SECURITY FUNDS
ANNUAL REPORT
December 31, 1998
o SECURITY INCOME FUND
--Corporate Bond
Series
--U.S. Government
Series
--Limited Maturity
Bond Series
--High Yield Series
o SECURITY MUNICIPAL BOND FUND
o SECURITY CASH FUND
[LOGO]SECURITY DISTRIBUTORS, INC.
A Member of The Security Benefit
Group of Companies
<PAGE>
PRESIDENT'S LETTER
SECURITY FUNDS
February 15, 1999
[PICTURE OF JOHN CLELAND]
John Cleland
TO OUR SHAREHOLDERS:
The fixed income markets in 1998 continued to benefit from declining
inflationary pressures in the United States. The thirty-year Treasury bond began
the year yielding 5.92% and closed December 31, 1998 at 5.09%, having dipped as
low as 4.72% in October. In addition to favorable inflation reports, bonds were
also positively impacted by the "flight to quality" precipitated by the Asian
financial crisis and the economic meltdown in Russia, and reinforced by the
difficulties encountered by the U.S. hedge fund firm Long Term Capital
Management.
THE EURO AS A RESERVE CURRENCY
While we do not anticipate any significant increase in inflation in 1999, we
believe we are not likely to see the declines of last year again simply because
at today's current levels there is little room for additional improvement. We
also expect to see competition emerge for the U.S. dollar as the currency of
choice for world reserves as the new European currency, the euro, replaces
individual currencies of the eleven European Monetary Union countries. This may
precipitate liquidations of some U.S. Treasury holdings on the parts of foreign
central banks taking positions in new euro-denominated bonds, bringing some
pressure on the U.S. Treasury market early in the year.
YIELD SPREADS MAY NARROW
We also believe that yield spreads between Treasury issues and corporate bonds
of corresponding maturities may narrow in 1999 as the crisis atmosphere
surrounding the global economic scene recedes from investors' minds. This spread
narrowing may well lead to opportunities for investors in both the high grade
and the noninvestment grade sectors of the corporate bond market.
Tax exempt yields are particularly favorable at this time for those investors
who desire income exempt from federal income taxes. Our newest fixed-income
subadvisor group, Salomon Brothers Asset Management, has done an exemplary job
managing our municipal bond portfolio since joining our fund family in May.
VOLATILITY REMAINS IN THE INVESTMENT PICTURE
In our view volatility will continue to be an ever-present component of the
fixed income markets as rapidly changing global economic, political, and
monetary factors affect the investor psychology in varying degrees. We remind
our investor audience that a long-term investment horizon helps even out the
effects of security price swings generated by changing conditions that plague
day-to-day markets.
As always, we appreciate your continuing investments in the Security Funds. We
invite your comments and questions at any time.
Sincerely,
/s/ JOHN CLELAND
John Cleland, President
The Security Funds
1
<PAGE>
MANAGER'S COMMENTARY
SECURITY FUNDS
February 15, 1999
[PICTURE OF STEVEN M. BOWSER]
Steven M. Bowser,
Portfolio Manager
SECURITY INCOME
FUND
CORPORATE BOND SERIES
The Corporate Bond Series of Security Income Fund enjoyed positive returns in
1998, increasing to 7.56% over the twelve months and besting its Lipper peer
group average return of 7.47%.1 The return lagged the benchmark Lehman Brothers
Corporate Bond Index, which rose 8.57% over the same time period.
THE HIGH YIELD COMPONENT HURT
Overall performance was negatively impacted by weak returns in the high yield
bond markets. Investors, fearful of eroding global economic conditions, poured
money into the U.S. Treasury bond markets where they perceived a greater degree
of safety. Lesser-quality issues in general did not benefit from these strong
cash inflows. The weakness in emerging market countries after the economic
meltdown in Russia cast a pall on high yield bonds as well. We maintained a
weighting of about 15% of portfolio assets in high yield issues throughout the
year.
Within this sector we saw lower-than-average results in the gaming industry,
including our bonds issued by MGM Grand, Inc. This sector is being weakened by
perceived overcapacity as many new casinos are being built. Our investment-grade
casino operator Mirage Resorts, Inc. suffered as well.
BETTER-QUALITY BONDS WERE STRONGER PERFORMERS
Treasury and Federal agency securities in the portfolio benefited from the
flight to quality that hurt high yield bonds. Federal agencies FNMA and Freddie
Mac brought several multibillion dollar issues to market in 1998. These issues
have come to trade as well as Treasury bonds because their large size gives them
a high degree of liquidity. Our holdings of FNMA and Freddie Mac bonds
appreciated in price when investors recognized this liquidity feature and
quickly pushed yields down closer to those on comparable-maturity Treasuries.
Many of our investment grade corporate bonds performed well. Telecommunication
companies such as MCI WorldCom, Inc. and Cable & Wireless PLC gained along with
their counterparts in the stock markets. Defensive industries like supermarkets,
food processors, and beverage manufacturers generally outperform during periods
of market volatility. We hold bonds of this type, including companies such as
Safeway Inc., Archer-Daniels-Midland Company, and Anheuser-Busch Companies,
Inc., and benefited from owning them in the third quarter when the equity
markets weakened.
Industries with ties to the building industry fared well in the low interest
rate climate that prevailed in 1998. Cement producer Lafarge Corporation was
among those companies whose bonds rose in value along with their stock, as did
the securities of building supplies retailer Lowe's Companies, Inc.
LOOKING AHEAD TO 1999
Although we expect interest rates to decline a bit further in the early months
of 1999, we believe volatility will continue to be higher than average in the
fixed income markets. We plan to keep the duration of the portfolio close to
that of the benchmark index. We will continue to hold the current
mortgage-backed securities holdings in the portfolio as we enter the new year,
but don't anticipate increasing this sector any time soon. New corporate bond
issues which come to market in multi-billion sizes are important to add to the
portfolio, because they quickly become a primary component of the benchmark
indexes.
Steven M. Bowser
Portfolio Manager
(1) Performance figures are based on Class A shares and do not reflect deduction
of the sales charge.
2
<PAGE>
MANAGER'S COMMENTARY
SECURITY FUNDS
February 15, 1999
CORPORATE BOND SERIES
12-31-98
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
Corporate Lehman Brothers
Date Bond Series Corporate Bond Index
---------- ----------- --------------------
12/31/1988 10,000 10,000
12/31/1989 10,479 11,409
12/31/1990 11,166 12,214
12/31/1991 12,967 14,476
12/31/1992 14,128 15,734
12/31/1993 16,065 17,648
12/31/1994 14,737 16,956
12/31/1995 17,423 20,726
12/31/1996 17,332 21,406
12/31/1997 19,004 23,596
12/31/1998 20,442 25,622
$10,000 OVER TEN YEARS
This chart assumes a $10,000 investment in Class A shares of Corporate Bond
Series on December 31, 1988, and reflects deduction of the 4.75% sales load. On
December 31, 1998, the value of your investment in the Series' Class A shares
(with dividends reinvested) would have grown to $20,442. By comparison, the same
$10,000 investment would have grown to $25,622 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, 1998
CLASS A SHARES CLASS B SHARES
1 Year 2.48% 1 Year 1.87%
5 Years 3.81% 5 Years 3.76%
10 Years 7.41% Since Inception 3.06%
(10-19-93)
The performance data above represents past performance which is not predictive
of future results. For Class A shares these figures reflect deduction of the
maximum sales charge of 4.75%. For Class B shares the figures reflect deduction
of the maximum contingent deferred sales charge, ranging from 5% in the first
year to 0% in the sixth and following years. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
3
<PAGE>
MANAGER'S COMMENTARY
SECURITY FUNDS
February 15, 1999
[PICTURE OF STEVEN M. BOWSER]
Steven M. Bowser,
Portfolio Manager
U.S. GOVERNMENT SERIES
The U.S. Government Series of Security Income Fund had a successful year in
1998, returning 9.09% compared with its Lipper peer group average of 8.07% for
the year.1 The return, however, was slightly below that of the benchmark Lehman
Brothers U.S. Government Index, which rose 9.85% in the same time period.
"SPREAD PRODUCT" ADDED TO TOTAL RETURN
So-called "spread product," bonds in sectors other than the U.S. Treasury market
which trade on the basis of their yield differential ("spread") over the yield
of Treasuries, includes corporate bonds, federal agency securities,
mortgage-backed and asset-backed issues. The extra yield provided by our agency
holdings such as our longer-maturity Fannie Mae and Freddie Mac bonds as well as
by our mortgage-backed GNMA issues helped boost total return in 1998.
We carefully select GNMA mortgage pools for inclusion in the portfolio which are
older, seasoned issues because they have existed through several interest rate
cycles and have already experienced many of the mortgage payoffs and
refinancings that will occur. The remaining mortgages in the pool are generally
stable, providing more reliable performance and more favorable returns than
newer unseasoned mortgage pools.
TREASURIES REAP "FLIGHT TO QUALITY" BENEFITS
The U.S. Treasury market saw prices rise throughout the year as investors fled
from southeast Asian and emerging markets countries into the relative safety of
the U.S. stock and bond markets. Our thirty-year Treasury bonds performed very
well; however, their positive effect was offset by the weaker results of our
Treasury issues maturing in two to four years.
At the close of the year the portfolio consisted of approximately 50% Federal
agency bonds, about 25% U.S. Treasury securities, and the remaining 25% in
mortgage-backed securities. The overall coupon average for the holdings was
6.93%, higher than the 6.69% average in the benchmark index.
OUR EXPECTATIONS FOR 1999
We believe spread product will continue to outperform in the coming year. Bond
yields have the possibility of declining further in the early months of the year
as inflation remains very well under control. We do not expect the Federal
Reserve to raise interest rates for some time, as a strong U.S. economy will be
essential to achieve a global economic recovery. We plan to maintain our current
sector balance into the first part of 1999, holding our average duration,
currently 5.7 years, close to that of the benchmark index.
Steven M. Bowser
Portfolio Manager
(1) Performance figures are based on Class A shares and do not reflect deduction
of the sales charge. Fee waivers reduced Fund expenses and in the absence of
such waivers, the performance quoted would be reduced.
4
<PAGE>
MANAGER'S COMMENTARY
SECURITY FUNDS
February 15, 1999
U.S. GOVERNMENT SERIES
12-31-98
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
U.S. Lehman Brothers
Government Government
Date Series Bond Index
---------- ----------- ---------------
12/31/1988 10,000 10,000
12/31/1989 10,650 11,423
12/31/1990 11,693 12,420
12/31/1991 13,306 14,324
12/31/1992 13,963 15,359
12/31/1993 15,602 16,995
12/31/1994 14,581 16,422
12/31/1995 17,768 19,433
12/31/1996 17,992 19,972
12/31/1997 19,648 21,885
12/31/1998 21,435 24,040
$10,000 OVER TEN YEARS
This chart assumes a $10,000 investment in Class A shares of U.S. Government
Series on December 31, 1988, and reflects deduction of the 4.75% sales load. On
December 31, 1998, the value of your investment in the Series' Class A shares
(with dividends reinvested) would have grown to $21,435. By comparison, the same
$10,000 investment would have grown to $24,040 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, 1998
CLASS A SHARES CLASS B SHARES
1 Year 3.91% 1 Year 3.00%
5 Years 5.52% 5 Year 5.14%
10 Years 7.92% Since Inception 4.53%
(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. Fee waivers reduced expenses of the
Fund 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
<PAGE>
MANAGER'S COMMENTARY
SECURITY FUNDS
February 15, 1999
[PICTURE OF STEVEN M. BOWSER]
Steven M. Bowser,
Portfolio Manager
LIMITED MATURITY
BOND SERIES
The Limited Maturity Bond Series of Security Income Fund completed the year with
an attractive 7.52% total return, besting its Lipper peer group average of
7.25%.1 Although longer maturities were the stars in 1998, benefiting from
declining interest rates and a surge of "flight to quality" money,
intermediate-maturity bonds held their own quite well.
TREASURY AND INVESTMENT GRADE CORPORATE PERFORMANCE
The U.S. Treasury bonds and Federal agency securities were the strongest
performers in the portfolio in the year just completed as investors fled
unstable market conditions in many foreign countries and poured money into the
U.S. Treasury markets. At year end about 10% of portfolio assets were invested
in these combined sectors.
Within the corporate bond arena telecommunication issues did very well,
following the trend of their stock counterparts. During periods of market
volatility defensive industries such as food processors, supermarkets, and
beverage manufacturers usually outperform also. We experienced good results in
these industries with bonds issued by such companies as Safeway Inc., Cargill,
Incorporated, Archer-Daniels-Midland Company, and Anheuser-Busch Companies, Inc.
SOME WEAKER SECTORS
Our high yield bond holdings underperformed their investment grade counterparts
as investors showed preference for better quality during the year. We averaged
an approximate 20% weighting in high yield issues, including gaming industry
holding MGM Grand, Inc.. This industry is suffering from investors' perceptions
of overcapacity as many new casinos are being built. Our position in
investment-grade casino operator Mirage Resorts, Inc. was hurt also.
Our mortgage-backed securities, about 20% of portfolio assets, didn't perform as
well as Treasuries, either. In periods of declining interest rates these
holdings can experience rapid prepayments as mortgageholders elect to refinance
or prepay their mortgage balances.
A third component which was less attractive in 1998 was Yankee bonds, securities
issued by foreign corporations but denominated in dollars for the U.S.
investment market. The cloud of economic weakness in Asia, followed by turmoil
in Russia and other emerging markets countries, frightened many investors away
from non-U.S. corporate issues. We held only about 8% of the portfolio in Yankee
bonds during the year.
THE 1999 OUTLOOK
We believe interest rates could fall further in the early months of 1999.
Although the mid-range maturities of the various bond market sectors tend to
underperform in periods of falling interest rates, they conversely are likely to
outperform longer-maturity bonds when rates begin rising. For investors seeking
less volatility than is usual in long maturities, the Limited Maturity Series
can be an appropriate investment vehicle.
Steven M. Bowser
Portfolio Manager
(1)Performance figures are based on Class A shares and do not reflect deduction
of the sales charge. Fee waivers reduced Fund expenses and in the absence of
such waivers, the performance quoted would be reduced.
6
<PAGE>
MANAGER'S COMMENTARY
SECURITY FUNDS
February 15, 1999
LIMITED MATURITY BOND SERIES
12-31-98
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
Limited Lehman Brothers
Maturity Intermediate Term
Date Bond Series Corporate Bond Index
---------- ----------- --------------------
01/17/1995 10,000 10,000
07/31/1995 10,280 11,180
01/31/1996 10,868 12,012
07/31/1996 10,741 11,822
01/31/1997 10,978 12,426
07/31/1997 11,583 13,092
01/31/1998 12,101 13,591
07/31/1998 12,399 13,947
12/31/1998 12,837 14,525
$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, 1998, the value of your investment in the
Series' Class A shares (with dividends reinvested) would have grown to $12,837.
By comparison, the same $10,000 investment would have grown to $14,525 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, 1998
CLASS A SHARES CLASS B SHARES
1 Year 2.45% 1 Year 1.37%
Since Inception 6.60% Since Inception 6.20%
(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. Fee waivers reduced expenses of the
Fund 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
SECURITY FUNDS
February 15, 1999
[PICTURE OF DAVID ESHNAUR]
David Eshnaur,
Portfolio Manager
HIGH YIELD SERIES
Although the high yield bond markets in general experienced difficulties in
1998, the High Yield Series of Security Income Fund was a strong performer
within its Lipper peer group, returning +4.98% compared with the peer group
average of -0.44% for the year.1 The benchmark Lehman Brothers Corporate High
Yield Index turned in a +1.60% total return for the same period.
STRATEGIES THAT HELPED PERFORMANCE
Our continuing focus on the upper tiers of the high yield bond universe, those
issues rated in the BB and B categories by Standard & Poor's rating agency,
served us well. The BB component of the Lehman Brothers High Yield Index rose
5.13% for the year, a much better performance than the overall benchmark index.
Additionally, our limited exposure to the emerging markets countries was
beneficial in a year in which the collapse of Russia's economy painted a black
cloud over other emerging markets.
CERTAIN SECTORS WERE STRONG POSITIVES
In a year in which mortgage interest rates continued to decline, the
homebuilding industry prospered. Our bonds issued by Toll Brothers, Inc., a
builder of luxury homes in six regions of the United States, performed
exceptionally well. Among the other "stars" within the sector were single-family
and multifamily homebuilders NVR, Inc. and Hovnanian Enterprises, Inc., and
residential homebuilders MDC Holdings, Inc. and D.R. Horton, Inc.
Our media noncable company sector was overweighted in the portfolio, boosting
total return because of the industry's favorable performance. We moved our
primary emphasis within the sector midyear from television to radio broadcasting
companies, believing that television revenues could be reduced because of the
lack of campaign advertising in the coming nonelection year. We also hold
newspaper companies such as printer and distributer Hollinger, Inc. and Big
Flower Press, a company which provides advertising inserts, specialized direct
mail products, and other advertising-related items.
Other positives included the steel industry, where we focused on companies
including minimill operator Ameristeel Corporation and AK Steel Corporation
which produces high quality steel for use in the automotive and appliance
industries. The steel companies which focus on higher-market and niche items
outperformed those firms which produce more commodity-oriented products.
STILL A FEW NEGATIVES
The worst performing industry in the high yield bond arena in 1998 was energy.
Although we held a few issues in this sector, we benefited by holding a smaller
weighting than the benchmark index. Uncertainties regarding new Medicare
regulations held down performance in the health care industry, particularly
damaging long-term care and acute care companies we owned such as Tenet
Healthcare Corporation, Multicare Companies Inc., and Genesis Health Ventures,
Inc.
One holding in particular was a strong negative in the portfolio. Golden Books
Family Entertainment, Inc., the publisher of the well-known children's books,
defaulted on their coupon interest payment in October. The company is now going
through a restructuring process; although it will take some time to complete, we
feel that there is still value in the bonds and are willing to be patient while
the firm recovers.
OUR HIGH YIELD MARKET OUTLOOK
We believe interest rates have further room to fall in the early months of 1999.
This will continue to strengthen the bond markets in general, and the positive
effect that lower interest rates have on corporate earnings will be an
additional benefit to the high yield sector of the bond markets. We plan to
maintain our focus on the higher-quality credits within the high yield sector as
we have done the past year.
David Eshnaur
Portfolio Manager
(1) Performance figures are based on Class A shares and do not reflect deduction
of the sales charge. Fee waivers reduced Fund expenses and in the absence of
such waivers, the performance quoted would be reduced.
8
<PAGE>
MANAGER'S COMMENTARY
SECURITY FUNDS
February 15, 1999
HIGH YIELD SERIES
12-31-98
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
High Yield Lehman Brothers
Date Series High Yield Index
---------- ----------- ----------------
08/15/1996 10,000 10,000
03/01/1997 10,288 10,833
06/01/1997 10,424 11,336
09/01/1997 10,825 11,852
03/01/1998 11,540 12,488
06/01/1998 11,716 12,626
09/01/1998 11,491 12,317
12/31/1998 11,828 12,579
$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, 1998, the value of your investment in the Series'
Class A shares (with dividends reinvested) would have grown to $11,828. By
comparison, the same $10,000 investment would have grown to $12,579 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 covers the universe of fixed rate,
noninvestment grade debt. Investments cannot be made directly in an index.
HIGH YIELD SERIES
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1998
CLASS A SHARES CLASS B SHARES
1 Year 0.01% 1 Year -0.79%
Since Inception 7.28% Since Inception 7.06%
(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. Fee waivers reduced expenses of the
Fund 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
SECURITY FUNDS
February 15, 1999
[PICTURE OF ROBERT AMODEO],
Picture Of Robert Amodeo,
Portfolio Manager
SECURITY MUNICIPAL
BOND FUND
We are very pleased to provide this annual update to the shareholders of
Security Municipal Bond Fund for the year ended December 31, 1998. The Fund
rewarded its shareholders with a total return of 6.05% for the year, easily
outpacing its Lipper peer group average of 5.32%.1
THE ECONOMY IN 1998
During 1998 the U.S. economy benefited from a strong housing market, low
unemployment, relatively high consumer confidence and benign inflation. The
domestic economy was prosperous throughout the year despite downward pressures
from abroad. Toward the second half of the year negative shocks waved through
financial markets. Unwinding of leveraged positions amid deteriorating liquidity
caused a significant amount of dislocation across financial markets. Panicked
investors sent credit spreads (risk premiums) to levels normally seen only
during recessions.
During this period municipal bonds fared relatively well. The liquidity for
municipal securities did not wane nor did credit spreads widen. The Federal
Reserve boldly intervened, cutting its short term lending rate by a total of 75
basis points during the year. The reduction of short term interest rates by the
Federal Reserve added both liquidity and stability to financial markets.
POSITIVE ECONOMIC EFFECTS ON THE MUNICIPAL MARKET
Many geographic regions benefited from a stronger domestic economy as evidenced
by the higher number of municipal credit rating upgrades versus downgrades.
Municipal bonds posted positive returns during the year despite the issuance of
a near-record amount of debt. State and local governments issued approximately
$284 billion of debt during 1998, just shy of 1993's record pace of $292
billion. Strong demand from property and casualty insurance companies,
corporations and mutual funds helped absorb the supply. Additionally, generous
yields on municipals when compared with their taxable counterparts in the fixed
income markets sparked demand from non-traditional buyers of municipal bonds.
THE PORTFOLIO AT YEAR'S END
At December 31, 1998 the Fund consisted of twenty-one issues scattered across
thirteen different states. It had an average maturity of 13.7 years and a
duration of slightly more than eight years. The portfolio's'credit quality
remains high, with an average rating of AA as rated by Standard & Poor's rating
agency. The industry sector weightings are well diversified, with the greatest
emphasis in education, water and sewer, and general obligation bonds.
Robert Amodeo
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
SECURITY FUNDS
February 15, 1999
MUNICIPAL BOND FUND
12-31-98
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
Municipal Lehman Brothers
Date Bond Fund Municipal Bond Index
---------- ----------- --------------------
12/31/1988 10,000 10,000
12/31/1989 9,947 11,079
12/31/1990 10,563 11,886
12/31/1991 11,803 13,330
12/31/1992 12,663 14,505
12/31/1993 14,224 16,286
12/31/1994 13,046 15,444
12/31/1995 15,066 18,140
12/31/1996 15,444 18,946
12/31/1997 16,720 20,691
12/31/1998 17,732 21,900
$10,000 OVER TEN YEARS
This chart assumes a $10,000 investment in Class A shares of Municipal Bond Fund
on December 31, 1988, and reflects deduction of the 4.75% sales load. On
December 31, 1998, the value of your investment in the Series' Class A shares
(with dividends reinvested) would have grown to $17,732. By comparison, the same
$10,000 investment would have grown to $21,900 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.
MUNICIPAL BOND FUND
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1998
CLASS A SHARES CLASS B SHARES
1 Year 1.04% 1 Year -0.16%
5 Years 3.57% 5 Years 3.02%
10 Years 5.90% Since Inception 2.68%
(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
SECURITY FUNDS
February 15, 1999
SECURITY CASH FUND
Money market portfolios such as Security Cash Fund saw their returns decline in
1998 as the Federal Reserve's policy-setting Open Market Committee cut its
short-term interest rate target three times in the last four months of the year.
Your fund returned 4.74% for the year, close to its Lipper peer group average of
4.84%.
DECLINING RATES LATE IN THE YEAR
The Federal Reserve Open Market Committee instituted its first rate cut in late
September, dropping its target Fed funds rate 25 basis points to 5.25%. Federal
Reserve Chairman Alan Greenspan then surprised the markets with a
between-meetings cut October 15, lowering both the Fed funds and discount rates
another 25 basis points. The final Fed funds rate cut of 25 basis points
occurred at the regular Open Market Committee meeting November 17.
These moves were taken primarily to help stabilize global economic conditions.
The policy makers were aided in their decision-making process by the continuing
low inflation rates in the United States. As money market interest rates fell in
response to the rate decreases, we intensified our efforts to find acceptable
instruments with higher yields than the traditional commercial paper markets
offered.
FUNDING AGREEMENTS ARE INCLUDED IN PORTFOLIO ASSETS
Securities known as "funding agreements", also called guaranteed investment
contracts, were approved by the Board of Directors of Security Cash Fund early
in the year for inclusion in the portfolio. These agreements are contracts which
are issued by insurance companies, and are liabilities backed by the issuing
company's general account assets. The Fund only purchases funding agreements
whose issues have credit ratings in the top tier as rated by major rating
agencies.
At year end funding agreements made up 8.0% of portfolio assets, and at the time
of purchase yielded twelve to fifteen basis points (0.12% to 0.15%) more than
comparable commercial paper. Although this may seem like a small amount, in the
short-term securities market these differences can help keep our fund
competitive with its peers.
PORTFOLIO COMPOSITION AT YEAR END
Commercial paper remained the largest component of assets in 1998, representing
65% of the portfolio at year end. Small Business Administration pools were about
5.8% of assets, and Federal agency securities approximately 27%. The portfolio
had an average maturity of 52 days, slightly less then the IBC Donoghue Money
Market Fund average of 54 days.
LOOKING TO 1999
Although we do not expect inflation to pick up dramatically in 1999 it is likely
to increase modestly from the below 2% levels experienced the past two years.
If this should happen we could see interest rates move back up somewhat. As
short-term rates change, our relatively short maturity structure will enable us
to adjust quickly to prevailing market levels.
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, 1998
SECURITY INCOME FUND
CORPORATE BOND SERIES
PRINCIPAL
AMOUNT OR
NUMBER MARKET
CORPORATE BONDS OF SHARES VALUE
- --------------------------------------------------------------------------------
AUTOMOTIVE - 3.1%
Chrysler Corporation,
7.45% - 2027 .............................. $1,200,000 $1,383,000
Federal-Mogul Corporation,
7.875% - 2010 ............................. $ 250,000 246,875
Mark IV Industries, Inc.,
7.75% - 2006 .............................. $ 250,000 243,125
----------
1,873,000
BANKING - 1.8%
Washington Mutual Capital I,
8.375% - 2027(1) .......................... $1,000,000 1,115,000
BEVERAGE - 2.0%
Anheuser-Busch Companies, Inc.,
7.10% - 2007 .............................. $1,150,000 1,260,687
BROKERAGE - 2.1%
SI Financing Trust, Inc.,
9.50% - 2026(1) ........................... 48,000 1,278,000
BUILDING MATERIALS - 1.0%
LaFarge Corporation,
6.375% - 2005 ............................. $ 600,000 618,750
CONSTRUCTION MACHINERY - 0.8%
AGCO Corporation,
8.50% - 2006 .............................. $ 250,000 239,375
Titan Wheel International,
8.75% - 2007 .............................. $ 250,000 240,000
----------
479,375
ENTERTAINMENT - 1.7%
Paramount Communications,
7.50% - 2023 .............................. $1,000,000 1,018,750
FINANCIAL COMPANIES - 10.1%
American RE Capital,
8.50% - 2025(1) ........................... 23,000 595,125
Associates Corporation, N.A.,
7.55% - 2006 .............................. $1,100,000 1,227,875
CB Richard Ellis Service,
8.875% - 2006 ............................. $ 250,000 244,375
Countrywide Capital Industries, Inc.,
8.00% - 2026(1) ........................... $1,000,000 1,033,750
General Electric Capital Corporation,
8.625% - 2008 ............................. $ 950,000 1,167,313
Morgan Stanley Dean Witter Discover
& Company, 6.875% - 2007 ....................... $1,050,000 1,102,500
PNC Funding Corporation,
7.75% - 2004 .............................. $ 700,000 770,000
----------
6,140,938
PRINCIPAL MARKET
CORPORATE BONDS (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
FOOD - 2.5%
Archer-Daniels-Midland Company,
8.875% - 2011 ............................. $1,000,000 $1,250,000
Chiquita Brands International, Inc.,
10.25% - 2006 ............................. 250,000 260,313
----------
1,510,313
GAMING - 2.3%
Boyd Gaming Corporation,
9.25% - 2003 .............................. 250,000 257,500
MGM Grand, Inc., 6.95% - 2005 .................. 600,000 583,500
Mirage Resorts, Inc.,
6.625% - 2005 ............................. 600,000 588,000
----------
1,429,000
HOME CONSTRUCTION - 0.4%
D.R. Horton, Inc.,
8.375% - 2004 ............................. 50,000 49,625
MDC Holdings, 8.375% - 2008 .................... 125,000 122,187
Toll Corporation, 7.75% - 2007 ................. 75,000 74,250
----------
246,062
INDEPENDENT ENERGY - 1.1%
Seagull Energy Corporation,
8.625% - 2005 ............................. 700,000 687,750
INSURANCE - 1.6%
Hartford Life, Inc., 7.10% - 2007 .............. 925,000 995,531
INTEGRATED ENERGY - 0.8%
Occidental Petroleum,
6.24% - 2000 .............................. 500,000 502,500
LODGING - 0.8%
HMH Properties, 7.875% - 2008 .................. 250,000 243,437
Prime Hospitality, 9.25% - 2006 ................ 250,000 259,063
----------
502,500
MEDIA - CABLE - 4.6%
Century Communications,
8.375% - 2007 ............................. 250,000 268,750
Comcast Corporation,
9.125% - 2006 ............................. 100,000 105,500
CSC Holdings, Inc.,
7.875% - 2018 ............................. 250,000 253,437
Jones Intercable, Inc.,
7.625% - 2008 ............................. 250,000 261,875
Lenfest Communications,
10.50% - 2006 ............................. 250,000 292,500
Rogers Cablesystems,
9.625% - 2002 ............................. 750,000 809,063
Rogers Communications, Inc.,
9.125% - 2006 ............................. 375,000 390,000
Westinghouse Electric Company,
8.375% - 2002 ............................. 400,000 426,500
----------
2,807,625
SEE ACCOMPANYING NOTES.
13
<PAGE>
SCHEDULE OF INVESTMENTS
December 31, 1998
SECURITY INCOME FUND
CORPORATE BOND SERIES (CONTINUED)
PRINCIPAL MARKET
CORPORATE BONDS (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
MEDIA - NON-CABLE - 0.9%
Big Flower Press Holdings, Inc.,
8.875% - 2007 ............................. $ 250,000 $ 252,500
K-III Communications Corporation,
10.25% - 2004 ............................. 300,000 312,375
----------
564,875
METALS - 0.9%
AK Steel, 10.75% - 2004 ........................ 500,000 520,000
OIL FIELD SERVICES - 1.9%
Transocean Offshore, Inc.,
8.00% - 2027 .............................. 1,000,000 1,178,750
RETAILERS - 2.5%
Lowe's Companies, Inc.,
6.70% - 2007 .............................. 850,000 891,438
Mattel, Inc., 6.125% - 2005 .................... 300,000 307,500
Specialty Retailers, Inc.,
8.50% - 2005 .............................. 125,000 112,187
Zale Corporation, 8.50% - 2007 ................. 250,000 242,500
----------
1,553,625
SERVICES - 0.8%
Loewen Group International, Inc.,
8.25% - 2003 .............................. 550,000 460,625
TECHNOLOGY - 0.9%
Dell Computer Corporation,
6.55% - 2008 .............................. 500,000 518,750
TELECOMMUNICATIONS - 4.8%
Cable & Wireless Communication PLC,
6.75% - 2008 .............................. 250,000 254,687
Comcast Cellular Holdings, Inc.,
9.50% - 2007 .............................. 150,000 159,750
GTE Corporation, 7.51% - 2009 .................. 1,000,000 1,142,500
MCI WorldCom, Inc.,
6.40% - 2005 .............................. 600,000 622,500
Southwestern Bell,
6.625% - 2007 ............................. 675,000 726,469
----------
2,905,906
TRANSPORTATION - AIRLINES - 4.1%
Southwest Airlines Company,
7.875% - 2007 ............................. 1,075,000 1,230,875
United Airlines, 11.21% - 2014 ................. 950,000 1,283,688
----------
2,514,563
TRANSPORTATION - OTHER - 0.4%
Allied Holdings, Inc.,
8.625% - 2007 ............................. 250,000 250,625
UTILITIES - ELECTRIC - 0.9%
AES Corporation, 10.25% - 2006 ................. 500,000 541,250
UTILITIES - NATURAL GAS - 1.8%
MCN Investment Corporation,
6.32% - 2003 .............................. $ 50,000 $ 51,375
National Fuel Gas Company,
6.303% - 2008 ............................. 1,000,000 1,042,500
----------
1,093,875
YANKEE - CORPORATE - 9.1%
ABN AMRO Bank NV,
7.55% - 2006 .............................. 1,000,000 1,093,750
Abbey National PLC,
6.69% - 2005 .............................. 1,125,000 1,182,656
BCH Cayman Islands, Ltd.,
7.70% - 2006 .............................. 1,000,000 1,086,250
Panamerican Beverages, Inc.,
8.125% - 2003 ............................. 1,200,000 1,227,000
Santander Financial Issuances, Ltd.,
7.00% - 2006 .............................. 900,000 945,000
----------
5,534,656
YANKEE - CANADIAN - 1.9%
Quebecor Printing Capital,
7.25% - 2007 .............................. 1,100,000 1,159,125
----------
Total corporate bonds - 67.6% .................. 41,262,406
MORTGAGE BACKED SECURITIES
- --------------------------
U.S. GOVERNMENT AGENCIES - 13.3%
Federal Home Loan Mortgage Corporation,
FHLMC, 5.125% - 2008 ................... 4,150,000 4,113,480
FHR 112 H, 8.80% - 2020 CMO ........... 105,869 106,068
FHR 1311 J, 7.50% - 2021 CMO ........... 1,050,000 1,076,008
FHR 1930 AB, 7.50% - 2023 CMO .......... 726,657 735,668
Federal National Mortgage Association,
FNR 1994-79 B,
7.00% - 2019 CMO ..................... 1,100,000 1,116,016
FNR 1990-52 D,
9.30% - 2019 CMO ..................... 121,557 121,649
FNR 1990-108 G,
7.00% - 2020 CMO ..................... 842,408 862,087
----------
8,130,976
U.S. GOVERNMENT SECURITIES - 5.7%
Government National Mortgage Association,
GNMA #313107,
7.00% - 2022 .............................. 852,206 874,372
GNMA #352022,
7.00% - 2023 .............................. 806,752 824,936
GNMA #369303,
7.00% - 2023 .............................. 832,504 851,144
GNMA II #2445,
8.00% - 2027 .............................. 392,133 405,611
GNR 1997-10 B,
7.50% - 2019 CMO .......................... 541,554 545,567
----------
3,501,630
SEE ACCOMPANYING NOTES.
14
<PAGE>
SCHEDULE OF INVESTMENTS
December 31, 1998
SECURITY INCOME FUND
CORPORATE BOND SERIES (CONTINUED)
MORTGAGE BACKED SECURITIES PRINCIPAL MARKET
(CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
NON-AGENCY SECURITIES - 4.1%
Chase Capital Mortgage Securities
Company, 1997-1B,
7.37% - 2007 CMO ........................... $1,500,000 $1,609,725
Chase Capital Mortgage Securities
Company, 1998-1B,
6.56% - 2008 CMO ........................... 500,000 513,675
General Electric Capital Mortgage
Services, Inc., 1992-7A A6,
8.30% -2023 ................................ 317,340 326,562
----------
2,449,962
----------
Total mortgage backed securities -23.1% ........ 14,082,568
GOVERNMENT SECURITIES
- ---------------------
U.S. GOVERNMENT SECURITIES - 7.8%
U.S. Treasury Bond,
6.00% - 2026 .............................. 2,000,000 2,186,560
6.625% - 2027 ............................. 1,000,000 1,180,310
U.S. Department of Housing &
Urban Development,
6.93% - 2013 .............................. 1,290,000 1,401,998
----------
Total government securities - 7.8% ............. 4,768,868
----------
Total investments - 98.5% ...................... 60,113,842
Cash and other assets,
less liabilities - 1.5% ........................ 922,473
----------
Total net assets - 100.0% ...................... $61,036,315
==========
SECURITY INCOME FUND
U.S. GOVERNMENT SERIES
U.S. GOVERNMENT & GOVERNMENT AGENCY SECURITIES
- ----------------------------------------------
FEDERAL HOME LOAN BANKS - 3.1%
5.19% - 2003 ........................... $ 500,000 $ 502,275
FEDERAL HOME LOAN MORTGAGE CORPORATION - 10.7%
7.125% - 2001 .......................... 700,000 707,266
5.125% - 2008 .......................... 850,000 842,520
8.29% - 2015 ........................... 150,000 190,276
-----------
1,740,062
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 21.8%
5.45% - 2003 ........................... 400,000 406,160
7.40% - 2004 ........................... 600,000 661,452
7.49% - 2005 ........................... 285,000 317,889
7.65% - 2005 ........................... 250,000 281,023
7.875% - 2005 .......................... 500,000 568,350
6.00% - 2008 ........................... 750,000 793,403
6.16% - 2028 ........................... 500,000 531,180
-----------
3,559,457
FINANCING CORPORATION - 4.5%
9.65% - 2018 ........................... $ 500,000 $ 738,750
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 23.5%
GNMA #2320 7.00% - 2006 ................ 407,673 415,301
GNMA #328618 7.00% - 2022 .............. 230,669 235,845
GNMA II #1260 7.00% - 2023 ............ 187,471 190,909
GNMA II #1849 8.50% - 2024 ............ 275,886 291,479
GNMA #347017 7.00% - 2024 .............. 434,669 444,553
GNMA #371006 7.00% - 2024 .............. 245,327 250,854
GNMA #371012 7.00% - 2024 .............. 448,588 458,776
GNMA #411643 7.75% - 2025 .............. 349,130 360,735
GNMA II #2270 8.00% - 2026 ............. 412,331 425,794
GNMA II #9365 8.25% - 2026 ............. 200,339 210,240
GNMA #365608 7.50% - 2034 .............. 517,894 551,817
-----------
3,836,303
PRIVATE EXPORT FUNDING CORPORATION - 3.0%
6.31% - 2004 ........................... 100,000 106,500
7.01% - 2004 ........................... 350,000 382,812
-----------
489,312
STUDENT LOAN MARKETING ASSOCIATION - 3.1%
9.25% - 2004 ........................... 420,000 499,918
TENNESSEE VALLEY AUTHORITY - 6.6%
6.00% - 2013 ........................... 500,000 523,125
6.75% - 2025 ........................... 500,000 564,375
-----------
1,087,500
U.S. TREASURY NOTES - 7.4%
5.50% - 2003 ........................... 750,000 774,007
6.50% - 2006 ........................... 100,000 111,196
5.625% - 2008 .......................... 300,000 320,145
-----------
1,205,348
U.S. TREASURY BONDS - 10.9%
8.75% - 2008 ........................... 600,000 700,116
6.00% - 2026 ........................... 1,000,000 1,093,280
-----------
1,793,396
-----------
Total investments - 94.6% ...................... 15,452,321
Cash and other assets,
less liabilities - 5.4% ........................ 879,047
-----------
Total net assets - 100.0% ...................... $16,331,368
===========
SEE ACCOMPANYING NOTES.
15
<PAGE>
SCHEDULE OF INVESTMENTS
December 31, 1998
SECURITY INCOME FUND
LIMITED MATURITY BOND SERIES
PRINCIPAL
AMOUNT OR
NUMBER MARKET
CORPORATE BONDS OF SHARES VALUE
- --------------------------------------------------------------------------------
AUTOMOTIVE - 1.1%
Chrysler Corporation,
7.45% - 2027 .............................. $ 50,000 $ 57,625
Federal-Mogul Corporation,
7.875% - 2010 ............................. $ 25,000 24,688
----------
82,313
BANKING - 3.4%
B.F. Saul REIT, 9.75% - 2008 ................... $ 13,000 11,928
Bank of New York, Inc.,
6.50% - 2003 .............................. $ 100,000 104,000
First Union Corporation,
8.125% - 2002 ............................. $ 110,000 120,175
Golden State Holdings,
7.125% - 2005 ............................. $ 25,000 24,906
----------
261,009
BEVERAGE - 1.4%
Anheuser-Busch Companies, Inc.,
7.10% - 2007 .............................. $ 100,000 109,625
BROKERAGE - 1.6%
SI Financing Trust, Inc.,
9.50% - 2026(1) ........................... 4,560 121,410
BUILDING MATERIALS - 1.0%
LaFarge Corporation,
6.375% - 2005 ............................. $ 50,000 51,562
Nortek, Inc., 8.875% - 2008 .................... $ 25,000 25,375
----------
76,937
CONSTRUCTION MACHINERY - 0.6%
AGCO Corporation,
8.50% - 2006 .............................. $ 25,000 23,938
Columbus McKinnon Corporation,
8.50% - 2008 .............................. $ 25,000 23,562
----------
47,500
CONSUMER CYCLICALS - OTHER - 0.2%
American ECO Corporation,
9.625% - 2008 ............................. $ 25,000 16,812
CONSUMER PRODUCTS - 0.7%
Shop Vac Corporation,
10.625% - 2003 ............................ $ 50,000 54,437
ENERGY - OTHER - 0.3%
P&L Coal Holdings Corporation,
8.875% - 2008 ............................. $ 25,000 25,500
ENERGY - REFINING - 2.2%
Vastar Resources, Inc.,
8.75% - 2005 .............................. $ 150,000 172,875
FINANCIAL COMPANIES - 10.2%
American RE Capital,
8.50% - 2025(1) ........................... 3,900 $ 100,913
Associates Corporation, N.A.,
7.55% - 2006 .............................. $ 100,000 111,625
CB Richard Ellis Service,
8.875% - 2006 ............................. $ 25,000 24,437
General Electric Capital Corporation,
8.625% - 2008 ............................. $ 100,000 122,875
Household Financial Corporation,
8.00% - 2004 .............................. $ 150,000 165,938
International Lease Finance Corporation,
8.25% - 2000 .............................. $ 150,000 154,313
Morgan Stanley Dean Witter Discover
& Company, 6.875% - 2007 ....................... $ 100,000 105,000
----------
785,101
FINANCE - OTHER - 1.3%
EOP Operating Limited Partnership, REIT,
6.625% - 2005 ............................. $ 100,000 100,375
FOOD - 2.6%
Archer-Daniels-Midland Company,
8.875% - 2011 ............................. $ 100,000 125,000
Cargill Corporation,
6.15% - 2008 .............................. $ 75,000 78,375
----------
203,375
GAMING - 3.1%
Boyd Gaming Corporation,
9.25% - 2003 .............................. $ 25,000 25,750
Circus Circus Enterprise,
9.25% - 2005 .............................. $ 25,000 25,531
Harrah's Operating, Inc.,
7.875% - 2005 ............................. $ 25,000 25,062
MGM Grand, Inc., 6.95% - 2005 .................. $ 75,000 72,938
Mirage Resorts, Inc.,6.625% - 2005 ............. $ 65,000 63,700
Park Place Entertainment,
7.875% - 2005 ............................. $ 25,000 25,000
----------
237,981
HEALTH CARE - 0.3%
Tenet Healthcare, 8.125% - 2008 ................ $ 25,000 25,844
HOME CONSTRUCTION - 0.3%
MDC Holdings, 8.375% - 2008 .................... $ 12,000 11,730
Toll Corporation, 7.75% - 2007 ................. $ 13,000 12,870
----------
24,600
INDEPENDENT ENERGY - 0.7%
Seagull Energy Corporation,
8.625% - 2005 ............................. $ 50,000 49,125
SEE ACCOMPANYING NOTES.
16
<PAGE>
SCHEDULE OF INVESTMENTS
December 31, 1998
SECURITY INCOME FUND
LIMITED MATURITY BOND SERIES (CONTINUED)
PRINCIPAL MARKET
CORPORATE BONDS (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
INSURANCE - 1.4%
Hartford Life, Inc.,
7.10% - 2007 .............................. $ 100,000 $ 107,625
LODGING - 0.3%
HMH Properties, 7.875% - 2008 .................. 25,000 24,344
MEDIA - CABLE - 3.7%
Adelphia Communications,
8.375% - 2008 ............................. 25,000 25,875
Century Communications,
8.375% - 2007 ............................. 25,000 26,875
Jones Intercable, Inc.,
7.625% - 2008 ............................. 25,000 26,187
Lenfest Communications,
10.50% - 2006 ............................. 25,000 29,250
Rogers Communications, Inc.,
9.125% - 2006 ............................. 75,000 78,000
Time-Warner Entertainment
Corporation, 10.15% - 2012 ..................... 50,000 68,688
Westinghouse Electric Company,
8.375% - 2002 ............................. 25,000 26,656
----------
281,531
MEDIA - NON-CABLE - 3.4%
Big Flower Press Holdings, Inc.,
8.875% - 2007 ............................. 25,000 25,250
Heritage Media Corporation,
8.75% - 2006 .............................. 100,000 107,500
K-III Communications Corporation,
10.25% - 2004 ............................. 75,000 78,094
USA Networks,
6.75% - 2005 .............................. 25,000 24,937
Viacom, Inc., 8.00% - 2006 ..................... 25,000 26,000
----------
261,781
METALS - 0.6%
Ameristeel Corporation,
8.75% - 2008 .............................. 25,000 24,188
WHX Corporation, 10.5% - 2005 .................. 25,000 22,937
----------
47,125
PACKAGING - 0.3%
Ball Corporation, 7.75% - 2006 ................. 25,000 26,250
RETAILERS - 4.9%
Lowe's Companies, Inc.,
6.70% - 2007 .............................. 100,000 104,875
Sears & Roebuck Company,
6.41% - 2001 .............................. 150,000 152,625
Specialty Retailers, Inc.,
8.50% - 2005 .............................. 25,000 22,438
Zale Corporation, 8.50% - 2007 ................. 100,000 97,000
----------
376,938
SERVICES - 0.9%
Loewen Group International, Inc.,
8.25% - 2003 .............................. $ 50,000 $ 41,875
Protection One Alarm,
7.375% - 2005 ............................. 25,000 25,812
----------
67,687
SUPERMARKETS - 1.3%
Safeway, Inc., 6.50% - 2008 .................... 100,000 102,750
TELECOMMUNICATIONS - 6.7%
Cable & Wireless Communication PLC,
6.75% - 2008 .............................. 50,000 50,938
Centennial Cellular,
8.875% - 2001 ............................. 100,000 104,875
Comcast Cellular Holdings, Inc.,
9.50% - 2007 .............................. 25,000 26,625
Mastec, Inc., 7.75% - 2008 ..................... 25,000 23,812
MCI WorldCom, Inc.,
6.40% - 2005 .............................. 100,000 103,750
New Jersey Bell, 6.625% - 2008 ................. 100,000 100,875
Southwestern Bell,
6.625% - 2007 ............................. 100,000 107,625
----------
518,500
TEXTILES - 0.3%
Westpoint Stevens, Inc.,
7.875% - 2008 ............................. 25,000 25,625
TOBACCO- 1.3%
Dimon, Inc., 8.875% - 2006 ..................... 50,000 48,750
Standard Commercial Tobacco
Corporation, 8.875% - 2005 ..................... 50,000 49,062
----------
97,812
TRANSPORTATION - AIRLINES - 2.8%
Southwest Airlines Company,
7.875% - 2007 ............................. 100,000 114,500
United Airlines, 11.21% - 2014 ................. 75,000 101,344
----------
215,844
TRANSPORTATION - OTHER - 0.3%
Allied Holdings, Inc.,
8.625% - 2007 ............................. 25,000 25,062
UTILITIES - ELECTRIC - 3.7%
Calpine Corporation,
8.75% - 2007 .............................. 25,000 26,188
Cinergy Global Resources,
6.20% - 2008 .............................. 100,000 101,000
Consolidated Edison Company,
6.625% - 2002 ............................. 150,000 156,000
----------
283,188
SEE ACCOMPANYING NOTES.
17
<PAGE>
SCHEDULE OF INVESTMENTS
December 31, 1998
SECURITY INCOME FUND
LIMITED MATURITY BOND SERIES (CONTINUED)
PRINCIPAL MARKET
CORPORATE BONDS (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
UTILITIES - NATURAL GAS - 2.0%
MCN Investment Corporation,
6.32% - 2003 .............................. $ 150,000 $ 154,125
YANKEE - CORPORATE - 4.1%
ABN AMRO Bank NV,
7.55% - 2006 .............................. 100,000 109,375
Den Danske Bank, 7.40% - 2010 .................. 100,000 106,250
Panamerican Beverages, Inc.,
8.125% - 2003 ............................. 100,000 102,250
----------
317,875
YANKEE - CANADIAN - 1.4%
Quebecor Printing Capital,
7.25% - 2007 .............................. 100,000 105,375
----------
Total corporate bonds - 70.4% .................. 5,434,256
MORTGAGE BACKED SECURITIES
- --------------------------
U.S. GOVERNMENT AGENCIES - 18.0%
Federal Home Loan Banks
FHLB, 5.19% - 2003 ..................... 150,000 150,683
Federal Home Loan Mortgage Corporation,
FHG #42 K, 8.00% - 2024 CMO ............ 186,000 188,096
FHR #1102 G, 8.00% - 2020 CMO .......... 27,417 27,450
FHR #1104 K, 8.50% - 2020 CMO .......... 3,716 3,709
FHR #1311 J, 7.50% - 2021 CMO .......... 100,000 102,477
FHR #1930 AB, 7.50% - 2023 CMO ......... 53,431 54,093
Federal National Mortgage Association,
FNR 1992-98 PJ,
7.50% - 2019 CMO ...................... 52,061 52,059
FNR 1992-143 J,
7.00% - 2020 CMO ...................... 74,050 73,995
FNMA, 5.45% - 2003 ..................... 100,000 101,540
FNMA, 6.00% - 2008 ..................... 600,000 634,722
----------
1,388,824
U.S. GOVERNMENT SECURITIES - 2.4%
Government National Mortgage Association,
GNMA #369303,
7.00% - 2023 .......................... 83,250 85,114
GNMA II #2445,
8.00% - 2027 .......................... 94,112 97,347
----------
182,461
NON-AGENCY SECURITIES - 0.8%
General Electric Capital Mortgage
Services, Inc., 1992-7A A6
8.30% - 2023 .............................. 29,480 30,336
Global Rated Eligible Asset Trust,
7.33% - 2006 .............................. 45,371 34,028
----------
64,364
----------
Total mortgage backed
securities - 21.2% ........................... 1,635,649
PRINCIPAL
AMOUNT OR
NUMBER MARKET
GOVERNMENT SECURITIES OF SHARES VALUE
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES - 4.1%
U.S. Treasury Note,
6.50% - 2006 .............................. $ 100,000 $ 111,196
6.625% - 2027 ............................. $ 125,000 147,539
U.S. Department of Housing and
Urban Development,
6.93% - 2013 ............................... $ 50,000 54,341
----------
313,076
CANADIAN GOVERNMENT AGENCIES - 2.2%
Province of Quebec,
8.625% - 2005 ............................. $ 150,000 171,750
----------
Total government securities - 6.3% ............. 484,826
----------
Total investments - 97.9% ...................... 7,554,731
Cash and other assets, less
liabilities - 2.1% ........................ 164,607
----------
Total net assets - 100.0% ...................... $7,719,338
==========
SECURITY INCOME FUND
HIGH YIELD SERIES
CORPORATE BONDS
- ---------------
AEROSPACE/DEFENSE - 1.7%
Burke Industries, Inc., 10.0% - 2007 ........... $ 175,000 $ 171,937
AUTOMOTIVE - 1.0%
Federal-Mogul Corporation,
7.875% - 2010 ............................. $ 100,000 98,750
BANKING - 2.7%
BF Saul REIT, 9.75% - 2008 ..................... $ 75,000 68,812
FCB/NC Capital Trust,
8.05% - 2028 .............................. $ 50,000 54,062
Homeside, Inc., 11.25% - 2003 .................. $ 125,000 147,031
__________
269,905
BEVERAGES - 1.0%
Delta Beverage Group,
9.75% - 2003 .............................. $ 100,000 104,250
Brokerage - 1.3%
SI Financing Trust, Inc.,
9.50% - 2026(1) ........................... 5,000 133,125
BUILDING MATERIALS - 2.4%
Knoll, Inc., 10.875% - 2006 .................... $ 100,000 110,000
Nortek, Inc., 8.875% - 2008 .................... $ 125,000 126,875
__________
236,875
CHEMICALS - 0.3%
Envirodyne Industries, Inc.,
12.00% - 2000 ............................. $ 34,000 34,042
SEE ACCOMPANYING NOTES.
18
<PAGE>
SCHEDULE OF INVESTMENTS
December 31, 1998
SECURITY INCOME FUND
HIGH YIELD SERIES (CONTINUED)
PRINCIPAL MARKET
CORPORATE BONDS (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
CONSTRUCTION MACHINERY - 3.9%
AGCO Corporation,
8.50% - 2006 .............................. $ 100,000 $ 95,750
Columbus McKinnon Corporation,
8.50% - 2008 .............................. 125,000 117,812
Navistar International,
8.00% - 2008 .............................. 75,000 76,219
Titan Wheel International, Inc.,
8.75% - 2007 .............................. 100,000 96,000
----------
385,781
CONSUMER CYCLICAL - OTHER - 0.8%
American ECO Corporation,
9.625% - 2008 ............................. 125,000 84,062
CONSUMER PRODUCTS - 2.0%
Revlon Consumer Products,
8.125% - 2006 ............................. 100,000 94,250
Shop Vac Corporation,
10.625% - 2003 ............................ 100,000 108,875
----------
203,125
ELECTRIC - UTILITY - 4.3%
AES Corporation, 10.25% - 2006 ................. 100,000 108,250
Cal Energy Company, Inc.,
9.50% - 2006 .............................. 100,000 110,750
Calpine Corporation,
8.75% - 2007 .............................. 125,000 130,937
Niagara Mohawk Power,
7.75% - 2008 .............................. 75,000 81,188
----------
431,125
ENERGY - INDEPENDENT - 2.0%
COHO Energy, Inc.,
8.875% - 2007 ............................. 150,000 125,625
Seagull Energy Corporation,
8.625% - 2005 ............................. 75,000 73,688
----------
199,313
ENERGY - OTHER - 0.8%
P & L Coal Holdings Corporation,
8.875% - 2008 ............................. 75,000 76,500
ENERGY - REFINING - 2.5%
Crown Central Petroleum,
10.875% - 2005 ............................ 140,000 125,650
Giant Industries, Inc.,
9.00% - 2007 .............................. 125,000 122,188
----------
247,838
ENTERTAINMENT - 1.6%
Empress Entertainment, Inc.,
8.125% - 2006 ............................. 75,000 75,188
Premier Parks, 9.75% - 2007 .................... 75,000 81,656
----------
156,844
FINANCIAL COMPANIES - 1.0%
Dollar Financial Group, Inc.,
10.875% - 2006 ............................ $ 100,000 $ 100,875
FOOD - 2.0%
Chiquita Brands International, Inc.,
10.25% - 2006 ............................. 100,000 104,125
Nash Finch Company,
8.50% - 2008 .............................. 100,000 95,125
----------
199,250
GAMING - 5.7%
Circus Circus Enterprise,
9.25% - 2005 .............................. 75,000 76,594
Harrahs Operating, Inc.,
7.875% - 2005 ............................. 150,000 150,375
MGM Grand, Inc., 6.95% - 2005 .................. 125,000 121,562
Mirage Resorts, Inc.,
6.625% - 2005 ............................. 125,000 122,500
Park Place Entertainment,
7.875% - 2005 ............................. 100,000 100,000
----------
571,031
HEALTH CARE - 4.2%
Genesis Health Ventures,
9.875% - 2009 ............................. 100,000 95,750
Multicare Companies, Inc.,
9.00% - 2007 .............................. 75,000 71,063
Packard Bioscience Company,
9.375% - 2007 ............................. 80,000 75,700
Prime Medical Services,
8.75% - 2008 .............................. 75,000 72,000
Tenet Healthcare Corporation,
8.125% - 2008 ............................. 100,000 103,375
----------
417,888
HOME CONSTRUCTION - 1.7%
D.R. Horton, Inc.,
8.375% - 2004 ............................. 25,000 24,813
Hovnanian Enterprise,
9.75% - 2005 .............................. 100,000 95,000
Toll Corporation, 7.75% - 2007 ................. 50,000 49,500
----------
169,313
INSURANCE - 0.8%
GENAMERICA Capital, Inc.,
8.525% - 2027 ............................. 75,000 79,406
LODGING - 1.7%
HMH Properties,
7.875% - 2008 ............................. 175,000 170,406
SEE ACCOMPANYING NOTES.
19
<PAGE>
SCHEDULE OF INVESTMENTS
December 31, 1998
SECURITY INCOME FUND
HIGH YIELD SERIES (CONTINUED)
PRINCIPAL MARKET
CORPORATE BONDS (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
MEDIA - CABLE - 10.0%
Adelphia Communications Corporation,
9.50% - 2004 .............................. $ 100,000 $ 106,000
8.375% - 2008 ............................. 100,000 103,500
Century Communications,
9.50% - 2005 .............................. 100,000 111,250
8.375% - 2007 ............................. 75,000 80,625
CSC Holdings, Inc.,
7.625% - 2018 ............................. 75,000 75,281
7.875% - 2018 ............................. 25,000 25,344
Diamond Holdings,
9.125% - 2008 ............................. 100,000 95,250
Jones Intercable, Inc.,
7.625% - 2008 ............................. 100,000 104,750
Lenfest Communications,
10.50% - 2006 ............................. 100,000 117,000
Rogers Cablesystems,
9.625% - 2002 ............................. 100,000 107,875
Rogers Communications, Inc.,
9.125% - 2006 ............................. 70,000 72,800
----------
999,675
MEDIA - NONCABLE - 7.9%
Allbritton Communications Company,
9.75% - 2007 .............................. 75,000 79,500
Big Flower Press Holdings, Inc.,
8.875% - 2007 ............................. 75,000 75,750
Golden Books Publishing, Inc.,
7.65% - 2002 .............................. 100,000 31,500
Heritage Media Corporation,
8.75% - 2006 .............................. 100,000 107,500
Hollinger International Publishing, Inc.,
8.625% - 2005 ............................. 25,000 26,469
9.25% - 2006 .............................. 175,000 183,969
K-III Communications Corporation,
10.25% - 2004 ............................. 50,000 52,062
USA Networks, 6.75% - 2005 ..................... 75,000 74,813
Viacom, Inc., 8.00 - 2006 ...................... 150,000 156,000
----------
787,563
METALS - 4.4%
AK Steel Corporation,
10.75% - 2004 ............................. $ 75,000 $ 78,000
Ameristeel Corporation,
8.75% - 2008 .............................. 100,000 96,750
Bulong Operations,
12.50% - 2008 ............................. 75,000 75,000
Simcala, Inc., 9.625% - 2006 ................... 75,000 53,438
Wheeling-Pittsburgh Corporation,
9.25% - 2007 .............................. 100,000 92,750
WHX Corporation, 10.50% - 2005 ................. 50,000 45,875
----------
441,813
PACKAGING & CONTAINERS - 3.9%
Huntsman Packaging Corporation,
9.125% - 2007 ............................. 125,000 124,062
Indesco International, Inc.,
9.75% - 2008 .............................. 150,000 139,875
Plastic Containers, Inc.,
10.0% - 2006 .............................. 125,000 131,094
----------
395,031
RETAILERS - 2.1%
Specialty Retailers, Inc.,
8.50% - 2005 .............................. 125,000 112,187
Zale Corporation, 8.50% - 2007 ................. 100,000 97,000
----------
209,187
SERVICES - 3.0%
Loewen Group, Inc.,
6.70% - 1999 .............................. 100,000 94,250
Protection One Alarm,
7.375% - 2005 ............................. 200,000 206,500
----------
300,750
TELECOMMUNICATIONS - 8.3%
Centennial Cellular,
8.875% - 2001 ............................. 100,000 104,875
Comcast Cellular Holdings, Inc.,
9.50% - 2007 .............................. 125,000 133,125
Mcleodusa, Inc.,
8.375% - 2008 ............................. 150,000 147,750
MJD Communications, Inc.,
9.50% - 2008 .............................. 150,000 148,875
RCN Corporation,
10.0% - 2007 .............................. 225,000 215,438
Satelites Mexicanos, Inc.,
10.125% - 2004 ............................ 100,000 79,750
----------
829,813
SEE ACCOMPANYING NOTES.
20
<PAGE>
SCHEDULE OF INVESTMENTS
December 31, 1998
SECURITY INCOME FUND
HIGH YIELD SERIES (CONTINUED)
PRINCIPAL
AMOUNT OR
NUMBER MARKET
CORPORATE BONDS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
TEXTILES - 2.0%
Delta Mills, Inc., 9.625% - 2007 ............... $ 125,000 $ 122,813
Westpoint Stevens, Inc.,
7.875% - 2008 ............................. $ 75,000 76,875
----------
199,688
TOBACCO - 1.2%
Dimon, Inc., 8.875% - 2006 ..................... $ 50,000 48,750
Standard Commerical Tobacco
Corporation, 8.875% - 2005 ..................... $ 75,000 73,594
----------
122,344
TRANSPORTATION - OTHER - 2.1%
Allied Holdings, Inc.,
8.625% - 2007 ............................. $ 75,000 75,188
Teekay Shipping Corporation,
8.32% - 2008 .............................. $ 135,000 134,156
----------
209,344
----------
Total corporate bonds - 90.3% .................. 9,036,849
PREFERRED STOCKS
- ----------------
BANKS AND CREDIT - 1.0%
California Federal Bank,
9.125% .................................... 4,000 101,250
MEDIA - CABLE - 0.7%
CSC Holdings, Inc., 11.125% .................... 602 66,403
MEDIA - NONCABLE - 0.7%
Primedia, Inc., 10.00% - 2008 .................. 700 72,975
----------
Total preferred stocks - 2.4% .................. 240,628
COMMON STOCKS
- -------------
BROADCAST MEDIA - 0.5%
Infinity Broadcasting
Corporation ............................... 2000 54,750
----------
Total investments - 93.2% ...................... 9,332,227
Cash and other assets,
less liabilities 6.8% ..................... 684,681
----------
Total net assets - 100.0% ...................... $10,016,908
==========
PRINCIPAL MARKET
MUNICIPAL BONDS AMOUNT VALUE
- --------------------------------------------------------------------------------
CALIFORNIA - 11.1%
Los Angeles County, California Metro
Authority, 5.625% - 2018 .................. $1,000,000 $1,051,010
Los Angeles, California Wastewater
System Revenue, 6.00% - 2014 .............. 1,100,000 1,207,690
----------
2,258,700
GEORGIA - 3.9%
Fulton County, Georgia School District,
5.25% - 2014 .............................. 750,000 801,563
ILLINOIS - 10.9%
Winnebago County, Illinois School
District No. 122, 0% - 2014 ............... 2,155,000 1,028,883
DuPage County, Illinois Stormwater
Project Refunding, 5.60% - 2021 ........... 1,000,000 1,090,770
Joliet, Illinois Regional Port District,
variable rate - 2024(4) ................... 100,000 100,000
----------
2,219,653
INDIANA - 1.0%
Jasper County, Indiana Pollution Control
Revenue Bond, variable rate - 2013(4) ..... 200,000 200,000
MICHIGAN - 3.9%
Detroit, Michigan School District,
5.25% - 2017 .............................. 750,000 784,897
MISSOURI - 2.7%
Kansas City, Missouri Port Authority
Riverfront Park, 5.75% - 2005 ............. 500,000 542,140
NEVADA - 5.1%
Clark County, Nevada School District,
Series A, 5.50% - 2016 .................... 1,000,000 1,041,820
NEW JERSEY - 5.5%
North Brunswick Township, New Jersey
Board of Education,
6.30% - 2013 .............................. 1,000,000 1,122,950
NEW YORK - 10.9%
New York State Environmental Facilities
Corporation Pollution Control
Revenue, 5.75% - 2009 ..................... 1,000,000 1,123,300
New York State Dorm Authority Revenue
North Shore, 5.50% - 2012 ................. 1,000,000 1,092,580
----------
2,215,880
PENNSYLVANIA - 5.3%
Delaware Valley, Pennsylvania
Regional Financial Authority,
5.50% - 2028 .............................. 1,000,000 1,088,860
Rhode Island - 5.4%
Rhode Island General Obligation,
5.30% - 2008 .............................. 1,030,000 1,107,487
SEE ACCOMPANYING NOTES.
21
<PAGE>
SCHEDULE OF INVESTMENTS
December 31, 1998
SECURITY MUNICIPAL BOND FUND (CONTINUED)
PRINCIPAL MARKET
MUNICIPAL BONDS (CONTINUED) AMOUNT VALUE
- --------------------------------------------------------------------------------
TEXAS - 15.5%
University of Texas,
4.80% - 2009 .............................. $1,000,000 $1,042,540
Houston, Texas Water & Sewer
System Revenue, Series A,
6.20% - 2020 .............................. 1,000,000 1,131,230
Bell County, Texas Health Facilities
Development, 5.00% - 2016 ...................... 1,000,000 994,220
----------
3,167,990
WASHINGTON - 17.0%
Washington Public Power Supply
System Revenue Nuclear Project #2,
6.30% - 2012 .............................. 1,000,000 1,156,970
King County, Washington Sewer
Revenue, Series A,
6.25% - 2034 .............................. 1,000,000 1,121,820
Island County, Washington School
District South Whidbey,
6.75% - 2007 .............................. 1,000,000 1,186,510
----------
3,465,300
----------
Total investments - 98.2% ...................... 20,017,240
Cash and other assets,less liabilities - 1.8% .. 361,882
----------
Total net assets - 100.0% ...................... $20,379,122
==========
SECURITY CASH FUND
COMMERCIAL PAPER
- ----------------
BEVERAGES - 4.5%
Coca Cola Company .............................. $1,800,000
5.13%, 1-12-99 ............................ $ 998,433
5.03%, 2-22-99 ............................ 794,187
Pepsi-Cola, Inc.,
5.10% - 1-13-99 ........................... 1,000,000 998,300
----------
2,790,920
BROKERAGE - 4.2%
Bear Stearns Companies, Inc.,
5.13%, 2-19-99 ............................ 1,130,000 1,122,110
Merrill Lynch & Company, Inc., ................. 1,491,000
5.14%, 1-15-99 ............................ 608,781
5.05%, 3-16-99 ............................ 278,083
5.02%, 3-24-99 ............................ 593,139
----------
2,602,113
BUSINESS SERVICES - 3.5%
General Electric Capital Corporation,
5.13%, 1-25-99 ............................ $1,000,000 $ 996,580
Nordstrom Credit, Inc.,
5.15%, 2-05-99 ............................ 1,200,000 1,193,991
----------
2,190,571
COMBINATION GAS & ELECTRIC - 2.5%
Dayton Power & Light Company, .................. 1,530,000
5.20%, 1-19-99 ............................ 997,400
5.03%, 3-08-99 ............................ 277,417
5.08%, 3-23-99 ............................ 247,143
----------
1,521,960
ELECTRIC UTILITIES - 11.5%
Carolina Power & Light Company, ................ 550,000
5.13%, 2-03-99 ............................ 318,495
5.10%, 2-26-99 ............................ 228,175
CLECO Corporation, ............................. 2,000,000
5.25%, 1-05-99 ............................ 999,417
5.30%, 1-05-99 ............................ 999,412
Florida Power Corporation,
5.25%, 1-12-99 ............................ 2,000,000 1,996,792
Progress Capital Holdings, Inc.,
5.25%, 1-21-99 ............................ 1,600,000 1,595,333
Southern California Edison Company,
5.18%, 1-14-99 ............................ 1,000,000 998,129
----------
7,135,753
ELECTRICAL EQUIPMENT - 2.1%
General Electric Company,
5.01%, 1-29-99 ............................ 1,300,000 1,294,934
ELECTRONICS - 4.8%
AVNET, Inc., ................................... 2,700,000
5.25%, 1-13-99 ............................ 1,197,900
5.35%, 1-15-99 ............................ 1,496,879
Emerson Electric Company,
5.05%, 2-11-99 ............................ 280,000 278,390
----------
2,973,169
ENTERTAINMENT - 4.1%
Walt Disney Company, The ....................... 2,520,000
5.05%, 1-14-99 ............................ 1,417,410
5.08%, 1-21-99 ............................ 1,096,896
----------
2,514,306
FINANCIAL SERVICES - 5.5%
Toyota Motor Credit Corporation, ............... 3,400,000
5.09%, 1-08-99 ............................ 2,797,229
5.06%, 2-05-99 ............................ 597,048
----------
3,394,277
SEE ACCOMPANYING NOTES.
22
<PAGE>
SCHEDULE OF INVESTMENTS
December 31, 1998
SECURITY CASH FUND (CONTINUED)
PRINCIPAL MARKET
COMMERCIAL PAPER (CONTINUED) AMOUNT VALUE
- -------------------------------------------------------------------------------
FOOD SERVICES - 3.6%
General Mills, 5.12%, 1-11-99 .................. $2,200,000 $2,196,871
LEASING - 3.5%
International Lease Finance Corporation,
5.05%, 3-04-99 ............................ 2,190,000 2,170,953
METALS & MINERALS - 1.9%
Aluminum Company of America,
5.15%, 2-12-99 ............................ 1,200,000 1,192,790
NATURAL GAS - 2.7%
Consolidated Natural Gas Company,
5.12%, 1-28-99 ............................ 1,650,000 1,643,664
NUCLEAR- 1.1%
Bayshore Fuel Company,
5.38%, 1-14-99 ............................ 700,000 698,640
PHARMACEUTICALS - 1.0%
Schering Corporation,
5.23%, 2-02-99 ............................ 600,000 597,211
PHOTOGRAPH/IMAGING - 3.2%
Eastman Kodak Company,
5.05%, 1-25-99 ............................ 2,000,000 1,993,267
PUBLISHING - 2.9%
McGraw-Hill Company, Inc., ..................... 1,780,000
5.15%, 2-23-99 ............................ 793,935
5.02%, 3-24-99 ............................ 968,794
----------
1,762,729
TELECOMMUNICATIONS - 2.2%
Bell Atlantic Network Funding
Corporation, 5.22%, 1-06-99 ............... 1,000,000 999,275
BellSouth Telecommunications, Inc.,
5.03%, 2-22-99 ............................ 369,000 366,319
----------
1,365,594
----------
Total commercial paper - 64.8% ................. 40,039,722
U.S. GOVERNMENT & AGENCIES
- --------------------------
FEDERAL HOME LOAN BANK - 3.2%
Federal Home Loan Bank
5.12%, 11-05-99 ........................... 2,000,000 2,000,000
FEDERAL MORTGAGE CORPORATION - 5.5%
Federal Mortgage Corporation
4.5625%, 1-04-99 .......................... 3,400,000 3,398,725
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 18.5%
Federal National Mortgage Association, 11,620,000
4.62367%, 4-01-99 ...................... 3,360,807
4.9185%, 4-05-99 ....................... 2,369,356
4.8159%, 5-19-99 ....................... 1,963,583
4.8261%, 5-25-99 ....................... 1,961,920
4.80583%, 7-01-99 ...................... 1,776,626
----------
11,432,292
U.S. GOVERNMENT & PRINCIPAL MARKET
AGENCIES (CONTINUED) AMOUNT VALUE
- -------------------------------------------------------------------------------
SMALL BUSINESS ASSOCIATION POOLS - 5.8%
#501927, 6.00%, 2017(2) ................ $1,196,863 $1,208,157
#502398, 5.875%, 2018(3) ............... 526,420 528,395
#503152, 5.875%, 2020(3) ............... 636,709 636,709
#503295, 5.75%, 2021(3) ................ 571,359 571,716
#503303, 5.75%, 2021(3) ................ 630,673 631,068
----------
3,576,045
----------
Total U.S. government & agencies -33.0% ........ 20,407,062
MISCELLANEOUS ASSETS
- --------------------
FUNDING AGREEMENTS - 8.1%
Security Life of Denver Insurance
Company, 5.57656%, 2001 ........................ 2,000,000 2,000,000
Travelers Insurance Company,
5.5666%, 8-21-2001 ........................ 3,000,000 3,000,000
----------
5,000,000
----------
Total investments - 105.9% ..................... 65,446,784
Liabilities, less cash and
other assets - (5.9%) ..................... (3,619,201)
----------
Total net assets - 100.0% ...................... $61,827,583
==========
The identified cost of investments owned at December 31, 1998, was the same for
federal income tax and book purposes.
(1)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.
(2)Variable rate security which may be reset the first of each month.
(3)Variable rate security which may be reset the first of each quarter.
(4)Variable rate security which may be reset daily.
SEE ACCOMPANYING NOTES.
23
<PAGE>
BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SECURITY INCOME FUND
-----------------------------------------------------------
U.S. LIMITED HIGH
CORPORATE GOVERNMENT MATURITY YIELD
BOND SERIES SERIES BOND SERIES SERIES
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Investments, at value (identified cost
$58,281,503, $14,974,224, $7,388,517,
$9,452,312, $18,841,592, and
$25,407,062, respectively) ............................. $ 60,113,842 $ 15,452,321 $ 7,554,731 $ 9,332,227
Commercial paper, at amortized cost which
approximates market value .............................. -- -- -- --
Cash ........................................................... 125,015 377,519 56,421 504,451
Receivables:
Fund shares sold ....................................... 57,786 320,453 16 288
Securities sold ........................................ 23,047 -- -- --
Interest ............................................... 932,440 192,007 122,820 211,115
Prepaid expenses ............................................... 17,079 9,917 5,230 8,395
------------ ------------ ------------ ------------
Total assets ........................................... $ 61,269,209 $ 16,352,217 $ 7,739,218 $ 10,056,476
============ ============ ============ ============
LIABILITIES AND NET ASSETS
Liabilities:
Payable for:
Securities purchased ........................... $ -- $ -- $ -- $ --
Fund shares redeemed ........................... 68,827 580 120 620
Dividends payable to shareholders .............. -- -- -- --
Other Liabilities:
Management fees ................................ 25,489 -- -- --
Custodian fees ................................. 762 393 -- 1,051
Transfer and administration fees ............... 15,631 5,782 1,161 1,873
Professional fees .............................. 2,405 3,929 2,987 5,189
12b-1 distribution plan fees ................... 110,235 7,474 14,600 30,740
Miscellaneous fees ............................. 9,545 2,691 1,012 95
------------ ------------ ------------ ------------
Total liabilities ...................... 232,894 20,849 19,880 39,568
Net Assets:
Paid in capital ........................................ 71,263,430 16,626,407 7,556,714 10,134,652
Undistributed net investment income .................... 13,549 2,607 4,202 2,110
Accumulated undistributed net realized
gain (loss) on sale of investments ............. (12,073,003) (775,743) (7,792) 231
Net unrealized appreciation
in value of investments ........................ 1,832,339 478,097 166,214 (120,085)
------------ ------------ ------------ ------------
Net assets ............................. 61,036,315 16,331,368 7,719,338 10,016,908
------------ ------------ ------------ ------------
Total liabilities and net assets $ 61,269,209 $ 16,352,217 $ 7,739,218 $ 10,056,476
============ ============ ============ ============
CLASS "A" SHARES
Capital shares outstanding ............................. 7,427,091 2,554,117 611,971 384,049
Net assets ............................................. $ 53,054,531 $ 12,663,689 $ 6,365,473 $ 5,780,942
Net asset value per share (net assets
divided by shares outstanding) ................. $ 7.14 $ 4.96 $ 10.40 $ 15.05
Add: Selling commission (4.75% of the
offering price) ................................ 0.36 0.25 0.52 0.75
------------ ------------ ------------ ------------
Offering price per share (net asset value
divided by 95.25%) ............................. $ 7.50 $ 5.21 $ 10.92 $ 15.80
============ ============ ============ ============
CLASS "B" SHARES
Capital shares outstanding ............................. 1,110,752 741,215 130,588 282,004
Net assets ............................................. $ 7,981,784 $ 3,667,679 $ 1,353,865 $ 4,235,966
Net asset value per share (net assets
divided by shares outstanding) ................. $ 7.19 $ 4.95 $ 10.37 $ 15.02
============ ============ ============ ============
<CAPTION>
SECURITY SECURITY
MUNICIPAL BOND CASH
FUND FUND
------------ ------------
ASSETS
Investments, at value (identified cost
$58,281,503, $14,974,224, $7,388,517,
$9,452,312, $18,841,592, and
$25,407,062, respectively) ............................. $ 20,017,240 $ 25,407,062
Commercial paper, at amortized cost which
approximates market value .............................. -- 40,039,722
Cash ........................................................... 96,965 170,903
Receivables:
Fund shares sold ....................................... -- 266,203
Securities sold ........................................ -- 29,996
Interest ............................................... 285,858 92,080
Prepaid expenses ............................................... 14,692 18,491
------------ ------------
Total assets ........................................... $ 20,414,755 $ 66,024,457
============ ============
LIABILITIES AND NET ASSETS
Liabilities:
Payable for:
Securities purchased ........................... $ -- $ 3,360,807
Fund shares redeemed ........................... 14,292 558,459
Dividends payable to shareholders .............. -- 231,271
Other Liabilities:
Management fees ................................ 8,756 25,762
Custodian fees ................................. -- 1,000
Transfer and administration fees ............... 2,569 11,439
Professional fees .............................. 2,880 6,936
12b-1 distribution plan fees ................... 1,159 --
Miscellaneous fees ............................. 5,977 1,200
------------ ------------
Total liabilities ...................... 35,633 4,196,874
Net Assets:
Paid in capital ........................................
20,177,765 61,827,583
Undistributed net investment income .................... 290
------------
Accumulated undistributed net realized
gain (loss) on sale of investments ............. (974,581) --
Net unrealized appreciation
in value of investments ........................ 1,175,648 --
------------ ------------
Net assets .............................
20,379,122 61,827,583
------------ ------------
Total liabilities and net assets $ 20,414,755 $ 66,024,457
============ ============
CLASS "A" SHARES
Capital shares outstanding ............................. 1,855,833 61,827,583
Net assets ............................................. $ 19,012,433 $ 61,827,583
Net asset value per share (net assets
divided by shares outstanding) ................. $ 10.24 $ 1.00
Add: Selling commission (4.75% of the
offering price) ................................ 0.51 --
------------ ------------
Offering price per share (net asset value
divided by 95.25%) ............................. $ 10.75 $ 1.00
============ ============
CLASS "B" SHARES
Capital shares outstanding ............................. 133,186 --
Net assets ............................................. $ 1,366,689 --
Net asset value per share (net assets
divided by shares outstanding) ................. $ 10.26 --
============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
24
<PAGE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SECURITY INCOME FUND
-----------------------------------------------------------
U.S. LIMITED HIGH
CORPORATE GOVERNMENT MATURITY YIELD
BOND SERIES SERIES BOND SERIES SERIES
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest .................................................. $ 4,418,686 $ 791,448 $ 498,875 $ 809,041
EXPENSES:
Management fees ........................................... 312,369 60,492 35,063 55,715
Custodian fees ............................................ 6,532 3,639 2,744 8,832
Transfer/maintenance fees ................................. 125,361 44,220 6,177 15,743
Administration fees ....................................... 56,226 10,889 6,311 8,357
Directors' fees ........................................... 8,132 1,179 857 1,774
Professional fees ......................................... 7,262 5,884 5,928 11,445
Reports to shareholders ................................... 10,253 3,322 509 1,838
Registration fees ......................................... 15,897 30,724 27,483 --
Other expenses ............................................ 4,186 844 614 --
12b-1 distribution plan fees .............................. 212,023 46,600 26,062 52,941
----------- ----------- ----------- -----------
758,241 207,793 111,748 156,645
Less: Earnings credits applied ................................... -- -- (2,744) --
Reimbursement of expenses .................................. (34,672) (75,262) (39,398) (55,715)
----------- ----------- ----------- -----------
Total expenses ............................................. 723,569 132,531 69,606 100,930
----------- ----------- ----------- -----------
Net investment income ..................... 3,695,117 658,917 429,269 708,111
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain during the period on
investments ....................................... 1,119,315 184,827 54,799 120,648
Net change in unrealized appreciation
(depreciation) during the period on
investments ....................................... (339,170) 166,956 13,121 (394,063)
----------- ----------- ----------- -----------
Net gain (loss) ................... 780,145 351,783 67,920 (273,415)
----------- ----------- ----------- -----------
Net increase in net assets
resulting from operations $ 4,475,262 $ 1,010,700 $ 497,189 $ 434,696
=========== =========== =========== ===========
<CAPTION>
SECURITY SECURITY
MUNICIPAL BOND CASH
FUND FUND
------------ ------------
INVESTMENT INCOME:
Interest .................................................. $ 1,147,827 $ 3,667,940
EXPENSES:
Management fees ........................................... 113,719 326,960
Custodian fees ............................................ 2,018 5,740
Transfer/maintenance fees ................................. 13,726 125,374
Administration fees ....................................... 20,469 29,803
Directors' fees ........................................... 8,755 8,491
Professional fees ......................................... 6,299 11,239
Reports to shareholders ................................... 7,255 3,061
Registration fees ......................................... 19,430 80,274
Other expenses ............................................ 1,893 --
12b-1 distribution plan fees .............................. 17,095 --
----------- -----------
210,659 590,942
Less: Earnings credits applied ................................... (2,018) --
Reimbursement of expenses .................................. (2,927) --
----------- -----------
Total expenses ............................................. 205,714 590,942
----------- -----------
Net investment income ..................... 942,113 3,076,998
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain during the period on
investments ....................................... 272,376 --
Net change in unrealized appreciation
(depreciation) during the period on
investments ....................................... 131,309 --
----------- -----------
Net gain (loss) ................... 403,685 --
----------- -----------
Net increase in net assets
resulting from operations $ 1,345,798 $ 3,076,998
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
25
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SECURITY INCOME FUND
----------------------------------------------------------------
U.S. LIMITED HIGH
CORPORATE GOVERNMENT MATURITY YIELD
BOND SERIES SERIES BOND SERIES SERIES
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income ................... $ 3,695,117 $ 658,917 $ 429,269 $ 708,111
Net realized gain ....................... 1,119,315 184,827 54,799 120,648
Unrealized appreciation (depreciation)
during the period ............... (339,170) 166,956 13,121 (394,063)
------------- ------------- ------------- -------------
Net increase in net assets
resulting from operations 4,475,262 1,010,700 497,189 434,696
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A ......................... (3,295,442) (558,165) (369,492) (421,676)
Class B ......................... (392,086) (101,909) (59,672) (284,325)
Net realized gain
Class A ......................... -- -- -- (69,754)
Class B ......................... -- -- -- (50,663)
------------- ------------- ------------- -------------
Total distributions to
shareholders .... (3,687,528) (660,074) (429,164) (826,418)
CAPITAL SHARE TRANSACTIONS (A):
Proceeds from sale of shares
Class A ......................... 9,456,996 11,636,842 930,954 1,305,154
Class B ......................... 6,749,469 5,947,155 308,521 725,072
Dividends reinvested
Class A ......................... 2,451,335 496,431 327,974 485,918
Class B ......................... 338,481 96,301 59,625 330,173
Shares redeemed
Class A ......................... (16,052,921) (7,406,532) (441,561) (958,823)
Class B ......................... (5,674,709) (3,532,042) (78,374) (1,090,329)
------------- ------------- ------------- -------------
Net increase (decrease)
from capital share
transactions ............ (2,731,349) 7,238,155 1,107,139 797,165
------------- ------------- ------------- -------------
Total increase (decrease)
in net assets ........ (1,943,615) 7,588,781 1,175,164 405,443
NET ASSETS:
Beginning of year ....................... 62,979,930 8,742,587 6,544,174 9,611,465
------------- ------------- ------------- -------------
End of year ............................. $ 61,036,315 $ 16,331,368 $ 7,719,338 $ 10,016,908
============= ============= ============= =============
Undistributed net investment income
at end of year .......................... $ 13,549 $ 2,607 $ 4,202 $ 2,110
============= ============= ============= =============
(a) Shares issued and redeemed
Shares sold
Class A ......................... 1,328,007 2,375,565 89,736 83,624
Class B ......................... 941,610 1,218,421 29,782 46,914
Dividends reinvested
Class A ......................... 346,774 101,709 31,739 31,457
Class B ......................... 47,576 19,745 5,781 21,420
Shares redeemed
Class A ......................... (2,260,991) (1,513,349) (42,567) (60,714)
Class B ......................... (794,135) (724,045) (7,583) (124,440)
------------- ------------- ------------- -------------
Net increase (decrease).......... (391,159) 1,478,046 106,888 53,712
============= ============= ============= =============
<CAPTION>
SECURITY SECURITY
MUNICIPAL BOND CASH
FUND FUND
------------- -------------
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income ................... $ 942,113 $ 3,076,998
Net realized gain ....................... 272,376 --
Unrealized appreciation (depreciation)
during the period ............... 131,309 --
------------- -------------
Net increase in net assets
resulting from operations 1,345,798 3,076,998
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A ......................... (895,549) (3,076,998)
Class B ......................... (49,226) --
Net realized gain
Class A ......................... -- --
Class B ......................... -- --
------------- -------------
Total distributions to
shareholders .... (944,775) (3,076,998)
CAPITAL SHARE TRANSACTIONS (a):
Proceeds from sale of shares
Class A ......................... 1,206,819 181,678,722
Class B ......................... 228,767 --
Dividends reinvested
Class A ......................... 541,785 2,862,953
Class B ......................... 25,166 --
Shares redeemed
Class A ......................... (5,053,185) (180,154,877)
Class B ......................... (1,268,565) --
------------- -------------
Net increase (decrease)
from capital share
transactions ............ (4,319,213) 4,386,798
------------- -------------
Total increase (decrease)
in net assets ........ (3,918,190) 4,386,798
NET ASSETS:
Beginning of year ....................... 24,297,312 57,440,785
------------- -------------
End of year ............................. $ 20,379,122 $ 61,827,583
============= =============
Undistributed net investment income
at end of year .......................... $ 290 $ --
============= =============
(a) Shares issued and redeemed
Shares sold
Class A ......................... 119,141 181,678,722
Class B ......................... 22,491 --
Dividends reinvested
Class A ......................... 53,431 2,862,953
Class B ......................... 2,480 --
Shares redeemed
Class A ......................... (495,418) (180,154,877)
Class B ......................... (124,440) --
------------- -------------
Net increase (decrease).......... (422,315) 4,386,798
============= =============
</TABLE>
SEE ACCOMPANYING NOTES.
26
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
SECURITY INCOME FUND
----------------------------------------------------------------
U.S. LIMITED HIGH
CORPORATE GOVERNMENT MATURITY YIELD
BOND SERIES SERIES BOND SERIES SERIES
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
FROM OPERATIONS:
Net investment income ................... $ 4,348,326 $ 564,698 $ 428,582 $ 562,155
Net realized gain (loss) ................ (819,146) 17,807 14,159 159,295
Unrealized appreciation (depreciation)
during the period ............... 2,374,236 149,552 89,543 126,911
------------- ------------- ------------- -------------
Net increase in net assets
resulting from operations 5,903,416 732,057 532,284 848,361
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A ......................... (3,949,944) (514,896) (368,619) (321,919)
Class B ......................... (403,170) (46,196) (56,487) (241,725)
Net realized gain
Class A ......................... -- -- -- (67,514)
Class B ......................... -- -- -- (57,795)
------------- ------------- ------------- -------------
Total distributions to
shareholders .... (4,353,114) (561,092) (425,106) (688,953)
CAPITAL SHARE TRANSACTIONS (a):
Proceeds from sale of shares
Class A ......................... 7,162,943 1,566,140 1,371,189 2,272,583
Class B ......................... 4,821,878 684,955 399,599 1,441,420
Dividends reinvested
Class A ......................... 2,918,082 427,733 329,483 389,121
Class B ......................... 363,965 40,597 56,486 298,860
Shares redeemed
Class A ......................... (28,343,679) (2,531,194) (1,243,300) (358,981)
Class B ......................... (6,157,206) (314,008) (175,370) (90,052)
------------- ------------- ------------- -------------
Net increase (decrease)
from capital share
transactions ............ (19,234,017) (125,777) 738,087 3,952,951
------------- ------------- ------------- -------------
Total increase (decrease)
in net assets ........ (17,683,715) 45,188 845,265 4,112,359
NET ASSETS:
Beginning of period ..................... 80,663,645 8,697,399 5,698,909 5,499,106
------------- ------------- ------------- -------------
End of period ........................... $ 62,979,930 $ 8,742,587 $ 6,544,174 $ 9,611,465
============= ============= ============= =============
Undistributed net investment income
at end of period ........................ $ 22,204 $ 3,764 $ 4,097 $ --
============= ============= ============= =============
(a) Shares issued and redeemed
Shares sold
Class A ................. 1,036,267 329,947 136,018 146,171
Class B ................. 691,990 144,444 39,239 91,689
Dividends reinvested
Class A ................. 425,158 90,953 32,458 24,910
Class B ................. 52,774 8,630 5,576 19,160
Shares redeemed
Class A ................. (4,129,146) (535,552) (122,325) (22,867)
Class B ................. (886,785) (66,308) (17,298) (5,669)
------------- ------------- ------------- -------------
Net increase (decrease) . (2,809,742) (27,886) 73,668 253,394
============= ============= ============= =============
<CAPTION>
SECURITY SECURITY
MUNICIPAL BOND CASH
FUND FUND
------------- -------------
INCREASE IN NET ASSETS
FROM OPERATIONS:
Net investment income ................... $ 974,901 $ 2,334,419
Net realized gain (loss) ................ 230,930 --
Unrealized appreciation (depreciation)
during the period ............... 592,486 --
------------- -------------
Net increase in net assets
resulting from operations 1,798,317 2,334,419
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A ......................... (930,144) (2,334,419)
Class B ......................... (47,364) --
Net realized gain
Class A ......................... -- --
Class B ......................... -- --
------------- -------------
Total distributions to
shareholders .... (977,508) (2,334,419)
CAPITAL SHARE TRANSACTIONS (a):
Proceeds from sale of shares
Class A ......................... 2,482,623 234,698,276
Class B ......................... 1,198,639 --
Dividends reinvested
Class A ......................... 493,192 2,203,684
Class B ......................... 31,059 --
Shares redeemed
Class A ......................... (5,087,737) (224,791,899)
Class B ......................... (455,776) --
------------- -------------
Net increase (decrease)
from capital share
transactions ............ (1,338,000) 12,110,061
------------- -------------
Total increase (decrease)
in net assets ........ (517,191) 12,110,061
NET ASSETS:
Beginning of period ..................... 24,814,503 45,330,724
------------- -------------
End of period ........................... $ 24,297,312 $ 57,440,785
============= =============
Undistributed net investment income
at end of period ........................ $ 2,952 $ --
============= =============
(a) Shares issued and redeemed
Shares sold
Class A ................. 251,471 234,698,276
Class B ................. 120,884 --
Dividends reinvested
Class A ................. 49,419 2,203,684
Class B ................. 3,160 --
Shares redeemed
Class A ................. (519,951) (224,791,899)
Class B ................. (46,659) --
------------- -------------
Net increase (decrease) . (141,676) 12,110,061
============= =============
</TABLE>
SEE ACCOMPANYING NOTES.
27
<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
------------------------------------------------------------------------------
1998(b)(c) 1997(c) 1996(c)(e) 1995(c)(e) 1994
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD ........... $ 7.05 $ 6.87 $ 7.39 $ 6.68 $ 7.81
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income ......................... 0.43 0.45 0.47 0.47 0.49
Net Gain (Loss) on Securities
(realized & unrealized) ............... 0.09 0.19 (0.52) 0.71 (1.13)
---------- ---------- ---------- ---------- ----------
Total from Investment Operations .............. 0.52 0.64 (0.05) 1.18 (0.64)
LESS DISTRIBUTIONS
Dividends (from Net Investment Income) ........ (0.43) (0.46) (0.47) (0.47) (0.49)
Distributions (from Capital Gains) ............ -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total Distributions ................... (0.43) (0.46) (0.47) (0.47) (0.49)
---------- ---------- ---------- ---------- ----------
NET ASSET VALUE END OF PERIOD ................. $ 7.14 $ 7.05 $ 6.87 $ 7.39 $ 6.68
========== ========== ========== ========== ==========
TOTAL RETURN (a) .............................. 7.6% 9.7% (0.5%) 18.2% (8.3%)
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) .......... $ 53,055 $ 56,487 $ 73,360 $ 93,701 $ 90,593
Ratio of Expenses to Average Net Assets ....... 1.06% 1.07% 1.01% 1.02% 1.01%
Ratio of Net Investment Income (Loss)
to Average Net Assets ................. 6.01% 6.50% 6.54% 6.62% 6.91%
Portfolio Turnover Rate ....................... 64% 120% 292% 200% 204%
<CAPTION>
CORPORATE BOND SERIES (CLASS B)
FISCAL PERIOD ENDED DECEMBER 31
---------------------------------------------------------------------------
1998 (b)(c) 1997(b)(c) 1996(b)(c)(e) 1995(b)(c)(e) 1994(b)
---------- --------- ------------ ------------ ----------
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD ................ $ 7.09 $ 6.90 $ 7.43 $ 6.71 $ 7.84
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income .............................. 0.37 0.40 0.40 0.40 0.43
Net Gain (Loss) on Securities
(realized & unrealized) .................... 0.10 0.19 (0.52) 0.73 (1.13)
--------- --------- --------- --------- ---------
Total from Investment Operations ................... 0.47 0.59 (0.12) 1.13 (0.70)
LESS DISTRIBUTIONS
Dividends (from Net Investment Income) ............. (0.37) (0.40) (0.41) (0.41) (0.43)
Distributions (from Capital Gains) ................. -- -- -- -- --
--------- --------- --------- --------- ---------
Total Distributions ........................ (0.37) (0.40) (0.41) (0.41) (0.43)
--------- --------- --------- --------- ---------
NET ASSET VALUE END OF PERIOD ...................... $ 7.19 $ 7.09 $ 6.90 $ 7.43 $ 6.71
========= ========= ========= ========= =========
TOTAL RETURN(a) .................................... 6.9% 8.7% (1.4%) 17.3% (9.0%)
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) ............... $ 7,982 $ 6,493 $ 7,303 $ 5,743 $ 3,878
Ratio of Expenses to Average Net Assets ............ 1.85% 1.85% 1.85% 1.85% 1.85%
Ratio of Net Investment Income (Loss)
to Average Net Assets ...................... 5.18% 5.72% 5.70% 5.80% 6.08%
Portfolio Turnover Rate ............................ 64% 120% 292% 200% 204%
</TABLE>
SEE ACCOMPANYING NOTES.
28
<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
----------------------------------------------------------------------------
1998 (b)(c) 1997(b)(c) 1996(b)(c)(e) 1995(b)(c)(e) 1994(b)
---------- ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD ............ $ 4.81 $ 4.71 $ 4.97 $ 4.35 $ 4.97
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income .......................... 0.27 0.32 0.31 0.30 0.30
Net Gain (Loss) on Securities
(realized & unrealized) ................ 0.16 0.10 (0.26) 0.62 (0.62)
---------- ---------- ---------- ---------- ----------
Total from Investment Operations ............... 0.43 0.42 0.05 0.92 (0.32)
LESS DISTRIBUTIONS
Dividends (from Net Investment Income) ......... (0.28) (0.32) (0.31) (0.30) (0.30)
Distributions (from Capital Gains) ............. -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total Distributions .................... (0.28) (0.32) (0.31) (0.30) (0.30)
---------- ---------- ---------- ---------- ----------
NET ASSET VALUE END OF PERIOD .................. $ 4.96 $ 4.81 $ 4.71 $ 4.97 $ 4.35
========== ========== ========== ========== ==========
TOTAL RETURN (a) ............................... 9.1% 9.2% 1.3% 21.9% (6.5%)
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) ........... $ 12,664 $ 7,652 $ 8,036 $ 10,080 $ 8,309
Ratio of Expenses to Average Net Assets ........ 0.93% 0.60% 0.65% 1.11% 1.10%
Ratio of Net Investment Income (Loss)
to Average Net Assets .................. 5.62% 6.10% 6.44% 6.41% 6.47%
Portfolio Turnover Rate ........................ 78% 39% 75% 81% 220%
<CAPTION>
U.S. GOVERNMENT SERIES (CLASS B)
FISCAL PERIOD ENDED DECEMBER 31
--------------------------------------------------------------------------
1998 (b)(c) 1997(b)(c) 1996(b)(c)(e) 1995(b)(c)(e) 1994(b)
---------- --------- ------------ ------------ ----------
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD ............... $ 4.80 $ 4.71 $ 4.97 $ 4.35 $ 4.97
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income ............................. 0.22 0.26 0.25 0.26 0.26
Net Gain (Loss) on Securities
(realized & unrealized) ................... 0.16 0.10 (0.25) 0.63 (0.62)
--------- --------- --------- --------- ---------
Total from Investment Operations .................. 0.38 0.36 (0.00) 0.89 (0.36)
LESS DISTRIBUTIONS
Dividends (from Net Investment Income) ............ (0.23) (0.27) (0.26) (0.27) (0.26)
Distributions (from Capital Gains) ................ -- -- -- -- --
--------- --------- --------- --------- ---------
Total Distributions ....................... (0.23) (0.27) (0.26) (0.27) (0.26)
--------- --------- --------- --------- ---------
NET ASSET VALUE END OF PERIOD ..................... $ 4.95 $ 4.80 $ 4.71 $ 4.97 $ 4.35
========= ========= ========= ========= =========
TOTAL RETURN (a) .................................. 8.0% 7.9% (0.02%) 20.9% (7.4%)
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) .............. $ 3,668 $ 1,091 $ 661 $ 582 $ 321
Ratio of Expenses to Average Net Assets ........... 1.85% 1.68% 1.86% 1.87% 1.85%
Ratio of Net Investment Income (Loss)
to Average Net Assets ..................... 4.66% 5.02% 5.23% 5.69% 5.76%
Portfolio Turnover Rate ........................... 78% 39% 75% 81% 220%
</TABLE>
SEE ACCOMPANYING NOTES.
29
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
LIMITED MATURITY BOND SERIES (CLASS A)
<TABLE>
<CAPTION>
FISCAL PERIOD ENDED DECEMBER 31
----------------------------------------------------------
1998 (b)(c)(e) 1997(b)(c)(e) 1996(b)(c)(e) 1995(b)(c)(d)(e)
------------- ------------ ------------ ---------------
<S> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD ... $ 10.30 $ 10.14 $ 10.66 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income ................. 0.65 0.72 0.72 0.62
Net Gain (Loss) on Securities
(realized & unrealized) ....... 0.10 0.16 (0.51) 0.65
--------- --------- --------- ---------
Total from Investment Operations ...... 0.75 0.88 0.21 1.27
LESS DISTRIBUTIONS
Dividends (from Net Investment Income) (0.65) (0.72) (0.72) (0.61)
Distributions (from Capital Gains) .... -- -- -- --
Return of Capital ..................... -- -- (0.01) --
--------- --------- --------- ---------
Total Distributions ........... (0.65) (0.72) (0.73) (0.61)
--------- --------- --------- ---------
NET ASSET VALUE END OF PERIOD ......... $ 10.40 $ 10.30 $ 10.14 $ 10.66
========= ========= ========= =========
TOTAL RETURN (a) ...................... 7.5% 9.0% 2.1% 13.0%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) .. $ 6,365 $ 5,490 $ 4,938 $ 3,322
Ratio of Expenses to Average Net Assets 0.87% 0.55% 0.90% 0.84%
Ratio of Net Investment Income (Loss)
to Average Net Assets ......... 6.30% 7.10% 6.97% 5.97%
Portfolio Turnover Rate ............... 58% 76% 105% 4%
<CAPTION>
LIMITED MATURITY BOND SERIES (CLASS B)
FISCAL PERIOD ENDED DECEMBER 31
--------------------------------------------------------------
1998 (b)(c)(e) 1997(b)(c)(e) 1996(b)(c)(e) 1995(b)(c)(d)(e)
------------- ------------ ------------ --------------
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD .... $ 10.27 $ 10.14 $ 10.67 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income .......... 0.53 0.61 0.63 0.53
Net Gain (Loss) on Securities
(realized & unrealized) 0.11 0.14 (0.52) 0.66
--------- --------- --------- ---------
Total from Investment Operations 0.64 0.75 0.11 1.19
LESS DISTRIBUTIONS
Dividends (from Net Investment Income) . (0.54) (0.62) (0.63) (0.52)
Distributions (from Capital Gains) ..... -- -- -- --
Return of Capital ...................... -- -- (0.01) --
--------- --------- --------- ---------
Total Distributions .................... (0.54) (0.62) (0.64) (0.52)
--------- --------- --------- ---------
NET ASSET VALUE END OF PERIOD .......... $ 10.37 $ 10.27 $ 10.14 $ 10.67
========= ========= ========= =========
TOTAL RETURN (a) ....................... 6.4% 7.7% 1.1% 12.2%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) ... $ 1,354 $ 1,054 $ 761 $ 752
Ratio of Expenses to Average Net Assets 1.89% 1.50% 1.88% 1.71%
Ratio of Net Investment Income (Loss)
to Average Net Assets .......... 5.18% 6.15% 5.99% 5.12%
Portfolio Turnover Rate ................ 58% 76% 105% 4%
</TABLE>
SEE ACCOMPANYING NOTES.
30
<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
----------------------------------------
1998 (b)(c) 1997(b)(c) 1996(b)(c)(f)
---------- --------- ------------
<S> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD ............ $ 15.71 $ 15.32 $ 15.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income .......................... 1.22 1.25 0.45
Net Gain (Loss) on Securities
(realized & unrealized) ................ (0.47) 0.60 0.32
--------- --------- ---------
Total from Investment Operations 0.75 1.85 0.77
LESS DISTRIBUTIONS
Dividends (from Net Investment Income) ......... (1.22) (1.25) (0.45)
Distributions (from Capital Gains) ............. (0.19) (0.21) --
--------- --------- ---------
Total Distributions .................... (1.41) (1.46) (0.45)
--------- --------- ---------
NET ASSET VALUE END OF PERIOD .................. $ 15.05 $ 15.71 $ 15.32
========= ========= =========
TOTAL RETURN (a) ............................... 5.0% 12.6% 5.2%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) ........... $ 5,781 $ 5,179 $ 2,780
Ratio of Expenses to Average Net Assets ........ 0.76% 0.87% 1.54%
Ratio of Net Investment Income (Loss)
to Average Net Assets .................. 7.96% 8.14% 7.47%
Portfolio Turnover Rate ........................ 103% 87% 168%
<CAPTION>
HIGH YIELD SERIES (CLASS B)
FISCAL PERIOD ENDED DECEMBER 31
----------------------------------------
1998 (b)(c) 1997(b)(c) 1996(b)(c)(f)
---------- ---------- ------------
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD ............ $ 15.68 $ 15.32 $ 15.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income .......................... 1.10 1.10 0.41
Net Gain (Loss) on Securities
(realized & unrealized) ................ (0.47) 0.59 0.32
--------- --------- ---------
Total from Investment Operations ............... 0.63 1.69 0.73
LESS DISTRIBUTIONS
Dividends (from Net Investment Income) ......... (1.10) (1.12) (0.41)
Distributions (from Capital Gains) ............. (0.19) (0.21) --
--------- --------- ---------
Total Distributions .................... (1.29) (1.33) (0.41)
--------- --------- ---------
NET ASSET VALUE END OF PERIOD .................. $ 15.02 $ 15.68 $ 15.32
========= ========= =========
TOTAL RETURN (a) ............................... 4.2% 11.5% 4.9%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) ........... $ 4,236 $ 4,432 $ 2,719
Ratio of Expenses to Average Net Assets ........ 1.53% 1.80% 2.26%
Ratio of Net Investment Income (Loss)
to Average Net Assets .................. 7.17% 7.21% 6.74%
Portfolio Turnover Rate ........................ 103% 87% 168%
</TABLE>
SEE ACCOMPANYING NOTES.
31
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
SECURITY MUNICIPAL BOND FUND (CLASS A)
<TABLE>
<CAPTION>
FISCAL PERIOD ENDED DECEMBER 31
----------------------------------------------------------------------
1998 (b)(c)(e) 1997(b)(c) 1996(b)(c)(e) 1995(b)(c)(e) 1994
------------- ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD ... $ 10.08 $ 9.72 $ 9.94 $ 9.05 $ 10.37
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income ................. 0.43 0.42 0.45 0.48 0.47
Net Gain (Loss) on Securities
(realized & unrealized) ....... 0.17 0.36 (0.21) 0.89 (1.32)
---------- ---------- ---------- ---------- ----------
Total from Investment Operations ...... 0.60 0.78 0.24 1.37 (0.85)
LESS DISTRIBUTIONS
Dividends (from Net Investment Income) (0.44) (0.42) (0.46) (0.48) (0.47)
Distributions (from Capital Gains) .... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total Distributions ........... (0.44) (0.42) (0.46) (0.48) (0.47)
---------- ---------- ---------- ---------- ----------
NET ASSET VALUE END OF PERIOD ......... $ 10.24 $ 10.08 $ 9.72 $ 9.94 $ 9.05
========== ========== ========== ========== ==========
TOTAL RETURN (a) ...................... 6.1% 8.3% 2.5% 15.5% (8.3%)
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) .. $ 19,012 $ 21,953 $ 23,304 $ 25,026 $ 24,092
Ratio of Expenses to Average Net Assets 0.82% 0.82% 0.78% 0.86% 0.82%
Ratio of Net Investment Income (Loss)
to Average Net Assets ......... 4.23% 4.29% 4.67% 5.02% 4.74%
Portfolio Turnover Rate ............... 94% 48% 54% 103% 88%
<CAPTION>
SECURITY MUNICIPAL BOND FUND (CLASS B)
FISCAL PERIOD ENDED DECEMBER 31
----------------------------------------------------------------------
1998 (b)(c)(e) 1997(b)(c) 1996(b)(c)(e) 1995(b)(c)(e) 1994(b)
------------- ---------- ------------ ------------ ----------
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD ... $ 10.08 $ 9.73 $ 9.95 $ 9.05 $ 10.37
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income ................. 0.31 0.29 0.33 0.37 0.35
Net Gain (Loss) on Securities
(realized & unrealized) ....... 0.17 0.37 (0.21) 0.90 (1.32)
---------- ---------- ---------- ---------- ----------
Total from Investment Operations ...... 0.48 0.66 0.12 1.27 (0.97)
LESS DISTRIBUTIONS
Dividends (from Net Investment Income) (0.30) (0.31) (0.34) (0.37) (0.35)
Distributions (from Capital Gains) .... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total Distributions ........... (0.30) (0.31) (0.34) (0.37) (0.35)
---------- ---------- ---------- ---------- ----------
NET ASSET VALUE END OF PERIOD ......... $ 10.26 $ 10.08 $ 9.73 $ 9.95 $ 9.05
========== ========== ========== ========== ==========
TOTAL RETURN (a) ...................... 4.8% 6.9% 1.2% 14.3% (9.5%)
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) .. $ 1,367 $ 2,344 $ 1,510 $ 1,190 $ 760
Ratio of Expenses to Average Net Assets 2.01% 2.00% 2.01% 2.00% 2.00%
Ratio of Net Investment Income (Loss)
to Average Net Assets ......... 3.04% 3.11% 3.44% 3.90% 3.50%
Portfolio Turnover Rate ............... 94% 48% 54% 103% 88%
</TABLE>
SEE ACCOMPANYING NOTES.
32
<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
----------------------------------------------------------------------
1998 (e) 1997 (c) 1996(b)(c)(e) 1995(b)(c)(e) 1994
---------- ---------- ------------ ------------- ----------
<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 0.05 0.03
Net Gain (Loss) on Securities
(realized & unrealized) ....... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total from Investment Operations ...... 0.05 0.05 0.05 0.05 0.03
LESS DISTRIBUTIONS
Dividends (from Net Investment Income) (0.05) (0.05) (0.05) (0.05) (0.03)
Distributions (from Capital Gains) .... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total Distributions ........... (0.05) (0.05) (0.05) (0.05) (0.03)
---------- ---------- ---------- ---------- ----------
NET ASSET VALUE END OF PERIOD ......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========== ========== ==========
TOTAL RETURN (a) ...................... 4.7% 4.9% 4.6% 5.0% 3.4%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) .. $ 61,828 $ 57,441 $ 45,331 $ 38,158 $ 58,102
Ratio of Expenses to Average Net Assets 0.89% 0.90% 1.01% 1.00% 0.96%
Ratio of Net Investment Income (Loss)
to Average Net Assets ......... 4.60% 4.80% 4.47% 5.00% 3.24%
</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) Fund expenses were reduced by the Investment Manager and expense ratios
absent such reimbursement would have been as follows:
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Corporate Bond Series Class B 2.00% 2.19% 2.05% 2.10% 2.32%
U.S. Government Series Class A 1.20% 1.22% 1.17% 1.06% 1.43%
Class B 2.91% 3.70% 3.26% 2.14% 3.03%
Limited Maturity Class A -- 1.04% 1.40% 1.04% 1.38%
Bond Series Class B -- 2.12% 2.60% 1.99% 2.70%
High Yield Series Class A -- -- 2.11% 1.44% 1.36%
Class B -- -- 2.83% 2.37% 2.13%
Municipal Bond Fund Class A -- 0.86% 0.78% 0.83% 0.82%
Class B 2.32% 2.45% 2.19% 2.00% 2.18%
Cash Fund -- 1.04% 1.01% -- --
</TABLE>
(c) Net investment income was computed using the average month-end shares
outstanding throughout the period.
(d) 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.
(e) 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 1998
---- ---- ---- ----
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% 0.83%
Bond Series Class B 1.65% 1.85% 1.46% 1.85%
Municipal Bond Fund Class A 0.85% 0.77% 0.83% 0.82%
Class B 2.00% 2.00% 2.00% 2.00%
Cash Fund 1.00% 1.00% 1.00% 0.89%
(f) 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.
33
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. SIGNIFICANT ACCOUNTING POLICIES
Security Income Fund, Security Municipal Bond Fund (formerly 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, except that
purchases of Class A shares of $1 million or more sold without a front-end sales
charge are subject to a contingent deferred sales charge if redeemed within one
year of purchase. 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 Municipal Bond 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. Premiums and discounts (except original issue
discounts) on debt securities are not amortized, except Security Municipal Bond
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.
G. USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of increases and decreases in
net assets from operations during the reporting period. Actual results could
differ from those estimates.
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
daily net assets of each fund, except for the High Yield Series which fees are
.60 of 1% of the average daily net assets of the Series. The Investment Manager
pays Salomon Brothers Asset Management, Inc., an annual fee equal to .22% of the
average daily net assets of Security Municipal Bond Fund for management services
provided to the Fund. The investment advisory contract for Security 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
34
<PAGE>
qualified for sale. For the year ended December 31, 1998, 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, 1998. The investment
advisory contract for Municipal Bond Fund provides that the total annual
expenses of the Fund, exclusive of interest, taxes, Rule 12b-1 fees, brokerage
fees and commissions and extraordinary expenses, will not exceed an amount equal
to an annual rate of 1.0% of the average net assets of the Fund as calculated on
a daily basis. The investment advisory contract for Security Cash Fund provides
that the total annual expenses of the Fund, exclusive of interest, taxes,
brokerage fees and commissions and extraordinary expenses, will not exceed an
amount equal to an annual rate of 1% of the average net assets of the 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
Municipal Bond Fund and .045% of the average daily net assets of Cash Fund
calculated daily and payable monthly.
Income and Municipal Bond 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 daily net assets of Class B shares. Class A shares of Security Income
Fund and Security Municipal Bond Fund incur 12b-1 distribution fees at an annual
rate of .25% of the average daily net assets of each Series.
Security Distributors, Inc. (SDl), a wholly-owned subsidiary of Security
Benefit Group, Inc., a financial services holding company, is national
distributor for Security Income and Municipal Bond 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 year
ended December 31, 1998, in the amounts presented below:
CORPORATE U.S. LIMITED HIGH MUNICIPAL
BOND GOVERNMENT MATURITY YIELD BOND
SERIES SERIES SERIES SERIES FUND
-------- ------- ------ ------- --------
SDI underwriting
(Class A) $ 4,808 $ 3,676 $ 448 $ 578 $ 3,709
CDSC (Class B) $ 14,332 $ 2,208 $ 803 $ 127 $ 5,887
Broker/Dealer
(Class A) $ 24,507 $30,822 $3,406 $12,334 $ 14,606
Broker/Dealer
(Class B) $ 32,326 $41,452 $1,963 $14,139 $ 5,737
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 year ended December 31, 1998, (excluding
overnight investments and short-term debt securities) were as follows:
CORPORATE U.S. LIMITED HIGH MUNICIPAL
BOND GOVERNMENT MATURITY YIELD BOND
SERIES SERIES SERIES SERIES FUND
-------- ------- ------ ------- --------
Purchases $39,090,037 $15,528,563 $4,901,969 $9,768,262 $20,858,698
Proceeds from
sales $41,426,196 $ 9,036,592 $3,769,424 $9,374,654 $24,939,544
4. FEDERAL INCOME TAX MATTERS
The amounts of unrealized appreciation (depreciation) as of December 31,
1998, were as follows:
CORPORATE U.S. LIMITED HIGH MUNICIPAL
BOND GOVERNMENT MATURITY YIELD BOND
SERIES SERIES SERIES SERIES FUND
-------- ------- ------ ------- --------
Gross unrealized
appreciation $2,163,420 $488,161 $228,327 $209,410 $1,175,648
Gross unrealized
depreciation (331,081) (10,064) (62,113) (329,495) -
---------- -------- -------- --------- ----------
Net unrealized
appreciation $1,832,339 $478,097 $166,214 ($120,085) $1,175,648
========== ======== ======== ========= ==========
At December 31, 1998, the following Funds had accumulated net realized
capital loss carryovers as shown:
Capital
Loss Expiration
Carryover Year
--------- ----------------
Corporate Bond $12,073,003 2002, 2004, 2005
Series
U.S. Government $775,743 2002
Series
Limited Maturity $7,792 2004
Bond Series
Municipal Bond $974,581 2002
Fund
For Federal income tax purposes, High Yield Series designated $50,664 as capital
gains dividends.
35
<PAGE>
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
SECURITY INCOME FUND, SECURITY MUNICIPAL BOND FUND
AND SECURITY CASH FUND
We have audited the accompanying balance sheets, including the schedule of
investments, of Security Municipal Bond Fund, (formerly Security Tax-Exempt
Fund) Security Cash Fund and the following series of Security Income Fund
(Corporate Bond, U.S. Government, Limited Maturity Bond and High Yield Bond
Series) (the Funds) as of December 31, 1998, the related statements of
operations, changes in net assets and the financial highlights for the periods
indicated therein. These financial statements and the financial highlights are
the responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
investments owned as of December 31, 1998, 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, 1998, 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 5, 1999
36
<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 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 DISTRIBUTORS, INC.
- ----------------------------------
700 SW Harrison St.
Topeka, KS 66636-0001
SECURITY FUNDS
OFFICERS AND DIRECTORS
DIRECTORS
Donald A. Chubb, Jr.
John D. Cleland
Penny A. Lumpkin
Mark L. Morris, Jr., D.V.M.
Maynard F. Oliverius
Maria Fiorini Ramirez (Income Fund only)
James R. Schmank
OFFICERS
John D. Cleland, President
James R. Schmank, Vice President
Mark E. Young, Vice President
Steven M. Bowser, Vice President
Michael A. Peterson, Vice President
Thomas A. Swank, Vice President
Amy J. Lee, Secretary
Christopher D. Swickard, Assistant Secretary
Brenda M. Harwood, Treasurer
<PAGE>
MFR
ANNUAL
REPORT
DECEMBER 31, 1998
O MFR EMERGING
MARKETS TOTAL
RETURN SERIES
O MFR GLOBAL
ASSET ALLOCATION
SERIES
O MFR GLOBAL
HIGH YIELD
SERIES
[LOGO] MFR Advisors Inc.
[LOGO] SECURITY DISTRIBUTORS, INC.
A Member of The Security Benefit
Group of Companies
<PAGE>
MFR EMERGING MARKETS TOTAL RETURN
MANAGER'S COMMENTARY
FEBRUARY 15, 1999
TO OUR SHAREHOLDERS:
The best thing we can say about 1998 is that it is over. Continued currency
devaluations in Asia, debt defaults in Russia and political turmoil such as we
saw in Indonesia combined to make it a particularly unrewarding year in emerging
markets. The good news is that the Emerging Markets Total Return Series
performed admirably for the year-it was the only emerging markets fund in its
Lipper peer group with a positive total return for the year-and that the worst
for these markets may be finally be behind us.
For 1998 the Series had a total return of +10.21%, solidly ahead of the average
return of -26.83% for our peer group as reported by Lipper Analytical Services.1
For comparison purposes, the widely recognized International Finance Corporation
Emerging Markets Regional Investable Index fell 21.98% for the year.
LARGE ALLOCATIONS TO GREECE AND PORTUGAL
Throughout the year the Series maintained a particularly high allocation to the
Greek and Portugese markets, totaling over 30% of portfolio assets. As we have
mentioned in previous letters to shareholders, we believed that both countries
would benefit from their renewed fiscal discipline that was a part of their
drive to enter the European Monetary Union (EMU).
As of January 1, 1999, Portugal is one of the eleven European countries that now
use the common currency of the EMU, the euro. Since its entry into EMU, Portugal
will become the first country ever to be selected to "graduate" from the
International Finance Corporation's emerging markets indexes. For 1998 the
Portugese stock market as represented by the Lisbon BVL General Index was up
26.2% in local currency terms.
We believe Greece will be approved for entry into EMU in 2001. Accordingly, the
Greek market still presents excellent investment opportunities. With a 9%
difference in short term interest rates between the EMU countries (3%) and
Greece (12%), it is not hard to see that the Greek economy could continue to be
propelled higher as their interest rates converge downward toward the EMU rates.
For 1998, the Greek stock market, as seen in the Athens Stock Exchange
Composite, was one of the top performing markets in the world with a total
return of 86.3% in local currency terms.
NEXT YEAR'S OUTLOOK
We are quite optimistic for 1999. In our view there is little doubt that Asia is
on the road to recovery. Central Europe has absorbed the shock waves from
Russia's debt default and economic collapse. Latin America, while vulnerable to
continued Brazilian troubles, has already had its assets marked down
significantly in 1998.
Our favorite countries, not surprisingly, continue to be Portugal and Greece.
However, we now have a third favorite country, the Philippines. The Philippine
economy enters 1999 on firm footing, having managed to show positive economic
growth in 1998. This was not an easy feat, considering that many of its
neighbors saw their economies shrink in excess of 5%. In addition, its banking
system remains sound. Unlike South Korea, Thailand, and even Japan,
nonperforming loans at banks in the Philippines are peaking at manageable
levels. Furthermore, its biggest trading partner, the United States, continues
to grow economically and absorb an increasing number of Philippine goods. We
believe these positive attributes combined with a stabilizing Asia should
provide fertile ground for significant equity upside in 1999.
In summary, 1998 was a difficult year in emerging markets, but it was also a
year which highlighted the positives of our asset allocation approach to
emerging market investing. We look forward to the challenges of the new year and
firmly believe that 1999 will be a much better year for emerging markets.
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, are not annualized and do
not reflect deduction of the sales charge. Fee waivers reduced Fund expenses and
in the absence of such waivers, the performance quoted would be reduced.
Investing in foreign countries may involve risks, such as non-uniform accounting
practices and political instability, not associated with investing exclusively
in the U.S.
1
<PAGE>
MFR EMERGING MARKETS TOTAL RETURN
MANAGER'S COMMENTARY
FEBRUARY 15, 1999
MFR EMERGING MARKETS TOTAL RETURN
VS. IFC EMERGING MARKETS
REGIONAL INVESTABLE INDEX
12-31-98
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
MFR EMERGING MARKETS IFC EMERGING MARKETS
TOTAL RETURN SERIES REGIONAL INVESTABLE INDEX
-------------------- -------------------------
05/19/97 10,000 10,000
06/30/97 9,752 10,755
09/30/97 10,038 9,780
12/31/97 8,989 7,898
06/30/98 9,805 6,657
09/30/98 8,105 5,217
12/31/98 9,907 6,158
$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, 1998, the value of your investment in
the Series' Class A shares (with dividends reinvested) would have equaled
$9,907. By comparison, the same $10,000 investment would have equaled $6,158
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, 1998
CLASS A SHARES CLASS B SHARES
1 Year 4.99% 1 Year 5.06%
Since Inception -0.57% Since Inception -0.37%
(5/19/97) (5/19/97)
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 ended
December 31, 1998 and in the absence of such reimbursement and/or waiver, the
performance quoted would be reduced.
2
<PAGE>
MFR GLOBAL ASSET ALLOCATION
Manager's Commentary (continued)
February 15, 1999
TO OUR SHAREHOLDERS:
The Global Asset Allocation Series had an excellent year. During fiscal year
1998 we increased the equity exposure in the portfolio from approximately 65% at
the beginning of the year to about 76% at year end. The Series was well rewarded
by this relatively high exposure to stocks. The Global Asset Allocation Series
returned +20.92% for the year, significantly outpacing its Lipper peer group
average return of 10.61% and comparing favorably with the major indexes.1 For
comparative purposes, the Dow Jones Industrial Average rose 16.10%, the S&P 500
gained 26.67%, the Dow Jones World Index was up 20.21% and, on the bond side,
the Lehman Global Bond Index rose 15.33%.
CONTRASTING PERFORMANCE IN HALVES OF THE YEAR
In 1998 the markets displayed strikingly different investment performance in
each half of the year. In the first half the European equity markets were on
fire and handily outpaced the U.S. stock market. Relatively weak European
currencies compared with the U.S. dollar aided European exporters and combined
with solid earnings and productivity gains to propel European stocks. As the
year wore on, however, earnings warnings due to slower European growth forecasts
and the Russian economic difficulties combined with stronger European
currencies. This resulted from U.S. hedge fund leverage excesses and the
excitement surounding the new euro currency to significantly decrease the
advances that had been made in the early months. By year's end the U.S. and
European equity markets had advanced by about the same amount.
During the second half of the year the Series increased its U.S. equity exposure
by about 10% to total slightly over 16% of portfolio assets. However, we believe
that European stock markets will outperform in the first half of 1999. We expect
the world's major asset allocators to increase their exposure to Europe as the
new euro becomes a major challenger to the U.S. dollar and the Japanese yen.
Unfortunately, the continued strength of the euro will hurt the major European
exporters in the core countries such as France and Germany. Because of this we
plan to stay with our high percentage allocation to the southern European
countries including Portugal, Italy and Spain. We believe the dramatic decreases
in interest rates these countries have seen over the past few years will more
than offset the negatives the strengthening euro has on exporters. In addition,
we are investing in more locally oriented companies in Europe, such as TelePizza
in Spain and Ergo Bank in Greece.
OUR VIEW OF 1999
We expect 1999 to be another fruitful year for investors as inflation and
interest rates stay at beneficially low levels. Earnings will probably remain
under some pressure in the first half of the year as economic problems continue
in Asia, Russia, and Brazil. We believe that later in the year, however, markets
will begin to recover as these regions take steps to resolve their economic
difficulties.
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, are not annualized and do
not reflect deduction of the sales charge. Fee waivers reduced Fund expenses and
in the absence of such waivers, the performance quoted would be reduced.
Investing in foreign countries may involve risks, such as non-uniform accounting
practices and political instability, not associated with investing exclusively
in the U.S.
3
<PAGE>
MFR GLOBAL ASSET ALLOCATION
MANAGER'S COMMENTARY (CONTINUED)
FEBRUARY 15, 1999
MFR GLOBAL ASSET ALLOCATION SERIES VS.
LEHMAN GLOBAL BOND INDEX AND
MCSI WORLD INDEX
12-31-98
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
MFR GLOBAL ASSET LEHMAN GLOBAL
ALLOCATION SERIES INDEX BOND MSCI WORLD INDEX
-------------------- -------------- ------------------
05/19/97 10,000 10,000 10,000
06/30/97 9,829 10,318 11,150
09/30/97 10,133 10,499 11,480
12/31/97 9,427 10,591 11,209
06/30/98 11,203 10,966 13,097
09/30/98 9,600 11,908 11,539
12/31/98 11,397 12,215 13,987
$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, 1998, the value of your investment in the
Series' Class A shares (with dividends reinvested) would have been $11,397. By
comparison, the same $10,000 investment would have been $12,215 based on the
performance of the Lehman Brothers Global Bond Index and $13,987 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, 1998
CLASS A SHARES CLASS B SHARES
1 Year 15.16% 1 Year 13.61%
Since Inception 8.40% Since Inception 7.72%
(5/19/97) (5/19/97)
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 ended
December 31, 1998 and in the absence of such reimbursement and/or waiver, the
performance quoted would be reduced.
4
<PAGE>
MFR GLOBAL HIGH YIELD
MANAGER'S COMMENTARY (CONTINUED)
FEBRUARY 15, 1999
TO OUR SHAREHOLDERS:
This past year displayed a broad range of fixed income returns. From the +15.33%
total return of the Lehman Brothers Global Bond Index to the -14.35% total
return of the J.P. Morgan EMBI+ Index (an index of emerging market debt). The
deciding variable was the amount of credit risk in the underlying securities. In
1998 the rule seemed to be the greater the credit risk, the lower the total
return. This held true for domestic high yield securities as well as global
bonds. The continuing Asian crisis, Russia's outright default on its debt,
spectacular losses by U.S. hedge funds and President Clinton's troubles all
combined to make investors seek the relative safety of the most creditworthy
fixed income securities such as U.S. Treasuries. Our diversified approach to
higher yielding investments allowed the Global High Yield Series to return
6.76%, besting its Lipper peer group average of 6.23%.1
COUNTRY ALLOCATIONS DURING THE YEAR
Throughout 1998 we maintained a high allocation to our three favorite fixed
income opportunities: Greece, Poland and Hungary. At year end these three
countries made up about 25% of the portfolio's total assets. All three are in
the process of lowering inflation via steadily improving fiscal discipline and
tight monetary policies such as high short-term interest rates. In Greece, for
example, inflation has fallen from the double digits of a few years ago to under
4% at the end of 1998, and is expected to approach 2% in the coming year. While
Poland and Hungary are significantly behind Greece's levels of improvement,
their governmental policies are expected to eventually yield similar results.
OUR OUTLOOK FOR 1999
As we enter 1999 we hope that the "last shoe to drop" will turn out to be the
recent Brazilian currency devaluation. Investors will surely take their time
returning to high yield securities this year, and in particular the debt of
emerging markets, but we do believe that 1999 will turn out to be a very good
year for the global high yield investor. Yields on many global securities are
now the highest that they have been in a number of years. One of the greatest
benefits of investing in high yield securities is that an investor earns an
attractive income stream while waiting for the market to return to more normal
levels, as we believe it will in 1999.
We believe that our diversified and somewhat unique approach of combining
emerging market debt, domestic high yield securities and a high yielding
non-dollar denominated debt should continue to dampen overall volatility of the
portfolio's returns while providing us with opportunities both for yield and
capital appreciation.
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, are not annualized and do
not reflect deduction of the sales charge. Fee waivers reduced Fund expenses and
in the absence of such waivers, the performance quoted would be reduced.
Investing in foreign countries may involve risks, such as non-uniform accounting
practices and political instability, not associated with investing exclusively
in the U.S.
5
<PAGE>
MFR GLOBAL HIGH YIELD
MANAGER'S COMMENTARY (CONTINUED)
FEBRUARY 15, 1999
MFR GLOBAL HIGH YIELD SERIES VS.
LEHMAN BROTHERS GLOBAL BOND INDEX
12-31-98
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
MFR GLOBAL HIGH LEHMAN BROTHERS
YIELD SERIES GLOBAL BOND INDEX
------------------ --------------------
06/01/95 10,000 10,000
12/31/95 10,220 10,669
12/31/96 11,403 11,880
12/30/97 11,924 13,397
12/31/98 12,731 15,450
$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, 1998 the value of your investment in the Series'
Class A shares (with dividends reinvested) would have grown to $12,731. By
comparison, the same $10,000 investment would have grown to $15,450 based on the
performance of the Lehman Brothers Global Bond Index.
The performance illustrated above is based on the performance of Class A shares.
The performance of Class B shares will be greater or less than the performance
shown for Class A shares as a result of the different loads and fees associated
with an investment in Class B shares.
The performance data illustrated above reflects past performance which is not
predictive of future results.
The Lehman Brothers Global Bond Index includes local currency-denominated
sovereign debt of 19 countries plus European Currency Units-denominated debt.
Investment cannot directly be made in an index.
MFR GLOBAL HIGH YIELD SERIES
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1998
CLASS A SHARES CLASS B SHARES
1 Year 1.65% 1 Year -0.43%
Since Inception 6.96% Since Inception 6.69%
(6/1/95) (6/1/95)
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 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 ended
December 31, 1998 and in the absence of such reimbursement and/or waiver, the
performance quoted would be reduced.
6
<PAGE>
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1998
MFR EMERGING MARKETS TOTAL RETURN SERIES
NUMBER MARKET
COMMON STOCKS & OTHER EQUITY INTERESTS OF SHARES VALUE
- --------------------------------------------------------------------------------
ARGENTINA - 3.3%
Telefonica de Argentina
S.A. ADR ....................................... 800 $ 22,350
YPF Sociedad Anonima ADR ....................... 800 22,350
-------------
44,700
BRAZIL - 3.7%
CESP - Companhia Energetica
de Sao Paulo ADR ............................... 2,100 13,545
Telecomunicacoes Brasilerias S.A ............... 500 36,344
-------------
49,889
CHILE - 0.9%
Maderas Y Sinteticos S.A. ADR .................. 2,000 12,750
CZECH REPUBLIC - 1.1%
SPT Telecom S.A.* .............................. 1,000 15,277
DOMINICAN REPUBLIC - 5.0%
Tricom S.A. ADR* ............................... 9,500 66,500
GREECE - 17.3%
Bank of Piraeus ................................ 2,880 90,241
Bank of Piraeus Rights ......................... 2,880 64,377
Hellenic Telecommunication
Organization S.A ............................... 1,308 34,796
Titan Cement Company S.A ....................... 600 46,063
-------------
235,477
HONG KONG - 3.6%
China Telecommunications
Limited* ....................................... 10,000 17,296
Glorious Sun Enterprises ....................... 42,000 7,481
Legend Holdings Limited ........................ 70,000 24,622
-------------
49,399
HUNGARY - 8.9%
Danubius Hotel & Spa Rt.* ...................... 1,300 27,232
OTP Bank Rt .................................... 600 30,070
Pick Szeged Rt ................................. 1,500 63,750
-------------
121,052
MEXICO - 5.7%
Cemex S.A. de C.V. (CI. B) ..................... 9,150 22,621
Cifra S.A. ADR* ................................ 3,000 36,390
Grupo Casa Autrey
S.A. de C.V. ADR ............................... 2,800 19,075
-------------
78,086
PHILIPPINES - 8.0%
Ayala Land, Inc. ............................... 94,000 $ 26,581
Bank of the Philippine Islands ................. 17,600 37,327
Jolibee Foods Corporation ...................... 50,000 19,280
Music Corporation* ............................. 96,000 7,897
SM Prime Holdings, Inc. ........................ 90,000 17,121
-------------
108,206
POLAND - 5.7%
Elektrim Spolka Akcyjna S.A .................... 2,800 30,313
Exbud S.A.* .................................... 5,500 47,479
-------------
77,792
PORTUGAL - 9.8%
Banco Comercial Portugues S.A .................. 1,300 39,968
Ibersol SGPS S.A ............................... 250 31,628
Portugal Fund .................................. 2,200 34,375
Portugal Telecom S.A ........................... 600 27,511
-------------
133,482
SINGAPORE - 2.2%
Want Want Holdings ............................. 24,800 29,760
SOUTH AFRICA - 2.1%
South African Breweries Limited ................ 1,717 28,924
-------------
Total common stocks
& other equity interests - 77.3% ............... $ 1,051,294
PRINCIPAL
AMOUNT OR
NUMBER MARKET
COMMON STOCKS & OTHER EQUITY INTERESTS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
GOVERNMENT OBLIGATIONS
- ----------------------
BRAZIL - 2.6%
Government of Brazil "C" Bond,
8.00% - 2014(1, 3) ........................... $58,881 35,329
COSTA RICA - 3.7%
Banco Costa Rica, 6.25% - 2010 ............... $57,712 50,498
GREECE - 3.5%
Hellenic Republic,
13.10% - 2003(1, 4) .......................... 13,000,000 47,558
HUNGARY - 3.5%
Government of Hungary,
23.00% - 1999(1) ............................. 10,000,000 47,423
KOREA - 2.7%
Republic of South Korea,
8.875% - 2008 ................................ $35,000 35,935
PERU - 1.8%
Peru PDI, 4.00% - 2017 ....................... $39,000 24,473
SEE ACCOMPANYING NOTES.
7
<PAGE>
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1998
MFR EMERGING MARKETS TOTAL RETURN SERIES (CONTINUED)
PRINCIPAL
AMOUNT OR
NUMBER MARKET
GOVERNMENT OBLIGATIONS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
SOUTH AFRICA - 2.1%
Republic of South Africa,
12.00% - 2005(1) ............................... 200,000 $ 28,854
-------------
Total government obligations - 19.9% ........... 270,070
-------------
Total investments - 97.2% ...................... 1,321,364
Cash and other assets, less liabilities - 2.8% . 38,355
-------------
Total net assets - 100.0% ...................... $ 1,359,719
=============
At December 31, 1998, MFR Emerging Markets Total Return Series' investment
concentration by industry was as follows:
Banks and Credit ............................................. 19.3%
Beverage/Alcohol ............................................. 2.1
Building Materials ........................................... 8.0
Closed-End Funds ............................................. 2.5
Commercial Property Development .............................. 1.4
Computer Systems ............................................. 1.8
Electric Equipment ........................................... 2.3
Electric Utilities ........................................... 1.2
Food Processing .............................................. 8.0
Foreign Government Bonds ..................................... 19.9
Hotel/Motel .................................................. 2.1
Housing - Home Building ...................................... 2.2
Oil and Gas Exploration ...................................... 1.7
Restaurants .................................................. 3.8
Retail - General Merchandising ............................... 2.7
Semiconductors ............................................... 1.0
Telecommunications ........................................... 7.0
Telephone .................................................... 9.2
Textiles ..................................................... 1.0
Cash, short term investments,
and other assets, less liabilities .......................... 2.8
-----
Total net assets ............................................. 100.0%
=====
MFR GLOBAL ASSET ALLOCATION SERIES
NUMBER MARKET
COMMON STOCKS & OTHER EQUITY INTERESTS OF SHARES VALUE
- --------------------------------------------------------------------------------
AUSTRALIA - 2.5%
Coles Myer Limited ............................. 3,500 $ 18,356
Foster's Brewing Group, Ltd. ................... 15,000 40,668
-------------
59,024
BRAZIL - 1.2%
Telecomunicacoes Brasilerias S.A ............... 400 29,075
CANADA - 5.7%
Bombardier, Inc. (CI. B) ....................... 2,000 $ 28,646
Imax Corporation* .............................. 3,350 106,868
-------------
135,514
CZECH REPUBLIC - 0.6%
SPT Telecom S.A.* .............................. 1,000 15,278
FRANCE - 3.3%
Alcatel Alsthom ................................ 200 24,489
Sidel S.A ...................................... 650 55,154
-------------
79,643
GERMANY - 5.0%
Sap AG ......................................... 70 30,259
Volkswagen AG .................................. 1,130 90,232
-------------
120,491
GREECE - 8.8%
Bank of Piraeus ................................ 1,100 34,467
Bank of Piraeus Rights ......................... 1,100 24,588
Ergo Bank S. A ................................. 600 69,416
Hellenic Telecommunications
Organization S.A ............................... 1,308 34,796
Titan Cement Company S.A ....................... 600 46,063
-------------
209,330
HUNGARY - 0.4%
Danubius Hotel & Spa Rt.* ...................... 400 8,379
IRELAND - 4.3%
Allied Irish Banks PLC ......................... 2,630 47,174
CRH PLC ........................................ 2,000 34,041
Independent Newspapers PLC ..................... 5,000 21,005
-------------
102,220
ITALY - 2.5%
World Equity Benchmark
Shares - Italy ................................. 2,200 59,813
JAPAN - 4.2%
Fuji Photo Film ................................ 1,000 37,234
Sony Corporation ............................... 300 21,888
Tokyu Department Store
Company Limited* ............................... 14,000 13,032
Toyota Motor Corporation ....................... 1,000 27,217
-------------
99,371
SEE ACCOMPANYING NOTES.
8
<PAGE>
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1998
MFR GLOBAL ASSET ALLOCATION SERIES
NUMBER MARKET
COMMON STOCKS & OTHER EQUITY INTERESTS (CONTINUED) OF SHARES VALUE
- --------------------------------------------------------------------------------
MEXICO - 0.5%
Cemex S.A. de C.V. (CI. B) ..................... 5,150 $ 12,732
NETHERLANDS - 2.1%
Phillips Electronics N.V ....................... 475 31,891
Royal Dutch Petroleum
Company ADR .................................... 400 19,150
-------------
51,041
POLAND - 0.7%
Electrim Spolka Akcyjna S.A .................... 1,600 17,322
PORTUGAL - 2.0%
Portugal Fund .................................. 3,000 46,875
SINGAPORE - 0.5%
Want Want Holdings ............................. 10,800 12,960
SOUTH AFRICA- 0.5%
South African Breweries Limited ................ 700 11,792
SPAIN - 9.8%
Adolfo Dominguez S.A.* ......................... 600 12,110
Banco Popular Espanol S.A ...................... 550 41,533
TelePizza S.A.* ................................ 8,000 76,220
World Equity Benchmark Shares-
Spain .......................................... 3,500 104,562
-------------
234,425
SWEDEN - 0.9%
Skandinaviska Enskilda
Banken ......................................... 2,000 21,096
SWITZERLAND - 1.6%
Novartis AG .................................... 20 39,316
UNITED KINGDOM - 3.9%
Pizzaexpress PLC ............................... 4,000 53,574
Vodafone Group PLC ............................. 2,500 40,514
-------------
94,088
UNITED STATES - 14.7%
Cadence Design Systems, Inc.* .................. 1,600 47,600
Lucent Technologies, Inc. ...................... 900 99,000
Northern Trust Corporation ..................... 400 34,925
PNC Bank Corporation ........................... 1,000 54,125
Paine Webber Group, Inc. ....................... 1,000 38,625
Summit Bancorp ................................. 700 30,581
Unum Corporation ............................... 800 46,700
-------------
351,556
-------------
Total common stocks
& other equity interests - 75.7% ............ 1,811,341
PRINCIPAL
AMOUNT OR
NUMBER MARKET
CORPORATE BONDS OF SHARES VALUE
- --------------------------------------------------------------------------------
DENMARK - 1.3%
Nykredit, 6.00% - 2029(1) ...................... 200,000 $ 30,843
DOMINICAN REPUBLIC - 3.4%
Tricom SA, 11.375% - 2004 ...................... $ 100,000 82,000
PUERTO RICO - 4.1%
First Bank Puerto Rico,
7.625% - 2005 ............................... $ 100,000 99,239
UNITED STATES - 4.3%
Archibald Candy Corporation,
10.25% - 2004 ............................... $ 50,000 50,625
Clark Material Handling Company,
10.75% - 2006 ............................... $ 50,000 51,375
-------------
102,000
-------------
Total corporate bonds - 13.1% .................. 314,082
GOVERNMENT OBLIGATIONS
- ----------------------
ARGENTINA - 1.5%
Republic of Argentina,
5.75% - 2023(2) ............................. $ 50,000 35,975
BRAZIL - 1.5%
Government of Brazil "C" Bond,
8.00% - 2014(3).............................. $ 58,881 35,329
GREECE - 2.0%
Hellenic Republic,
13.10% - 2003(1, 4) ......................... 13,000,000 47,558
SOUTH AFRICA - 0.6%
Republic of South Africa,
12.00% - 2005(1) ............................ 100,000 14,427
UNITED KINGDOM - 1.3%
United Kingdom Treasury Bond,
7.25% - 2007(1) ............................. 15,000 30,178
UNITED STATES - 2.9%
GNMA #486515, 6.00% - 2028 ..................... $ 69,772 69,183
-------------
Total government obligations - 9.8% ............ 232,650
-------------
Total investments - 98.6% ...................... 2,358,073
Cash and other assets, less liabilities - 1.4% . 34,401
-------------
Total net assets - 100.0% ...................... $ 2,392,474
=============
SEE ACCOMPANYING NOTES.
9
<PAGE>
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1998
MFR GLOBAL ASSET ALLOCATION SERIES (CONTINUED)
- --------------------------------------------------------------------------------
At December 31, 1998, MFR Global Asset Allocation Series' investment
concentration by industry was as follows:
Automobile ............................................ 4.9%
Banks and Credit ...................................... 19.7
Beverage/Alcohol ...................................... 2.2
Broadcast Media ....................................... 0.9
Building Materials .................................... 6.5
Closed End Funds ...................................... 8.8
Computer Software ..................................... 3.6
Computer Systems ...................................... 4.2
Diversified ........................................... 2.3
Electric Equipment .................................... 3.7
Entertainment ......................................... 4.5
Financial ............................................. 1.6
Food Processing ....................................... 4.8
Foreign Government Bonds .............................. 6.8
Hotel/Motel ........................................... 0.4
Insurance ............................................. 2.1
Machinery ............................................. 2.5
Oil and Gas Exploration ............................... 0.9
Pharmaceuticals ....................................... 1.6
Photography ........................................... 1.7
Restaurants ........................................... 3.4
Retail - General Merchandising ........................ 1.9
Telecommunication ..................................... 6.6
U.S. Government Bonds ................................. 2.9
Cash and other assets,
less liabilities ................................... 1.5
-----
Total net assets ...................................... 100.0%
=====
MFR GLOBAL HIGH YIELD SERIES
PRINCIPAL MARKET
GOVERNMENT OBLIGATIONS AMOUNT VALUE
- --------------------------------------------------------------------------------
ARGENTINA - 2.1%
Argentina Government,
9.75% - 2027 ................................ $ 100,000 $ 88,750
BRAZIL - 4.1%
Government of Brazil "C",
8.00% - 2014(1) ............................. $ 294,405 176,643
DOMINICAN REPUBLIC - 3.7%
Central Bank of Dominican
Republic, 6.0625% - 2024(4) .................... $ 250,000 162,500
ECUADOR - 3.6%
Republic of Ecuador,
6.625% - 2025(4) ............................ $ 300,000 157,260
GREECE - 12.9%
Hellenic Republic,
13.10% - 2003(1, 4) ......................... 120,000,000 438,993
Hellenic Republic,
8.80% - 2007(1) ............................. 30,000,000 119,229
-------------
558,222
HUNGARY - 6.6%
Government of Hungary,
21.00% - 1999(1) ............................ 30,000,000 144,736
23.00% - 1999(1) ............................ 30,000,000 142,270
-------------
287,006
KOREA - 3.0%
Republic of South Korea,
8.875% - 2008 ............................... $ 125,000 128,341
MEXICO - 4.5%
United Mexican States,
6.25% - 2019 ................................ $ 250,000 194,325
PHILIPPINES - 5.0%
Philippine Government Bond,
18.50% - 2000(1) ............................ 8,000,000 214,268
SOUTH AFRICA - 6.2%
Electricity Supply Commission,
11.00% - 2008(1) ............................ 1,000,000 126,622
Republic of South Africa,
12.00% - 2005(1) ............................ 1,000,000 144,268
-------------
270,890
-------------
Total government obligations - 51.7% ........... 2,238,205
SEE ACCOMPANYING NOTES.
10
<PAGE>
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1998
MFR GLOBAL HIGH YIELD SERIES (CONTINUED)
PRINCIPAL MARKET
CORPORATE BONDS AMOUNT VALUE
- --------------------------------------------------------------------------------
CANADA - 1.6%
Roger's Communication, Inc.,
10.50% - 2006(1) ............................ 100,000 $ 69,569
CZECH REPUBLIC - 2.0%
CEZ, a.s., 11.30% - 2005(1) .................... 2,500,000 85,745
DENMARK - 11.5%
Nykredit, 6.00% - 2029(1) ...................... 1,300,000 200,479
Realkredit Danmark,
6.00% - 2029(1) .............................. 1,250,000 192,572
Unikredit Realkredit,
6.00% - 2029(1) ............................. 675,000 103,490
-------------
496,541
MEXICO - 3.9%
Cemex SA, 12.75% - 2006 ........................ $ 150,000 168,750
POLAND - 5.0%
Poland Government Bond,
12.00% - 2001(1) ............................ 750,000 216,018
United States - 17.1%
Archibald Candy Corporation,
10.25% - 2004 ............................... $ 200,000 202,500
Countrywide Home Loans,
1997-1 B3, 7.50% - 2027 ..................... $ 196,491 183,413
PNC Mortgage Securities Corporation,
1998-11 2B6, 6.25% - 2013 ................... $ 223,673 48,719
PNC Mortgage Securities Corporation,
1998-11 2B5, 6.25% - 2013 ................... $ 223,670 139,724
Residential Asset Securitization Trust,
1997-A 6B4, 7.25% - 2012 .................... $ 189,240 165,171
-------------
739,527
-------------
Total corporate bonds - 41.1% .................. 1,776,150
-------------
Total investments - 92.8% ...................... 4,014,355
Cash and other assets, less liabilities - 7.2% . 313,230
-------------
Total net assets - 100.0% ...................... $ 4,327,585
=============
- --------------------------------------------------------------------------------
The identified cost of investments owned at December 31, 1998, was the same for
federal income tax and book purposes.
* Securities on which no cash dividend was paid during the preceding twelve
months.
ADR (American Depositary Receipt)
1 Principal amount on foreign bond is reflected in local currency (e.g.
Japanese yen) while market value is reflected in U.S. dollars.
2 Step-up rate security 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, 1998
<TABLE>
<CAPTION>
MFR EMERGING MFR GLOBAL MFR GLOBAL
MARKETS ASSET HIGH
TOTAL RETURN ALLOCATION YEILD
SERIES SERIES SERIES
------------ ----------- -----------
<S> <C> <C> <C>
ASSETS
Investments, at value (identified
cost $1,378,078, $2,097,332 and
$4,394,510, respectively) ..................... $ 1,321,364 $ 2,358,073 $ 4,014,355
Cash ........................................... 10,321 6,912 209,523
Receivables:
Fund shares sold ............................ 8,000 -- 16
Securities sold ............................. -- 81 733
Interest .................................... 6,785 11,400 111,085
Dividends ................................... 12,767 17,547 --
MFR Advisors, Inc. .......................... 968 3,084 11,256
Foreign taxes recoverable ................... 271 1,582 4,085
Prepaid Expenses ............................... 3,907 4,487 4,859
------------ ----------- -----------
Total assets ................... $ 1,364,383 $ 2,403,166 $ 4,355,912
============ =========== ===========
LIABILITIES AND NET ASSETS
Liabilities:
Payable for:
Fund shares redeemed ........................ $ 80 $ 30 $ 10
Other liabilities:
Custodian fees .............................. 308 596 1,636
Transfer and administration fees ............ 168 326 544
Professional fees ........................... 2,605 3,301 10,458
12b-1 distribution plan fees ................ 1,162 1,588 13,458
Miscellaneous fees .......................... 341 336 2,221
Forward foreign exhange contracts .............. -- 4,515 --
------------ ----------- -----------
Total liabilities .............. 4,664 10,692 28,327
Net Assets:
Paid in capital ................................ 1,416,409 2,160,441 4,677,705
Undistributed net investment income ............ -- 4,515 4,817
Accumulated undistributed net realized
gain (loss) on sale of investments,
futures and foreign currency transactions ..... -- (28,753) 24,778
Net unrealized appreciation (depreciation)
in value of investments, futures and
translation of assets and liabilities in
foreign currency .............................. (56,690) 256,271 (379,715)
------------ ----------- -----------
Net assets ..................... 1,359,719 2,392,474 4,327,585
------------ ----------- -----------
Total liabilities and net assets $ 1,364,383 $ 2,403,166 $ 4,355,912
============ =========== ===========
CLASS "A" SHARES
Capital shares outstanding ..................... 81,728 138,196 288,308
Net assets ..................................... $ 757,172 $ 1,590,625 $ 2,628,823
Net asset value per share (net assets
divided by shares outstanding) ................ $ 9.26 $ 11.51 $ 9.12
Add: Selling commission (4.75% of
the offering price) .......................... 0.46 0.57 0.45
------------ ----------- -----------
Offering price per share (net asset
value divided by 95.25%) ...................... $ 9.72 $ 12.08 $ 9.57
============ =========== ===========
CLASS "B" SHARES
Capital shares outstanding ..................... 64,696 70,332 181,677
Net assets ..................................... $ 602,547 $ 801,849 $ 1,698,762
Net asset value per share (net assets
divided by shares outstanding) ................ $ 9.31 $ 11.40 $ 9.35
============ =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
12
<PAGE>
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
MFR EMERGING MFR GLOBAL MFR GLOBAL
MARKETS ASSET HIGH
TOTAL RETURN ALLOCATION YEILD
SERIES SERIES SERIES
------------ ---------- ----------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends .................................... $ 24,374 $ 37,124 $ --
Interest ..................................... 39,239 38,726 616,086
------------ ---------- ----------
63,613 75,850 616,086
Less foreign tax expense ................. (433) (1,401) (12,328)
------------ ---------- ----------
Total investment income .................... 63,180 74,449 603,758
EXPENSES:
Management fees ............................ 10,835 16,221 38,430
Custodian fees ............................. 6,652 4,015 9,235
Transfer/maintenance fees .................. 384 1,139 4,045
Administration fees ........................ 15,488 15,730 47,306
Directors' fees ............................ 98 146 1,095
Professional fees .......................... 4,416 5,165 2,875
Reports to shareholders .................... 421 446 2,905
Registration fees .......................... 20,433 20,433 16,857
Other expenses ............................. 477 476 1,121
12b-1 distribution plan fees ............... 6,643 8,988 25,090
------------ ---------- ----------
65,847 72,759 148,959
Less: Reimbursement of expenses ............ (40,904) (40,623) (49,686)
------------ ---------- ----------
Total expenses ............................. 24,943 32,136 99,273
------------ ---------- ----------
Net investment income .................... 38,237 42,313 504,485
NET REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) during the period on:
Investments ................................ 62,220 (26,250) 27,067
Option contracts written ................... 3,515 5,948 26,968
Foreign currency transactions .............. (1,550) 7,699 (13,328)
------------ ---------- ----------
Net realized gain (loss) ................. 64,185 (12,603) 40,707
Net change in unrealized appreciation
(depreciation) during the period on:
Investments ................................. 17,533 288,262 (206,276)
Translation of assets and liabilities
in foreign currencies ...................... (675) (7,795) (3,290)
------------ ---------- ----------
Net unrealized appreciation (depreciation) . 16,858 280,467 (209,566)
------------ ---------- ----------
Net gain (loss) ........................... 81,043 267,864 (168,859)
------------ ---------- ----------
Net increase in net assets
resulting from operations ............... $ 119,280 $ 310,177 $ 335,626
============ ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
13
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
MFR EMERGING MFR GLOBAL MFR GLOBAL
MARKETS ASSET HIGH
TOTAL RETURN ALLOCATION YEILD
SERIES SERIES SERIES
------------ ----------- -----------
<S> <C> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income ..................... $ 38,237 $ 42,313 $ 504,485
Net realized gain (loss) .................. 64,185 (12,603) 40,707
Unrealized appreciation (depreciation)
during the year .......................... 16,858 280,467 (209,566)
------------ ----------- -----------
Net increase in net assets
resulting from operations .............. 119,280 310,177 335,626
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A ................................. (19,305) (47,067) (313,112)
Class B ................................. (11,597) (16,244) (119,467)
Net realized gain
Class A ................................. (49,451) (1,063) (112,564)
Class B ................................. (39,404) (531) (72,438)
------------ ----------- -----------
Total distributions to shareholders ..... (119,757) (64,905) (617,581)
CAPITAL SHARE TRANSACTIONS (a):
Proceeds from sale of shares
Class A ................................. 195,135 930,998 257,972
Class B ................................. 57,764 186,899 37,765
Dividends reinvested
Class A ................................. 68,660 40,030 406,455
Class B ................................. 51,001 14,698 189,618
Shares redeemed
Class A ................................. (1,786) (105,412) (2,504,274)
Class B ................................. (5,165) (10) (42,989)
------------ ----------- -----------
Net increase (decrease) from
capital share transactions ............. 365,609 1,067,203 (1,655,453)
------------ ----------- -----------
Total increase (decrease) in net assets 365,132 1,312,475 (1,937,408)
NET ASSETS:
Beginning of period ....................... 994,587 1,079,999 6,264,993
------------ ----------- -----------
End of period ............................. $ 1,359,719 $ 2,392,474 $ 4,327,585
============ =========== ===========
Undistributed net investment income
at end of year ........................... $ -- $ 4,515 $ 4,817
============ =========== ===========
(a) Shares issued and redeemed
Shares sold
Class A ............................... 20,710 86,550 26,847
Class B ............................... 6,063 16,827 3,810
Dividends reinvested
Class A ............................... 7,484 3,522 43,292
Class B ............................... 5,533 1,308 20,007
Shares redeemed
Class A ............................... (219) (9,647) (249,470)
Class B ............................... (633) (1) (4,338)
------------ ----------- -----------
Net increase (decrease) ................. 38,938 98,559 (159,852)
============ =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
14
<PAGE>
STATEMENTS 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 YEILD
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
(loss) 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.
15
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
MFR EMERGING MARKETS TOTAL RETURN SERIES (CLASS A)
FISCAL PERIOD ENDED
DECEMBER 31
----------------------------
1998(c)(e) 1997(b)(c)(e)
---------- -------------
PER SHARE DATA:
NET ASSET VALUE BEGINNING OF PERIOD ........... $ 9.25 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income ......................... 0.38 0.21
Net Gain (Loss) on Securities
(realized and unrealized) .................... 0.56 (0.77)
---------- -------------
Total from Investment Operations .............. 0.94 (0.56)
LESS DISTRIBUTIONS:
Dividends (from Net Investment Income) ........ (0.26) (0.19)
Distributions (from Capital Gains) ............ (0.67) --
---------- -------------
Total Distributions ......................... (0.93) (0.19)
---------- -------------
NET ASSET VALUE END OF PERIOD ................. $ 9.26 $ 9.25
========== =============
TOTAL RETURN (a) .............................. 10.21% (5.6%)
RATIOS/SUPPLEMENTAL DATA:
Net Assets End of Period (thousands) .......... $ 757 $ 497
Ratio of Expenses to Average Net Assets ....... 1.88% 2.00%
Ratio of Net Investment Income (Loss)
to Average Net Assets ........................ 3.99% 3.38%
Portfolio Turnover Rate ....................... 84% 22%
MFR EMERGING MARKETS TOTAL RETURN SERIES (CLASS B)
FISCAL PERIOD ENDED
DECEMBER 31
----------------------------
1998(c)(e) 1997(b)(c)(e)
---------- -------------
PER SHARE DATA:
NET ASSET VALUE BEGINNING OF PERIOD ........... $ 9.25 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income ......................... 0.29 0.16
Net Gain (Loss) on Securities
(realized and unrealized) .................... 0.63 (0.77)
---------- -------------
Total from Investment Operations .............. 0.92 (0.61)
LESS DISTRIBUTIONS:
Dividends (from Net Investment Income) ........ (0.19) (0.14)
Distributions (from Capital Gains) ............ (0.67) --
---------- -------------
Total Distributions ......................... (0.86) (0.14)
---------- -------------
NET ASSET VALUE END OF PERIOD ................. $ 9.31 $ 9.25
========== =============
TOTAL RETURN (a) .............................. 10.1% (6.1%)
RATIOS/SUPPLEMENTAL DATA:
Net Assets End of Period (thousands) .......... $ 603 $ 497
Ratio of Expenses to Average Net Assets ....... 2.75% 2.72%
Ratio of Net Investment Income (Loss)
to Average Net Assets ........................ 3.03% 2.66%
Portfolio Turnover Rate ....................... 84% 22%
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)
FISCAL PERIOD ENDED
DECEMBER 31
----------------------------
1998(c)(e) 1997(b)(c)(e)
---------- -------------
PER SHARE DATA:
NET ASSET VALUE BEGINNING OF PERIOD ........... $ 9.82 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income ......................... 0.43 0.14
Net Gain (Loss) on Securities
(realized and unrealized) .................... 1.62 (0.24)
---------- -------------
Total from Investment Operations .............. 2.05 (0.10)
LESS DISTRIBUTIONS:
Dividends (from Net Investment Income) ........ (0.35) (0.08)
Distributions (from Capital Gains) ............ (0.01) --
---------- -------------
Total Distributions ......................... (0.36) (0.08)
---------- -------------
NET ASSET VALUE END OF PERIOD ................. $ 11.51 $ 9.82
========== =============
TOTAL RETURN (a) .............................. 20.9% (1.0%)
RATIOS/SUPPLEMENTAL DATA:
Net Assets End of Period (thousands) .......... $ 1,591 $ 567
Ratio of Expenses to Average Net Assets ....... 1.46% 1.85%
Ratio of Net Investment Income (Loss)
to Average Net Assets ........................ 3.22% 2.24%
Portfolio Turnover Rate ....................... 25% 28%
MFR GLOBAL ASSET ALLOCATION SERIES (CLASS B)
FISCAL PERIOD ENDED
DECEMBER 31
----------------------------
1998(c)(e) 1997(b)(c)(e)
---------- -------------
PER SHARE DATA:
NET ASSET VALUE BEGINNING OF PERIOD ........... $ 9.82 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income ......................... 0.26 0.09
Net Gain (Loss) on Securities
(realized and unrealized) .................... 1.56 (0.24)
---------- -------------
Total from Investment Operations .............. 1.82 (0.15)
LESS DISTRIBUTIONS:
Dividends (from Net Investment Income) ........ (0.23) (0.03)
Distributions (from Capital Gains) ............ (0.01) --
---------- -------------
Total Distributions ......................... (0.24) (0.03)
---------- -------------
NET ASSET VALUE END OF PERIOD ................. $ 11.40 $ 9.82
========== =============
TOTAL RETURN (a) .............................. 18.6% (1.5%)
RATIOS/SUPPLEMENTAL DATA:
Net Assets End of Period (thousands) .......... $ 802 $ 513
Ratio of Expenses to Average Net Assets ....... 2.75% 2.72%
Ratio of Net Investment Income (Loss)
to Average Net Assets ....................... 1.72% 1.40%
Portfolio Turnover Rate ....................... 25% 28%
SEE ACCOMPANYING NOTES.
17
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
MFR GLOBAL HIGH YIELD SERIES (CLASS A)
<TABLE>
<CAPTION>
FISCAL PERIOD ENDED DECEMBER 31
----------------------------------------------------------
PER SHARE DATA: ........................ 1998(c)(e) 1997(c)(e) 1996(c)(e) 1995(c)(d)(e)
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD .... $ 9.94 $ 10.36 $ 10.15 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income .................. 1.05 0.88 1.06 0.63
Net Gain (Loss) on Securities
(realized and unrealized) ............. (0.42) (0.42) .06 0.09
---------- ---------- ---------- -------------
Total from Investment Operations ....... 0.63 0.46 1.12 0.72
LESS DISTRIBUTIONS:
Dividends (from Net Investment Income) . (1.03) (0.63) (0.69) (0.55)
Distributions (from Capital Gains) ..... (0.42) (0.25) (0.22) (0.02)
---------- ---------- ---------- -------------
Total Distributions .................... (1.45) (0.88) (0.91) (0.57)
---------- ---------- ---------- -------------
NET ASSET VALUE END OF PERIOD .......... $ 9.12 $ 9.94 $ 10.36 $ 10.15
========== ========== ========== =============
TOTAL RETURN (a) ....................... 6.8% 4.6% 11.6% 7.3%
RATIOS/SUPPLEMENTAL DATA:
Net Assets End of Period (thousands) ... $ 2,629 $ 4,647 $ 3,507 $ 2,968
Ratio of Expenses to Average Net Assets 1.56% 1.76% 1.98% 2.00%
Ratio of Net Investment Income (Loss) to
Average Net Assets .................... 10.29% 8.77% 10.39% 11.04%
Portfolio Turnover Rate ................ 57% 88% 96% 127%
</TABLE>
MFR GLOBAL HIGH YIELD SERIES (CLASS B)
<TABLE>
<CAPTION>
FISCAL PERIOD ENDED DECEMBER 31
----------------------------------------------------------
PER SHARE DATA: ....................... 1998(c)(e) 1997(c)(e) 1996(c)(e) 1995(c)(d)(e)
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD ... $ 9.98 $ 10.41 $ 10.17 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income ................. 0.87 0.85 0.98 0.56
Net Gain (Loss) on Securities
(realized and unrealized) ............ (0.36) (0.49) 0.06 0.12
---------- ---------- ---------- -------------
Total from Investment Operations ...... 0.51 0.36 1.04 0.68
LESS DISTRIBUTIONS:
Dividends (from Net Investment Income) (0.72) (0.54) (0.57) (0.49)
Distributions (from Capital Gains) .... (0.42) (0.25) (0.23) (0.02)
---------- ---------- ---------- -------------
Total Distributions ................... (1.14) (0.79) (0.80) (0.51)
---------- ---------- ---------- -------------
NET ASSET VALUE END OF PERIOD ......... $ 9.35 $ 9.98 $ 10.41 $ 10.17
========== ========== ========== =============
TOTAL RETURN (a) ...................... 5.4% 3.6% 10.7% 6.9%
RATIOS/SUPPLEMENTAL DATA:
Net Assets End of Period (thousands) .. $ 1,699 $ 1,618 $ 1,541 $ 1,440
Ratio of Expenses to Average Net Assets 2.75% 2.51% 2.75% 2.75%
Ratio of Net Investment Income (Loss)
to Average Net Assets ................ 8.90% 8.02% 9.64% 10.24%
Portfolio Turnover Rate ............... 57% 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 1998
---- ---- ---- ----
MFR Emerging Markets Total Class A - - 5.88% 5.66%
Return Series Class B - - 6.60% 6.52%
MFR Global Asset Allocation Class A - - 5.67% 3.97%
Series Class B - - 6.54% 5.24%
MFR Global High Yield Class A 2.42% 2.73% 2.51% 2.53%
Series Class B 3.93% 3.75% 3.25% 3.72%
(d) MFR Global High Yield 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.
SEE ACCOMPANYING NOTES.
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. SIGNIFICANT ACCOUNTING POLICIES
MFR Emerging Markets Total Return Series, MFR Global Asset Allocation Series,
and MFR Global High Yield 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.
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 counterparty 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. Fluctuations 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)
DECEMBER 31, 1998
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.
H. USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from such estimates.
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 Series and 1% of the average net assets for MFR Emerging
Markets Total Return Series and MFR Global Asset Allocation Series. MFR is
waiving all of the management fees for the Series until December 31, 1998. In
addition, for the year ended December 31, 1998, 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 Series 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 year ended
December 31, 1998, 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 year ended
December 31, 1998, 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) ................ $ 407 $ 1,149 $ 852
CDSC (Class B) ............................ 250 0 86
Broker/Dealer (Class A) ................... 2,703 5,126 3,581
Broker/Dealer (Class B) ................... 2,291 7,285 1,266
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.
21
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
3. INVESTMENT TRANSACTIONS
Investment transactions for the year ended December 31, 1998, (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 ............................. $ 1,014,648 $1,425,193 $2,678,945
Proceeds from Sales ................... 631,509 368,139 4,177,329
4. FEDERAL INCOME TAX MATTERS
The amounts of unrealized appreciation (depreciation) as of December 31,
1998, were as follows:
MFR MFR MFR
Emerging Global Global
Markets Asset High
Total Return Allocation Yield
Series Series Series
------------ ---------- ---------
Gross Unrealized Appreciation ....... $ 183,407 $ 379,986 $ 72,960
Gross Unrealized Depreciation ....... (240,097) (123,715) (452,675)
------------ ---------- ---------
Net Unrealized Appreciation
(Depreciation) ..................... $ (56,690) $ 256,271 $(379,715)
============ ========== =========
5. FORWARD FOREIGN EXCHANGE CONTRACT
At December 31, 1998, the following Series had open forward foreign exchange
contract to sell currency:
<TABLE>
<CAPTION>
Foreign Amount U.S. $ Value
Settlement Currency to be received as of Unrealized
Currency Type Date to be delivered in U.S. $ 12-31-98 Depreciation
- -------- ---- ---------- --------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
MFR GLOBAL
ASSET ALLOCATION
SERIES
Japanese Yen....... Sell 1/11/99 10,000,000 $ 84,026 $ 88,541 $ (4,515)
============
</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, 1997 ......... $ -- --
Options written .................. 4,609 507,018
Exercised ........................ (1,694) (157,013)
Expirations ...................... (2,915) (350,005)
--------- ---------
Balance at Dec. 31, 1998 ......... $ -- --
========= =========
MFR GLOBAL ASSET ALLOCATION SERIES
----------------------------------
Number of
Premiums Contracts
--------- ---------
Balance at Dec. 31, 1997 ......... $ -- --
Options written .................. 4,525 551,301
Exercised ........................ (1,777) (100,476)
Expirations ...................... (2,748) (450,825)
--------- ---------
Balance at Dec. 31, 1998 ......... $ -- --
========= =========
MFR GLOBAL HIGH YIELD SERIES
----------------------------
Number of
Premiums Contracts
---------- ----------
Balance at Dec. 31, 1997 ......... $ 12,062 570,130
Options written .................. 32,871 3,273,300
Exercised ........................ (22,165) (1,783,247)
Expirations ...................... (22,768) (2,060,183)
---------- ----------
Balance at Dec. 31, 1998 ......... $ -- --
========== ==========
22
<PAGE>
REPORT OF INDEPENDANT AUDITORS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
SECURITY INCOME FUND
We have audited the accompanying balance sheets, including the schedule of
investments, of the following series of Security Income Fund: MFR Global High
Yield, MFR Emerging Markets Total Return and MFR Global Asset Allocation Series
(the Funds) as of December 31, 1998, the related statements of operations,
changes in net assets and the financial highlights for the periods indicated
therein. These financial statements and the financial highlights are the
responsibility of the 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, 1998, 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 series of Security Income Fund indicated above at December 31, 1998, 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 5, 1999
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 concerning the sales charges and other pertinent information.
SECURITY FUNDS
OFFICERS AND DIRECTORS
DIRECTORS
Donald A. Chubb, Jr.
John D. Cleland
Penny A. Lumpkin
Mark L. Morris, Jr., D.V.M.
Maynard F. Oliverius
Maria Fiorini Ramirez (Income Fund only)
James R. Schmank
OFFICERS
John D. Cleland, PRESIDENT
James R. Schmank, VICE PRESIDENT
Mark E. Young, VICE PRESIDENT
Steven M. Bowser, VICE PRESIDENT, INCOME FUND
Michael A. Petersen, VICE PRESIDENT, INCOME FUND
Thomas A. Swank, VICE PRESIDENT, INCOME FUND
Amy J. Lee, SECRETARY
Christopher D. Swickard, ASSISTANT SECRETARY
Brenda M. Harwood, TREASURER
[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
