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SECURITY
FUNDS
================================================================================
ANNUAL REPORT
SEPTEMBER 30, 1999
* SECURITY CAPITAL
PRESERVATION FUND
SECURITY DISTRIBUTORS, INC.
[LOGO] A Member of The Security Benefit
Group of Companies
<PAGE> 2
MANAGER'S COMMENTARY
SECURITY --------------------------------------------------------------------
FUNDS NOVEMBER 15, 1999
SECURITY CAPITAL PRESERVATION FUND
We are pleased to present the first annual report for the Security Capital
Preservation Fund (the "Fund"), providing a detailed review of the market, the
portfolio assets, and our outlook. Since its inception May 3, 1999 the Fund has
returned 2.24%.1 Its benchmark, the Lehman Brothers 1-3 Year
Government/Corporate Bond Index returned 1.45% over the same five-month period.
Security Capital Preservation Fund is part of a "master-feeder" arrangement in
which the Fund invests all of its assets in the BT PreservationPlus Income
Portfolio (the "Portfolio") advised by Bankers Trust Company, a wholly owned
subsidiary of Deutsche Bank. The Fund seeks to deliver returns above those of
money market funds while maintaining a constant share price. The Fund is offered
to tax sheltered annuity custodial accounts, traditional Individual Retirement
Accounts (IRAs), Roth IRAs, education IRAs, simplified employee pension IRAs
(Sep IRAs), savings incentive match plan for employees (SIMPLE IRAs), Keogh
plans, and other qualified retirement plans.
FIXED INCOME MARKETS IN 1999
The U.S. bond market was dominated by a dramatic increase in interest rates
during 1999. The birth of the Euro currency, Brazilian currency devaluation,
NATO military action in the Balkans, and heavy merger activity and booming debt
origination in the U.S. were just some of the factors that led to disappointing
returns from U.S. Treasury securities. The Treasury markets conceded to improved
international economic conditions which prompted investors to move away from the
relative safety of U.S. Treasuries and toward the higher yields offered by other
fixed income sectors.
To guard against the perceived risks of inflationary pressures brought on by an
improving global economy, a still-strong U.S. economy, and an extremely tight
labor market, the Federal Reserve Board raised its target Federal Funds rate in
June and again in August. The yield on the five-year U.S. Treasury note rose
from 5.10% to 5.75% in the last six months of the fiscal year. Yet despite
significant market volatility, the Fund met its objective of maintaining a
stable net asset value of $10 per share while producing an attractive level of
current income.
INVESTMENTS USED IN THE PORTFOLIO
The Portfolio invests across major sectors of the investment grade fixed income
market. At September 30, 1999 the Portfolio was allocated 26% to corporate
bonds, 37% to mortgage-backed securities, 12% to asset-backed securites, 3% to
U.S. Treasuries, 8% to foreign bonds, and 14% to cash equivalents. This
allocation of fixed income securities is intentionally weighted toward the
corporate and mortgage sectors, as these sectors have historically offered
higher yields than U.S. government securities.
Additionally, the Portfolio has entered into Wrapper Agreements that are
intended to help stabilize the value of the Portfolio's investments, and in
effect the Fund's net asset value. The Fund is one of the first SEC-registered
funds for tax sheltered annuity investors and IRA investors which enables them
to make use of Wrapper Agreements to seek to maintain principal stability in the
face of fluctuations in values due to changes in yields. To date we have
negotiated two Wrapper Agreements, each of which covers approximately one-half
of the fixed income securities in the Portfolio. Generally speaking, Wrapper
Agreements are issued by insurance companies, banks and other financial
institutions. The Wrapper Agreements held by the Portfolio as of September 30,
1999 were issued by Bank of America NT&SA and Transamerica Life Insurance and
Annuity Company.
The average credit quality of investments in the Portfolio at the end of the
fiscal year was AA, as measured by Standard & Poor's rating agency. The average
quality of the issuers of the Wrapper Agreements was also AA, again as measured
by Standard & Poor's. The average duration of Portfolio assets at September 30
stood at 3.64 years.
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1
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MANAGER'S COMMENTARY
SECURITY --------------------------------------------------------------------
FUNDS NOVEMBER 15, 1999
OUTLOOK FOR THE COMING YEAR
Economic momentum continues to build around the world. U.S. growth has shown
little sign of slowing, the expansions in Europe have picked up speed, and
recoveries in Asia have been surprisingly vigorous. We continue to expect some
additional interest rate increases by the Federal Reserve Bank, and we believe
gradually building inflationary pressures will impart a cautious tone in the
U.S. financial markets.
Given this outlook, we anticipate fixed income yields to drift a bit higher and
yield spreads to widen over the near term as liquidity concerns relating to the
turn of the century arise. These conditions should present attractive
opportunities to invest new cash flows at higher yield spreads. Over the longer
term, we maintain a generally positive but cautious outlook for the U.S. fixed
income markets.
Eric M. Kirsch
Portfolio Manager
Bankers Trust Company
1Performance figures are based on Class A shares and do not reflect deduction of
the sales charge.
The Capital Preservation Fund is not a money market fund and there can be no
assurance that it will be able to maintain a stable share price.
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2
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SECURITY CAPITAL PRESERVATION FUND
STATEMENT OF ASSETS AND LIABILITIES
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SEPTEMBER 30, 1999
Assets
Investments in PreservationPlus Income Portfolio,
at value........................................... $25,952,067
Prepaid Expenses..................................... 27,575
-----------
Total assets....................................... 25,979,642
-----------
Liabilities
Dividends payable.................................... 142,268
Accrued expenses and other liabilities............... 58,824
-----------
Total liabilities.................................. 201,092
-----------
Net assets........................................... $25,778,550
===========
Net Assets consist of:
Paid-in Capital...................................... $25,778,550
Accumulated net realized loss from Investments,
Futures Contracts, Foreign Currency
and Forward Foreign Currency Transactions.......... (32,650)
Net unrealized depreciation on Investments,
Futures Contracts, Foreign Currency
and Forward Foreign Currency Contracts............. (329,909)
Unrealized appreciation on Wrapper
Agreements......................................... 362,559
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Total net assets ............................... $25,778,550
===========
Class "A" Shares
Capital shares outstanding........................... 2,526,071
Net assets........................................... $25,260,710
Net asset value per share............................ $ 10.00
===========
Offering price per share (net asset value
divided by 96.5%).................................. $ 10.36
===========
Class "B" Shares
Capital shares outstanding........................... 32,381
Net assets........................................... $ 323,810
Net asset value per share............................ $ 10.00
===========
Class "C" Shares
Capital shares outstanding........................... 19,403
Net assets........................................... $ 194,030
Net asset value per share............................ $ 10.00
===========
See accompanying notes.
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3
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SECURITY CAPITAL PRESERVATION FUND
STATEMENT OF OPERATIONS
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FOR THE PERIOD MAY 3, 1999*
THROUGH SEPTEMBER 30, 1999
Investment Income:
Income net of expenses allocated
from PreservationPlus Income Portfolio $493,556
Expenses:
Administration and management services fees................ 21,748
12b-1 distribution fees.................................... 28,032
Registration fees.......................................... 10,981
Reports to shareholders ................................... 204
Trustee fees............................................... 102
Professional fees.......................................... 1,633
Other fees................................................. 5,480
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Total expenses........................................... 68,180
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Net investment income.................................. 425,376
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NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND WRAPPER AGREEMENT:
Net realized gain (loss) from:
Investments, Foreign Currency and Forward
Foreign Currency Transactions............................ 3,868
Futures Contracts........................................ (36,518)
--------
Net realized loss........................................ (32,650)
Net change in Unrealized appreciation/depreciation on:
Investments, Foreign Currency, Forward
Foreign Currency Contracts and
Futures Contracts ....................................... (329,909)
Wrapper Agreements ...................................... 362,559
--------
Net Realized and Unrealized Gain (Loss) on
Investments, Futures, Foreign Currencies, Forward
Foreign Currency Contracts and
Wrapper Agreements....................................... 0
--------
Net increase in net assets from operations................. $425,376
========
*Inception of fund
See accompanying notes.
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SECURITY CAPITAL PRESERVATION FUND
STATEMENT OF CHANGES IN NET ASSETS
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FOR THE PERIOD MAY 3, 19991
THROUGH SEPTEMBER 30, 1999
Increase (decrease) in net assets from operations:
Net investment income................................. $ 425,376
Net realized loss from investments,
futures, foreign currency and
forward foreign currency transactions............... (32,650)
Net unrealized depreciation on investments,
futures contracts, foreign currencies and
forward foreign currency contracts.................. (329,909)
Net unrealized appreciation on Wrapper
Agreements.......................................... 362,559
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Net increase in net assets resulting
from operations................................... 425,376
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Distributions to shareholders from:
Net investment income
Class A............................................. (291,497)
Class B............................................. (65,870)
Class C............................................. (68,009)
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Total distributions to shareholders............... (425,376)
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Capital transactions in shares
of beneficial interest
Proceeds from sale of shares:
Class A............................................. 25,126,081
Class B............................................. 8,399,792
Class C............................................. 8,333,343
Dividends reinvested
Class A............................................. 154,171
Class B............................................. 63,246
Class C............................................. 65,690
Cost of shares redeemed
Class A............................................. (19,545)
Class B............................................. (8,139,228)
Class C............................................. (8,205,000)
-----------
Net increase in net assets from capital
transactions in shares of beneficial interest....... 25,778,550
-----------
Net increase in net assets ........................... 25,778,550
Net assets:
Beginning of period .................................. --
-----------
End of period......................................... $25,778,550
===========
(1) Inception of Fund
See accompanying notes.
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5
<PAGE> 7
FINANCIAL HIGHLIGHTS
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SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
SECURITY CAPITAL PRESERVATION FUND (CLASS A SHARES)
1999 (A)(D)
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PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD................ $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income ............................. 0.22
DISTRIBUTIONS TO SHAREHOLDERS:
Net Investment Income ............................. (0.22)
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NET ASSET VALUE END OF PERIOD...................... $ 10.00
=======
TOTAL INVESTMENT RETURN (B)........................ 2.24%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands)............... $25,261
Ratio of Net Investment Income
to Average Net Assets............................. 6.16%
Ratio of Expenses to Average Net Assets (c)........ 1.26%
Decrease Reflected in the Above Expense
Ratio Due to Absorption of Expenses by
Bankers Trust..................................... .92%
SECURITY CAPITAL PRESERVATION FUND (CLASS B SHARES)
1999 (A)(D)
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PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD................ $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income ............................. 0.20
DISTRIBUTIONS TO SHAREHOLDERS:
Net Investment Income.............................. (0.20)
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NET ASSET VALUE END OF PERIOD...................... $ 10.00
=======
TOTAL INVESTMENT RETURN (B)........................ 2.03%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) .............. $324
Ratio of Net Investment Income
to Average Net Assets............................. 5.27%
Ratio of Expenses to Average Net Assets (c)........ 1.89%
Decrease Reflected in the Above Expense
Ratio Due to Absorption of Expenses by
Bankers Trust..................................... .92%
SECURITY CAPITAL PRESERVATION FUND (CLASS C SHARES)
1999 (A)(D)
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PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD................ $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income.............................. 0.21
DISTRIBUTIONS TO SHAREHOLDERS:
Net Investment Income ............................. (0.21)
-------
NET ASSET VALUE END OF PERIOD...................... $ 10.00
=======
TOTAL INVESTMENT RETURN (B)........................ 2.12%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands)............... $194
Ratio of Net Investment Income
to Average Net Assets............................. 5.51%
Ratio of Expenses to Average Net Assets (c)........ 1.64%
Decrease Reflected in the Above Expense
Ratio Due to Absorption of Expenses by
Bankers Trust..................................... .92%
(a) Security Capital Preservation Fund Class A, B and C Shares were initially
capitalized on May 3, 1999, with a net asset value of $10 per share.
Amounts presented are for the period May 3, 1999 through September 30,
1999. Percentage amounts, except for total return, have been annualized.
(b) Total return information does not reflect deduction of any sales charges
imposed at the time of purchase for Class A shares or upon redemption for
Class B and C shares.
(c) Ratio expenses to average net assets include expenses of the BT
PreservationPlus Income Portfolio.
(d) Net investment income was computed using average month-end shares
outstanding.
See accompanying notes.
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6
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NOTES TO FINANCIAL STATEMENTS
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NOTE I - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION
Security Capital Preservation Fund (the "Fund") seeks to provide investors
with a high level of current income while seeking to maintain a stable net asset
value ("NAV") per share. Security Income Fund is an open-end management
investment company (mutual fund). The Fund is a separate series of Security
Income Fund and currently offers three classes of shares (the "Shares"). The
Shares are offered exclusively to retirement accounts such as tax-sheltered
annuity custodial accounts ("TSA Accounts"), individual retirement accounts
("IRAs"), and to employees investing through participant-directed employee
benefit plans.The Fund began operations on May 3, 1999. 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. Class B and C shares are offered without a
front-end sales charge but incur additional class-specific expenses. Redemptions
of the shares within 5 years of acquisition for Class B shares and redemptions
within 1 year of acquisition for Class C shares incur a contingent deferred
sales charge.
The Fund seeks to achieve its investment objective ~by investing
substantially all of its assets in the BT PreservationPlus Income Portfolio (the
"Portfolio"). The Portfolio is an open-end management investment company
registered under the Act. The value of such investment in Portfolio reflects the
Fund's proportionate interest in the net assets of the Portfolio. At September
30,1999, the Fund's investment was approximately 99% of the Portfolio.
The financial statements of the Portfolio, including a list of assets held,
are contained elsewhere in this report and should be read in conjunction with
the Fund's financial statements.
B. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME The
Fund earns income, net of expenses, on its investment in the Portfolio. All
of the net investment income and net realized and unrealized gains and losses
(including Wrapper Agreements) of the Portfolio are allocated pro rata among the
investors in the Portfolio on a daily basis.
Security transactions are accounted for on a trade date basis. Realized
gains and losses on investments sold are computed on the basis of identified
cost. The realized and unrealized gains and losses in the Statement of
Operations represent the Fund's pro rata interest in the realized and unrealized
gains and losses of the Portfolio, including the offsetting valuation change of
the Wrapper Agreements.
C. DISTRIBUTIONS
It is the Fund's policy to declare dividends daily and distribute dividends
monthly to shareholders from net investment income. Dividends payable to
shareholders are recorded by the Fund on the ex-dividend date. Distributions of
net realized short-term and long-term capital gains, if any, will be made
annually.
D. FEDERAL INCOME TAXES
It is the Fund's policy to comply with the requirements of the Internal
Revenue Code and distribute income to shareholders. Therefore, no federal income
tax provision is required. The Fund may periodically make reclassifications
among certain of its capital accounts as a result of differences in the
characterization and allocation of certain income and capital gains determined
in accordance with federal tax regulations which may differ from generally
accepted accounting principles.
E. OTHER
Security Income Fund accounts separately for the assets, liabilities and
operations of each fund. Expenses directly attributable to a fund are charged to
that fund, while expenses which are attributable to all of the funds are
allocated among them on the basis of relative net assets.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in the financial statements. Actual
results could differ from those estimates.
NOTE 2 - FEES AND TRANSACTIONS WITH AFFILIATES
The Fund has entered into an Administration and Services Agreement with
Security Management Company, LLC ("SMC").Under this agreement, SMC provides
administrative functions and transfer agency services. This agreement provides
for the Fund to pay SMC an administration fee, accrued daily and paid monthly,
equal to .09% per year of the average daily net assets of the Fund. SMC is paid
an annual fixed charge per account as well as transaction fees for shareholder
activity and dividend payments.
Under a Sub-Accounting Agreement between SMC and Bankers Trust Company,
Bankers Trust has agreed to provide certain accounting services to the Fund,
including the daily calculation of the Fund's NAV. The Sub-Accounting Agreement
provides for SMC to pay Bankers Trust a fee, equal to $14,000 per year.
Pursuant to a separate Management Services Agreement, SMC also performs
certain other services on behalf of the Fund. Under this Agreement, SMC
provides, among other things, feeder fund management and administrative services
to the Fund which include monitoring the performance of the Portfolio,
coordinating the Fund's relationship with the Portfolio, communicating with the
Fund's Board of Directors and shareholders regarding the Portfolio's performance
and the Fund's two tier structure, and in general, assisting the Board of
Directors of the Fund in all aspects of the administration and operation of the
Fund. For these services, the Fund pays SMC a fee at the annual rate of .20% of
its average daily net assets, calculated daily and payable monthly.
Bankers Trust has agreed to waive its entire investment fee payable by the
Portfolio until July 31, 2000. Bankers Trust has also voluntarily agreed to
waive a portion of its Portfolio
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7
<PAGE> 9
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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NOTE 2 - FEES AND TRANSACTIONS WITH AFFILIATES (CONTINUED)
administration fees. Bankers Trust may terminate or adjust the waiver and
reimbursement with respect to the administration agreement at any time in its
sole discretion without notice to shareholders. In addition, SMC has agreed to
cap the average annual expenses of the Fund at 1.50%, exclusive of interest,
taxes, brokerage fees and commissions, extraordinary expenses and 12b-1 fees.
The Fund has adopted Distribution Plans related to the offering of Class A,
B and C shares pursuant to Rule 12b-1 of the Investment Company Act of 1940. The
Plans provide for payments at an annual rate of 0.25% of the average net assets
of Class A shares, 0.75% of the average net assets of Class B shares and 0.50%
of the average net assets of Class C shares.
Security Distributors, Inc. (SDl), a wholly-owned subsidiary of Security
Benefit Group, Inc., a financial services holding company, is national
distributor for the Income Fund. For the period May 3, 1999 through September
30, 1999, SDI received net underwriting commissions on sales of Class A shares
and contingent deferred sales charges (CDSC) on redemptions of Class B and Class
C shares, after allowances to brokers and dealers in the amounts presented in
the following table:
SDI Underwriting (Class A) $0
SDI CDSC (Class B) $0
SDI CDSC (Class C) $0
Broker/Dealer (Class A) $2,000
Broker/Dealer (Class B) $3,964
Broker/Dealer (Class C) $0
Certain officers and directors of the Fund are also officers and/or directors
of Security Benefit Life Insurance Company and its subsidiaries, which include
SMC and SDI.
NOTE 3 - SHARES OF BENEFICIAL INTEREST
At September 30, 1999, there were an unlimited number of shares of beneficial
interest authorized. Transactions in shares of beneficial interest for the
period ended September 30, 1999 were as follows:
Shares Shares Shares lncrease (Decrease)
Sold Reinvested Redeemed Shares
-------------------------------------------------------------
Class A 2,512,608 15,417 (1,954) 2,526,071
Class B 839,979 6,325 (813,923) 32,381
Class C 833,334 6,569 (820,500) 19,403
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<PAGE> 10
REPORT OF INDEPENDENT AUDITORS
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The Shareholders and Board of Trustees
Security Income Fund - Security Capital Preservation Fund
We have audited the accompanying statement of assets and liabilities of Security
Capital Preservation Fund (the "Fund") as of September 30, 1999, and the related
statement of operations, statement of changes in net assets and financial
highlights for the period May 3, 1999 (commencement of operations) through
September 30, 1999. These financial statements and 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
audit.
We conducted our audit 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 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. 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 audit provides 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
Security Capital Preservation Fund at September 30, 1999, and the results of its
operations, the changes in its net assets and its financial highlights for the
period May 3, 1999 (commencement of operations) through September 30, 1999, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Philadelphia, Pennsylvania
November 9, 1999
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<PAGE> 11
SCHEDULE OF PORTFOLIO INVESTMENTS
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SEPTEMBER 30, 1999
- ------------------------------------
BT PreservationPlus Income Portfolio
- ------------------------------------
PRINCIPAL MARKET
ASSET-BACKED SECURITIES AMOUNT VALUE
- ------------------------------------------------------------------------
ASSET-BACKED SECURITIES - 11.6%
GE Capital Mortgage Service, Inc.
6.00%, 6-1-2029............................ $ 974,063 $ 923,568
Norwest Asset Securities Corp,
6.75%, 2-25-2029........................... 1,050,000 1,023,529
Residential Funding Mortgage Securities,
6.75%, 4-25-2029........................... 971,401 934,566
Vendee Mortgage Trust,
7.50%, 8-15-2017........................... 150,000 151,431
----------
Total asset-backed securities............................ 3,033,094
----------
CORPORATE DEBT - 26.3%
FINANCIAL SERVICES - 7.3%
Household Finance Corp.,
6.50%, 11-15-2008.......................... 1,000,000 940,909
Paine Webber Group, Inc.,
6.37%, 5-15-2004........................... 1,000,000 964,129
----------
1,905,038
----------
INDUSTRIAL - 19.0%
Delphi Auto Systems Corp.,
6.50%, 5-1-2009............................ 1,000,000 930,772
Laidlaw, Inc.,
7.70%, 8-15-2002........................... 1,000,000 993,713
News America Holding,
8.50%, 2-15-2005........................... 1,000,000 1,050,091
Northrop-Gruman Corp.,
7.00%, 5/1/2006............................ 1,000,000 965,965
Time Warner, Inc..
7.48%, 1-15-2008........................... 1,000,000 1,008,320
----------
4,948,861
----------
Total corporate debt..................................... 6,853,899
----------
FOREIGN DEBT - 7.5%
Celulosa Arauco y Constitu,
6.75%, 12-15-2003.......................... 1,000,000 940,058
Corp Andina de Foment,
7.75%, 3-1-2004............................ 1,000,000 1,002,095
----------
Total foreign debt........................................ 1,942,153
----------
MORTGAGE BACKED SECURITIES - 35.7%
FGLMC COLD,
7.50%, 10-1-2024........................... 5,083,224 5,111,655
FHLMC, 8.00%, 3-1-2027....................... 1,135,629 1,163,297
FNCL, 6.50%, 9-1-2028........................ 1,057,079 1,014,021
FNCL, 6.50%, 10-1-2028....................... 1,080,115 1,036,119
FNCL, 6.50%, 12-1-2028....................... 1,043,684 1,001,172
----------
Total mortgage backed securities......................... 9,326,264
----------
PRINCIPAL
AMOUNT OR
NUMBER OF MARKET
U.S. TREASURY SECURITIES SHARES VALUE
- ------------------------------------------------------------------------
U.S. TREASURY SECURITIES - 1.7%
U.S. Treasury Note,
5.25%, 5-15-2004 .......................... $440,000 $ 429,963
-----------
Total U.S. treasury securities........................... 429,963
-----------
SHORT-TERM INSTRUMENTS - 14.4%
MUTUAL FUNDS - 13.4%
Institutional Cash
Management Fund............................. 3,498,725 3,498,725
U.S. TREASURY BILLS - 1.0%
U.S. Treasury Bill,
4.55%, 12-2-1999............................ $275,000 272,845
-----------
Total short-term instruments............................. 3,771,570
-----------
Total investments - 97.2%................................ 25,356,943
-----------
WRAPPER AGREEMENTS* - 1.6%
Bank of America NT&SA......................... 264,272
TransAmerica Life Insurance
& Annuity Co. ............................. 145,357
-----------
Total Wrapper Agreements ................................ 409,629
-----------
Other assets in excess of liabilities - 1.2%............. 328,425
-----------
Net assets - 100%........................................ $26,094,997
===========
The following abbreviations are used in portfolio descriptions:
FHLMC - Federal Home Loan Mortgage Corp.
FNCL - Federal National Mortgage Association Class Loan
* Wrapper Agreements - Each Wrapper Agreement obligates the wrapper provider to
maintain the book value of a portion of the Portfolio's assets up to a
specified maximum dollar amount, upon the occurrence of certain specified
events.
See accompanying notes.
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<PAGE> 12
<TABLE>
<CAPTION>
==================================================================================================================================
BT PreservationPlus Income Portfolio
STATEMENT OF ASSETS AND LIABILITIES September 30, 1999
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<S> <C>
Assets
Investment at Value (Cost $25,605,534) ..................................................................... $25,356,943
Interest Receivable ........................................................................................ 266,680
Prepaid Expenses and Other ................................................................................. 72,843
Wrapper Agreements ......................................................................................... 409,629
Due from Bankers Trust ..................................................................................... 17,882
Variation Margin Receivable ................................................................................ 30,456
-----------
Total Assets ................................................................................................. 26,154,433
-----------
Liabilities
Accrued Expenses and Other ................................................................................. 59,436
-----------
Total Liabilities ............................................................................................ 59,436
-----------
Net Assets ................................................................................................... $26,094,997
===========
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------------------------------
For the Period
December 23, 1998/1/
through
September 30, 1999
------------------
<S> <C>
Investment Income:
Interest Income ............................................................................................ $ 595,970
Credited Rate Interest ..................................................................................... 47,245
-----------
Total Investment Income ...................................................................................... 643,215
-----------
Expenses:
Advisory Fees .............................................................................................. 64,673
Professional Fees .......................................................................................... 21,863
Wrapper Fees ............................................................................................... 18,692
Printing and Shareholder Reports ........................................................................... 7,000
Administration and Service Fees ............................................................................ 4,620
Trustees Fees .............................................................................................. 4,013
Miscellaneous .............................................................................................. 10,284
-----------
Total Expenses ............................................................................................. 131,145
Less Expenses Absorbed by Bankers Trust .................................................................... (85,905)
-----------
Net Expenses ............................................................................................. 45,240
-----------
Net Investment Income ........................................................................................ 597,975
-----------
Realized and Unrealized Gain on Investments, Foreign Currency Transactions,
Forward Foreign Currency Contracts, Future Contracts and Wrapper Agreements:
Net Realized Gain (Loss) from:
Investment, Foreign Currency and Forward Foreign Currency Transactions ................................. 3,867
Futures Contracts ...................................................................................... (36,687)
Net Change in Unrealized Appreciation/Depreciation on:
Investments, Foreign Currency, Forward Foreign Currency Contracts and Future Contracts ................. (329,564)
Wrapper Agreements ..................................................................................... 362,384
-----------
Net Realized and Unrealized Gain (Loss) on Investments, Futures, Foreign Currencies,
Forward Foreign Currency Contracts and Wrapper Agreements .................................................. --
-----------
Net Increase in Net Assets from Operations ................................................................... $ 597,975
===========
</TABLE>
/1/ Commencement of operations.
See notes to financial statements
- --------------------------------------------------------------------------------
11
<PAGE> 13
- --------------------------------------------------------------------------------
BT PreservationPlus Income Portfolio
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
December 23, 1998/1/
through
September 30, 1999
------------------
<S> <C>
Increase (Decrease) in Net Assets from:
Operations
Net Investment Income............................................................................ $ 597,975
Net Change in Unrealized Appreciation/Depreciation on Investments, Futures Contracts,
Foreign Currency and Forward Foreign Currency Contracts........................................ (329,564)
Net Unrealized Appreciation on Wrapper Agreements................................................ 362,384
Net Realized Loss from Investments, Futures, Foreign Currency and
Forward Foreign Currency Transactions.......................................................... (32,820)
------------
Net Increase in Net Assets from Operations.......................................................... 597,975
------------
Capital Transactions
Proceeds from Capital lnvested................................................................... 44,761,026
Value of Capital Withdrawn....................................................................... (19,264,004)
------------
Net Increase in Net Assets from Capital Transactions................................................ 25,497,022
------------
Total Increase in Net Assets........................................................................ 26,094,997
Net Assets
Beginning of Period................................................................................. --
------------
End of Period....................................................................................... $26,094,997
============
</TABLE>
/1/ Commencement of operations
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Contained below are selected ratios to average net assets and other supplemental
data for the period indicated for the PreservationPlus Income Portfolio.
For the Period
December 23, 1998/1/
through
September 30, 1999
------------------
SUPPLEMENTAL DATA AND RATIOS
Net Assets, End of Period (000s omitted) ....................... $26,095
Ratios to Average Net Assets
Net Investment Income......................................... 6.47%/2/
Expenses...................................................... 0.49%/2/
Decrease Reflected in the Above Expense Ratio Due
to Absorption of Expenses by Bankers Trust.................. 0.92%/2/
Portfolio Turnover Rate......................................... 149%
/1/ Commencement of operations.
/2/ Annualized
See notes to financial statements
- --------------------------------------------------------------------------------
12
<PAGE> 14
- --------------------------------------------------------------------------------
BT PreservationPlus Income Portfolio
NOTE 1-ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
A. Organization
The Preservation Plus Income Portfolio (the "Portfolio") is registered under the
Investment Company Act of 1940 (the "Act"), as amended, as an open-end
management investment company. The Portfolio was organized and began operations
on December 23, 1998 as an unincorporated trust under the laws of New York. The
Declaration of Trust permits the Board of Trustees (the "Trustees") to issue
beneficial interests in the Portfolio.
B. Security Valuation
Debt securities (other than short-term debt obligations maturing in 60 days or
less), including listed securities and securities for which price quotations are
available, will normally be valued on the basis of market valuations furnished
by a pricing service. Such market valuations may represent the last quoted price
on the securities' major trading exchange or quotes received from dealers or
market makers in the relevant securities or may be determined through the use of
matrix pricing. In matrix pricing, pricing services may use various pricing
models, involving comparable securities, historic relative price movements,
economic factors and dealer quotations. Over-the-counter securities will
normally be valued at the bid price. Short-term debt obligations and money
market securities maturing in 60 days or less are valued at amortized cost.
Securities for which market quotations are not readily available are valued by
Bankers Trust pursuant to procedures adopted by the Portfolio's Trust Board.
Wrapper Agreements generally will be equal to the difference between the Book
Value and Market Value (plus the crediting rate adjustment) on the applicable
covered assets and will either be reflected as an asset or a liability of the
Portfolio. The Portfolio's Trust Board in performing its fair value
determination of the Portfolio's Wrapper Agreements considers the
creditworthiness and the ability of Wrapper Providers to pay amounts due under
the Wrapper Agreements.
C. Security Transactions and Interest Income
Security transactions are accounted for on a trade date basis. Interest income
is recorded on the accrual basis and includes amortization of premium and
discount on investments. Realized gains and losses from security transactions
are recorded on the identified cost basis. The credited rate interest represents
the actual interest earned on covered assets under the Portfolio's Wrapper
Agreements (the "agreements") plus or minus an adjustment for an amount
receivable from or payable to the wrapper provider based on fluctuation in the
market value of covered assets under the agreements.
All of the net investment income and net realized and unrealized gains and
losses (including the Wrapper Agreements) of the Portfolio are allocated pro
rata to the investors in the Portfolio on a daily basis.
D. TBA Purchase Commitments
The Portfolio may enter into "TBA" (to be announced) purchase commitments to
purchase securities for a fixed price at a future date, typically not exceeding
45 days. TBA purchase commitments may be considered securities in themselves,
and involve a risk of loss if the value of the security to be purchased declines
prior to settlement date, which risk is in addition to the risk of decline in
the value of the Portfolio's other assets. Unsettled TBA purchase commitments
are valued at the current market value of the underlying securities, according
to the procedures described under "Security Valuation" above.
E. Foreign Currency Transactions
The books and records of the Portfolio 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.
F. Forward Foreign Currency Contracts
The Portfolio may enter into forward foreign currency contracts in an attempt to
enhance the return on the Portfolio's assets pursuant to its Global Asset
Allocation strategy. The net U.S. dollar value of foreign currency underlying
all contractual commitments held by the Portfolio and the resulting unrealized
appreciation or depreciation are determined using prevailing exchange rates.
With respect to forward foreign currency contracts, losses in excess of amounts
recognized in the Statement of Operations may arise due to changes in the value
of the foreign currency or if the counterparty does not perform under the
contract.
G. Option Contracts
The Portfolio may enter into option contracts. Upon the purchase of a put option
or a call option by the Portfolio, the premium paid is recorded as an
investment, and marked-to-market daily to reflect the current market value. When
a purchased option expires, the Portfolio will realize a loss in the amount of
the cost of the option. When the Portfolio enters into a closing sale
transaction, the Portfolio will realize a gain or loss depending on whether the
sale proceeds from the closing sale transaction are greater or less than the
cost of the option. When the Portfolio exercises a put option, it realizes a
gain or loss from the sale of the underlying security and the proceeds from such
sale will be decreased by the premium originally paid. When the Portfolio
exercises a call option, the cost of the security which the Portfolio purchases
upon exercise will be increased by the premium originally paid.
H. Futures Contracts
The Portfolio may enter into financial futures contracts which are contracts to
buy or sell a standard quantity of securities at a specified price on a future
date. The Portfolio is required to make initial margin deposits either in cash
or securities in an amount equal to a certain percentage of the contract amount.
Variation margin payments are made or received by the Portfolio each day,
dependent on the daily fluctuations in the value of the underlying security, and
are recorded for financial statement purposes as unrealized gains or losses by
the Portfolio.
Futures contracts do involve certain risks. These risks could include a lack of
correlation between the futures contract and the corresponding securities
market, a potential lack of liquidity in the secondary market and incorrect
assessments of market trends which may result in poorer overall performance than
if a futures contract had not been entered into.
Futures contracts are valued at the settlement price established each day by the
board of trade or exchange on which they are traded.
I. Federal Income Taxes
The Portfolio is considered a partnership under the Internal Revenue Code.
Therefore, no federal income tax provision is necessary.
J. Other
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts in the financial statements. Actual results could
differ from those estimates.
NOTE 2--FEES AND TRANSACTIONS WITH AFFILIATES
The Portfolio has entered into an Administration and Services Agreement with
Bankers Trust Company ("Bankers Trust"). Under the Agreement, Bankers Trust
provides administrative, custody, transfer agency and shareholder services to
the Portfolio in return for a fee computed daily and paid monthly at an annual
rate of .05% of the Portfolio's average daily net assets.
The Portfolio has entered into an Advisory Agreement with Bankers Trust. Under
this Agreement, the Portfolio pays Bankers Trust an advisory fee computed daily
and paid monthly at an annual rate of .70% of the Portfolio's average daily net
assets, less advisor fees paid for the pro rata amount due to investment in the
Institutional Cash Management Fund.
- --------------------------------------------------------------------------------
13
<PAGE> 15
- --------------------------------------------------------------------------------
BT PRESERVATIONPLUS INCOME PORTFOLIO
NOTE 2--FEES AND TRANSACTIONS WITH AFFILIATES (CONTINUED)
Bankers Trust has voluntarily undertaken to waive its fees and reimburse
expenses of the Portfolio, to the extent necessary, to limit all expenses to
.35% of the average daily net assets of the Portfolio. Prior to July 1, 1999
Bankers Trust voluntarily undertook to waive its fees and reimburse expenses of
the Portfolio, to the extent necessary, to limit all expenses to .80% of the
average daily net assets of the Portfolio.
The Portfolio may invest in the Institutional Cash Management Fund (the "Cash
Management Fund"), an open-ended management investment company managed by
Bankers Trust. The Cash Management Fund is offered as a cash management option
to the Portfolio and other accounts managed by Bankers Trust. Distributions from
the Cash Management Fund to the Portfolio for the period ended September 30,
1999 amounted to $62,885.
At September 30, 1999, the Portfolio was a participant with other affiliated
entities in a revolving credit facility in the amount $100,000,000, which
expires April 29, 2000. A commitment fee of .10% per annum on the average daily
amount of the available commitment is payable on a quarterly basis and
apportioned equally among all participants. On October 8, 1999, the revolving
credit facility was increased to $150,000,000. No amounts were outstanding under
the credit facility for the year ended September 30, 1999.
Bankers Trust was a wholly owned subsidiary of Bankers Trust Corporation ("BT
Corp."). On June 4, 1999, BT Corp. was acquired by Deutsche Bank AG ("Deutsche
Bank"). As a result of the transaction, Bankers Trust became an indirect
wholly-owned subsidiary of Deutsche Bank.
NOTE 3--PURCHASES AND SALES OF INVESTMENT SECURITIES
The aggregate cost of purchases and proceeds from sales of investments, other
than short-term obligations, for the period ended September 30, 1999, were
$36,034,878 and $13,381,816, respectively. For federal income tax purposes, the
tax basis of investments held at September 30, 1999, was $25,605,534. The
aggregate gross unrealized appreciation was $3,695, and the aggregate gross
unrealized depreciation for all investments was $252,286 as of September 30,
1999.
NOTE 4--WRAPPER AGREEMENTS
The Portfolio will enter into Wrapper Agreements with insurance companies, banks
or other financial institutions ("Wrapper Providers") that are rated, at the
time of purchase, in one of the top two long-term rating categories by Moody's
or S&P. A wrapper agreement is a derivative instrument that is designed to
protect the portfolio from investment losses and under most circumstances permit
the Fund to maintain a constant NAV per share. There is no active trading market
for Wrapper Agreements, and none is expected to develop; therefore, they are
considered illiquid.
A default by the issuer of a Portfolio security or a Wrapper Provider on its
obligation may result in a decrease in the value of the Portfolio assets. The
Wrapper Agreements generally do not protect the Portfolio from loss if an issuer
of Portfolio securities defaults on payments of interest or principal.
Additionally, a Fund shareholder may realize more or less than the actual
investment return on the Portfolio securities depending upon the timing of the
shareholder's purchases and redemption of shares, as well as those of other
shareholders.
NOTE 5--FUTURES CONTRACTS
A summary of obligations under these financial instruments at September 30, 1999
is as follows:
<TABLE>
<CAPTION>
Unrealized
Appreciation
Types of Futures Expiration Contracts Position Market Value (Depreciation)
- --------------------------------- ----------------- --------- -------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Japanese Topix Index Futures December 10, 1999 2 Long $ 281,259 $ 976
British FTSE 100 Index Futures December 18, 1999 3 Long 300,375 (5,469)
DAX Index Futures December 17, 1999 3 Long 411,874 (25,367)
Toronto 35 Index Futures December 23, 1999 1 Long 137,060 (3,452)
Australian SPI Index Futures December 31, 1999 1 Long 47,022 (524)
CAC 40 Euro Index Futures December 31, 1999 (4) Short (196,106) 446
Long Gilt Bond Futures December 22, 1999 (1) Short (175,186) 6,286
Canadian Government Bond Futures December 31, 1999 (9) Short (753,238) (3,182)
Euro Bond Futures December 9, 1999 (1) Short (112,719) 487
Japanese Bond Futures March 10, 2000 (1) Short (1,239,643) (19,587)
Australian Bond Futures December 16, 1999 (5) Short (706,093) (2,260)
U.S. Treasury Note Futures December 22, 1999 (6) Short (660,750) (2,707)
----------- --------
Total $(2,666,145) $(54,353)
=========== ========
</TABLE>
NOTE 6--FORWARD FOREIGN CURRENCY CONTRACTS
As of September 30, 1999, the PreservationPlus Income Portfolio had the
following open forward foreign currency contracts:
<TABLE>
<CAPTION>
Net Unrealized
Appreciation
Contracts In Exchange For Settlement Date Value (US$) (Depreciation) (US$)
- ------------------------------------------------------------------------------------------------------------------------------------
Sales
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Australian Dollar 606,000 US Dollar 389,815 l0/7/99 $395,639 $ (5,824)
Canadian Dollar 829,000 US Dollar 556,219 10/6/99 564,906 (8,687)
Japanese Yen 59,746,000 US Dollar 550,274 10/7/99 561,681 (11,407)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Sales (25,918)
- ------------------------------------------------------------------------------------------------------------------------------------
Purchases
- ------------------------------------------------------------------------------------------------------------------------------------
Euro Dollar 130,000 US Dollar 139,136 10/7/99 $139,035 (101)
British Pound 92,000 US Dollar 147,942 10/7/99 151,432 3,490
- ------------------------------------------------------------------------------------------------------------------------------------
Total Purchases 3,389
- ------------------------------------------------------------------------------------------------------------------------------------
Net Unrealized Depreciation $ (22,529)
</TABLE>
- --------------------------------------------------------------------------------
14
<PAGE> 16
- --------------------------------------------------------------------------------
BT PreservationPlus Income Portfolio
REPORT OF INDEPENDENT AUDITORS
The Shareholders and Board of Trustees
BT PreservationPlus Income Portfolio
We have audited the accompanying statements of assets and liabilities, including
the schedule of portfolio investments, ~of
BT PreservationPlus Income Portfolio (the "Portfolio") as of September 30, 1999,
and the related statement of operations, statement of changes in net assets, and
financial highlights for the period December 23, 1998 (commencement of
operations) through September 30, 1999. These financial statements and financial
highlights are the responsibility of the Portfolio's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit.
We conducted our audit 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 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 securities owned
as of September 30, 1999, by correspondence with the Portfolio's custodian and
brokers. 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 audit provides 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 BT
PreservationPlus Income Portfolio at September 30, 1999, and the results of its
operations, the changes in its net assets and its financial highlights for the
period December 23, 1998 (commencement of operations) through September 30,
1999, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Philadedphia, Pennsylvania
November 8, 1999
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16
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17
<PAGE> 19
THE SECURITY GROUP OF SECURITY FUNDS
MUTUAL FUNDS OFFICERS AND DIRECTORS
Security Growth and Income Fund DIRECTORS
Security Equity Fund
- Equity Series Donald A. Chubb, Jr.
- Global Series John D. Cleland
- Total Return Series Penny A. Lumpkin
- Social Awareness Series Mark L. Morris, Jr., D.V.M.
- Value Series Maynard F. Oliverius
- Small Company Series James R. Schmank
- Enhanced Index Series
- International Series OFFICERS
- Select 25 Series
John D. Cleland, President
Security Ultra Fund James R. Schmank, Vice President
Security Income Fund Steven M. Bowser, Vice President
- Corporate Bond Series David Eshnaur, Vice President
- U.S. Government Series Thomas A. Swank, Vice President
- Limited Maturity Bond Series Amy J. Lee, Secretary
- High Yield Series Christopher D. Swickard, Assistant Secretary
- Capital Preservation Series Brenda M. Harwood, Treasurer
Security Municipal Bond 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.
- -----------------------------------
[LOGO] SECURITY DISTRIBUTIORS, INC.
- -----------------------------------
700 SW Harrison St.
Topeka, KS 66636-0001
