SECURITY FUNDS
ANNUAL REPORT
December 31, 1997
o Security Income Fund
- Corporate Bond Series
- U.S. Government Series
- Limited Maturity Bond Series
- High Yield Series
o Security Tax-Exempt Fund
o Security Cash Fund
[SECURITY DISTRIBUTORS LOGO]
Security Distributors, Inc.
A Member of The Security Benefit
Group of Companies
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SECURITY FUNDS
President's Letter
February 15, 1998
To Our Shareholders:
1997 produced a roller coaster ride for investors in fixed income instruments.
The year began with the thirty-year Treasury bond yielding 6.64%. It traded up
to 7.14% in April, and spent a good part of the year in a range between 6.40%
and 6.80% before beginning a sharp decline in the fourth quarter. The long bond
ended the year at 5.92%, very close to the 5.77% record low since the government
began regular sales of thirty-year bonds in 1977.
The performance of our fixed income portfolios was excellent in 1997. Total
returns ranged from 12.56% on the High Yield Series to 8.97% on the
Intermediate-term Limited Maturity Bond Series, well in line with their peers
and benchmark indexes.(1)
CONTRIBUTORS TO THE RATE DECLINE
The chief economic component behind the decline in interest rates late in the
year we believe was the ultimate recognition that inflation has at long last
been brought under control. This was a result of a combination of the enormously
competitive global economic environment and the extremely astute monetary policy
of our central bank under the direction of Alan Greenspan, as well as that of
other central bankers around the world.
Perhaps the greatest recent influence on the U.S. inflation picture has been and
continues to be the weakened economic conditions in the southeast Asian
countries. As sales decline in their home markets, these countries are
increasing their efforts to export goods to European and American buyers, often
at reduced prices. This price competition makes it necessary for U.S.
manufacturers to drop their price levels in order to remain competitive.
Although the situation may be unpleasant for residents of the Asian countries,
the resulting low inflation rates should benefit our bond markets.
A LOOK INTO THE YEAR AHEAD
Our fixed income portfolios are now being managed by two members of our very
capable fixed income team. Steven Bowser, who has worked with Security Benefit
Group's general account portfolio for the past five years, is overseeing the
investment-grade portions of the portfolio. David Eshnaur, who joined the
Security Management group of investment professionals in 1997, is working with
the high yield issues. In addition, our expanded team of research analysts lend
support to the two managers with their work.
We expect the positive environment for fixed income investors to continue into
1998. The still favorable inflation picture and a continuation of the "flight to
quality" as a result of the uncertain international environment brought about by
problems in southeast Asia give us the prospect of long term interest rates
trading close to the 5.50% level as measured by the thirty-year government bond.
We also believe that there is a reasonable prospect for the Federal Reserve Bank
to reduce short term interest rates, depending on how severe the global economic
problems triggered by the Asian crisis turn out to be.
As always, we appreciate your continuing investments in Security products. We
invite your comments and questions at any time.
/s/ JOHN CLELAND
John Cleland, President
The Security Funds
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Manager's Commentary
February 15, 1998
SECURITY INCOME FUND
Corporate Bond Series
The Corporate Bond Series of Security Income Fund completed a successful year in
1997, generating a total return of 9.63% compared with its Lipper peer group
average of 9.17%, and finishing the year in the top quartile of its peer
group.(1) These returns are slightly lower than the benchmark Lehman Brothers
Corporate Bond Index, however, which generated a 10.23% total return for the
year.
RESTRUCTURING STEPS IN 1997
After a disappointing first quarter, we took steps to restructure the portfolio
with an overall emphasis on spreading the risk by sector and by size of
individual holdings. The average quality in the high yield portion of the Series
was upgraded, and issues providing a yield premium over Treasury bonds were
sought.
During the fall months, yield spreads between Treasuries and corporate bond
issues tightened considerably, reducing the attractiveness of corporates. When
the reward for accepting a lower quality was minimal, we chose to buy Treasury
issues instead. This helped overall performance in the fourth quarter, when
Treasury bond prices increased dramatically as investors moved funds from Asian
countries in a "flight to quality."
CURRENT PORTFOLIO STRUCTURE
We were fortunate to have eliminated our Asian exposure in mid-summer, selling
such "Yankee bond" issues as Petronas, Bangkok Bank, and Malayan Bank before the
Asian markets met disaster. (Yankee bonds are issued by foreign corporations,
but denominated in dollars for U.S. investors.) We also sold issues in the
troubled hospital care sector. We broadened our high yield position, emphasizing
the better quality issues, in order to gain additional yield.
At the end of 1997 the portfolio consisted of 41% investment grade corporate
bonds, 21% high yield issues, 13% Yankee bonds, 8% Treasuries, and 16%
mortgage-backed securities, with the remaining 1% in cash. At year-end the
average duration of the Series was 5.9 years, with an overall mid-A credit
quality average. Our target is to have no more than 2% of the assets invested in
any one company, with high yield issues being 1% or less per name.
PLANS FOR THE YEAR AHEAD
We believe this formula of diversification by sector and security will serve us
well in the volatile investment climate we expect in 1998. We will continue to
look for areas in which we can upgrade credit quality and increase yield. If
interest rates begin to reverse direction and move up, we will keep our
portfolio average duration close to that of the benchmark index in order to
reduce volatility. Our sizeable position in very liquid U.S. Treasury issues
allows us to adjust quickly to changes in economic conditions.
We will continue to use the talents of our expanded analytical team to add value
in the portfolio holdings. At this particular stage in the economic cycle, it is
important to excel in individual security selection in order to compete with
one's peers.
Steven M. Bowser
Portfolio Manager
(1) Performance figures are based on Class A shares and do not reflect
deduction of the sales charge.
2
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Manager's Commentary
February 15, 1998
CORPORATE BOND SERIES
[LINEAR GRAPH PLOTTED FROM POINTS IN TABLE BELOW]
Security Funds Lehman Brothers
Date Corporate Bond Fund Corporate Bond Index
- ---------- ------------------- --------------------
12/31/1987 .................. $ 10,000.00 $ 10,000
03/31/1988 .................. 9,750.05 10,444
06/30/1988 .................. 9,806.18 10,560
09/30/1988 .................. 10,003.23 10,809
12/31/1988 .................. 10,138.40 10,922
03/31/1989 .................. 10,250.72 11,053
06/30/1989 .................. 10,855.21 11,928
09/30/1989 .................. 10,888.25 12,084
12/31/1989 .................. 11,149.08 12,461
03/31/1990 .................. 11,158.35 12,352
06/30/1990 .................. 11,564.12 12,834
09/30/1990 .................. 11,375.15 12,831
12/31/1990 .................. 11,880.80 13,340
03/31/1991 .................. 12,332.65 13,909
06/30/1991 .................. 12,557.54 14,186
09/30/1991 .................. 13,204.99 15,019
12/31/1991 .................. 13,796.96 15,811
03/31/1992 .................. 13,756.13 15,695
06/30/1992 .................. 14,268.15 16,377
09/30/1992 .................. 14,855.21 17,150
12/31/1992 .................. 15,031.61 17,184
03/31/1993 .................. 15,954.38 18,052
06/30/1993 .................. 16,544.71 18,655
09/30/1993 .................. 17,270.94 19,304
12/31/1993 .................. 17,092.50 19,275
03/31/1994 .................. 16,206.18 18,596
06/30/1994 .................. 15,638.30 18,303
09/30/1994 .................. 15,589.88 18,438
12/31/1994 .................. 15,679.69 18,518
03/31/1995 .................. 16,421.91 19,615
06/30/1995 .................. 17,292.80 21,074
09/30/1995 .................. 17,621.80 21,570
12/31/1995 .................. 18,537.60 22,636
03/31/1996 .................. 17,871.59 22,052
06/30/1996 .................. 17,863.27 22,150
09/30/1996 .................. 18,250.02 22,592
12/31/1996 .................. 18,440.79 23,379
03/31/1997 .................. 18,233.72 23,143
06/30/1997 .................. 18,874.89 24,098
09/30/1997 .................. 19,629.42 25,041
12/31/1997 .................. 20,219.41 25,771
$10,000 OVER TEN YEARS
This chart assumes a $10,000 investment in Class A shares of Corporate Bond
Series on December 31, 1987, and reflects deduction of the 4.75% sales load. On
December 31, 1997, the value of your investment in the Series' Class A shares
(with dividends reinvested) would have grown to $20,219. By comparison, the same
$10,000 investment would have grown to $25,771 based on the performance of the
Lehman Brothers 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.
Investments cannot be made directly in an index. The Lehman Brothers Corporate
Bond Index includes all corporate debt securities rated A or higher.
CORPORATE BOND SERIES
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1997
Class A Shares Class B Shares
---------------------- -----------------------------
1 Year 4.47% 1 Year 3.74%
5 Years 5.10% Since Inception 1.85%
10 Years 7.30% (10-19-93)
The performance data above represents past performance which is not predictive
of future results. For Class A shares these figures reflect deduction of the
maximum sales charge of 4.75%. For Class B shares the figures reflect deduction
of the maximum contingent deferred sales charge, ranging from 5% in the first
year to 0% in the sixth and following years. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
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Manager's Commentary
February 15, 1998
U.S. GOVERNMENT SERIES
The U.S. Government Series of Security Income Fund returned an attractive 9.19%
in the year just completed.(1) This compared very favorably with the average
8.84% return of its Lipper peers, placing the fund in the top third of the
group. The total return lagged slightly the 9.59% return of the benchmark Lehman
Government Bond Index over the period.
FACTORS CONTRIBUTING TO OVERALL PERFORMANCE
As interest rates declined during the second half of 1997 we reduced slightly
our holdings in mortgage-backed securities. In times of falling interest rates,
concerns that homeowners will refinance or prepay their mortgages tends to hold
back returns on these types of bonds. The proceeds from the sales were for the
most part used to purchase federal agency securities, which yielded more than
Treasury issues of similar maturities.
PORTFOLIO COMPOSITION AT YEAR END
The sector weightings in the portfolio at the end of the year consisted of 43%
federal agency issues, 23% Treasury securities, 33% mortgage-backed bonds, and
about 1% in cash. Although the spread between yields on Treasury bonds and
agency securities were narrow at times during the year, (perhaps reducing the
attractiveness of agency issues) any incremental advantage in yield helps
competitive position based on total return in an all government securities
portfolio.
The portfolio's duration at the close of 1997 was 5.2 years, slightly longer
than the 5.1 year duration of the benchmark index. As interest rates declined
through the second half of the year, we extended duration from the 4.85 year
level at the end of June because longer-maturity bonds generally reap greater
benefits from a drop in yields. The average coupon in the portfolio was 8.01%
versus the benchmark index average 6.92%, primarily because of the greater
representation of mortgage-backed bonds bearing higher coupons.
PLANS FOR THE COMING YEAR
The U.S. Government Series is a high-quality portfolio designed for more
conservative investors. Because of this, we avoid trying to outguess the markets
by dramatically lengthening or shortening the duration of portfolio holdings.
While we make modest adjustments to take advantage of current conditions, as a
general rule we track the characteristics of the benchmark index fairly closely.
We do not anticipate any dramatic change in sector weightings in coming months,
but will monitor the bond markets carefully in an effort to continue to provide
attractive, competitive returns to our shareholders.
Steven M. Bowser
Portfolio Manager
(1) Performance figures are based on Class A shares and do not reflect
deduction of the sales charge. The Investment Manager waived its advisory
fee for the fiscal year ended December 31, 1997 and in the absence of such
waiver, the performance quoted would be reduced.
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.
4
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Manager's Commentary
February 15, 1998
U.S. GOVERNMENT SERIES
12-31-97
[LINEAR GRAPH PLOTTED FROM POINTS IN TABLE BELOW]
Lehman
Brothers
U.S. Gov't.
Government Bond
Series Index
---------- ----------
12/31/1997 .................. $10,000.00 $10,000.00
03/31/1988 .................. 9,753.16 10,117.69
06/30/1988 .................. 9,911.93 9,941.33
09/30/1988 .................. 10,068.06 9,673.52
12/31/1988 .................. 10,118.03 10,219.24
03/31/1989 .................. 10,223.76 10,556.47
06/30/1989 .................. 10,810.68 10,656.38
09/30/1989 .................. 10,952.93 10,836.28
12/31/1989 .................. 11,313.27 10,938.28
03/31/1990 .................. 11,304.13 11,054.50
06/30/1990 .................. 11,691.71 11,943.56
09/30/1990 .................. 11,842.91 12,042.24
12/31/1990 .................. 12,421.69 12,495.17
03/31/1991 .................. 12,731.06 12,339.91
06/30/1991 .................. 12,944.86 12,771.22
09/30/1991 .................. 13,560.06 12,877.35
12/31/1991 .................. 14,135.00 13,585.14
03/31/1992 .................. 13,960.43 13,879.19
06/30/1992 .................. 14,370.52 14,066.86
09/30/1992 .................. 14,684.87 14,870.35
12/31/1992 .................. 14,832.73 15,667.87
03/31/1993 .................. 15,517.12 15,393.80
06/30/1993 .................. 16,110.77 16,002.98
09/30/1993 .................. 16,643.01 16,792.31
12/31/1993 .................. 16,573.48 16,799.94
03/31/1994 .................. 15,9~3.68 17,558.69
06/30/1994 .................. 15,539.81 18,066.80
09/30/1994 .................. 15,424.29 18,652.97
12/31/1994 .................. 15,488.87 18,590.11
03/31/1995 .................. 16,169.74 18,030.26
06/30/1995 .................. 17,357.83 17,823.48
09/30/1995 .................. 17,853.25 17,899.08
12/31/1995 .................. 18,874.24 17,963.26
03/31/1996 .................. 18,247.54 18,808.53
06/30/1996 .................. 18,268.00 19,975.47
09/30/1996 .................. 18,631.75 20,327.70
12/31/1996 .................. 19,112.58 21,256.22
03/31/1997 .................. 18,969.03 20,775.73
06/30/1997 .................. 19,583.89 20,873.51
09/30/1997 .................. 20,266.46 21,226.26
12/31/1997 .................. 20,871.51 21,845.58
$10,000 OVER TEN YEARS
This chart assumes a $10,000 investment in Class A shares of U.S. Government
Series on December 31, 1987, and reflects deduction of the 4.75% sales load. On
December 31, 1997, the value of your investment in the Series' Class A shares
(with dividends reinvested) would have grown to $20,872. By comparison, the same
$10,000 investment would have grown to $23,424 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, 1997
CLASS A SHARES CLASS B SHARES
-------------- --------------
1 Year.......... 4.12% 1 Year........... 2.86%
5 Years......... 6.04% Since Inception.. 3.38%
10 Years........ 7.64% (10-19-93)
The performance data above represents past performance which is not predictive
of future results. For Class A shares these figures reflect deduction of the
maximum sales charge of 4.75%. For Class B shares the figures reflect deduction
of the maximum contingent deferred sales charge, ranging from 5% in the first
year to 0% in the sixth and following years. The Investment Manager waived its
advisory fee for the fiscal year ended December 31, 1997 and in the absence of
such waiver, the performance quoted would be reduced. The investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
5
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Manager's Commentary
February 15, 1998
LIMITED MATURITY BOND SERIES
The Limited Maturity Bond Series completed 1997 with a strong performance,
returning 8.96% for the year compared with its Lipper peer group average of
8.57%.(1) This placed the Series in the top third of its peer group. The return
also is favorable when viewed against its benchmark, the Lehman Brothers
Intermediate Corporate Bond Index, which gained 8.36% in 1997.
PORTFOLIO CHANGES DURING THE YEAR
The overall theme in portfolio adjustments throughout the year was one of
upgrading average credit quality and lessening risk exposure by reducing the
block size of the bonds. The Yankee bond holdings (bonds issued by foreign
corporations, but denominated in dollars for U.S. investors) selected for the
portfolio are also confined to the higher-quality names with good liquidity,
since obtaining current financial information on foreign corporations can be
more difficult than with domestic companies.
CONTRIBUTORS TO TOTAL RETURN
A strong contributor to the portfolio's return has been our Salomon Brothers
preferred stock. These securities bear a 9.50% coupon, payable quarterly. In
addition, when Salomon Brothers was purchased by Traveler's Corporation their
credit rating was upgraded from the high yield category to investment grade,
giving a boost to the price of the issue.
We avoided a potential negative impact on total return by the early selling of
Yankee bonds such as Bangkok Bank which were located in the Pacific Rim. The
prices of these bonds took a tumble in the second half of the year as the
southeast Asian crisis unfolded.
PORTFOLIO COMPOSITION AT YEAR END
At the close of the year the portfolio consisted of 2% U.S. Treasury issues, 12%
Yankee bonds, 18% mortgage-backed securities, 21% high yield bonds, and 42%
investment grade corporate bonds. The average duration of the Series was 4.3
years, just slightly longer than that of the benchmark index 4.1 years.
We believe that the steps taken to diversify the portfolio by sector and to
reduce the size of the holdings in any one name will serve us well in the
volatile investment climate we expect in 1998. We continue to seek out those
areas for investment which will increase the overall yield without adding undue
risk.
We are fortunate to have a staff of talented analysts who monitor the portfolio
securities and seek new names to add. We believe that their efforts will be
invaluable in helping us maintain a solid, rewarding Series for our
shareholders.
Steven M. Bowser
Portfolio Manager
(1) Performance figures are based on Class A shares and do not reflect
deduction of the sales charge. The Investment Manager waived its advisory
fee for the fiscal year ended December 31, 1997 and in the absence of such
waiver, the performance quoted would be reduced.
6
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Manager's Commentary
February 15, 1998
LIMITED MATURITY BOND SERIES
12-31-97
[LINEAR GRAPH PLOTTED FROM POINTS IN TABLE BELOW]
Lehman
Brothers
Intermediate
Limited Term
Maturity Corporate
Bond Series Bond Index
----------- ------------
01/31/1995 .................. $10,000.00 $ 10,192.00
03/31/1995 .................. 9,770.45 10,533.00
06/30/1995 .................. 10,329.35 11,194.00
09/30/1995 .................. 10,457.98 11,424.00
12/31/1995 .................. 10,731.61 11,901.00
03/31/1996 .................. 10,644.16 11,735.00
06/30/1996 .................. 10,711.88 11,793.00
09/30/1996 .................. 10,933.46 12,023.00
12/31/1996 .................. 10,956.04 12,375.00
03/31/1997 .................. 10,936.02 12,325.00
06/30/1997 .................. 11,306.95 12,754.00
09/30/1997 .................. 11,652.69 13,158.00
12/31/1997 .................. 11,939.12 13,412.00
$10,000 OVER TEN YEARS
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, 1997, the value of your investment in the
Series' Class A shares (with dividends reinvested) would have grown to $11,939.
By comparison, the same $10,000 investment would have grown to $13,412 based on
the performance of the Lehman Brothers Intermediate Term Corporate Bond Index.
The performance illustrated above is based on the performance of Class A shares.
The performance of Class B shares will be greater or less than the performance
shown for Class A shares as a result of the different loads and fees associated
with an investment in Class B shares.
The performance data illustrated above reflects past performance which is not
predictive of future results.
The Lehman Brothers Intermediate Term Corporate Bond Index includes all
corporate debt securities rated A or higher. Investments cannot be made directly
in an index.
LIMITED MATURITY BOND SERIES
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1997
CLASS A SHARES CLASS B SHARES
-------------- --------------
1 Year.......... 3.76% 1 Year.......... 2.70%
Since Inception. 6.29% Since Inception. 5.79%
(1-17-95) (1-17-95)
The performance data above represents past performance which is not predictive
of future results. For Class A shares these figures reflect deduction of the
maximum sales charge of 4.75%. For Class B shares the figures reflect deduction
of the maximum contingent deferred sales charge, ranging from 5% in the first
year to 0% in the sixth and following years. The Investment Manager waived its
advisory fee for the fiscal year ended December 31, 1997 and in the absence of
such waiver, the performance quoted would be reduced. The investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
7
<PAGE>
Manager's Commentary
February 15, 1998
HIGH YIELD SERIES
The year ended December 31,1997, was an excellent one for the high yield bond
markets. Declining interest rates helped generate record inflows of cash into
high yield funds. Buyers such as pension funds, insurance companies, and other
investment grade bond buyers moved to the high yield markets in their search for
greater returns.
PORTFOLIO PERFORMANCE IN 1997
The High Yield Series of Security Income Fund produced a total return of 12.57%
for the year, coming close to the 12.76% return of the benchmark Lehman High
Yield Index and slightly lagging the 12.96% average yield of its Lipper peer
group.(1) Although our emphasis on the upper tier of ratings within the high
yield universe may subtract modestly from the portfolio's overall return in
periods of strong bond market performance, we believe that the incremental
reduction in risk justifies the practice.
CONTRIBUTORS TO STRONG PERFORMANCE
Contributing positively to total return, our overweighting in media, finance,
and textile issues served us well. Our media holdings such as Cablevision
Systems, Comcast Corporation, and Adelphia Communications turned in strong
performances. Finance industry bonds including Dollar Financial Group and
Salomon, Inc. were beneficiaries of falling interest rates. The textile industry
overall was a performance laggard, but our holdings in Westpoint Stevens,
Pillowtex Corporation, and Dyersburg Corporation bucked the trend and
contributed strongly to the portfolio's total return.
Throughout the year we had no direct investment in bonds issued by the
governments of emerging market countries nor of corporations located in those
regions. In the latter half of the year those issues declined rapidly in value
as the problems in southeast Asian countries erupted. The portfolio also was
underweighted in bonds of companies operating in the basic industry arenas such
as paper and chemicals. These sectors suffered as commodity prices fell in the
third and fourth quarters of 1997.
The cash holdings in the portfolio increased as we approached year end,
reflecting the overall market's experience of greater cash inflows. We are
putting this money to work carefully, as opportunities to select undervalued
issues arise. One area in which we have begun building a position is the
homebuilding industry, with names such as Toll Brothers, Inc. and Hovnanian
Enterprises. This industry is experiencing increasing strength as interest rates
on home mortgage loans decline.
OUTLOOK FOR 1998
Our outlook for the high yield bond market for the year ahead is positive.
Declining interest rates make the high yield bond market appealing for fixed
income investors as they search for greater yield than that provided by
investment-grade issues. The high yield bond market frequently exhibits lower
volatility than the stock markets, which may attract equity investors to the
arena as well.
Continuing economic stability in the U.S. should keep defaults in high yield
bond issues at or below their historical averages. Individual selection in this
market remains very important, however, in order to reduce risk, we have
expanded our fixed income analytical staff to aid in research in the high yield
market and will continue to use their abilities to the fullest extent to select
the more creditworthy names for the portfolio.
David Eshnaur
Portfolio Manager
Tom Swank
Portfolio Manager
(1) Performance figures are based on Class A shares and do not reflect
deduction of the sales charge. The Investment Manager waived its advisory
fee for the fiscal year ended December 31, 1997 and in the absence of such
waiver, the performance quoted would be reduced.
Investors should remember that while high yield bonds provide potentially
higher yields than many other types of bonds, they also present greater
credit risk.
8
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Manager's Commentary
February 15, 1998
HIGH YIELD SERIES
12-31-97
[LINEAR GRAPH PLOTTED FROM POINTS IN TABLE BELOW]
Lehman
High Brothers
Yield High Yield
Series Index
--------- ----------
08/31/1996 .................. $10,000.00 $10,000
09/30/1996 .................. 9,771.07 10,108
12/31/1996 .................. 10,009.21 10,713
03/31/1997 .................. 10,184.31 10,833
06/30/1997 .................. 10,588.88 11,336
09/30/1997 .................. 10,992.17 11,852
12/31/1997 .................. 11,267.25 12,081
$10,000 OVER TEN YEARS
This chart assumes a $10,000 investment in Class A shares of High Yield Series
on August 15, 1996 (date of inception), and reflects deduction of the 4.75%
sales load. On December 31, 1997, the value of your investment in the Series'
Class A shares (with dividends reinvested) would have grown to $11,267. By
comparison, the same $10,000 investment would have grown to $12,081 based on the
performance of the Lehman Brothers High Yield 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 High Yield Bond Index includes local currency-denominated
sovereign debt of 19 countries plus European Currency Units-denominated debt.
Investments cannot be made directly in an index.
HIGH YIELD SERIES
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1997
CLASS A SHARES CLASS B SHARES
-------------- --------------
1 Year.......... 7.25% 1 Year.......... 6.45%
Since Inception. 8.94% Since Inception. 12.91%
(8-05-96) (8-05-96)
The performance data above represents past performance which is not predictive
of future results. For Class A shares these figures reflect deduction of the
maximum sales charge of 4.75%. For Class B shares the figures reflect deduction
of the maximum contingent deferred sales charge, ranging from 5% in the first
year to 0% in the sixth and following years. The Investment Manager waived its
advisory fee for the fiscal year ended December 31, 1997 and in the absence of
such waiver, the performance quoted would be reduced. The investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
9
<PAGE>
Manager's Commentary
February 15, 1998
SECURITY TAX-EXEMPT FUND
In a year in which Congress took few actions which threatened the status of tax
exempt securities, and in which interest rates in general declined throughout
the year, municipal bond portfolios rewarded their shareholders with attractive
returns. The Security Tax Exempt Fund turned in a respectable 8.26% total return
in 1997, but lagged the peer group average of 9.11% for the year.(1)
TAX EXEMPT VERSUS TAXABLE YIELDS
Although actual returns on tax exempt securities were lower for the year than
their taxable counterparts, when calculated on an after-tax basis they remained
very competitive. For example, a shareholder in the Security Tax Exempt Fund who
is in the 28% tax bracket would have earned the equivalent of 11.47% on a
taxable basis. Similarly, shareholders in the 31% bracket realized a
taxable-equivalent yield of 11.97%. The benchmark index for taxable securities,
the Lehman Brothers Government/Corporate Bond Index, returned 9.65% in 1997.
COMPOSITION OF THE PORTFOLIO
The portfolio assets at year end were invested in securities with an average AA
credit quality. As we have noted in the past, it is often more difficult to
obtain financial information on municipalities than on corporations. In
addition, city and state governments are subject to increased expenses as
Congress pushes the costs of assistance programs back to the state levels. For
these reasons we remain conservative in the credit quality of our tax exempt
investments.
The portfolio average duration at the close of the year was 6.9 years, somewhat
shorter than the 7.25 year average of the benchmark Lehman Brothers Municipal
Bond Index. This hurt overall performance in a year in which declining interest
rates made longer issues more attractive from a total return standpoint.
The largest sector was education revenue bonds, making up 28.8% of assets. These
issues represented a broad geographic distribution, including states from
Florida to New Jersey to Washington and in between. State general obligation
bonds were the second largest category at 21.9% of assets. Sewer revenues and
electric revenues followed, at 18.4% and 13.3% respectively.
LOOKING AHEAD
Although a balanced Federal budget would be healthy for the U.S.
economy now that surpluses appear likely, Congressional representatives are
beginning talk of tax cuts. Such talk often has an adverse effect on municipal
bond markets because of the possibility of reduced advantages over taxable
bonds. This negative effect is usually temporary, ending when agreement is
reached on tax legislation.
We expect that overall, the favorable economic conditions and the potential for
declining interest rates will make fixed income instruments attractive for
investment again in 1998. For those taxpayers in the higher tax brackets,
municipal bond markets should once again be an appropriate place to invest.
Steven M. Bowser
Portfolio Manager
(1) Performance figures are based on Class A shares and do not reflect
deduction of the sales charge.
10
<PAGE>
Manager's Commentary
February 15, 1998
TAX-EXEMPT FUND
12-31-97
[LINEAR GRAPH PLOTTED FROM POINTS IN TABLE BELOW]
Lehman
Tax Brothers
Exempt Municipal
Fund Bond Fund
---------- ----------
12/31/1987 .................. $10,000.00 $10,000.00
03/31/1988 .................. 9,807.91 10,344.37
06/30/1988 .................. 10,041.92 10,544.50
09/30/1988 .................. 10,238.86 10,814.86
12/31/1988 .................. 10,502.39 11,015.17
03/31/1989 .................. 10,319.80 11,088.33
06/30/1989 .................. 10,708.82 11,744.82
09/30/1989 .................. 10,702.98 11,752.52
12/31/1989 .................. 10,965.63 12,203.33
03/31/1990 .................. 10,978.37 12,257.75
06/30/1990 .................. 11,223.32 12,544.22
09/30/1990 .................. 11,245.12 12,551.58
12/31/1990 .................. 11,644.73 13,092.97
03/31/1991 .................. 11,889.41 13,389.21
06/30/1991 .................. 12,100.61 13,674.34
09/30/1991 .................. 12,558.32 14,206.18
12/31/1991 .................. 13,011.37 14,683.22
03/31/1992 .................. 13,015.75 14,727.30
06/30/1992 .................. 13,460.82 15,286.26
09/30/1992 .................. 13,747.41 15,691.89
12/31/1992 .................. 13,959.38 15,977.57
03/31/1993 .................. 14,376.39 16,570.48
06/30/1993 .................. 14,925.64 17,112.66
09/30/1993 .................. 15,460.46 17,690.71
12/31/1993 .................. 15,680.82 17,939.04
03/31/1994 .................. 14,549.84 16,954.31
06/30/1994 .................. 14,657.41 17,141.97
09/30/1994 .................. 14,641.50 17,259.27
12/31/1994 .................. 14,382.28 17,011.42
03/31/1995 .................. 15,351.79 18,214.21
06/30/1995 .................. 15,505.12 18,654.09
09/30/1995 .................. 15,850.20 19,190.60
12/31/1995 .................. 16,608.37 19,982.05
03/31/1996 .................. 16,191.18 19,741.04
06/30/1996 .................. 16,263.54 19,892.38
09/30/1996 .................. 16,614.08 20,350.36
12/31/1996 .................. 17,025.09 20,868.92
03/31/1997 .................. 16,913.83 20,820.29
06/30/1997 .................. 17,464.03 21,540.25
09/30/1997 .................. 17,964.94 22,189.78
12/31/1997 .................. 18,432.51 22,791.52
$10,000 OVER TEN YEARS
This chart assumes a $10,000 investment in Class A shares of Tax Exempt Fund on
December 31, 1987, and reflects deduction of the 4.75% sales load. On December
31, 1997, the value of your investment in the Series' Class A shares (with
dividends reinvested) would have grown to $18,433. By comparison, the same
$10,000 investment would have grown to $22,792 based on the performance of the
Lehman Brothers Municipal Bond Index.
The performance illustrated above is based on the performance of Class A shares.
The performance of Class B shares will be greater or less than the performance
shown for Class A shares as a result of the different loads and fees associated
with an investment in Class B shares.
The performance data illustrated above reflects past performance which is not
predictive of future results.
The Lehman Brothers Municipal Bond Index is a total return performance benchmark
for the long-term, investment-grade tax-exempt bond market. Returns and
attributes are calculated semi-monthly using approximately 15,000 municipal
bonds. Investments cannot be made directly in an index.
TAX-EXEMPT FUND
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1997
CLASS A SHARES CLASS B SHARES
-------------- --------------
1 Year........ 3.17% 1 Year.......... 1.94%
5 Years....... 4.70% Since Inception. 1.87%
10 Years...... 6.31% (10-19-93)
The performance data above represents past performance which is not predictive
of future results. For Class A shares these figures reflect deduction of the
maximum sales charge of 4.75%. For Class B shares the figures reflect deduction
of the maximum contingent deferred sales charge, ranging from 5% in the first
year to 0% in the sixth and following years. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
11
<PAGE>
Manager's Commentary
February 15, 1998
SECURITY CASH FUND
Short-term fixed income investment vehicles such as money market funds saw their
interest rates increase during 1997, unlike their longer-term counterparts which
experienced declining rates. Security Cash Fund returned 4.90% for the year,
matching the average return of its Lipper peer group exactly.
RISING SHORT-TERM RATES
In March the Federal Reserve Board's policy-making arm, the Federal Open Market
Committee, raised its target rate on Federal Funds to 5.50%. The Fed's Funds
rate, the rate at which banks loan overnight funds to each other, is a strong
influence on rate levels for short-term investments such as those used in money
market funds.
The purpose of this rate hike was to keep inflation in the U.S. from escalating.
Investors in long-term bonds watched interest rates decline as the inflation
specter waned. But the Federal Reserve, remaining diligent in its inflation
fight, kept short-term rates at the same level. Investors in Security Cash Fund
thus experienced increased returns over those of the previous year.
MATURITY STRUCTURE OF THE PORTFOLIO
As in the past, we strive to maintain an average maturity within ten days more
or less than that of the benchmark Money Fund Report published by IBC Donoghue.
We avoid trying to outguess the markets by dramatically lengthening or
shortening the average maturity of the fund. Because of the "laddered" structure
of maturities - issues coming due at regular intervals over the life of the
portfolio - we have holdings maturing frequently and can adjust quickly should
there be a sharp change in short-term interest rates.
ASSET SECTORS REPRESENTED IN THE PORTFOLIO
At the end of 1997 the assets in Security Cash Fund consisted of 79% commercial
paper, 12% federal agency securities, and 9% Small Business Administration
issues. As of year-end, the commercial paper in the portfolio was entirely in
the "top tier" of rating agency classifications, rated at least A1 by Standard
and Poor's rating agency or P1 by Moody's Investor Services. The federal agency
holdings at year end were primarily short-term securities issued by The Federal
Home Loan Bank and the Federal National Mortgage Association.
The Small Business Administration (SBA) issues are fully guaranteed by the
federal government as to timely payment of both principal and interest. These
issues, while bearing stated maturities in the twenty- to thirty-year range, are
considered to be short maturity paper because their interest rates reset
periodically (usually monthly or quarterly). This enables the issues to carry
coupons representing recent market levels, staying competitive with other
short-term investment options.
OUTLOOK FOR 1998
The interest rate outlook for short-term fixed income investments in 1998 is
uncertain. Although the U.S. economy has exhibited several signs of strength in
recent months, the Federal Reserve Open Market Committee may be reluctant to
raise interest rates because the impact of the Asian crisis on the U.S. is as
yet unknown. We will continue to monitor markets carefully, and will remain
ready to adjust portfolio holdings as economic conditions warrant.
FIXED INCOME TEAM
The Security Cash Fund is neither insured nor guaranteed by the U.S. Government
and there is no assurance that the fund will be able to maintain a stable net
asset value of $1.00 per share.
12
<PAGE>
Schedule of Investments
December 31, 1997
SECURITY INCOME FUND
CORPORATE BOND SERIES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Principal Market
CORPORATE BONDS Amount Value
- ------------------------------------------------------------------------------------------------------------------------------------
AIR TRANSPORTATION - 4.3%
<S> <C> <C>
Southwest Airlines Company, 7.875% - 2007 ........................................ $1,250,000 $1,382,812
United Airlines, 11.21% - 2014 ................................................... 950,000 1,315,750
----------
2,698,562
BANKS - 10.7%
ABN AMRO Bank NV, 7.55% - 2006 ................................................... 1,000,000 1,070,000
Abbey National PLC, 6.69% - 2005 ................................................. 1,250,000 1,276,563
BCH Cayman Islands, Ltd., 7.70% - 2006 ........................................... 1,000,000 1,060,000
Bank of New York, Inc., 6.50% - 2003 ............................................. 1,250,000 1,256,250
PNC Funding Corporation, 7.75% - 2004 ............................................ 700,000 749,875
Santander Financial Issuances, Ltd., 7.00% - 2006 ................................ 1,300,000 1,334,125
----------
6,746,813
COMMUNICATIONS - 9.2%
Comcast Corporation, 9.125% - 2006 ............................................... 1,000,000 1,062,500
New Jersey Bell, 6.625% - 2008 ................................................... 1,000,000 1,006,250
Paramount Communications, Inc., 7.50% - 2023 ..................................... 1,000,000 947,500
Rogers Cablesystems, Ltd., 9.625% - 2002 ......................................... 750,000 796,875
Rogers Communication, Inc., 9.125% - 2006 ........................................ 550,000 558,250
Valassis Communications, Inc., 9.55% - 2003 ...................................... 1,250,000 1,404,688
----------
5,776,063
ELECTRIC COMPANIES - 0.9%
AES Corporation, 10.25% - 2006 ................................................... 500,000 542,500
FINANCE - 7.1%
Associates Corporation, N.A., 7.55% - 2006 ....................................... 1,100,000 1,185,250
GE Capital Corporation, 8.625% - 2008 ............................................ 950,000 1,117,438
MCN Investment Corporation, 6.32% - 2003 ......................................... 50,000 49,750
Morgan Stanley Group, 6.875% - 2007 .............................................. 1,050,000 1,076,250
US West Capital Funding, Inc., 7.30% - 2007 ...................................... 1,000,000 1,030,000
----------
4,458,688
FOOD & BEVERAGES - 7.5%
Anheuser-Busch Companies, Inc., 7.10% - 2007 ..................................... 1,150,000 1,194,562
Chiquita Brands International, Inc., 10.25% - 2006 ............................... $1,125,000 $1,229,063
Cott Corporation, 9.375% - 2005 .................................................. 1,000,000 1,045,000
Panamerican Beverages, Inc., 8.125% - 2003 ....................................... 1,200,000 1,252,500
----------
4,721,125
FUNERAL HOMES - 2.6%
Loewen Group International, Inc., 8.25% - 2003 ................................... 1,550,000 1,637,187
HOSPITAL MANAGEMENT - 1.4%
Tenet Healthcare, 10.125% - 2005 ................................................. 800,000 872,000
MEDIA - 3.0%
Time Warner Entertainment, 10.15% - 2012 ......................................... 880,000 1,131,900
Westinghouse Electric Company, 8.375% - 2002 ..................................... 700,000 732,375
----------
1,864,275
MANUFACTURING - 1.7%
Caterpillar, Inc., 7.375% - 2097 ................................................. 1,000,000 1,073,750
MOTOR VEHICLES & EQUIPMENT - 2.0%
Chrysler Corporation, 7.45% - 2027 ............................................... 1,200,000 1,293,000
OIL & GAS COMPANIES - 7.2%
Occidental Petroleum, 6.24% - 2000 ............................................... 50,000 50,063
Petroleum Geo-Services, 7.50% - 2007 ............................................. 1,150,000 1,216,125
Seagull Energy Corporation, 8.625% - 2005 ........................................ 1,000,000 1,042,500
Transocean Offshore, Inc., 8.00% - 2027 .......................................... 1,000,000 1,136,250
Union Pacific Resources Group, 7.50% - 2026 ...................................... 1,000,000 1,073,750
----------
4,518,688
PUBLISHING & PRINTING - 2.3%
K-III Communications Corporation, 10.25% - 2004 .................................. 300,000 322,500
Quebecor Printing Capital, 7.25% - 2007 .......................................... 1,100,000 1,160,500
----------
1,483,000
RETAIL - 0.8%
Sears & Roebuck Company, 6.41% - 2007 ............................................ 500,000 502,500
STEEL & METAL PRODUCTS - 1.3%
AK Steel, 10.75% - 2004 .......................................................... 750,000 800,625
TOBACCO PRODUCTS - 0.9%
Philip Morris Company, Inc., 6.80% - 2003 ........................................ 550,000 556,875
See accompanying notes.
13
<PAGE>
Schedule of Investments
December 31, 1997
SECURITY INCOME FUND
CORPORATE BOND SERIES (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
Principal
Amount or
Number Market
CORPORATE BONDS (continued) of Shares Value
- ------------------------------------------------------------------------------------------------------------------------------------
UTILITIES - 2.2%
Tennessee Gas Pipeline, 7.50% - 2017 ............................................. $1,300,000 $1,392,624
----------
Total corporate bonds - 65.1% ............................................................................. 40,938,275
TRUST PREFERRED SECURITIES(3)
- -----------------------------
FINANCE - 7.8%
Chase Capital Trust, 6.3625% - 2027(2) ........................................... $1,500,000 1,476,585
Countrywide Capital Industries, Inc., 8.00% - 2026 ............................... $1,000,000 1,053,750
SI Financing, Inc., 9.50% - 2026 ................................................. 48,000 1,296,000
Washington Mutual Capital, 8.375% - 2002 ......................................... $1,000,000 1,097,500
----------
4,923,835
INSURANCE - 1.7%
Travelers Capital Trust, 7.75% - 2036 ............................................ $1,050,000 1,107,750
----------
Total trust preferred securities - 9.5% ................................................................... 6,031,585
U.S. GOVERNMENT SECURITIES
- --------------------------
U.S. TREASURY NOTE - 1.7%
6.50% - 2006 ............................................................. $1,000,000 1,046,920
U.S. TREASURY BONDS - 5.8%
6.00% - 2026 ............................................................. $1,500,000 1,496,910
6.625% - 2027 ............................................................ $2,000,000 2,169,660
----------
3,666,570
----------
Total U.S. government securities - 7.5% ................................................................... 4,713,490
MORTGAGE BACKED SECURITIES
- --------------------------
U.S. GOVERNMENT AGENCIES - 11.6%
Federal Home Loan Mortgage Corporation,
FHR 112 H, 8.80% - 2020 .................................................. $ 505,375 515,693
FHR 1311 J, 7.50% - 2021 ................................................. $1,050,000 1,080,570
FHR 1930 AB, 7.50% - 2023 ................................................ $1,548,244 1,578,885
Federal National Mortgage Association,
FHR 1994-79 B, 7.00% - 2019 .............................................. $1,100,000 1,111,391
FHR 1990-52 D, 9.30% - 2019 .............................................. $ 624,064 637,404
FHR 1990-108 G, 7.00% - 2020 ............................................. $1,000,000 999,426
Government National Mortgage Association,
GNMA 1997-10 B, 7.50% - 2019 ............................................. $ 750,000 765,866
GNMA II 2445, 8.00% - 2027 ............................................... $ 601,917 621,407
-----------
Total U.S. government agencies - 11.6% .................................................................... 7,310,642
NON-AGENCY SECURITIES - 4.3%
Chase Capital Mortgage Securities Company, 1997-1B, 7.37% - 2007 ................. 1,500,000 1,573,125
General Electric Capital Mortgage Securities, 1992-7A, 8.30% -2023 ............... 1,084,848 1,124,015
-----------
2,697,140
Total mortgage backed securities -15.9% .................................................................. $10,007,782
-----------
Total investments - 98.0% ................................................................................ 61,691,132
Cash and other assets, less liabilities - 2.0% ........................................................... 1,288,798
-----------
Total net assets - 100.0% ................................................................................ $62,979,930
===========
SECURITY INCOME FUND
U.S. GOVERNMENT SERIES
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT & GOVERNMENT AGENCY SECURITIES
- ----------------------------------------------
FEDERAL HOME LOAN BANK - 2.1%
8.29% - 2015 ............................................................. $ 150,000 $ 180,359
FEDERAL HOME LOAN MORTGAGE CORPORATION - 8.2%
7.125% - 2001 ............................................................ 700,000 713,411
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 20.2%
7.40% - 2004 ............................................................. 600,000 644,555
7.875% - 2005 ............................................................ 340,000 376,761
8.10% - 2019 ............................................................. 100,000 120,687
8.28% - 2025 ............................................................. 500,000 625,560
----------
1,767,563
FINANCING CORPORATION - 7.9%
9.65% - 2018 ............................................................. 500,000 692,500
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 32.3%
GNMA II #1849 8.50% - 2024 ............................................... 530,345 558,300
GNMA II #411643 7.75% - 2025 ............................................. 687,703 708,719
GNMA II #2270 8.00% - 2026 ............................................... 724,159 747,405
GNMA II #9365 8.25% - 2026 ............................................... 267,249 279,128
GNMA II #365608 7.50% - 2034 ............................................. 520,509 530,737
----------
2,824,289
STUDENT LOAN MARKETING ASSOCIATION - 5.6%
9.25% - 2004 ............................................................. 420,000 491,959
U.S. TREASURY NOTES - 12.4%
8.50% - 2000 ............................................................. 330,000 348,299
6.50% - 2006 ............................................................. 700,000 732,844
----------
1,081,143
U.S. TREASURY BONDS - 9.8%
8.75% - 2008 ............................................................. $ 600,000 $ 682,704
6.00% - 2026 ............................................................. 175,000 174,638
----------
857,342
----------
Total investments - 98.5% ................................................................................. 8,608,566
Cash and other assets, less liabilities - 1.5% ............................................................ 134,021
----------
Total net assets - 100.0% ................................................................................. $8,742,587
==========
See accompanying notes.
14
<PAGE>
Schedule Of Investments
December 31, 1997
SECURITY INCOME FUND
LIMITED MATURITY BOND SERIES
- ------------------------------------------------------------------------------------------------------------------------------------
Principal
Amount or
Number Market
CORPORATE BONDS of Shares Value
- ------------------------------------------------------------------------------------------------------------------------------------
AIR TRANSPORTATION - 3.3%
Southwest Airlines Company, 7.875% - 2007 ........................................ $ 100,000 $ 110,625
United Airlines, 11.21% - 2014 ................................................... 75,000 103,875
----------
214,500
BANKS - 9.9%
ABN AMRO, 7.55% - 2006 ........................................................... 150,000 160,500
Bank Austria, 7.25% - 2017 ....................................................... 160,000 169,800
Bank of New York, Inc., 6.50% - 2003 ............................................. 100,000 100,500
First Union Corporation, 8.125% - 2002 ........................................... 110,000 117,425
Santander Financial Issuances, Ltd., 7.00% - 2006 ................................ 100,000 102,625
----------
650,850
COMMUNICATIONS - CABLE - 8.8%
Centennial Cellular Corporation, 8.875% - 2001 ................................... 100,000 101,875
Comcast Corporation, 9.125% - 2006 ............................................... 100,000 106,250
K-III Communications Corporation, 10.25% - 2004 .................................. 75,000 80,625
New Jersey Bell, 6.875% - 2007 ................................................... 100,000 100,625
Rogers Communication, Inc., 9.125% - 2006 ........................................ 100,000 101,500
Valassis Communications Corporation, 9.55% - 2003 ................................ 75,000 84,281
----------
575,156
ELECTRIC COMPANIES - 2.3%
Consolidated Edison Company of New York, 6.625% - 2002 ........................... 150,000 151,687
ENTERTAINMENT - 1.2%
Speedway Motorsports, Inc., 8.50% - 2007 ......................................... 75,000 76,688
FINANCE - 12.2%
Associates Corporation, N.A., 7.55% - 2006 ....................................... 100,000 107,750
General Electric Capital Corporation, 8.625% - 2008 .............................. 100,000 117,625
Household Finance Corporation, 8.00% - 2004 ...................................... 150,000 162,750
International Lease Finance Corporation, 8.25% - 2000 ............................ 150,000 156,188
MCN Investment Corporation, 6.32% - 2003 ......................................... 150,000 149,250
Morgan Stanley Group, 6.875% - 2007 .............................................. 100,000 102,500
----------
796,063
FOOD & BEVERAGE TRADE - 4.8%
Anheuser-Busch Companies, Inc., 7.10% - 2007 ..................................... $ 100,000 $ 103,875
Cott Corporation, 9.375% - 2005 .................................................. 100,000 104,500
PanAmerican Beverage, Inc., 8.125% - 2003 ........................................ 100,000 104,375
----------
312,750
FUNERAL HOMES - 1.6%
Loewen Corporation, 8.25% - 2003 ................................................. 100,000 105,625
HOSPITAL MANAGEMENT - 1.7%
Tenet Healthcare, 10.125% - 2005 ................................................. 100,000 109,000
MANUFACTURING - 1.6%
Shop Vac Corporation, 10.625% - 2003 ............................................. 100,000 108,624
MEDIA - 5.1%
Heritage Media Corporation, 8.75% - 2006 ......................................... 100,000 107,000
News America Holdings, 8.625% - 2003 ............................................. 50,000 54,625
Time-Warner Entertainment Corporation, 10.15% - 2012 ............................. 50,000 64,313
Westinghouse Electric Company, 8.375% - 2002 ..................................... 100,000 104,625
----------
330,563
METALS - 2.3%
Alcan Aluminum, Ltd., 9.20% - 2001 ............................................... 148,000 148,924
MOTOR VEHICLES & EQUIPMENT - 0.8%
Chrysler Corporation, 7.45% - 2027 ............................................... 50,000 53,875
NATURAL GAS COMPANIES - 2.5%
Vastar Resources, Inc., 8.75% - 2005 ............................................. 150,000 167,063
OIL & GAS COMPANIES - 2.4%
Seagull Energy Corporation, 8.625% - 2005 ........................................ 150,000 156,375
PUBLISHING & PRINTING - 1.6%
Quebecor Printing Capital, 7.25% - 2007 .......................................... 100,000 105,500
RETAIL TRADE - 6.2%
Sears Corporation, 6.41% - 2001 .................................................. 150,000 150,750
Wal-Mart Stores, Inc., 7.50% - 2004 .............................................. 150,000 160,313
Zale's Corporation, 8.50% - 2007 ................................................. 100,000 98,750
----------
409,813
TOBACCO PRODUCTS - 2.4%
Dimon, Inc., 8.875% - 2006 ....................................................... 50,000 54,000
Philip Morris Company, Inc., 6.80% - 2003 ........................................ 50,000 50,625
Standard Commercial Tobacco, 8.875% - 2005 ....................................... 50,000 50,313
----------
154,938
Total corporate bonds - 70.7% ............................................................................. 4,627,994
See accompanying notes.
15
<PAGE>
Schedule of Investments
December 31, 1997
SECURITY INCOME FUND
LIMITED MATURITY BOND SERIES (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
Principal
Amount or
Number Market
TRUST PREFERRED SECURITIES(3) of Shares Value
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCE - 1.9%
SI Financing, Inc., 9.50% - 2026 ................................................. 4,560 $ 123,120
INSURANCE - 2.4%
Travelers Capital Trust, 7.75% - 2036 ............................................ $ 150,000 158,250
----------
Total trust preferred securities - 4.3% ................................................................... 281,370
MORTGAGE BACKED SECURITIES
- --------------------------
U.S. GOVERNMENT AGENCIES - 14.7%
Federal Home Loan Mortgage Corporation,
FHR 1102 G, 8.00% - 2020 ...................................................... $ 139,293 141,325
FHR 1104 K, 8.50% - 2020 ...................................................... $ 44,000 45,032
FHR 1311 J, 7.50% - 2021 ...................................................... $ 100,000 102,911
FHR 1930 AB, 7.50% - 2023 ..................................................... $ 113,841 116,095
FHR 42 K, 8.00% - 2024 ........................................................ $ 186,000 189,765
Federal National Mortgage Association,
1992-98 PJ, 7.50% - 2019 ...................................................... $ 118,000 119,756
1992-143 J, 7.00% - 2020 ...................................................... $ 100,000 99,680
Government National Mortgage Association,
GNMA II 2445, 8.00% - 2027 .................................................... $ 144,460 149,138
----------
963,702
NON AGENCY SECURITIES - 3.2%
General Electric Capital Mortgage Securities, #1992-7A 8.30% - 2023 .............. $ 100,778 104,417
Sears Mortgage Securities 1994-14 T3, 8.50% - 2022 ............................... $ 100,000 103,226
----------
207,643
----------
Total mortgage backed securities - 17.9% .................................................................. 1,171,345
GOVERNMENT & GOVERNMENT AGENCY SECURITIES
- -----------------------------------------
Canadian Government Agencies - 2.6%
Province of Quebec, 8.625% - 2005 ................................................ $ 150,000 168,750
U.S. GOVERNMENT SECURITIES - 1.6%
U.S. Treasury Note, 6.50% - 2006 ................................................. $ 100,000 104,692
----------
Total government & government agency securities - 4.2% .................................................... 273,442
----------
Total investments - 97.1% ................................................................................. 6,354,151
Cash and other assets, less liabilities - 2.9% ............................................................ 190,023
----------
Total net assets - 100.0% ................................................................................. $6,544,174
==========
SECURITY INCOME FUND
HIGH YIELD SERIES
- ------------------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS
- ---------------
AEROSPACE/DEFENSE - 1.3%
Burke Industries, Inc., 10.0% - 2007 ............................................. $ 125,000 $ 129,688
BANKS & CREDIT - 1.1%
Bay View Capital Corporation, 9.125% - 2007 ...................................... 100,000 102,750
BEVERAGES - 2.2%
Cott Corporation, 9.375% - 2005 .................................................. 100,000 104,500
Delta Beverage Group, 9.75% - 2003 ............................................... 100,000 105,500
----------
210,000
BROADCAST MEDIA - 2.9%
Allbritton Communications Company, 9.75% - 2007 .................................. 100,000 102,250
Young Broadcasting, 8.75% - 2007 ................................................. 175,000 173,250
----------
275,500
BUILDING MATERIALS - 3.3%
AAF-McQuay, Inc., 8.875% - 2003 .................................................. 100,000 99,125
Johns Manville International
Group, Inc., 10.875 - 2004 ............................................... 100,000 110,750
Sequa Corporation, 9.375% - 2003 ................................................. 100,000 104,250
----------
314,125
BUSINESS SERVICES - 1.1%
Heritage Media Corporation, 8.75% - 2006 ......................................... 100,000 107,000
CABLE SYSTEMS - 2.5%
Adelphia Communications Corporation, 9.875% - 2007 ............................... 100,000 105,750
Adelphia Communications, 12.50% - 2002 ........................................... 26,000 27,300
Rogers Cablesystems, Ltd., 9.625% - 2002 ......................................... 100,000 106,250
----------
239,300
CHEMICALS - 1.1%
Envirodyne Industries, Inc., 12.00% - 2000 ....................................... 100,000 107,125
COAL MINING - 1.6%
AEI Holdings, 10.00% - 2007 ...................................................... 150,000 153,750
COMMUNICATIONS - 1.5%
Century Communication Corporation, 8.375% - 2007 ................................. 75,000 75,000
Rogers Communications, Inc., 9.125% - 2006 ....................................... 70,000 71,050
----------
146,050
See accompanying notes
16
<PAGE>
Schedule of Investments
December 31, 1997
SECURITY INCOME FUND
HIGH YIELD SERIES (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
Principal
Amount or
Number Market
CORPORATE BONDS (continued) of Shares Value
- ------------------------------------------------------------------------------------------------------------------------------------
COMMUNICATION SERVICES - 3.5%
Cablevision Systems Corporation, 7.875% - 2004 ................................... $ 100,000 $ 102,125
Century Communications Corporation, 9.50% - 2005 ................................. 125,000 131,563
Comcast Corporation, 9.125% - 2006 ............................................... 100,000 106,250
----------
339,938
ELECTRIC UTILITIES - 3.2%
AES Corporation, 10.25% - 2006 ................................................... 135,000 146,475
Cal Energy Company, Inc., 9.50% - 2006 ........................................... 150,000 163,125
----------
309,600
FINANCIAL SERVICES - 4.5%
Dollar Financial Group, Inc., 10.875% - 2006 ..................................... 100,000 106,875
Emergent Group, Inc., 10.75% - 2004 .............................................. 175,000 175,000
Homeside, Inc., 11.25% - 2003 .................................................... 125,000 148,125
----------
430,000
FOOD AND BEVERAGES - 1.1%
Chiquita Brands International, Inc., 10.25% - 2006 ............................... 100,000 109,250
GAMING - 2.1%
Harrahs Operating, Inc., 8.75% - 2000 ............................................ 100,000 102,375
Station Casinos, Inc., 9.625% - 2003 ............................................. 100,000 103,500
----------
205,875
HEALTH CARE SERVICES - 2.5%
Genesis Eldercare Acquisitions, 9.00% - 2007 ..................................... 75,000 73,500
Tenet Healthcare Corporation, 10.125% - 2005 ..................................... 150,000 163,500
----------
237,000
MANUFACTURING - 4.9%
AGCO Corporation, 8.50% - 2006 ................................................... 100,000 102,500
DESA International, Inc., 9.875% - 2007 .......................................... 150,000 153,750
Shop Vac Corporation, 10.625% - 2003 ............................................. 100,000 108,625
Titan Wheel International, Inc., 8.75% - 2007 .................................... 100,000 104,750
----------
469,625
MISCELLANEOUS - 1.1%
Packard Bioscience Company, 9.375% - 2007 ........................................ 110,000 105,875
OIL - 6.8%
COHO Energy, Inc., 8.875% - 2007 ................................................. $ 150,000 $ 150,375
Crown Central Petroleum, 10.875% - 2005 .......................................... 140,000 148,750
Giant Industries, 9.00% - 2007 ................................................... 125,000 124,375
Seagull Energy Corporation, 8.625% - 2005 ........................................ 75,000 78,188
Southwest Royalties, Inc., 10.50% - 2004 ......................................... 150,000 148,125
----------
649,813
OFFICE EQUIPMENT AND SUPPLIES - 1.2%
Knoll, Inc., 10.875% - 2006 ...................................................... 100,000 111,750
PACKAGING & CONTAINERS - 3.2%
Huntsman Packaging Corporation, 9.125% - 2007 .................................... 175,000 180,250
Plastic Containers, Inc., 10.00% - 2006 .......................................... 125,000 131,563
----------
311,813
PUBLISHING - 3.7%
Big Flower Press Holdings, Inc., 8.875% - 2007 ................................... 100,000 100,750
Golden Books Publishing, Inc., 7.65% - 2002 ...................................... 100,000 96,250
Hollinger International Publishing, 8.625% - 2005 ................................ 75,000 77,531
K-III Communications Corporation, 10.25% - 2004 .................................. 50,000 53,750
Valissis Communications, Inc., 9.55% - 2003 ...................................... 25,000 28,094
----------
356,375
REAL ESTATE - 1.1%
B.F. Saul REIT, 11.625% - 2002 ................................................... 100,000 106,750
RECREATION - 3.9%
AMF Bowling Worldwide, Inc., 10.875% - 2006 ...................................... 100,000 109,625
Premier Parks, 9.75% - 2007 ...................................................... 150,000 159,375
Speedway Motorsports, Inc., 8.50% - 2007 ......................................... 100,000 102,250
----------
371,250
RESTAURANTS - 3.2%
Carrols Corporation, 11.50% - 2003 ............................................... 175,000 185,938
Friendly Ice Cream Corporation, 10.50% - 2007 .................................... 125,000 125,625
----------
311,563
RETAIL - GROCERY - 1.3%
Marsh Supermarket, Inc., 8.875% - 2007 ........................................... 125,000 126,562
See accompanying notes.
17
<PAGE>
Schedule of Investments
December 31, 1997
SECURITY INCOME FUND
HIGH YIELD SERIES
- ------------------------------------------------------------------------------------------------------------------------------------
Principal
Amount or
Number Market
CORPORATE BONDS (continued) of Shares Value
- ------------------------------------------------------------------------------------------------------------------------------------
RETAIL - GENERAL MERCHANDISING - 1.1%
Cole National Group, 9.875% - 2006 ............................................... $ 100,000 $ 106,750
RETAIL - SPECIALTY - 3.0%
Central Tractor, 10.625% - 2007 .................................................. 100,000 105,750
Southland Corporation, 4.50% - 2004 .............................................. 100,000 81,000
Zale's Corporation, 8.50% - 2007 ................................................. 100,000 98,750
----------
285,500
STEEL - 2.6%
AK Steel Corporation, 9.125% - 2006 .............................................. 75,000 77,062
Wheeling-Pittsburgh Corporation, 9.25% - 2007 .................................... 175,000 171,500
----------
248,562
TELECOMMUNICATIONS - 6.4%
Centennial Cellular, Inc., 8.875% - 2001 ......................................... 150,000 152,812
Comcast Cellular Holdings, Inc., 9.50% - 2007 .................................... 150,000 156,750
Intermedia Communications, Inc., 8.50% - 2008 .................................... 125,000 125,000
RCN Corporation, 10.0% - 2007 .................................................... 175,000 180,250
----------
614,812
TEXTILES - 7.3%
Delta Mills, Inc., 9.625% - 2007 ................................................. 125,000 127,187
Dyersburg Corporation, 9.75% - 2007 .............................................. 125,000 130,938
Pillowtex Corporation, 9.00% - 2007 .............................................. 125,000 127,656
Westpoint Stevens, Inc., 9.375% - 2005 ........................................... 150,000 157,125
Worldtex, Inc., 9.625% - 2007 .................................................... 150,000 154,125
----------
697,031
TOBACCO - 1.3%
Dimon, Inc., 8.875% - 2006 ....................................................... 50,000 54,000
Standard Commercial Tobacco, 8.875% - 2005 ....................................... 75,000 75,468
----------
129,468
TRANSPORTATION - 3.3%
Allied Holdings, Inc., 8.625% - 2007 ............................................. 175,000 179,375
Teekay Shipping Corporation, 8.32% - 2008 ........................................ 135,000 137,363
----------
316,738
----------
Total corporate bonds - 90.9% ............................................................................. 8,737,188
TRUST PREFERRED SECURITIES(3)
- -----------------------------
FINANCE - 1.4%
SI Financing, Inc., 9.50% - 2026 ................................................ 5,000 $ 135,000
PREFERRED STOCKS
BANKS AND CREDIT - 2.1%
California Federal Bank, 11.50% .................................................. 1,750 197,750
COMMUNICATIONS - 0.6%
Cablevision Systems, Inc., ....................................................... 541 62,291
PUBLISHING - 0.8%
PRIMEDIA, Inc., 10.00% - 2008 .................................................... 700 73,675
----------
Total preferred stocks - 3.5% ............................................................................. 333,716
----------
Total investments - 95.8% ................................................................................. 9,205,904
Cash and other assets, less liabilities 4.2% .............................................................. 405,561
----------
Total net assets - 100.0% ................................................................................. $9,611,465
==========
SECURITY TAX-EXEMPT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL BONDS
- ---------------
EDUCATION REVENUE - 28.8%
Florida State Board of Education Capital Outlay, 5.00% - 2011 .................... $1,000,000 $1,016,250
Illinois Chicago School, A, 4.90% - 2005 ......................................... $1,000,000 1,032,500
Island County Washington School District, South Whidbey, 6.75% - 2007 ............ $1,000,000 1,191,910
Mukwanago, Wisconsin School District, 5.00% - 2004 ............................... $ 500,000 520,000
North Brunswick Township, New Jersey Board of Education, 6.30% - 2013 ............ $1,000,000 1,113,750
Ohio State Public Facilities Series II-B, 5.00% - 2012 ........................... $1,100,000 1,115,125
University of Texas, 4.80% - 2009 ................................................ $1,000,000 1,015,000
----------
7,004,535
ELECTRIC UTILITY REVENUE - 13.3%
Nebraska Public Power District
Revenue, Series A, 6.25% - 2022 .................................................. $1,000,000 1,067,500
Orville, Ohio Electric System Revenue Bond, 5.00% - 2010 ......................... $1,000,000 1,031,250
Washington Public Power Supply System Revenue Nuclear Project #2, 6.30% - 2012 ... $1,000,000 1,130,000
----------
3,228,750
See accompanying notes.
18
<PAGE>
Schedule of Investments
December 31, 1997
SECURITY TAX-EXEMPT FUND (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
Principal
Amount or
Number Market
MUNICIPAL BONDS (continued) of Shares Value
- ------------------------------------------------------------------------------------------------------------------------------------
GENERAL OBLIGATION - 21.9%
Clark County, Nevada School District, Series A, 5.50% - 2016 ..................... $1,000,000 $ 1,031,250
Dade County, Florida, 5.75% - 2001 ............................................... 1,000,000 1,056,250
Henderson, Nevada Parks & Recreation, 5.875% - 2004 .............................. 1,000,000 1,089,330
Pennsylvania State, 5.00% - 2006 ................................................. 1,000,000 1,043,750
Rhode Island General Obligation, 5.30% - 2008 .................................... 1,030,000 1,091,800
-----------
5,312,380
SPECIAL OBLIGATION - 4.1%
Massachusetts Special Obligation Bond, 4.80% - 2009 .............................. 1,000,000 1,006,250
PORTS & HARBORS - 2.2%
Kansas City, Missouri Port Authority Riverfront Park, 5.75% - 2005 ............... 500,000 532,500
SEWER REVENUE - 18.4%
DuPage County, Illinois Stormwater Project Refunding, 5.60% - 2021 ............... 1,000,000 1,088,750
Houston, Texas Water & Sewer System Revenue, Series A, 6.20% - 2020 .............. 1,000,000 1,118,750
King County Washington Sewer Revenue, Series A, 6.25% - 2034 ..................... 1,000,000 1,082,500
Los Angeles, California Wastewater System Revenue, 6.00% - 2014 .................. 1,100,000 1,177,000
-----------
4,467,000
TRANSPORTATION - 4.2%
Los Angeles County, California Metro Authority, 5.625% - 2018 .................... 1,000,000 1,035,000
WATER REVENUE - 4.6%
New York State Environmental Facilities Corporation Pollution Control Revenue,
5.75% - 2009 ............................................................. 1,000,000 1,111,250
-----------
Total investments - 97.5% ................................................................................. 23,697,665
Cash and other assets, less liabilities - 2.5% ............................................................ 599,647
-----------
Total net assets - 100.0% ................................................................................. $24,297,312
===========
SECURITY CASH FUND
- ------------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER
- ----------------
BROKERAGE - 7.5%
Bear Stearns Companies, Inc., 5.57%, 2-12-98 ..................................... $2,000,000 $1,987,003
Merrill Lynch & Company, Inc., ................................................... 2,320,000
5.57%, 1-06-98 ........................................................... 469,636
5.72%, 1-09-98 ........................................................... 798,983
5.63%, 1-14-98 ........................................................... 948,069
5.60%, 2-20-98 ........................................................... 99,222
----------
4,302,913
BUSINESS SERVICES - 7.6%
General Electric Capital Corporation, ............................................ 2,400,000
5.72%, 1-05-98 ........................................................... 999,364
5.58%, 1-15-98 ........................................................... 1,396,962
Nordstrom Credit, Inc., .......................................................... 2,000,000
6.00%, 1-12-98 ........................................................... 1,996,333
----------
4,392,659
COMBINATION GAS & ELECTRIC - 4.9%
Baltimore Gas & Electric Company, ................................................ 2,803,000
5.95%, 1-07-98 ........................................................... 1,998,017
5.97%, 1-13-98 ........................................................... 801,402
----------
2,799,419
COMPUTER SYSTEMS - 1.3%
International Business Machines Corporation, 5.71%, 1-07-98 ...................... 760,000 759,277
ELECTRIC UTILITIES - 15.0%
Central Louisiana Electric Company, Inc., ........................................ 2,450,000
5.55%, 1-12-98 ........................................................... 1,447,541
5.85%, 1-21-98 ........................................................... 996,750
Interstate Power Company, ........................................................ 2,809,000
5.90%, 1-13-98 ........................................................... 383,245
5.77%, 1-21-98 ........................................................... 996,794
5.75%, 1-26-98 ........................................................... 821,706
6.00%, 1-26-98 ........................................................... 597,500
New England Power Company, ....................................................... 260,000
6.15%, 1-08-98 ........................................................... 259,689
Progress Capital Holdings, Inc., ................................................. 3,040,000
5.84%, 1-13-98 ........................................................... 1,237,586
6.34%, 1-14-98 ........................................................... 448,970
5.87%, 1-16-98 ........................................................... 1,346,698
----------
8,536,479
ELECTRICAL EQUIPMENT - 4.9%
General Electric Company, ........................................................ 2,830,000
5.53%, 1-13-98 ........................................................... 648,802
5.60%, 1-14-98 ........................................................... 2,175,592
----------
2,824,394
See accompanying notes.
19
<PAGE>
Schedule of Investments
December 31, 1997
SECURITY CASH FUND (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
Principal
Amount or
Number Market
COMMERCIAL PAPER (continued) of Shares Value
- ------------------------------------------------------------------------------------------------------------------------------------
ELECTRONICS - 4.8%
AVNET, Inc., ..................................................................... $2,770,000
5.63% - 1-16-98 .......................................................... $1,995,308
5.65% - 1-23-98 .......................................................... 637,791
5.70% - 1-23-98 .......................................................... 129,547
----------
2,762,646
ENGINEERING - 1.9%
FLUOR Corporation, ............................................................... 1,100,000
5.71% - 1-16-98 .......................................................... 698,335
6.20% - 1-23-98 .......................................................... 398,484
----------
1,096,819
ENTERTAINMENT - 3.4%
The Walt Disney Company, 5.63% - 3-27-98 ......................................... 2,000,000 1,973,414
HARDWARE & TOOLS - 4.2%
Sherwin-Williams Company (PP), 5.83% - 1-09-98 ................................... 2,000,000 1,997,409
Stanley Works, Inc., 5.64%, 2-12-98 .............................................. 425,000 422,204
----------
2,419,613
LEASING - 1.7%
International Lease Financing Corporation, 5.54% - 1-20-98 ....................... 1,000,000 997,076
NATURAL GAS - 6.4%
Bay State Gas Company, ........................................................... 940,000
5.70% - 1-15-98 .......................................................... 239,468
6.10% - 1-15-98 .......................................................... 399,051
5.71% - 1-22-98 .......................................................... 299,001
Questar Corporation .............................................................. 2,725,000
5.80% - 1-05-98 .......................................................... 227,853
6.00% - 1-27-98 .......................................................... 494,846
5.95% - 2-03-98 .......................................................... 1,989,092
----------
3,649,311
POLLUTION CONTROL - 3.7%
Engelhard Corporation, 5.72% - 2-27-98 ........................................... 2,170,000 2,150,347
RETAIL - GROCERY - 4.7%
Winn-Dixie Stores, Inc., ......................................................... 2,700,000
5.50% - 1-06-98 .......................................................... 999,236
5.68% - 2-10-98 .......................................................... 1,689,271
----------
2,688,507
TELECOMMUNICATIONS - 6.4%
AT&T Company, 5.75% - 1-27-98 .................................................... 2,100,000 2,091,279
Bell Atlantic Network Funding Corporation, 5.90% - 1-08-98 ....................... 1,600,000 1,598,164
----------
3,689,443
----------
Total commercial paper - 78.4% ............................................................................ 45,042,317
U.S. GOVERNMENT & AGENCIES
- --------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION - 8.7%
5.87% - 1-30-98 .......................................................... $2,000,000 $ 2,000,000
5.90% - 9-30-98 .......................................................... 2,000,000 2,000,000
5.95% - 11-12-98 ......................................................... 1,000,000 1,000,000
-----------
5,000,000
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 3.5%
5.74% - 6-09-98 .......................................................... 2,000,000 2,000,000
SMALL BUSINESS ASSOCIATION POOLS - 8.8%
#501927 - 6.75%, 2017(1) ................................................. 1,810,126 1,827,209
#502398 - 6.125%, 2018(2) ................................................ 855,517 858,725
#503152 - 6.125%, 2020(2) ................................................ 881,942 881,942
#503295 - 6.00%, 2021(2) ................................................. 742,200 742,665
#503303 - 6.00%, 2021(2) ................................................. 727,875 728,331
-----------
5,038,872
-----------
Total U.S. government & agencies - 21.0% .................................................................. 12,038,872
-----------
Total investments - 99.4% ................................................................................. 57,081,189
Cash and other assets, less liabilities - 0.6% ............................................................ 359,596
-----------
Total net assets - 100.0% ................................................................................. $57,440,785
===========
</TABLE>
The identified cost of investments owned at December 31, 1997, was the same for
federal income tax and book purposes, except for the Corporate Bond Series for
which the identified cost for federal income tax purposes was $59,522,510.
PP - indicates private placement.
(1) Variable rate security which may be reset the first of each month.
(2) Variable rate security which may be reset the first of each quarter.
(3) Trust Preferred Securities - Securities issued by financial institutions to
augment their Tier 1 capital base. Issued on a subordinate basis relative to
senior notes or debentures. Institutions may defer cash payments for up to
10 pay periods.
See accompanying notes.
20
<PAGE>
BALANCE SHEETS
December 31, 1997
<TABLE>
<CAPTION>
Security Income Fund
-----------------------------------------------
Corporate U.S. Limited High Security Security
Bond Government Maturity Yield Tax-exempt Cash
Series Series Bond Series Series Fund Fund
----------- ---------- ---------- ---------- ----------- -----------
Assets
<S> <C> <C> <C> <C> <C> <C>
Investments, at value (identified cost $59,519,623,
$8,297,425, $6,201,058, $8,931,926,
$22,653,326 and $12,038,872, respectively) ...... $61,691,132 $8,608,566 $6,354,151 $9,205,904 $23,697,665 $12,038,872
Commercial paper, at amortized cost which
approximates market value ....................... -- -- -- -- -- 45,042,317
Cash .................................................... 459,237 13,534 68,711 222,116 260,727 311,774
Receivables:
Fund shares sold ................................ 34,342 167 -- 8,950 -- 56,082
Securities sold ................................. -- -- -- -- -- 50,703
Interest ........................................ 961,521 130,509 112,851 193,041 353,066 216,444
Prepaid expenses ........................................ 8,884 21,058 15,248 1,837 8,833 60,475
----------- ---------- ---------- ---------- ----------- -----------
Total assets .................................... $63,155,116 $8,773,834 $6,550,961 $9,631,848 $24,320,291 $57,776,667
=========== ========== ========== ========== =========== ===========
LIABILITIES AND NET ASSETS
Liabilities:
Payable for:
Securities purchased .................... $ -- $ -- $ -- $ -- $ -- $ --
Fund shares redeemed .................... 101,212 20,000 -- -- 14,419
Dividends payable to shareholders ....... -- -- -- -- -- 258,814
Other Liabilities:
Management fees ......................... 28,405 -- -- -- 10,861 26,240
Custodian fees .......................... 1,502 300 -- 2,474 -- 1,479
Transfer and administration fees ........ 14,367 2,729 1,110 2,475 3,218 13,934
Professional fees ....................... 2,311 4,281 2,983 4,947 5,600 5,017
12b-1 distribution plan fees ............ 18,555 2,717 2,124 10,487 2,088 --
Miscellaneous fees ...................... 8,834 1,220 570 -- 1,212 15,979
----------- ---------- ---------- ---------- ----------- -----------
Total liabilities ............... 175,186 31,247 6,787 20,383 22,979 335,882
Net Assets:
Paid in capital ......................................... 73,978,535 9,388,252 6,449,575 9,337,487 24,496,978 57,440,785
Undistributed net investment income ..................... 22,204 3,764 4,097 -- 2,952 --
Accumulated undistributed net realized gain (loss)
on sale of investments .......................... (13,192,318) (960,570) (62,591) -- (1,246,957) --
Net unrealized appreciation
in value of investments ......................... 2,171,509 311,141 153,093 273,978 1,044,339 --
----------- ---------- ---------- ---------- ----------- -----------
Net assets .............................. 62,979,930 8,742,587 6,544,174 9,611,465 24,297,312 57,440,785
----------- ---------- ---------- ---------- ----------- -----------
Total liabilities and net assets ........ $63,155,116 $8,773,834 $6,550,961 $9,631,848 $24,320,291 $57,776,667
=========== ========== ========== ========== =========== ===========
CLASS "A" SHARES
Capital shares outstanding .............................. 8,013,301 1,590,192 533,063 329,682 2,178,679 57,440,785
Net assets .............................................. $56,486,745 $7,651,715 $5,489,908 $5,179,468 $21,953,078 $57,440,785
Net asset value per share (net assets divided by
shares outstanding) ............................. $ 7.05 $ 4.81 $ 10.30 $ 15.71 $ 10.08 $ 1.00
Add: Selling commission (4.75% of the
offering price) ................................. 0.35 0.24 0.51 0.78 0.50 --
----------- ---------- ---------- ---------- ----------- -----------
Offering price per share (net asset value
divided by 95.25%) .............................. $ 7.40 $ 5.05 $ 10.81 $ 16.49 $ 10.58 $ 1.00
=========== ========== ========== ========== =========== ===========
CLASS "B" SHARES
Capital shares outstanding .............................. 915,701 227,094 102,608 282,659 232,655 --
Net assets .............................................. $ 6,493,185 $1,090,872 $1,054,266 $4,431,997 $ 2,344,234 --
Net asset value per share (net assets divided
by shares outstanding) .......................... $ 7.09 $ 4.80 $ 10.27 $ 15.68 $ 10.08 --
=========== ========== ========== ========== =========== ===========
</TABLE>
See accompanying notes.
21
<PAGE>
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Security Income Fund
---------------------------------------------------
Corporate U.S. Limited High Security Security
Bond Government Maturity Yield Tax-exempt Cash
Series Series Bond Series Series Fund Fund
------------ ----------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest ............................... $5,127,816 $630,773 $468,723 $656,148 $1,182,900 $2,754,633
EXPENSES:
Management fees ........................ 338,609 42,687 27,818 41,748 115,812 238,616
Custodian fees ......................... 21,291 -- 2,025 1,099 1,344 5,633
Transfer/maintenance fees .............. 108,817 18,944 5,226 8,425 15,105 119,258
Administration fees .................... 60,950 7,684 5,543 6,557 20,846 21,990
Directors' fees ........................ 4,915 941 504 292 9,459 9,581
Professional fees ...................... 5,889 8,642 5,558 6,934 6,812 3,651
Reports to shareholders ................ 7,215 1,299 352 58 730 8,997
Registration fees ...................... 23,469 561 3,301 25,868 24,404 3,011
Other expenses ......................... 4,084 626 277 1,715 322 9,477
12b-1 distribution plan fees ........... 221,713 27,378 22,183 43,045 14,509 --
---------- -------- -------- -------- ---------- ----------
796,952 108,762 72,787 135,741 209,343 420,214
Less: Earnings credits applied ................ -- -- (2,025 -- (1,344 --
Reimbursement of expenses ............... (17,462) (42,687) (30,621) (41,748) -- --
---------- -------- -------- -------- ---------- ----------
Total expenses .......................... 779,490 66,075 40,141 93,993 207,999 420,214
---------- -------- -------- -------- ---------- ----------
Net investment income ................ 4,348,326 564,698 428,582 562,155 974,901 2,334,419
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) during the period on
investments ............................ (819,146) 17,807 14,159 159,295 230,930 --
Net change in unrealized appreciation
during the period on
investments ............................ 2,374,236 149,552 89,543 126,911 592,486 --
---------- -------- -------- -------- ---------- ----------
Net gain ............................. 1,555,090 167,359 103,702 286,206 823,416 --
---------- -------- -------- -------- ---------- ----------
Net increase in net assets
resulting from operations ........ $5,903,416 $732,057 $532,284 $848,361 $1,798,317 $2,334,419
========== ======== ======== ======== ========== ==========
</TABLE>
See accompanying notes.
22
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Security Income Fund
---------------------------------------------------
Corporate U.S. Limited High Security Security
Bond Government Maturity Yield Tax-exempt Cash
Series Series Bond Series Series Fund Fund
------------ ----------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income ................... $ 4,348,326 $ 564,698 $ 428,582 $ 562,155 $ 974,901 $ 2,334,419
Net realized gain (loss) ................ (819,146) 17,807 14,159 159,295 230,930 --
Unrealized appreciation (depreciation)
during the period ............... 2,374,236 149,552 89,543 126,911 592,486 --
------------ ----------- ----------- ----------- ------------ -------------
Net increase in net assets
resulting from operations 5,903,416 732,057 532,284 848,361 1,798,317 2,334,419
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A ......................... (3,949,944) (514,896) (368,619) (321,919) (930,144) (2,334,419)
Class B ......................... (403,170) (46,196) (56,487) (241,725) (47,364) --
Net realized gain
Class A ......................... -- -- -- (67,514) -- --
Class B ......................... -- -- -- (57,795) -- --
------------ ----------- ----------- ----------- ------------ -------------
Total distributions to
shareholders .... (4,353,114) (561,092) (425,106) (688,953) (977,508) (2,334,419)
CAPITAL SHARE TRANSACTIONS (a):
Proceeds from sale of shares
Class A ......................... 7,162,943 1,566,140 1,371,189 2,272,583 2,482,623 234,698,276
Class B ......................... 4,821,878 684,955 399,599 1,441,420 1,198,639 --
Dividends reinvested
Class A ......................... 2,918,082 427,733 329,483 389,121 493,192 2,203,684
Class B ......................... 363,965 40,597 56,486 298,860 31,059 --
Shares redeemed
Class A ......................... (28,343,679) (2,531,194) (1,243,300) (358,981) (5,087,737) (224,791,899)
Class B ......................... (6,157,206) (314,008) (175,370) (90,052) (455,776) --
------------ ----------- ----------- ----------- ------------ -------------
Net increase (decrease)
from capital share
transactions ............ (19,234,017) (125,777) 738,087 3,952,951 (1,338,000) 12,110,061
------------ ----------- ----------- ----------- ------------ -------------
Total increase (decrease)
in net assets ........ (17,683,715) 45,188 845,265 4,112,359 (517,191) 12,110,061
NET ASSETS:
Beginning of period ..................... 80,663,645 8,697,399 5,698,909 5,499,106 24,814,503 45,330,724
------------ ----------- ----------- ----------- ------------ -------------
End of period ........................... $ 62,979,930 $ 8,742,587 $ 6,544,174 $ 9,611,465 $ 24,297,312 $ 57,440,785
============ =========== =========== =========== ============ =============
Undistributed net investment income
at end of period ........................ $ 22,204 $ 3,764 $ 4,097 $ -- $ 2,952 $ --
============ =========== =========== =========== ============ =============
(a) Shares issued and redeemed
Shares sold
Class A ................. 1,036,267 329,947 136,018 146,171 251,471 234,698,276
Class B ................. 691,990 144,444 39,239 91,689 120,884 --
Dividends reinvested
Class A ................. 425,158 90,953 32,458 24,910 49,419 2,203,684
Class B ................. 52,774 8,630 5,576 19,160 3,160 --
Shares redeemed
Class A ................. (4,129,146) (535,552) (122,325) (22,867) (519,951) (224,791,899)
Class B ................. (886,785) (66,308) (17,298) (5,669) (46,659) --
------------ ----------- ----------- ----------- ------------ -------------
Net increase (decrease) . (2,809,742) (27,886) 73,668 253,394 (141,676) 12,110,061
============ =========== =========== =========== ============ =============
</TABLE>
See accompanying notes.
23
<PAGE>
STATMENT OF CHANGES IN NET ASSETS
For the Year Ended December 31, 1996
<TABLE>
<CAPTION>
Security Income Fund
----------------------------------------------------
Corporate U.S. Limited High Security Security
Bond Government Maturity Yield Tax-exempt Cash
Series Series Bond Series Series Fund Fund
------------ ----------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income ................ $ 5,712,167 $ 685,751 $ 351,230 $ 151,652 $ 1,153,538 $ 2,158,130
Net realized gain (loss) ............. (1,347,012) 182,946 (46,509) (36,585) 56,324 --
Unrealized appreciation
(depreciation) during the
period ....................... (5,522,985) (735,463) (186,260) 147,067 (671,331) --
------------ ------------ ----------- ---------- ----------- ------------
Net increase (decrease) in net
assets resulting from
operations ........... (1,157,830) 133,234 118,461 262,134 538,531 2,158,130
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A .............. (5,393,982) (655,579) (304,962) (79,996) (1,107,445) (2,158,130)
Class B .............. (343,417) (32,686) (47,156) (70,935) (44,319) --
Tax return of capital
Class A .............. -- -- (5,684) -- -- --
Class A .............. -- -- (879) -- -- --
------------ ------------ ----------- ---------- ----------- ------------
Total distributions to
shareholders ......... (5,737,399) (688,265) (358,681) (150,931) (1,151,764) (2,158,130)
CAPITAL SHARE TRANSACTIONS (a):
Proceeds from sale of shares
Class A ...................... 8,731,109 1,930,782 2,444,146 2,644,208 1,613,431 310,586,017
Class B ...................... 3,464,361 375,419 269,401 2,611,381 579,929 --
Dividends reinvested
Class A ...................... 4,241,649 543,532 284,749 79,998 626,193 1,969,086
Class B ...................... 304,987 26,151 47,452 70,935 31,495 --
Cost of shares redeemed
Class A .............. (26,834,054) (3,998,800) (913,142) (48) (3,379,177) 305,382,279)
Class B .............. (1,793,517) (286,899) (267,281) (18,571) (260,053) --
------------ ------------ ----------- ---------- ----------- ------------
Net increase (decrease)
from capital share
transactions ..................... (11,885,465) (1,409,815) 1,865,325 5,387,903 (788,182) 7,172,824
------------ ------------ ----------- ---------- ----------- ------------
Total increase (decrease)
in net assets .................... (18,780,694) (1,964,846) 1,625,105 5,499,106 (1,401,415) 7,172,824
NET ASSETS:
Beginning of period .................. 99,444,339 10,662,245 4,073,804 -- 26,215,918 38,157,900
------------ ------------ ----------- ---------- ----------- ------------
End of period ........................ $ 80,663,645 $ 8,697,399 $ 5,698,909 $5,499,106 $24,814,503 $ 45,330,724
============ ============ =========== ========== =========== ============
Undistributed net
investment income at
end of period ...................... $ -- $ 158 $ -- $ 721 $ 5,559 $ --
============ ============ =========== ========== =========== ============
(a) Shares issued and redeemed
Shares sold
Class A .............. 1,257,439 408,653 236,285 176,201 167,132 310,586,017
Class B .............. 497,238 79,022 25,885 174,028 59,521 --
Dividends reinvested
Class A .............. 608,432 115,124 27,590 5,270 65,031 1,969,086
Class B .............. 43,584 5,533 4,593 4,677 3,268 --
Shares redeemed
Class A .............. (3,860,010) (845,356) (88,496) (3) (350,952) (305,382,279)
Class B .............. (256,329) (61,304) (25,864) (1,226) (27,117) --
------------ ------------ ----------- ---------- ----------- ------------
Net increase (decrease) ...... (1,709,646) (298,328) 179,993 358,947 (83,117) 7,172,824
============ ============ =========== ========== =========== ============
</TABLE>
*Period August 5, 1996 (inception) through December 31, 1996.
See accompanying notes.
24
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each period
CORPORATE BOND SERIES (CLASS A)
<TABLE>
<CAPTION>
Fiscal Period Ended December 31
-----------------------------------------------------------------------------
1997(d) 1996(d)(f) 1995(d)(f) 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD ............... $ 6.87 $ 7.39 $ 6.68 $ 7.81 $ 7.72
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income ............................. 0.45 0.47 0.47 0.49 0.52
Net Gain (Loss) on Securities
(realized & unrealized) ................... 0.19 (0.52) 0.71 (1.13) 0.52
----------- ----------- ----------- ----------- -----------
Total from Investment Operations .................. 0.64 (0.05) 1.18 (0.64) 1.04
LESS DISTRIBUTIONS
Dividends (from Net Investment Income) ............ (0.46) (0.47) (0.47) (0.49) (0.53)
Distributions (from Capital Gains) ................ -- -- -- -- (0.42)
----------- ----------- ----------- ----------- -----------
Total Distributions ....................... (0.46) (0.47) (0.47) (0.49) (0.95)
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE END OF PERIOD ..................... $ 7.05 $ 6.87 $ 7.39 $ 6.68 $ 7.81
----------- ----------- ----------- ----------- -----------
TOTAL RETURN (a) .................................. 9.7% (0.5%) 18.2% (8.3%) 13.4%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) .............. $ 56,487 $ 73,360 $ 93,701 $ 90,593 $ 118,433
Ratio of Expenses to Average Net Assets ........... 1.07% 1.01% 1.02% 1.01% 1.02%
Ratio of Net Investment Income (Loss)
to Average Net Assets ..................... 6.50% 6.54% 6.62% 6.91% 6.46%
Portfolio Turnover Rate ........................... 120% 292% 200% 204% 157%
CORPORATE BOND SERIES (CLASS B)
Fiscal Period Ended December 31
-------------------------------------------------------------------------
1997(c)(d) 1996(c)(d)(f) 1995(c)(d)(f) 1994(c) 1993(b)
--------- --------- --------- --------- ---------
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD ................ $ 6.90 $ 7.43 $ 6.71 $ 7.84 $ 8.59
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income .............................. 0.40 0.40 0.40 0.43 0.11
Net Gain (Loss) on Securities
(realized & unrealized) .................... 0.19 (0.52) 0.73 (1.13) (0.32)
--------- --------- --------- --------- ---------
Total from Investment Operations ................... 0.59 (0.12) 1.13 (0.70) (0.21)
LESS DISTRIBUTIONS
Dividends (from Net Investment Income) ............. (0.40) (0.41) (0.41) (0.43) (0.11)
Distributions (from Capital Gains) ................. -- -- -- -- 0.43)
--------- --------- --------- --------- ---------
Total Distributions ........................ (0.40) (0.41) (0.41) (0.43) (0.54)
--------- --------- --------- --------- ---------
NET ASSET VALUE END OF PERIOD ...................... $ 7.09 $ 6.90 $ 7.43 $ 6.71 $ 7.84
========= ========= ========= ========= =========
TOTAL RETURN(a) .................................... 8.7% (1.4%) 17.3% (9.0%) (2.5%)
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) ............... $ 6,493 $ 7,303 $ 5,743 $ 3,878 $ 1,022
Ratio of Expenses to Average Net Assets ............ 1.85% 1.85% 1.85% 1.85% 1.88%
Ratio of Net Investment Income (Loss)
to Average Net Assets 5.72% 5.70% 5.80% 6.08% 5.16%
Portfolio Turnover Rate 120% 292% 200% 204% 164%
</TABLE>
See accompanying notes.
25
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each period
U.S. GOVERNMENT SERIES (CLASS A)
<TABLE>
<CAPTION>
Fiscal Period Ended December 31
------------------------------------------------------------------------
1997(c)(d)(f) 1996(c)(d)(f) 1995(c)(d)(f) 1994(c) 1993(c)
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD ................. $ 4.71 $ 4.97 $ 4.35 $ 4.97 $ 5.04
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income ............................... 0.32 0.31 0.30 0.30 0.31
Net Gain (Loss) on Securities
(realized & unrealized) ..................... .10 (0.26) 0.62 (0.62) 0.27
---------- ---------- ---------- ---------- ----------
Total from Investment Operations .................... 0.42 0.05 0.92 (0.32) 0.58
LESS DISTRIBUTIONS
Dividends (from Net Investment Income) .............. (0.32) (0.31) (0.30) (0.30) (0.31)
Distributions (from Capital Gains) .................. -- -- -- -- (0.34)
---------- ---------- ---------- ---------- ----------
Total Distributions ......................... (0.32) (0.31) (0.30) (0.30) (0.65)
---------- ---------- ---------- ---------- ----------
NET ASSET VALUE END OF PERIOD ....................... $ 4.81 $ 4.71 $ 4.97 $ 4.35 $ 4.97
========== ========== ========== ========== ==========
TOTAL RETURN (a) .................................... 9.2% 1.3% 21.9% (6.5%) 10.9%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) ................ $ 7,652 $ 8,036 $ 10,080 $ 8,309 $ 10,098
Ratio of Expenses to Average Net Assets ............. 0.60% 0.65% 1.11% 1.10% 1.10%
Ratio of Net Investment Income (Loss)
to Average Net Assets ....................... 6.10% 6.44% 6.41% 6.47% 5.90%
Portfolio Turnover Rate ............................. 39% 75% 81% 220% 153%
U.S. GOVERNMENT SERIES (CLASS B)
Fiscal Period Ended December 31
----------------------------------------------------------------------------
1997(c)(d) 1996(c)(d)(f) 1995(c)(d)(f) 1994(c) 1993(b)(c)
--------- --------- --------- --------- ---------
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD .............. $ 4.71 $ 4.97 $ 4.35 $ 4.97 $ 5.51
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income ............................ 0.26 0.25 0.26 0.26 0.04
Net Gain (Loss) on Securities
(realized & unrealized) .................. 0.10 (0.25) 0.63 (0.62) (0.19)
--------- --------- --------- --------- ---------
Total from Investment Operations ................. 0.36 (0.00) 0.89 (0.36) (0.15)
LESS DISTRIBUTIONS
Dividends (from Net Investment Income) ........... (0.27) (0.26) (0.27) (0.26) (0.04)
Distributions (from Capital Gains) ............... -- -- -- -- (0.35)
--------- --------- --------- --------- ---------
Total Distributions ...................... (0.27) (0.26) (0.27) (0.26) (0.39)
--------- --------- --------- --------- ---------
NET ASSET VALUE END OF PERIOD .................... $ 4.80 $ 4.71 $ 4.97 $ 4.35 $ 4.97
========= ========= ========= ========= =========
TOTAL RETURN (a) ................................. 7.9% (0.02%) 20.9 (7.4%) (1.4%)
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) ............. $ 1,091 $ 661 $ 582 $ 321 $ 140
Ratio of Expenses to Average Net Assets .......... 1.68% 1.86% 1.87% 1.85% 1.61%
Ratio of Net Investment Income (Loss)
to Average Net Assets .................... 5.02% 5.23% 5.69% 5.76% 5.54%
Portfolio Turnover Rate .......................... 39% 75% 81% 220% 114%
</TABLE>
See accompanying notes.
26
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each period
Limited Maturity Bond Series (Class B)
<TABLE>
<CAPTION>
Fiscal Period Ended December 31
----------------------------------------------------
1997(c)(d)(f) 1996(c)(d)(f) 1995(c)(d)(e)(f)
-------------- -------------- --------------
<S> <C> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD ........... $ 10.14 $ 10.66 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income ......................... 0.72 0.72 0.62
Net Gain (Loss) on Securities
(realized & unrealized) ............... 0.16 (0.51) 0.65
-------------- -------------- --------------
Total from Investment Operations .............. 0.88 0.21 1.27
LESS DISTRIBUTIONS
Dividends (from Net Investment Income) ........ (0.72) (0.72) (0.61)
Distributions (from Capital Gains) ............ -- -- --
Return of Capital ............................. -- (0.01) --
-------------- -------------- --------------
Total Distributions ................... (0.72) (0.73) (0.61)
-------------- -------------- --------------
NET ASSET VALUE END OF PERIOD ................. $ 10.30 $ 10.14 $ 10.66
============== ============== ==============
TOTAL RETURN (a) .............................. 9.0% 2.1% 13.0%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) .......... $ 5,490 $ 4,938 $ 3,322
Ratio of Expenses to Average Net Assets ....... 0.55% 0.90% 0.84%
Ratio of Net Investment Income (Loss)
to Average Net Assets ................. 7.10% 6.97% 5.97%
Portfolio Turnover Rate ....................... 76% 105% 4%
LIMITED MATURITY BOND SERIES (CLASS B)
Fiscal Period Ended December 31
---------------------------------------------------
1997(c)(d)(f) 1996(c)(d)(f) 1995(c)(d)(e)(f)
------------- ------------- ----------------
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD ........... $ 10.14 $ 10.67 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income ................. 0.61 0.63 0.53
Net Gain (Loss) on Securities
(realized & unrealized) ....... 0.14 (0.52) 0.66
------- ------- -------
Total from Investment Operations ...... 0.75 0.11 1.19
LESS DISTRIBUTIONS
Dividends (from Net Investment Income) ........ (0.62) (0.62) (0.52)
Distributions (from Capital Gains) ............ -- -- --
Return of Capital ............................. -- (0.01) --
------- ------- -------
Total Distributions ........................... (0.62) (0.64) (0.52)
------- ------- -------
NET ASSET VALUE END OF PERIOD ................. $ 10.27 $ 10.14 $ 10.67
======= ======= =======
TOTAL RETURN (a) .............................. 7.7% 1.1% 12.2%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) .......... $ 1,054 $ 761 $ 752
Ratio of Expenses to Average Net Assets ....... 1.50% 1.88% 1.71%
Ratio of Net Investment Income (Loss)
to Average Net Assets ................. 6.15% 5.99% 5.12%
Portfolio Turnover Rate ....................... 76% 105% 4%
</TABLE>
See accompanying notes.
27
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each period
HIGH YIELD SERIES (CLASS A)
<TABLE>
<CAPTION>
Fiscal Period
Ended December 31
-------------------------
1997(c)(d) 1996(c)(d)(g)
---------- -------------
<S> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD ................ $ 15.32 $ 15.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income .............................. 1.25 0.45
Net Gain (Loss) on Securities
(realized & unrealized) .................... 0.60 0.32
--------- ---------
Total from Investment Operations ... 1.85 0.77
LESS DISTRIBUTIONS
Dividends (from Net Investment Income) ............. (1.25) (0.45)
Distributions (from Capital Gains) ................. (0.21) --
--------- ---------
Total Distributions ........................ (1.46) (0.45)
--------- ---------
NET ASSET VALUE END OF PERIOD ...................... $ 15.71 $ 15.32
========= =========
TOTAL RETURN (a) ................................... 12.6% 5.2%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) ............... $ 5,179 $ 2,780
Ratio of Expenses to Average Net Assets ............ 0.87% 1.54%
Ratio of Net Investment Income (Loss)
to Average Net Assets ...................... 8.14% 7.47%
Portfolio Turnover Rate ............................ 87% 168%
HIGH YIELD SERIES (CLASS B)
Fiscal Period
Ended December 31
------------------------
1997(c)(d) 1996(c)(d)(g)
--------- ---------
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD ................ $ 15.32 $ 15.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income .............................. 1.10 0.41
Net Gain (Loss) on Securities
(realized & unrealized) .................... 0.59 0.32
--------- ---------
Total from Investment Operations ................... 1.69 0.73
LESS DISTRIBUTIONS
Dividends (from Net Investment Income) ............. (1.12) (0.41)
Distributions (from Capital Gains) ................. (0.21) --
--------- ---------
Total Distributions ........................ (1.33) (0.41)
--------- ---------
NET ASSET VALUE END OF PERIOD ...................... $ 15.68 $ 15.32
========= =========
TOTAL RETURN (a) ................................... 11.5% 4.9%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) ............... $ 4,432 $ 2,719
Ratio of Expenses to Average Net Assets ............ 1.80% 2.26%
Ratio of Net Investment Income (Loss)
to Average Net Assets ...................... 7.21% 6.74%
Portfolio Turnover Rate ............................ 87% 168%
</TABLE>
See accompanying notes.
28
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each period
SECURITY TAX-EXEMPT FUND (CLASS A)
<TABLE>
<CAPTION>
Fiscal Period Ended December 31
--------------------------------------------------------------------------
1997(c)(d) 1996(c)(d)(f) 1995(c)(d)(f) 1994 1993
---------- ------------- ------------- ---- ----
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD .............. $ 9.72 $ 9.94 $ 9.05 $ 10.37 $ 10.06
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income ............................ 0.42 0.45 0.48 0.47 0.51
Net Gain (Loss) on Securities
(realized & unrealized) .................. 0.36 (0.21) 0.89 (1.32) 0.70
---------- ---------- ---------- ---------- ----------
Total from Investment Operations ................. 0.78 0.24 1.37 (0.85) 1.21
LESS DISTRIBUTIONS
Dividends (from Net Investment Income) ........... (0.42) (0.46) (0.48) (0.47) (0.51)
Distributions (from Capital Gains) ............... -- -- -- -- (0.39)
---------- ---------- ---------- ---------- ----------
Total Distributions ...................... (0.42) (0.46) (0.48) (0.47) (0.90)
---------- ---------- ---------- ---------- ----------
NET ASSET VALUE END OF PERIOD .................... $ 10.08 $ 9.72 $ 9.94 $ 9.05 $ 10.37
========== ========== ========== ========== ==========
TOTAL RETURN (a) ................................. 8.3% 2.5% 15.5% (8.3%) 11.6%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) ............. $ 21,953 $ 23,304 $ 25,026 $ 24,092 $ 32,115
Ratio of Expenses to Average Net Assets .......... 0.82% 0.78% 0.86% 0.82% 0.82%
Ratio of Net Investment Income (Loss)
to Average Net Assets .................... 4.29% 4.67% 5.02% 4.74% 4.92%
Portfolio Turnover Rate .......................... 48% 54% 103% 88% 118%
SECURITY TAX-EXEMPT FUND (CLASS B)
Fiscal Period Ended December 31
--------------------------------------------------------------------------
1997(c)(d) 1996(c)(d)(f) 1995(c)(d)(f) 1994(c) 1993(b)
---------- ------------- ------------- ------- --------
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD ............... $ 9.73 $ 9.95 $ 9.05 $ 10.37 $ 10.88
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income ............................. 0.29 0.33 0.48 0.35 0.10
Net Gain (Loss) on Securities
(realized & unrealized) ................... 0.37 (0.21) 0.89 (1.32) (0.13)
--------- --------- --------- --------- ---------
Total from Investment Operations .................. 0.66 0.12 1.37 (0.97) (0.03)
LESS DISTRIBUTIONS
Dividends (from Net Investment Income) ............ (0.31) (0.34) (0.48) (0.35) (0.09)
Distributions (from Capital Gains) ................ -- -- -- -- (0.39)
--------- --------- --------- --------- ---------
Total Distributions ....................... (0.31) (0.34) (0.48) (0.35) (0.48)
--------- --------- --------- --------- ---------
NET ASSET VALUE END OF PERIOD ..................... $ 10.08 $ 9.73 $ 9.94 $ 9.05 $ 10.37
========= ========= ========= ========= =========
TOTAL RETURN (a) .................................. 6.9% 1.2% 14.3% (9.5%) (0.2%)
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) .............. $ 2,344 $ 1,510 $ 1,190 $ 760 $ 106
Ratio of Expenses to Average Net Assets ........... 2.00% 2.01% 2.00% 2.00% 2.89%
Ratio of Net Investment Income (Loss)
to Average Net Assets ..................... 3.11% 3.44% 3.90% 3.50% 2.71%
Portfolio Turnover Rate ........................... 48% 54% 103% 88% 90%
</TABLE>
See accompanying notes.
29
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each period
SECURITY CASH FUND
<TABLE>
<CAPTION>
Fiscal Period Ended December 31
-------------------------------------------------------------
1997 (d) 1996(c)(d)(f) 1995(c)(d)(f) 1994 1993(c)
-------- ------------- ------------- ---- -------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD .......................... $1.00 $ 1.00 $1.00 $1.00 $ 1.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income ........................................ 0.05 0.05 0.05 0.03 0.02
Net Gain (Loss) on Securities
(realized & unrealized) .............................. -- -- -- -- --
---- ---- ---- ---- ----
Total from Investment Operations ............................. 0.05 0.05 0.05 0.03 0.02
LESS DISTRIBUTIONS
Dividends (from Net Investment Income) ....................... (0.05) (0.05) (0.05) (0.03) (0.02)
Distributions (from Capital Gains) ........................... -- -- -- -- --
---- ---- ---- ---- ----
Total Distributions .................................. (0.05) (0.05) (0.05) (0.03) (0.02)
---- ---- ---- ---- ----
NET ASSET VALUE END OF PERIOD ................................ $1.00 $ 1.00 $1.00 $1.00 $ 1.00
==== ==== ==== ==== ====
TOTAL RETURN (a) ............................................. 4.9% 4.6% 5.0% 3.4% 2.4%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) ......................... $57,441 $45,331 $38,158 $58,102 $71,870
Ratio of Expenses to Average Net Assets ...................... 0.90% 1.01% 1.00% 0.96% 1.00%
Ratio of Net Investment Income (Loss)
to Average Net Assets ................................ 4.80% 4.47% 5.00% 3.24% 2.28%
Portfolio Turnover Rate ...................................... -- -- -- -- --
</TABLE>
(a) Total return information does not take into account any charges paid at
time of purchase or contingent deferred sales charges paid at time of
redemption.
(b) Class "B" shares were initially issued on October 19, 1993. Percentage
amounts for the period, except total return, have been annualized.
(c) Fund expenses were reduced by the Investment Manager and expense ratios
absent such reimbursement would have been as follows:
1993 1994 1995 1996 1997
----- ----- ----- ----- -----
Corporate Bond Series Class B ___ 2.00% 2.19% 2.05% 2.10%
U.S. Government Series Class A 1.20% 1.20% 1.22% 1.17% 1.06%
Class B 1.75% 2.91% 3.70% 3.26% 2.14%
Limited Maturity Class A ___ ___ 1.04% 1.40% 1.04%
Bond Series Class B ___ ___ 2.12% 2.60% 1.99%
High Yield Series Class A ___ ___ ___ 2.11% 1.44%
Class B ___ ___ ___ 2.83% 2.37%
Tax-Exempt Fund Class A ___ ___ 0.86% 0.78% 0.83%
Class B ___ 2.32% 2.45% 2.19% 2.00%
Cash Fund 1.03% ___ 1.04% 1.01% ___
(d) Net investment income was computed using the average month-end shares
outstanding throughout the period.
(e) Security Limited Maturity Bond Series was initially capitalized on January
17, 1995, with a net asset value of $10 per share. Percentage amounts for
period have been annualized, except for total return.
(f) Expense ratios including reimbursements, were calculated without the
reduction for custodian fees earnings credits beginning February 1, 1995.
Expense ratios with such reductions would have been as follows:
1995 1996 1997
----- ----- -----
Corporate Bond Series Class A 1.02% 1.01% ___
Class B 1.85% 1.85% ___
U.S. Government Series Class A 1.10% 0.64% ___
Class B 1.85% 1.85% ___
Limited Maturity Class A 0.81% 0.87% 0.51%
Bond Series Class B 1.65% 1.85% 1.46%
Tax-Exempt Fund Class A 0.85% 0.77% 0.83%
Class B 2.00% 2.00% 2.00%
Cash Fund 1.00% 1.00% 1.00%
(g) Security High Yield Series was initially capitalized on August 15, 1996,
with a net asset value of $15 per share. Percentage amounts for the period
have been annualized, except for total return.
See accompanying notes.
30
<PAGE>
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES
Security Income Fund, Security Tax-Exempt Fund and Security Cash Fund (the
Funds) are registered under the Investment Company Act of 1940, as amended, as
diversified open-end management investment companies. The shares of Security
Income Fund are currently issued in multiple series, with each series, in
effect, representing a separate Fund. The Income Fund is required to account for
each series separately and to allocate general expenses to each series based on
the net asset value of each series. 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. The Funds began offering an additional class of shares ("B"
shares) on October 19, 1993. The shares are offered without a front-end sales
charge but incur additional class-specific expenses. Redemptions of the shares
within five years of acquisition incur a contingent deferred sales charge. The
following is a summary of the significant accounting policies followed by the
Funds in the preparation of their financial statements. These policies are in
conformity with generally accepted accounting principles.
A. SECURITY VALUATION - Valuations of Income Funds' and Tax-Exempt Fund's
securities are supplied by pricing services approved by the Board of Directors.
Securities listed or traded on a national securities exchange are valued on the
basis of the last sales price. If there are no sales on a particular day, then
the securities are valued at the last bid price. Securities for which market
quotations are not readily available are valued by a pricing service considering
securities with similar yields, quality, type of issue, coupon, duration and
rating. If there is no bid price or if the bid price is deemed to be
unsatisfactory by the Board of Directors or by the Funds' investment manager,
then the securities are valued in good faith by such method as the Board of
Directors determines will reflect the fair value. The Funds' officers, under the
general supervision of the Board of Directors, regularly review procedures used
by, and valuations provided by, the pricing service.
Cash Fund, by approval of the Board of Directors, utilizes the amortized
cost method for valuing portfolio securities, whereby all investments are valued
by reference to their acquisition cost as adjusted for amortization of premium
or accretion of discount.
B. OPTIONS - The High Yield Series may purchase put and call options and
write such options on a covered basis on securities that are traded on
recognized securities exchanges and over-the-counter markets. Call and put
options on securities give the holder the right to purchase or sell,
respectively (and the writer the obligation to sell or purchase), a security at
a specified price, until a certain date. The primary risks associated with the
use of options are an imperfect correlation between the change in market value
of the securities held by the Series and the price of the option, the
possibility of an illiquid market, and the inability of the counter-party to
meet the terms of the contract.
The premium received for a written option is recorded as an asset, with an
equal liability which is marked to market based on the option's quoted daily
settlement price. Fluctuation in the value of such instruments are recorded as
unrealized appreciation (depreciation) until terminated, at which time realized
gains and losses are recognized.
C. SECURITY TRANSACTIONS AND INVESTMENT INCOME - Security transactions are
accounted for on the date the securities are purchased or sold. Realized gains
and losses are reported on an identified cost basis. Interest income is
recognized on the accrual basis. Premium and discounts (except original issue
discounts) on debt securities are not amortized, except Security Tax-Exempt Fund
which amortizes premiums.
D. DISTRIBUTIONS TO SHAREHOLDERS - Distributions to shareholders are
recorded on the ex-dividend date. The character of distributions made during the
year from net investment income or net realized gains may differ from their
ultimate characterization for federal income tax purposes. These differences are
primarily due to the recharacterization of foreign currency gains and losses.
E. TAXES - The Funds complied with the requirements of the Internal Revenue
Code applicable to regulated investment companies and distributed all of their
taxable net income and net realized gains sufficient to relieve them from all,
or substantially all, federal income, excise and state income taxes. Therefore,
no provision for federal or state income tax is required.
F. EARNINGS CREDITS - Under the fee schedule with the custodian, the Funds
earn credits based on overnight custody cash balances. These credits are
utilized to reduce related custodial expenses. The custodian fees disclosed in
the statement of operations do not reflect the reduction in expense from the
related earnings credits.
2. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Management fees are payable to Security Management Company, LLC (SMC)
under investment advisory contracts at an annual rate of .50 of 1% of the
average net assets of each fund, except for the High Yield Series which fees are
.60 of 1% of the average net assets of the Series. The investment advisory
contract for Income Fund provides that the total annual expenses of each Series
of the Fund (including management fees and custodian fees net of earnings
credits, but excluding interest, taxes, brokerage commissions, extraordinary
expenses and distribution fees paid under the Class B distribution plan) will
not exceed the level of expenses which Income Fund is permitted to bear under
the most restrictive expense limitation imposed by any state in which shares of
the Fund are then qualified for sale. For the period ended December 31, 1997,
SMC agreed to limit the total expenses of Corporate Bond Series, U.S. Government
Series and Limited Maturity Bond Series to an annual rate of 1.1% of the average
daily net asset value of Class A shares and 1.85% of Class B shares of each
respective Series. SMC also agreed to limit the total expenses of the High Yield
Series to 2.0% for Class A Shares and 2.75% for Class B shares. In addition, SMC
agreed to waive all of the management fees for the U.S. Government Series,
Limited Maturity Bond Series and the High Yield Series until December 31, 1997.
The investment advisory contract for Tax-Exempt and Cash Funds provides that the
total annual expenses of the Funds net of custodian fee earnings credits will
not exceed an amount equal to an annual rate of 1.0% of the average net assets
of Class A shares
31
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
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% of the average daily net assets of Corporate Bond Series, U.S.
Government Series, Limited Maturity Bond Series, High Yield Series, and
Tax-Exempt Fund and .045% of the average daily net assets of Cash Fund
calculated daily and payable monthly.
Income and Tax-Exempt Funds have adopted Distribution Plans related to the
offering of Class B shares pursuant to Rule 12b-1 of the Investment Company Act
of 1940. The Plans provide for payments at an annual rate of 1.0% of the average
net assets of Class B shares. Class A shares of Income Fund incur 12b-1
distribution fees at an annual rate of .25% of the average net assets of each
Series.
Security Distributors, Inc. (SDI), a wholly-owned subsidiary of Security
Benefit Group, Inc., a financial services holding company, is national
distributor for Income and Tax-Exempt Funds. SDI received net underwriting
commissions on sales of Class A shares and contingent deferred sales charges
(CDSC) on redemptions occurring within 5 years of the date of purchase of Class
B shares, after allowances to brokers and dealers for the period ended December
31, 1997, in the amounts presented below:
Corporate U.S. Limited High Tax-
Bond Government Maturity Yield Exempt
Series Series Series Series Fund
------- ------ ------ ------- -------
SDI underwriting
(Class A) ............ $ 5,221 $1,979 $2,232 $ 736 $ 2,581
CDSC (Class B) ............ $15,849 $2,159 $ 893 $ 1,161 $ 3,510
Broker/Dealer
(Class A) ............ $21,438 $8,680 $9,614 $ 3,565 $ 9,830
Broker/Dealer
(Class B) ............ $47,733 $5,878 $7,825 $16,593 $50,942
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 31,1997, (excluding
overnight investments and short-term debt securities) were as follows:
Corporate U.S. Limited High Tax-
Bond Government Maturity Yield Exempt
Series Series Series Series Fund
----------- ---------- ---------- ---------- -----------
Purchases ... $76,921,168 $3,386,846 $5,477,011 $9,882,654 $11,105,240
Proceeds from
sales ... $92,603,472 $3,222,884 $4,354,028 $6,018,681 $12,084,148
4. FEDERAL INCOME TAX MATTERS
The amounts of unrealized appreciation (depreciation) as of December 31,
1997, were as follows:
Corporate U.S. Limited High Tax-
Bond Government Maturity Yield Exempt
Series Series Series Series Fund
----------- --------- --------- --------- ----------
Gross unrealized
appreciation $ 2,233,243 $ 311,175 $ 159,906 $ 291,154 $1,044,339
Gross unrealized
depreciation (64,621) (34) (6,813) (17,176) --
----------- --------- --------- --------- ----------
Net unrealized
appreciation $ 2,168,622 $ 311,141 $ 153,093 $ 273,978 $1,044,339
At December 31, 1997, the following Funds had accumulated net realized
capital loss carryovers as shown:
Capital
Loss Expiration
Carryover Year
----------- ------------
Corporate Bond Series ......................... $13,189,431 2002 to 2005
U.S. Government Series ........................ 960,570 2002
Limited Maturity
Bond Series ................................. 62,591 2003 to 2004
Tax-Exempt Fund ............................... 1,246,957 2002
For federal income tax purposes, High Yield Series designated $56,465 as capital
gains dividends.
32
<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, including the schedules of
investments, of SecurityTax-Exempt Fund, Security Cash Fund and the following
series of Security Income Fund (Corporate Bond, U.S. Government, Limited
Maturity Bond and High Yield Series) (the Funds) as of December 31, 1997, and
the related statements of operations and changes in net assets and the financial
highlights for the periods indicated therein. These financial statements and the
financial highlights are the responsibility of the Funds management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
investments owned as of December 31, 1997, by correspondence with the custodian.
As to securities relating to uncompleted transactions, we performed other audit
procedures. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
each of the Funds indicated above at December 31, 1997, and the results of their
operations, changes in their net assets and the financial highlights for the
periods indicated therein in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Kansas City, Missouri
February 6, 1998
- --------------------------------------------------------------------------------
NOTICE:
IN THE FUTURE, YOU WILL RECEIVE ONLY ONE COPY PER ADDRESS OF THE PROSPECTUS,
SEMI-ANNUAL AND ANNUAL REPORTS. IF YOU WISH TO CONTINUE RECEIVING ONE FOR EACH
PRIMARY OWNER OF RECORD, WE ASK THAT YOU PLEASE SEND YOUR REQUEST IN WRITING TO
SECURITY BENEFIT, ATTN: PAT RIPPBERGER, 700 SW HARRISON ST., TOPEKA, KS
6636-0001
- --------------------------------------------------------------------------------
<PAGE>
THE SECURITY GROUP OF MUTUAL FUNDS
Security Growth and Income Fund
Security Equity Fund
o Equity Series
o Global Series
o Asset Allocation Series
o Social Awareness Series
o Value Series
o Small Company Series
Security Ultra Fund
Security Income Fund
o Corporate Bond Series
o U.S. Government Series
o Limited Maturity Bond Series
o High Yield Series
Security Tax-Exempt Fund
Security Cash Fund
This report is submitted for the general information of the shareholders of the
Funds. The report is not authorized for distribution to prospective investors in
the Funds unless preceded or accompanied by an effective prospectus which
contains details concerning the sales charges and other pertinent information.
SECURITY FUNDS OFFICERS AND DIRECTORS
DIRECTORS
Donald A. Chubb, Jr.
John D. Cleland
Donald L. Hardesty
Bruce Jensen (Income Fund only)
Penny A. Lumpkin
Mark L. Morris, Jr., D.V.M.
Maria Fiorini Ramirez (Income Fund only)
Hugh L. Thompson, Ph.D.
OFFICERS
John D. Cleland, President
James R. Schmank, Vice President and Treasurer
Mark E. Young, Vice President
Steven M. Bowser, Vice President
Jane A. Tedder, Vice President
Barbara J. Davison, Assistant Vice President
Thomas A. Swank, Vice President
Amy J. Lee, Secretary
Christopher D. Swickard, Assistant Secretary
Brenda M. Harwood, Assistant Treasurer and Assistant Secretary
[SECURITY DISTRIBUTORS, INC. LOGO]
SECURITY DISTRIBUTORS, INC.
700 SW Harrison St.
Topeka, KS 66636-0001
(785) 431-3127
(800) 888-2461
<PAGE>
MFR
ANNUAL REPORT
December 31, 1997
o MFR Emerging Markets Total Return Series
o MFR Global Asset Allocation Series
o MFR Global High Yield Series
[MFR LOGO] MFR Advisors, Inc.
SECURITY DISTRIBUTORS, INC.
A Member of The Security Benefit
Group of Companies
<PAGE>
Manager's Commentary
February 15, 1998
MFR EMERGING MARKETS TOTAL RETURN
To Our Shareholders:
The second half of 1997 was a tumultuous time for most emerging markets and in
particular those in southeast Asian countries. What was originally thought to be
primarily a currency problem in Thailand quickly turned into a regional
financial crisis that still affects both developed and emerging financial
markets around the world today. The widespread declines in emerging market
equities and currencies resulted in a negative 5.62% total return for the MFR
Emerging Market Total Return since its inception May 19, 1997.(1) While we are
disappointed in the Series' return, it compares very favorably with the
International Finance Corporation (IFC) Emerging Markets Regional Investable
Index which was down 21.02% for the same time period.
PORTFOLIO ACTIVITY IN THE SECOND HALF
As you know, the Series has the ability to allocate its investments between
emerging market stocks and bonds based upon MFR Advisors' investment outlook.
During the second half of 1997 we maintained what we consider a relatively high
allocation to emerging market bonds and a relatively low exposure to southeast
Asia. This strategy enabled the fund to easily outperform the IFC index.
The damage inflicted on the Asian financial markets was impressive. A few
examples of the losses incurred during the last six months of 1997 include
Indonesian stocks which were down 41%, the Indonesian Rupiah's decline of 55%,
Thai stocks down 28%, and the Thai Baht which lost 47%. In general, the problem
in the region was the unsustainable policy of linking local currencies to the
U.S. dollar. Years of low currency volatility encouraged local corporations and
governments to borrow in U.S. dollars. This U.S. dollar debt then became
prohibitively expensive when the currency links broke down. Unfortunately, the
"Asian contagion" spread like wildfire throughout Latin America, Central Europe,
and even the developed financial markets.
WHAT'S AHEAD FOR 1998
As we enter 1998 we believe that the "broad brush" applied to emerging markets
will soon end. This means that sound macroeconomic research and analytical
skills should be well rewarded. The ability to allocate assets between stocks
and bonds, and probably even more importantly, to properly allocate assets among
countries will again be the principal skills needed to outperform in 1998.
We will continue our cautious approach in the new year, but we firmly believe
that opportunities will abound in the not too distant future. We remain very
constructive on central Europe and will selectively look to build additional
investment positions in Hungary and Poland. These countries both have relatively
stable political frameworks and are pursuing reasonable monetary and fiscal
policies. In Latin America, Mexico remains our favorite. Aided by the economic
strength of the U.S., Mexico's economy has had a dramatic recovery from its
currency devaluation in 1994, and we look for further gains in 1998.
Finally, we believe that Asia will begin to sort out its problems in the first
half of the new year. While it will take some time for economic strength to
return to the region, remember that investment opportunities usually present
themselves well in advance of the return to economic health. Simply put, we'll
be carefully monitoring Asia for investment opportunities.
Thank you for your support during these volatile times. Please feel free to call
us with any comments or questions about your investment.
Maria Fiorini Ramirez Bruce Jensen
President and CEO Chief Investment Officer
MFR Advisors, Inc. MFR Advisors, Inc.
(1) Performance figures are based on Class A shares and do not reflect deduction
of the sales charge. Certain fund expenses were reimbursed and/or waived for
the period ended December 31, 1997 and in the absence of such reimbursement,
the performance quoted would be reduced.
Investing in foreign countries may involve risks, such as currency
fluctuations and political instability, not associated with investing
exclusively in the U.S.
1
<PAGE>
Manager's Commentary
February 15, 1998
MFR EMERGING MARKETS TOTAL RETURN
MFR EMERGING MARKETS TOTAL RETURN
vs. IFC EMERGING MARKETS
REGIONAL INVESTABLE INDEX
12-31-97
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
MFR Emerging Markets IFC Emerging Markets
Date Total Return Series Regional Investable Index
- ---- -------------------- -------------------------
5/97 .................. $ 10,000.00 $ 10,000.00
6/97 .................. 9,752.38 10,755.00
9/97 .................. 10,038.10 9,780.00
12/97 ................. 8,978.32 7,898.00
$10,000 OVER THE LIFE OF THE SERIES
This chart assumes a $10,000 investment in Class A shares of Emerging Markets
Total Return Series on May 19, 1997 (date of inception), and reflects deduction
of the 4.75% sales load. On December 31, 1997, the value of your investment in
the Series' Class A shares (with dividends reinvested) would have equaled
$8,978. By comparison, the same $10,000 investment would have equaled $7,898
based on the performance of the IFC Emerging Markets Regional Investable 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 IFC Emerging Markets Regional Investable Index represents the IFC Investable
Regional Total Return Composite. The term Investable indicates that the stocks
and the weights in the IFCI index represent the amount that the foreign
institutional investors might buy by the virtue of the foreign institutional
restrictions (either at the national level or by the individual company's
corporate statute) plus factoring in minimum market capitalization and liquidity
screens.
EMERGING MARKETS TOTAL RETURN SERIES
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1997
CLASS A SHARES CLASS B SHARES
-------------- --------------
Since Inception Since Inception
(5/19/97)..... -10.11% (5/19/97)..... -10.75%
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, ranging from 5% in
the first year to 0% in the sixth and following years. The investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Certain fund expenses were reimbursed and/or waived for the fiscal year ending
December 31, 1997 and in the absence of such reimbursement and/or waiver, the
performance quoted would be reduced.
2
<PAGE>
Manager's Commentary (continued)
February 15, 1998
MFR Global Asset Allocation
To Our Shareholders:
MFR Global Asset Allocation Series had a disappointing negative total return of
1.02% in 1997(1). Even though the Series had limited exposure to Asia, and in
particular to southeast Asia, during the second half of the year, the series
overall total return was severely impacted by the significant losses on those
positions. As you can see by the following financial statements, the Series had
less than 5% of its assets invested in Asia at the end of the year. More than
half of this exposure is in Sony Corporation, whose outlook we believe remains
positive. Sony's price actually increased approximately 16% in the second half
of 1997 while the Japanese stock index, the Nikkei 225, lost over 25% of its
value.
CONSEQUENCES OF THE ASIAN PROBLEMS
1998 should prove to be a very interesting year. Asia's problems will surely
dominate financial markets and headlines again in the first half of the new
year. While we don't look for a quick economic recovery in the region, we do
believe that the crisis should begin to subside in the first six months of 1998.
As the problems start to sort themselves out, investor confidence should also
begin to return to the region.
The heavy damage inflicted on many of these markets (for example, in the last
six months of 1997 Indonesia's stock market was down over 41% and its currency
dropped 55% versus the U.S. dollar) means that there will be plenty of buying
opportunities in the not-too-distant future. We have recently heard of some
buying in selected blue chip Korean and Indonesian companies.
A LOOK AT THE REST OF THE WORLD
Enough of the bad news. Looking ahead outside of Asia, we remain positive. Low
inflation throughout the developed world has helped bring bond yields down to
historically low levels in many countries. In the U.S. the yield on the
thirty-year Treasury bond, which began regular issuance in 1977, is at its
historic lows. Low inflation and this low interest rate environment can only
help support equity prices.
Economic growth remains robust in many regions. The U.S.--in fact, all of North
America--remains the leader, while the rate of growth in Europe should quicken
in 1998. On the equity side we continue to be more positive on European
companies than on their U.S. counterparts. We see many European companies
restructuring, raising productivity and becoming more efficient, much like U.S.
industry was forced to do in the 1980's. This is actually a big part of the
reason why overall economic growth in Europe has lagged the U.S. Inherent in any
cost cutting, productivity increases result in the layoff of workers and/or the
containment of wages. While this helps profitability on the company level, it
results in stubbornly high unemployment levels and disappointing overall
macroeconomic growth on the country level.
WHAT ABOUT BONDS?
On the bond side we continue to favor the higher yielding sectors, including
"Brady" bonds. With interest rates on government securities at all-time lows in
many countries, it's almost a given that global investors will continue to seek
higher yields by either taking on additional credit risk or by moving their
investments into higher yielding countries. Default risk should decline due to
the combination of strong economic growth with the ability of corporations to
reduce interest costs. This means sound macroeconomic research and credit skills
should be well rewarded in 1998.
Finally, thank you for your support. We look forward to improved investment
results in 1998.
Maria Fiorini Ramirez
President and CEO
MFR Advisors, Inc.
Bruce Jensen
Chief Investment Officer
MFR Advisors, Inc.
(1) Performance figures are based on Class A shares and do not reflect deduction
of the sales charge. Certain fund expenses were reimbursed and/or waived for
the period ended December 31, 1997 and in the absence of such reimbursement,
the performance quoted would be reduced.
Investing in foreign countries may involve risks, such as currency
fluctuations and political instability, not associated with investing
exclusively in the U.S.
3
<PAGE>
Manager's Commentary (continued)
February 15, 1998
MFR GLOBAL ASSET ALLOCATION
MFR GLOBAL ASSET ALLOCATION SERIES vs.
LEHMAN GLOBAL BOND INDEX AND
MSCI WORLD INDEX
12-31-97
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
MFR Global Asset Lehman Global MCI World
Date Allocation Series Bond Index Index
- ---- ----------------- ------------- ----------
5/97 .................. $10,000.00 $10,000.00 $10,000.00
6/97 .................. 9,828.57 10,318.00 11,150.00
9/97 .................. 10,133.33 10,499.00 11,480.00
12/97 ................. 9,426.73 10,591.00 11,209.00
$10,000 OVER THE LIFE OF THE SERIES
This chart assumes a $10,000 investment in Class A shares of Global Asset
Allocation Series on May 19, 1997 (date of inception), and reflects deduction of
the 4.75% sales load. On December 31, 1997, the value of your investment in the
Series' Class A shares (with dividends reinvested) would have been $9,427. By
comparison, the same $10,000 investment would have been $10,591 based on the
performance of the Lehman Brothers Global Bond Index and $11,209 based on the
MSCI World Index.
The performance illustrated above is based on the performance of Class A shares.
The performance of Class B shares will be greater or less than the performance
shown for Class A shares as a result of the different loads and fees associated
with an investment in Class B shares.
The performance data illustrated above reflects past performance which is not
predictive of future results.
The Lehman Brothers Global Bond Index includes local currency-denominated
sovereign debt of 19 countries plus European Currency Units-denominated debt.
Investment cannot directly be made in an index.
The MSCI is based on the share prices of approximately 1,600 companies listed on
stock exchanges in the twenty-two countries that make up the MSCI National
Indices.
MFR GLOBAL ASSET ALLOCATION SERIES
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1997
CLASS A SHARES CLASS B SHARES
-------------- --------------
Since Inception Since Inception
(5/19/97)..... -5.73% (5/19/97)..... -6.43%
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, ranging from 5% in
the first year to 0% in the sixth and following years. The investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Certain fund expenses were reimbursed and/or waived for the fiscal year ending
December 31, 1997 and in the absence of such reimbursement and/or waiver, the
performance quoted would be reduced.
4
<PAGE>
Manager's Commentary (continued)
February 15, 1998
MFR Global High Yield
To Our Shareholders:
1997 was a mixed year for global bond investors. While interest rates fell in
almost all developed countries, the MFR Global High Yield Series' total return
was limited by a strong U.S. dollar and widening yield spreads on emerging
market debt relative to U.S. Treasury bonds due to the problems in southeast
Asia.
PERFORMANCE OF THE GLOBAL AGGRESSIVE BOND SERIES
Despite the problems in the global bond sector, the Global High Yield Series
returned 4.57% for the year, comparing favorably with the Lipper peer group
average of 3.00%(1). Performance was also very strong versus the benchmark
Lehman Global Bond Index return of 1.04% for 1997.
OUTLOOK FOR EMERGING MARKETS
We expect 1998 to be a much better year for global bonds for a number of
reasons. First, we believe that emerging market countries and companies will be
evaluated more on an individual basis than being painted with the negative broad
brush they received in 1997 due to the Asian crisis. Sound macroeconomic
research and credit skills should be well rewarded in these markets. We continue
to favor emerging market countries such as Greece, Hungary, Poland, and Mexico,
because each has a relatively stable political framework and is headed in the
right direction with fiscal and monetary policies.
Second, we believe that much of the good news that has propelled the U.S. dollar
versus its European counterparts has now been factored into its value. This is
supported by the fact that the U.S. dollar rose over 11% versus the Deutsche
mark in the first half of 1997, but only 3% during the second half. For 1998 we
forecast a further 3% to 5% rise in the U.S. dollar early in the new year,
followed by a declining dollar as European growth accelerates and U.S. growth
slows. Therefore, as opposed to 1997, we believe foreign currencies will be a
positive for the total return of the Series in 1998.
BENEFITS OF THE ASIAN CRISIS
Finally, we expect inflation to remain subdued. Despite all the questions and
uncertainties the Asian crisis has raised, one thing is fairly certain: the
damage that the currency devaluations and resulting crisis have caused to the
economies of Asia will benefit the rest of the world's inflation outlook in two
ways. First, the Asian economies will slow dramatically and so will their demand
for commodities. We are already seeing a slowing in the demand for oil from
Asia. And second, many imported goods produced in Asia will be cheaper due to
the dramatic decline in many Asian currencies. All in all, we look forward to a
rewarding year for global bond markets in 1998.
Maria Fiorini Ramirez
President and CEO
MFR Advisors, Inc.
Bruce Jensen
Chief Investment Officer
MFR Advisors, Inc.
(1) Performance figures are based on Class A shares and do not reflect deduction
of the sales charge. Certain fund expenses were reimbursed and/or waived for
the fiscal year ended December 31, 1997 and in the absence of such
reimbursement, the performance quoted would be reduced.
Investing in foreign countries may involve risks, such as currency
fluctuations and political instability, not associated with investing
exclusively in the U.S.
5
<PAGE>
Manager's Commentary (continued)
February 15, 1998
MFR GLOBAL HIGH YIELD
MFR GLOBAL HIGH YIELD SERIES VS.
LEHMAN GLOBAL BOND INDEX
12-31-97
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
MFR Global High Lehman Brothers
Date Yield Series Bond Index
- ---- --------------- ----------------
6/95 ................ $ 9,485.71 $10,069.00
12/95 ............... 10,220.35 10,521.00
6/96 ................ 10,484.91 10,428.48
12/96 ............... 11,403.57 11,059.48
6/97 ................ 11,652.28 10,885.08
12/97 ............... 11,924.43 11,173.42
$10,000 OVER THE LIFE OF THE SERIES
This chart assumes a $10,000 investment in Class A shares of Global High Yield
Series on June 1, 1995 (date of inception), and reflects deduction of the 4.75%
sales load. On December 31, 1997 the value of your investment in the Series'
Class A shares (with dividends reinvested) would have grown to $11,924. By
comparison, the same $10,000 investment would have grown to $11,173 based on the
performance of the Lehman Brothers Global Bond Index.
The performance illustrated above is based on the performance of Class A shares.
The performance of Class B shares will be greater or less than the performance
shown for Class A shares as a result of the different loads and fees associated
with an investment in Class B shares.
The performance data illustrated above reflects past performance which is not
predictive of future results.
The Lehman Brothers Global Bond Index inlcudes local currency-denominated
sovereign debt of 19 countries plus European Currency Units-denominated debt.
Investment cannot directly be made in an index.
MFR GLOBAL HIGH YIELD SERIES
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1997
CLASS A SHARES CLASS B SHARES
-------------- --------------
1 Year.......... -0.43% 1 Year.......... -1.44%
Since Inception Since Inception
(6/1/95)........ -7.04% (6/1/95)......... -6.78%
The performance data above represents past performance which is not predictive
of future results. For Class A shares these figures reflect deduction of the
maximum sales charge of 4.75%. For Class B shares the total return includes
deduction of the maximum contingent deferred sales charge, ranging from 5% in
the first year to 0% in the sixth and following years. The investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Certain fund expenses were reimbursed and/or waived for the fiscal year ending
December 31, 1997 and in the absence of such reimbursement and/or waiver, the
performance quoted would be reduced.
6
<PAGE>
Schedule of Investments
December 31, 1997
MFR EMERGING MARKETS TOTAL RETURN SERIES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Principal
Amount or
COMMON STOCKS & Number Market
OTHER EQUITY INTERESTS of Shares Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ARGENTINA - 3.0%
Telefonica de Argentina S.A. ADR ........................................... 800 $ 29,800
BRAZIL - 6.1%
Aracruz Celulose S.A. ADR .................................................. 1,200 17,250
CESP - Companhia Energetica de Sao Paulo ADR* .............................. 1,100 19,811
Telecom Braxileiras S.A. ADR ............................................... 200 23,288
--------
60,349
CHILE - 1.9%
Maderas Y Sinteticos S.A. ADR .............................................. 2,000 19,000
CZECH REPUBLIC - 1.1%
SPT Telecom A.S.* .......................................................... 100 10,671
GREECE - 7.8%
Bank of Piraeus ............................................................ 1,500 25,643
Hellenic Telecommunication Organization S.A ................................ 1,178 24,166
Titan Cement Company S.A ................................................... 600 27,388
--------
77,197
HONG KONG - 1.1%
Glorious Sun Enterprises ................................................... 42,000 10,977
HUNGARY - 3.7%
Zalakeramia Rt ............................................................. 800 37,137
INDONESIA - 0.9%
Pt Ramayana Lestari Sentosa ................................................ 10,000 9,418
MEXICO - 13.1%
Cemex S.A. de C.V. (CI. B) ................................................. 5,000 26,545
Grupo Casa Autrey S.A. de C.V. ADR ......................................... 1,200 24,525
Grupo Industrial Maseca S.A. de C.V. ADR ................................... 2,000 31,000
World Equity Benchmark Shares - Mexico .................................... 2,000 47,850
--------
129,920
PHILIPPINES - 0.4%
C & P Homes, Inc. .......................................................... 65,000 3,845
POLAND - 5.3%
Elektrim Spolka Arcyjna S.A ................................................ 2,800 $ 27,087
E. Wedel S.A ............................................................... 500 25,674
--------
52,761
PORTUGAL - 2.8%
Portugal Telecom S.A ....................................................... 600 27,871
SINGAPORE - 1.2%
Want Want Holdings - A* .................................................... 1,500 1,980
Want Want Holdings* ........................................................ 7,500 10,350
--------
12,330
SOUTH AFRICA - 2.5%
South African Breweries Limited ............................................ 1,000 24,659
SPAIN - 8.0%
Tele Pizza, S.A.* .......................................................... 600 48,420
World Equity Benchmark Shares - Spain ...................................... 1,500 30,938
--------
79,358
--------
Total common stocks & other equity interests - 58.9% ................................................... 585,293
GOVERNMENT OBLIGATIONS
- ----------------------
ARGENTINA - 3.7%
Republic of Argentina, 5.50% - 2023(2) ..................................... $ 50,000 36,687
BRAZIL - 4.5%
Government of Brazil "C" Bond, 8.00% - 2014(3) ............................. $ 57,013 44,755
COSTA RICA - 4.8%
Banco Costa Rica, 6.25% - 2010 ............................................. $ 57,712 47,901
ECUADOR - 5.7%
Republic of Ecuador, 6.6875% - 2025(4) ..................................... $ 75,000 56,640
GREECE - 4.5%
Hellenic Republic, 11.00% - 2003(1) ........................................ 13,000,000 44,312
HUNGARY - 5.2%
Government of Hungary, 23.00% - 1999(1) .................................... 10,000,000 51,611
See accompanying notes.
7
<PAGE>
Schedule of Investments
December 31, 1997
MFR EMERGING MARKETS TOTAL RETURN SERIES (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
Principal
Amount or
Number Market
GOVERNMENT OBLIGATIONS (continued) of Shares Value
- ------------------------------------------------------------------------------------------------------------------------------------
PERU - 2.5%
Peru - PDI, 4.00% - 2017 ................................................... $ 39,000 $25,204
SOUTH AFRICA - 3.8%
Republic of South Africa, 12.00% - 2005(1) ................................. 200,000 37,951
-------
Total government obligations - 34.7% ................................................................... 345,061
SHORT TERM INVESTMENTS
- ----------------------
MEXICO - 3.2%
Mexico Cetes, 0% 4/2/98(1) ................................................. 280,830 32,222
MONEY MARKET FUND - 1.5%
Vista Treasury Plus International Fund ..................................... 14,908 14,908
-------
Total short-term investments - 4.7% .................................................................... 47,130
-------
Total investments - 98.3% .............................................................................. 977,484
Cash and other assets, less liabilities - 1.7% ......................................................... 17,103
-------
Total net assets - 100.0% .............................................................................. $994,587
=======
At December 31, 1997, MFR Emerging Markets Total Return Series' investment
concentration by industry was as follows:
Banks and Credit ....................................................................................... 2.6%
Brewery ................................................................................................ 2.5
Building Materials ..................................................................................... 11.5
Electric Utilities ..................................................................................... 2.0
Electronics ............................................................................................ 2.7
Food Processing ........................................................................................ 3.8
Foods .................................................................................................. 3.1
Foreign Government Bonds ............................................................................... 34.7
Medical ................................................................................................ 2.5
Miscellaneous .......................................................................................... 7.9
Paper and Paper Products ............................................................................... 1.7
Restaurants ............................................................................................ 4.9
Retail/Department Store ................................................................................ 1.0
Telecommunications ..................................................................................... 8.6
Telephone .............................................................................................. 3.0
Textiles ............................................................................................... 1.1
Cash, short term investments and other assets, less liabilities ........................................ 6.4
------
Total net assets ....................................................................................... 100.0%
======
MFR GLOBAL ASSET ALLOCATION SERIES
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS
& OTHER EQUITY INTERESTS
- ------------------------
ARGENTINA - 2.1%
Telefonica de Argentina S.A. ADR ........................................... 600 $ 22,350
AUSTRALIA - 2.6%
Foster's Brewing Group, Ltd. ............................................... 15,000 28,539
AUSTRIA - 1.6%
Boehler-Uddeholm AG ........................................................ 300 17,560
CANADA - 6.9%
Bombardier, Inc. (CI. B) ................................................... 1,000 20,545
Imax Corporation* .......................................................... 1,500 32,599
Stelco, Inc. (CI. A) ....................................................... 3,200 21,132
--------
74,276
CZECH REPUBLIC - 1.0%
SPT Telecom A.S.* .......................................................... 100 10,671
FRANCE - 4.2%
Alcatel Alsthom ............................................................ 200 25,433
Sidel, S.A ................................................................. 300 19,897
--------
45,330
GREECE - 7.7%
Ergo Bank S. A ............................................................. 300 31,047
Hellenic Telecommunication Organization S.A ................................ 1,178 24,166
Titan Cement Company, S.A .................................................. 600 27,388
--------
82,601
IRELAND - 2.3%
Allied Irish Banks PLC ..................................................... 2,600 25,200
JAPAN - 3.0%
Amway Japan Ltd. ........................................................... 300 5,768
Sony Corporation ........................................................... 300 26,765
--------
32,533
MEXICO - 4.0%
Cemex S.A. de C.V (CI. B) .................................................. 5,000 26,545
World Equity Benchmark Shares Mexico ....................................... 1,000 16,500
--------
43,045
NETHERLANDS - 1.7%
Phillips Electronics N.V ................................................... 300 17,995
See accompanying notes.
8
<PAGE>
Schedule of Investments
December 31, 1997
MFR GLOBAL ASSET ALLOCATION SERIES (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
Principal
Amount or
COMMON STOCKS & Number Market
OTHER EQUITY INTERESTS(continued) of Shares Value
- ------------------------------------------------------------------------------------------------------------------------------------
NEW ZEALAND - 1.4%
Fletcher Challenge Building ......................................... 7,500 $ 15,329
Fletcher Challenge Forests .......................................... 300 249
--------
15,578
PHILIPPINES - 0.3%
C & P Homes, Inc. ................................................... 50,000 2,957
POLAND - 2.6%
Electrim Spolka Akcyjna S.A ......................................... 1,600 15,479
E. Wedel S.A ........................................................ 250 12,837
--------
28,316
SINGAPORE - 1.1%
Want Want Holdings-A* ............................................... 1,500 1,980
Want Want Holdings* ................................................. 7,500 10,350
--------
12,330
SPAIN - 7.5%
Adolfo Dominguez S.A.* .............................................. 600 17,419
Tele Pizza, S.A.* ................................................... 400 32,280
World Equity Benchmark Shares - Spain ............................... 1,500 30,938
--------
80,637
SWEDEN - 2.4%
Skandinaviska Enskilda Banken ....................................... 2,000 25,333
SWITZERLAND - 3.5%
Saurer AG* .......................................................... 30 21,802
Novartis AG ......................................................... 10 16,249
--------
38,051
UNITED STATES - 9.0%
Cisco Systems, Inc.* ................................................ 300 16,725
International Business Machines Corporation ......................... 300 31,369
Northern Trust Corporation .......................................... 400 27,900
Royal Dutch Petroleum Company ADR ................................... 400 21,675
--------
97,669
--------
Total common stocks & other equity interests - 64.9% ........................... 700,971
CORPORATE BONDS
- ---------------
CANADA - 2.5%
CHC Helicopter, 11.50% - 2002 ....................................... $ 25,000 $ 26,688
DENMARK - 4.0%
Nykredit, 7.00% - 2026(10) .......................................... 298,712 43,647
UNITED STATES - 4.8%
Archibald Candy Corporation, 10.25% - 2004 .......................... $ 50,000 52,250
--------
Total corporate bonds - 11.3% .................................................. 122,585
GOVERNMENT OBLIGATIONS
- ----------------------
ARGENTINA - 3.4%
Republic of Argentina, 5.50% - 2023(2) .............................. $ 50,000 36,688
BRAZIL - 4.1%
Government of Brazil "C" Bond, 8.00% - 2014(3) ...................... $ 57,013 44,755
ECUADOR - 1.8%
Republic of Ecuador, 6.6875% - 2025(4) .............................. $ 25,000 18,880
GREECE - 4.1%
Hellenic Republic, 11.00% - 2003(1) ................................. 13,000,000 44,311
SOUTH AFRICA - 1.8%
Republic of South Africa, 12.00% - 2005(1) .......................... 100,000 18,975
UNITED KINGDOM - 2.5%
United Kingdom Treasury Bond, 7.25% - 2007(1) ....................... 15,000 26,401
----------
Total government obligations - 17.7% ................................................................... 190,010
TEMPORARY CASH INVESTMENTS
- --------------------------
MONEY MARKET FUND - 4.6%
Vista Treasury Plus International Fund ..................................... 50,000 50,000
----------
Total investments - 98.5% .............................................................................. 1,063,566
Cash and other assets, less liabilities - 1.5% ......................................................... 16,433
----------
Total net assets - 100.0% .............................................................................. $1,079,999
==========
See accompanying notes.
9
<PAGE>
Schedule of Investments
December 31, 1997
MFR GLOBAL ASSET ALLOCATION SERIES (continued)
At December 31, 1997, MFR Global Asset Allocation Series' investment
concentration by industry was as follows:
Apparel ................................................................................................ 1.6%
Banks and Credit ....................................................................................... 7.5
Brewery ................................................................................................ 2.6
Building Materials ..................................................................................... 6.7
Commercial Banks ....................................................................................... 2.6
Computer Hardware ...................................................................................... 2.9
Computer Systems ....................................................................................... 1.5
Electronics ............................................................................................ 5.6
Entertainment .......................................................................................... 3.0
Financial .............................................................................................. 4.0
Food Processing ........................................................................................ 2.3
Foreign Government Bonds ............................................................................... 17.7
Forestry ............................................................................................... 0.1
Industrial Services .................................................................................... 4.8
Integrated Petroleum -- International .................................................................. 2.0
Machinery .............................................................................................. 5.8
Metals and Minerals .................................................................................... 1.6
Miscellaneous .......................................................................................... 4.9
Pharmaceuticals ........................................................................................ 1.5
Restaurants ............................................................................................ 3.0
Steel .................................................................................................. 2.0
Telecommunications ..................................................................................... 5.6
Telephone .............................................................................................. 2.1
Transportation ......................................................................................... 2.5
Cash, short-term investments, and other assets, less liabilities ....................................... 6.1
-----
Total net assets ....................................................................................... 100.0%
=====
MFR GLOBAL HIGH YIELD SERIES
- ------------------------------------------------------------------------------------------------------------------------------------
Principal Market
GOVERNMENT OBLIGATIONS Amount Value
- ------------------------------------------------------------------------------------------------------------------------------------
ARGENTINA - 4.7%
Republic of Argentina, 5.50% - 2023(1) ..................................... $ 400,000 $293,500
BRAZIL - 7.1%
Government of Brazil "C" Bond 4.50% - 2014(3) .............................. $ 570,130 447,552
COSTA RICA - 4.0%
Banco Costa Rica, 6.25% - 2010 ............................................. $ 300,000 249,000
DOMINICAN REPUBLIC - 3.2%
Central Bank of Dominican Republic, 6.875% - 2024(3) ....................... $ 250,000 200,000
EQUADOR - 3.6%
Republic of Ecuador, 6.6875% - 2025(4) ..................................... $ 300,000 226,562
GREECE - 8.0%
Hellenic Republic, 11.00% - 2003(1) ........................................ 120,000,000 409,022
Hellenic Republic, 8.80% - 2007(1) ......................................... 30,000,000 94,642
--------
503,664
HUNGARY - 4.9%
Government of Hungary, 23.00% - 1999(1) .................................... 30,000,000 154,834
Government of Hungary, 21.00% - 1999(1) .................................... 30,000,000 153,130
--------
307,964
MEXICO - 3.3%
United Mexican States, 6.25% - 2019 ........................................ $ 250,000 208,594
PHILIPPINES - 3.8%
Central Bank Philippines, 6.00% - 2008 ..................................... $ 275,000 239,175
POLAND - 4.7%
Government of Poland, 16.00% - 1998(1) ..................................... 1,120,000 296,577
SOUTH AFRICA - 5.8%
Electricity Supply Commission, 11.00% - 2008(1) ............................ 1,000,000 173,343
Republic of South Africa, 12.00% - 2005(1) ................................. 1,000,000 189,754
--------
363,097
See accompanying notes.
10
<PAGE>
Schedule of Investments
December 31, 1997
MFR GLOBAL HIGH YIELD SERIES (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
GOVERNMENT Principal Market
OBLIGATIONS (continued) Amount Value
- ------------------------------------------------------------------------------------------------------------------------------------
UNITED KINGDOM - 4.2%
United Kingdom Treasury Bond, 7.5% - 2006(1) ............................... 150,000 $ 265,784
----------
Total government obligations - 57.3% ................................................................... 3,601,469
CORPORATE BONDS
CANADA - 8.1%
CHC Helicopter, 11.5% - 2002 ............................................... $ 237,000 252,998
Roger's Communication, Inc., 10.50% - 2006(1) .............................. 100,000 75,455
Stelco, Inc., 10.40% - 2009(1) ............................................. 200,000 180,903
----------
509,356
CZECH REPUBLIC - 2.6%
CEZ, a.s., 11.30% - 2005(1) ................................................ 2,500,000 62,514
Skofin, S.R.O., a.s., 11.625% - 1998(1) .................................... 3,500,000 99,501
---------
162,015
DENMARK - 9.2%
Nykredit, 7.00% - 2026(1) .................................................. 1,482,608 216,635
Realkredit Danmark, 7.00% - 2026(1) ........................................ 1,484,455 217,339
Unikredit Realkredit, 7.00% - 2026(1) ...................................... 993,834 145,725
----------
579,699
UNITED STATES - 14.3%
Archibald Candy Corporation, 10.25% - 2004 ................................. $ 250,000 261,250
Clark Materials Handling, 10.75% - 2006 .................................... $ 250,000 265,625
Countrywide Home Loans, 7.50% - 2027 ....................................... $ 198,427 184,041
Residential Asset Securitization Trust, 7.25% - 2012 ....................... $ 197,584 183,220
----------
894,136
----------
Total corporate bonds - 34.2% .......................................................................... 2,145,206
SHORT-TERM INVESTMENTS
- ----------------------
MEXICO - 2.3%
Mexican Cetes, 0% - 3-5-98(1) .............................................. 1,200,000 $144,056
TURKEY - 3.4%
Government of Turkey Treasury Bill, 0% - 5-27-98(1) ........................ 60,000,000,000 214,879
-----------
Total short-term investments - 5.7% .................................................................... 358,935
-----------
Total investments - 97.2% .............................................................................. 6,105,610
WRITTEN OPTION
- --------------
Call option on Brazil "C" Bond, strike price 77.8125 USD, January 1998
(Premium $12,062) .................................................................................. (15,741)
-----------
Total written options .................................................................................. (15,741)
Cash and other assets, less liabilities - 2.8% ......................................................... 175,124
-----------
Total net assets - 100.0% .............................................................................. $ 6,264,993
-----------
</TABLE>
The identified cost of investments owned at December 31, 1997, was the same for
federal income tax and book purposes, except for the MFR Global High Yield
Series for which the identified cost for federal income tax purposes was
$6,276,846.
* Securities on which no cash dividend was paid during the preceding twelve
months.
ADR (American Depositary Receipt)
(1) Principal amount on foreign bond is reflected in local currency (e.g.
Japanese yen) while market value is reflected in U.S. dollars.
(2) Step-up rate security in which the interest rate will increase over the life
of the bond.
(3) Variable rate security which may be reset every two years.
(4) Floating rate security which may be reset as of the first of each
semi-annual payment.
See accompanying notes.
11
<PAGE>
BALANCE SHEETS
December 31, 1997
<TABLE>
<CAPTION>
MFR Emerging MFR Global MFR Global
Markets Asset High
Total Return Allocation Yield
Series Series Series
-------------- -------------- --------------
<S> <C> <C> <C>
ASSETS
Investments, at value (identified cost
$1,051,732, $1,091,087 and $6,275,809,
respectively) ............................ $ 977,484 $ 1,063,566 $ 6,105,610
Cash ...................................... 186 12,607 94,061
Receivables:
Securities sold ....................... -- -- 409,550
Interest .............................. 8,233 8,392 141,021
Dividends ............................. 135 84 --
MFR Advisors, Inc. .................... 981 1,059 --
Foreign taxes recoverable ............. 73 340 4,121
Forward foreign exhange contracts ......... 804 3,433 6,017
Prepaid Expenses .......................... 10,751 10,751 4,716
-------------- -------------- --------------
Total assets ...................... $ 998,647 $ 1,100,232 $ 6,765,096
============== ============== ==============
LIABILITIES AND NET ASSETS
Liabilities:
Payable for:
Securities purchased .................. $ -- $ 15,491 $ 456,282
Written call options outstanding ...... -- -- 15,741
Other Liabilities:
Custodian fees ........................ 600 1,246 8,859
Transfer and administration fees ...... 77 91 4,396
Professional fees ..................... 2,792 2,792 11,786
12b-1 distribution plan fees .......... 556 578 2,499
Miscellaneous fees .................... 35 35 540
-------------- -------------- --------------
Total liabilities ................. 4,060 20,233 500,103
Net Assets:
Paid in capital ........................... 1,073,403 1,101,686 6,333,158
Undistributed net investment income ....... (804) 960 98,885
Accumulated undistributed net realized gain
(loss) on sale of investments and
foreign currency transactions ......... (4,464) 1,549 3,099
Net unrealized depreciation in value of
investments and translation of assets
and liabilities in foreign currency ... (73,548) (24,196) (170,149)
-------------- -------------- --------------
Net assets ........................ 994,587 1,079,999 6,264,993
-------------- -------------- --------------
Total liabilities and net assets .. $ 998,647 $ 1,100,232 $ 6,765,096
============== ============== ==============
CLASS "A" SHARES
Capital shares outstanding ................ 53,753 57,771 467,639
Net assets ................................ $ 497,420 $ 567,447 $ 4,646,791
Net asset value per share (net assets
divided by shares outstanding) ........ $ 9.25 $ 9.82 $ 9.94
Add: Selling commission (4.75% of the
offering price) ....................... 0.46 0.49 0.50
-------------- -------------- --------------
Offering price per share (net asset value
divided by 95.25%) .................... $ 9.71 $ 10.31 $ 10.44
============== ============== ==============
CLASS "B" SHARES
Capital shares outstanding ................ 53,733 52,198 162,198
Net assets ................................ $ 497,167 $ 512,552 $ 1,618,202
Net asset value per share (net assets
divided by shares outstanding) ........ $ 9.25 $ 9.82 $ 9.98
============== ============== ==============
</TABLE>
See accompanying notes.
12
<PAGE>
STATEMENT OF OPERATIONS
For The Year Ended December 31, 1997
<TABLE>
<CAPTION>
MFR Emerging MFR Global MFR Global
Markets Asset High
Total Return Allocation Yield
Series* Series* Series
-------------- -------------- --------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends ................................. $ 4,544 $ 8,107 $ --
Interest .................................. 29,761 18,813 626,167
-------------- -------------- --------------
34,305 26,920 626,167
Less foreign tax expense .............. (77) (715) (7,446)
-------------- -------------- --------------
Total investment income ................... 34,228 26,205 618,721
EXPENSES:
Management fees ....................... 6,377 6,553 43,925
Custodian fees ........................ 1,793 1,863 9,490
Transfer/maintenance fees ............. 123 102 3,754
12b-1 distribution plan fees .......... 3,989 4,032 26,579
Administration fees ................... 287 295 47,946
Directors' fees ....................... 95 97 513
Professional fees ..................... 14,167 14,167 16,504
Reports to shareholders ............... -- -- 401
Registration fees ..................... 12,657 12,657 10,066
Other expenses ........................ 300 178 69
-------------- -------------- --------------
39,788 39,944 159,247
Less: Reimbursement of expenses ....... (24,755) (25,033) (43,925)
-------------- -------------- --------------
Total expenses ........................ 15,033 14,911 115,322
-------------- -------------- --------------
Net investment income ............. 19,195 11,294 503,399
NET REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) during the period on:
Investments ........................... (3,134) 2,879 187,113
Foreign currency transactions ......... (5,126) (5,684) (108,499)
-------------- -------------- --------------
Net realized gain (loss) .......... (8,260) (2,805) 78,614
Net change in unrealized appreciation
(depreciation) during the period on:
Investments ........................... (74,248) (27,521) (314,708)
Translation of assets and liabilities
in foreign currencies ............. 700 3,325 71
-------------- -------------- --------------
Net unrealized depreciation ........... (73,548) (24,196) (314,637)
-------------- -------------- --------------
Net loss .......................... (81,808) (27,001) (236,023)
-------------- -------------- --------------
Net increase (decrease) in net
assets resulting from
operations $ (62,613) $ (15,707) $ 267,376
============== ============== ==============
</TABLE>
* Period May 19,1997 (inception) through December 31, 1997.
See accompanying notes.
13
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
For The Year Ended December 31, 1997
<TABLE>
<CAPTION>
MFR Emerging MFR Global MFR Global
Markets Asset High
Total Return Allocation Yield
Series* Series* Series
-------------- -------------- --------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income ................. $ 19,195 $ 11,294 $ 503,399
Net realized gain (loss) .............. (8,260) (2,805) 78,614
Unrealized depreciation during
the period ........................ (73,548) (24,196) (314,637)
-------------- -------------- --------------
Net increase (decrease) in net assets
resulting from operations .... (62,613) (15,707) 267,376
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A ........................... (9,904) (4,471) (262,935)
Class B ........................... (7,619) (1,509) (82,758)
Net realized gain
Class A ........................... -- -- (112,766)
Class B ........................... -- -- (39,266)
-------------- -------------- --------------
Total distributions to shareholders (17,523) (5,980) (497,725)
CAPITAL SHARE TRANSACTIONS (A):
Proceeds from sale of shares
Class A ........................... 531,901 575,114 1,110,977
Class B ........................... 530,116 520,600 75,541
Dividends reinvested
Class A ........................... 9,879 4,463 366,619
Class B ........................... 7,619 1,509 119,908
Shares redeemed
Class A ........................... (4,792) -- (173,066)
Class B ........................... -- -- (51,885)
-------------- -------------- --------------
Net increase from capital share
transactions ................. 1,074,723 1,101,686 1,448,094
-------------- -------------- --------------
Total increase in net assets 994,587 1,079,999 1,217,745
NET ASSETS:
Beginning of period ................... -- -- 5,047,248
-------------- -------------- --------------
End of period ......................... $ 994,587 $ 1,079,999 $ 6,264,993
============== ============== ==============
Undistributed net investment income at
end of period ..................... $ (804) $ 960 $ 98,885
============== ============== ==============
(a) Shares issued and redeemed
Shares sold
Class A ........................... 53,146 57,316 109,726
Class B ........................... 52,907 52,044 7,398
Dividends reinvested
Class A ........................... 1,070 455 36,294
Class B ........................... 826 154 11,830
Shares redeemed
Class A ........................... (463) -- (16,985)
Class B ........................... -- -- (5,057)
-------------- -------------- --------------
Net increase ...................... 107,486 109,969 143,206
============== ============== ==============
</TABLE>
* Period May 19, 1997 (inception) through December 31, 1997
See accompanying notes.
14
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
For The Year Ended
December 31, 1996
MFR Global
Aggressive
Bond Series
-----------
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income ................................... $ 472,087
Net realized loss ....................................... (40,713)
Unrealized appreciation
during the period .................................... 75,068
-----------
Net increase in net assets resulting
from operations .................................. 506,442
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A ......................................... (210,236)
Class B ......................................... (85,158)
In excess of net realized gain
Class A ......................................... (74,660)
Class B ......................................... (32,900)
-----------
Total distributions to shareholders ............. (402,954)
CAPITAL SHARE TRANSACTIONS (A):
Proceeds from sale of shares
Class A ......................................... 255,854
Class B ......................................... 79,004
Dividends reinvested
Class A ......................................... 283,688
Class B ......................................... 110,636
Cost of shares redeemed
Class A ......................................... (66,489)
Class B ......................................... (127,192)
-----------
Net increase from capital share
transactions .............................. 535,501
-----------
Total increase in net assets .................. 638,989
NET ASSETS:
Beginning of period ..................................... 4,408,259
-----------
End of period ........................................... $ 5,047,248
===========
Undistributed net investment income
at end of period ........................................ $ 117,348
===========
(a) Shares issued and redeemed:
Shares sold
Class A ......................................... 24,675
Class B ......................................... 7,907
Dividends reinvested
Class A ......................................... 27,930
Class B ......................................... 10,901
Shares redeemed
Class A ......................................... (6,449)
Class B ......................................... (12,357)
-----------
Net increase ........................................ 52,607
===========
See accompanying notes.
15
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each period
MFR EMERGING MARKETS TOTAL RETURN SERIES (Class A)
1997(b)(c)(e)
-------------
PER SHARE DATA:
NET ASSET VALUE BEGINNING OF PERIOD ............................ $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income .......................................... 0.21
Net Gain (Loss) on Securities (realized and unrealized) ........ (0.77)
----------
Total from Investment Operations ............................... (0.56)
LESS DISTRIBUTIONS:
Dividends (from Net Investment Income) ......................... (0.19)
Distributions (from Capital Gains) ............................. --
----------
Total Distributions ............................................ (0.19)
----------
NET ASSET VALUE END OF PERIOD .................................. $ 9.25
==========
TOTAL RETURN (a) ............................................... (5.6%)
RATIOS/SUPPLEMENTAL DATA:
Net Assets End of Period (thousands) ........................... $ 497
Ratio of Expenses to Average Net Assets ........................ 2.00%
Ratio of Net Investment Income (loss) to Average Net Assets .... 3.38%
Portfolio Turnover Rate ........................................ 22%
Average Commission Paid Per Equity Share Traded (f) ............ $ 0.0138
MFR EMERGING MARKETS TOTAL RETURN SERIES (CLASS B)
1997(b)(c)(e)
-------------
PER SHARE DATA:
NET ASSET VALUE BEGINNING OF PERIOD ............................. $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income ........................................... 0.16
Net Gain (Loss) on Securities (realized and unrealized) ......... (0.77)
----------
Total from Investment Operations ................................ (0.61)
LESS DISTRIBUTIONS:
Dividends (from Net Investment Income) .......................... (0.14)
Distributions (from Capital Gains) .............................. --
----------
Total Distributions ........................................... (0.14)
----------
NET ASSET VALUE END OF PERIOD ................................... $ 9.25
==========
TOTAL RETURN (a) ................................................ (6.1%)
RATIOS/SUPPLEMENTAL DATA:
Net Assets End of Period (thousands) ............................ $ 497
Ratio of Expenses to Average Net Assets ......................... 2.72%
Ratio of Net Investment Income (loss) to Average Net Assets ..... 2.66%
Portfolio Turnover Rate ......................................... 22%
Average Commission Paid Per Equity Share Traded (f) ............. $ 0.0138
See accompanying notes.
16
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each period
MFR GLOBAL ASSET ALLOCATION SERIES (Class A)
1997(b)(c)(e)
-------------
PER SHARE DATA:
NET ASSET VALUE BEGINNING OF PERIOD ............................ $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income .......................................... 0.14
Net Gain (Loss) on Securities (realized and unrealized) ........ (0.24)
----------
Total from Investment Operations ............................... (0.10)
LESS DISTRIBUTIONS:
Dividends (from Net Investment Income) ......................... (0.08)
Distributions (from Capital Gains) ............................. --
----------
Total Distributions ............................................ (0.08)
----------
NET ASSET VALUE END OF PERIOD .................................. $ 9.82
==========
TOTAL RETURN (a) ............................................... (1.0%)
RATIOS/SUPPLEMENTAL DATA:
Net Assets End of Period (thousands) ........................... $ 567
Ratio of Expenses to Average Net Assets ........................ 1.85%
Ratio of Net Investment Income (loss) to Average Net Assets .... 2.24%
Portfolio Turnover Rate ........................................ 28%
Average Commission Paid Per Equity Share Traded (f) ............ $ 0.0178
MFR GLOBAL ASSET ALLOCATION SERIES (Class B)
1997(b)(c)(e)
-------------
PER SHARE DATA:
NET ASSET VALUE BEGINNING OF PERIOD ............................. $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income ........................................... 0.09
Net Gain (Loss) on Securities (realized and unrealized) ......... (0.24)
----------
Total from Investment Operations ................................ (0.15)
Less Distributions:
Dividends (from Net Investment Income) .......................... (0.03)
Distributions (from Capital Gains) .............................. --
----------
Total Distributions ........................................... (0.03)
----------
NET ASSET VALUE END OF PERIOD ................................... $ 9.82
==========
TOTAL RETURN (a) ................................................ (1.5%)
RATIOS/SUPPLEMENTAL DATA:
Net Assets End of Period (thousands) ............................ $ 513
Ratio of Expenses to Average Net Assets ......................... 2.72%
Ratio of Net Investment Income (loss) to Average Net Assets ..... 1.40%
Portfolio Turnover Rate ........................................ 28%
Average Commission Paid Per Equity Share Traded (f) ............. $ 0.0178
See accompanying notes.
17
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each period
<TABLE>
<CAPTION>
Fiscal Period Ended December 31
--------------------------------------------------------------
MFR GLOBAL HIGH YIELD SERIES (Class A) 1997(c)(e) 1996(c)(e) 1995(c)(d)(e)
-------------- -------------- --------------
<S> <C> <C> <C>
PER SHARE DATA:
NET ASSET VALUE BEGINNING OF PERIOD ....... $ 10.36 $ 10.15 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income ..................... 0.88 1.06 0.63
Net Gain (Loss) on Securities (realized and
unrealzed............................... (0.42) .06 0.09
-------------- -------------- --------------
Total from Investment Operations .......... 0.46 1.12 0.72
LESS DISTRIBUTIONS:
Dividends (from Net Investment Income) .... (0.63) (0.69) (0.55)
Distributions (from Capital Gains) ........ (0.25) (0.22) (0.02)
-------------- -------------- --------------
Total Distributions ....................... (0.88) (0.91) (0.57)
-------------- -------------- --------------
NET ASSET VALUE END OF PERIOD ............. $ 9.94 $ 10.36 $ 10.15
============== ============== ==============
TOTAL RETURN (a) .......................... 4.6% 11.6% 7.3%
RATIOS/SUPPLEMENTAL DATA:
Net Assets End of Period (thousands) ...... $ 4,647 $ 3,507 $ 2,968
Ratio of Expenses to Average Net Assets ... 1.76% 1.98% 2.00%
Ratio of Net Investment Income (loss)
to Average Net Assets.................. 8.77% 10.39% 11.04%
Portfolio Turnover Rate ................... 88% 96% 127%
MFR GLOBAL HIGH YIELD SERIES (Class B)
Fiscal Period Ended December 31
-----------------------------------------------------------------
PER SHARE DATA: ........................... 1997(C)(E) 1996(C)(E) 1995(C)(D)(E)
-------------- -------------- --------------
NET ASSET VALUE BEGINNING OF PERIOD ....... $ 10.41 $ 10.17 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income ..................... 0.85 0.98 0.56
Net Gain (Loss) on Securities (realized and
unrealized) ............................. (0.49) 0.06 0.12
-------------- -------------- --------------
Total from Investment Operations .......... 0.36 1.04 0.68
LESS DISTRIBUTIONS:
Dividends (from Net Investment Income) .... (0.54) (0.57) (0.49)
Distributions (from Capital Gains) ........ (0.25) (0.23) (0.02)
-------------- -------------- --------------
Total Distributions ....................... (0.79) (0.80) (0.51)
-------------- -------------- --------------
NET ASSET VALUE END OF PERIOD ............. $ 9.98 $ 10.41 $ 10.17
============== ============== ==============
TOTAL RETURN (a) .......................... 3.6% 10.7% 6.9%
RATIOS/SUPPLEMENTAL DATA:
Net Assets End of Period (thousands) ...... $ 1,618 $ 1,541 $ 1,440
Ratio of Expenses to Average Net Assets ... 2.51% 2.75% 2.75%
Ratio of Net Investment Income (loss) to
Average Net Assets ...................... 8.02% 9.64% 10.24%
Portfolio Turnover Rate ................... 88% 96% 127%
</TABLE>
See accompanying notes.
18
<PAGE>
FINANCIAL HIGHLIGHTS
Selected Data For Each Share Of Capital Stock Outstanding Throughout Each Period
(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) MFR Emerging Markets Total Return Series and MFR Global Asset Allocation
Series were initially capitalized on May 19, 1997, with a net asset value of
$10 per share. Percentage amounts for the period have been annualized,
except for total return.
(c) Fund expenses were reduced by the Investment Manager and expense ratios
absent such reimbursement would have been as follows:
1995 1996 1997
------- ------- -------
MFR Emerging Markets Total Class A -- -- 5.88%
Return Series Class B -- -- 6.60%
MFR Global Asset Allocation Class A -- -- 5.67%
Series Class B -- -- 6.54%
MFR Global High Yield Class A 2.42% 2.73% 2.51%
Series Class B 3.93% 3.75% 3.25%
(d) Global High Yield Series (formerly Global Aggressive Bond Series) was
initially capitalized on June 1, 1995, with a net asset value of $10 per
share. Percentage amounts for the period have been annualized except for
total return.
(e) Net investment income per share has been calculated using the weighted
monthly average numbers of capital shares outstanding.
(f) Brokerage commissions paid on portfolio transactions increase the cost of
securities purchased or reduce the proceeds of securities sold and are not
reflected in the Fund's statement of operations. Shares traded on a
principal basis, such as most over-the- counter and fixed-income
transactions, pay a "spread" or "mark-up" rather than a commission and are
therefore excluded from this calculation. Generally, non-U.S. commissions
are lower than U.S. commissions when expressed as cents per share but higher
when expressed as a percentage of transactions because of the lower
per-share prices of many non-U.S. securities. Prior to 1996, average
commission information was not required to be disclosed.
See accompanying notes.
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES
MFR Emerging Markets Total Return Series, MFR Global Asset Allocation
Series, and MFR Global High Yield Series (formerly Global Aggressive Bond
Series) (the Series) are diversified series of Security Income Fund, an open-end
investment management company registered under the Investment Company Act of
1940, as amended. Each Series is accounted for separately and general expenses
are allocated to each Series based on the net asset value of each Series. The
following is a summary of the significant accounting policies followed by the
Series in the preparation of their financial statements. These policies are in
conformity with generally accepted accounting principles.
A. SECURITY VALUATION -- Valuations of the Series' securities are supplied
by pricing services approved by the Board of Directors. Securities listed or
traded on a national securities exchange are valued on the basis of the last
sales price. If there are no sales on a particular day, then the securities are
valued at the last bid price. Securities for which market quotations are not
readily available are valued by a pricing service considering securities with
similar yields, quality, type of issue, coupon, duration, and rating. If there
is no bid price or if the bid price is deemed to be unsatisfactory by the Board
of Directors or by the Series' investment manager, then the securities are
valued in good faith by such method as the Board of Directors determines will
reflect the fair value. The Series' officers, under the general supervision of
the Board of Directors, regularly review procedures used by, and valuations
provided by, the pricing service.
Generally, trading in foreign securities markets is substantially completed
each day at various times prior to the close of the New York Stock Exchange. The
values of foreign securities are determined as of the close of such foreign
markets or the close of the New York Stock Exchange if earlier. All investments
quoted in foreign currency are valued in U.S. dollars on the basis of the
foreign currency exchange rate prevailing at the close of business. Investments
in foreign securities may involve risks not present in domestic investments.
Since foreign securities may be denominated in a foreign currency, involve
settlement and pay interest in foreign currencies, changes in the relationship
of these foreign currencies to the U.S. dollar can significantly affect the
value of the investments and earnings of the Series. Foreign investments may
also subject the Series to foreign government exchange restrictions,
expropriation, taxation or other political, social or economic developments, all
of which could affect the market and/or credit risk of the investments.
B. FOREIGN CURRENCY TRANSACTIONS -- The accounting records of the Series'
are maintained in U.S. dollars. All assets and liabilities initially expressed
in foreign currencies are converted into U.S. dollars at prevailing exchange
rates. Purchases and sales of investment securities, dividend and interest
income, and certain expenses are translated at the rates of exchange prevailing
on the respective dates of such transactions.
The Series isolate that portion of the results of operations resulting from
changes in foreign exchange rates on investments from the fluctuations arising
from changes in the market prices of securities held.
Net realized foreign exchange gains or losses arise from sales of portfolio
securities, sales of foreign currencies, and the difference between asset and
liability amounts initially stated in foreign currencies and the U.S. dollar
value of the amounts actually received or paid. Net unrealized foreign exchange
gains or losses arise from changes in the exchange rates which effect the value
of portfolio securities and other assets and liabilities at the end of the
reporting period.
C. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS -- The Series may enter into
forward foreign currency exchange contracts in order to manage against foreign
currency risk from purchase or sale of securities denominated in foreign
currency. The Series may also enter into such contracts to manage changes in
foreign currency exchange rates on portfolio positions. These contracts are
marked to market daily, by recognizing the difference between the contract
exchange rate and the current market rate as unrealized gains or losses.
Realized gains or losses are recognized when contracts are settled and are
reflected in the statement of operations. These contracts involve market risk in
excess of the amount reflected in the Balance Sheet. The face or contract amount
in U.S. dollars reflects the total exposure the Series has in that particular
currency contract. Losses may arise due to changes in the value of the foreign
currency or if the counterparty does not perform under the contract.
D. OPTIONS -- The Series may purchase put and call options and write such
options on a covered basis on securities that are traded on recognized
securities exchanges and over-the-counter markets. Call and put options on
securities give the holder the right to purchase or sell, respectively (and the
writer the obligation to sell or purchase), a security at a specified price, on
or until a certain date. The primary risks associated with the use of options
are an imperfect correlation between the change in market value of the
securities held by the Series and the price of the option, the possibility of an
illiquid market, and the inability of the counter-party to meet the terms of the
contract.
The premium received for a written option is recorded as an asset, with an
equal liability which is marked to market based on the option's quoted daily
settlement price. Fluctuation in the value of such instruments are recorded as
unrealized appreciation (depreciation) until terminated, at which time realized
gains and losses are recognized.
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
E. SECURITY TRANSACTIONS AND INVESTMENT INCOME -- Security transactions are
accounted for on the date the securities are purchased or sold. Realized gains
and losses are reported on an identified cost basis. Interest income is
recognized on the accrual basis. Premium and discounts on debt securities are
amortized.
F. DISTRIBUTIONS TO SHAREHOLDERS -- Distributions to shareholders are
recorded on the ex-dividend date. The character of distributions made during the
year from net investment income or net realized gains may differ from their
ultimate characterization for federal income tax purposes. These differences are
primarily due to the recharacterization of foreign currency gains and losses.
G. TAXES -- The Series complied with the requirements of the Internal
Revenue Code applicable to regulated investment companies and distributed all of
their taxable net income and net realized gains sufficient to relieve them from
all, or substantially all, federal income, excise and state income taxes.
Therefore, no provision for federal or state tax is required.
2. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Management fees are payable to MFR Advisors, Inc. (MFR) under investment
advisory contracts at an annual rate of .75 of 1% of the average net assets for
MFR Global High Yield Bond Series and 1% of the average net assets for MFR
Emerging Markets Total Return Series and MFR Global Asset Allocation Series. MFR
waived all of the management fees for the Series until August 31, 1997. In
addition, for the period ended December 31, 1997, MFR agreed to limit the total
expenses of each Series to an annual rate of 2.0% of the average daily net asset
value of Class A shares and 2.75% of the average daily net asset value of the
Class B shares.
As compensation for the services provided to the MFR Global Asset Allocation
Series, MFR pays each of Lexington Management Corporation (Lexington) and
Security Management Company, LLC (SMC), as Sub-Advisors, on an annual basis, a
fee equal to .20 percent and .15 percent, respectively, of the average daily net
assets of the Series. With respect to the MFR Global High Yield and MFR Emerging
Markets Total Return Series, MFR pays Lexington, as Sub-Advisor, on an annual
basis, a fee equal to .20 percent of the average daily net assets of each
Series. Fees paid to the Sub-Advisors are calculated daily and payable monthly.
The Series have entered into contracts with SMC for transfer agent services
and certain other administrative services which SMC provides to the Series. SMC
is paid an annual fixed charge per account and a shareholder and dividend
transaction fee.
As the administrative agent for the Series, SMC performs administrative
functions, such as regulatory filings, bookkeeping, accounting and pricing
functions for the Series. For this service, SMC receives on an annual basis .045
percent of the average daily net assets of the Series, plus an annual fee equal
to the greater of .10 percent of the average daily net assets of each Series,
calculated daily and payable monthly, or (i) $30,000 in the year ended May 31,
1998; (ii) $45,000 in the year ended May 31, 1999; or (iii) $60,000 thereafter,
for the MFR Global Asset Allocation Series and the MFR Emerging Markets Total
Return Series. For the MFR Global High Yield Series, this fee is equal to .10
percent of the average daily net assets or $60,000 annually. For the period
ended December 31, 1997, SMC has agreed to limit these fees to $15,000 for the
MFR Emerging Markets Total Return Series and the MFR Global Asset Allocation
Series; and $45,000 for the MFR Global High Yield Series.
The Series have adopted Distribution Plans related to the offering of Class
B shares pursuant to Rule 12b-1 under the Investment Company Act of 1940. The
Plans provide for payments at an annual rate of 1.0% of the average net assets
of Class B shares. Class A shares incur 12b-1 fees at an annual rate of .25% of
the average net assets of each Series.
Security Distributors, Inc. (SDI), a wholly-owned subsidiary of Security
Benefit Group, Inc., is national distributor for the Series. SDI received net
underwriting commissions on sales of Class A shares and contingent deferred
sales charges on redemptions occurring within 5 years of the date of purchase of
Class B shares, after allowances to brokers and dealers for the period ended
December 31, 1997, in the amounts presented below:
MFR MFR MFR
Emerging Global Global
Markets Asset High
Total Return Allocation Yield
Series Series Series
----------- ----------- -----------
SDI underwriting (Class A) ...... $ 71 $ 145 $ 119
CDSC (Class B) .................. $ 0 $ 0 $ 0
Broker/Dealer (Class A) ......... $ 378 $ 596 $ 652
Broker/Dealer (Class B) ......... $ 0 $ 240 $ 1,254
Certain officers and directors of the Series are also officers and/or
directors of MFR Advisors, Inc. and Security Benefit Life Insurance Company and
its subsidiaries, which include SMC and SDI.
3. INVESTMENT TRANSACTIONS
Investment transactions for the period ended December 31, 1997, (excluding
overnight investments and short-term debt securities) were as follows:
MFR MFR MFR
Emerging Global Global
Markets Asset High
Total Return Allocation Yield
Series Series Series
---------- ---------- ----------
Purchases ....................... $1,138,425 $1,221,295 $6,451,351
Proceeds from Sales ............. $ 131,016 $ 182,015 $4,892,433
21
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
4. FEDERAL INCOME TAX MATTERS
The amounts of unrealized appreciation (depreciation) as of December 31,
1997, were as follows:
MFR MFR MFR
Emerging Global Global
Markets Asset High
Total Return Allocation Yield
Series Series Series
---------- ---------- ----------
Gross Unrealized Appreciation .... $ 52,270 $ 64,195 $ 234,896
Gross Unrealized Depreciation .... $ (125,818) $ (88,391) $ (406,082)
---------- ---------- ----------
Net Unrealized Depreciation ...... $ (73,548) $ (24,196) $ (171,186)
========== ========== ==========
At December 31, 1997, MFR Emerging Markets Total Return Series had a capital
loss carryforward of $4,464 which is available to offset future taxable gains
and expires in 2005.
5. FORWARD FOREIGN EXCHANGE CONTRACTS
At December 31, 1997, the following Series had open forward foreign exchange
contracts to sell currency (excluding foreign currency contracts used for
purchase and sale settlements):
<TABLE>
<CAPTION>
Settlement Foreign U.S. Unrealized
Currency Type Date Amount Amount Gain
-------- ---- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
GLOBAL ASSET ALLOCATION SERIES
Danish Krona ....................... Sell 1/12/98 250,000 $ 37,000 $ 430
Deutsche Marks ..................... Sell 1/12/98 380,000 $214,215 $ 2,545
Japanese Yen ....................... Sell 1/12/98 3,800,000 $ 29,725 $ 458
---------
$ 3,433
=========
EMERGING MARKETS TOTAL RETURN SERIES
Deutsche Marks ..................... Sell 1/12/98 $ 120,000 $ 67,647 $ 804
GLOBAL HIGH YIELD SERIES
Danish Kroner ...................... Sell 1/12/98 3,500,000 $518,004 $ 6,017
</TABLE>
6. TRANSACTIONS IN WRITTEN CALL OPTIONS
Transactions in written covered call options were as follows:
MFR EMERGING MARKETS TOTAL RETURN SERIES
Number of
Premiums Contracts
--------- ---------
Balance at Dec. 31, 1996 ............... $ -- --
Options written ........................ 1,894 168,588
Exercised .............................. (564) (56,523)
Expirations ............................ (1,330) (112,065)
--------- ---------
Balance at Dec. 31, 1997 ............... $ -- --
========= =========
MFR GLOBAL ASSET ALLOCATION SERIES
Number of
Premiums Contracts
--------- ---------
Balance at Dec. 31, 1996................ $ -- --
Options written......................... 1,894 168,588
Exercised............................... (564) (56,523)
Expirations............................. (1,330) (112,065)
--------- ---------
Balance at Dec. 31, 1997................ $ -- --
========= =========
MFR GLOBAL HIGH YIELD SERIES
Number of
Premiums Contracts
--------- ---------
Balance at Dec. 31, 1996................ $ 3,050 275,342
Options written......................... 73,269 5,279,059
Exercised............................... (42,387) (3,145,197)
Expirations............................. (21,870) (1,839,074)
--------- ---------
Balance at Dec. 31, 1997................ $ 12,062 570,130
========= =========
7. FEDERAL TAX STATUS OF DIVIDENDS
The income dividends paid by the Funds are taxable as ordinary income on the
shareholder's tax return. The portion of ordinary income of dividends (including
net short-term capital gains) attributed to the year ended December 31, 1997
that qualified for the dividends received deductions for corporate shareholders
was 6%, 14% and 0% of the amount taxable as ordinary income for MFR Emerging
Markets Total Return Series, MFR Global Asset Allocation Series and MFR Global
High Yield Series, respectively.
8. SHAREHOLDERS'S MEETING
The Board of Directors of Security Income Fund approved a change in the name
of the Global Aggressive Bond Series to MFR Global High Yield Series to more
fully reflect the investment objectives of the Series. The name change was
effective May 1, 1997.
A special meeting of the stockholders of the Global Aggressive Bond Series
of Security Income Fund was held on April 28, 1997. At this meeting,,
shareholders voted to approve a new investment advisory contract which replaced
Security Management Company, LLC as investment manager to the Fund with MFR
Advisors, Inc. In addition, shareholders also voted to approve a new
sub-advisory contract between MFR Advisors, Inc. and Lexington Management
Corproation. The total number of eligible votes were 489,633. The results of the
votes are as follows: 463,099 in favor, 0 votes against and 1,508 votes
abstained.
22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors
Security Income Fund.
We have audited the accompanying balance sheets, including the schedules of
investments, of the following series of Security Income Fund (MFR Global High
Yield (formerly Global Aggressive Bond), MFR Emerging Markets Total Return and
MFR Global Asset Allocation Series) (the Fund) as of December 31, 1997, the
related statements of operations and changes in net assets and the financial
highlights for the periods indicated therein. These financial statements and the
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
investments owned as of December 31, 1997, by correspondence with the custodian.
As to securities relating to uncompleted transactions, we performed other audit
procedures. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
each of the Funds indicated above at December 31, 1997, and the results of their
operations, changes in their net assets and the financial highlights for the
periods indicated therein in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Kansas City, Missouri
February 6, 1998
23
<PAGE>
MFR FUNDS
o Emerging Markets Total Return Series
o Global Asset Allocation Series
o Global High Yield Series
This report is submitted for the general information of the shareholders of
the Funds. The report is not authorized for distribution to prospective
investors in the Funds unless preceded or accompanied by an effective
prospectus which contains details.
SECURITY FUNDS OFFICERS AND DIRECTORS
DIRECTORS
Donald A. Chubb, Jr.
John D. Cleland
Donald L. Hardesty
Bruce Jensen (Income Fund only)
Penny A. Lumpkin
Mark L. Morris, Jr., D.V.M.
Maria Fiorini Ramirez (Income Fund only)
Hugh L. Thompson, Ph.D.
OFFICERS
John D. Cleland, President
James R. Schmank, Vice President and Treasurer
Mark E. Young, Vice President
Terry A. Milberger, Vice President, Equity Fund
Jane A. Tedder, Vice President
Cindy L. Shields, Assistant Vice President
Thomas A. Swank, Assistant Vice President
Amy J. Lee, Secretary
Christopher D. Swickard, Assistant Secretary
Brenda M. Harwood, Assistant Treasurer and Assistant Secretary
[SECURITY DISTRIBUTORS LOGO]
SECURITY DISTRIBUTORS, INC.
A Member of The Security Benefit
Group of Companies
700 SW Harrison St.
Topeka, KS 66636-0001
(800) 643-8188
