held in such accounts as such Fund may establish from time to time; and
WHEREAS, Custodian is willing to accept such appointment on the terms and
conditions hereof.
NOW, THEREFORE, in consideration of the mutual promises contained herein, the
parties hereto, intending to be legally bound, mutually covenant and agree as
follows:
1. APPOINTMENT OF CUSTODIAN.
Each Fund hereby constitutes and appoints the Custodian as custodian of
Assets belonging to each such Fund which have been or may be from time to
time deposited with the Custodian. Custodian accepts such appointment as a
custodian and agrees to perform the duties and responsibilities of
Custodian as set forth herein on the conditions set forth herein.
2. DEFINITIONS.
For purposes of this Agreement, the following terms shall have the meanings
so indicated:
(a) "Security" or "Securities" shall mean stocks, bonds, bills, rights,
script, warrants, interim certificates and all negotiable or
nonnegotiable paper commonly known as Securities and other
instruments or obligations.
(b) "Assets" shall mean Securities, monies and other property held by
the Custodian for the benefit of a Fund.
(c)(1) "Instructions", as used herein, shall mean: (i) a tested telex, a
written (including, without limitation, facsimile transmission)
request, direction, instruction or
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<PAGE>
certification signed or initialed by or on behalf of a Fund by an
Authorized Person; (ii) a telephonic or other oral communication
from a person the Custodian reasonably believes to be an Authorized
Person; or (iii) a communication effected directly between an
electro-mechanical or electronic device or system (including,
without limitation, computers) on behalf of a Fund. Instructions in
the form of oral communications shall be confirmed by the
appropriate Fund by tested telex or in writing in the manner set
forth in clause (i) above, but the lack of such confirmation shall
in no way affect any action taken by the Custodian in reliance upon
such oral Instructions prior to the Custodian's receipt of such
confirmation. Each Fund authorizes the Custodian to record any and
all telephonic or other oral Instructions communicated to the
Custodian.
(c)(2) "Special Instructions", as used herein, shall mean Instructions
countersigned or confirmed in writing by the Treasurer or any
Assistant Treasurer of a Fund or any other person designated by the
Treasurer of such Fund in writing, which countersignature or
confirmation shall be included on the same instrument containing
the Instructions or on a separate instrument relating thereto.
(c)(3) Instructions and Special Instructions shall be delivered to the
Custodian at the address and/or telephone, facsimile transmission
or telex number agreed upon from time to time by the Custodian and
each Fund.
(c)(4) Where appropriate, Instructions and Special Instructions shall be
continuing instructions.
3. DELIVERY OF CORPORATE DOCUMENTS.
Each of the parties to this Agreement represents that its execution does
not violate any of the provisions of its respective charter, articles of
incorporation, articles of association or bylaws and all required corporate
action to authorize the execution and delivery of this Agreement has been
taken.
Each Fund has furnished the Custodian with copies, properly certified or
authenticated, with all amendments or supplements thereto, of the following
documents:
(a) Certificate of Incorporation (or equivalent document) of the Fund
as in effect on the date hereof;
(b) By-Laws of the Fund as in effect on the date hereof;
(c) Resolutions of the Board of Directors of the Fund appointing the
Custodian and approving the form of this Agreement; and
(d) The Fund's current prospectus and statements of additional
information.
2
<PAGE>
Each Fund shall promptly furnish the Custodian with copies of any updates,
amendments or supplements to the foregoing documents.
In addition, each Fund has delivered or will promptly deliver to the
Custodian, copies of the Resolution(s) of its Board of Directors or
Trustees and all amendments or supplements thereto, properly certified or
authenticated, designating certain officers or employees of each such Fund
who will have continuing authority to certify to the Custodian: (a) the
names, titles, signatures and scope of authority of all persons authorized
to give Instructions or any other notice, request, direction, instruction,
certificate or instrument on behalf of each Fund, and (b) the names, titles
and signatures of those persons authorized to countersign or confirm
Special Instructions on behalf of each Fund (in both cases collectively,
the "Authorized Persons" and individually, an "Authorized Person"). Such
Resolutions and certificates may be accepted and relied upon by the
Custodian as conclusive evidence of the facts set forth therein and shall
be considered to be in full force and effect until delivery to the
Custodian of a similar Resolution or certificate to the contrary. Upon
delivery of a certificate which deletes or does not include the name(s) of
a person previously authorized to give Instructions or to countersign or
confirm Special Instructions, such persons shall no longer be considered an
Authorized Person authorized to give Instructions or to countersign or
confirm Special Instructions. Unless the certificate specifically requires
that the approval of anyone else will first have been obtained, the
Custodian will be under no obligation to inquire into the right of the
person giving such Instructions or Special Instructions to do so.
Notwithstanding any of the foregoing, no Instructions or Special
Instructions received by the Custodian from a Fund will be deemed to
authorize or permit any director, trustee, officer, employee, or agent of
such Fund to withdraw any of the Assets of such Fund upon the mere receipt
of such authorization, Special Instructions or Instructions from such
director, trustee, officer, employee or agent.
4. POWERS AND DUTIES OF CUSTODIAN AND DOMESTIC SUBCUSTODIAN.
Except for Assets held by any Subcustodian appointed pursuant to Sections
5(b), (c), or (d) of this Agreement, the Custodian shall have and perform
the powers and duties hereinafter set forth in this Section 4. For purposes
of this Section 4 all references to powers and duties of the "Custodian"
shall also refer to any Domestic Subcustodian appointed pursuant to Section
5(a).
(a) SAFEKEEPING.
The Custodian will keep safely the Assets of each Fund which are
delivered to it from time to time. The Custodian shall not be
responsible for any property of a Fund held or received by such
Fund and not delivered to the Custodian.
3
<PAGE>
(b) MANNER OF HOLDING SECURITIES.
(1) The Custodian shall at all times hold Securities of each Fund
either: (i) by physical possession of the share certificates
or other instruments representing such Securities in
registered or bearer form; or (ii) in book-entry form by a
Securities System (as hereinafter defined) in accordance with
the provisions of sub-paragraph (3) below.
(2) The Custodian may hold registrable portfolio Securities which
have been delivered to it in physical form, by registering the
same in the name of the appropriate Fund or its nominee, or in
the name of the Custodian or its nominee, for whose actions
such Fund and Custodian, respectively, shall be fully
responsible. Upon the receipt of Instructions, the Custodian
shall hold such Securities in street certificate form, so
called, with or without any indication of fiduciary capacity.
However, unless it receives Instructions to the contrary, the
Custodian will register all such portfolio Securities in the
name of the Custodian's authorized nominee. All such
Securities shall be held in an account of the Custodian
containing only assets of the appropriate Fund or only assets
held by the Custodian as a fiduciary, provided that the
records of the Custodian shall indicate at all times the Fund
or other customer for which such Securities are held in such
accounts and the respective interests therein.
(3) The Custodian may deposit and/or maintain domestic Securities
owned by a Fund in, and each Fund hereby approves use of: (a)
The Depository Trust Company; (b) The Participants Trust
Company; and (c) any book-entry system as provided in (i)
Subpart 0 of Treasury Circular No. 300, 31 CFR 306.115, (ii)
Subpart B of Treasury Circular Public Debt Series No. 27-76,
31 CFR 350.2, or (iii) the book-entry regulations of federal
agencies substantially in the form of 31 CFR 306.115. Upon the
receipt of Special Instructions, the Custodian may deposit
and/or maintain domestic Securities owned by a Fund in any
other domestic clearing agency registered with the Securities
and Exchange Commission ("SEC") under Section 17A of the
Securities Exchange Act of 1934 (or as may otherwise be
authorized by the SEC to serve in the capacity of depository
or clearing agent for the Securities or other assets of
investment companies) which acts as a Securities depository.
Each of the foregoing shall be referred to in this Agreement
as a "Securities System", and all such Securities Systems
shall be listed on the attached Appendix A. Use of a
Securities System shall be in accordance with applicable
Federal Reserve Board and SEC rules and regulations, if any,
and subject to the following provisions:
(i) The Custodian may deposit the Securities directly or
through one or more agents or Subcustodians which are
also qualified to act as custodians for investment
companies.
4
<PAGE>
(ii) The Custodian shall deposit and/or maintain the
Securities in a Securities System, provided that such
Securities are represented in an account ("Account") of
the Custodian in the Securities System that includes
only assets held by the Custodian as a fiduciary,
custodian or otherwise for customers.
(iii) The books and records of the Custodian shall at all
times identify those Securities belonging to any one or
more Funds which are maintained in a Securities System.
(iv) The Custodian shall pay for Securities purchased for
the account of a Fund only upon (a) receipt of advice
from the Securities System that such Securities have
been transferred to the Account of the Custodian in
accordance with the rules of the Securities System, and
(b) the making of an entry on the records of the
Custodian to reflect such payment and transfer for the
account of such Fund. The Custodian shall transfer
Securities sold for the account of a Fund only upon (a)
receipt of advice from the Securities System that
payment for such Securities has been transferred to the
Account of the Custodian in accordance with the rules
of the Securities System, and (b) the making of an
entry on the records of the Custodian to reflect such
transfer and payment for the account of such Fund.
Copies of all advices from the Securities System
relating to transfers of Securities for the account of
a Fund shall be maintained for such Fund by the
Custodian. The Custodian shall deliver to a Fund on the
next succeeding business day daily transaction reports
which shall include each day's transactions in the
Securities System for the account of such Fund. Such
transaction reports shall be delivered to such Fund or
any agent designated by such Fund pursuant to
Instructions, by computer or in such other manner as
such Fund and Custodian may agree.
(v) The Custodian shall, if requested by a Fund pursuant to
Instructions, provide such Fund with reports obtained
by the Custodian or any Subcustodian with respect to a
Securities System's accounting system, internal
accounting control and procedures for safeguarding
Securities deposited in the Securities System.
(vi) Upon receipt of Special Instructions, the Custodian
shall terminate the use of any Securities System on
behalf of a Fund as promptly as practicable and shall
take all actions reasonably practicable to safeguard
the Securities of such Fund maintained with such
Securities System.
5
<PAGE>
(c) FREE DELIVERY OF ASSETS.
Notwithstanding any other provision of this Agreement and except as
provided in Section 3 hereof, the Custodian, upon receipt of
Special Instructions, will undertake to make free delivery of
Assets, provided such Assets are on hand and available, in
connection with a Fund's transactions and to transfer such Assets
to such broker, dealer, Subcustodian, bank, agent, Securities
System or otherwise as specified in such Special Instructions.
(d) EXCHANGE OF SECURITIES.
Upon receipt of Instructions, the Custodian will exchange portfolio
Securities held by it for a Fund for other Securities or cash paid
in connection with any reorganization, recapitalization, merger,
consolidation, or conversion of convertible Securities, and will
deposit any such Securities in accordance with the terms of any
reorganization or protective plan.
Without Instructions, the Custodian is authorized to exchange
Securities held by it in temporary form for Securities in
definitive form, to surrender Securities for transfer into a name
or nominee name as permitted in Section 4(b)(2), to effect an
exchange of shares in a stock split or when the par value of the
stock is changed, to sell any fractional shares, and, upon
receiving payment therefor, to surrender bonds or other Securities
held by it at maturity or call.
(e) PURCHASE OF ASSETS.
(1) SECURITIES PURCHASES. In accordance with Instructions, the
Custodian shall, with respect to a purchase of Securities, pay
for such Securities out of monies held for a Fund's account
for which the purchase was made, but only insofar as monies
are available therein for such purpose, and receive the
portfolio Securities so purchased. Unless the Custodian has
received Special Instructions to the contrary, such payment
will be made only upon receipt of Securities by the Custodian,
a clearing corporation of a national Securities exchange of
which the Custodian is a member, or a Securities System in
accordance with the provisions of Section 4(b)(3) hereof.
Notwithstanding the foregoing, upon receipt of Instructions:
(i) in connection with a repurchase agreement, the Custodian
may release funds to a Securities System prior to the receipt
of advice from the Securities System that the Securities
underlying such repurchase agreement have been transferred by
book-entry into the Account maintained with such Securities
System by the Custodian, provided that the Custodian's
instructions to the Securities System require that the
Securities System may make payment of such funds to the other
party to the repurchase agreement only upon transfer by
book-entry of the Securities underlying the repurchase
agreement into such Account; (ii) in the case of Interest
Bearing Deposits, currency deposits, and
6
<PAGE>
other deposits, foreign exchange transactions, futures
contracts or options, pursuant to Sections 4(g), 4(h), 4(1),
and 4(m) hereof, the Custodian may make payment therefor
before receipt of an advice of transaction; and (iii) in the
case of Securities as to which payment for the Security and
receipt of the instrument evidencing the Security are under
generally accepted trade practice or the terms of the
instrument representing the Security expected to take place in
different locations or through separate parties, such as
commercial paper which is indexed to foreign currency exchange
rates, derivatives and similar Securities, the Custodian may
make payment for such Securities prior to delivery thereof in
accordance with such generally accepted trade practice or the
terms of the instrument representing such Security.
(2) OTHER ASSETS PURCHASED. Upon receipt of Instructions and
except as otherwise provided herein, the Custodian shall pay
for and receive other Assets for the account of a Fund as
provided in Instructions.
(f) SALES OF ASSETS.
(1) SECURITIES SOLD. In accordance with Instructions, the
Custodian will, with respect to a sale, deliver or cause to be
delivered the Securities thus designated as sold to the broker
or other person specified in the Instructions relating to such
sale. Unless the Custodian has received Special Instructions
to the contrary, such delivery shall be made only upon receipt
of payment therefor in the form of: (a) cash, certified check,
bank cashier's check, bank credit, or bank wire transfer; (b)
credit to the account of the Custodian with a clearing
corporation of a national Securities exchange of which the
Custodian is a member; or (c) credit to the Account of the
Custodian with a Securities System, in accordance with the
provisions of Section 4(b)(3) hereof. Notwithstanding the
foregoing, Securities held in physical form may be delivered
and paid for in accordance with "street delivery custom" to a
broker or its clearing agent, against delivery to the
Custodian of a receipt for such Securities, provided that the
Custodian shall have taken reasonable steps to ensure prompt
collection of the payment for, or return of, such Securities
by the broker or its clearing agent, and provided further that
the Custodian shall not be responsible for the selection of or
the failure or inability to perform of such broker or its
clearing agent or for any related loss arising from delivery
or custody of such Securities prior to receiving payment
therefor.
(2) OTHER ASSETS SOLD. Upon receipt of Instructions and except as
otherwise provided herein, the Custodian shall receive payment
for and deliver other Assets for the account of a Fund as
provided in Instructions.
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(g) OPTIONS.
(1) Upon receipt of Instructions relating to the purchase of an
option or sale of a covered call option, the Custodian shall:
(a) receive and retain confirmations or other documents, if
any, evidencing the purchase or writing of the option by a
Fund; (b) if the transaction involves the sale of a covered
call option, deposit and maintain in a segregated account the
Securities (either physically or by book-entry in a Securities
System) subject to the covered call option written on behalf
of such Fund; and (c) pay, release and/or transfer such
Securities, cash or other Assets in accordance with any
notices or other communications evidencing the expiration,
termination or exercise of such options which are furnished to
the Custodian by the Options Clearing Corporation (the "OCC"),
the securities or options exchanges on which such options were
traded, or such other organization as may be responsible for
handling such option transactions.
(2) Upon receipt of Instructions relating to the sale of a naked
option (including stock index and commodity options), the
Custodian, the appropriate Fund and the broker-dealer shall
enter into an agreement to comply with the rules of the OCC or
of any registered national securities exchange or similar
organizations(s). Pursuant to that agreement and such Fund's
Instructions, the Custodian shall: (a) receive and retain
confirmations or other documents, if any, evidencing the
writing of the option; (b) deposit and maintain in a
segregated account, Securities (either physically or by
book-entry in a Securities System), cash and/or other Assets;
and (c) pay, release and/or transfer such Securities, cash or
other Assets in accordance with any such agreement and with
any notices or other communications evidencing the expiration,
termination or exercise of such option which are furnished to
the Custodian by the OCC, the securities or options exchanges
on which such options were traded, or such other organization
as may be responsible for handling such option transactions.
The appropriate Fund and the broker-dealer shall be
responsible for determining the quality and quantity of assets
held in any segregated account established in compliance with
applicable margin maintenance requirements and the performance
of other terms of any option contract.
(h) FUTURES CONTRACTS.
Upon receipt of Instructions, the Custodian shall enter into a
futures margin procedural agreement among the appropriate Fund, the
Custodian and the designated futures commission merchant (a
"Procedural Agreement"). Under the Procedural Agreement the
Custodian shall: (a) receive and retain confirmations, if any,
evidencing the purchase or sale of a futures contract or an option
on a futures contract by such Fund; (b) deposit and maintain in a
segregated account cash, Securities and/or other Assets designated
as initial, maintenance or variation
8
<PAGE>
"margin" deposits intended to secure such Fund's performance of its
obligations under any futures contracts purchased or sold, or any
options on futures contracts written by such Fund, in accordance
with the provisions of any Procedural Agreement designed to comply
with the provisions of the Commodity Futures Trading Commission
and/or any commodity exchange or contract market (such as the
Chicago Board of Trade), or any similar organization(s), regarding
such margin deposits; and (c) release Assets from and/or transfer
Assets into such margin accounts only in accordance with any such
Procedural Agreements. The appropriate Fund and such futures
commission merchant shall be responsible for determining the type
and amount of Assets held in the segregated account or paid to the
broker-dealer in compliance with applicable margin maintenance
requirements and the performance of any futures contract or option
on a futures contract in accordance with its terms.
(i) SEGREGATED ACCOUNTS.
Upon receipt of Instructions, the Custodian shall establish and
maintain on its books a segregated account or accounts for and on
behalf of a Fund, into which account or accounts may be transferred
Assets of such Fund, including Securities maintained by the
Custodian in a Securities System pursuant to Paragraph (b)(3) of
this Section 4, said account or accounts to be maintained (i) for
the purposes set forth in Sections 4(g), 4(h) and 4(n) and (ii) for
the purpose of compliance by such Fund with the procedures required
by the SEC Investment Company Act Release Number 10666 or any
subsequent release or releases relating to the maintenance of
segregated accounts by registered investment companies, or (iii)
for such other purposes as may be set forth, from time to time, in
Special Instructions. The Custodian shall not be responsible for
the determination of the type or amount of Assets to be held in any
segregated account referred to in this paragraph, or for compliance
by the Fund with required procedures noted in (ii) above.
(j) DEPOSITORY RECEIPTS.
Upon receipt of Instructions, the Custodian shall surrender or
cause to be surrendered Securities to the depositary used for such
Securities by an issuer of American Depositary Receipts or
International Depositary Receipts (hereinafter referred to,
collectively, as "ADRs"), against a written receipt therefor
adequately describing such Securities and written evidence
satisfactory to the organization surrendering the same that the
depositary has acknowledged receipt of instructions to issue ADRs
with respect to such Securities in the name of the Custodian or a
nominee of the Custodian, for delivery in accordance with such
instructions.
Upon receipt of Instructions, the Custodian shall surrender or
cause to be surrendered ADRs to the issuer thereof, against a
written receipt therefor adequately describing the ADRs surrendered
and written evidence satisfactory to the organization surrendering
the same that the issuer of the ADRs has
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acknowledged receipt of instructions to cause its depository to
deliver the Securities underlying such ADRs in accordance with such
instructions.
(k) CORPORATE ACTIONS, PUT BONDS, CALLED BONDS, ETC.
Upon receipt of Instructions, the Custodian shall: (a) deliver
warrants, puts, calls, rights or similar Securities to the issuer
or trustee thereof (or to the agent of such issuer or trustee) for
the purpose of exercise or sale, provided that the new Securities,
cash or other Assets, if any, acquired as a result of such actions
are to be delivered to the Custodian; and (b) deposit Securities
upon invitations for tenders thereof, provided that the
consideration for such Securities is to be paid or delivered to the
Custodian, or the tendered Securities are to be returned to the
Custodian.
Notwithstanding any provision of this Agreement to the contrary,
the Custodian shall take all necessary action, unless otherwise
directed to the contrary in Instructions, to comply with the terms
of all mandatory or compulsory exchanges, calls, tenders,
redemptions, or similar rights of security ownership, and shall
notify the appropriate Fund of such action in writing by facsimile
transmission or in such other manner as such Fund and Custodian may
agree in writing.
The Fund agrees that if it gives an Instruction for the performance
of an act on the last permissible date of a period established by
any optional offer or on the last permissible date for the
performance of such act, the Fund shall hold the Bank harmless from
any adverse consequences in connection with acting upon or failing
to act upon such Instructions.
(l) INTEREST BEARING DEPOSITS.
Upon receipt of Instructions directing the Custodian to purchase
interest bearing fixed term and call deposits (hereinafter referred
to, collectively, as "Interest Bearing Deposits") for the account
of a Fund, the Custodian shall purchase such Interest Bearing
Deposits in the name of such Fund with such banks or trust
companies, including the Custodian, any Subcustodian or any
subsidiary or affiliate of the Custodian (hereinafter referred to
as "Banking Institutions"), and in such amounts as such Fund may
direct pursuant to Instructions. Such Interest Bearing Deposits may
be denominated in U.S. dollars or other currencies, as such Fund
may determine and direct pursuant to Instructions. The
responsibilities of the Custodian to a Fund for Interest Bearing
Deposits issued by the Custodian shall be that of a U.S. bank for a
similar deposit. With respect to Interest Bearing Deposits other
than those issued by the Custodian, (a) the Custodian shall be
responsible for the collection of income and the transmission of
cash to and from such accounts; and (b) the Custodian shall have no
duty with respect to the selection of the Banking Institution or
for the failure of such Banking Institution to pay upon demand.
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(m) FOREIGN EXCHANGE TRANSACTIONS OTHER THAN AS PRINCIPAL.
(1) Upon receipt of Instructions, the Custodian shall settle
foreign exchange contracts or options to purchase and sell
foreign currencies for spot and future delivery on behalf of
and for the account of a Fund with such currency brokers or
Banking Institutions as such Fund may determine and direct
pursuant to Instructions. Each Fund accepts full
responsibility for its use of third party foreign exchange
brokers and for execution of said foreign exchange contracts
and understands that the Fund shall be responsible for any and
all costs and interest charges which may be incurred as a
result of the failure or delay of its third party broker to
deliver foreign exchange. The Custodian shall have no
responsibility with respect to the selection of the currency
brokers or Banking Institutions with which a Fund deals or, so
long as the Custodian acts in accordance with Instructions,
for the failure of such brokers or Banking Institutions to
comply with the terms of any contract or option.
(2) Notwithstanding anything to the contrary contained herein,
upon receipt of Instructions the Custodian may, in connection
with a foreign exchange contract, make free outgoing payments
of cash in the form of U.S. Dollars or foreign currency prior
to receipt of confirmation of such foreign exchange contract
or confirmation that the countervalue currency completing such
contract has been delivered or received.
(n) PLEDGES OR LOANS OF SECURITIES.
(1) Upon receipt of Instructions from a Fund, the Custodian will
release or cause to be released Securities held in custody to
the pledgees designated in such Instructions by way of pledge
or hypothecation to secure loans incurred by such Fund with
various lenders including but not limited to UMB Bank, n.a.;
provided, however, that the Securities shall be released only
upon payment to the Custodian of the monies borrowed, except
that in cases where additional collateral is required to
secure existing borrowings, further Securities may be released
or delivered, or caused to be released or delivered for that
purpose upon receipt of Instructions. Upon receipt of
Instructions, the Custodian will pay, but only from funds
available for such purpose, any such loan upon re-delivery to
it of the Securities pledged or hypothecated therefor and upon
surrender of the note or notes evidencing such loan. In lieu
of delivering collateral to a pledgee, the Custodian, on the
receipt of Instructions, shall transfer the pledged Securities
to a segregated account for the benefit of the pledgee.
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(2) Upon receipt of Special Instructions, and execution of a
separate Securities Lending Agreement, the Custodian will
release Securities held in custody to the borrower designated
in such Instructions and may, except as otherwise provided
below, deliver such Securities prior to the receipt of
collateral, if any, for such borrowing, provided that, in case
of loans of Securities held by a Securities System that are
secured by cash collateral, the Custodian's instructions to
the Securities System shall require that the Securities System
deliver the Securities of the appropriate Fund to the borrower
thereof only upon receipt of the collateral for such
borrowing. The Custodian shall have no responsibility or
liability for any loss arising from the delivery of Securities
prior to the receipt of collateral. Upon receipt of
Instructions and the loaned Securities, the Custodian will
release the collateral to the borrower.
(o) STOCK DIVIDENDS, RIGHTS, ETC.
The Custodian shall receive and collect all stock dividends,
rights, and other items of like nature and, upon receipt of
Instructions, take action with respect to the same as directed in
such Instructions.
(p) ROUTINE DEALINGS.
The Custodian will, in general, attend to all routine and
mechanical matters in accordance with industry standards in
connection with the sale, exchange, substitution, purchase,
transfer, or other dealings with Securities or other property of
each Fund except as may be otherwise provided in this Agreement or
directed from time to time by Instructions from any particular
Fund. The Custodian may also make payments to itself or others from
the Assets for disbursements and out-of-pocket expenses incidental
to handling Securities or other similar items relating to its
duties under this Agreement, provided that all such payments shall
be accounted for to the appropriate Fund.
(q) COLLECTIONS.
The Custodian shall (a) collect amounts due and payable to each
Fund with respect to portfolio Securities and other Assets; (b)
promptly credit to the account of each Fund all income and other
payments relating to portfolio Securities and other Assets held by
the Custodian hereunder upon Custodian's receipt of such income or
payments or as otherwise agreed in writing by the Custodian and any
particular Fund; (c) promptly endorse and deliver any instruments
required to effect such collection; and (d) promptly execute
ownership and other certificates and affidavits for all federal,
state, local and foreign tax purposes in connection with receipt of
income or other payments with respect to portfolio Securities and
other Assets, or in connection with the transfer of such Securities
or other Assets; provided, however, that with respect to portfolio
Securities registered in so-called street name, or physical
Securities with variable interest rates, the Custodian shall use
its
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best efforts to collect amounts due and payable to any such Fund.
The Custodian shall notify a Fund in writing by facsimile
transmission or in such other manner as such Fund and Custodian may
agree in writing if any amount payable with respect to portfolio
Securities or other Assets is not received by the Custodian when
due. The Custodian shall not be responsible for the collection of
amounts due and payable with respect to portfolio Securities or
other Assets that are in default.
(r) BANK ACCOUNTS.
Upon Instructions, the Custodian shall open and operate a bank
account or accounts on the books of the Custodian; provided that
such bank account(s) shall be in the name of the Custodian or a
nominee thereof, for the account of one or more Funds, and shall be
subject only to draft or order of the Custodian. The
responsibilities of the Custodian to any one or more such Funds for
deposits accepted on the Custodian's books shall be that of a U.S.
bank for a similar deposit.
(s) DIVIDENDS, DISTRIBUTIONS AND REDEMPTIONS.
To enable each Fund to pay dividends or other distributions to
shareholders of each such Fund and to make payment to shareholders
who have requested repurchase or redemption of their shares of each
such Fund (collectively, the "Shares"), the Custodian shall release
cash or Securities insofar as available. In the case of cash, the
Custodian shall, upon the receipt of Instructions, transfer such
funds by check or wire transfer to any account at any bank or trust
company designated by each such Fund in such Instructions. In the
case of Securities, the Custodian shall, upon the receipt of
Special Instructions, make such transfer to any entity or account
designated by each such Fund in such Special Instructions.
(t) PROCEEDS FROM SHARES SOLD.
The Custodian shall receive funds representing cash payments
received for shares issued or sold from time to time by each Fund,
and shall credit such funds to the account of the appropriate Fund.
The Custodian shall notify the appropriate Fund of Custodian's
receipt of cash in payment for shares issued by such Fund by
facsimile transmission or in such other manner as such Fund and the
Custodian shall agree. Upon receipt of Instructions, the Custodian
shall: (a) deliver all federal funds received by the Custodian in
payment for shares as may be set forth in such Instructions and at
a time agreed upon between the Custodian and such Fund; and (b)
make federal funds available to a Fund as of specified times agreed
upon from time to time by such Fund and the Custodian, in the
amount of checks received in payment for shares which are deposited
to the accounts of such Fund.
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(u) PROXIES AND NOTICES; COMPLIANCE WITH THE SHAREHOLDERS COMMUNICATION
ACT OF 1985.
The Custodian shall deliver or cause to be delivered to the
appropriate Fund all forms of proxies, all notices of meetings, and
any other notices or announcements affecting or relating to
Securities owned by such Fund that are received by the Custodian,
any Subcustodian, or any nominee of either of them, and, upon
receipt of Instructions, the Custodian shall execute and deliver,
or cause such Subcustodian or nominee to execute and deliver, such
proxies or other authorizations as may be required. Except as
directed pursuant to Instructions, neither the Custodian nor any
Subcustodian or nominee shall vote upon any such Securities, or
execute any proxy to vote thereon, or give any consent or take any
other action with respect thereto.
The Custodian will not release the identity of any Fund to an
issuer which requests such information pursuant to the Shareholder
Communications Act of 1985 for the specific purpose of direct
communications between such issuer and any such Fund unless a
particular Fund directs the Custodian otherwise in writing.
(v) BOOKS AND RECORDS.
The Custodian shall maintain such records relating to its
activities under this Agreement as are required to be maintained by
Rule 31a-1 under the Investment Company Act of 1940 ("the 1940
Act") and to preserve them for the periods prescribed in Rule 31a-2
under the 1940 Act. These records shall be open for inspection by
duly authorized officers, employees or agents (including
independent public accountants) of the appropriate Fund during
normal business hours of the Custodian.
The Custodian shall provide accountings relating to its activities
under this Agreement as shall be agreed upon by each Fund and the
Custodian.
(w) OPINION OF FUND'S INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.
The Custodian shall take all reasonable action as each Fund may
request to obtain from year to year favorable opinions from each
such Fund's independent certified public accountants with respect
to the Custodian's activities hereunder and in connection with the
preparation of each such Fund's periodic reports to the SEC and
with respect to any other requirements of the SEC.
(x) REPORTS BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.
At the request of a Fund, the Custodian shall deliver to such Fund
a written report prepared by the Custodian's independent certified
public accountants with respect to the services provided by the
Custodian under this Agreement, including, without
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limitation, the Custodian's accounting system, internal accounting
control and procedures for safeguarding cash, Securities and other
Assets, including cash, Securities and other Assets deposited
and/or maintained in a Securities System or with a Subcustodian.
Such report shall be of sufficient scope and in sufficient detail
as may reasonably be required by such Fund and as may reasonably be
obtained by the Custodian.
(y) BILLS AND OTHER DISBURSEMENTS.
Upon receipt of Instructions, the Custodian shall pay, or cause to
be paid, all bills, statements, or other obligations of a Fund.
5. SUBCUSTODIANS.
From time to time, in accordance with the relevant provisions of this
Agreement, the Custodian may appoint one or more Domestic Subcustodians,
Foreign Subcustodians, Special Subcustodians, or Interim Subcustodians (as
each are hereinafter defined) to act on behalf of any one or more Funds. A
Domestic Subcustodian, in accordance with the provisions of this Agreement,
may also appoint a Foreign Subcustodian, Special Subcustodian, or Interim
Subcustodian to act on behalf of any one or more Funds. For purposes of
this Agreement, all Domestic Subcustodians, Foreign Subcustodians, Special
Subcustodians and Interim Subcustodians shall be referred to collectively
as "Subcustodians".
(a) DOMESTIC SUBCUSTODIANS.
The Custodian may, at any time and from time to time, appoint any
bank as defined in Section 2(a)(5) of the 1940 Act or any trust
company or other entity, any of which meet the requirements of a
custodian under Section 17(f) of the 1940 Act and the rules and
regulations thereunder, to act for the Custodian on behalf of any
one or more Funds as a subcustodian for purposes of holding Assets
of such Fund(s) and performing other functions of the Custodian
within the United States (a "Domestic Subcustodian"). Each Fund
shall approve in writing the appointment of the proposed Domestic
Subcustodian; and the Custodian's appointment of any such Domestic
Subcustodian shall not be effective without such prior written
approval of the Fund(s). Each such duly approved Domestic
Subcustodian shall be listed on Appendix A attached hereto, as it
may be amended, from time to time.
(b) FOREIGN SUBCUSTODIANS.
The Custodian may at any time appoint, or cause a Domestic
Subcustodian to appoint, any bank, trust company or other entity
meeting the requirements of an "eligible foreign custodian" under
Section 17(f) of the 1940 Act and the rules and regulations
thereunder to act for the Custodian on behalf of any one or more
Funds as a subcustodian or sub-subcustodian (if appointed by a
Domestic Subcustodian)
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for purposes of holding Assets of the Fund(s) and performing other
functions of the Custodian in countries other than the United
States of America (hereinafter referred to as a "Foreign
Subcustodian" in the context of either a subcustodian or a
sub-subcustodian); provided that the Custodian shall have obtained
written confirmation from each Fund of the approval of the Board of
Directors or other governing body of each such Fund (which approval
may be withheld in the sole discretion of such Board of Directors
or other governing body or entity) with respect to (i) the identity
of any proposed Foreign Subcustodian (including branch
designation), (ii) the country or countries in which, and the
securities depositories or clearing agencies (hereinafter
"Securities Depositories and Clearing Agencies"), if any, through
which, the Custodian or any proposed Foreign Subcustodian is
authorized to hold Securities and other Assets of each such Fund,
and (iii) the form and terms of the subcustodian agreement to be
entered into with such proposed Foreign Subcustodian. Each such
duly approved Foreign Subcustodian and the countries where and the
Securities Depositories and Clearing Agencies through which they
may hold Securities and other Assets of the Fund(s) shall be listed
on Appendix A attached hereto, as it may be amended, from time to
time. Each Fund shall be responsible for informing the Custodian
sufficiently in advance of a proposed investment which is to be
held in a country in which no Foreign Subcustodian is authorized to
act, in order that there shall be sufficient time for the
Custodian, or any Domestic Subcustodian, to effect the appropriate
arrangements with a proposed Foreign Subcustodian, including
obtaining approval as provided in this Section 5(b). In connection
with the appointment of any Foreign Subcustodian, the Custodian
shall, or shall cause the Domestic Subcustodian to, enter into a
subcustodian agreement with the Foreign Subcustodian in form and
substance approved by each such Fund. The Custodian shall not
consent to the amendment of, and shall cause any Domestic
Subcustodian not to consent to the amendment of, any agreement
entered into with a Foreign Subcustodian, which materially affects
any Fund's rights under such agreement, except upon prior written
approval of such Fund pursuant to Special Instructions.
(c) INTERIM SUBCUSTODIANS.
Notwithstanding the foregoing, in the event that a Fund shall
invest in an Asset to be held in a country in which no Foreign
Subcustodian is authorized to act, the Custodian shall notify such
Fund in writing by facsimile transmission or in such other manner
as such Fund and the Custodian shall agree in writing of the
unavailability of an approved Foreign Subcustodian in such country;
and upon the receipt of Special Instructions from such Fund, the
Custodian shall, or shall cause its Domestic Subcustodian to,
appoint or approve an entity (referred to herein as an "Interim
Subcustodian") designated in such Special Instructions to hold such
Security or other Asset.
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(d) SPECIAL SUBCUSTODIANS.
Upon receipt of Special Instructions, the Custodian shall on behalf
of a Fund, appoint one or more banks, trust companies or other
entities designated in such Special Instructions to act for the
Custodian on behalf of such Fund as a subcustodian for purposes of:
(i) effecting third-party repurchase transactions with banks,
brokers, dealers or other entities through the use of a common
custodian or subcustodian; (ii) providing depository and clearing
agency services with respect to certain variable rate demand note
Securities, (iii) providing depository and clearing agency services
with respect to dollar denominated Securities, and (iv) effecting
any other transactions designated by such Fund in such Special
Instructions. Each such designated subcustodian (hereinafter
referred to as a "Special Subcustodian") shall be listed on
Appendix A attached hereto, as it may be amended from time to time.
In connection with the appointment of any Special Subcustodian, the
Custodian shall enter into a subcustodian agreement with the
Special Subcustodian in form and substance approved by the
appropriate Fund in Special Instructions. The Custodian shall not
amend any subcustodian agreement entered into with a Special
Subcustodian, or waive any rights under such agreement, except upon
prior approval pursuant to Special Instructions.
(e) TERMINATION OF A SUBCUSTODIAN.
The Custodian may, at any time in its discretion upon notification
to the appropriate Fund(s), terminate any Subcustodian of such
Fund(s) in accordance with the termination provisions under the
applicable subcustodian agreement, and upon the receipt of Special
Instructions, the Custodian will terminate any Subcustodian in
accordance with the termination provisions under the applicable
subcustodian agreement.
(f) CERTIFICATION REGARDING FOREIGN SUBCUSTODIANS.
Upon request of a Fund, the Custodian shall deliver to such Fund a
certificate stating: (i) the identity of each Foreign Subcustodian
then acting on behalf of the Custodian; (ii) the countries in which
and the Securities Depositories and Clearing Agencies through which
each such Foreign Subcustodian is then holding cash, Securities and
other Assets of such Fund; and (iii) such other information as may
be requested by such Fund, and as the Custodian shall be reasonably
able to obtain, to evidence compliance with rules and regulations
under the 1940 Act.
6. STANDARD OF CARE.
(a) GENERAL STANDARD OF CARE.
The Custodian shall be liable to a Fund for all losses, damages and
reasonable costs and expenses suffered or incurred by such Fund
resulting from the gross
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negligence or willful misfeasance of the Custodian; provided,
however, in no event shall the Custodian be liable for special,
indirect or consequential damages arising under or in connection
with this Agreement.
(b) ACTIONS PROHIBITED BY APPLICABLE LAW, EVENTS BEYOND CUSTODIAN'S
CONTROL, SOVEREIGN RISK, ETC.
In no event shall the Custodian or any Domestic Subcustodian incur
liability hereunder if the Custodian or any Subcustodian or
Securities System, or any subcustodian, Securities System,
Securities Depository or Clearing Agency utilized by the Custodian
or any such Subcustodian, or any nominee of the Custodian or any
Subcustodian (individually, a "Person") is prevented, forbidden or
delayed from performing, or omits to perform, any act or thing
which this Agreement provides shall be performed or omitted to be
performed, by reason of: (i) any provision of any present or future
law or regulation or order of the United States of America, or any
state thereof, or of any foreign country, or political subdivision
thereof or of any court of competent jurisdiction (and neither the
Custodian nor any other Person shall be obligated to take any
action contrary thereto); or (ii) any event beyond the control of
the Custodian or other Person such as armed conflict, riots,
strikes, lockouts, labor disputes, equipment or transmission
failures, natural disasters, or failure of the mails,
transportation, communications or power supply; or (iii) any
"Sovereign Risk." A "Sovereign Risk" shall mean nationalization,
expropriation, devaluation, revaluation, confiscation, seizure,
cancellation, destruction or similar action by any governmental
authority, de facto or de jure; or enactment, promulgation,
imposition or enforcement by any such governmental authority of
currency restrictions, exchange controls, taxes, levies or other
charges affecting a Fund's Assets; or acts of armed conflict,
terrorism, insurrection or revolution; or any other act or event
beyond the Custodian's or such other Person's control.
(c) LIABILITY FOR PAST RECORDS.
Neither the Custodian nor any Domestic Subcustodian shall have any
liability in respect of any loss, damage or expense suffered by a
Fund, insofar as such loss, damage or expense arises from the
performance of the Custodian or any Domestic Subcustodian in
reliance upon records that were maintained for such Fund by
entities other than the Custodian or any Domestic Subcustodian
prior to the Custodian's employment hereunder.
(d) ADVICE OF COUNSEL.
The Custodian and all Domestic Subcustodians shall be entitled to
receive and act upon advice of counsel of its own choosing on all
matters. The Custodian and all Domestic Subcustodians shall be
without liability for any actions taken or omitted in good faith
pursuant to the advice of counsel.
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(e) ADVICE OF THE FUND AND OTHERS.
The Custodian and any Domestic Subcustodian may rely upon the
advice of any Fund and upon statements of such Fund's accountants
and other persons believed by it in good faith to be expert in
matters upon which they are consulted, and neither the Custodian
nor any Domestic Subcustodian shall be liable for any actions taken
or omitted, in good faith, pursuant to such advice or statements.
(f) INSTRUCTIONS APPEARING TO BE GENUINE.
The Custodian and all Domestic Subcustodians shall be fully
protected and indemnified in acting as a custodian hereunder upon
any Resolutions of the Board of Directors or Trustees,
Instructions, Special Instructions, advice, notice, request,
consent, certificate, instrument or paper appearing to it to be
genuine and to have been properly executed and shall, unless
otherwise specifically provided herein, be entitled to receive as
conclusive proof of any fact or matter required to be ascertained
from any Fund hereunder a certificate signed by any officer of such
Fund authorized to countersign or confirm Special Instructions.
(g) EXCEPTIONS FROM LIABILITY.
Without limiting the generality of any other provisions hereof,
neither the Custodian nor any Domestic Subcustodian shall be under
any duty or obligation to inquire into, nor be liable for:
(i) the validity of the issue of any Securities purchased by or
for any Fund, the legality of the purchase thereof or
evidence of ownership required to be received by any such
Fund, or the propriety of the decision to purchase or amount
paid therefor;
(ii) the legality of the sale of any Securities by or for any
Fund, or the propriety of the amount for which the same were
sold; or
(iii) any other expenditures, encumbrances of Securities,
borrowings or similar actions with respect to any Fund's
Assets;
and may, until notified to the contrary, presume that all
Instructions or Special Instructions received by it are not in
conflict with or in any way contrary to any provisions of any such
Fund's Declaration of Trust, Partnership Agreement, Articles of
Incorporation or By-Laws or votes or proceedings of the
shareholders, trustees, partners or directors of any such Fund, or
any such Fund's currently effective Registration Statement on file
with the SEC.
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7. LIABILITY OF THE CUSTODIAN FOR ACTIONS OF OTHERS.
(a) DOMESTIC SUBCUSTODIANS
The Custodian shall be liable for the acts or omissions of any
Domestic Subcustodian to the same extent as if such actions or
omissions were performed by the Custodian itself.
(b) LIABILITY FOR ACTS AND OMISSIONS OF FOREIGN SUBCUSTODIANS.
The Custodian shall be liable to a Fund for any loss or damage to
such Fund caused by or resulting from the acts or omissions of any
Foreign Subcustodian to the extent that, under the terms set forth
in the subcustodian agreement between the Custodian or a Domestic
Subcustodian and such Foreign Subcustodian, the Foreign
Subcustodian has failed to perform in accordance with the standard
of conduct imposed under such subcustodian agreement and the
Custodian or Domestic Subcustodian recovers from the Foreign
Subcustodian under the applicable subcustodian agreement.
(c) SECURITIES SYSTEMS, INTERIM SUBCUSTODIANS, SPECIAL SUBCUSTODIANS,
SECURITIES DEPOSITORIES AND CLEARING AGENCIES.
The Custodian shall not be liable to any Fund for any loss, damage
or expense suffered or incurred by such Fund resulting from or
occasioned by the actions or omissions of a Securities System,
Interim Subcustodian, Special Subcustodian, or Securities
Depository and Clearing Agency unless such loss, damage or expense
is caused by, or results from, the gross negligence or willful
misfeasance of the Custodian.
(d) DEFAULTS OR INSOLVENCIES OF BROKERS, BANKS, ETC.
The Custodian shall not be liable for any loss, damage or expense
suffered or incurred by any Fund resulting from or occasioned by
the actions, omissions, neglects, defaults or insolvency of any
broker, bank, trust company or any other person with whom the
Custodian may deal (other than any of such entities acting as a
Subcustodian, Securities System or Securities Depository and
Clearing Agency, for whose actions the liability of the Custodian
is set out elsewhere in this Agreement) unless such loss, damage or
expense is caused by, or results from, the gross negligence or
willful misfeasance of the Custodian.
(e) REIMBURSEMENT OF EXPENSES.
Each Fund agrees to reimburse the Custodian for all out-of-pocket
expenses incurred by the Custodian in connection with this
Agreement, but excluding salaries and usual overhead expenses.
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8. INDEMNIFICATION.
(a) INDEMNIFICATION BY FUND.
Subject to the limitations set forth in this Agreement, each Fund
agrees to indemnify and hold harmless the Custodian and its
nominees from all losses, damages and expenses (including
attorneys' fees) suffered or incurred by the Custodian or its
nominee caused by or arising from actions taken by the Custodian,
its employees or agents in the performance of its duties and
obligations under this Agreement, including, but not limited to,
any indemnification obligations undertaken by the Custodian under
any relevant subcustodian agreement; provided, however, that such
indemnity shall not apply to the extent the Custodian is liable
under Sections 6 or 7 hereof.
If any Fund requires the Custodian to take any action with respect
to Securities, which action involves the payment of money or which
may, in the opinion of the Custodian, result in the Custodian or
its nominee assigned to such Fund being liable for the payment of
money or incurring liability of some other form, such Fund, as a
prerequisite to requiring the Custodian to take such action, shall
provide indemnity to the Custodian in an amount and form
satisfactory to it.
(b) INDEMNIFICATION BY CUSTODIAN.
Subject to the limitations set forth in this Agreement and in
addition to the obligations provided in Sections 6 and 7, the
Custodian agrees to indemnify and hold harmless each Fund from all
losses, damages and expenses suffered or incurred by each such Fund
caused by the gross negligence or willful misfeasance of the
Custodian.
9. ADVANCES.
In the event that, pursuant to Instructions, the Custodian or any
Subcustodian, Securities System, or Securities Depository or Clearing
Agency acting either directly or indirectly under agreement with the
Custodian (each of which for purposes of this Section 9 shall be referred
to as "Custodian"), makes any payment or transfer of funds on behalf of any
Fund as to which there would be, at the close of business on the date of
such payment or transfer, insufficient funds held by the Custodian on
behalf of any such Fund, the Custodian may, in its discretion without
further Instructions, provide an advance ("Advance") to any such Fund in an
amount sufficient to allow the completion of the transaction by reason of
which such payment or transfer of funds is to be made. In addition, in the
event the Custodian is directed by Instructions to make any payment or
transfer of funds on behalf of any Fund as to which it is subsequently
determined that such Fund has overdrawn its cash account with the Custodian
as of the close of business on the date of such payment or transfer, said
overdraft shall constitute an Advance. Any
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Advance shall be payable by the Fund on behalf of which the Advance was
made on demand by Custodian, unless otherwise agreed by such Fund and the
Custodian, and shall accrue interest from the date of the Advance to the
date of payment by such Fund to the Custodian at a rate agreed upon in
writing from time to time by the Custodian and such Fund. It is understood
that any transaction in respect of which the Custodian shall have made an
Advance, including but not limited to a foreign exchange contract or
transaction in respect of which the Custodian is not acting as a principal,
is for the account of and at the risk of the Fund on behalf of which the
Advance was made, and not, by reason of such Advance, deemed to be a
transaction undertaken by the Custodian for its own account and risk. The
Custodian and each of the Funds which are parties to this Agreement
acknowledge that the purpose of Advances is to finance temporarily the
purchase or sale of Securities for prompt delivery in accordance with the
settlement terms of such transactions or to meet emergency expenses not
reasonably foreseeable by a Fund. The Custodian shall promptly notify the
appropriate Fund of any Advance. Such notification shall be sent by
facsimile transmission or in such other manner as such Fund and the
Custodian may agree.
10. LIENS.
The Bank shall have a lien on the Property in the Custody Account to secure
payment of fees and expenses for the services rendered under this
Agreement. If the Bank advances cash or securities to the Fund for any
purpose or in the event that the Bank or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities
in connection with the performance of its duties hereunder, except such as
may arise from its or its nominee's negligent action, negligent failure to
act or willful misconduct, any Property at any time held for the Custody
Account shall be security therefor and the Fund hereby grants a security
interest therein to the Bank. The Fund shall promptly reimburse the Bank
for any such advance of cash or securities or any such taxes, charges,
expenses, assessments, claims or liabilities upon request for payment, but
should the Fund fail to so reimburse the Bank, the Bank shall be entitled
to dispose of such Property to the extent necessary to obtain
reimbursement. The Bank shall be entitled to debit any account of the Fund
with the Bank including, without limitation, the Custody Account, in
connection with any such advance and any interest on such advance as the
Bank deems reasonable.
11. COMPENSATION.
Each Fund will pay to the Custodian such compensation as is agreed to in
writing by the Custodian and each such Fund from time to time. Such
compensation, together with all amounts for which the Custodian is to be
reimbursed in accordance with Section 7(e), shall be billed to each such
Fund and paid in cash to the Custodian.
12. POWERS OF ATTORNEY.
Upon request, each Fund shall deliver to the Custodian such proxies, powers
of attorney or other instruments as may be reasonable and necessary or
desirable in connection with
22
<PAGE>
the performance by the Custodian or any Subcustodian of their respective
obligations under this Agreement or any applicable subcustodian agreement.
13. TERMINATION AND ASSIGNMENT.
Any Fund or the Custodian may terminate this Agreement by notice in
writing, delivered or mailed, postage prepaid (certified mail, return
receipt requested) to the other not less than 90 days prior to the date
upon which such termination shall take effect. Upon termination of this
Agreement, the appropriate Fund shall pay to the Custodian such fees as may
be due the Custodian hereunder as well as its reimbursable disbursements,
costs and expenses paid or incurred. Upon termination of this Agreement,
the Custodian shall deliver, at the terminating party's expense, all Assets
held by it hereunder to the appropriate Fund or as otherwise designated by
such Fund by Special Instructions. Upon such delivery, the Custodian shall
have no further obligations or liabilities under this Agreement except as
to the final resolution of matters relating to activity occurring prior to
the effective date of termination.
This Agreement may not be assigned by the Custodian or any Fund without the
respective consent of the other, duly authorized by a resolution by its
Board of Directors or Trustees.
14. ADDITIONAL FUNDS.
An additional Fund or Funds may become a party to this Agreement after the
date hereof by an instrument in writing to such effect signed by such Fund
or Funds and the Custodian. If this Agreement is terminated as to one or
more of the Funds (but less than all of the Funds) or if an additional Fund
or Funds shall become a party to this Agreement, there shall be delivered
to each party an Appendix B or an amended Appendix B, signed by each of the
additional Funds (if any) and each of the remaining Funds as well as the
Custodian, deleting or adding such Fund or Funds, as the case may be. The
termination of this Agreement as to less than all of the Funds shall not
affect the obligations of the Custodian and the remaining Funds hereunder
as set forth on the signature page hereto and in Appendix B as revised from
time to time.
15. NOTICES.
As to each Fund, notices, requests, instructions and other writings
delivered to THE SECURITY BENEFIT GROUP OF COMPANIES, 700 HARRISON, TOPEKA,
KS 66636-0001, postage prepaid, or to such other address as any particular
Fund may have designated to the Custodian in writing, shall be deemed to
have been properly delivered or given to a Fund.
Notices, requests, instructions and other writings delivered to the
Securities Administration Department of the Custodian at its office at 928
Grand Avenue, Kansas City, Missouri, or mailed postage prepaid, to the
Custodian's Securities Administration Department, Post Office Box 226,
Kansas City, Missouri 64141, or to such other addresses as the Custodian
may have designated to each Fund in writing, shall be deemed
23
<PAGE>
to have been properly delivered or given to the Custodian hereunder;
provided, however, that procedures for the delivery of Instructions and
Special Instructions shall be governed by Section 2(c) hereof..
16. MISCELLANEOUS.
(a) This Agreement is executed and delivered in the State of Missouri
and shall be governed by the laws of such state.
(b) All of the terms and provisions of this Agreement shall be binding
upon, and inure to the benefit of, and be enforceable by the
respective successors and assigns of the parties hereto.
(c) No provisions of this Agreement may be amended, modified or waived,
in any manner except in writing, properly executed by both parties
hereto; provided, however, Appendix A may be amended from time to
time as Domestic Subcustodians, Foreign Subcustodians, Special
Subcustodians, and Securities Depositories and Clearing Agencies
are approved or terminated according to the terms of this
Agreement.
(d) The captions in this Agreement are included for convenience of
reference only, and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
(e) This Agreement shall be effective as of the date of execution
hereof.
(f) This Agreement may be executed simultaneously in two or more
counterparts, each of which will be deemed an original, but all of
which together will constitute one and the same instrument.
(g) The following terms are defined terms within the meaning of this
Agreement, and the definitions thereof are found in the following
sections of the Agreement:
24
<PAGE>
TERM SECTION
Account 4(b)(3)(ii)
ADR'S 4(j)
Advance 9
Assets 2
Authorized Person 3
Banking Institution 4(l)
Domestic Subcustodian 5(a)
Foreign Subcustodian 5(b)
Instruction 2
Interim Subcustodian 5(c)
Interest Bearing Deposit 4(l)
Liability 10
OCC 4(g)(2)
Person 6(b)
Procedural Agreement 4(h)
SEC 4(b)(3)
Securities 2
Securities Depositories and Clearing Agencies 5(b)
Securities System 4(b)(3)
Shares 4(s)
Sovereign Risk 6(b)
Special Instruction 2
Special Subcustodian 5(c)
Subcustodian 5
1940 Act 4(v)
(h) If any part, term or provision of this Agreement is held to be
illegal, in conflict with any law or otherwise invalid by any court
of competent jurisdiction, the remaining portion or portions shall
be considered severable and shall not be affected, and the rights
and obligations of the parties shall be construed and enforced as
if this Agreement did not contain the particular part, term or
provision held to be illegal or invalid.
(i) This Agreement constitutes the entire understanding and agreement
of the parties hereto with respect to the subject matter hereof,
and accordingly supersedes, as of the effective date of this
Agreement, any custodian agreement heretofore in effect between the
Fund and the Custodian.
25
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Custody Agreement to be
executed by their respective duly authorized officers.
ATTEST: Security Ultra Fund
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: Security Equity Fund
Equity Series
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: Security Growth and Income Fund
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: Security Income Fund
Corporate Bond Series
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: Security Income Series
Limited Maturity Bond Series
AMY J. LEE By: JOHN D. CLELAND
Title: President
26
<PAGE>
ATTEST: Security Income Fund
U. S. Government Series
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: Security Tax-Exempt Fund
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: Security Cash Fund
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: SBL Fund
Series A, B, C, E, S and J
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: UMB BANK, N.A.
R. WILLIAM BLOOM By: DAVID SWAN
Title: Senior Vice President
Date: 1/11/95
27
<PAGE>
APPENDIX A
CUSTODY AGREEMENT
DOMESTIC SUBCUSTODIANS:
United Missouri Trust Company of New York
SECURITIES SYSTEMS:
Federal Book Entry
Depository Trust Company
Participant's Trust Company
SPECIAL SUBCUSTODIANS:
Bank of New York
SECURITIES DEPOSITORIES
COUNTRIES FOREIGN SUBCUSTODIANS CLEARING AGENCIES
Euroclear
Security Income Fund
Security Ultra Fund Limited Maturity Bond Series
By: JOHN D. CLELAND By: JOHN D. CLELAND
Title: President Title: President
Security Equity Fund Security Income Fund
Equity Series U. S. Government Series
By: JOHN D. CLELAND By: JOHN D. CLELAND
Title: President Title: President
Security Growth and Income Fund SBL Fund
By: JOHN D. CLELAND By: JOHN D. CLELAND
Title: President Title: President
Security Income Fund
Corporate Bond Series UMB BANK, N.A.
By: JOHN D. CLELAND By: DAVID SWAN
Title: President Title: Senior Vice President
Date: 1/11/95
28
<PAGE>
AMENDMENT TO CUSTODY AGREEMENT
The following open-end management investment companies ("Funds") are hereby made
parties to the Custody Agreement dated January 1, 1995, with UMB Bank, n.a.
("Custodian"), and agree to be bound by all the terms and conditions contained
in said Agreement:
List of Funds
Security Income Fund, High Yield Series
SBL Fund, Series P
ATTEST: Security Income Fund
High Yield Series
AMY J. LEE
- ----------------------------------- By: JOHN D. CLELAND
-----------------------------------
Title: President
ATTEST: SBL Fund
Series P
AMY J. LEE
- ----------------------------------- By: JOHN D. CLELAND
-----------------------------------
Title: President
ATTEST: UMB BANK, N.A.
R.WM. BLOOM By: DAVID SWAN
- ----------------------------------- -----------------------------------
Title: Senior Vice President
Date: April 29, 1996
<PAGE>
AMENDMENT TO APPENDIX A
CUSTODY AGREEMENT
DOMESTIC SUBCUSTODIANS:
United Missouri Trust Company of New York
SECURITIES SYSTEMS:
Federal Book Entry
Depository Trust Company
Participant's Trust Company
SPECIAL SUBCUSTODIANS:
Bank of New York
SECURITIES DEPOSITORIES
COUNTRIES FOREIGN SUBCUSTODIANS CLEARING AGENCIES
Euroclear
Security Income Fund
High Yield Series
By: JAMES R. SCHMANK
-----------------------------------
Title: Vice President & Treasurer
SBL Fund
Series B
Series E
Series P
By: JAMES R. SCHMANK
-----------------------------------
Title: Vice President & Treasurer
UMB BANK, N.A.
By: RALPH SANTORO
-----------------------------------
Title: Vice President
Date: August 15, 1996
<PAGE>
AMENDMENT TO CUSTODY AGREEMENT
The following open-end management investment company ("Fund") is hereby made a
party to the Custody Agreement dated January 1, 1995, with UMB Bank, n.a.
("Custodian"), and agrees to be bound by all the terms and conditions contained
in said Agreement:
Security Equity Fund
Social Awareness Series
ATTEST: Security Equity Fund
Social Awareness Series
CHRIS SWICKARD
- -----------------------------------
By: JAMES R. SCHMANK
-----------------------------------
Title: Vice President and Treasurer
ATTEST: UMB BANK, N.A.
WILLIAM BLOEMKER By: RALPH SANTORO
- ----------------------------------- -----------------------------------
Title: Vice President
Date: August 15, 1996
<PAGE>
UMB Financial Corporation
CUSTODY FEE SCHEDULE
Security Management Group of Mutual Funds
- --------------------------------------------------------------------------------
NET ASSET VALUE CHARGES
A fee to be computed as of month-end and payable on the last day of each
month of the portfolios' fiscal year, at the annual rate of:
0.275 basis points on the combined net assets of all portfolios, subject to
a $100.00 per month minimum per portfolio.
PORTFOLIO TRANSACTION CHARGES
DTC Book-Entry Transactions* $5.00
PTC Book-Entry Transactions* 11.50
Federal Book-Entry Transactions* 7.50
Physical Transactions* 18.00
Third Party (Bank Book-Entry) Transactions 15.00
Principal and Interest Paydowns 3.00
Options/Futures 25.00
Corporate Actions/Calls/Reorgs 30.00
*A TRANSACTION INCLUDES BUYS, SELLS, MATURITIES, AND FREE SECURITY MOVEMENTS.
OUT OF POCKET EXPENSES
Including, but not limited to, security transfer fees, certificate fees,
shipping/courier fees or charges, FDIC insurance premiums, and remote
system access charges.
UMB Bank, N.A. agrees that the foregoing fees and charges will be in effect for
a period of three years beginning December 1, 1996, unless otherwise agreed by
the parties.
IN WITNESS WHEREOF, the parties hereto have executed this amendment to the
Custody Agreement dated January 1, 1995, this 26th day of November, 1996.
ATTEST: Security Ultra Fund
AMY J. LEE By: JOHN D. CLELAND
- -------------------------------- --------------------------------
Name: John D. Cleland
Title: President
ATTEST: Security Equity Fund
Equity Series
Social Awareness Series
AMY J. LEE By: JOHN D. CLELAND
- -------------------------------- --------------------------------
Name: John D. Cleland
Title: President
<PAGE>
ATTEST: Security Growth and Income Fund
AMY J. LEE By: JOHN D. CLELAND
- -------------------------------- --------------------------------
Name: John D. Cleland
Title: President
ATTEST: Security Income Fund
Corporate Bond Series
Limited Maturity Bond Series
U.S. Government Bond Series
High Yield Series
AMY J. LEE By: JOHN D. CLELAND
- -------------------------------- --------------------------------
Name: John D. Cleland
Title: President
ATTEST: Security Tax-Exempt Fund
AMY J. LEE By: JOHN D. CLELAND
- -------------------------------- --------------------------------
Name: John D. Cleland
Title: President
ATTEST: Security Cash Fund
AMY J. LEE By: JOHN D. CLELAND
- -------------------------------- --------------------------------
Name: John D. Cleland
Title: President
ATTEST: SBL Fund
Series A, B, C, E, S, J and P
AMY J. LEE By: JOHN D. CLELAND
- -------------------------------- --------------------------------
Name: John D. Cleland
Title: President
ATTEST: UMB Bank, N.A.
R. W. BLOOM By: PATRICIA A. PETERSON
- -------------------------------- --------------------------------
Name: Patricia A. Peterson
Title: Senior Vice President
<PAGE>
ADMINISTRATIVE SERVICES AND
TRANSFER AGENCY AGREEMENT
This Agreement, made and entered into this 1st day of April, 1987, by and
between Security Income Fund, a Kansas corporation ("Fund"), and Security
Management Company, a Kansas corporation, ("SMC").
WHEREAS, the Fund is engaged in business as an open-end management investment
company registered under the Investment Company Act of 1940; and
WHEREAS, Security Management Company is willing to provide general
administrative, fund accounting, transfer agency, and dividend disbursing
services to the Fund under the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and mutual agreements made
herein, the parties agree as follows:
1. EMPLOYMENT OF SECURITY MANAGEMENT COMPANY
SMC will provide the Fund with general administrative, fund accounting,
transfer agency, and dividend disbursing services described and set forth
in Schedule A attached hereto and made a part of this agreement by
reference. SMC agrees to maintain sufficient trained personnel and
equipment and supplies to perform such services in conformity with the
current prospectus of the Fund and such other reasonable standards of
performance as the Fund may from time to time specify, and otherwise in an
accurate, timely, and efficient manner.
2. COMPENSATION
As consideration for the services described in Section I, the Fund agrees
to pay SMC a fee as described and set forth in Schedule B attached hereto
and made a part of this agreement by reference, as it may be amended from
time to time, such fee to be calculated and accrued daily and payable
monthly.
3. EXPENSES
A. EXPENSES OF SMC. SMC shall pay all of the expenses incurred in
providing Fund the services and facilities described in this agreement,
whether or not such expenses are billed to SMC or the fund, except as
otherwise provided herein.
B. DIRECT EXPENSES. Anything in this agreement to the contrary
notwithstanding, the Fund shall pay, or reimburse SMC for the payment
of, the following described expenses of the Fund (hereinafter called
"direct expenses") whether or not billed to the Fund, SMC or any
related entity:
<PAGE>
1. Fees and expenses of its independent directors and the meetings
thereof;
2. Fees and costs of investment advisory services;
3. Fees and costs of independent auditors and income tax
preparation;
4. Fees and costs of outside legal counsel and any legal counsel
directly employed by the Fund or its Board of Directors;
5. Custodian and banking services, fees and costs;
6. Costs of printing and mailing prospectuses to existing
shareholders, proxy statements and other reports to shareholders,
where such costs are incurred through the use of unaffiliated
vendors or mail services.
7. Fees and costs for the registration of its securities with the
Securities and Exchange Commission and the jurisdictions in which
it qualifies its share for sale, including the fees and costs of
registering and bonding brokers, dealers and salesmen as
required;
8. Dues and expenses associated with membership in the Investment
Company Institute;
9. Expenses of fidelity and liability insurance and bonding covering
Fund;
10. Organizational costs.
4. INSURANCE
The Fund and SMC agree to procure and maintain, separately or as joint
insureds with themselves, their directors, employees, agents and others,
and other investment companies for which SMC acts as investment advisor and
transfer agent, a policy or policies of insurance against loss arising from
breaches of trust, errors and omissions, and a fidelity bond meeting the
requirements of the Investment Company Act of 1940, in the amounts and with
such deductibles as may be agreed upon from time to time, and to pay such
portions of the premiums therefor as amount of the coverage attributable to
each party is to the aggregate amount of the coverage for all parties.
5. REGISTRATION AND COMPLIANCE
A. SMC represents that as of the date of this agreement it is registered
as a transfer agent with the Securities and Exchange Commission ("SEC")
pursuant to Subsection 17A of the Securities and Exchange Act of 1934
and the rules and regulations thereunder, and agrees to maintain said
registration and comply with all
<PAGE>
of the requirements of said Act, rules and regulations so long as this
agreement remains in force.
B. The Fund represents that it is a diversified management investment
company registered with the SEC in accordance with the Investment
Company Act of 1940 and the rules and regulations thereunder, and
authorized to sell its shares pursuant to said Act, the Securities Act
of 1933 and the rules and regulations thereunder.
6. LIABILITIES AND INDEMNIFICATION
SMC shall be liable for any actual losses, claims, damages or expenses
(including any reasonable counsel fees and expenses) resulting from SMC's
bad faith, willful misfeasance, reckless disregard of its obligations and
duties, negligence or failure to properly perform any of its
responsibilities or duties under this agreement. SMC shall not be liable
and shall be indemnified and held harmless by the Fund, for any claim,
demand or action brought against it arising out of, or in connection with:
A. Bad faith, willful misfeasance, reckless disregard of its duties or
negligence of the Board of Directors of the Fund, or SMC's acting upon
any instructions properly executed and authorized by the Board of
Directors of the Fund;
B. SMC acting in reliance upon advice given by independent counsel
retained by the Board of Directors of the Fund.
In the event that SMC requests the Fund to indemnify or hold it harmless
hereunder, SMC shall use its best efforts to inform the Fund of the
relevant facts concerning the matter in question. SMC shall use reasonable
care to identify and promptly notify the Fund concerning any matter which
presents, or appears likely to present, a claim for indemnification against
the Fund.
The Fund shall have the election of defending SMC against any claim which
may be the subject of indemnification hereunder. In the event the Fund so
elects, it will so notify SMC and thereupon the Fund shall take over
defenses of the claim, and (if so requested by the Fund, SMC shall incur no
further legal or other claims related thereto for which it would be
entitled to indemnity hereunder provided, however, that nothing herein
contained shall prevent SMC from retaining, at its own expense, counsel to
defend any claim. Except with the Fund's prior consent, SMC shall in no
event confess any claim or make any compromise in any matter in which the
Fund will be asked to indemnify or hold SMC harmless hereunder.
PUNITIVE DAMAGES. SMC shall not be liable to the Fund, or any third
party, for punitive, exemplary, indirect, special or consequential
damages (even if SMC has been advised of the possibility of such
damages) arising from its obligations and the services provided under
this agreement, including but not limited to loss of profits,
<PAGE>
loss of use of the shareholder accounting system, cost of capital and
expenses of substitute facilities, programs or services.
FORCE MAJEURE. Anything in this agreement to the contrary
notwithstanding, SMC shall not be liable for delays or errors occurring
by reason of circumstances beyond its control, including but not
limited to acts of civil or military authority, national emergencies,
work stoppages, fire, flood, catastrophe, earthquake, acts of God,
insurrection, war, riot, failure of communication or interruption.
7. DELEGATION OF DUTIES
SMC may, at its discretion, delegate, assign or subcontract any of the
duties, responsibilities and services governed by this agreement, to its
parent company, Security Benefit Group, Inc., whether or not by formal
written agreement. SMC shall, however, retain ultimate responsibility to
the Fund, and shall implement such reasonable procedures as may be
necessary, for assuring that any duties, responsibilities or services so
assigned, subcontracted or delegated are performed in conformity with the
terms and conditions of this agreement.
8. AMENDMENT
This agreement and the schedules forming a part hereof may be amended at
any time, without shareholder approval, by a writing signed by each of the
parties hereto. Any change in the Fund's registration statements or other
documents of compliance or in the forms relating to any plan, program or
service offered by its current prospectus which would require a change in
SMC's obligations hereunder shall be subject to SMC's approval, which shall
not be unreasonably withheld.
9. TERMINATION
This agreement may be terminated by either party without cause upon 120
days' written notice to the other, and at any time for cause in the event
that such cause remains unremedied for more than 30 days after receipt by
the other party of written specification of such cause.
In the event Fund designates a successor to any of SMC's obligations
hereunder, SMC shall, at the expense and pursuant to the direction of the
Fund, transfer to such successor all relevant books, records and other data
of Fund in the possession or under the control of SMC.
10. SEVERABILITY
If any clause or provision of this agreement is determined to be illegal,
invalid or unenforceable under present or future laws effective during the
term hereof, then such
<PAGE>
clause or provision shall be considered severed herefrom and the remainder
of this agreement shall continue in full force and effect.
11. TERM
This agreement initially shall become effective upon its approval by a
majority vote of the Board of Directors of the Fund, including a majority
vote of the Directors who are not "interested persons" of Fund or SMC, as
defined in the Investment Company Act of 1940, and shall continue until
terminated pursuant to its provisions.
12. APPLICABLE LAW
This agreement shall be subject to and construed in accordance with the
laws of the State of Kansas.
SECURITY MANAGEMENT COMPANY
BY: Everett S. Gille, President
------------------------------
ATTEST:
Barbara W. Rankin, Secretary
SECURITY INCOME FUND
BY: Everett S. Gille, President
------------------------------
ATTEST:
Barbara W. Rankin, Secretary
<PAGE>
SCHEDULE A
ADMINISTRATIVE SERVICES AND
TRANSFER AGENCY AGREEMENT
Schedule of Administrative and Fund Accounting
Facilities and Services
Security Management Company agrees to provide the Fund the following
Administrative facilities and services:
1. FUND AND PORTFOLIO ACCOUNTING
A. Maintenance of Fund General Ledger and Journal.
B. Preparing and recording disbursements for direct fund expenses.
C. Preparing daily money transfers.
D. Reconciliation of all Fund bank and custodian accounts.
E. Assisting Fund independent auditors as appropriate.
F. Prepare daily projection of available cash balances.
G. Record trading activity for purposes of determining net asset values and
daily dividend.
H. Prepare daily portfolio evaluation report to value portfolio securities
and determine daily accrued income.
I. Determine the daily net asset value per share.
J. Determine the daily, monthly, quarterly, semiannual or annual dividend
per share.
K. Prepare monthly, quarterly, semiannual and annual financial statements.
L. Provide financial information for reports to the securities and exchange
commission in compliance with the provisions of the Investment Company
Act of 1940 and the Securities Act of 1933, the Internal Revenue Service
and other regulatory agencies as required.
M. Provide financial, yield, net asset value, etc. information to NASD and
other survey and statistical agencies as instructed by the Fund.
<PAGE>
N. Report to the Audit Committee of the Board of Directors, if applicable.
2. LEGAL
A. Provide registration and other administrative services necessary to
qualify the shares of the Fund for sale in those jurisdictions
determined from time to time by the Fund's Board of Directors (commonly
known as "Blue Sky Registration").
B. Provide registration with and reports to the Securities and Exchange
Commission in compliance with the provisions of the Investment Company
Act of 1940 and the Securities Act of 1933.
C. Prepare and review Fund prospectus and Statement of Additional
Information.
D. Prepare proxy statements and oversee proxy tabulation for annual
meetings.
E. Prepare Board materials and maintain minutes of Board meetings.
F. Draft, review and maintain contractual agreements between Fund and
Investment Advisor, Custodian, Distributor and Transfer Agent.
G. Oversee printing of proxy statements, financial reports to shareholders,
prospectuses and Statements of Additional Information.
H. Provide legal advice and oversight regarding shareholder transactions,
administrative services, compliance with contractual agreements and the
provisions of the 1940 and 1933 Acts.
(Notwithstanding the above, outside counsel for the Funds may provide the
services listed above as a direct Fund expense or at the option of the
Funds, the Funds may employ their own counsel to perform any of these
services.)
<PAGE>
SCHEDULE OF SHARE TRANSFER AND DIVIDEND DISBURSING SERVICES
Security Management Company agrees to provide the Fund the following transfer
agency and dividend disbursing services:
1. Maintenance of shareholder accounts, including processing of new accounts.
2. Posting address changes and other file maintenance for shareholder
accounts.
3. Posting all transactions to the shareholder file, including:
A. Direct purchases
B. Wire order purchases
C. Direct redemptions
D. Wire order redemptions
E. Draft redemptions
F. Direct exchanges
G. Transfers
H. Certificate issuances
I. Certificate deposits
4. Monitor fiduciary processing, insuring accuracy and deduction of fees.
5. Prepare daily reconciliations of shareholder processing to money movement
instructions.
6. Handle bounced check collections. Immediately liquidate shares purchased
and return to the shareholder the check and confirmation of the
transaction.
7. Issuing all checks and stopping and replacing lost checks.
8. Draft clearing services.
A. Maintenance of signature cards and appropriate corporate resolutions.
B. Comparison of the signature on the check to the signatures on the
signature card for the purpose of paying the face amount of the check
only.
<PAGE>
C. Receiving checks presented for payment and liquidating shares after
verifying account balance.
D. Ordering checks in quantity specified by the Fund for the shareholder.
9. Mailing confirmations, checks and/or certificates resulting from
transaction requests to shareholders.
10. Performing all of the Fund's other mailings, including:
A. Dividend and capital gain distributions.
B. Semiannual and annual reports.
C. 1099/year-end shareholder reporting.
D. Systematic withdrawal plan payments.
E. Daily confirmations.
11. Answering all service related telephone inquiries from shareholders and
others, including:
A. General and policy inquiries (research and resolve problems).
B. Fund yield inquiries.
C. Taking shareholder processing requests and account maintenance changes
by telephone as described above.
D. Submit pending requests to correspondence.
E. Monitor online statistical performance of unit.
F. Develop reports on telephone activity.
12. Respond to written inquiries (research and resolve problems), including:
A. Initiate shareholder account reconciliation proceeding when
appropriate.
B. Notify shareholder of bounced investment checks.
C. Respond to financial institutions regarding verification of deposit.
D. Initiate proceedings regarding lost certificates.
<PAGE>
E. Respond to complaints and log activities.
F. Correspondence control.
13. Maintaining and retrieving all required past history for shareholders and
provide research capabilities as follows:
A. Daily monitoring of all processing activity to verify back-up
documentation.
B. Provide exception reports.
C. Microfilming.
D. Storage, retrieval and archive.
14. Prepare materials for annual meetings.
A. Address and mail annual proxy and related material.
B. Prepare and submit to Fund and affidavit of mailing.
C. Furnish certified list of shareholders (hard copy or microfilm) and
inspectors of election.
15. Report and remit as necessary for state escheat requirements.
Approved: Fund _________________________________________SMC Everette S. Gille
<PAGE>
---------------------------------------------------------------
MODEL: MONTHLY FUNDS
-------------
MAINTENANCE FEE.................................. $8.00
TRANSACTIONS..................................... $1.00
DIVIDENDS........................................ $0.50
ADMINISTRATION FEE............................... 0.00045
(BASED ON DAILY NET ASSET VALUE)
----------------------------------------------------------------
MASTER WORKSHEET BOND GOV HIGH YIELD
-----------------------------------------------
1986:
TRANSACTIONS - 6,897 603 260
DIVIDENDS - 23,264 2,195 314
SHAREHOLDER ACCTS - 3,574 226 258
AVERAGE NET ASSETS - 45,164,242.34 2,260,755.40 2,948,233.60
INCOME - 4,804,113.27 207,258.25 223,104.47
EXPENSES - 449,036.13 21,101.91 17,675.96
SERVICE FEES - 50,806.27 962.23 1,118.94
1986 1986
SERVICE TRANSFER & EXPENSE EXPENSE
FEES ADMINISTRATION PERCENT RATIO RATIO
ACTUAL MODEL INCREASE ACTUAL MODEL
-----------------------------------------------------------------
BOND 50,806.27 67,444.91 32.75% 0.994% 1.031%
GOVERNMENT 962.23 4,525.84 370.35% 0.933% 1.091%
HIGH YIELD 1,118.94 2,603.71 132.69% 0.600% 0.862%
<PAGE>
SCHEDULE B
AMENDMENT TO SECURITY INCOME FUND
ADMINISTRATIVE SERVICES AND
TRANSFER AGENCY AGREEMENT
Schedule of Fees
Annual Maintenance Fee........................$8.00 per account
Transactions..................................$1.00 per transaction
Administration Fee............................0.09% of the average net assets of
the Fund (calculated daily and payable monthly).
This amendment shall take effect as of April 28, 1989.
In witness thereof, the parties hereto have caused this amendment to be
executed on the date indicated.
Security Income Fund
By: Michael J. Provines, President
Date: January 27, 1989
Attest:
Amy J. Lee, Secretary
Security Management Company
By: Michael J. Provines, President
Date: January 27, 1989
Attest:
Amy J. Lee, Secretary
<PAGE>
AMENDMENT TO ADMINISTRATIVE SERVICES
AND TRANSFER AGENCY AGREEMENT
WHEREAS, Security Income Fund (hereinafter referred to as the "Fund") and
Security Management Company (hereinafter referred to as "SMC") are parties to an
Administrative Services and Transfer Agency Agreement dated April 1, 1987, (the
"Administrative Services Agreement") under which SMC agrees to provide general
administrative, fund accounting, transfer agency, and dividend disbursing
services to the Fund in return for the compensation specified in the
Administrative Services Agreement; and
WHEREAS, on July 7, 1989, the Board of Directors of the Fund voted to amend the
Administrative Services Agreement to provide for payment by the Fund of the fees
of all directors;
NOW THEREFORE, the Fund and the Management Company hereby amend the
Administrative Services Agreement, dated April 1, 1987, effective July 7, 1989,
as follows:
Paragraph 3.B.1. shall be deleted in its entirety and the following
paragraph inserted in lieu thereof:
3. EXPENSES
B. DIRECT EXPENSES
1. Fees and expenses of its directors (including the fees of those
directors who are deemed to be "interested persons" of the Fund
as that term is defined in the Investment Company Act of 1940)
and the meetings thereof;
IN WITNESS WHEREOF, the parties hereto have made this Amendment to the
Administrative Services Agreement this 7th day of July, 1989.
SECURITY INCOME FUND
By: Michael J. Provines, President
Attest:
Amy J. Lee, Secretary
SECURITY MANAGEMENT COMPANY
By: Michael J. Provines, President
Attest:
Amy J. Lee, Secretary
<PAGE>
AMENDMENT TO ADMINISTRATIVE SERVICES
AND TRANSFER AGENCY AGREEMENT
WHEREAS, Security Income Fund (hereinafter referred to as the "Fund") and
Security Management Company (hereinafter referred to as "SMC") are parties to an
Administrative Services and Transfer Agency Agreement dated April 1, 1987, as
amended January 27, 1989, and July 7, 1989, (the "Administrative Services
Agreement") under which SMC agrees to provide general administrative, fund
accounting, transfer agency, and dividend disbursing services to the Fund in
return for the compensation specified in the Administrative Services Agreement;
and
WHEREAS, on July 27, 1990, the Board of Directors of the Fund voted to amend the
Administrative Services Agreement to provide for payment by the Fund of the fees
of only those directors who are not "interested persons" of the Fund;
NOW THEREFORE, the Fund and SMC hereby amend the Administrative Services
Agreement, dated April 1, 1987, effective July 27, 1990, as follows:
Paragraph 3.B.1. shall be deleted in its entirety and the following
paragraph inserted in lieu thereof:
3. EXPENSES
B. DIRECT EXPENSES
1. Fees and expenses of its directors (including the fees of those
directors who are deemed to be "interested persons" of the Fund
as that term is defined in the Investment Company Act of 1940)
and the meetings thereof;
IN WITNESS WHEREOF, the parties hereto have made this Amendment to the
Administrative Services Agreement this 27th day of July, 1990.
SECURITY INCOME FUND
By: Michael J. Provines, President
Attest:
Amy J. Lee, Secretary
SECURITY MANAGEMENT COMPANY
By: Michael J. Provines, President
Attest:
Amy J. Lee, Secretary
<PAGE>
AMENDMENT TO ADMINISTRATIVE
SERVICES AND TRANSFER AGENCY AGREEMENT
WHEREAS, Security Income Fund (the "Fund") and Security Management Company (the
"Management Company") are parties to an Administrative Services and Transfer
Agency Agreement dated April 1, 1987, as amended (the "Administrative
Agreement"), under which the Management Company provides general administrative,
fund accounting, transfer agency and dividend disbursing services to the Fund in
return for the compensation specified in the Administrative Agreement;
WHEREAS, on October 21, 1994, the Board of Directors of the Fund authorized the
Fund to offer its common stock in a new series designated as the Limited
Maturity Bond Series, in addition to its presently offered series of common
stock of Corporate Bond Series and U.S. Government Series;
WHEREAS, on October 21, 1994, the Board of Directors of the Fund further
authorized the Fund to offer shares of the Limited Maturity Bond Series in two
classes, designated Class A shares and Class B shares; and
WHEREAS, on October 21, 1994, the Board of Directors approved the amendment of
the Administrative Agreement to provide that the Management Company would
provide general administrative, fund accounting, transfer agency, and dividend
disbursing services to each class of the Limited Maturity Bond Series under the
terms and conditions of the Administrative Agreement;
NOW, THEREFORE BE IT RESOLVED, that the Fund and Management Company hereby amend
the Administrative Agreement, to provide that the Management Company shall
provide those administrative and other services described in the Administrative
Contract, and each of the Management Company and the Fund shall fulfill all of
their respective obligations under the
<PAGE>
Administrative Contract, as to each of the Series of the Fund, including the
Limited Maturity Bond Series of the Fund.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to the
Administrative Agreement this 30th day of December 1994.
SECURITY INCOME FUND
By: John D. Cleland
-----------------------------------
John D. Cleland, President
ATTEST:
Amy J. Lee
- -----------------------------------
Amy J. Lee, Secretary
SECURITY MANAGEMENT COMPANY
By: Jeffrey B. Pantages
-----------------------------------
Jeffrey B. Pantages, President
ATTEST:
Amy J. Lee
- -----------------------------------
Amy J. Lee, Secretary
<PAGE>
AMENDMENT TO
ADMINISTRATIVE SERVICES AND TRANSFER AGENCY AGREEMENT
WHEREAS, Security Income Fund (the "Fund") and Security Management Company (the
"Management Company") are parties to an Administrative Services and Transfer
Agency Agreement dated April 1, 1987, as amended (the "Administrative
Agreement"), under which the Management Company provides general administrative,
fund accounting, transfer agency and dividend disbursing services to the Fund in
return for the compensation specified in the Administrative Agreement;
WHEREAS, on February 3, 1995, the Board of Directors of the Fund authorized the
Fund to offer its common stock in a new series designated as the Global
Aggressive Bond Series, in addition to its presently offered series of common
stock of Corporate Bond Series, Limited Maturity Bond Series and U.S. Government
Series;
WHEREAS, on February 3, 1995, the Board of Directors of the Fund further
authorized the Fund to offer shares of the Global Aggressive Bond Series in two
classes, designated Class A shares and Class B shares; and
WHEREAS, on February 3, 1995, the Board of Directors approved the amendment of
the Administrative Agreement to provide that the Management Company would
provide general administrative, fund accounting, transfer agency, and dividend
disbursing services to each class of the Global Aggressive Bond Series under the
terms and conditions of the Administrative Agreement;
<PAGE>
NOW, THEREFORE BE IT RESOLVED, that the Fund and Management Company hereby amend
the Administrative Agreement, dated April 1, 1987, as follows, effective May 1,
1995,
1. Schedule B shall be deleted in its entirety and the attached Schedule B
inserted in lieu thereof.
2. The Administrative Agreement is hereby amended to cover the Global
Aggressive Bond Series of the Fund.
3. Paragraph 7 shall be deleted in its entirety and the following paragraph
inserted in lieu thereof:
DELEGATION OF DUTIES
The Management Company may, at its discretion, delegate, assign or
subcontract any of the duties, responsibilities and services governed by
this agreement, to its parent company, Security Benefit Group, Inc., whether
or not by formal written agreement, or to any third party, provided that
such arrangement with a third party has been approved by the Board of
Directors of the Fund. The Management Company shall, however, retain
ultimate responsibility to the Fund and shall implement such reasonable
procedures as may be necessary for assuring that any duties,
responsibilities or services so assigned, subcontracted or delegated are
performed in conformity with the terms and conditions of this agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to the
Administrative Agreement this 28th day of April, 1995.
SECURITY INCOME FUND
By: John D. Cleland
-----------------------------------
John D. Cleland, President
ATTEST:
Amy J. Lee
- -----------------------------------
Amy J. Lee, Secretary
SECURITY MANAGEMENT COMPANY
By: Jeffrey B. Pantages
-----------------------------------
Jeffrey B. Pantages, President
ATTEST:
Amy J. Lee
- -----------------------------------
Amy J. Lee, Secretary
<PAGE>
SECURITY INCOME FUND ADMINISTRATIVE SERVICES
AND TRANSFER AGENCY AGREEMENT
SCHEDULE B
The following charges apply to all Series of Security Income Fund:
Maintenance Fee: $8.00 per account
Transaction Fee: $1.00
Dividend Fee: $1.00
Annual Administration Fee: 0.45% (based on daily net asset value)
The following charges apply only to Global Aggressive Bond Series of the
Security Income Fund:
Global Administration Fee: In addition to the above fees, Global Aggressive Bond
Series shall pay an annual fee equal to the greater of .10 percent of its
average net assets or (i) $30,000 in the year ending April 29, 1996; (ii)
$45,000 in the year ending April 29, 1997; and (iii) $60,000 thereafter. If this
Agreement shall terminate before the last day of a month, compensation for that
part of the month this Agreement is in effect shall be prorated in a manner
consistent with the calculation of the fees set forth above.
<PAGE>
AMENDMENT TO ADMINISTRATIVE SERVICES
AND TRANSFER AGENCY AGREEMENT
WHEREAS, Security Income Fund (hereinafter referred to as the "Fund") and
Security Management Company (hereinafter referred to as "SMC") are parties to an
Administrative Services and Transfer Agency Agreement dated April 1, 1987, as
amended, (the "Administrative Agreement"), under which SMC provides general
administrative, fund accounting, transfer agency and dividend disbursing
services to the Fund in return for the compensation specified in the
Administrative Agreement;
WHEREAS, on February 2, 1996, the Board of Directors of the Fund voted to amend
the Administrative Agreement to provide for payment by the Fund for costs
associated with preparing and transmitting electronic filings to the Securities
and Exchange Commission or any other regulating authority;
NOW THEREFORE, the Fund and SMC hereby amend paragraph 3B of the Administrative
Agreement, effective February 2, 1996, by adding the following language at the
end of paragraph 3B:
11. Costs associated with the preparation and transmission of any
electronic filings to the Securities and Exchange Commission or any
other regulating authority.
IN WITNESS WHEREOF, the parties hereto have made this Amendment to the
Administrative Agreement this 2nd day of February, 1996.
SECURITY INCOME FUND
By: John D. Cleland
-----------------------------------
John D. Cleland, President
ATTEST:
Amy J. Lee
- -----------------------------------
Amy J. Lee, Secretary
SECURITY MANAGEMENT COMPANY
By: Jeffrey B. Pantages
-----------------------------------
Jeffrey B. Pantages, President
ATTEST:
Amy J. Lee
- -----------------------------------
Amy J. Lee, Secretary
<PAGE>
AMENDMENT TO
ADMINISTRATIVE SERVICES AND TRANSFER AGENCY AGREEMENT
WHEREAS, Security Income Fund (the "Fund") and Security Management Company (the
"Management Company") are parties to an Administrative Services and Transfer
Agency Agreement dated April 1, 1987, as amended (the "Administrative
Agreement"), under which the Management Company provides general administrative,
fund accounting, transfer agency and dividend disbursing services to the Fund in
return for the compensation specified in the Administrative Agreement;
WHEREAS, on May 3, 1996, the Board of Directors of the Fund authorized the Fund
to offer its common stock in a new series designated as the High Yield Series,
in addition to its presently offered series of common stock of Corporate Bond
Series, Limited Maturity Bond Series, U.S. Government Series, and Global
Aggressive Bond Series;
WHEREAS, on May 3, 1996, the Board of Directors of the Fund further authorized
the Fund to offer shares of the High Yield Series in two classes, designated
Class A shares and Class B shares; and
WHEREAS, on May 3, 1996, the Board of Directors approved the amendment of the
Administrative Agreement to provide that the Management Company would provide
general administrative, fund accounting, transfer agency, and dividend
disbursing services to each class of the High Yield Series under the terms and
conditions of the Administrative Agreement;
<PAGE>
NOW, THEREFORE BE IT RESOLVED, that the Fund and Management Company hereby amend
the Administrative Agreement, dated April 1, 1987, as follows, effective July 1,
1996,
1. Schedule B shall be deleted in its entirety and the attached Schedule B
inserted in lieu thereof.
2. The Administrative Agreement is hereby amended to cover the High Yield
Series of the Fund.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to the
Administrative Agreement this 13th day of May, 1996.
SECURITY INCOME FUND
By: John D. Cleland
-----------------------------------
John D. Cleland, President
ATTEST:
Amy J. Lee
- -----------------------------------
Amy J. Lee, Secretary
SECURITY MANAGEMENT COMPANY
By: Jeffrey B. Pantages
-----------------------------------
Jeffrey B. Pantages, President
ATTEST:
Amy J. Lee
- -----------------------------------
Amy J. Lee, Secretary
<PAGE>
SECURITY INCOME FUND ADMINISTRATIVE SERVICES
AND TRANSFER AGENCY AGREEMENT
SCHEDULE B
The following charges apply to all Series of Security Income Fund:
Maintenance Fee: $8.00 per account
Transaction Fee: $1.00
Dividend Fee: $1.00
Annual Administration Fee: 0.09% (based on daily net asset value)
The following charges apply only to Global Aggressive Bond Series of the
Security Income Fund:
Global Administration Fee: In addition to the above fees, Global Aggressive Bond
Series shall pay an annual fee equal to (i) the greater of .10 percent of its
average net assets or $30,000 in the year beginning April 30, 1995 and ending
April 29, 1996; (ii) the greater of .10 percent of its average net assets or
$45,000 in the year beginning April 30, 1996 and ending April 29, 1997; and
(iii) the greater of .10 percent of its average net assets or $60,000
thereafter. If this Agreement shall terminate before the last day of a month,
compensation for that part of the month this Agreement is in effect shall be
prorated in a manner consistent with the calculation of the fees set forth
above.
<PAGE>
AMENDMENT TO ADMINISTRATIVE SERVICES
AND TRANSFER AGENCY AGREEMENT
WHEREAS, Security Income Fund (the "Fund") and Security Management Company (the
"Management Company") are parties to an Administrative Services and Transfer
Agency Agreement, dated April 1, 1987, as amended (the "Administrative
Agreement"), under which the Management Company provides general administrative,
fund accounting, transfer agency and dividend disbursing services to the Fund in
return for the compensation specified in the Administrative Agreement;
WHEREAS, on October 31, 1996, the operations of the Management Company, a Kansas
corporation, will be transferred to Security Management Company, LLC ("SMC,
LLC"), a Kansas limited liability company; and
WHEREAS, SMC, LLC desires to assume all rights, duties and obligations of the
Management Company under the Administrative Agreement.
NOW THEREFORE, in consideration of the premises and mutual agreements made
herein, the parties hereto agree as follows:
1. The Administrative Agreement is hereby amended to substitute SMC, LLC for
Security Management Company, with the same effect as though SMC, LLC were
the originally named management company, effective November 1, 1996;
2. SMC, LLC agrees to assume the rights, duties and obligations of Security
Management Company pursuant to the terms of the Administrative Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to
Administrative Services and Transfer Agency Agreement this 1st day of November,
1996.
SECURITY INCOME FUND SECURITY MANAGEMENT COMPANY, LLC
By: JOHN D. CLELAND By: JAMES R. SCHMANK
------------------------------ ------------------------------
John D. Cleland, President James R. Schmank, President
ATTEST: ATTEST:
AMY J. LEE AMY J. LEE
- ----------------------------------- -----------------------------------
Amy J. Lee, Secretary Amy J. Lee, Secretary
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" and "Independent Auditors" in the Registration Statement (Form N-1A)
and related prospectus of Security Income Fund and to the incorporation by
reference of our report dated January 26, 1996, with respect to the financial
statements of Security Income Fund included in its Annual Report to Shareholders
for the year ended December 31, 1995.
Ernst & Young LLP
Kansas City, Missouri
February 5, 1997
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
(CLASS A)
U.S. GOVERNMENT SERIES Yield Calculation As Of December 31, 1995 = 5.68%
----
[ [ (58,976.38 - 481.56 - 8772.18) ]6 ]
2 [ [ ------------------------------ +1 ] ]-1
[ [ (2,034,916.518)(5.22) ] ]
[ ( ( 49,722.64 ) )6 ]
2 [ ( ( -------------- )+1 ) ]-1
[ ( ( 10,622,264.223 ) ) ]
2 [ ( ( .004680983 + 1 )6 )-1 ]
2 [ (1.02841663)-1 ]
2 (.02841663)
= .056833259 December 31, 1995, Govt. A
----------
CORPORATE BOND SERIES Yield Calculation As Of December 31, 1995 = 5.26%
----
[ [ (501,509.11 - 76,743.08) ]6 ]
2 [ [ ------------------------ +1 ] ]-1
[ [ (12,614,629.269)(7.76) ] ]
[ ( ( 424,766.03 ) )6 ]
2 [ ( ( -------------- )+1 ) ]-1
[ ( ( 97,889,523.127 ) ) ]
2 [ ( ( 1.004339239 + 1 )6 )-1 ]
2 ( 1.026319508 - 1 )
2 (.026319508)
= .052639016 December 31, 1995, Corp. A
----------
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
(CLASS A)
LIMITED MATURITY BOND SERIES Yield Calculation As Of December 31, 1995 = 4.86%
----
[ [ (17,214.58 - 3,498.39) ]6 ]
2 [ [ ---------------------- +1 ] ]-1
[ [ (305,735.305)(11.19) ] ]
[ ( ( 13,716.19 ) )6 ]
2 [ ( ( ------------- ) +1 ) ]-1
[ ( ( 3,421,178.063 ) ) ]
2 [ ( ( .004009201 + 1 )6 )-1 ]
2 (1.02429760)-1 ]
2 (.02429760)
= .048595201 December 31, 1995, Limited Maturity Bond Series 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)
U.S. GOVERNMENT SERIES Yield Calculation As Of December 31, 1995 = 5.25%
----
[ [ (3,297.39 - 27.70 - 822.03) ]6 ]
2 [ [ --------------------------- +1 ] ]-1
[ [ (113,801.293)(4.97) ] ]
[ ( ( 2,447.66 ) )6 ]
2 [ ( ( ---------- ) +1 ) ]-1
[ ( ( 565,592.43 ) ) ]
2 [ ( ( .004327608 + 1 )6 )-1 ]
2 [ (1.026248195)-1 ]
2 (.026248195)
= .052496389 December 31, 1995, Govt. B
----------
CORPORATE BOND SERIES Yield Calculation As Of December 31, 1995 = 4.73%
----
[ [ (28,716.73 - 7,763.61) ]6 ]
2 [ [ ---------------------- +1 ] ]-1
[ [ (722,573.818)(7.43) ] ]
[ ( ( 20,953.12 ) )6 ]
2 [ ( ( ------------- )+1 ) ]-1
[ ( ( 5,368,723.468 ) ) ]
2 [ ( ( .003902812 + 1 )6 )-1 ]
2 ( 1.023646542 - 1 )
2 (.023646542)
= .047293083 December 31, 1995, Corp. B
----------
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
(CLASS B)
LIMITED MATURITY BOND SERIES Yield Calculation As Of December 31, 1995 = 4.43%
----
[ [ (3,942.22 - 1,198.72) ]6 ]
2 [ [ --------------------- +1 ] ]-1
[ [ (70,297.478)(10.67) ] ]
[ ( ( 2,743.50 ) )6 ]
2 [ ( ( ---------- )+1 ) ]-1
[ ( ( 750,074.09 ) ) ]
2 [ ( ( .003657633 + 1 )6 )-1 ]
2 [ (1.022147454)-1 ]
2 (.022147454)
= .044294908 December 31, 1995, Limited Maturity 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, 1995
Average Annual Total Return Of CORPORATE BOND SERIES (CLASS A)
1. Average Total Return For 1 Year = +12.67%
------
1000 (1+T) 1 = 1126.65
(1+T) 1 = 1.12665
1+T = 1.12665
T = .1267
2. Average Total Return For 5 Years = +8.26%
-----
1000 (1+T) 5 = 1486.90
(1+T) 5 = 1.48690
((1+T) 5)1/5 = (1.4869)1/5
1+T = 1.0826
T = .0826
3. Average Total Return For 10 Years = +7.91%
-----
1000 (1+T) 10 = 2140.74
(1+T) 10 = 2.14074
((1+T) 10)1/10 = (2.14074)1/10
1+T = 1.0791
T = .0791
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
As Of December 31, 1995
Average Annual Total Return Of U.S. GOVERNMENT SERIES (CLASS A)
1. Average Total Return For 1 Year = +15.99%
------
1000 (1+T) 1 = 1,159.90
(1+T) 1 = 1.1599
T = .1599
2. Average Total Return For 5 Years = +7.67%
-----
1000 (1+T) 5 = 1,447.16
(1+T) 5 = 1.44716
((1+T) 5)1/5 = (1.44716)1/5
1+T = 1.0767
T = .0767
3. Average Total Return For 10 Years = +7.87%
-----
1000 (1+T) 10 = 2,133.35
(1+T) 10 = (2.13335)
((1+T) 10)1/10 = (2.13335)1/10
1+T = 1.0787
T = .0787
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
As Of December 31, 1995
Average Annual Total Return Of LIMITED MATURITY BOND SERIES (CLASS A)
1. Average Total Return Since Inception (January 17, 1995) = +8.00%
-----
1000 (1+T) .956 = 1076.35
(1+T) .956 = 1.076349
((1+T) .956)1/.956 = 1.079998
(1+T) = 1.079998
T = .08
<PAGE>
Item 24.b. Exhibit (16)
SECURITY INCOME FUND
As Of December 31, 1995
Average Annual Total Return Of GLOBAL AGGRESSIVE BOND SERIES (CLASS A)
1. Average Total Return Since Inception (June 1, 1995) = +3.79%
-----
1000 (1+T) .5863 = 1,022.05
(1+T) .5863 = 1.02205
((1+T) .5863)1/.5863 = 1.0379
(1+T) = 1.0379
T = .0379
<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)
AVERAGE ANNUAL TOTAL RETURN
INCOME FUND-CORPORATE BOND SERIES
B SHARES
Total Return from January 1, 1995, to December 31, 1995. Assuming Initial
Investment of $1,000 at offering price at the beginning of period $1,000 / 6.71
= 149.031 shares.
Ending value of initial investment at December 31, 1995, NAV price = 149.031
shares x 7.43 = $1,107.30.
Ending value of shares received from reinvestment of all dividends at NAV =
8.784 shares x 7.43 = $65.27.
Contingent deferred sales charge = 1,000 x .05 = $50.00.
Total ending redeemable value: 1,107.30
65.27
- (50.00)
--------
1,122.57
Total Return: 1,122.57 - 1,000 = 122.57
122.57 / 1,000 = 12.26%
-----------------------------------------------
Calendar 1995 % change
= value at end of year.......... 1,122.57
less value at beginning......... 1,000.00
--------
122.57
Change 122.57
------
Beginning Value 1,000 = 12.26%
<PAGE>
Item 24.b. Exhibit (16)
AVERAGE ANNUAL TOTAL RETURN
INCOME FUND-U.S. GOVERNMENT SERIES
B SHARES
Total Return from January 1, 1995, to December 31, 1995. Assuming Initial
Investment of $1,000 at offering price at the beginning of period $1,000 / 4.35
= 229.885 shares.
Ending value of initial investment at December 31, 1995, NAV price = 229.885
shares x 4.97 = $1,142.52.
Ending value of shares received from reinvestment of all dividends at NAV =
13.46 shares x 4.97 = $66.90.
Contingent deferred sales charge = 1,000 x .05 = $50.00.
Total ending redeemable value: 1,142.52
66.90
- (50.00)
--------
1,159.42
Total Return: 1,159.42 - 1,000 = 159.42
159.42 / 1,000 = 15.94%
-----------------------------------------------
Calendar 1995 % change
= value at end of year.......... 1,159.42
less value at beginning......... 1,000.00
--------
159.42
Change 159.42
------
Beginning Value 1,000 = 15.94%
<PAGE>
Item 24.b. Exhibit (16)
AVERAGE ANNUAL TOTAL RETURN
INCOME FUND-LIMITED MATURITY BOND SERIES
B SHARES
Total Return from January 17, 1995, to December 31, 1995. Assuming Initial
Investment of $1,000 at offering price at the beginning of period $1,000 / 10.00
= 100.000 shares.
Ending value of initial investment at December 31, 1995, NAV price = 100.000
shares x 10.67 = $1,067.00.
Ending value of shares received from reinvestment of all dividends at NAV =
5.126 shares x 10.67 = $54.69.
Contingent deferred sales charge = 1,000 x .05 = $50.00.
Total ending redeemable value: 1,067.00
54.69
- (50.00)
--------
1,071.69
Total Return: 1,071.69 - 1,000 = 71.69
71.69 / 1,000 = 7.17%
-----------------------------------------------
Calendar 1995 % change
= value at end of year.......... 1,071.69
less value at beginning......... 1,000.00
--------
71.69
Change 71.69
-----
Beginning Value 1,000 = 7.17%
<PAGE>
Item 24.b. Exhibit (16)
AVERAGE ANNUAL TOTAL RETURN
INCOME FUND-GLOBAL AGGRESSIVE BOND SERIES
B SHARES
Total Return from June 1, 1995, to December 31, 1995. Assuming Initial
Investment of $1,000 at offering price at the beginning of period $1,000 / 10.00
= 100.000 shares.
Ending value of initial investment at December 31, 1995, NAV price = 100.000
shares x 10.17 = $1,017.00.
Ending value of shares received from reinvestment of all dividends at NAV =
5.082 shares x 10.17 = $51.69.
Contingent deferred sales charge = 1,000 x .05 = $50.00.
Total ending redeemable value: 1,017.00
51.69
- (50.00)
--------
1,018.69
Total Return: 1,018.69 - 1,000 = 18.69
18.69 / 1,000 = 1.87%
-----------------------------------------------
Calendar 1995 % change
= value at end of year.......... 1,018.69
less value at beginning......... 1,000.00
--------
18.69
Change 18.69
-----
Beginning Value 1,000 = 1.87%
<PAGE>
Item 24.b. Exhibit (16)
AVERAGE ANNUAL TOTAL RETURN
INCOME FUND-HIGH YIELD SERIES
B SHARES
Average Annual Total Return Of HIGH YIELD SERIES (CLASS B)
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)
AGGREGATE TOTAL RETURN
CORPORATE BOND SERIES - CLASS A
For the period of 12/31/85 to 12/31/95 (with deduction of sales charge)
Initial Investment = $1,000.00
Ending Value Of Investment = 2,140.75
--------
Net Increase In Value = $1,140.75
Total Return - net increase = 1,140.75 = 114.1%
------------------ --------
initial investment = 1,000.00
U.S. GOVERNMENT SERIES CLASS A
For the period of 12/31/85 to 12/31/95 (with deduction of sales charge)
Initial Investment = $1,000.00
Ending Value Of Investment = 2,136.60
--------
Net Increase In Value = $1,136.60
Total Return - net increase = 1,136.60 = 113.7%
------------------ --------
initial investment = 1,000.00
LIMITED MATURITY BOND SERIES CLASS A
For the period of 1/17/95 to 12/31/95 (with deduction of sales charge)
Initial Investment = $1,000.00
Ending Value Of Investment = 1,076.32
--------
Net Increase In Value = $ 76.32
Total Return - net increase = 76.32 = 7.6%
------------------ --------
initial investment = 1,000.00
GLOBAL AGGRESSIVE BOND SERIES CLASS A
For the period of 6/01/95 to 12/31/95 (with deduction of sales charge)
Initial Investment = $1,000.00
Ending Value Of Investment = 1,022.03
--------
Net Increase In Value = $ 22.03
Total Return - net increase = 22.03 = 2.2%
------------------ --------
initial investment = 1,000.00
<PAGE>
Item 24.b. Exhibit (16)
AGGREGATE TOTAL RETURN
HIGH YIELD SERIES CLASS A
For the period of 5/05/96 to 12/31/96 (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 .1%
<PAGE>
Item 24.b. Exhibit (16)
AGGREGATE TOTAL RETURN
CORPORATE BOND SERIES CLASS B
For the period of 10/19/93/95 to 12/31/95 (with deduction of 4% CDSC charge)
Initial Investment = $1,000.00
Ending Value Of Investment = 995.07
--------
Net Increase In Value = $ (4.93)
Total Return - net increase = (4.93) = (0.5%)
------------------ --------
initial investment = 1,000.00
U.S. GOVERNMENT SERIES CLASS B
For the period of 10/19/93/95 to 12/31/95 (with deduction of 4% CDSC charge)
Initial Investment = $1,000.00
Ending Value Of Investment = 995.07
--------
Net Increase In Value = $ (4.93)
Total Return - net increase = (4.93) = (0.5%)
------------------ --------
initial investment = 1,000.00
LIMITED MATURITY BOND SERIES - CLASS B
For the period of 01/17/95 to 12/31/95 (with deduction of 5% CDSC charge)
Initial Investment = $1,000.00
Ending Value Of Investment = 1,071.70
--------
Net Increase In Value = $ 71.70
Total Return - net increase = 71.70 = (0.5%)
------------------ --------
initial investment = 1,000.00
GLOBAL AGGRESSIVE BOND SERIES - CLASS B
For the period of 06/01/95 to 12/31/95 (with deduction of 5% CDSC charge)
Initial Investment = $1,000.00
Ending Value Of Investment = 1,018.69
--------
Net Increase In Value = $ 18.69
Total Return - net increase = 18.69 = 1.87%
------------------ --------
initial investment = 1,000.00
<PAGE>
Item 24.b. Exhibit (16)
AGGREGATE TOTAL RETURN
HIGH YIELD SERIES CLASS B
For the period of 8/05/96 to 12/31/96 (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 8/05/96 to 12/31/96 (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
U.S. GOVERNMENT SERIES (Class A Shares) Quotation of Total Return for the Period
of December 31, 1985, through December 31, 1995 (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 1,091 - 1,000 = 91 91 / 1,000 = 9.1%
Year 2 1,132 - 1,091 = 41 41 / 1,091 = 3.7%
Year 3 1,203 - 1,132 = 71 71 / 1,132 = 6.2%
Year 4 1,344 - 1,203 = 141 141 / 1,203 = 11.8%
Year 5 1,476 - 1,344 = 132 132 / 1,344 = 9.8%
Year 6 1,679 - 1,476 = 203 203 / 1,476 = 13.8%
Year 7 1,763 - 1,679 = 84 84 / 1,679 = 6.0%
Year 8 1,970 - 1,763 = 207 207 / 1,763 = 11.8%
Year 9 1,841 - 1,970 = (129) (129) / 1,970 = (6.5%)
Year 10 2,244 - 1,841 = 403 403 / 1,841 = 21.9%
<PAGE>
Item 24.b. Exhibit (16)
AGGREGATE TOTAL RETURN
CORPORATE BOND SERIES (Class A Shares) Quotation of Total Return for the Period
of December 31, 1985, through December 31, 1994 (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 1,110 - 1,000 = 110 110 / 1,000 = 11.0%
Year 2 1,154 - 1,110 = 44 44 / 1,110 = 4.0%
Year 3 1,229 - 1,154 = 75 75 / 1,154 = 6.5%
Year 4 1,351 - 1,229 = 122 122 / 1,229 = 9.9%
Year 5 1,440 - 1,351 = 89 89 / 1,351 = 6.6%
Year 6 1,672 - 1,440 = 232 232 / 1,440 = 16.1%
Year 7 1,822 - 1,672 = 150 150 / 1,672 = 9.0%
Year 8 2,072 - 1,822 = 250 250 / 1,822 = 13.7%
Year 9 1,901 - 1,918 = (171) (171) / 2,072 = (8.3%)
Year 10 2,248 - 1,901 = 347 347 / 1,901 = 18.2%
<PAGE>
Item 24.b. Exhibit (16)
AGGREGATE 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, 1995
(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%
<PAGE>
Item 24.b. Exhibit (16)
AGGREGATE TOTAL RETURN
GLOBAL AGGRESSIVE BOND SERIES (Class A Shares) Quotation of Total Return for the
Period of June 1, 1995, (date of inception) through December 31, 1995 (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%
<PAGE>
Item 24.b. Exhibit (16)
AGGREGATE 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, 1995 (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%
<PAGE>
Item 24.b. Exhibit (16)
AGGREGATE 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, 1995
(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%
<PAGE>
Item 24.b. Exhibit (16)
AGGREGATE 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, 1995 (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%
<PAGE>
Item 24.b. Exhibit (16)
AGGREGATE TOTAL RETURN
GLOBAL AGGRESSIVE BOND SERIES (Class B Shares) Quotation of Total Return for the
Period of October 19, 1993, (date of inception) through December 31, 1995
(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%
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<TABLE> <S> <C>
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<CIK> 0000088498
<NAME> SECURITY INCOME FUND
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<NAME> LIMITED MATURITY BOND - CLASS B
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<TABLE> <S> <C>
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<CIK> 0000088498
<NAME> SECURITY INCOME FUND
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<NAME> GLOBAL AGGRESSIVE BOND - CLASS A
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<TABLE> <S> <C>
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<CIK> 0000088498
<NAME> SECURITY INCOME FUND
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<NAME> GLOBAL AGGRESSIVE BOND - CLASS B
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<S> <C>
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<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000088498
<NAME> SECURITY INCOME FUND
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<NAME> HIGH YIELD - CLASS A
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<S> <C>
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<TABLE> <S> <C>
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<CIK> 0000088498
<NAME> SECURITY INCOME FUND
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<NAME> HIGH YIELD - CLASS B
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<S> <C>
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</TABLE>
