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SECURITY CAPITAL PRESERVATION FUND
A MEMBER OF THE SECURITY BENEFIT GROUP OF COMPANIES
700 HARRISON, TOPEKA, KANSAS 66636-0001
PROSPECTUS
MAY 3, 1999
Security Capital Preservation Fund seeks to provide investors with a high
level of current income while seeking to maintain a stable net asset value
("NAV") per share.
Security Income Fund is an open-end management investment company (mutual
fund). Security Capital Preservation Fund (the "Fund") is a separate series of
Security Income Fund and currently offers three classes of shares (the
"Shares"). The Shares are offered exclusively to retirement accounts such as
tax-sheltered annuity custodial accounts ("TSA Accounts"), individual retirement
accounts ("IRAs"), as defined in this Prospectus, and to employees investing
through participant-directed employee benefit plans.
UNLIKE OTHER MUTUAL FUNDS, THE FUND SEEKS TO ACHIEVE ITS INVESTMENT
OBJECTIVE BY INVESTING ALL OF ITS NET INVESTABLE ASSETS (THE "ASSETS") IN BT
PRESERVATIONPLUS INCOME PORTFOLIO (THE "PORTFOLIO"), A SEPARATE SUBTRUST OF BT
INVESTMENT PORTFOLIOS, A NEW YORK MASTER TRUST FUND (THE "PORTFOLIO TRUST"),
WITH AN IDENTICAL INVESTMENT OBJECTIVE. SEE "INFORMATION CONCERNING THE
MASTER-FEEDER FUND STRUCTURE." THE FUND IS NOT A MONEY MARKET FUND, AND THERE
CAN BE NO ASSURANCE THAT IT WILL BE ABLE TO MAINTAIN A STABLE NAV OR OTHERWISE
ACHIEVE ITS STATED INVESTMENT OBJECTIVE.
Please read this Prospectus before investing and keep it on file for future
reference. It contains important information concerning the Fund and the
Portfolio, including how the Portfolio invests and the services available to the
Fund's shareholders. Bankers Trust Company ("Bankers Trust") is the investment
adviser ("Adviser") of the Portfolio. Security Management Company, LLC is the
Fund's administrator and transfer agent (the "Administrator").
LIKE SHARES OF ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
To learn more about the Fund and the Portfolio, investors can obtain a copy
of the Fund's Statement of Additional Information ("SAI"), dated May 3, 1999,
which has been filed with the Securities and Exchange Commission (the "SEC") and
is incorporated herein by this reference. For a free copy of the SAI please call
Security Distributors, Inc. at 1-800-888-2461. The SAI, material incorporated by
reference into this document, and other information regarding the Fund is
maintained electronically with the SEC at Internet Web site
(http://www.sec.gov).
SHARES OF THE FUND ARE NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
AGENCY. AN INVESTMENT IN THE FUND IS SUBJECT TO RISK THAT MAY CAUSE THE VALUE OF
THE INVESTMENT TO FLUCTUATE, AND WHEN THE INVESTMENT IS REDEEMED, THE VALUE MAY
BE HIGHER OR LOWER THAN THE AMOUNT ORIGINALLY INVESTED BY THE INVESTOR.
These securities have not been approved or disapproved by the securities and
exchange
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THE FUND.................................................................... 3
Who May Invest............................................................ 3
INVESTMENT OBJECTIVE........................................................ 3
EXPENSE SUMMARY............................................................. 3
Fund Financial Highlights................................................. 5
INDIVIDUAL RETIREMENT ACCOUNTS AND RETIREMENT PLANS......................... 5
Overview of TSA Accounts.................................................. 5
Overview of Individual Retirement Accounts................................ 6
OWNERSHIP OF SHARES THROUGH PLANS........................................... 6
INVESTMENT OBJECTIVES, POLICIES, PRACTICES AND RISK FACTORS................. 6
Investment Objectives and Policies........................................ 6
Investment Practices of the Portfolio..................................... 8
Risk Factors.............................................................. 9
Risk Factors Relating to Portfolio Securities............................. 9
Lower-Rated Debt Securities ("Junk Bonds")................................ 10
Overview of Wrapper Agreements and Associated Risks....................... 11
Derivatives............................................................... 12
HOW TO PURCHASE SHARES...................................................... 13
Alternative Purchase Options.............................................. 13
Class A Shares............................................................ 13
Class A Distribution Plan................................................. 13
Class B Shares............................................................ 14
Class B Distribution Plan................................................. 15
Class C Shares............................................................ 15
Class C Distribution Plan................................................. 15
Calculation and Waiver of Contingent Deferred Sales Charge................ 16
Confirmations and Statements.............................................. 16
PURCHASES AT NET ASSET VALUE................................................ 16
PURCHASING SHARES THROUGH PLANS............................................. 17
PURCHASING SHARES THROUGH IRAS.............................................. 17
HOW TO REDEEM SHARES........................................................ 17
Redeeming Shares Owned Through Plans...................................... 18
Redeeming Shares Owned Through IRAs....................................... 18
Qualified IRA Redemptions................................................. 19
Traditional IRAs, SEP-IRAs and SIMPLE IRAs................................ 20
Roth IRAs................................................................. 20
Keogh Plans............................................................... 21
Education IRAs............................................................ 21
SHAREHOLDER AND FUND INFORMATION............................................ 21
Investor Services......................................................... 21
Net Asset Value........................................................... 21
Dividends and Capital Gains Distributions................................. 22
Tax Considerations........................................................ 22
Performance............................................................... 22
Explanation of Performance Terms.......................................... 23
MANAGEMENT OF THE FUND...................................................... 24
Boards of Directors....................................................... 24
Investment Adviser........................................................ 24
The Investment Advisory Agreement......................................... 25
Portfolio Management...................................................... 25
Administrator............................................................. 25
Distributor............................................................... 26
Custodian................................................................. 26
Year 2000 Compliance...................................................... 26
Exchange Privilege........................................................ 26
ADDITIONAL INFORMATION ABOUT THE FUND....................................... 27
Shareholder Inquiries..................................................... 28
INFORMATION CONCERNING THE MASTER FEEDER FUND STRUCTURE..................... 28
DEFINITIONS OF SECURITIES PURCHASED BY THE PORTFOLIO........................ 28
Asset-Backed Securities................................................... 28
Collateralized Mortgage Obligations....................................... 29
Mortgage-Backed Securities................................................ 29
Real Estate Mortgage Investment Conduits.................................. 29
Repurchase Agreements..................................................... 29
Reverse Repurchase Agreements and Dollar Rolls............................ 29
Rule 144A Securities...................................................... 30
Short-Term Investments.................................................... 30
U.S. Government Securities................................................ 30
Other U.S. Dollar-Denominated Fixed Income Securities..................... 30
U.S. Dollar-Denominated Foreign Securities................................ 30
U.S. Dollar-Denominated Sovereign and Supranational Fixed Income
Securities.............................................................. 30
When-Issued and Delayed Delivery Securities............................... 30
Zero Coupon Securities.................................................... 31
APPENDIX A - REDUCED SALES CHARGES.......................................... 32
Class A Shares............................................................ 32
Rights of Accumulation.................................................... 32
Statement of Intention.................................................... 32
Reinstatement Privilege................................................... 32
APPENDIX B - ADDITIONAL INFORMATION ABOUT TSAS.............................. 33
TYPES OF INDIVIDUAL RETIREMENT ACCOUNTS..................................... 33
Traditional IRAs.......................................................... 33
Roth IRAs................................................................. 33
SEP-IRAs.................................................................. 33
SIMPLE IRAs............................................................... 34
Keogh Plans............................................................... 34
Education IRAs............................................................ 34
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THE FUND
WHO MAY INVEST -- The Fund is designed for investors seeking preservation and
stability of principal and a level of current income higher than money market
securities over most time periods. The Fund has been established to serve as an
alternative investment to short-term bond funds and money market securities. In
addition, the Fund is designed as a comparable investment to stable value or
guaranteed investment contract options offered in employee benefit plans (such
as 401(k) plans). The Fund currently offers three classes of shares exclusively
to TSA Accounts, individual retirement accounts and to employees investing
through participant-directed employee benefit plans (each a "Plan" and together
"Plans"). For the purpose of this prospectus, individual retirement accounts
include, but are not limited to, those accounts commonly referred to as
traditional IRAs, Roth IRAs, simplified employee pension IRAs ("SEP-IRAs"), IRAs
that are part of a savings incentive match plan for employees ("SIMPLE IRAs"),
Keogh plans and education IRAs (each, an "IRA," collectively referred to herein
as "IRAs"). See "Types of Individual Retirement Accounts" on page 33. The Fund
is offering the Shares to owners of TSA Accounts, IRAs (each an "IRA Owner") and
participants of Plans who purchase Shares through their Plan ("Plan
Participants"). Shares are available to TSA Accounts or IRA Owners directly
through a Security Funds TSA or IRA or through another TSA or IRA provider who
makes available Shares of the Fund.
Shares are offered to Plans either directly, or through vehicles such as
bank collective funds or insurance company separate accounts consisting solely
of such Plans. Shares are also available to employee benefit plans which invest
in the Fund through an omnibus account or similar arrangement.
The Fund is not in itself a balanced investment plan. Owners of TSA
Accounts, IRA Owners and Plan Participants (collectively, "Shareholders") should
consider their investment objectives and tolerance for risk when making an
investment decision. When Shares are redeemed, they may be worth more or less
than what they originally cost, although the nature of the Portfolio's
investments--particularly the Wrapper Agreements (as defined below)--are
intended to stabilize the Fund's NAV per Share.
INVESTMENT OBJECTIVE
The Fund's investment objective is to provide investors with a high level of
current income while seeking to maintain a stable NAV per Share. The Fund seeks
to achieve its investment objective by investing all of its Assets in the
Portfolio. The Portfolio will seek to achieve this objective by investing in a
diversified portfolio of fixed income securities, money market instruments,
futures, options and other instruments ("Portfolio Securities") and by entering
into wrapper agreements with financial institutions, such as insurance companies
and banks, which are intended to stabilize the NAV per Share of the Fund (the
"Wrapper Agreements"). See "Overview of Wrapper Agreements and Associated Risks"
herein. In connection with the Global Asset Allocation Strategy (described
below), Portfolio Securities may include indexed securities, futures contracts
on securities indices, securities representing securities of foreign issuers
(e.g. ADRs, GDRs and EDRs), options on stocks, options on futures contracts,
foreign currency exchange transactions and options on foreign currencies. See
"Investment Objectives and Policies -- Global Asset Allocation Enhancement"
herein. There can be no assurance that the Fund will achieve its stated
investment objective.
EXPENSE SUMMARY
Annual operating expenses are paid out of the assets of the Portfolio and the
Fund. The Portfolio pays an investment advisory fee and an administrative
services fee to Bankers Trust and wrapper expenses to the Wrapper Providers (as
defined below). The Fund incurs additional administrative expenses such as
maintaining shareholder records and furnishing shareholder statements. The Fund
must also provide semi-annual financial reports. The following tables are
intended to assist investors in understanding the expenses associated with
investing in the Fund. The expenses shown on the following pages are estimates
for the first full year of operations. The table provides (i) a summary of
expenses related to purchases and redemptions (sales) of Shares and the
anticipated annual operating expenses of the Fund and the Portfolio, in the
aggregate, as a percentage of average daily net assets and (ii) an example
illustrating the dollar cost of such expenses on a $1,000 investment in the
Fund. THE DIRECTORS OF THE SECURITY INCOME FUND BELIEVE THAT THE AGGREGATE
EXPENSES OF THE FUND (INCLUDING ITS PROPORTIONATE SHARE OF THE PORTFOLIO'S
EXPENSES) WILL BE LESS THAN OR APPROXIMATELY EQUAL TO THE EXPENSES THAT THE FUND
WOULD INCUR IF IT DIRECTLY RETAINED THE SERVICES OF AN INVESTMENT ADVISER AND
THE ASSETS OF THE FUND WERE INVESTED DIRECTLY IN PORTFOLIO SECURITIES AND
WRAPPER AGREEMENTS.
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SHAREHOLDER FEES
(fees paid directly from your investment)
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CLASS A(1) CLASS B(2) CLASS C(3)
Maximum Sales Charge Imposed
on Purchases (as a percentage
of offering price) 3.5% None None
Maximum Sales Charge Imposed
on Reinvested Dividends None None None
Deferred Sales Load (as a None 5% during the 1%
percentage of original first year,
purchase price or decreasing to 0%
redemption proceeds, in the sixth and
whichever is lower) following years
Maximum Redemption Fee 3% 3% 3%
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1 Purchases of Class A shares in amounts of $1,000,000 or more are not subject
to an initial sales load; however, a deferred sales charge of 1% is imposed
in the event of redemption within one year of purchase.
2 Class B shares convert tax-free to Class A shares automatically after eight
years.
3 A deferred sales charge of 1% is imposed in the event of redemption within
one year of purchase.
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The redemption fee (the "Redemption Fee") payable to the Portfolio is
designed primarily to offset those expenses which may be incurred by the
Portfolio in connection with certain Shareholder redemptions. Proceeds from the
Redemption Fee will be used by the Portfolio to defray the actual portfolio and
administrative costs associated with such redemptions, including custodian,
transfer agent, settlement, and account processing costs, as well as the adverse
impact of such redemptions on the premiums paid for Wrapper Agreements and the
yield on Wrapper Agreements. The Redemption Fee may also have the effect of
discouraging redemptions initiated by shareholders attempting to take advantage
of short-term interest rate movements.
Qualified TSA Account Redemptions (as described in "Redeeming Shares Owned
Through TSA Accounts and IRAs" herein), Qualified IRA Redemptions (as described
in "Redeeming Shares Owned Through TSA Accounts and IRAs" herein) and Qualified
Plan Redemptions (as described in "Redeeming Shares Owned Through Plans" herein)
are not subject to the Redemption Fee at any time. All other redemptions are
subject to the Redemption Fee, in the amount of 3%, on the proceeds of such
redemptions of Shares by Shareholders on any day that the "Interest Rate
Trigger" (as described below) is "active," and not subject to those charges on
days that the Interest Rate Trigger is "inactive." The Interest Rate Trigger is
active on any day when, as of the preceding day, the "Reference Index Yield"
exceeds the sum of the "Annual Effective Yield of the Portfolio" plus 1.80%. The
"Reference Index Yield" shall be defined on any determination date as the
previous day's closing "Yield to Worst" on the Lehman Brothers Intermediate
Treasury Bond Index(R) and the "Annual Effective Yield of the Portfolio" is
defined as set forth under "Explanation of Performance Terms" on page 23 herein.
See "Shareholder and Fund Information -- Explanation of Performance Terms".
The status of the Interest Rate Trigger will either be "active" or
"inactive" on any day, and shall be determined on every day that an NAV is
calculated for the Portfolio. Once the Interest Rate Trigger is active, it
remains active every day until the Reference Index Yield is less than the sum of
the Annual Effective Yield of the Portfolio plus 1.55%, at which time the
Interest Rate Trigger becomes inactive on the following day and remains inactive
every day thereafter until it becomes active again. The following is an example
of when and how the Redemption Fee will apply to the redemption of Shares.
EXAMPLE -- A Class A Shareholder is considering submitting a request for a
redemption other than a Qualified TSA Redemption, a Qualified IRA Redemption or
Qualified Plan Redemption to the Fund on March 2 in the amount of $5,000. Assume
that the Reference Index Yield is 8.65% as of the close of business on March 1
and the Annual Effective Yield of the Portfolio is 6.20% as of that date. Since
the Annual Effective Yield of the Portfolio plus 1.80% (8.0%) is less than the
Reference Index Yield (8.65%), the Interest Rate Trigger is active. Thus, the
net redemption proceeds to the Shareholder will be $4,850. The Redemption Fee
will continue to apply to all redemptions which are not Qualified TSA
Redemptions, Qualified IRA Redemptions or Qualified Plan Redemptions until the
day after the Reference Index Yield is less than the sum of the Annual Effective
Yield of the Portfolio plus 1.55%.
(Please note that this example does not take into consideration an
individual Shareholder's tax issues or consequences including without limitation
any withholding taxes that may apply.)
Shareholders can obtain information regarding when the Interest Rate Trigger
is active, as well as the Annual Effective Yield of the Portfolio and the
Reference Index Yield by calling 1-800-888-2461, extension 3127. The amount of,
and method of applying, the Redemption Fee, including the operation of the
Interest Rate Trigger, may be changed in the future.
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ANNUAL FUND OPERATING EXPENSES
(as a percentage of the Fund's projected averaged daily net assets)
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CLASS A CLASS B CLASS C
Management Fees (after fee waivers)(1)........ .42% .42% .42%
12b-1 Fees(2)................................. 0.25% 0.75% 0.50%
Other Expenses (after expense reimbursements). 1.08% 1.08% 1.08%
---- ---- ----
Total Fund Operating Expenses................. 1.75% 2.25% 2.00%
==== ==== ====
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1 The Fund does not directly pay a management fee; the amount shown reflects
the Fund's proportionate share of the Portfolio's management fee.
2 Long-term holders of shares that are subject to an asset-based sales charge
may pay more than the equivalent of the maximum front-end sales charge
otherwise permitted by NASD Rules.
3 "Other Expenses" includes 0.20% for the purchase of wrapper agreements by the
Portfolio. This amount is an estimate and the actual cost of wrapper
agreements may be more or less than 0.20%. The wrapper fee expenses incurred
by the Portfolio will be those fees actually charged by the wrapper providers.
Wrapper Agreements are contracts entered into by the Portfolio that are
intended to stabilize the value per share of the Fund (see "Investment
Objectives, Policies, Practices and Risk Factors").
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EXAMPLE -- You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period. No
Redemption Fee has been included.
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CLASS A CLASS B CLASS C
------------------------------------------------------
1 Year $64 $73 $30
3 Years 100 100 63
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You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return, (2) redemption at the end of each time period and (3) assessment
of the 3% Redemption Fee.
------------------------------------------------------
CLASS A CLASS B CLASS C
------------------------------------------------------
1 Year $94 $103 $60
3 Years 130 130 93
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You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) no redemption.
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CLASS A CLASS B CLASS C
------------------------------------------------------
1 Year $64 $23 $20
3 Years 100 70 63
------------------------------------------------------
The expense table and the example above show the estimated costs and
expenses that a Shareholder will bear directly or indirectly as a shareholder of
the Fund. Bankers Trust has voluntarily agreed to waive a portion of its
investment advisory fee payable by the Portfolio. Without such waiver, the
Portfolio's investment advisory fee would be 0.70% of its average daily net
assets. Bankers Trust has also voluntarily agreed to waive a portion of its
administration fees (included in "Other Expenses"). Without such waiver, "Other
Expenses" would be 1.16%. Bankers Trust may terminate or adjust these voluntary
waivers and reimbursements at any time in its sole discretion without notice to
shareholders. In addition, the Administrator has agreed, for each of the Fund's
fiscal years, to cap the average annual expenses of the Fund at 1.5%, exclusive
of interest, taxes, brokerage fees and commissions, extraordinary expenses and
12b-1 fees. In the absence of these waivers, it is estimated that "Total
Operating Expenses" of the Class A shares would be 2.11% for the Class B shares
would be 2.61% and for Class C shares would be 2.36%. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES, AND ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. Moreover, while the example assumes a 5%
annual return, actual performance will vary and may result in a return greater
or less than 5%.
For more information about the Fund's and the Portfolio's expenses see
"Management of the Fund" and "Valuation Details" herein. See "How to Purchase
Shares" for more information concerning the sales load. Also, see Appendix A for
a discussion of "Rights of Accumulation" and "Statement of Intention" which
options may serve to reduce the front-end sale load on purchases of Class A
shorts.
FUND FINANCIAL HIGHLIGHTS -- The Fund will have a fiscal year end of September
30. As this is the Fund's first fiscal year, financial information with respect
to the Fund is not available at this time.
TSA ACCOUNTS, INDIVIDUAL RETIREMENT ACCOUNTS AND RETIREMENT PLANS
OVERVIEW OF TSA ACCOUNTS -- In general, Section 403(b)(7) of the Internal
Revenue Code of 1986, as amended (the "Code") permits public school employees
and employees of certain types of charitable, educational and scientific
organizations specified in Section 501(c)(3) of the Code to purchase shares of a
mutual fund through a custodial account, and, subject to certain limitations, to
exclude the amount of purchase payments from gross income for tax purposes.
Shares of the Fund may be purchased in connection with a TSA custodial account.
TSA Accounts may provide significant tax savings to individuals, but are
governed by a complex set of tax rules under the Code and the regulations
promulgated by the Department of the Treasury thereunder. If you already have a
Security Funds TSA custodial account, you may be able to invest in the Fund. If
you do not presently have a Security Funds TSA custodial account and you meet
the requirements of the applicable tax rules, you may be able to create a
Security Funds TSA custodial account (or a TSA custodial account from another
provider that makes shares of the Fund available to its customers) and invest in
shares of the Fund through that TSA. Included in Appendix B is a general
discussion of some TSA features. HOWEVER, TSA OWNERS AND OTHER PROSPECTIVE
INVESTORS SHOULD CONSULT WITH THEIR PROFESSIONAL TAX AND FINANCIAL ADVISERS
BEFORE ESTABLISHING A TSA OR OTHERWISE INVESTING IN SHARES.
OVERVIEW OF INDIVIDUAL RETIREMENT ACCOUNTS -- In general, an IRA is a trust or
custodial account established in the United States for the exclusive benefit of
an individual or his or her beneficiaries. (Keogh plans are established by
self-employed persons, including partnerships, and also cover eligible non-owner
employees.) Most IRAs are designed principally as retirement savings vehicles.
Education IRAs are designed to provide a tax-favored means of saving for a
child's educational expenses. IRAs may provide significant tax savings to
individuals, but are governed by a complex set of tax rules set out under the
Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
promulgated by the Department of the Treasury thereunder. If you already have an
IRA, your IRA may be able to invest in the Fund. If you do not presently have an
IRA and you meet the requirements of the applicable tax rules, you may be able
to create an IRA and invest in Shares of the Fund through that IRA. Included in
Appendix B is a general discussion of some IRA features and IRA types. HOWEVER,
IRA OWNERS AND OTHER PROSPECTIVE INVESTORS SHOULD CONSULT WITH THEIR
PROFESSIONAL TAX AND FINANCIAL ADVISERS BEFORE ESTABLISHING AN IRA OR INVESTING
IN SHARES. FOR MORE INFORMATION CALL 1-800-888-2461.
OWNERSHIP OF SHARES THROUGH PLANS
Fund Shares owned by Plan Participants through Plans are held either directly by
the respective Plan, or beneficially through vehicles such as bank collective
funds or insurance company separate accounts consisting solely of such Plans
(collectively, "Plan Pools"), which will in turn offer the Fund as an investment
option to their participants. Investments in the Fund may by themselves
represent an investment option for a Plan or may be combined with other
investments as part of a pooled investment option for the Plan. In the latter
case, the Fund may require Plans to provide information regarding the withdrawal
order and other characteristics of any pooled investment option in which the
Shares are included prior to a Plan's initial investment in the Fund.
Thereafter, the Fund will require the Plan to provide information regarding any
changes to the withdrawal order and other characteristics of the pooled
investment option before such changes are implemented. The Fund in its sole
discretion may decline to sell Shares to Plans if the governing withdrawal order
or other characteristics of any pooled investment option in which the Shares are
included is determined at any time to be disadvantageous to the Fund.
Plan Participants should contact their Plan administrator or the
organization that provides recordkeeping services if they have questions
concerning their account. Plan administrators and fiduciaries should call
1-800-888-2461, extension 3127 for information regarding a Plan's account with
the Fund.
INVESTMENT OBJECTIVES, POLICIES, PRACTICES AND RISK FACTORS
INVESTMENT OBJECTIVES AND POLICIES --
THE FUND. The Fund seeks to achieve its investment objective by investing
all of its Assets in the Portfolio, which has the same investment objective as
the Fund. Since the investment characteristics of the Fund will correspond
directly to those of the Portfolio, the following is a discussion of the various
investments of and techniques employed by the Portfolio. Additional information
about the investment policies of the Portfolio appears in "Risk Factors Relating
to Fixed Income Securities" herein and in the SAI. There can be no assurance
that the Fund's and the Portfolio's investment objective will be achieved.
THE PORTFOLIO. The Portfolio's investment objective is a high level of
current income while seeking to maintain a stable value per Share. The Portfolio
will seek to achieve this objective by investing in the Portfolio Securities and
by entering into Wrapper Agreements, intended to stabilize the NAV per Share of
the Fund. Each Wrapper Agreement obligates the Wrapper Provider to maintain the
"Book Value" of a portion of the Portfolio's assets ("Covered Assets") up to a
specified maximum dollar amount, upon the occurrence of certain specified
events. Generally, the Book Value of the Covered Assets is their purchase price
plus interest on the Covered Assets accreted at a rate specified in the Wrapper
Agreement ("Crediting Rate"). The Crediting Rate used in computing Book Value is
calculated by a formula specified in the Wrapper Agreement and is adjusted
periodically. In the case of Wrapper Agreements purchased by the Portfolio, the
Crediting Rate is the actual interest earned on the Covered Assets, or an
index-based approximation thereof, plus or minus an adjustment for an amount
receivable from or payable to the Wrapper Provider based on fluctuations in the
market value of the Covered Assets. See "Overview of Wrapper Agreements and
Associated Risks" herein for further detail.
The Portfolio expects to invest at least 65% of its total assets in fixed-
and floating or variable-rate securities ("Fixed Income Securities") of varying
maturities rated, at the time of purchase, in one of the top four long-term
rating categories by Standard & Poor's ("S&P"), Moody's Investors Service, Inc.
("Moody's"), or Duff & Phelps Credit Rating Co., or comparably rated by another
nationally recognized statistical rating organization ("NRSRO"), or, if not
rated by a NRSRO, of comparable quality as determined by Bankers Trust in its
sole discretion. For example, included are those Fixed Income Securities rated
by S&P in long-term rating categories ranging from AAA to BBB- and the
comparable categories of Moody's, Duff & Phelps Credit Rating Co., or another
NRSRO, or, if not rated by a NRSRO, deemed to be of comparable quality as
determined by Bankers Trust in its sole discretion. Further, because high yield
securities will usually offer higher-yields than higher-rated securities, the
Portfolio may also invest up to ten percent (10%) of its assets in Fixed Income
Securities rated, at the time of purchase in the fifth and sixth long-term
rating categories by S&P (i.e., BB and B), Moody's, or Duff & Phelps Credit
Rating Co., or comparably rated by another NRSRO, or, if not rated by a NRSRO,
of comparable quality as determined by Bankers Trust in its sole discretion. See
"Lower Rated Debt Securities" herein.
WRAPPERS. In addition to the above, the Portfolio will enter into Wrapper
Agreements with insurance companies, banks or other financial institutions
("Wrapper Providers") that are rated, at the time of purchase, in one of the top
two long-term rating categories by Moody's or S&P. There is no active trading
market for Wrapper Agreements, and none is expected to develop; therefore, they
will be considered illiquid. At the time of purchase of any Wrapper Agreement,
the value of all of the Wrapper Agreements and any other illiquid securities
will not exceed 15% of the Portfolio's net assets.
FIXED INCOME SECURITIES. The Fixed Income Securities include fixed income
securities issued or guaranteed by the U.S. government, or any agency or
instrumentality thereof; publicly or privately issued U.S. dollar-denominated
debt of domestic or foreign entities, including corporate, sovereign or
supranational entities; publicly issued U.S. dollar denominated asset-backed
securities issued by domestic or foreign entities; mortgage pass-through
securities issued by the Government National Mortgage Association ("GNMA"), the
Federal Home Loan Mortgage Corporation ("FHLMC") or the Federal National
Mortgage Association ("FNMA"); mortgage pass-through securities issued by
non-government entities such as banks, mortgage lenders, or other financial
institutions, including private label mortgage pass-through securities and whole
loans; collateralized mortgage obligations ("CMOs") and real estate mortgage
investment conduits ("REMICs"), which are mortgage-backed debt instruments that
make payments of principal and interest at a variety of intervals and are
collateralized by any of the aforementioned mortgage pass-through securities or
whole loans; and obligations issued or guaranteed, or backed by securities
issued or guaranteed, by the U.S. government or any of its agencies or
instrumentalities, including Certificates of Accrual Treasury Securities
("CATS"), Treasury Income Growth Receipts ("TIGRs"), and Treasury Receipts
("TRs") and zero coupon securities (securities consisting solely of the
principal or interest component of a U.S. Treasury bond). See "Definitions of
Securities Purchased by the Portfolio" herein for a more detailed description of
the foregoing.
The Portfolio Securities purchased by the Portfolio also include short-term
investments rated, at the time of purchase, in one of the top two short-term
rating categories by an NRSRO or, if unrated, of comparable quality in the
opinion of the Adviser, including commercial paper and time deposits,
certificates of deposit, bankers' acceptances, other instruments of foreign and
domestic banks and thrift institutions and shares of money market mutual funds.
The Portfolio may invest up to 35% of its total assets in such short-term
investments for purposes of liquidity and up to 100% of its total assets in such
instruments for temporary defensive purposes.
GLOBAL ASSET ALLOCATION ENHANCEMENT. Although the Portfolio is intended to
be primarily invested in Fixed Income Securities, the Adviser intends to
implement its Global Asset Allocation Strategy (the "GAA Strategy") in an
attempt to enhance the return on the Portfolio's Assets. The GAA Strategy
employs a multi-factor, global asset allocation model which evaluates equity,
bond, cash and currency opportunities across domestic and international markets.
The GAA Strategy seeks to enhance long-term returns and manage risk by
responding effectively to changes in global markets using instruments including
but not limited to, futures, options and currency forwards.
In implementing the GAA Strategy, the Portfolio invests in options and
futures based on any type of security or index including options and futures
traded on foreign exchanges such as bonds and equity indices of foreign
countries. Some options and futures strategies, including selling futures,
buying puts, and writing calls, hedge the Portfolio's investments against price
fluctuations. Other strategies, including buying futures, writing puts, and
buying calls, tend to increase and will broaden the Portfolio's market exposure.
Options and futures may be combined with each other, or with forward contracts,
in order to adjust the risk and return characteristics of an overall strategy.
The Portfolio may also enter into forward currency exchange contracts
(agreements to exchange one currency for another at a future date), may buy and
sell options and futures contracts relating to foreign currencies, and may
purchase securities indexed to foreign currencies. Currency management
strategies allow the Adviser to shift investment exposure from one currency to
another or to attempt to profit from anticipated declines in the value of a
foreign currency relative to the U.S. dollar. Some of these strategies will
require the Portfolio to segregate liquid assets in a custodial account to cover
its obligations. See "Definitions of Securities Purchased by the Portfolio"
herein. For further information regarding the GAA Strategy, you should consult
"Investment Policies -- Global Asset Allocation Enhancement" in the Fund's SAI.
The Portfolio may also invest in and utilize the following investments and
investment techniques and practices: Rule 144A securities (as defined in
"Securities and Investment Practices of the Portfolio"), when-issued and delayed
delivery securities, repurchase agreements, reverse repurchase agreements and
dollar rolls, and options and futures contracts. See "Definitions of Securities
Purchased by the Portfolio" herein for a more detailed description of the
foregoing.
OTHER PORTFOLIO INFORMATION. In selecting securities for the Portfolio, the
Adviser attempts to maintain an average portfolio duration of the Portfolio
Securities within a range of 2.5 to 4.5 years. Duration is a measure of the
expected life of a Fixed Income Security on a present value basis which
incorporates the security's yield, coupon interest payments, final maturity and
call features into a single measure.
The Fund's investment objective is not a fundamental policy and may be
changed upon notice to, but without the need for approval of, its shareholders.
If there is a change in the Fund's investment objective, its shareholders should
consider whether the Fund remains an appropriate investment in light of their
then-current needs. The investment objective of the Portfolio also is not a
fundamental policy. Shareholders of the Fund will receive 30 days' prior written
notice with respect to any change in the investment objective of the Fund or the
Portfolio. See "Investment Restrictions" in the SAI for a description of the
fundamental policies of the Portfolio that cannot be changed without approval by
"the vote of a majority of the outstanding voting securities" (as defined in the
Investment Company Act of 1940 (the "1940 Act") ) of the Portfolio.
INVESTMENT PRACTICES OF THE PORTFOLIO --
BORROWING. The Portfolio will not borrow money (including through reverse
repurchase agreements or dollar roll transactions) for any purpose in excess of
5% of its total assets, except that it may borrow for temporary or emergency
purposes up to 1/3 of its total assets. Under the 1940 Act, the Portfolio is
required to maintain continuous asset coverage of 300% with respect to such
borrowings and to sell (within three days) sufficient portfolio holdings to
restore such coverage if it should decline to less than 300% due to market
fluctuations or otherwise, even if such liquidation of the Portfolio's holdings
may be disadvantageous from an investment standpoint.
Leveraging by means of borrowing may exaggerate the effect of any increase
or decrease in the value of the Portfolio's securities and the Fund's NAV per
Share, and money borrowed by the Portfolio will be subject to interest and other
costs (which may include commitment fees and/or the cost of maintaining minimum
average balances) that may exceed the income received from the securities
purchased with the borrowed funds. It is not the intention of the Adviser to use
leverage as a normal practice in the investment of the Portfolio's Assets.
HEDGING STRATEGIES. The Portfolio may use certain strategies designed to
adjust the overall risk of its investment portfolio. These "hedging" strategies
involve derivative contracts, including U.S. Treasury and Eurodollar futures
contracts and exchange-traded put and call options on such futures contracts.
New financial products and risk management techniques continue to be developed
and may be used if consistent with the Portfolio's investment objective and
policies. Among other purposes, these hedging strategies may be used to
effectively maintain a desired portfolio duration or to protect against market
risk should the Portfolio change its investments among different types of Fixed
Income Securities. In this respect, these hedging strategies are designed for
different purposes than the investments in Wrapper Agreements. The SAI contains
further information on these strategies.
The Portfolio might not use any hedging strategies, and there can be no
assurance that any strategy used will succeed. If the Adviser is incorrect in
its judgment on market values, interest rates or other economic factors in using
a hedging strategy, the Portfolio may have lower net income and a net loss on
the investment.
Each of these strategies involves certain risks, which include: the fact
that the skills needed to use hedging instruments are different from those
needed to select securities for the Portfolio; the possibility of imperfect
correlation, or even no correlation, between the price movements of hedging
instruments and price movements of the securities or currencies being hedged;
possible constraints placed on the Portfolio's ability to purchase or sell
portfolio investments at advantageous times due to the need for the Portfolio to
maintain "cover" or to segregate securities; and the possibility that the
Portfolio will be unable to close out or liquidate its hedged position.
ASSET COVERAGE. To assure that the Portfolio's use of futures contracts and
related options, as well as when-issued and delayed-delivery securities, are not
used to achieve investment leverage, the Portfolio will cover such transactions,
as required under applicable interpretations of the SEC, either by owning the
underlying securities or by segregating or earmarking liquid securities with the
Portfolio's Custodian (Bankers Trust) in an amount at all times equal to or
exceeding the Portfolio's commitment with respect to these instruments or
contracts. The Portfolio will also cover its use of Wrapper Agreements to the
extent required to avoid the creation of a "senior security" (as defined in the
1940 Act) in connection with its use of such agreements.
GAA STRATEGY. In connection with the GAA Strategy, the Board of Trustees of
the Portfolio has adopted a restriction that the Portfolio will not enter into
any futures contracts or option on futures contracts if immediately thereafter
the amount of margin deposits on all of the futures contracts of the Portfolio
and premiums paid on outstanding options on futures contract owned by the
Portfolio (other than those entered into for bona fide hedging purposes) would
exceed five percent (5%) of the market value of the total assets of the
Portfolio.
RISK FACTORS -- The value of most of the Portfolio Securities will fluctuate
based upon changes in domestic or foreign interest rates, the credit quality of
the issuer, market conditions, and other economic and political news. In
general, the prices of Portfolio Securities will rise when interest rates fall,
and fall when interest rates rise. The Wrapper Agreements are intended to
stabilize the value per Share by offsetting fluctuations in the value of the
Portfolio Securities under certain conditions. Under most circumstances, the
combination of Portfolio Securities and Wrapper Agreements held by the Portfolio
is expected to provide Fund shareholders with a constant NAV per Share and a
current rate of return that is higher than most money market mutual funds over
most time periods. However, there can be no guarantee that the Portfolio will
maintain a constant NAV, and consequently that the Fund will be able to maintain
a constant NAV per Share.
The Portfolio incurs costs in connection with its investment in Wrapper
Agreements which will reduce the Fund's investment return. The Wrapper
Agreements may not insulate the Portfolio from loss if an issuer of Portfolio
Securities defaults on payments of interest or principal. Additionally, an
issuer of a Wrapper Agreement could default on its obligations under the
agreement or the Portfolio might be unable to obtain Wrapper Agreements covering
all of its assets. Either type of default or the inability to obtain Wrapper
Agreements might result in a decline in the value of the Shares. Moreover, in
valuing a Wrapper Agreement, the Board of Trustees of the Portfolio Trust may
determine that such agreement should not be carried by the Portfolio at a value
sufficient to maintain the Portfolio's NAV per Share.
Bankers Trust may use various investment techniques to hedge the Portfolio's
risks, but there is no guarantee that these strategies will work as intended.
See "Risk Factors Related to Fixed Income Securities" for more information.
RISK FACTORS RELATING TO PORTFOLIO SECURITIES -- The following pages contain
more detailed information about the specific types of instruments in which the
Portfolio may invest and strategies the Adviser may employ in pursuit of the
Portfolio's investment objective. A summary of the risks and restrictions
associated with these investments and investment practices is included as well.
The Adviser may not buy all of these instruments or use all of these
techniques to the full extent permitted unless it believes that doing so will
help the Portfolio achieve its objective. Current holdings and investment
strategies will be described in the financial reports of the Fund and the
Portfolio, which will be sent to Fund shareholders twice a year.
All fixed income investments have exposure to three primary types of risks.
Credit risk is the possibility that the issuer of a Fixed Income Security will
fail to make timely payments of either interest or principal to the Portfolio.
Interest rate risk is the potential for fluctuations in the prices of Fixed
Income Securities due to changing interest rates. Income risk is the potential
for decline in the Portfolio's income due to the investment or reinvestment of
assets in Fixed Income Securities when market interest rates are falling.
Although there is no assurance that it will achieve its objective, the
Portfolio attempts to enhance yield while minimizing these risks. If an issuer
of a Fixed Income Security or a Wrapper Provider becomes financially impaired,
it may default on its obligations and the Portfolio's interest income may be
reduced or the Portfolio may incur a loss of principal. This is an example of
credit risk. In order to minimize credit risk, the Portfolio's assets are
allocated among a diversified group of issuers. Credit analysis is applied to
every security and Wrapper Provider selected for the Portfolio. Once purchased,
a security and, in the case of a Wrapper Agreement, the Wrapper Provider is
monitored regularly by Bankers Trust for maintenance of adequate credit
characteristics. In the event that the rating of a security or Wrapper Provider
is downgraded by one or more NRSRO, the Portfolio may elect to retain the
security or applicable Wrapper Agreement. However, some Wrapper Agreements may
require that Fixed Income Securities that fall below investment grade be
liquidated within a set time period typically within one year or less. The
Portfolio may elect not to cover with Wrapper Agreements any Fixed Income
Securities with a remaining maturity of 60 days or less and any cash or short
term investments.
When interest rates rise, Fixed Income Security prices generally decline.
When interest rates fall, Fixed Income Security prices generally increase.
Generally, the longer the maturity of the Fixed Income Security, the higher its
yield, although longer-term Fixed Income Securities tend to offer less price
stability in response to changes in interest rates than do shorter-term
investments. Therefore, portfolios with shorter average maturities tend to have
less risk and lower returns than portfolios with longer average maturities. This
is an example of interest rate risk. In order to help maintain an average
portfolio duration of 2.5 to 4.5 years, the Portfolio will invest primarily in
Fixed Income Securities of short- to intermediate-term maturities. This will
help to minimize interest rate risk. In addition, unlike most traditional fixed
income portfolios, the Portfolio purchases Wrapper Agreements that should offset
substantially all of the price fluctuations typically associated with
longer-term Fixed Income Securities.
It is important to note the distinction between the Portfolio and short-term
investments such as money market funds. The securities held by the Portfolio
have a longer average maturity than those of money market funds. Because a money
market fund has a shorter average maturity, its yield will track the direction
of current market rates of return more closely than the Portfolio. For example,
in a rising interest rate environment, money market yields may rise more quickly
than those of the Portfolio. In a falling interest rate environment, money
market yields may fall more quickly than those of the Portfolio. Over the
long-term, however, intermediate and long-term Fixed Income Securities such as
those purchased by the Portfolio have historically offered higher yields than
short-term investments (i.e., money market funds).
LOWER-RATED DEBT SECURITIES ("JUNK BONDS") -- The Portfolio may invest in debt
securities rated in the fifth and sixth long-term rating categories by S&P,
Moody's and Duff & Phelps Credit Rating Company, or comparably rated by another
NRSRO, or if not rated by a NRSRO, deemed to be of comparable quality as
determined by the Adviser in its sole discretion. While the market for high
yield corporate debt securities has been in existence for many years and has
weathered previous economic downturns, the 1980's brought a dramatic increase in
the use of such securities to fund highly leveraged corporate acquisitions and
restructuring. Past experience may not provide an accurate indication of future
performance of the high yield bond market, especially during periods of economic
recession. In fact, from 1989 to 1991, the percentage of lower-rated debt
securities that defaulted rose significantly above prior levels. The market for
lower-rated debt securities may be thinner and less active than that for
higher-rated debt securities, which can adversely affect the prices at which the
former are sold. If market quotations are not available, lower-rated debt
securities will be valued in accordance with procedures established by the Board
of Trustees, including the use of outside pricing services. Judgment plays a
greater role in valuing high yield corporate debt securities than is the case
for securities for which more external sources for quotations and last sale
information is available. Adverse publicity and changing investor perception may
affect the availability of outside pricing services to value lower-rated debt
securities and the Portfolio's ability to dispose of these securities.
Since the risk of default is higher for lower-rated debt securities, the
Adviser's research and credit analysis are an especially important part of
managing securities of this type held by the Portfolio. In considering
investments for the Portfolio, the Adviser will attempt to identify those
issuers of high-yielding debt securities whose financial conditions are adequate
to meet future obligations, have improved or are expected to improve in the
future. The Adviser's analysis focuses on relative values based on such factors
as interest on dividend coverage, asset coverage, earnings prospects and the
experience and managerial strength of the issuer. The Portfolio may choose, at
its expense or in conjunction with others, to pursue litigation or otherwise
exercise its rights as a security holder to seek to protect the interest of
security holders if it determines this to be in the interest of the Portfolio.
OVERVIEW OF WRAPPER AGREEMENTS AND ASSOCIATED RISKS -- As discussed above, each
Wrapper Agreement obligates the Wrapper Provider to maintain the "Book Value" of
the Covered Assets up to a specified maximum dollar amount, upon the occurrence
of certain specified events. The Book Value of the Covered Assets is their
purchase price (i) plus interest on the Covered Assets at the Crediting Rate,
and (ii) less an adjustment to reflect any defaulted securities. The Crediting
Rate used in computing Book Value is calculated by a formula specified in the
Wrapper Agreement and is adjusted periodically. In the case of Wrapper
Agreements purchased by the Portfolio, the Crediting Rate is the actual interest
earned on the Covered Assets, or an index-based approximation thereof, plus or
minus an adjustment for an amount receivable from or payable to the Wrapper
Provider based on fluctuations in the market value of the Covered Assets. As a
result, while the Crediting Rate will generally reflect movements in the market
rates of interest, it may at any time be more or less than these rates or the
actual interest income earned on the Covered Assets. The Crediting Rate may also
be impacted by defaulted securities and by increases and decreases of the amount
of Covered Assets as a result of contributions and withdrawals tied to the
purchase and redemption of Shares. Furthermore, the premiums due Wrapper
Providers in connection with the Portfolio's investments in Wrapper Agreements
are offset against interest earned and thus reduce the Crediting Rate. These
premiums are generally paid quarterly. In no event will the Crediting Rate fall
below 0% under the Wrapper Agreements entered into by the Portfolio.
Generally, under the terms of a Wrapper Agreement, if the market value (plus
accrued interest on the underlying securities) of the Covered Assets is less
than their Book Value at the time the Covered Assets are liquidated in order to
provide proceeds for withdrawals of Portfolio interests resulting from
redemptions of Shares by Shareholders, the Wrapper Provider becomes obligated to
pay to the Portfolio the difference. Conversely, the Portfolio becomes obligated
to make a payment to the Wrapper Provider if it is necessary for the Portfolio
to liquidate Covered Assets at a price above their Book Value in order to make
withdrawal payments. (Withdrawals generally will arise when the Fund must pay
shareholders who redeem Shares.) Because it is anticipated that each Wrapper
Agreement will cover all Covered Assets up to a specified dollar amount, if more
than one Wrapper Provider becomes obligated to pay to the Portfolio the
difference between Book Value and market value (plus accrued interest on the
underlying securities), each Wrapper Provider will be obligated to pay a
pro-rata amount in proportion to the maximum dollar amount of coverage provided.
Thus, the Portfolio will not have the option of choosing which Wrapper Agreement
to draw upon in any such payment situation.
The terms of the Wrapper Agreements vary concerning when these payments must
actually be made between the Portfolio and the Wrapper Provider. In some cases,
payments may be due upon disposition of Covered Assets; other Wrapper Agreements
provide for settlement of payments only upon termination of the Wrapper
Agreement or total liquidation of the Covered Assets.
The Fund expects that the use of Wrapper Agreements by the Portfolio will
under most circumstances permit the Fund to maintain a constant NAV and to pay
dividends that will generally reflect over time both the interest income of, and
market gains and losses on, the Covered Assets held by the Portfolio less the
expenses of the Fund and the Portfolio. However, there can be no guarantee that
the Fund will maintain a constant NAV per Share or that any Shareholder will
realize the same investment return as might be realized by investing directly in
the Portfolio assets other than the Wrapper Agreements. For example, a default
by the issuer of a Portfolio Security or a Wrapper Provider on its obligations
might result in a decrease in the value of the Portfolio assets and,
consequently, the Shares. The Wrapper Agreements generally do not protect the
Portfolio from loss if an issuer of Portfolio Securities defaults on payments of
interest or principal. Additionally, a Fund shareholder may realize more or less
than the actual investment return on the Portfolio Securities. Furthermore,
there can be no assurance that the Portfolio will be able at all times to obtain
Wrapper Agreements. Although it is the current intention of the Portfolio to
obtain such agreements covering all of its assets (with the exceptions noted),
the Portfolio may elect not to cover some or all of its assets with Wrapper
Agreements should Wrapper Agreements become unavailable or should other
conditions such as cost, in Bankers Trust's sole discretion, render their
purchase inadvisable.
If, in the event of a default of a Wrapper Provider, the Portfolio were
unable to obtain a replacement Wrapper Agreement, Shareholders redeeming Shares
might experience losses if the market value of the Portfolio's assets no longer
covered by the Wrapper Agreement is below Book Value. The combination of the
default of a Wrapper Provider and an inability to obtain a replacement agreement
could render the Portfolio and the Fund unable to achieve their investment
objective of maintaining a stable NAV per Share. If the Board of Trustees of the
Portfolio Trust (the "Portfolio Trust Board") determines that a Wrapper Provider
is unable to make payments when due, that Board may assign a fair value to the
Wrapper Agreement that is less than the difference between the Book Value and
the market value (plus accrued interest on the underlying securities) of the
applicable Covered Assets and the Portfolio might be unable to maintain NAV
stability.
Some Wrapper Agreements require that the Portfolio maintain a specified
percentage of its total assets in short-term investments ("Liquidity Reserve").
These short-term investments must be used for the payment of withdrawals from
the Portfolio and Portfolio expenses. To the extent the Liquidity Reserve falls
below the specified percentage of total assets, the Portfolio is obligated to
direct all net cash flow to the replenishment of the Liquidity Reserve. The
obligation to maintain a Liquidity Reserve may result in a lower return for the
Portfolio and the Fund than if these funds were invested in longer-term Fixed
Income Securities. The Liquidity Reserve required by all Wrapper Agreements is
not expected to exceed 20% of the Portfolio's total assets.
Wrapper Agreements also require that the Covered Assets have a specified
duration or maturity, consist of specified types of securities or be of a
specified investment quality. The Portfolio will purchase Wrapper Agreements
whose criteria in this regard are consistent with the Portfolio's (and the
Fund's) investment objective and policies as described in this Prospectus.
Wrapper Agreements may also require the disposition of securities whose ratings
are downgraded below a certain level. This may limit the Portfolio's ability to
hold such downgraded securities. Please see the SAI for additional information
concerning Wrapper Agreements.
DERIVATIVES -- The Portfolio may invest in various instruments, including the
Wrapper Agreements, that are commonly known as "derivatives." Broadly defined, a
derivative is a financial arrangement the value of which is based on, or
"derived" from, a traditional security, asset or market index. Some derivatives
such as mortgage-related and other asset-backed securities are in many respects
like any other investments, although they may be more volatile or less liquid
than more traditional debt securities. There are, in fact, many different types
of derivatives and many different ways to use them. There are a range of risks
associated with those uses. Futures contracts and options are commonly used for
traditional hedging purposes to attempt to protect an investor from exposure to
changing interest rates, securities prices or currency exchange rates and for
cash management purposes as a low cost method of gaining exposure to a
particular securities market without investing directly in those securities.
However, some derivatives are used for leverage, which tends to magnify the
effect of an instrument's price changes as market conditions change. Leverage
involves the use of a small amount of money to control a large amount of
financial assets and can, in some circumstances, lead to significant losses.
Bankers Trust uses derivatives only in circumstances where it believes they
offer the most economic means of improving the risk/reward profile of the
Portfolio. Except as noted herein, derivatives will not be used to increase
portfolio risk above the level that could be achieved using only traditional
investment securities or to acquire exposure to changes in the value of assets
or indexes that by themselves would not be purchased for the Portfolio. The use
of derivatives for non-hedging purposes may be considered speculative.
GAA STRATEGY. In implementing the GAA Strategy, the Portfolio's investment
in derivatives such as options, futures or forward contracts, and similar
strategies depend on the Adviser's judgment as to the potential risks and
rewards of implementing the different types of strategies. Options and futures
can be volatile investments, and may not perform as expected. If the Adviser
applies a hedge at an inappropriate time or judges price trends incorrectly,
options and futures strategies may lower the Portfolio's return. Additionally,
options and futures traded on foreign exchanges generally are not regulated by
U.S. authorities, and may offer less liquidity and less protection to a
Portfolio in the event of default by the other party to the contract. The
Portfolio could also experience losses if the prices of its options and futures
positions were poorly correlated with its other investments, or if it could not
close out its positions because of an illiquid secondary market.
HOW TO PURCHASE SHARES
Security Distributors, Inc. (the "Distributor"), a wholly-owned subsidiary
of Security Benefit Group, Inc., is principal underwriter for the Fund. Shares
of the Fund may be purchased through authorized investment dealers. In addition,
banks and other financial intermediaries that have an agreement with the
Distributor may make shares of the Fund available to their customers. The
minimum initial purchase must be $100 and subsequent purchases must be $100
unless made through an Accumulation Plan which allows subsequent purchases of
$20.
Orders for the purchase of Shares will be confirmed at an offering price
equal to the net asset value per share next determined after receipt of the
order in proper form by the Distributor (generally as of the close of the
Exchange on that day) plus the sales charge in the case of Class A shares.
Orders received by dealers or other firms prior to the close of the Exchange and
received by the Distributor prior to the close of its business day will be
confirmed at the offering price effective as of the close of the Exchange on
that day.
Orders for shares received by broker/dealers prior to that day's close of
trading on the New York Stock Exchange and transmitted to the Fund prior to its
close of business that day will receive the offering price equal to the net
asset value per share computed at the close of trading on the Exchange on the
same day plus, in the case of Class A shares, the sales charge. Orders received
by broker/dealers after that day's close of trading on the Exchange and
transmitted to the Fund prior to the close of business on the next business day
will receive the next business day's offering price.
ALTERNATIVE PURCHASE OPTIONS -- The Fund offers three classes of shares:
CLASS A SHARES - FRONT-END LOAD OPTION. Class A shares are sold with a sales
charge at the time of purchase. Class A shares are not subject to a sales charge
when they are redeemed (except that shares sold in an amount of $1,000,000 or
more without a front-end sales charge will be subject to a contingent deferred
sales charge for one year.) See Appendix A on page 32 for a discussion of
possible reductions in the front-end sales charge.
CLASS B SHARES - BACK-END LOAD OPTION. Class B shares are sold without a
sales charge at the time of purchase, but are subject to a deferred sales charge
if they are redeemed within five years of the date of purchase. Class B shares
will automatically convert tax-free to Class A shares at the end of eight years
after purchase.
CLASS C SHARES - BACK-END LOAD OPTION. Class C shares are sold without a
sales charge at the time of purchase, but are subject to a deferred sales charge
of 1% if they are redeemed within one year of the date of purchase. Class C
shares do not automatically convert to any other share class.
The decision as to which share class is more beneficial to an investor
depends on the amount and intended length of the investment. Investors who would
rather pay the entire cost of distribution at the time of investment, rather
than spreading such cost over time, might consider Class A shares. Other
investors might consider Class B or Class C shares, in which case 100% of the
purchase price is invested immediately, depending on the amount of the purchase
and the intended length of investment.
Dealers or others receive different levels of compensation depending on
which class of Shares they sell.
CLASS A SHARES -- Class A shares of the Fund are offered at net asset value plus
an initial sales charge as follows:
- --------------------------------------------------------------------------------
SALES CHARGE
--------------------------------------------
APPLICABLE PERCENTAGE OF PERCENTAGE
AMOUNT OF PURCHASE PERCENTAGE OF NET AMOUNT REALLOWABLE
AT OFFERING PRICE OFFERING PRICE INVESTED TO DEALERS
- --------------------------------------------------------------------------------
Less than $100,000............... 3.5% 3.63% 3.0%
$100,000 but less than $500,000.. 2.5% 2.56% 2.0%
$500,000 but less than $1,000,000 1.5% 1.52% 1.0%
$1,000,000 and over.............. None None (See below)
- --------------------------------------------------------------------------------
Purchases of Class A shares in amounts of $1,000,000 or more are made at net
asset value (without a sales charge), but are subject to a contingent deferred
sales charge of 1% in the event of redemption within one year following
purchase. For a discussion of the contingent deferred sales charge, see
"Calculation and Waiver of Contingent Deferred Sales Charges" on page 16.
The Distributor will pay a commission to dealers on such purchases of
$1,000,000 or more as follows: 0.50% on sales up to $5,000,000, plus 0.25% on
sales of $5,000,000 or more up to $10,000,000 and 0.10% on any amount of
$10,000,000 or more.
CLASS A DISTRIBUTION PLAN -- In addition to the sales charge deducted from Class
A shares at the time of purchase, the Fund is also authorized, under a
Distribution Plan pursuant to Rule 12b-1 under the Investment Company Act of
1940 (the "Class A Distribution Plan"), to use its assets to finance certain
activities relating to the distribution of its Shares to investors. The Fund's
Class A Distribution Plan permits payments to be made by the Fund to the
Distributor, to finance various activities relating to the distribution of its
Class A shares to investors, including, but not limited to, the payment of
compensation (including incentive compensation to securities dealers and other
financial institutions and organizations) to obtain various distribution-related
and/or administrative services for the Fund.
Under the Class A Distribution Plan, a monthly payment is made to the
Distributor in an amount computed at an annual rate of .25% of the average daily
net asset value of the Fund's Class A shares. The distribution fees collected
may be used by the Fund and the other series of Security Income Fund to finance
joint distribution activities, for example advertisements promoting each of the
funds, and the costs of such joint activities will be allocated among the funds
on a fair and equitable basis, including on the basis of the relative net assets
of their Class A shares.
The Class A Distribution Plan authorizes payment by the Class A shares of
the Fund of the cost of preparing, printing and distributing prospectuses and
Statements of Additional Information to prospective investors and of
implementing and operating the Plan.
In addition, compensation to securities dealers and others is paid from
distribution fees at an annual rate of .25% of the average daily net asset value
of Class A shares sold by such dealers and remaining outstanding on the Fund's
books to obtain certain administrative services for the Fund's Class A
shareholders. The services include, among other things, processing new
stockholder account applications and serving as the primary source of
information to customers in answering questions concerning the Fund and their
transactions with the Fund. The Distributor is also authorized to engage in
advertising, the preparation and distribution of sales literature and other
promotional activities on behalf of the Fund. Other promotional activities which
may be financed pursuant to the Plan include (i) informational meetings
concerning the Fund for registered representatives interested in selling shares
of the Fund, and (ii) bonuses or incentives offered to all or specified dealers
on the basis of sales of a specified minimum dollar amount of Class A shares of
the Fund by the registered representatives employed by such dealer(s). The
expenses associated with the foregoing activities will include travel expenses,
including lodging.
The Class A Distribution Plan may be terminated at any time by vote of the
directors of the Fund, who are not interested persons of the Fund as defined in
the 1940 Act or by vote of a majority of the Fund's outstanding Class A shares.
In the event the Class A Distribution Plan is terminated, the payments made to
the Distributor pursuant to the Plan up to that time would be retained by the
Distributor. Any expenses incurred by the Distributor in excess of those
payments would be absorbed by the Distributor.
CLASS B SHARES -- Class B shares of the Fund are offered at net asset value,
without an initial sales charge. With certain exceptions, the Fund may impose a
deferred sales charge on Class B shares redeemed within five years of the date
of purchase. No deferred sales charge is imposed on amounts redeemed thereafter.
If imposed, the deferred sales charge is deducted from the redemption proceeds
otherwise payable. The deferred sales charge is retained by the Distributor.
Whether a contingent deferred sales charge is imposed and the amount of the
charge will depend on the number of years since the shareholder made a purchase
payment from which an amount is being redeemed, according to the following
schedule:
--------------------------------------------
CONTINGENT
YEAR SINCE DEFERRED
PURCHASE WAS MADE SALES CHARGE
--------------------------------------------
First........................ 5%
Second....................... 4%
Third........................ 3%
Fourth....................... 3%
Fifth........................ 2%
Sixth and following.......... 0%
--------------------------------------------
Class B shares (except shares purchased through the reinvestment of
dividends and other distributions paid with respect to Class B shares) will
automatically convert on the eighth anniversary of the date such shares were
purchased to Class A shares which are subject to a lower distribution fee. This
automatic conversion of Class B shares will take place without imposition of a
front-end sales charge or exchange fee. (Conversion of Class B shares
represented by stock certificates will require the return of the stock
certificates to the transfer agent.) All shares purchased through reinvestment
of dividends and other distributions paid with respect to Class B shares
("reinvestment shares") will be considered to be held in a separate subaccount.
Each time any Class B shares (other than those held in the subaccount) convert
to Class A shares, a pro rata portion of the reinvestment shares held in the
subaccount will also convert to Class A shares. Class B shares so converted will
no longer be subject to the higher expenses borne by Class B shares. Because the
net asset value per share of the Class A shares may be higher or lower than that
of the Class B shares at the time of conversion, although the dollar value will
be the same, a shareholder may receive more or less Class A shares than the
number of Class B shares converted. Under current law, it is the Fund's opinion
that such a conversion will not constitute a taxable event under federal income
tax law. In the event that this ceases to be the case, the Board of Directors
will consider what action, if any, is appropriate and in the best interests of
the Class B shareholders.
CLASS B DISTRIBUTION PLAN -- The Fund bears some of the costs of selling its
Class B shares under a Distribution Plan adopted with respect to its Class B
shares ("Class B Distribution Plan") pursuant to Rule 12b-1 under the Investment
Company Act of 1940 ("1940 Act"). The Class B Distribution Plan provides for
payments at an annual rate of .75% of the average daily net asset value of the
Class B shares. Amounts paid by the Fund are currently used to pay dealers and
other firms that make Class B shares available to their customers (1) a
commission at the time of purchase normally equal to 2.75% of the value of each
share sold, and (2) a service fee payable for the first year, initially, and for
each year thereafter, quarterly, in an amount equal to .25% annually of the
average daily net asset value of Class B shares sold by such dealers and other
firms and remaining outstanding on the books of the Fund.
NASD Rules limit the aggregate amount that the Fund may pay annually in
distribution costs for the sale of its Class B shares to 6.25% of gross sales of
Class B shares since the inception of the Class B Distribution Plan, plus
interest at the prime rate plus 1% on such amount (less any contingent deferred
sales charges paid by Class B shareholders to the Distributor). The Distributor
intends, but is not obligated, to continue to apply or accrue distribution
charges incurred in connection with the Class B Distribution Plan which exceed
current annual payments permitted to be received by the Distributor from the
Fund. The Distributor intends to seek full payment of such charges from the Fund
(together with annual interest thereon at the prime rate plus 1%) at such time
in the future as, and to the extent that, payment thereof by the Fund would be
within permitted limits.
The Fund's Class B Distribution Plan may be terminated at any time by vote
of its directors who are not interested persons of the Fund as defined in the
1940 Act or by vote of a majority of the outstanding Class B shares. In the
event the Class B Distribution Plan is terminated, the payments made to the
Distributor pursuant to the Plan up to that time would be retained by the
Distributor. Any expenses incurred by the Distributor in excess of those
payments would be absorbed by the Distributor. The Fund makes no payments in
connection with the sale of their Class B shares other than the distribution fee
paid to the Distributor.
CLASS C SHARES -- Class C shares of the Fund are offered at net asset value,
without an initial sales charge. With certain exceptions, the Fund will impose a
deferred sales charge on Class C shares redeemed within one year of the date of
purchase. No deferred sales charge is imposed on amounts redeemed thereafter. If
imposed, the deferred sales charge is deducted from the redemption proceeds
otherwise payable. The deferred sales charge is retained by the Distributor.
CLASS C DISTRIBUTION PLAN -- The Fund bears some of the costs of selling its
Class C shares under a Distribution Plan adopted with respect to its Class C
shares ("Class C Distribution Plan") pursuant to Rule 12b-1 under the 1940 Act.
The Class C Distribution Plan provides for payments at an annual rate of .50% of
the average daily net asset value of the Class C shares. Amounts paid by the
Fund are currently used to pay dealers and other firms that make Class C shares
available to their customers (1) a commission at the time of purchase normally
equal to .25% of the value of each share sold, and for each year thereafter,
quarterly, in an amount equal to .25% annually of the average daily net asset
value of Class C shares sold by such dealers and other firms and remaining
outstanding on the books of the Fund, and (2) a service fee payable for the
first year, initially, and for each year thereafter, quarterly, in an amount
equal to .25% annually of the average daily net asset value of Class C shares
sold by such dealers and other firms and remaining outstanding on the books of
the Fund.
NASD Rules limit the aggregate amount that the Fund may pay annually in
distribution costs for the sale of its Class C shares to 6.25% of gross sales of
Class C shares since the inception of the Class C Distribution Plan, plus
interest at the prime rate plus 1% on such amount (less any contingent deferred
sales charges paid by Class C shareholders to the Distributor). The Distributor
intends, but is not obligated, to continue to apply or accrue distribution
charges incurred in connection with the Class C Distribution Plan which exceed
current annual payments permitted to be received by the Distributor from the
Fund. The Distributor intends to seek full payment of such charges from the Fund
(together with annual interest thereon at the prime rate plus 1%) at such time
in the future as, and to the extent that, payment thereof by the Fund would be
within permitted limits.
The Fund's Class C Distribution Plan may be terminated at any time by vote
of its directors who are not interested persons of the Fund as defined in the
1940 Act or by vote of a majority of the outstanding Class C shares. In the
event the Class C Distribution Plan is terminated, the payments made to the
Distributor pursuant to the Plan up to that time would be retained by the
Distributor. Any expenses incurred by the Distributor in excess of those
payments would be absorbed by the Distributor. The Fund makes no payments in
connection with the sale of their Class C shares other than the distribution fee
paid to the Distributor.
CALCULATION AND WAIVER OF CONTINGENT DEFERRED SALES CHARGES -- Any contingent
deferred sales charge imposed upon redemption of Class A shares (purchased in an
amount of $1,000,000 or more), and Class B shares or Class C shares is a
percentage of the lesser of (1) the net asset value of the shares redeemed or
(2) the net cost of such shares. No contingent deferred sales charge is imposed
upon redemption of amounts derived from (1) increases in the value above the net
cost of such shares due to increases in the net asset value per share of the
Fund; (2) shares acquired through reinvestment of income dividends and capital
gain distributions; (3) Class A shares (purchased in an amount of $1,000,000 or
more) or Class C shares held for more than one year; or (4) Class B shares held
for more than five years. Upon request for redemption, shares not subject to the
contingent deferred sales charge will be redeemed first. Thereafter, shares held
the longest will be the first to be redeemed.
The contingent deferred sales charge is waived: (1) following the death of a
shareholder if redemption is made within one year after death; (2) upon the
disability (as defined in Section 72(m)(7) of the Internal Revenue Code) of a
stockholder prior to age 65 if redemption is made within one year after the
disability, provided such disability occurred after the stockholder opened the
account; (3) in connection with required minimum distributions in the case of an
IRA, SAR-SEP or Keogh or any other retirement plan qualified under section
401(a), 401(k) or 403(b) of the Code; and (4) in the case of distributions from
retirement plans qualified under section 401(a) or 401(k) of the Internal
Revenue Code due to (i) returns of excess contributions to the plan, (ii)
retirement of a participant in the plan, (iii) a loan from the plan (repayment
of loans, however, will constitute new sales for purposes of assessing the
contingent deferred sales charge), (iv) "financial hardship" of a participant in
the plan, as that term is defined in Treasury Regulation section
1.401(k)1(d)(2), as amended from time to time, (v) termination of employment of
a participant in the plan, (vi) any other permissible withdrawal under the terms
of the plan.
CONFIRMATIONS AND STATEMENTS -- Certain transactions may be confirmed on a
quarterly basis including systematic withdrawals, automatic purchases and
reinvested dividends.
PURCHASES AT NET ASSET VALUE
Class A shares of the Fund may be purchased at net asset value by (1)
directors, officers and employees of the Fund, the Fund's Administrator or
Distributor; directors, officers and employees of Security Benefit Life
Insurance Company and its subsidiaries; agents licensed with Security Benefit
Life Insurance Company; spouses or minor children of any such agents; as well as
the following relatives of any such directors, officers and employees (and their
spouses): spouses, grandparents, parents, children, grandchildren, siblings,
nieces and nephews; (2) any trust, pension, profit sharing or other benefit plan
established by any of the foregoing corporations for persons described above;
(3) retirement plans where third party administrators of such plans have entered
into certain arrangements with the Distributor or its affiliates provided that
no commission is paid to dealers; and (4) officers, directors, partners or
registered representatives (and their spouses and minor children) of
broker/dealers who have a selling agreement with the Distributor. Such sales are
made upon the written assurance of the purchaser that the purchase is made for
investment purposes and that the securities will not be transferred or resold
except through redemption or repurchase by or on behalf of the Fund.
Class A shares of the Fund may also be purchased at net asset value when the
purchase is made on the recommendation of (i) a registered investment adviser,
trustee or financial intermediary who has authority to make investment decisions
on behalf of the investor; or (ii) a certified financial planner or registered
broker-dealer who either charges periodic fees to its customers for financial
planning, investment advisory or asset management services, or provides such
services in connection with the establishment of an investment account for which
a comprehensive "wrap fee" is imposed. The Distributor must be notified when a
purchase is made that qualifies under this provision.
PURCHASING SHARES THROUGH PLANS
Plan participant-directed purchases, exchanges and redemptions of Shares are
handled in accordance with each Plan's specific provisions. Plans may have
different provisions with respect to the timing and method of purchases,
exchanges and redemptions by Plan Participants. Plan Participants should contact
their Plan administrator for details concerning how they may direct transactions
in Shares. It is the responsibility of the Plan administrator or other Plan
service provider to forward instructions for these transactions to the
Administrator.
PURCHASING SHARES THROUGH TSA ACCOUNTS AND IRAS
Shares may be purchased through a TSA Account or an IRA established with the
Security Funds by calling the Distributor at 1-800-888-2461. Alternatively,
Shares may be purchased through a TSA Account or an IRA established with an
authorized investment dealer or other financial intermediary that has a selling
agreement with the Distributor (collectively referred to as "Investment
Dealers").
For information regarding opening a TSA Account or an IRA account, call the
Distributor at 1-800-888-2461 or contact your Investment Dealer.
HOW TO REDEEM SHARES
A Shareholder may redeem shares at the net asset value next determined after the
time when such shares are tendered for redemption, less any applicable deferred
sales charge and Redemption Fee.
Shares will be redeemed on request of the shareholder in proper order to the
Fund's Administrator. A request is made in proper order by submitting the
following items to the Administrator: (1) a written request for redemption
signed by all registered owners exactly as the account is registered, including
fiduciary titles, if any, and specifying the account number and the dollar
amount or number of shares to be redeemed; (2) a guarantee of all signatures on
the written request or on the share certificate or accompanying stock power; (3)
any share certificates issued for any of the shares to be redeemed; and (4) any
additional documents which may be required by the Administrator for redemption
by corporations or other organizations, executors, administrators, trustees,
custodians or the like. Transfers of shares are subject to the same
requirements. The signature guarantee must be provided by an eligible guarantor
institution, such as a bank, broker, credit union, national securities exchange
or savings association. A signature guarantee is not required for redemptions of
$10,000 or less, requested by and payable to all shareholders of record for an
account, to be sent to the address of record. The Transfer Agent reserves the
right to reject any signature guarantee pursuant to its written procedures which
may be revised in the future. To avoid delay in redemption or transfer
stockholders having questions should contact the Administrator by calling
1-800-888-2461, extension 3127.
Payment of the amount due on redemption, less any applicable deferred sales
charge and Redemption Fee, will be made by check or by wire at the sole
discretion of the Administrator, within seven days after receipt of the
redemption request in proper order. If a wire transfer is requested, the
Administrator must be provided with the name and address of the shareholder's
bank as well as the account number to which payment is to be wired. Checks will
be mailed to the shareholder's registered address (or as otherwise directed).
Remittance by wire (to a commercial bank account in the same name(s) as the
shares are registered), by certified or cashier's check, or by express mail, if
requested, will be at a charge of $15, which will be deducted from the
redemption proceeds.
In addition to the foregoing redemption procedures, the Fund repurchases
shares from broker/dealers at the price determined as of the close of business
on the day such offer is confirmed. Dealers may charge a commission on the
repurchase of shares.
At various times, requests may be made to redeem shares for which good
payment has not yet been received. Accordingly, payment of redemption proceeds
may be delayed until such time as good payment has been collected for the
purchase of the shares in question, which may take up to 15 days from the
purchase date.
Requests may also be made to redeem shares in an account for which the
shareholder's tax identification number has been provided. To the extent
permitted by law, the redemption proceeds from such an account will be reduced
by $50 to reimburse for the penalty imposed by the Internal revenue Service for
failure to report the tax identification number.
The Fund reserves the right to honor any request for redemption by making
payment in whole or in part in securities selected solely in the discretion of
the Fund provided, however, that such "securities" shall not include Wrapper
Agreements. The Fund intends to exercise this right under certain extraordinary
conditions as determined by the Fund. To the extent that payment is made in
securities, a shareholder may incur brokerage expenses in converting these
securities into cash. Please see the Fund's Statement of Additional Information
for additional information concerning redemptions in kind.
REDEEMING SHARES OWNED THROUGH PLANS -- Redemption requests will be processed at
the NAV per share next determined after a request for redemption is received in
good order by the Administrator, less any applicable deferred sales charge and
redemption fee. There will be no reduction of the NAV per Share for "Qualified
Plan Redemptions," which are redemptions resulting from a Plan Participant's
death, disability, retirement or termination of employment or to fund loans to,
or "in service" withdrawals by, a Plan Participant, other than the possible
assessment of a contingent deferred sales charge as described above. All other
redemptions of Shares, including those to fund transfers to other Plan
investment options, will be subject to the 3% Redemption Fee, if the Interest
Rate Trigger is active. See "EXPENSE SUMMARY" and "Shareholder Transaction
Expenses" above.
The Fund and the Administrator reserve the right to require written
verification of whether a redemption request is for a Qualified Plan Redemption
in accordance with Plan provisions and to establish the authenticity of this
information before processing a redemption request. Normally, the Fund will make
payment for all Shares redeemed within one business day after a request is
received. In no event will payment be made more than seven days after receipt of
a redemption request in good order. The Fund may suspend the right of redemption
or postpone the date of payment at times when both the NYSE and the Fund's
Administrator are closed, or under any emergency circumstances as determined by
the SEC.
The value of Shares at the time of redemption may be more or less than the
Plan Participant's cost at the time of purchase, depending upon the then-current
market value of the Fund's assets (its interest in the Portfolio). Plan
Participants should consult with their Plan administrator and/or professional
tax adviser with respect to the terms and conditions for withdrawal from, or
redemption of their interests in, their respective Plans.
REDEEMING SHARES OWNED THROUGH TSA ACCOUNTS AND IRAS -- Redemption Requests by
Owners of TSA Accounts and IRA Owners should be transmitted in accordance with
procedures established by the Administrator. Requests for redemptions of Shares
held through TSA Accounts and IRAs must be made in writing and describe the
nature of the redemption in order to be deemed "in good order." Forms are
available from the Security Funds Service Center at 1-800-888-2461 or from your
Investment Dealer.
Redemption requests initiated by Owners f TSA Accounts and IRA Owners will
be processed at the NAV per Share next determined after a request for redemption
is received in good order by the Transfer Agent, less any applicable deferred
sales charge and redemption fee. Normally, the Fund will make payment for all
Shares redeemed under this procedure within one business day after a request is
received in good order. In no event will payment be made more than seven days
after receipt of a redemption request in good order. The Fund may suspend the
right of redemption or postpone the date of payment at times when both the NYSE
and the Fund's Transfer Agent are closed, or under any emergency circumstances
as determined by the SEC.
The value of Shares at the time of redemption may be more or less than the
investor's cost at the time of purchase, depending upon the then-current market
value of the Fund's assets (its interest in the Portfolio). Consult with your
Investment Dealer and/or professional tax adviser with respect to the terms and
conditions for withdrawal of particular TSA Accounts and IRAs.
Redemptions of Shares which are not Qualified TSA Redemptions or Qualified
IRA Redemptions, as defined below, will be subject to the 3% Redemption Fee (in
addition to any applicable deferred sales charge), if the Interest Rate Trigger
is active. See "EXPENSE SUMMARY" and "Shareholder Transaction Expenses" above.
QUALIFIED TSA ACCOUNT REDEMPTIONS -- At any time, a redemption of Fund shares
can be effected without assessment of the Redemption Fee, if such redemption is
a "Qualified TSA Account Redemption." In general, amounts distributed to a
taxpayer from a TSA Account prior to the date on which the taxpayer reaches age
59 1/2 are includible in the taxpayer's gross income and, unless the
distribution meets the requirements of a specific exception, are also subject to
an additional 10% penalty tax. In general, rollovers from a TSA Account to an
IRA and direct trustee-to-trustee transfers from a TSA Account to another TSA
Account are not subject to tax. A "Qualified TSA Account Redemption" is a
redemption made by an owner of a TSA Account that is not subject to any early
withdrawal penalty tax, other than a rollover to an IRA or a direct
trustee-to-trustee transfers ("Qualified Transfers"), unless the owner of the
TSA Account or IRA Owner continues the investment of the transferred amount in
the Fund.
Owners of TSA Accounts requesting a redemption of Fund shares will be
required to provide a written statement as to whether the proceeds of the
redemption will be subject to the early withdrawal penalty tax and to identify
the specific exception upon which he or she intends to rely. The information
provided by the owner of the TSA Account will be reflected on the Form 1099-R
issued to the owner and filed with the Internal Revenue Service in connection
with the redemption, as well as forming the basis for redemption as a Qualified
TSA Account Redemption. The Fund and/or the Transfer Agent may require
additional evidence, such as the opinion of a certified public accountant or tax
attorney, that any particular redemption will not be subject to any penalty tax.
If a qualified exception to the early withdrawal penalty, other than a Qualified
Transfer, is not identified by the TSA Account owner, the Redemption Fee will be
assessed on the redemption if the Interest Rate Trigger is active (unless the
owner continues the investment of the Fund after the transfer). OWNERS OF TSA
ACCOUNTS SHOULD CONSULT THEIR TAX ADVISERS REGARDING THE TAX CONSEQUENCES OF ANY
REDEMPTION.
Some of the exceptions to the early withdrawal penalty taxes are described
below. THIS DESCRIPTION IS INTENDED TO PROVIDE ONLY A BRIEF SUMMARY OF THE
PRINCIPAL EXCEPTIONS TO THE ADDITIONAL TAX IMPOSED ON EARLY WITHDRAWALS UNDER
THE CURRENT PROVISIONS OF THE CODE, WHICH MAY CHANGE FROM TIME TO TIME. THE FUND
INTENDS TO CONFORM THE DEFINITION OF QUALIFIED TSA ACCOUNT REDEMPTIONS TO
CHANGES IN APPLICABLE TAX LAWS; HOWEVER, THE FUND RESERVES THE RIGHT TO CONTINUE
TO DEFINE QUALIFIED TSA ACCOUNT REDEMPTIONS BY REFERENCE TO CODE PROVISIONS NOW
IN EFFECT OR OTHERWISE TO DEFINE SUCH PHRASE INDEPENDENTLY OF FUTURE CODE
PROVISIONS.
In general, the early withdrawal penalty tax imposed by the Code will not
apply to the following types of distributions from a TSA Account and these will
be treated as Qualified TSA Account Redemptions:
1. Distributions made on or after the date on which the TSA Account owner
attains age 59 1/2;
2. Distributions made to a beneficiary (or to the estate of the TSA Account
owner) on or after the death of the TSA Account owner;
3. Distributions attributable to the TSA Account owner being disabled;
4. Distributions made to the TSA Account owner after separation from service
after age 55;
5. Distributions to an alternate payee (e.g. a former spouse) pursuant to a
qualified domestic relations order;
6. Distributions that are part of a series of substantially equal periodic
payments made at least annually for the life (or life expectancy) of the TSA
Account owner, or the joint lives (or life expectancies) of the TSA Account
owner and his or her designated beneficiary, after the TSA Account owner
separates from service;
7. Distributions made to a TSA Account owner for medical care, but not in
excess of the amount allowable as a medical expense deduction by the TSA
Account owner on his or her tax return for the year;
8. Distributions timely made to correct an excess contribution; and
9. Distributions timely made to reduce an excess elective deferral.
QUALIFIED IRA REDEMPTIONS -- At any time, a redemption of Fund Shares can be
effected without assessment of the Redemption Fee, if such redemption is a
"Qualified IRA Redemption." In general, amounts distributed to a taxpayer from a
Traditional IRA, SEP-IRA or SIMPLE IRA prior to the date on which the taxpayer
reaches age 59 1/2 are includible in the taxpayer's gross income and, unless the
distribution meets the requirements of a specific exception, are also subject to
an additional 10% penalty tax. (The penalty is increased to 25% for early
withdrawals from SIMPLE IRAs that occur within two years of beginning
participation.) Similar penalties apply to early withdrawals from Roth IRAs,
Keogh plans and education IRAs. In general, rollovers from one IRA to another
and direct trustee-to-trustee transfers from an IRA to another IRA (or in some
cases to other types of qualified plans) are not subject to tax. In addition,
conversions of Traditional IRAs to Roth IRAs are subject to income tax but are
not subject to the early withdrawal penalty tax. A "Qualified IRA Redemption" is
a redemption made by an IRA Owner to effect a distribution from his or her IRA
account that is not subject to any early withdrawal penalty tax, other than IRA
rollovers, direct trustee-to-trustee transfers and conversions of Traditional
IRAs to Roth IRAs ("Qualified Transfers"), unless the IRA Owner continues the
investment of the transferred amount in the Fund. IRA Owners requesting a
redemption of Fund Shares will be required to provide a written statement as to
whether the proceeds of the redemption will be subject to the early withdrawal
penalty tax and to identify the specific exception upon which the IRA Owner
intends to rely. The information provided by the IRA Owner will be reflected on
the Form 1099-R issued to the IRA Owner and filed with the Internal Revenue
Service in connection with the redemption as well as forming the basis for
redemption as a Qualified IRA Redemption. The Fund and/or Transfer Agent may
require additional evidence, such as the opinion of a certified public
accountant or tax attorney, that any particular redemption will not be subject
to any penalty tax. If a qualified exception to the early withdrawal penalty
other than a Qualified Transfer is not identified by the IRA Owner, the
Redemption Fee will be assessed on the redemption if the Interest Rate Trigger
is active (unless shares of the Fund are transferred). IRA OWNERS SHOULD CONSULT
THEIR TAX ADVISERS REGARDING THE TAX CONSEQUENCES OF ANY REDEMPTION.
Some of the exceptions to the early withdrawal penalty taxes are described
below. THIS DESCRIPTION IS INTENDED TO PROVIDE ONLY A BRIEF SUMMARY OF THE
PRINCIPAL EXCEPTIONS TO THE ADDITIONAL TAX IMPOSED ON EARLY WITHDRAWALS UNDER
THE CURRENT PROVISIONS OF THE CODE, WHICH MAY CHANGE FROM TIME TO TIME. THE FUND
INTENDS TO CONFORM THE DEFINITION OF QUALIFIED IRA REDEMPTIONS TO CHANGES IN
APPLICABLE TAX LAWS; HOWEVER, THE FUND RESERVES THE RIGHT TO CONTINUE TO DEFINE
QUALIFIED IRA REDEMPTIONS BY REFERENCE TO CODE PROVISIONS NOW IN EFFECT OR
OTHERWISE TO DEFINE SUCH PHRASE INDEPENDENTLY OF FUTURE CODE PROVISIONS.
TRADITIONAL IRAS, SEP-IRAS AND SIMPLE IRAS -- In general, the early withdrawal
penalty tax imposed by the Code will not apply to the following types of
distributions from a Traditional IRA, SEP-IRA or a SIMPLE IRA and these will be
treated as Qualified IRA Redemptions:
1. Distributions made on or after the date on which the IRA Owner attains age
59 1/2;
2. Distributions made to a beneficiary (or to the estate of the IRA Owner) on
or after the death of the IRA Owner;
3. Distributions attributable to the IRA Owner's being disabled;
4. Distributions made to the IRA Owner to the extent such distributions do not
exceed the amount of unreimbursed medical expenses allowed as a tax
deduction;
5. Distributions to unemployed individuals to the extent such distributions do
not exceed the amount paid for medical insurance for the IRA Owner, and his
or her spouse and dependents;
6. Distributions to an IRA Owner to the extent such distributions do not exceed
the qualified higher education expenses for the IRA Owner;
7. Distributions to an IRA Owner that are used to acquire a first home, and
that meet the definition of "qualified first-time homebuyer distributions"
under the Code; and
8. Distributions that are part of a series of substantially equal periodic
payments made at least annually for the life (or life expectancy) of the IRA
Owner, or the joint lives (or life expectancies) of the IRA Owner and his or
her designated beneficiary.
ROTH IRAS -- With respect to a Roth IRA, all "qualified distributions" are
excluded from gross income and, therefore, from the early withdrawal penalty
tax. In general, qualified distributions from a Roth IRA which will be treated
as Qualified IRA Redemptions include:
1. Distributions made on or after the date on which the IRA Owner attains age
59 1/2;
2. Distributions made to a beneficiary (or to the estate of the IRA Owner) on
or after the death of the IRA Owner;
3. Distributions attributable to the IRA Owner's being disabled; and
4. Distributions to an IRA Owner that are used to acquire a first home, and
that meet the definition of "qualified first-time homebuyer distributions"
under the Code.
However, a distribution will not be a qualified distribution, even if it
otherwise meets the definition, if it is made within the 5-year period beginning
with the first taxable year for which the IRA Owner made a contribution to the
Roth IRA (or such person's spouse made a contribution to a Roth IRA established
for the IRA Owner). Special rules apply with respect to certain types of
rollovers.
To the extent a distribution from a Roth IRA is not a qualified
distribution, either because it does not meet the definition of a qualified
distribution in the first instance, or because it is made within the five-year
period described above, the portion of the distribution that represents earnings
will be subject to tax under the Code, and will also be subject to the early
withdrawal penalty tax. The same exceptions to the penalty tax that apply to
Traditional IRAs will apply to nonqualified distributions from Roth IRAs.
In the event of a nonqualified distribution from a Roth IRA, only the
earnings in the account are subject to tax; contributions may be recovered
tax-free (since no deduction is permitted for such contributions). Under the
Code, distributions from Roth IRAs are considered to come first from
contributions, to the extent that distributions do not exceed the total amount
of contributions.
KEOGH PLANS -- In general, the early withdrawal penalty tax imposed by the Code
will not apply to the following types of distributions from a Keogh plan:
1. Distributions made on or after the date on which the IRA Owner attains age
59 1/2;
2. Distributions made to a beneficiary (or to the estate of the IRA Owner) on
or after the death of the IRA Owner;
3. Distributions attributable to the IRA Owner's being disabled;
4. Distributions made to the IRA Owner after separation from service after age
55;
5. Distributions to unemployed individuals to the extent such distributions do
not exceed the amount of unreimbursed medical expenses allowed as a tax
deduction;
6. Distributions to an alternate payee (e.g., a former spouse) pursuant to a
qualified domestic relations order; and
7. Distributions that are part of a series of substantially equal periodic
payments made at least annually for the life (or life expectancy) of the IRA
Owner, or the joint lives (or life expectancies) of the IRA Owner and his or
her designated beneficiary.
EDUCATION IRAS -- Distributions from an education IRA are included in income
unless the qualified higher education expenses of the designated beneficiary are
equal to or greater than the amount of such distributions. In addition, certain
special rules are provided that permit certain rollovers or changes in
beneficiaries. Any distribution that is subject to tax under the Code is also
subject to the early withdrawal penalty tax. Thus, in general, any distribution
from an education IRA that exceeds the amount of qualified higher education
expenses of the designated beneficiary will be subject to the early withdrawal
penalty tax.
SHAREHOLDER AND FUND INFORMATION
INVESTOR SERVICES -- The Fund provides a variety of services to help you manage
your account. Information Services Statements and reports that your Investment
Dealer or the Administrator may send to you include the following:
* Confirmation statements (which may be sent quarterly for certain systematic
transactions);
* Account statements;
* Financial reports (every six months)
To reduce expenses, only one copy of most financial reports will be mailed,
even if you have more than one account in the Fund. Call your Investment Dealer
or the Security Funds Service Center at 1-800-888-2461 extension 3127 if you
need additional copies of financial reports.
NET ASSET VALUE -- The NAV is calculated on each day on which the New York Stock
Exchange, Inc. (the "NYSE") is open (each such day being a "Valuation Day"). The
NYSE is currently open on each day, Monday through Friday, except (a) January 1,
Martin Luther King Day, Presidents' Day (the third Monday in February), Good
Friday, Memorial Day (the last Monday in May), July 4, Labor Day (the first
Monday in September), Thanksgiving Day (the last Thursday in November) and
December 25; and (b) the preceding Friday or the subsequent Monday when one of
the calendar-determined holidays falls on a Saturday or Sunday, respectively.
The NAV per Share is calculated once on each Valuation Day as of the close
of regular trading on the NYSE (the "Valuation Time"), which is currently 3:00
p.m., Central time, or if the NYSE closes early, at the time of the early
closing. The NAV per Share is computed by dividing the value of the Fund's
assets (i.e., the value of its investment in the Portfolio and other assets, if
any), less all liabilities, by the total number of its Shares outstanding. The
Portfolio's securities and other assets are valued primarily on the basis of
market quotations or, if quotations are not readily available, by a method that
the Portfolio Trust Board believes accurately reflects fair value.
Pursuant to procedures adopted by the Portfolio Trust Board, the fair value
of a Wrapper Agreement ("Wrapper Value") generally will be equal to the
difference between the Book Value and the market value (plus accrued interest on
the underlying securities) of the applicable Covered Assets. If the market value
(plus accrued interest on the underlying securities) of the Covered Assets is
greater than their Book Value, the Wrapper Value will be reflected as a
liability of the Portfolio in the amount of the difference, i.e., a negative
value, reflecting the potential liability of the Portfolio to the Wrapper
Provider. If the market value (plus accrued interest on the underlying
securities) of the Covered Assets is less than their Book Value, the Wrapper
Value will be reflected as an asset of the Portfolio in the amount of the
difference, i.e., a positive value, reflecting the potential liability of the
Wrapper Provider to the Portfolio. In performing its fair value determination,
the Portfolio Trust Board expects to consider the creditworthiness and ability
of a Wrapper Provider to pay amounts due under the Wrapper Agreement. If the
Portfolio Trust Board determines that a Wrapper Provider is unable to make such
payments, that Board may assign a fair value to the Wrapper Agreement that is
less than the difference between the Book Value and the market value (plus
accrued interest on the underlying securities) of the applicable Covered Assets
and the Portfolio might be unable to maintain NAV stability.
Under procedures adopted by the Trust Board, an NAV per Share later
determined to have been inaccurate for any reason will be recalculated.
Purchases and redemptions made at the NAV per Share and determined to have been
inaccurate will be adjusted, although in certain circumstances, such as where
the difference between the original NAV per Share and the recalculated NAV per
Share divided by the latter is 0.005 (1/2 of 1%) or less or shareholder
transactions are otherwise insubstantially affected, action is not required.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS -- The Fund intends to distribute all
of its net investment income and net capital gains, if any, to its shareholders
each year. Dividends from net investment income are declared daily and are paid
monthly, and any net capital gains are distributed annually. An additional
annual distribution ("Additional Distribution") may be paid to satisfy the tax
requirements that the Fund distribute each year substantially all of its
investment company taxable income (see "Tax Considerations").
Dividends and other distributions are automatically reinvested in additional
Shares unless the Plan participant directs otherwise.
The Fund may declare and pay dividends in amounts which are not equal to the
amount of the net investment income it actually earns. Consequently, in any year
the amount actually distributed may differ from the income earned. If, for any
year, those distributions exceed the income earned, the excess may be considered
a return of capital. On the other hand, if the income earned exceeds the amount
of the dividends distributed, the Fund may make an Additional Distribution of
that excess. To enable the Fund to maintain a stable NAV per Share in the event
of an Additional Distribution, the Fund Board may declare, effective on the
ex-distribution date of an Additional Distribution, a reverse split of the
Shares in an amount that will cause the total number of Shares held by each
shareholder, including Shares acquired on reinvestment of that distribution, to
remain the same as before that distribution was paid.
For example, if the Fund declares an Additional Distribution of $0.10 per
Share at a time when the NAV per Share is $10.00, a shareholder holding one
Share would receive 0.01 additional Shares on reinvestment of that distribution.
If there were no reverse split, the per Share NAV of the 1.01 Shares held by the
shareholder would be approximately $9.90, and the aggregate value thereof would
be $10.00. If a 1.01-for-1 reverse Share split were declared, however, the
shareholder's holdings would be consolidated back into one Share having an NAV
of $10.00. Thus, a reverse Share split will not affect the value of the total
holdings of a shareholder.
TAX CONSIDERATIONS -- The Fund intends to qualify to be treated as a regulated
investment company under the Code. As a regulated investment company, the Fund
will not be subject to U.S. federal income tax on its investment company taxable
income (generally consisting of net investment income and the excess of net
short-term capital gain over net long-term capital loss, if any) and net capital
gain (the excess of net long-term capital gain over net short-term capital
loss), if any, that it distributes to its shareholders. The Fund intends to
distribute to its shareholders all of its investment company taxable income and
net capital gain at least annually, if necessary through Additional
Distributions, and therefore does not anticipate incurring any federal income
tax liability.
For Owners of TSA Accounts, IRA Owners and Plan Participants, the dividend
and capital gain distributions from the Fund generally will not be subject to
current taxation, but will accumulate on a tax-deferred basis. To the extent
that distributions from a TSA, IRA or Plan are taxable, they are taxable as
ordinary income. TSAs, IRAs and Plans are governed by a complex set of tax
rules. Owners of TSA Accounts, IRA Owners and Plan Participants should consult
with a professional tax adviser regarding the tax consequences associated with
an investment in the Fund.
PERFORMANCE -- The Fund's performance may be used from time to time in
advertisements, shareholders reports or other communications to shareholders or
prospective shareholders. In accordance with SEC regulations, Fund performance
may be calculated with or without deduction of the maximum sales charge.
However, any performance information shown without deduction of the sales charge
would be lower if the sales charge had been deducted. Performance information
may include investment results and/or comparisons of its investment results to
the IBC Averages, Lipper Averages, an appropriate guaranteed interest contract
average, or other various unmanaged indices or results of other mutual funds or
investment or saving vehicles. The Portfolio's strategies, holdings and
performance will be detailed twice a year in the Fund's financial reports, which
are sent to all Fund shareholders.
Mutual fund performance is commonly measured as total return and/or yield.
The performance of a class of shares is affected by its expenses and its share
of those expenses of the Portfolio.
EXPLANATION OF PERFORMANCE TERMS -- Total Return is the change in value of an
investment in the Shares over a given period, assuming reinvestment of any
dividends and capital gain distributions. A cumulative total return reflects
actual performance over a stated period of time. An average annual total return
is a hypothetical rate of return that, if achieved annually, would have produced
the same cumulative total return if performance had been constant over the
entire period. Average annual total return calculations smooth out variations in
performance; they are not the same as actual year-by-year results. Average
annual total returns covering periods of less than one year assume that
performance will remain constant for the rest of the year.
Yield refers to the income generated by an investment in the Shares over a
given period of time, expressed as an annual percentage rate. Yields are
calculated according to a standard that is required for all stock and bond
funds. Because this differs from other accounting methods, the quoted yield may
not equal the income actually paid to shareholders.
In accordance with SEC regulations, the yield of the Fund (the "SEC Yield")
shall be calculated on any determination date as follows:
2[((a-b)/c*d) + 1)^6 - 1]
a = Current income measured over a 30-day period
b = Expenses accrued during the same 30-day period
c = Average daily number of shares outstanding during the same 30-day period
d = Maximum offering price per share on the last day of the period.
The "Annual Effective Yield of the Fund" is intended to represent one day's
investment income expressed as an annualized yield and compounded annually. The
Annual Effective Yield of the Fund shall be expressed as a percentage and
calculated on each business day as follows based on the dividend declared for
the previous day:
[(1 + PREVIOUS DAY'S DIVIDEND FACTOR)^365-1]
--------------------------------------------
NAV Per Share
EXAMPLE: If on March 1 the Fund's Dividend Factor is 0.00174163 and the
Fund's NAV per share is $10, then the Fund's Annual Effective Yield for March 2
equals 6.56%.
The "Annual Effective Yield of the Portfolio" is intended to represent the
previous day's investment income of the Portfolio, expressed as an annualized
yield and compounded annually.
The "Annual Effective Yield of the Portfolio" shall be expressed as a
percentage and calculated on each Business Day as follows based on the dividend
declared for the previous day:
[(1 + PREVIOUS DAY'S PORTFOLIO DIVIDEND FACTOR)^365-1]
------------------------------------------------------
NAV Per Share
Once the Interest Rate Trigger is active, it shall remain active every day
until the Reference Index Yield is less than the Annual Effective Yield of the
Portfolio plus 1.55%, at which time the Interest Rate Trigger becomes inactive
on the following day and remains inactive every day thereafter until it becomes
active again.
EXAMPLE: If on March 1 the Portfolio's Dividend Factor is 0.00174163 and the
Portfolio's NAV per share is $10, then the Portfolio's Annual Effective Yield
for March 2 equals 6.56%.
The Annual Effective Yield of the Portfolio is used in determining when the
Interest Rate Trigger is active, as discussed in "Shareholder Fees," on page 4.
Performance information or advertisements may include comparisons of the
Shares' investment results to various unmanaged indices or results of other
mutual funds or investment or savings vehicles. From time to time, the Shares'
ranking may be quoted from various sources, such as Lipper Analytical Services,
Inc., Value Line, Inc. and Morningstar, Inc.
Unlike some bank deposits or other investments that pay a fixed yield for a
stated period of time, the total return of the Shares will vary depending upon
interest rates, the current market value of the Portfolio Securities and the
value of the Wrapper Agreements and changes in the expenses of the Shares and
the Portfolio. In addition, during certain periods for which total return may be
provided, the Fund's administrator and Transfer Agent, Security Management
Company, LLC ("SMC") may have voluntarily agreed to waive portions of its fees,
or to reimburse certain operating expenses of the Fund. In addition, Bankers
Trust may have agreed to do the same with respect to the Portfolio. Such waivers
will have the effect of increasing the Fund's net income (and therefore its
yield and total return) during the period such waivers are in effect.
TOTAL RETURNS AND YIELDS ARE BASED ON PAST RESULTS AND ARE NOT AN INDICATION
OF FUTURE PERFORMANCE.
MANAGEMENT OF THE FUND
BOARDS OF DIRECTORS -- The Fund's business and affairs are governed by a Board
of Directors. See "Management of the Fund" in the SAI for more information with
respect to the Directors and officers of the Fund.
INVESTMENT ADVISER -- The Fund has not retained the services of an investment
adviser because it seeks to achieve its investment objective by investing all of
its Assets in the Portfolio. The Portfolio has retained the services of Bankers
Trust as its investment adviser pursuant to an Investment Advisory Agreement
between the Portfolio Trust and Bankers Trust dated April 28, 1993 (the
"Investment Advisory Agreement").
Bankers Trust, subject to the supervision and direction of the Portfolio
Trust's Board, manages the Portfolio in accordance with the Portfolio's
investment objective and stated investment policies, makes investment decisions
for the Portfolio, places orders to purchase and sell securities and other
financial instruments on behalf of the Portfolio and employs professional
investment managers and securities analysts who provide research services to the
Portfolio. Bankers Trust may utilize the expertise of any of its worldwide
subsidiaries and affiliates to assist it in its role as investment adviser. All
orders for investment transactions on behalf of the Portfolio are placed by
Bankers Trust with broker-dealers and other financial intermediaries that it
selects, including those affiliated with Bankers Trust. A Bankers Trust
affiliate will be used in connection with a purchase or sale of an investment
for the Portfolio only if Bankers Trust believes that the affiliate's charge for
the transaction does not exceed usual and customary levels. The Portfolio will
not invest in obligations, including Wrapper Agreements, for which Bankers Trust
or any of its affiliates is the ultimate obligor or accepting bank. The
Portfolio may, however, invest in the obligations of correspondents and
customers of Bankers Trust.
On March 11, 1999, Bankers Trust announced that it had reached an agreement
with the United States Attorney's Office in the Southern District of New York to
resolve an investigation concerning inappropriate transfers of unclaimed funds
and related record-keeping problems that occurred between 1994 and early 1996.
These past events led to a guilty plea by Bankers Trust, but did not arise out
of the investment advisory or mutual fund management activities of Bankers Trust
or its affiliates.
Pursuant to its agreement with the U.S. Attorney's Office, Bankers Trust
pleaded guilty to misstating entries in the bank's books and records and agreed
to pay a $60 million fine to federal authorities. Separately, Bankers Trust
agreed to pay a $3.5 million fine to the State of New York.
The SEC has granted a temporary order to permit Bankers Trust and its
affiliates to continue to provide investment advisory services to registered
investment companies. There is no assurance that the SEC will grant a permanent
order. As a result of the plea, absent an order from the SEC, Bankers Trust
would not be able to continue to provide investment advisory services to the
Portfolio.
Although the Fund has not currently retained the services of an investment
adviser or sub-adviser, it may do so in the future. Accordingly, the Fund, along
with the other mutual funds in the Security Funds complex, intends to apply to
the Securities and Exchange Commission ("SEC") for an exemptive order from the
Investment Company Act of 1940 that will permit the Fund and Security Management
Company, LLC to enter into and materially amend sub-advisory agreements without
the agreements or amendments being approved by shareholders. However, this order
would not apply to sub-advisory agreements with an affiliate of Security
Management Company, LLC. If this order is obtained, the Fund or Security
Management Company, LLC could terminate a sub-advisory agreement with a
sub-adviser and engage a new sub-adviser, or materially amend a sub-advisory
agreement, without shareholder approval of the new sub-advisory agreement or the
amendment.
In order for the Fund to enter into and amend sub-advisory agreements
without shareholder approval, the Fund and Security Management Company, LLC must
not only receive an order from the SEC, but the shareholders of the Fund must
also approve this method of operation. The initial shareholder of the Fund has
approved this method of operation and accordingly, further Fund shareholder
approval is not necessary. Therefore the Fund could be operated under the method
of operation described above upon effectiveness of the exemptive order, although
at this time it is not anticipated that it will do so.
There can be no assurance that the exemptive order will be issued by the
SEC. It is anticipated that if the exemptive order is granted, notice to
shareholders would be required of sub-advisory agreements or material amendments
to sub-advisory agreements.
THE INVESTMENT ADVISORY AGREEMENT -- The Investment Advisory Agreement provides
for the Portfolio Trust to pay Bankers Trust a fee, accrued daily and paid
monthly, equal to 0.70% per year of the average daily net assets of the
Portfolio. Bankers Trust has indicated that it will voluntarily waive all but
0.42% of this fee.
Bankers Trust has been advised by its counsel that, in counsel's opinion,
Bankers Trust currently may perform the services for the Portfolio described in
this Prospectus and the SAI without violation of the Glass-Steagall Act or other
applicable banking laws or regulations. State laws on this issue may differ from
the interpretations of relevant federal law, and banks and financial
institutions may be required to register as dealers pursuant to state securities
law.
PORTFOLIO MANAGEMENT -- ERIC KIRSCh (CFA), is a Managing Director and the Chief
Investment Officer of the Structured Fixed Income Group at Bankers Trust in New
York. In this capacity, he oversees over $15 billion of stable value and fixed
income portfolios and coordinates fixed income portfolio management and trading
functions with regards to these portfolios' investments. He has over ten years
of investment experience relating to structured fixed income portfolios, and
previous experience in Employee Benefit Trust Administration. Mr. Kirsch joined
Bankers Trust in 1980.
LOUIS R. D'ARIENZO is a Vice President and a portfolio manager of the
Structured Fixed Income Group at Bankers Trust in New York, where he is
responsible for managing Structured Fixed Income accounts. He has managed the
Fixed Income Securities of the Portfolio since its inception. Mr. D'Arienzo has
17 years of trading and investment experience in structured portfolios,
quantitative analysis of fixed income and derivative securities. Mr. D'Arienzo
joined Bankers Trust in 1981.
JOHN D. AXTELL, JR. is a Principal and a Stable Value portfolio manager at
Bankers Trust in New York, where he is responsible for the portfolio management
and trading activities relating to Stable Value Investments for client
portfolios. He previously managed $2 billion in Structured Bond Portfolios for
four years. Mr. Axtell is a former fixed income portfolio strategist at Drexel
Burnham Lambert, Inc. and has prior experience as Systems Engineer at Hewlett
Packard. Mr. Axtell joined Bankers Trust in 1990.
Bankers Trust investment personnel may invest in securities for their own
account pursuant to a code of ethics that establishes procedures for personal
investing and restricts certain transactions.
ADMINISTRATOR -- Under an Administration Services and Transfer Agency Agreement
with Security Income Fund, Security Management Company, LLC ("SMC" or the
"Administrator") is responsible for calculating the Fund's NAV and for
performing the bookkeeping, accounting and transfer agency function for the
Fund. This Agreement provides for the Fund to pay SMC a fee, accrued daily and
paid monthly, equal to .09% per year of the average daily net assets of the
Fund. For its transfer agency services SMC receives $8 per account and $1 per
dividend and other transactions. SMC is a limited liability company organized
under the laws of the State of Kansas and is owned by its member firms, Security
Benefit Life Insurance Company and Security Benefit Group, Inc. SMC's principal
offices are located at 700 SW Harrison, Topeka, Kansas 66636-0001.
Under a Sub-Accounting Agreement between SMC and Bankers Trust, Bankers
Trust has agreed to provide certain accounting services to the Fund, including
the daily calculation of the Fund's NAV. The Sub-Accounting Agreement provides
for SMC to pay Bankers Trust a fee, equal to $14,000 per year.
Pursuant to a separate Management Services Agreement, SMC also performs
certain other services on behalf of the Fund. Under this Agreement, SMC
provides, among other things, feeder fund management and administrative services
to the Fund which include monitoring the performance of the Portfolio,
coordinating the Fund's relationship with the Portfolio, communicating with the
Fund's Board of Directors and shareholders regarding the Portfolio's performance
and the Fund's two tier structure, and in general, assisting the Board of
Directors of the Fund in all aspects of the administration and operation of the
Fund. For these services, the Fund pays SMC a fee at the annual rate of .20% of
its average daily net assets, calculated daily and payable monthly.
Under an Administration and Services and Transfer Agency Agreement with the
Portfolio Trust, Bankers Trust calculates the NAV of the Portfolio and generally
assists the Portfolio in all aspects of the administration and operation of the
Portfolio. This Administration and Services Agreement provides for the Portfolio
to pay Bankers Trust a fee, accrued daily and paid monthly, equal to 0.05% per
year of the Portfolio's average daily net assets. Under this Administration and
Services Agreement, Bankers Trust may delegate one or more of its
responsibilities to others, including the Distributor, at Bankers Trust's
expense.
Subject to certain conditions, SMC may, out of its own resources, make
ongoing payments to brokerage firms, plan administrators and fiduciaries,
financial institutions (including banks) and other entities for certain services
provided to the Fund and/or shareholders.
For providing certain shareholder services to the shareholders of the fund,
SMC receives from Bankers Trust a fee which is equal on an annual basis to .20%
of the aggregate net asset of the Fund invested in the Portfolio. The fee is not
an expense of the Fund or the Portfolio.
DISTRIBUTOR -- Security Distributors, Inc., as distributor, serves as the Fund's
principal underwriter. Security Distributors, Inc. is a registered broker/dealer
and is a wholly-owned subsidiary of Security Benefit Group, Inc. Its principal
offices are at 700 SW Harrison, Topeka, Kansas 66636-0001.
CUSTODIAN -- UMB Bank, n.a. acts as custodian for the assets of the Fund.
Bankers Trust acts as custodian for the assets of the Portfolio under the
Administration and Services Agreement with the Trust. It is not separately
compensated for this service and may, at its own expense, delegate certain
services to other qualified entities.
YEAR 2000 COMPLIANCE -- Like other mutual funds, as well as other financial and
business organizations around the world, the Fund could be adversely affected if
the computer systems used by the Administrator, Bankers Trust, and other service
providers, in performing their management and administrative functions do not
properly process and calculate date-related information and data before, during
and after January 1, 2000. Some computer software and hardware systems currently
cannot distinguish between the year 2000 and the year 1900 or some other date
because of the way date fields were encoded. This is commonly known as the "Year
2000 Problem." If not addressed, the Year 2000 Problem could impact the
management, transfer agency, accounting, custody and other services provided to
the Fund by the Administrator, Bankers Trust and other service providers.
The Administrator has adopted a plan to be "Year 2000 Compliant" with
respect to both its internally built systems as well as systems provided by
external vendors. The Administrator considers a system "Year 2000 Compliant"
when it is able to correctly process, provide and/or receive data before, during
and after the Year 2000. The Administrator's overall approach to addressing the
Year 2000 Problem is as follows: (1) to inventory its internal and external
hardware, software, telecommunications and data transmissions to customers and
conduct a risk assessment with respect to the impact that a failure of any such
system would have on its business operations; (2) to modify or replace its
internal systems and obtain vendor certifications of Year 2000 compliance for
systems provided by vendors or replace such systems that are not Year 2000
Compliant; and (3) to implement and test its systems for Year 2000 compliance.
The Administrator has completed the inventory of its internal and external
systems and has made substantial progress toward completing the
modification/replacement of its internal systems, as well as towards obtaining
Year 2000 Compliant certifications from its external vendors. Overall systems
testing commenced in early 1998 and will extend into the first eight months of
1999. In addition, the Fund has been informed by Bankers Trust that it is
working both internally and with its business partners and service providers to
address the Year 2000 Problem.
Although the Administrator has taken steps to ensure that its systems will
function properly before, during and after the Year 2000, its key operating
systems and information sources are provided by or through external vendors
which creates uncertainty to the extent the Administrator is relying on the
assurance of such vendors as to whether their systems will be Year 2000
Compliant. The costs or consequences of incomplete or untimely resolution of the
Year 2000 issue are unknown to the Administrator at this time but could have a
material adverse impact on the operations of the Fund, the Administrator and
Bankers Trust.
The Year 2000 Problem is also expected to impact operating companies, which
may include issuers of portfolio securities held by the Portfolio, to varying
degrees based upon various factors, including, but not limited to, the company's
industry sector and degree of technological sophistication. The Fund and Bankers
Trust are unable to predict what impact, if any, the Year 2000 Problem will have
on issuers of the portfolio securities held by the Portfolio and, indirectly, on
the value of the Fund's shares.
EXCHANGE PRIVILEGE -- Shareholders who own shares of the Fund may exchange those
shares for shares of another of the series of Security Income Fund or for shares
of other mutual funds distributed by the Distributor (the "Security Funds").
Exchanges may be made, only in those states where shares of the fund into which
an exchange is to be made are qualified for sale. No service fee is presently
imposed on such an exchange. Class A, Class B and Class C shares of the Fund may
be exchanged for Class A, Class B and, if applicable, Class C shares,
respectively, of another Security Fund. A Redemption Fee may be assessed on an
exchange from the Security Capital Preservation Fund to another Security Fund if
the Interest Rate Trigger is active. Any applicable contingent deferred sales
charge will be calculated from the date of the initial purchase.
Exchanges of Class A shares from the Fund are made at net asset value
without a front-end sales charge if (1) the shares have been owned for at least
90 consecutive days prior to the exchange, (2) the shares were acquired pursuant
to a prior exchange from a Security Fund which assessed a sales charge on the
original purchase, or (3) the shares were acquired as a result of the
reinvestment of dividends or capital gains distributions. Exchanges of Class A
shares from the Fund, other than those described above, are made at net asset
value plus the sales charge described in the prospectus of the other Security
Fund being acquired, less the sales charge paid on the shares of the Fund at the
time of original purchase.
Shareholders should contact the Fund before requesting an exchange in order
to ascertain whether any sales charges are applicable to the shares to be
exchanged. In effecting the exchanges of Fund shares, the Administrator will
first cause to be exchanged those shares which would not be subject to any sales
charges.
For tax purposes, an exchange is a sale of shares which may result in a
taxable gain or loss. Special rules may apply to determine the amount of gain or
loss on an exchange occurring within ninety days after the exchanged shares were
acquired.
Exchanges are made upon receipt of a properly completed Exchange
Authorization form. This privilege may be changed or discontinued at any time at
the discretion of the management of the Fund upon 60 days' notice to
shareholders. A current prospectus of the Security Fund into which an exchange
is made will be given to each shareholder exercising this privilege.
ADDITIONAL INFORMATION ABOUT THE FUND
The Fund is a mutual fund: an investment that pools shareholders' money and
invests it toward a specified goal. The Fund is a separate series of the
Security Income Fund organized under the laws of the State of Kansas on
September 9, 1970. The Portfolio is a separate subtrust of the Portfolio Trust,
a New York master trust fund organized pursuant to a Declaration of Trust dated
March 27, 1993.
The Fund and the Trust each reserves the right to add additional
series/subtrusts in the future.
The Articles of Incorporation of Security Income Fund provides for the
issuance of an indefinite numberof shares of capital stock in one or more
classes or series.
Security Income Fund has authorized capital stock of $1.00 par value. Its
shares are currently issued in five series, Corporate Bond Fund, Limited
Maturity Bond Fund, U.S. Government Fund, High Yield Fund and the Capital
Preservation Fund. The shares of each series represent a pro rata beneficial
interest in that series' net assets and in the earnings and profits or losses
derived from the investment of such assets.
Security Income Fund currently issues two classes of shares for each of its
five series, except Capital Preservation Fund which offers three classes of
shares. Each class of shares participates proportionately based on their
relative net asset values in dividends and distributions and have equal voting,
liquidation and other rights except that (i) expenses related to the
distribution of each class of shares or other expenses that the Board of
Directors may designate as class expenses from time to time, are borne solely by
each class; (ii) each class of shares has exclusive voting rights with respect
to any Distribution Plan adopted for that class; (iii) each class has different
exchange privileges; and (iv) each class has a different designation.
When issued and paid for, the Fund's shares will be fully paid and
nonassessable by the Fund. Shares may be exchanged as described above under
"Exchange Privilege," but will have no other preference, conversion, exchange or
preemptive rights. Shares are transferable, redeemable and assignable and have
cumulative voting privileges for the election of directors.
On certain matters, such as the election of directors, all shares of each
series of Income Fund vote together, with each share having one vote. Under
certain circumstances, the shareholders of one series of Security Income Fund
could control the outcome of these votes. On other matters affecting a
particular series, such as the fundamental investment policies, only shares of
that series are entitled to vote, and a majority vote of the shares of that
series is required for approval of the proposal.
The Fund does not generally hold annual meetings of shareholders and will do
so only when required by law. Shareholders may remove directors from office by
votes cast in person or by proxy at a meeting of shareholders. Such a meeting
will be called at the written request of the holders of 10% of Security Income
Fund's outstanding shares.
Each subtrust of the Portfolio Trust, including the Portfolio, will vote
separately on any matter involving that subtrust. Holders of interests in all
the subtrusts of the Portfolio Trust, however, will vote together to elect
Trustees of the Portfolio Trust and for certain other matters. The subtrusts of
the Portfolio Trust will vote together or separately on matters in the same
manner, and in the same circumstances, as do the series of the Fund. As with
Security Income Fund, the investors in one or more subtrusts of the Portfolio
Trust could control the outcome of these votes. No subtrust of the Portfolio
Trust has any preference over any other subtrust.
The Portfolio Trust was organized as a trust under the laws of the State of
New York. The Portfolio Trust's Declaration of Trust provides that the entities
investing in the Portfolio (e.g., investment companies such as the Fund and
common and commingled trust funds) will each be liable for all obligations of
the Portfolio. However, the risk of the Fund's incurring financial loss on
account of such liability is limited to circumstances in which both inadequate
insurance existed and the Portfolio itself was unable to meet its obligations.
Accordingly, the Directors of the Fund believe that neither the Fund nor its
shareholders will be adversely affected by reason of the Fund's investing in the
Portfolio.
SHAREHOLDER INQUIRIES -- Shareholders who have questions concerning their
account or wish to obtain additional information may write to the Security Funds
at 700 SW Harrison Street, Topeka, Kansas 66636-0001, or call (785) 431-3127 or
1-800-888-2461, extension 3127.
INFORMATION CONCERNING THE MASTER FEEDER FUND STRUCTURE
Unlike other mutual funds that directly acquire and manage their own portfolio
securities, the Fund seeks to achieve its investment objective by investing all
of its Assets in the Portfolio, a separate subtrust of a registered investment
company with the same investment objective as the Fund. Therefore, a Fund
shareholder's interest in the Portfolio's assets is indirect. In addition to
selling a beneficial interest to the Fund, the Portfolio may sell beneficial
interests to other mutual funds or institutional investors. Such investors will
invest in the Portfolio on the same terms and conditions and will pay a
proportionate share of the Portfolio's expenses. However, the other investors
investing in the Portfolio are not required to sell their shares or other
interests at the same public offering price as the Fund, due to variations in
sales commissions and other operating expenses. Therefore, investors in the Fund
should be aware that these differences may result in differences in returns
experienced by investors in the different entities that invest in the Portfolio.
Such differences in returns are also present in other mutual fund structures.
Information concerning other holders of interests in the Portfolio is available
from Bankers Trust, as the Administrator of the Portfolio, at 1-800-677-7596.
The master-feeder structure is relatively complex, so shareholders should
carefully consider this investment approach. Smaller investors in the Portfolio
may be materially affected by the actions of larger investors in the Portfolio.
For example, if a large investor withdraws from the Portfolio, the remaining
investors may experience higher pro rata operating expenses, thereby producing
lower returns (however, this possibility exists as well for traditionally
structured funds that have large investors). Additionally, the Portfolio may
become less diverse, resulting in increased portfolio risk. Also, investors with
a greater pro rata ownership in the Portfolio could have effective voting
control of its operations. Except as permitted by the SEC, whenever the Fund is
requested to vote on matters pertaining to the Portfolio, the Fund will hold a
meeting of shareholders of the Fund and will cast all of its votes in the same
proportion as the votes of the Fund's shareholders. Fund shareholders who do not
vote will not affect the Fund's votes on the Portfolio's matters; the Fund's
votes representing Fund shareholders not voting will be voted by the Directors
or officers of the Fund in the same proportion as the Fund shareholders who do,
in fact, vote. Certain changes in the Portfolio's investment objective, policies
or restrictions may require the Fund to withdraw its interest in the Portfolio.
Any such withdrawal could result in a distribution "in kind" of Portfolio assets
(as opposed to a cash distribution from the Portfolio). If securities are
distributed, the Fund could incur brokerage, tax or other charges in converting
the securities to cash. In addition, the distribution in kind may result in a
less diversified portfolio of investments or adversely affect the liquidity of
the Fund. Notwithstanding the above, there are other means for meeting
redemption requests, such as borrowing. The Fund may withdraw its investment
from the Portfolio at any time, if the Board of Directors of Security Income
Fund (the "Fund Board") determines that it is in the best interests of the
shareholders of the Fund to do so. Upon any such withdrawal, the Fund Board
would consider what action might be taken, including the investment of all the
assets of the Fund in another pooled investment entity having the same
investment objective as the Fund or the retaining of an investment adviser to
manage the Fund's assets in accordance with the investment policies described
herein with respect to the Portfolio.
DEFINITIONS OF SECURITIES PURCHASED BY THE PORTFOLIO
ASSET-BACKED SECURITIES -- Asset-backed securities have structural
characteristics similar to mortgage-backed securities. However, the underlying
assets are not first lien mortgage loans or interests therein but include assets
such as motor vehicle installment sale contracts, other installment sale
contracts, home equity loans, leases of various types of real and personal
property, and receivables from revolving credit (credit card) agreements. Such
assets are securitized through the use of trusts or special purpose
corporations. Payments or distributions of principal and interest on
asset-backed securities may be guaranteed up to certain amounts and for a
certain time period by a letter of credit or a pool insurance policy issued by a
financial institution unaffiliated with the issuer, or other credit enhancements
may be present.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of the same type of security interest in the related collateral. Credit card
receivables are generally unsecured, and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to avoid payment of certain amounts owed on the
credit cards, thereby reducing the balance due. There is the risk in connection
with automobile receivables that recoveries on repossessed collateral may not,
in some cases, be available to support payments on those securities.
COLLATERALIZED MORTGAGE OBLIGATIONS -- CMOs are mortgage-backed bonds that
separate mortgage pools into different classes, called tranches. Tranches pay
different rates of interest and can mature in a few months, or in as long as 20
years. Issued by the Federal Home Loan Mortgage Corporation (Freddie Mac) and
private issuers, CMOs are usually backed by government-guaranteed or other
top-grade mortgages and have AAA ratings. In return for a lower yield, CMOs
provide investors with increased security throughout the life of their
investment compared to purchasing a whole mortgage-backed security. Even so, if
mortgage rates drop sharply, causing a flood of refinancings, prepayment rates
will soar and CMO tranches will be repaid before their expected maturity. See
also REMICs, below.
MORTGAGE-BACKED SECURITIES -- The Portfolio may purchase mortgage-backed
securities issued by the U.S. government, its agencies or instrumentalities and
non-governmental entities such as banks, mortgage lenders or other financial
institutions. Mortgage-backed securities include mortgage pass-through
securities, mortgage-backed bonds and mortgage pay-through securities. A
mortgage pass-through security is a pro rata interest in a pool of mortgages
where the cash flow generated from the mortgage collateral is passed through to
the security holder. A mortgage-backed bond is a general obligation of the
issuer, payable out of the issuer's general funds and additionally secured by a
first lien on a pool of mortgages. Mortgage pay-through securities exhibit
characteristics of both pass-through and mortgage-backed bonds. The mortgage
pass-through securities issued by non-governmental entities such as banks,
mortgage lenders or other financial institutions in which the Portfolio may
invest include private label mortgage pass-through securities and whole loans.
Mortgage-backed securities also include other debt obligations secured by
mortgages on commercial real estate or residential properties. Other types of
mortgage-backed securities will likely be developed in the future, and the
Portfolio may invest in them if Bankers Trust determines they are consistent
with the Portfolio's investment objective and policies.
Unlike ordinary Fixed Income Securities, which generally pay a fixed rate of
interest and return principal upon maturity, mortgage-backed securities repay
both interest income and principal as part of their periodic payments. Because
the mortgages underlying mortgage-backed certificates can be prepaid at any time
by homeowners or corporate borrowers, mortgage-backed securities give rise to
certain unique "pre-payment" risks. Prepayment risk or call risk is the
likelihood that, during periods of falling interest rates, securities with high
stated interest rates will be prepaid (or "called") prior to maturity, requiring
the Portfolio to invest the proceeds at generally lower interest rates.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS -- REMICs are pass-through vehicles
created under the tax reform act of 1986 to issue multiclass mortgage-backed
securities. REMICs may be organized as corporations, partnerships or trusts.
Interests in REMICs may be senior or junior, regular (DEBT INSTRUMENTS) or
residual (equity interests). CMOs (described above) normally have AAA bond
ratings, whereas REMICs represent a range of risk levels.
REPURCHASE AGREEMENTS -- In a repurchase agreement, the Portfolio buys a
security at one price and simultaneously agrees to sell it back to the seller on
a specific date and at a higher price reflecting a market rate of interest
unrelated to the coupon rate or maturity of the underlying security. Delays or
losses could result if the other party to the agreement defaults or becomes
insolvent.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS -- In a reverse repurchase
agreement, the Portfolio temporarily transfers possession of a portfolio
instrument to another party in return for cash. This could increase the risk of
fluctuation in the Fund's yield or in the market value of its interest in the
Portfolio. In a dollar roll, the Portfolio sells mortgage-backed or other
securities for delivery in the current month and simultaneously contracts to
purchase substantially similar securities on a specified future date. Reverse
repurchase agreements and dollar rolls are forms of borrowing and will be
counted towards the Portfolio's borrowing restrictions. See "Borrowing" on the
following pages and in the SAI. Wrapper Agreements would cover the cash proceeds
of such transactions but not the portfolio instruments transferred to another
party until possession of such instruments is returned to the Portfolio.
RULE 144A SECURITIES -- Rule 144A Securities are securities that are not
registered for sale under the federal securities laws but can be resold to
institutions pursuant to Rule 144A under the Securities Act of 1933. Provided
that a dealer or institutional trading market in such securities exists, these
restricted securities are treated as exempt from the Portfolio's 15% limit on
illiquid securities. Under the supervision of the Portfolio Trust Board, Bankers
Trust determines the liquidity of restricted securities; and through reports
from Bankers Trust, the Portfolio Trust Board monitors trading activity in
restricted securities. If institutional trading in restricted securities were to
decline, the liquidity of the Portfolio could be adversely affected.
SHORT-TERM INVESTMENTS -- The Portfolio's assets may be invested in high quality
short-term investments with remaining maturities of 397 days or less to maintain
the Liquidity Reserve, to meet anticipated redemptions and expenses for
day-to-day operating purposes and when, in Bankers Trust's opinion, it is
advisable to adopt a temporary defensive position because of unusual and adverse
conditions affecting the respective markets.
U.S. GOVERNMENT SECURITIES -- U.S. government securities are high-quality debt
securities issued or guaranteed by the U.S. Treasury or by an agency or
instrumentality of the U.S. government. Not all U.S. government securities are
backed by the full faith and credit of the United States. For example,
securities issued by the Farm Credit Banks or by the FNMA are supported by the
instrumentality's right to borrow money from the U.S. Treasury under certain
circumstances. However, securities issued by certain other U.S. agencies or
instrumentalities are supported only by the credit of the entity that issued
them.
OTHER U.S. DOLLAR-DENOMINATED FIXED INCOME SECURITIES -- Bonds and other debt
instruments are used by issuers to borrow money from investors. The issuer pays
the investor a fixed or variable rate of interest and must repay the amount
borrowed at maturity. Some debt securities, such as zero coupon bonds, do not
pay current interest but are purchased at a discount from their face values.
Debt securities, loans and other direct debt have varying degrees of quality and
varying levels of sensitivity to changes in interest rates. Longer-term bonds
are generally more sensitive to interest rate changes than short-term bonds.
U.S. DOLLAR-DENOMINATED FOREIGN SECURITIES -- The Portfolio may invest a portion
of its assets in the dollar-denominated debt securities of foreign companies.
Investing in the securities of foreign companies involves more risks than
investing in securities of U.S. companies. Their value is subject to economic
and political developments in the countries where the companies operate and to
changes in foreign currency values. Values may also be affected by foreign tax
laws, changes in foreign economic or monetary policies, exchange control
regulations and regulations involving prohibitions on the repatriation of
foreign currencies.
In general, less information may be available about foreign companies than
about U.S. companies, and foreign companies are generally not subject to the
same accounting, auditing and financial reporting standards as are U.S.
companies. Foreign securities markets may be less liquid and subject to less
regulation than the U.S. securities markets. The costs of investing outside the
United States frequently are higher than those in the United States. These costs
include relatively higher brokerage commissions and foreign custody expenses.
U.S. DOLLAR-DENOMINATED SOVEREIGN AND SUPRANATIONAL FIXED INCOME SECURITIES --
Debt instruments issued or guaranteed by foreign governments, agencies and
supranational organizations ("sovereign debt obligations"), especially sovereign
debt obligations of developing countries, may involve a high degree of risk. The
issuer of the obligation or the governmental authorities that control the
repayment of the debt may be unable or unwilling to repay principal and interest
when due and may require renegotiation or rescheduling of debt payments. In
addition, prospects for repayment of principal and interest may depend on
political as well as economic factors.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES -- The Portfolio may purchase
securities on a when-issued or delayed delivery basis. Delivery of and payment
for these securities may take place as late as a month or more after the date of
the purchase commitment. The value of these securities is subject to market
fluctuations during this period, and no income accrues to the Portfolio until
settlement takes place.
ZERO COUPON SECURITIES -- Zero Coupon Securities including CATS, TIGRs and TRs,
are the separate income or principal components of a debt instrument. These
involve risks that are similar to those of other debt securities, although they
may be more volatile, and the value of certain zero coupon securities moves in
the same direction as interest rates. Zero coupon bonds do not make regular
interest payments.
<PAGE>
REDUCED SALES CHARGES
CLASS A SHARES -- Initial sales charges may be reduced or eliminated for persons
or organizations purchasing Class A shares of the Fund alone or in combination
with Class A shares of other Security Funds.
For purposes of qualifying for reduced sales charges on purchases made
pursuant to Rights of Accumulation or a Statement of Intention, the term
"Purchaser" includes the following persons: an individual, his or her spouse and
children under the age of 21; a trustee or other fiduciary of a single trust
estate or single fiduciary account established for their benefit; an
organization exempt from federal income tax under Section 501(c)(3) or (13) of
the Internal Revenue Code; or a pension, profit-sharing or other employee
benefit plan whether or not qualified under Section 401 of the Internal Revenue
Code.
RIGHTS OF ACCUMULATION -- To reduce sales charges on purchases of Class A shares
of a Fund, a Purchaser may combine all previous purchases of the Funds with a
contemplated current purchase and receive the reduced applicable front-end sales
charge. The Distributor must be notified when a sale takes place which might
qualify for the reduced charge on the basis of previous purchases.
Rights of accumulation also apply to purchases representing a combination of
the Class A shares of the Funds, and other Security Funds, except Security Cash
Fund, in those states where shares of the fund being purchased are qualified for
sale.
STATEMENT OF INTENTION -- A Purchaser may choose to sign a Statement of
Intention within 90 days after the first purchase to be included thereunder,
which will cover future purchases of Class A shares of the Funds, and other
Security Funds, except Security Cash Fund. The amount of these future purchases
shall be specified and must be made within a 13-month period (or 36-month period
for purchases of $1 million or more) to become eligible for the reduced
front-end sales charge applicable to the actual amount purchased under the
Statement. Shares equal to five percent (5%) of the amount specified in the
Statement of Intention will be held in escrow until the statement is completed
or terminated. These shares may be redeemed by the Fund if the Purchaser is
required to pay additional sales charges.
A Statement of Intention may be revised during the 13-month (or, if
applicable, 36-month) period. A Statement of Intention may be obtained from the
Fund.
REINSTATEMENT PRIVILEGE -- Shareholders who redeem their Class A shares of the
Funds have a one-time privilege (1) to reinstate their accounts by purchasing
Class A shares without a sales charge up to the dollar amount of the redemption
proceeds; or (2) to the extent the redeemed shares would have been eligible for
the exchange privilege, to purchase Class A shares of another of the Security
Funds, without a sales charge up to the dollar amount of the redemption
proceeds. To exercise this privilege, a shareholder must provide written notice
and a check in the amount of the reinvestment within thirty days after the
redemption request; the reinstatement will be made at the net asset value on the
date received by the Fund or the Security Funds, as appropriate.
<PAGE>
ADDITIONAL INFORMATION ABOUT TSAS
TSA Accounts must generally be provided under a plan which meets certain minimum
participation, coverage, and nondiscrimination requirements. TSA Accounts are
subject to minimum distribution requirements such that an employees interest in
a TSA Account must generally be distributed or begin to be distributed not later
than April 1 of the calendar year following the later of the calendar year in
which they employee reaches age 70 1/2 or retires.
TSA Accounts may be purchased with employer contributions, employee
contributions or a combination of both. An employee's rights under a TSA Account
must be nonforfeitable. Numerous limitations apply to the amount of
contributions that may be made to a TSA Account. The applicable limit will
depend upon, among other things, whether the TSA Account is purchased with
employer or employee contributions.
Amounts used to purchase a TSA Account generally are excludable from the
taxable income of the employee. As a result, all distributions from such
accounts are normally taxable in full as ordinary income to the employee.
TSA Accounts must prohibit the distribution of employee contributions
(including earnings thereon) until the employee: (i) attains age 59 1/2; (ii)
terminates employment, (iii) dies; (iv) becomes disabled; or (v) incurs
financial hardship (earnings may not be distributed in the event of hardship).
TYPES OF INDIVIDUAL RETIREMENT ACCOUNTS
TRADITIONAL IRAS -- If you are under age 70 1/2, and you (or if you file a joint
return, your spouse) have taxable compensation, you may set up a Traditional IRA
and make annual IRA contributions of up to $2,000, or 100% of your taxable
compensation, whichever is less. Taxable income includes wages, salaries, and
other amounts reported in box 1 of Form W-2, as well as earnings from
self-employment. If you file a joint return and your taxable compensation is
less than that of your spouse, you may make annual contributions to a
Traditional IRA equal to the lesser of $2,000, or the sum of (i) your taxable
compensation and (ii) the taxable compensation of your spouse, reduced by the
amount of his or her IRA deduction for the year.
Amounts contributed to a Traditional IRA generally are deductible for
federal income tax purposes. However, if you were covered by an employer
retirement plan, the amount of your contribution to a Traditional IRA that you
may deduct will be reduced or eliminated if your modified adjusted gross income
exceeds certain amounts (currently $50,000 for a married couple filing a joint
return and $30,000 for a single taxpayer). If your spouse is covered by an
employer retirement plan but you are not, you may be able to deduct your
contributions to a Traditional IRA; however, the deduction will be reduced or
eliminated if your adjusted gross income on a joint return exceeds $150,000.
Even if your ability to deduct contributions to a Traditional IRA is limited,
you may still make contributions up to the limits described above.
In general, you may also make a contribution to a Traditional IRA by
"rolling over" all or a portion of a distribution you receive from a qualified
retirement plan (such as a pension or profit-sharing plan or a 401(k) plan) or
another Traditional IRA. Amounts distributed from a Traditional IRA and eligible
rollover distributions from qualified retirement plans will not be includible in
income if they are contributed to a Traditional IRA in a rollover transaction
which meets certain conditions; however, a federal withholding tax may be
imposed on such distributions. Consult your tax adviser for complete details on
Traditional IRAs.
ROTH IRAS -- Regardless of your age, you may be able to establish a Roth IRA.
Contributions to Roth IRAs are not deductible for federal income tax purposes.
However, if all of the applicable requirements are met, earnings in the account
accumulate tax free, and all withdrawals are also tax free. Generally, you may
contribute up to $2,000 annually to a Roth IRA; however, your ability to
contribute to a Roth IRA will be reduced or eliminated if your adjusted gross
income exceeds certain amounts (currently $150,000 for a married couple filing a
joint return and $95,000 for a single taxpayer). In addition, if you make
contributions to both a Traditional IRA and a Roth IRA, your contribution limit
for the Roth IRA will be reduced by the amount of the contribution you make to
the Traditional IRA.
If certain requirements are met, and (i) your modified adjusted gross income
is not more than $100,00, and (ii) you are not married and filing a separate tax
return, you can roll over amounts from a Traditional IRA to a Roth IRA. The
amount rolled over generally will be included in your taxable income. You may
also roll over amounts from one Roth IRA to another Roth IRA. Consult your
professional tax adviser for complete details on Roth IRAs.
SEP-IRAS -- SEP-IRAs are IRAs that are created in connection with a simplified
employee pension ("SEP") established and maintained by a self-employed
individual, a partnership or a corporation. SEP-IRAs must be created for each
qualifying employee of the employer that establishes a SEP. In general, a
qualifying employee is an employee who has: (i) reached the age of 21; and (ii)
worked for the employer at least three out of the past five years. Each SEP-IRA
is owned by the employee for whom it is created; assets of a SEP are not pooled
together.
SEPs must provide for discretionary employer contributions. In other words,
employers are not required to make contributions to SEP-IRAs each year, but if
they do make contributions for any year, the contributions must be based on a
specific allocation formula set forth in the SEP, and must not discriminate in
favor of highly compensated employees.
Contributions to SEP-IRAs generally are deductible by the employer, subject
to certain limitations. Contributions to SEP-IRAs of self-employed individuals
are subject to certain additional limitations.
SEP-IRAs generally are subject to the same distribution and rollover rules
that apply to Traditional IRAs.
SIMPLE IRAS -- In general, a SIMPLE plan may be established by any employer,
including a sole proprietorship, partnership or corporation, with 100 or fewer
employees, and must be the only retirement plan maintained by the employer.
Under a SIMPLE plan using SIMPLE IRAs, a SIMPLE IRA is created for each
eligible employee which, in general, includes all employees who received at
least $5,000 in compensation during any two years preceding the year for which
eligibility is being determined (i.e., the current year) and is reasonably
expected to earn at least $5,000 during the current year. As with SEP-IRAs,
SIMPLE IRAs are individual accounts owned by each eligible employee.
Under a SIMPLE IRA plan, eligible employees can elect to contribute a
portion of their salary to their SIMPLE IRA. (These contributions are referred
to as "elective deferrals.") Elective deferrals are based on a stated percentage
of the employee's compensation, and are limited to $6,000 per year (indexed for
inflation). Elective deferrals are included in employees' gross income only for
Social Security and Medicare tax purposes (i.e., they are not included in wages
for federal income tax purposes).
In addition to elective deferrals by employees, under a SIMPLE IRA plan,
employers must make either: (i) matching contributions equal to each employee's
elective deferral, up to a maximum of 3% of the employee's compensation, or (ii)
nonelective contributions of 2% of compensation for each eligible employee
(subject to certain limits). Employer contributions to SIMPLE IRAs are excluded
from employees' gross income and are deductible by the employer.
SIMPLE IRAs generally are subject to the same distribution and rollover
rules that apply to Traditional IRAs. However, a rollover from a SIMPLE IRA to a
Traditional IRA can be made tax free only after the employee has participated in
the SIMPLE IRA plan for at least two years.
KEOGH PLANS -- Keogh plans are qualified retirement plans established by sole
proprietors or partnerships. As with other qualified retirement plans, in
general, contributions to Keogh plans are deductible, and neither such
contributions nor the investment earnings thereon are subject to tax until they
are distributed by the plan.
A number of different types of plans may qualify as Keogh plans. In certain
circumstances, Keogh plans may provide greater tax advantages than other types
of retirement plans. However, Keogh plans must satisfy a number of complex
rules, including minimum participation requirements, under which certain
employees must be covered by the plan, and in some cases, minimum funding
requirements. Professional assistance generally is required to establish and
maintain a Keogh plan.
EDUCATION IRAS -- An education IRA is a trust or custodial account created for
the purpose of paying the qualified higher education expenses of a designated
beneficiary, i.e., a child under the age of 18 at the time of the contributions.
In general, qualified higher education expenses include expenses for tuition,
fees, books, supplies and equipment required for the designated beneficiary of
the Education IRA to attend an eligible educational institution, which includes
essentially all accredited post secondary educational institutions. Any
individual may make contributions to an education IRA so long as his or her
modified adjusted gross income is less than $110,000 ($160,000 for married
taxpayers filing jointly). The maximum total contributions that may be made to
education IRAs for each child is $500 per year. Generally, amounts may be rolled
over from an education IRA to another education IRA established for the same
beneficiary or for certain members of the beneficiary's family. Beneficiaries
may make tax free withdrawals from education IRAs to pay qualified higher
education expenses. Other withdrawals generally will be subject to tax. Consult
your professional tax adviser for complete details on Education IRAs.
<PAGE>
- --------------------------------------------------------------------------------
SECURITY INCOME FUND
* CAPITAL PRESERVATION SERIES
STATEMENT OF ADDITIONAL INFORMATION
MAY 3, 1999
RELATING TO THE PROSPECTUS DATED May 1, 1999,
AS IT MAY BE SUPPLEMENTED FROM TIME TO TIME
(785) 431-3127
(800) 888-2461
- --------------------------------------------------------------------------------
FUND ADMINISTRATOR
Security Management Company, LLC
700 SW Harrison Street
Topeka, Kansas 66636-0001
DISTRIBUTOR
Security Distributors, Inc.
700 SW Harrison Street
Topeka, Kansas 66636-0001
CUSTODIAN
UMB Bank, N.A.
928 Grand Avenue
Kansas City, Missouri 64106
INDEPENDENT AUDITORS
Ernst & Young LLP
One Kansas City Place
1200 Main Street
Kansas City, Missouri 64105-2143
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS........................... 3
Investment Objective..................................................... 3
Investment Policies...................................................... 3
SHORT-TERM INSTRUMENTS................................................. 3
CERTIFICATES OF DEPOSIT AND BANKERS' ACCEPTANCES....................... 3
COMMERCIAL PAPER....................................................... 4
MORTGAGE-AND ASSET-BACKED SECURITIES................................... 4
ZERO-COUPON SECURITIES................................................. 4
WRAPPER AGREEMENTS..................................................... 4
ILLIQUID SECURITIES.................................................... 5
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES............................ 6
ADDITIONAL U.S. GOVERNMENT OBLIGATIONS................................. 6
LOWER-RATED DEBT SECURITIES ("JUNK BONDS")............................. 6
FUTURES CONTRACTS AND OPTIONS AND FUTURES CONTRACTS - GENERAL.......... 7
FUTURES CONTRACTS...................................................... 7
OPTIONS ON FUTURES CONTRACTS........................................... 8
OPTIONS ON SECURITIES.................................................. 9
GLOBAL ASSET ALLOCATION ENHANCEMENT.................................... 10
Rating Services.......................................................... 12
Investment Restrictions.................................................. 12
FUNDAMENTAL RESTRICTIONS............................................... 12
NON-FUNDAMENTAL RESTRICTIONS........................................... 13
Portfolio Transactions and Brokerage Commissions......................... 13
PERFORMANCE INFORMATION.................................................... 14
Standard Performance Information......................................... 14
YIELD.................................................................. 14
TOTAL RETURN........................................................... 14
PERFORMANCE RESULTS.................................................... 15
Comparison of Fund Performance........................................... 15
Economic and Market Information.......................................... 15
VALUATION OF ASSETS; REDEMPTIONS IN KIND................................... 15
QUALIFIED REDEMPTIONS...................................................... 16
Traditional IRAs, SEP-IRAs and SIMPLE IRAs............................... 18
Roth IRAs................................................................ 18
Keogh Plans.............................................................. 18
Education IRAs........................................................... 19
MANAGEMENT OF THE FUND AND TRUST........................................... 19
Directors and Officers of Security Income Fund........................... 19
Trustees of BT Investment Portfolios..................................... 20
Officers of BT Investment Portfolios..................................... 20
Security Income Fund Director Compensation Table......................... 21
BT Investment Portfolio Trustee Compensation Table....................... 21
Investment Adviser....................................................... 21
Administrator............................................................ 22
Custodian................................................................ 22
Banking Regulatory Matters............................................... 23
Independent Accountants.................................................. 23
ORGANIZATION OF SECURITY INCOME FUND....................................... 23
ORGANIZATION OF THE TRUST.................................................. 23
TAXATION................................................................... 24
Taxation of the Fund..................................................... 24
Taxation of the Portfolio................................................ 24
Other Taxation........................................................... 25
Foreign Withholding Taxes................................................ 25
FINANCIAL STATEMENTS....................................................... 26
APPENDIX................................................................... 27
Description of Moody's Corporate Bond Ratings............................ 27
Description of S&P's Corporate Bond Ratings.............................. 27
Duff & Phelps' Long-Term Debt Ratings.................................... 28
Description of Moody's Short-Term Ratings................................ 28
Description of S&P Short-Term Issuer Credit Ratings...................... 29
Description of Duff & Phelps' Commercial Paper Ratings................... 29
Description of Moody's Insurance Financial Strength Ratings.............. 29
Description of S&P Claims Paying Ability Rating Definitions.............. 30
Duff & Phelps' Claims Paying Ability Ratings............................. 30
<PAGE>
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
Security Capital Preservation Fund (the "Fund") is a separate series of
Security Income Fund, an open-end, management investment company (mutual fund)
of the series type, offering shares of the Fund ("Shares") as described herein.
As described in the Fund's Prospectus, the Fund seeks to achieve its
investment objective by investing all its net investable assets (the "Assets")
in BT PreservationPlus Income Portfolio (the "Portfolio"), a diversified
open-end management investment company having the same investment objective as
the Fund. The Portfolio is a separate subtrust of BT Investment Portfolios, a
New York master trust fund (the "Portfolio Trust").
Because the investment characteristics of the Fund correspond directly to
those of the Portfolio (in which the Fund invests all of its assets), the
following is a discussion of the various investments of and techniques employed
by the Portfolio. The Fund has been established to serve as an alternative
investment to short-term bond funds and money market funds. In addition, since
to date, there has been no comparable investment substitute for those
individuals who are "rolling" assets over from the stable value or guaranteed
investment contract ("GIC") option of their employee benefit plans (such as
401(k) plans), the Fund is designed to be that comparable alternative.
Shares of the Fund are sold by Security Distributors, Inc., the Fund's
distributor (the "Distributor"), solely to tax-sheltered annuity custodial
accounts as defined in Section 403(b)(7) of the Internal Revenue Code of 1986,
as amended (the "Code"), individual retirement accounts as defined in Section
408 of the Code including "SIMPLE IRAs" and "SEP IRAs", Roth IRAs as defined in
Section 408A of the Code, education individual retirement accounts as defined in
Section 530 of the Code and "Keogh Plans" (sometimes collectively referred to
herein as "IRAs"), and to employees investing through participant-directed
employee benefit plans (each a "Plan" and together "Plans"). Shares are offered
to Plans either directly, or through vehicles such as bank collective funds or
insurance company separate accounts consisting solely of such Plans. Shares are
also available to employee benefit plans which invest in the Fund through an
omnibus account or similar arrangement.
The Fund's Prospectus (the "Prospectus") is dated May 3, 1999. The Prospectus
provides the basic information investors should know before investing and may be
obtained without charge by calling the Distributor at 1-800-888-2461 extension
3127. This Statement of Additional Information ("SAI"), which is not a
prospectus, is intended to provide additional information regarding the
activities and operations of the Fund and the Portfolio and should be read in
conjunction with the Prospectus. This SAI is not an offer by the Fund to an
investor that has not received a Prospectus. Capitalized terms not otherwise
defined in this SAI have the meanings ascribed to them in the Prospectus.
INVESTMENT OBJECTIVE -- The investment objective of the Fund is a high level of
current income while seeking to maintain a stable value per share. There can, of
course, be no assurance that the Fund will achieve its investment objective.
INVESTMENT POLICIES -- The Fund seeks to achieve its investment objective by
investing all of its Assets in the Portfolio. The Fund's investment in the
Portfolio may be withdrawn at any time if the Board of Directors of Security
Income Fund determines that it is in the best interests of the Fund to do so.
The following is a discussion of the various investments of and techniques
employed by the Portfolio.
SHORT-TERM INSTRUMENTS. The Portfolio may hold short-term investments
consisting of foreign and domestic (i) short-term obligations of sovereign
governments, their agencies, instrumentalities, authorities or political
subdivisions; (ii) other short-term debt securities rated in one of the top two
short-term rating categories by an NRSRO or, if unrated, of comparable quality
in the opinion of Bankers Trust Company, the Portfolio's investment adviser (the
"Adviser"); (iii) commercial paper; (iv) bank obligations, including negotiable
certificates of deposit, time deposits and bankers' acceptances; and (v)
repurchase agreements. At the time the Portfolio invests in commercial paper,
bank obligations or repurchase agreements, the issuer or the issuer's parent
must have an outstanding long-term debt rating of A or higher by Standard &
Poor's Ratings Group ("S&P") or A-2 or higher by Moody's Investors Service, Inc.
("Moody's") or outstanding commercial paper or bank obligations rated A-1 by S&P
or Prime-1 by Moody's; or, if no such ratings are available, the instrument must
be of comparable quality in the opinion of Bankers Trust.
CERTIFICATES OF DEPOSIT AND BANKERS' ACCEPTANCES. Certificates of deposit are
receipts issued by a depository institution in exchange for the deposit of
funds. The issuer agrees to pay the amount deposited plus interest to the bearer
of the receipt on the date specified on the certificate. The certificate usually
can be traded in the secondary market prior to maturity. Bankers' acceptances
typically arise from short-term credit arrangements designed to enable
businesses to obtain funds to finance commercial transactions. Generally, an
acceptance is a time draft drawn on a bank by an exporter or an importer to
obtain a stated amount of funds to pay for specific merchandise. The draft is
then "accepted" by a bank that, in effect, unconditionally guarantees to pay the
face value of the instrument on its maturity date. The acceptance may then be
held by the accepting bank as an earning asset or it may be sold in the
secondary market at the going rate of discount for a specific maturity. Although
maturities for acceptances can be as long as 270 days, most acceptances have
maturities of six months or less.
COMMERCIAL PAPER. Commercial paper consists of short-term (usually from one
to 270 days) unsecured promissory notes issued by corporations in order to
finance their current operations. A variable amount master demand note (which is
a type of commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts.
For a description of commercial paper ratings, see the Appendix.
MORTGAGE- AND ASSET-BACKED SECURITIES. The yield characteristics of the
mortgage- and asset-backed securities in which the Portfolio may invest differ
from those of traditional debt securities. Among the major differences are that
interest and principal payments are made more frequently on mortgage- and
asset-backed securities (usually monthly) and that principal may be prepaid at
any time because the underlying mortgage loans or other assets generally may be
prepaid at any time. As a result, if the Portfolio purchases these securities at
a premium, a prepayment rate that is faster than expected will reduce their
yield, while a prepayment rate that is slower than expected will have the
opposite effect of increasing yield. Conversely, if the Portfolio purchases
these securities at a discount, faster than expected prepayments will increase,
while slower than expected prepayments will reduce, their yield. Amounts
available for reinvestment by the Portfolio are likely to be greater during a
period of declining interest rates and, as a result, are likely to be reinvested
at lower interest rates than during a period of rising interest rates.
In general, the prepayment rate for mortgage-backed securities decreases as
interest rates rise and increases as interest rates fall. However, rising
interest rates will tend to decrease the value of these securities. In addition,
an increase in interest rates may affect the volatility of these securities by
effectively changing a security that was considered a short-term security at the
time of purchase into a long-term security. Long-term securities generally
fluctuate more widely in response to changes in interest rates than short- or
intermediate-term securities.
The market for privately issued mortgage- and asset-backed securities is
smaller and less liquid than the market for U.S. government mortgage-backed
securities. Collateralized mortgage obligation ("CMO") classes may be specially
structured in a manner that provides any of a wide variety of investment
characteristics, such as yield, effective maturity and interest rate
sensitivity. As market conditions change, however, and particularly during
periods of rapid or unanticipated changes in market interest rates, the
attractiveness of the CMO classes and the ability of the structure to provide
the anticipated investment characteristics may be significantly reduced. These
changes can result in volatility in the market value, and in some instances
reduced liquidity, of the CMO class.
ZERO-COUPON SECURITIES. The Portfolio may invest in certain zero coupon
securities that are "stripped" U.S. Treasury notes and bonds. Zero coupon
securities usually trade at a substantial discount from their face or par value.
Zero coupon securities are subject to greater fluctuations of market value in
response to changing interest rates than debt obligations of comparable
maturities that make current distributions of interest in cash.
WRAPPER AGREEMENTS. Wrapper Agreements are structured with a number of
different features. Wrapper Agreements purchased by the Portfolio are of three
basic types: (1) non-participating, (2) participating and (3) "hybrid." In
addition, the Wrapper Agreements will either be of fixed-maturity or open-end
maturity ("evergreen"). The Portfolio enters into particular types of Wrapper
Agreements depending upon their respective cost to the Portfolio and the Wrapper
Provider's creditworthiness, as well as upon other factors. Under most
circumstances, it is anticipated that the Portfolio will enter into
participating Wrapper Agreements of open-end maturity and hybrid Wrapper
Agreements.
Under a NON-PARTICIPATING WRAPPER AGREEMENT, the Wrapper Provider becomes
obligated to make a payment to the Portfolio whenever the Portfolio sells
Covered Assets at a price below Book Value to meet withdrawals of a type covered
by the Wrapper Agreement (a "Benefit Event"). Conversely, the Portfolio becomes
obligated to make a payment to the Wrapper Provider whenever the Portfolio sells
Covered Assets at a price above their Book Value in response to a Benefit Event.
In neither case is the Crediting Rate adjusted at the time of the Benefit Event.
Accordingly, under this type of Wrapper Agreement, while the Portfolio is
protected against decreases in the market value of the Covered Assets below Book
Value, it does not realize increases in the market value of the Covered Assets
above Book Value; those increases are realized by the Wrapper Providers.
Under a PARTICIPATING WRAPPER AGREEMENT, the obligation of the Wrapper
Provider or the Portfolio to make payments to each other typically does not
arise until all of the Covered Assets have been liquidated. Instead of payments
being made on the occurrence of each Benefit Event, these obligations are a
factor in the periodic adjustment of the Crediting Rate.
Under a HYBRID WRAPPER AGREEMENT, the obligation of the Wrapper Provider or
the Portfolio to make payments does not arise until withdrawals exceed a
specified percentage of the Covered Assets, after which time payment covering
the difference between market value and Book Value will occur.
A FIXED-MATURITY WRAPPER AGREEMENT terminates at a specified date, at which
time settlement of any difference between Book Value and market value of the
Covered Assets occurs. A fixed-maturity Wrapper Agreement tends to ensure that
the Covered Assets provide a relatively fixed rate of return over a specified
period of time through bond immunization, which targets the duration of the
Covered Assets to the remaining life of the Wrapper Agreement.
An EVERGREEN WRAPPER AGREEMENT has no fixed maturity date on which payment
must be made, and the rate of return on the Covered Assets accordingly tends to
vary. Unlike the rate of return under a fixed-maturity Wrapper Agreement, the
rate of return on assets covered by an evergreen Wrapper Agreement tends to more
closely track prevailing market interest rates and thus tends to rise when
interest rates rise and fall when interest rates fall. An evergreen Wrapper
Agreement may be converted into a fixed-maturity Wrapper Agreement that will
mature in the number of years equal to the duration of the Covered Assets.
Wrapper Providers are banks, insurance companies and other financial
institutions. The number of Wrapper Providers has been increasing in recent
years. As of April 1998, there were approximately fifteen Wrapper Providers
rated in one of the top two long-term rating categories by Moody's, S&P or
another NRSRO. The cost of Wrapper Agreements is typically 0.10% to 0.25% per
dollar of Covered Assets per annum.
In the event of the default of a Wrapper Provider, the Portfolio could
potentially lose the Book Value protections provided by the Wrapper Agreements
with that Wrapper Provider. However, the impact of such a default on the
Portfolio as a whole may be minimal or non-existent if the market value of the
Covered Assets thereunder is greater than their Book Value at the time of the
default, because the Wrapper Provider would have no obligation to make payments
to the Portfolio under those circumstances. In addition, the Portfolio may be
able to obtain another Wrapper Agreement from another Wrapper Provider to
provide Book Value protections with respect to those Covered Assets. The cost of
the replacement Wrapper Agreement might be higher than the initial Wrapper
Agreement due to market conditions or if the market value (plus accrued interest
on the underlying securities) of those Covered Assets is less than their Book
Value at the time of entering into the replacement agreement. Such cost would
also be in addition to any premiums previously paid to the defaulting Wrapper
Provider. If the Portfolio were unable to obtain a replacement Wrapper
Agreement, participants redeeming Shares might experience losses if the market
value of the Portfolio's assets no longer covered by the Wrapper Agreement is
below Book Value. The combination of the default of a Wrapper Provider and an
inability to obtain a replacement agreement could render the Portfolio and the
Fund unable to achieve their investment objective of seeking to maintain a
stable value per Share.
With respect to payments made under the Wrapper Agreements between the
Portfolio and the Wrapper Provider, some Wrapper Agreements, as noted in the
Fund's prospectus, provide that payments may be due upon disposition of the
Covered Assets, while others provide for payment only upon the total liquidation
of the Covered Assets or upon termination of the Wrapper Agreement. In none of
these cases, however, would the terms of the Wrapper Agreements specify which
Portfolio Securities are to be disposed of or liquidated. Moreover, because it
is anticipated that each Wrapper Agreement will cover all Covered Assets up to a
specified dollar amount, if more than one Wrapper Provider becomes obligated to
pay to the Portfolio the difference between Book Value and market value (plus
accrued interest on the underlying securities), each Wrapper Provider will pay a
pro-rata amount in proportion to the maximum dollar amount of coverage provided.
Thus, the Portfolio will not have the option of choosing which Wrapper Agreement
to draw upon in any such payment situation. Under the terms of most Wrapper
Agreements, the Wrapper Provider will have the right to terminate the Wrapper
Agreement in the event that material changes are made to the Portfolio's
investment objectives or limitations or to the nature of the Portfolio's
operations. In such event, the Portfolio may be obligated to pay the Wrapper
Provider termination fees equal in amount to the premiums that would have been
due had the Wrapper Agreement continued through the predetermined period. The
Portfolio will have the right to terminate a Wrapper Agreement for any reason.
Such right, however, may also be subject to the payment of termination fees. In
the event of termination of a Wrapper Agreement or conversion of an evergreen
Wrapper Agreement to a fixed maturity, some Wrapper Agreements may require that
the duration of some portion of the Portfolio's securities be reduced to
correspond to the fixed maturity or termination date and that such securities
maintain a higher credit rating than is normally required, either of which
requirements might adversely affect the return of the Portfolio and the Fund.
For a description of Wrapper Provider ratings, see the Appendix.
ILLIQUID SECURITIES. Mutual funds do not typically hold a significant amount
of illiquid securities because of the potential for delays on resale and
uncertainty in valuation. Limitations on resale may have an adverse effect on
the marketability of portfolio securities, and a mutual fund might be unable to
dispose of illiquid securities promptly or at reasonable prices and might
thereby experience difficulty satisfying redemptions within seven days. A mutual
fund might also have to register restricted securities in order to dispose of
them, resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the 1933 Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale of such investments to the
general public or to certain institutions may not be indicative of their
liquidity.
The Securities and Exchange Commission (the "SEC") has adopted Rule 144A
under the 1933 Act, which allows a broader institutional trading market for
securities otherwise subject to restriction on their resale to the general
public. Rule 144A establishes a "safe harbor" from the registration requirements
of the 1933 Act for resales of certain securities to qualified institutional
buyers. The Adviser anticipates that the market for certain restricted
securities such as institutional commercial paper will expand further as a
result of this rule and the development of automated systems for the trading,
clearance and settlement of unregistered securities of domestic and foreign
issuers, such as the PORTAL System sponsored by the National Association of
Securities Dealers, Inc.
The Adviser will monitor the liquidity of Rule 144A securities held by the
Portfolio under the supervision of the Portfolio Trust Board. In reaching
liquidity decisions, the Adviser will consider, among other things, the
following factors: (1) the frequency of trades and quotes for the security; (2)
the number of dealers and other potential purchasers or sellers of the security;
(3) dealer undertakings to make a market in the security; and (4) the nature of
the security and of the marketplace trades (e.g., the time needed to dispose of
the security, the method of soliciting offers and the mechanics of the
transfer).
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. Delivery of and payment
for these securities can take place a month or more after the date of the
purchase commitment. The purchase price and the interest rate payable, if any,
on the securities are fixed on the purchase commitment date or at the time the
settlement date is fixed. The value of such securities is subject to market
fluctuation, and no interest accrues to the Portfolio until settlement takes
place. At the time the Portfolio makes the commitment to purchase securities on
a when-issued or delayed delivery basis, it will record the transaction, reflect
the value each day of such securities in determining its NAV and, if applicable,
calculate the maturity for the purposes of average maturity from that date. At
the time of settlement, a when-issued security may be valued at less than the
purchase price. To facilitate such acquisitions, the Portfolio will maintain
with its custodian (Bankers Trust) a segregated account with liquid assets,
consisting of cash, U.S. government securities or other appropriate securities,
in an amount at least equal to such commitments. On delivery dates for such
transactions, the Portfolio will meet its obligations from maturities or sales
of the securities held in the segregated account and/or from cash flow. If the
Portfolio chooses to dispose of the right to acquire a when-issued security
prior to its acquisition, it could, as with the disposition of any other
portfolio obligation, realize a gain or loss due to market fluctuation. It is
the current policy of the Portfolio not to enter into when-issued commitments
exceeding in the aggregate 15% of the market value of its total assets, less
liabilities other than the obligations created by when-issued commitments.
ADDITIONAL U.S. GOVERNMENT OBLIGATIONS. The Portfolio may invest in
obligations issued or guaranteed by U.S. government agencies or
instrumentalities. These obligations may or may not be backed by the "full faith
and credit" of the United States. In the case of securities not backed by the
full faith and credit of the United States, the Portfolio must look principally
to the federal agency issuing or guaranteeing the obligation for ultimate
repayment and may not be able to assert a claim against the United States itself
in the event the agency or instrumentality does not meet its commitments.
Securities in which the Portfolio may invest that are not backed by the full
faith and credit of the United States include obligations of the Tennessee
Valley Authority, the Federal Home Loan Mortgage Corporation and the U.S. Postal
Service, each of which has the right to borrow from the U.S. Treasury to meet
its obligations, and obligations of the Federal Farm Credit System and the
Federal Home Loan Banks, both of whose obligations may be satisfied only by the
individual credit of the issuing agency. Securities that are backed by the full
faith and credit of the United States include obligations of the Government
National Mortgage Association (the "GNMA"), the Farmers Home Administration and
the Export-Import Bank.
LOWER-RATED DEBT SECURITIES ("JUNK BONDS"). The Portfolio may invest in debt
securities rated in the fifth and sixth long-term rating categories by S&P,
Moody's and Duff & Phelps Credit Rating Company, or comparably rated by another
NRSRO, or if not rated by a NRSRO, of comparable quality as determined by
Bankers Trust in its sole discretion. While the market for high yield corporate
debt securities has been in existence for many years and has weathered previous
economic downturns, the 1980's brought a dramatic increase in the use of such
securities to fund highly leveraged corporate acquisitions and restructuring.
Past experience may not provide an accurate indication of future performance of
the high yield bond market, especially during periods of economic recession. In
fact, from 1989 to 1991, the percentage of lower-rated debt securities that
defaulted rose significantly above prior levels.
The market for lower-rated debt securities may be thinner and less active
than that for higher rated debt securities, which can adversely affect the
prices at which the former are sold. If market quotations are not available,
lower-rated debt securities will be valued in accordance with procedures
established by the Board of Trustees, including the use of outside pricing
services. Judgment plays a greater role in valuing high yield corporate debt
securities than is the case for securities for which more external sources for
quotations and last sale information is available. Adverse publicity and
changing investor perception may affect the availability of outside pricing
services to value lower-rated debt securities and the Portfolio's ability to
dispose of these securities.
Since the risk of default is higher for lower-rated debt securities, Bankers
Trust's research and credit analysis are an especially important part of
managing securities of this type held by the Portfolio. In considering
investments for the Portfolio, Bankers Trust will attempt to identify those
issuers of high yielding debt securities whose financial conditions are adequate
to meet future obligations, have improved or are expected to improve in the
future. Bankers Trust's analysis focuses on relative values based on such
factors as interest on dividend coverage, asset coverage, earnings prospects and
the experience and managerial strength of the issuer.
The Portfolio may choose, at its expense or in conjunction with others, to
pursue litigation or otherwise exercise its rights as a security holder to seek
to protect the interest of security holders if it determines this to be in the
interest of the Portfolio.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS -- GENERAL. The successful
use of these instruments draws upon the Adviser's skill and experience with
respect to such instruments and usually depends on its ability to forecast
interest rate movements correctly. If interest rates move in an unexpected
manner, the Portfolio may not achieve the anticipated benefits of futures
contracts or options thereon or may realize losses and thus will be in a worse
position than if such strategies had not been used. In addition, the correlation
between movements in the price of futures contracts or options thereon and
movements in the price of the securities hedged or used for cover will not be
perfect and could produce unanticipated losses.
FUTURES CONTRACTS. The Portfolio may enter into contracts for the purchase or
sale for future delivery of fixed-income securities or contracts based on
financial indices, including any index of U.S. government securities, foreign
government securities or corporate debt securities. U.S. futures contracts have
been designed by exchanges that have been designated "contracts markets" by the
Commodity Futures Trading Commission ("CFTC") and must be executed through a
futures commission merchant, or brokerage firm, that is a member of the relevant
contract market. Futures contracts trade on a number of exchange markets, and,
through their clearing corporations, the exchanges guarantee performance of the
contracts as between the clearing members of the exchange. The Portfolio may
enter into futures contracts based on debt securities that are backed by the
full faith and credit of the U.S. government, such as long-term U.S. Treasury
bonds, U.S. Treasury notes, GNMA modified pass-through mortgage-backed
securities and three-month U.S. Treasury bills. The Portfolio may also enter
into futures contracts that are based on bonds issued by entities other than the
U.S. government.
At the same time a futures contract is purchased or sold, the Portfolio must
allocate cash or securities as a deposit payment ("initial margin"). It is
expected that the initial margin would be approximately 1 1/2% to 5% of a
contract's face value. Daily thereafter, the futures contract is valued and
"variation margin" may be required (that is, the Portfolio may have to provide
or may receive cash that reflects any decline or increase in the contract's
value).
At the time of delivery of securities pursuant to a futures contract,
adjustments are made to recognize differences in value arising from the delivery
of securities with a different interest rate from that specified in the
contract. In some (but not many) cases, securities called for by a futures
contract may not have been issued when the contract was written.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is fulfilled
before the termination date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled through a
clearinghouse associated with the exchange on which the contracts are traded,
the Portfolio will incur brokerage fees when it purchases or sells futures
contracts.
The purpose of the Portfolio's acquisition or sale of a futures contract is
to attempt to protect the Portfolio from fluctuations in interest rates without
actually buying or selling fixed-income securities. For example, if interest
rates were expected to increase (which thus would cause the prices of debt
securities to decline), the Portfolio might enter into futures contracts for the
sale of debt securities. Such a sale would have much the same effect as selling
an equivalent value of the debt securities owned by the Portfolio. If interest
rates did increase, the value of the debt securities held by the Portfolio would
decline, but the value of the futures contracts to the Portfolio would increase
at approximately the same rate, thereby keeping the Portfolio's NAV from
declining as much as it otherwise would have. The Portfolio could accomplish
similar results by selling debt securities and investing in bonds with short
maturities when interest rates are expected to increase. However, since the
futures market is more liquid than the cash market, the use of futures contracts
as an investment technique allows the Portfolio to maintain a defensive position
without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline (thus
increasing the value of debt securities), futures contracts for the acquisition
of debt securities may be purchased to attempt to hedge against anticipated
purchases of debt securities at higher prices. Since the fluctuations in the
value of futures contracts should be similar to those of the underlying debt
securities, the Portfolio could take advantage of the anticipated rise in the
value of debt securities without actually buying them until the market had
stabilized. At that time, the futures contracts could be liquidated and the
Portfolio could then buy debt securities on the cash market. To the extent the
Portfolio enters into futures contracts for this purpose, the assets in the
segregated asset account maintained to cover the Portfolio's obligations with
respect to such futures contracts will consist of cash, cash equivalents or high
quality liquid debt securities from its portfolio in an amount equal to the
difference between the fluctuating market value of such futures contracts and
the aggregate value of the initial and variation margin payments made by the
Portfolio with respect to such futures contracts.
The ordinary spreads between prices in the cash and futures market, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial and variation
margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions that could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by Bankers Trust may still not
result in a successful transaction.
In addition, futures contracts entail risks. Although the Adviser believes
that use of such contracts will benefit the Portfolio, if its investment
judgment about the general direction of interest rates is incorrect, the
Portfolio's overall performance would be poorer than if it had not entered into
any such contract. For example, if the Portfolio has hedged against the
possibility of an increase in interest rates that would adversely affect the
price of debt securities held in its portfolio and interest rates decrease
instead, the Portfolio will lose part or all of the benefit of the increased
value of its debt securities that it has hedged because it will have offsetting
losses in its futures positions. In addition, in such situations, if the
Portfolio has insufficient cash, it may have to sell debt securities from its
portfolio to meet daily variation margin requirements. Such sales of securities
may be, but will not necessarily be, at increased prices that reflect the rising
market. The Portfolio may have to sell securities at a time when it may be
disadvantageous to do so.
OPTIONS ON FUTURES CONTRACTS. The Portfolio may purchase and write (sell)
options on futures contracts for hedging purposes. The purchase of a call option
on a futures contract is similar in some respects to the purchase of a call
option on an individual security. Depending on the pricing of the option
compared to either the price of the futures contract upon which it is based or
the price of the underlying debt securities, it may or may not be less risky
than ownership of the futures contract or underlying debt securities. As with
the purchase of futures contracts, when the Portfolio is not fully invested it
may purchase a call option on a futures contract to hedge against a market
advance due to declining interest rates.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the security that is deliverable upon exercise
of the futures contract. If the futures price at expiration of the option is
below the price specified in the option ("exercise price"), the Portfolio will
retain the full amount of the net premium (the premium received for writing the
option less any commission), which will provide a partial hedge against any
decline that may have occurred in its portfolio holdings. The writing of a put
option on a futures contract constitutes a partial hedge against increasing
prices of the security that is deliverable upon exercise of the futures
contract. If the futures price at expiration of the option is higher than the
exercise price, the Portfolio will retain the full amount of the option net
premium, which will provide a partial hedge against any increase in the price of
securities that the Portfolio intends to purchase. If a put or call option the
Portfolio has written is exercised, the Portfolio may incur a loss that will be
reduced by the amount of the net premium it receives. Depending on the degree of
correlation between changes in the value of its portfolio securities and changes
in the value of its futures positions, such losses from existing options on
futures may to some extent be reduced or increased by changes in the value of
portfolio securities.
The purchase of a put option on a futures contract is similar in some
respects to the purchase of put options on portfolio securities. For example,
the Portfolio may purchase a put option on a futures contract to hedge its
portfolio against the risk of rising interest rates. The amount of risk the
Portfolio assumes when it purchases an option on a futures contract is the
premium paid for the option plus related transaction costs. In addition to the
correlation risks discussed above, the purchase of an option also entails the
risk that changes in the value of the underlying futures contract will not be
fully reflected in the value of the option purchased.
The Portfolio Trust Board has adopted a restriction that the Portfolio will
not enter into any futures contract or option on a futures contract if
immediately thereafter the amount of margin deposits on all the futures
contracts held by the Portfolio and premiums paid on outstanding options on its
futures contracts (other than those entered into for BONA FIDE hedging purposes)
would exceed 5% of the market value of the Portfolio's total assets.
OPTIONS ON SECURITIES. The Portfolio may write (sell) covered call and put
options on its portfolio securities ("covered options") to a limited extent in
an attempt to increase income. However, the Portfolio may forgo the benefits of
appreciation on securities sold or may pay more than the market price on
securities acquired pursuant to call and put options it writes. A call option
written by a Portfolio is "covered" if the Portfolio owns the underlying
security covered by the call or has an absolute and immediate right to acquire
that security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if the Portfolio holds a call option on the same security and in the
same principal amount as the written call option where the exercise price of the
call option so held (a) is equal to or less than the exercise price of the
written call option or (b) is greater than the exercise price of the written
call option if the difference is maintained by the Portfolio in cash, U.S.
government securities and other high quality liquid securities in a segregated
account with its custodian.
When the Portfolio writes a covered call option, it gives the purchaser of
the option the right to buy the underlying security at the exercise price by
exercising the option at any time during the option period. If the option
expires unexercised, the Portfolio will realize income in an amount equal to the
premium received for writing the option. If the option is exercised, a decision
over which the Portfolio has no control, the Portfolio must sell the underlying
security to the option holder at the exercise price. By writing a covered call
option, the Portfolio forgoes, in exchange for the net premium, the opportunity
to profit during the option period from an increase in the market value of the
underlying security above the exercise price.
When the Portfolio writes a covered put option, it gives the purchaser of the
option the right to sell the underlying security to the Portfolio at the
exercise price at any time during the option period. If the option expires
unexercised, the Portfolio will realize income in the amount of the net premium
received for writing the option. If the put option is exercised, a decision over
which the Portfolio has no control, the Portfolio must purchase the underlying
security from the option holder at the exercise price. By writing a covered put
option, the Portfolio, in exchange for the net premium, accepts the risk of a
decline in the market value of the underlying security below the exercise price.
The Portfolio will only write put options involving securities for which a
determination is made at the time the option is written that the Portfolio
wishes to acquire the securities at the exercise price.
The Portfolio may terminate its obligation as the writer of a call or put
option by purchasing an option with the same exercise price and expiration date
as the option previously written. This transaction is called a "closing purchase
transaction." The Portfolio will realize a profit or loss on a closing purchase
transaction if the amount paid to purchase the option is less or more, as the
case may be, than the amount received from the sale thereof. To close out a
position as a purchaser of an option, the Portfolio may enter into a "closing
sale transaction," which involves liquidating the Portfolio's position by
selling the option previously purchased. Where the Portfolio cannot effect a
closing purchase transaction, it may be forced to incur brokerage commissions or
dealer spreads in selling securities it receives or it may be forced to hold
underlying securities until an option is exercised or expires.
When the Portfolio writes an option, an amount equal to the net premium
received is included in the liability section of its Statement of Assets and
Liabilities as a deferred credit. The amount of the deferred credit will be
subsequently marked to market to reflect the current market value of the option.
The current market value of a traded option is the last sale price or, in the
absence of a sale, the mean between the closing bid and asked prices. If an
option expires or if the Portfolio enters into a closing purchase transaction,
the Portfolio will realize a gain (or loss if the cost of the closing purchase
transaction exceeds the net premium received when the option was sold), and the
deferred credit related to such option will be eliminated. If a call option is
exercised, the Portfolio will realize a gain or loss from the sale of the
underlying security and the proceeds of the sale will be increased by the
premium originally received. The writing of covered call options may be deemed
to involve the pledge of the securities against which the option is being
written. Securities against which call options are written will be segregated on
the books of the custodian for the Portfolio.
The Portfolio may purchase call and put options on any securities in which it
may invest. The Portfolio would normally purchase a call option in anticipation
of an increase in the market value of such securities. The purchase of a call
option would entitle the Portfolio, in exchange for the premium paid, to
purchase a security at a specified price during the option period. The Portfolio
would ordinarily have a gain the value of the securities increased above the
exercise price sufficiently to cover the premium and would have a loss if the
value of the securities remained at or below the exercise price during the
option period.
The Portfolio would normally purchase put options in anticipation of a
decline in the market value of securities in its portfolio ("protective puts")
or securities of the type in which it is permitted to invest. The purchase of a
put option would entitle the Portfolio, in exchange for the premium paid, to
sell a security, which may or may not be held in the Portfolio's holdings, at a
specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the market value of the
Portfolio's holdings. Put options also may be purchased by the Portfolio for the
purpose of benefiting from a decline in the price of securities that the
Portfolio does not own. The Portfolio would ordinarily recognize a gain if the
value of the securities decreased below the exercise price sufficiently to cover
the premium and would recognize a loss if the value of the securities remained
at or above the exercise price. Gains and losses on the purchase of protective
put options would tend to be offset by countervailing changes in the value of
underlying portfolio securities.
The Portfolio has adopted certain non-fundamental policies concerning option
transactions that are discussed below. The Portfolio's activities in options may
also be restricted by the requirements of the Internal Revenue Code of 1986, as
amended (the "Code"), for qualification as a regulated investment company.
The hours of trading for options on securities may not conform to the hours
during which the underlying securities are traded if the option markets close
before the markets for the underlying securities, significant price and rate
movements can take place in the underlying securities markets that will not be
reflected in the option markets. It is impossible to predict the volume of
trading that may exist in such options, and there can be no assurance that
viable exchange markets will develop or continue.
The Portfolio may engage in over-the-counter options transactions with
broker-dealers who make markets in these options. At present, approximately ten
broker-dealers, including several of the largest primary dealers in U.S.
government securities, make these markets. The ability to terminate
over-the-counter option positions is more limited than with exchange-traded
option positions because the predominant market is the issuing broker rather
than an exchange and may involve the risk that broker-dealers participating in
such transactions will not fulfill their obligations. To reduce this risk, the
Portfolio will purchase such options only from broker-dealers who are primary
U.S. government securities dealers recognized by the Federal Reserve Bank of New
York and who agree to (and are expected to be capable of) entering into closing
transactions, although there can be no guarantee that any such option will be
liquidated at a favorable price prior to expiration. Bankers Trust will monitor
the creditworthiness of dealers with whom the Portfolio enters into such options
transactions under the general supervision of the Portfolio Board.
GLOBAL ASSET ALLOCATION ENHANCEMENT. In connection with the GAA Strategy and
in addition to the securities described above, the Portfolio may invest in
indexed securities, futures contracts on securities indices, securities
representing securities of foreign issuers (e.g. ADRs, GDRs and EDRs), options
on stocks, options on futures contracts, foreign currency exchange transactions
and options on foreign currencies. These are discussed below, to the extent not
already described above.
INDEXED SECURITIES. The indexed securities in which the Portfolio may invest
include debt securities whose value at maturity is determined by reference to
the relative prices of various currencies or to the price of a stock index. The
value of such securities depends on the price of foreign currencies, securities
indices or other financial values or statistics. These securities may be
positively or negatively indexed; that is, their value may increase or decrease
if the underlying instrument appreciates.
FUTURES CONTRACTS ON SECURITIES INDICES. Futures contracts on securities
indices provide for the making and acceptance of a cash settlement based upon
changes in the value of an index of securities, and will be entered into by the
Portfolio to hedge against anticipated future change in general market prices
which otherwise might either adversely affect the value of securities held by
the Portfolio or adversely affect the prices of securities which are intended to
be purchased at a later date for the Portfolio, or as an efficient means of
managing allocations between asset classes. A futures contract may also be
entered into to close out or offset an existing futures position. The risks
attendant to futures contracts on securities indices are similar to those of
futures contracts, discussed above.
SECURITIES REPRESENTING SECURITIES OF FOREIGN ISSUERS. The Portfolio's
investments in the securities of foreign issuers may be made directly or in the
form of American Depositary Receipts ("ADRs"), Global Depositary Receipts
("GDRs"), European Depositary Receipts ("EDRs") or other similar securities
representing securities of foreign issuers. These securities may not necessarily
be denominated in the same currency as the securities they represent, and while
designed for use as alternatives to the purchase of the underlying securities in
their national markets and currencies, are subject to the same risks as the
foreign securities to which they relate.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. The Portfolio from time to time may
enter into foreign currency exchange transactions to convert to and from
different foreign currencies and to convert foreign currencies to and from the
U.S. dollar, either on a spot (i.e., cash) basis at the spot rate prevailing in
the foreign currency exchange market, or through forward contracts to purchase
or sell foreign currencies. A forward foreign currency exchange contract
obligates the Portfolio to purchase or sell a specific currency at a future
date, which may be any fixed number of days from the date of the contract.
Forward foreign currency exchange contracts establish an exchange rate at a
future date. These contracts are transferable in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A forward foreign currency exchange contract generally has no deposit
requirement and is traded at a net price without commission. Neither spot
transactions nor forward foreign currency exchange contracts eliminate
fluctuations in the prices of the Portfolio's securities or in foreign exchange
rates, or prevent loss if the prices of these securities should decline.
The Portfolio may enter into foreign currency hedging transactions in an
attempt to protect against changes in foreign currency exchange rates between
the trade and settlement dates of specific securities transactions or changes in
foreign currency exchange rates that would adversely affect a portfolio position
or an anticipated investment position. Since consideration of the prospect for
currency parities will be incorporated into Bankers Trust's long term investment
decisions, the Portfolio will not routinely enter into foreign currency hedging
transactions with respect to security transactions; however, Bankers Trust
believes that it is important to have the flexibility to enter into foreign
currency hedging transactions when it determines that the transactions would be
in the Portfolio's best interest. Although these transactions tend to minimize
the risk of loss due to a decline in the value of the hedged currency, at the
same time they tend to limit any potential gain that might be realized should
the value of the hedged currency increase. The precise matching of the forward
contract amounts and the value of the securities involved will not generally be
possible because the future value of such securities in foreign currencies will
change as a consequence of market movements in the value of such securities
between the date the forward contract is entered into and the date it matures.
The projection of currency market movements is extremely difficult, and the
successful execution of a hedging strategy is highly uncertain.
OPTIONS ON FOREIGN CURRENCIES. The Portfolio may write covered put and call
options and purchase put and call options on foreign currencies for the purpose
of protecting against declines in the dollar value of portfolio securities and
against increases in the dollar cost of securities to be acquired. The Portfolio
may use options on currency to cross hedge, which involves writing or purchasing
options on one currency to hedge against changes in exchange rates for a
different, but related currency. As with other types of options, however, the
writing of an option on foreign currency will constitute only a partial hedge up
to the amount of the premium received, and the Portfolio could be required to
purchase or sell foreign currencies at disadvantageous exchange rates, thereby
incurring losses. The purchase of an option on foreign currency may be used to
hedge against fluctuations in exchange rates although, in the event of exchange
rate movements adverse to the Portfolio's position, it may forfeit the entire
amount of the premium plus related transaction costs. In addition, the Portfolio
may purchase call options on currency when the Adviser anticipates that the
currency will appreciate in value.
There is no assurance that a liquid secondary market on an options exchange
will exist for any particular option, or at any particular time. If the
Portfolio is unable to effect a closing purchase transaction with respect to
covered options it has written, the Portfolio will not be able to sell the
underlying currency or dispose of assets held in a segregated account until the
options expire or are exercised. Similarly, if the Portfolio is unable to effect
a closing sale transaction with respect to options it has purchased, it would
have to exercise the options in order to realize any profit and will incur
transaction costs upon the purchase or sale of underlying currency. The
Portfolio pays brokerage commissions or spreads in connection with its options
transactions.
As in the case of forward contracts, certain options on foreign currencies
are traded over the counter and involve liquidity and credit risks which may not
be present in the case of exchange traded currency options. The Portfolio's
ability to terminate OTC options will be more limited than with exchange traded
options. It is also possible that broker dealers participating in OTC options
transactions will not fulfill their obligations. Until such time as the staff of
the SEC changes its position, the Portfolio will treat purchased OTC options and
assets used to cover written OTC options as illiquid securities. With respect to
options written with primary dealers in U.S. Government securities pursuant to
an agreement requiring a closing purchase transaction at a formula price, the
amount of illiquid securities may be calculated with reference to the repurchase
formula.
There can be no assurance that the use of these portfolio strategies will be
successful.
RATING SERVICES -- The ratings of rating services represent their opinions as to
the quality of the securities that they undertake to rate. It should be
emphasized, however, that ratings are relative and subjective and are not
absolute standards of quality. Although these ratings are an initial criterion
for selection of portfolio investments, the Adviser also makes its own
evaluation of these securities, subject to review by the Portfolio Trust Board.
After purchase by the Portfolio, an obligation may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Portfolio.
Neither event would require the Portfolio to eliminate the obligation from its
portfolio, but the Adviser will consider such an event in its determination of
whether the Portfolio should continue to hold the obligation. A description of
the ratings referred to herein and in the Prospectus is set forth in the
Appendix.
INVESTMENT RESTRICTIONS -- The following investment restrictions are
"fundamental policies" of the Fund and the Portfolio and may not be changed
without the approval of a "majority of the outstanding voting securities" of the
Fund or the Portfolio, as the case may be. "Majority of the outstanding voting
securities" under the 1940 Act, and as used in this SAI and the Prospectus,
means, with respect to the Fund (or the Portfolio), the lesser of (1) 67% or
more of the outstanding voting securities of the Fund (or of the total
beneficial interests of the Portfolio) present at a meeting, if the holders of
more than 50% of the outstanding voting securities of the Fund (or of the total
beneficial interests of the Portfolio) are present or represented by proxy or
(2) more than 50% of the outstanding voting securities of the Fund (or of the
total beneficial interests of the Portfolio). Whenever the Fund is requested to
vote on a fundamental policy of the Portfolio, it will hold a meeting of the
Fund's shareholders and will cast its vote as instructed by them. Fund
shareholders who do not vote will not affect the Fund's votes at the Portfolio
meeting. The Fund's votes representing Fund shareholders not voting will be
voted by the Directors of Security Income Fund in the same proportion as the
Fund shareholders who do, in fact, vote.
None of the fundamental and non-fundamental policies described below shall
prevent the Fund from investing all of its assets in an open-end investment
company with substantially the same investment objective. Because the Fund and
the Portfolio have the same fundamental policies and the Fund invests all of its
Assets in the Portfolio, the following discussion (though speaking only of the
Portfolio) applies to the Fund as well.
FUNDAMENTAL RESTRICTIONS. As a matter of fundamental policy, the Portfolio
and Fund may not:
1. Borrow money (including through reverse repurchase or dollar roll
transactions) in excess of 5% of the Portfolio's total assets (taken at
cost), except that the Portfolio may borrow for temporary or emergency
purposes up to 1/3 of its total assets. The Portfolio may pledge, mortgage
or hypothecate not more than 1/3 of such assets to secure such borrowings
provided that collateral arrangements with respect to options and futures,
including deposits of initial and variation margin, are not considered a
pledge of assets for purposes of this restriction and except that assets
may be pledged to secure letters of credit solely for the purpose of
participating in a captive insurance company sponsored by the Investment
Company Institute;
2. Underwrite securities issued by other persons except insofar as the
Portfolio may be deemed an underwriter under the 1933 Act in selling a
portfolio security;
3. Make loans to other persons except (a) through the lending of the
Portfolio's portfolio securities and provided that any such loans not
exceed 30% of its total assets (taken at market value); (b) through the use
of repurchase agreements or the purchase of short-term obligations; or (c)
by purchasing a portion of an issue of debt securities of types distributed
publicly or privately;
4. Purchase or sell real estate (including limited partnership interests but
excluding securities secured by real estate or interests therein),
interests in oil, gas or mineral leases, commodities or commodity contracts
(except futures and option contracts) in the ordinary course of business
(except that the Portfolio may hold and sell, for its portfolio, real
estate acquired as a result of the Portfolio's ownership of securities);
5. Concentrate its investments in any particular industry (excluding U.S.
government securities), but if it is deemed appropriate for the achievement
of the Portfolio's investment objective, up to 25% of its total assets may
be invested in any one industry;
6. Issue any senior security (as that term is defined in the 1940 Act) if such
issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder, provided that collateral arrangements
with respect to options and futures contracts, including deposits of
initial and variation margin, are not considered to be the issuance of a
senior security for purposes of this restriction;
7. Purchase, with respect to 75% of the Portfolio's total assets, securities
of any issuer if such purchase at the time thereof would cause the
Portfolio to hold more than 10% of any class of securities of such issuer,
for which purposes all indebtedness of an issuer shall be deemed a single
class and all preferred stock of an issuer shall be deemed a single class,
except that options or futures contracts shall not be subject to this
restriction; and
8. Invest, with respect to 75% of the Portfolio's total assets, more than 5%
of its total assets in the securities (excluding U.S. government
securities) of any one issuer.
NON-FUNDAMENTAL RESTRICTIONS. In order to comply with certain statutes and
policies and for other reasons, the Portfolio will not, as a matter of operating
policy (these restrictions may be changed without shareholder approval):
(i) purchase any security or evidence of interest therein on margin, except
that short-term credit necessary for the clearance of purchases and sales
of securities may be obtained and deposits of initial and variation
margin may be made in connection with the purchase, ownership, holding or
sale of futures contracts;
(ii) sell securities it does not own (short sales). (This restriction does not
preclude short sales "against the box" (that is, sales of securities (a)
the Portfolio contemporaneously owns or (b) where the Portfolio has the
right to obtain securities equivalent in kind and amount to those sold).
The Portfolio has no current intention to engage in short selling);
(iii) purchase securities issued by any investment company except to the extent
permitted by the 1940 Act (including any exemptions or exclusions
therefrom), except that this limitation does not apply to securities
received or acquired as dividends, through offers of exchange, or as a
result of reorganization, consolidation or merger; and
(iv) invest more than 15% of the Portfolio's net assets (taken at the greater
of cost or market value) in securities that are illiquid or not readily
marketable (excluding Rule 144A securities deemed by the Portfolio Board
to be liquid).
An investment restriction will not be considered violated if that restriction
is complied with at the time the relevant action is taken, notwithstanding a
later change in the market value of an investment, in net or total assets or in
the change of securities rating of the investment or any other later change.
The Portfolio will comply with the permitted investments and investment
limitations in the securities laws and regulations of all states in which the
Fund, or any other registered investment company investing in the Portfolio, is
registered.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS -- The Adviser is responsible
for decisions to buy and sell securities, futures contracts and options thereon
for the Portfolio, the selection of brokers, dealers and futures commission
merchants to effect transactions and the negotiation of brokerage commissions,
if any. Broker-dealers may receive brokerage commissions on portfolio
transactions, including options, futures contracts and options on futures
transactions and the purchase and sale of underlying securities upon the
exercise of options. Orders may be directed to any broker-dealer or futures
commission merchant, including, to the extent and in the manner permitted by
applicable law, the Adviser or its subsidiaries or affiliates. Purchases and
sales of certain portfolio securities on behalf of the Portfolio are frequently
placed by the Adviser with the issuer or a primary or secondary market-maker for
these securities on a net basis, without any brokerage commission being paid by
the Portfolio. Trading does, however, involve transaction costs. Transactions
with dealers serving as market-makers reflect the spread between the bid and
asked prices. Transaction costs may also include fees paid to third parties for
information as to potential purchasers or sellers of securities. Purchases of
underwritten issues may be made that will include an underwriting fee paid to
the underwriter.
The Adviser seeks to evaluate the overall reasonableness of the brokerage
commissions paid (to the extent applicable) in placing orders for the purchase
and sale of securities for the Portfolio taking into account such factors as
price, commission (negotiable in the case of national securities exchange
transactions), if any, size of order, difficulty of execution and skill required
of the executing broker-dealer through familiarity with commissions charged on
comparable transactions, as well as by comparing commissions paid by the
Portfolio to reported commissions paid by others. The Adviser reviews on a
routine basis commission rates, execution and settlement services performed,
making internal and external comparisons. The Adviser is authorized, consistent
with Section 28(e) of the Securities Exchange Act of 1934, as amended, when
placing portfolio transactions for the Portfolio with a broker to pay a
brokerage commission (to the extent applicable) in excess of that which another
broker might have charged for effecting the same transaction on account of the
receipt of research, market or statistical information. The term "research,
market or statistical information" includes (a) advice as to (i) the value of
securities, (ii) the advisability of investing in, purchasing or selling
securities, and (iii) the availability of securities or purchasers or sellers of
securities and (b) furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends, portfolio strategy and the
performance of accounts. Higher commissions may be paid to firms that provide
research services to the extent permitted by law. The Adviser may use this
research information in managing the Portfolio's assets, as well as the assets
of other clients. Consistent with the policy stated above, the Conduct Rules of
the National Association of Securities Dealers, Inc. and such other policies as
the Portfolio Trust Board may determine, the Adviser may consider sales of
shares of the Fund and of other investment company clients of the Adviser as a
factor in the selection of broker-dealers to execute portfolio transactions. The
Adviser will make such allocations if commissions are comparable to those
charged by nonaffiliated, qualified broker-dealers for similar services. Except
for implementing the policies stated above, there is no intention to place
portfolio transactions with particular brokers or dealers or groups thereof. In
effecting transactions in over-the-counter securities, orders are placed with
the principal market-makers for the security being traded unless, after
exercising care, it appears that more favorable results are available otherwise.
Although certain research, market or statistical information from brokers and
dealers can be useful to the Portfolio and to the Adviser, it is the opinion of
the Portfolio's management that such information is only supplementary to the
Adviser's own research effort, since the information must still be analyzed,
weighed and reviewed by the Adviser's staff. Such information may be useful to
the Adviser in providing services to clients other than the Portfolio, and not
all such information is used by the Adviser in connection with the Portfolio.
Conversely, such information provided to the Adviser by brokers and dealers
through whom other clients of the Adviser effect securities transactions may be
useful to the Adviser in providing services to the Portfolio. In certain
instances there may be securities that are suitable for the Portfolio, as well
as for one or more of the Adviser's other clients. Investment decisions for the
Portfolio and for the Adviser's other clients are made with a view to achieving
their respective investment objectives. It may develop that a particular
security is bought or sold for only one client even though it might be held by,
or bought or sold for, other clients. Likewise, a particular security may be
bought for one or more clients when one or more clients are selling that same
security. Some simultaneous transactions are inevitable when several clients
receive investment advice from the same investment adviser, particularly when
the same security is suitable for the investment objectives of more than one
client. When two or more clients are simultaneously engaged in the purchase or
sale of the same security, the securities are allocated between (among) clients
in a manner believed to be equitable to each. It is recognized that in some
cases this system could have a detrimental effect on the price or volume of the
security as far as the Portfolio is concerned. However, it is believed that the
ability of the Portfolio to participate in volume transactions will produce
better executions for the Portfolio.
PERFORMANCE INFORMATION
STANDARD PERFORMANCE INFORMATION -- From time to time, quotations of the Fund's
performance may be included in advertisements, sales literature or shareholder
reports. These performance figures are calculated in the following manner:
YIELD. Yield refers to the income generated by an investment over a given
period of time, expressed as an annual percentage rate. Yields are calculated
according to a standard that is required for all stock and bond mutual funds.
Because this differs from other accounting methods, the quoted yield may not
equal the income actually paid to shareholders.
Performance information or advertisements may include comparisons of the
Fund's investment results to various unmanaged indices or results of other
mutual funds or investment or savings vehicles. From time to time, the Fund's
ranking may be quoted from various sources, such as Lipper Analytical Services,
Inc., Value Line, Inc. and Morningstar, Inc.
Unlike some bank deposits or other investments that pay a fixed yield for a
stated period of time, the total return of the Shares will vary depending upon
interest rates, the current market value of the securities held by the Portfolio
and the Wrapper Agreements and changes in the expenses of the Shares and the
Portfolio. In addition, during certain periods for which yield and total return
may be provided, the Fund's administrator, Security Management Company, LLC, may
have voluntarily agreed to waive portions of its fees, or to reimburse certain
operating expenses of the Fund, on a month-to-month basis. Bankers Trust may
have agreed to do the same with respect to the Portfolio. Such waivers will have
the effect of increasing the Fund's net income (and therefore its yield and
total return) during the period such waivers are in effect.
TOTAL RETURN. The Fund's average annual total return is calculated for
certain periods by determining the average annual compounded rates of return
over those periods that would cause an investment of $1,000 (made at the maximum
public offering price with all distributions reinvested) to reach the value of
that investment at the end of the periods. The Fund may also calculate total
return figures that represent aggregate performance over a period or
year-by-year performance.
PERFORMANCE RESULTS. Any performance information provided for the Fund should
not be considered as representative of its performance in the future, because
the NAV and public offering price of Shares will vary based not only on the
type, quality and maturities of the securities held by the Portfolio but also on
changes in the current value of such securities and on changes in the expenses
of the Fund and the Portfolio. Total return reflects the performance of both
principal and income.
Unless noted otherwise, the Fund's total return and average annual total
return will reflect deduction of the maximum initial sales load in the case of
Class A shares or the applicable deferred sales charge in the case of Class B
and Class C shares. From time to time the Fund may include performance
information in advertisements and sales literature without deduction of the
sales charge, which, if deducted, would reduce the performance data quoted.
COMPARISON OF FUND PERFORMANCE -- Comparison of the quoted nonstandardized
performance of various investments is valid only if performance is calculated in
the same manner. Since there are different methods of calculating performance,
investors should consider the effect of the methods used to calculate
performance when comparing performance of the Fund with performance quoted with
respect to other investment companies or types of investments.
In connection with communicating its performance to current or prospective
shareholders, the Fund also may compare these figures to the performance of
other mutual funds tracked by mutual fund rating services or to unmanaged
indices that may assume reinvestment of dividends but generally do not reflect
deductions for administrative and management costs. Evaluations of the Fund's
performance made by independent sources may also be used in advertisements
concerning the Fund. Sources for the Fund's performance information could
include the following: ASIAN WALL STREET JOURNAL, BARRON'S, BUSINESS WEEK,
CHANGING TIMES, THE KIPLINGER MAGAZINE, CONSUMER DIGEST, FINANCIAL TIMES,
FINANCIAL WORLD, FORBES, FORTUNE, GLOBAL INVESTOR, INVESTOR'S DAILY, LIPPER
ANALYTICAL SERVICES, INC.'S MUTUAL FUND PERFORMANCE ANALYSIS, MONEY, MORNINGSTAR
INC., NEW YORK TIMES, PERSONAL INVESTING NEWS, PERSONAL INVESTOR, SUCCESS, U.S.
NEWS AND WORLD REPORT, VALUELINE, WALL STREET JOURNAL, WEISENBERGER INVESTMENT
COMPANIES SERVICES, WORKING WOMEN and WORTH.
ECONOMIC AND MARKET INFORMATION -- Advertising and sales literature of the Fund
may include discussions of economic, financial and political developments and
their effect on the securities market. Such discussions may take the form of
commentary on these developments by Fund portfolio managers and their views and
analysis on how such developments could affect the Fund. In addition,
advertising and sales literature may quote statistics and give general
information about the mutual fund industry, including the growth of the
industry, from sources such as the Investment Company Institute ("ICI"). For
example, according to the ICI, thirty-seven percent of American households are
pursuing their financial goals through mutual funds. These investors, as well as
businesses and institutions, have entrusted over $3.5 trillion to the more than
6,000 funds available.
VALUATION OF ASSETS; REDEMPTIONS IN KIND
Debt securities (other than short-term debt obligations maturing in 60 days or
less), including listed securities and securities for which price quotations are
available, will normally be valued on the basis of market valuations furnished
by a pricing service. Such market valuations may represent the last quoted price
on the securities' major trading exchange or quotes received from dealers or
market makers in the relevant securities or may be determined through the use of
matrix pricing. In matrix pricing, pricing services may use various pricing
models, involving comparable securities, historic relative price movements,
economic factors and dealer quotations. Over-the-counter securities will
normally be valued at the bid price. Short-term debt obligations and money
market securities maturing in 60 days or less are valued at amortized cost.
Securities for which market quotations are not readily available are valued
by Bankers Trust pursuant to procedures adopted by the Portfolio's Trust Board.
The NAV per Share is calculated once on each Valuation Day as of the
Valuation Time, which is currently 3:00 p.m., Central time, or if the NYSE
closes early, at the time of such early closing. The NAV per Share is computed
by dividing the value of the Fund's assets (I.E., the value of its investment in
the Portfolio and other assets, if any), less all liabilities, by the total
number of its Shares outstanding. The Portfolio's securities and other assets
are valued primarily on the basis of market quotations or, if quotations are not
readily available, by a method that the Portfolio Trust Board believes
accurately reflects fair value.
Pursuant to procedures adopted by the Portfolio Trust Board, the Wrapper
Value generally will be equal to the difference between the Book Value and the
market value (plus accrued interest on the underlying securities) of the
applicable Covered Assets. If the market value (plus accrued interest on the
underlying securities) of the Covered Assets is greater than their Book Value,
the Wrapper Value will be reflected as a liability of the Portfolio in the
amount of the difference, I.E., a negative value, reflecting the potential
liability of the Portfolio to the Wrapper Provider. If the market value (plus
accrued interest on the underlying securities) of the Covered Assets is less
than their Book Value, the Wrapper Value will be reflected as an asset of the
Portfolio in the amount of the difference, I.E., a positive value, reflecting
the potential liability of the Wrapper Provider to the Portfolio. In performing
its fair value determination, the Portfolio Trust Board expects to consider the
creditworthiness and ability of a Wrapper Provider to pay amounts due under the
Wrapper Agreement. If the Portfolio Trust Board determine that a Wrapper
Provider is unable to make such payments, that Board may assign a fair value to
the Wrapper Agreement that is less than the difference between the Book Value
and the market value (plus accrued interest on the underlying securities) of the
applicable Covered Assets and the Portfolio might be unable to maintain NAV
stability.
The problems inherent in making a good faith determination of value are
recognized in the codification effected by SEC Financial Reporting Release No. 1
(formerly Accounting Series Release No. 113) ("FRR 1"), which concludes that
there is "no automatic formula" for calculating the value of restricted
securities. It recommends that the best method simply is to consider all
relevant factors before making any calculation. According to FRR 1, such factors
would include consideration of the --
type of security involved, financial statements, cost at date of purchase,
size of holding, discount from market value of unrestricted securities of
the same class at the time of purchase, special reports prepared by
analysts, information as to any transactions or offers with respect to the
security, existence of merger proposals or tender offers affecting the
security, price and extent of public trading in similar securities of the
issuer or comparable companies, and other relevant matters.
The Adviser will value securities purchased by the Portfolio that are
restricted as to resale or for which current market quotations are not readily
available, including Wrapper Agreements, based upon all relevant factors as
outlined in FRR 1.
The Fund and the Portfolio each reserves the right, if conditions exist that
make cash payments undesirable, or for other reasons, to honor any request for
redemption or withdrawal, respectively, by making payment wholly or partly in
Portfolio Securities (a "redemption in kind"). Such securities shall not include
Wrapper Agreements, and shall be valued as they are for purposes of computing
the Fund's or the Portfolio's NAV, as the case may be. If payment is made to a
Fund shareholder in securities, the shareholder may incur transaction expenses
in converting those securities into cash.
The Portfolio has agreed to make a redemption in kind to the Fund whenever
the Fund wishes to make a redemption in kind to a shareholder thereof, and
therefore Fund shareholders that receive redemptions in kind will receive
Portfolio Securities of the Portfolio and in no case will they receive a
security issued by the Portfolio. The Portfolio has advised Security Income Fund
that the Portfolio will not redeem in kind except in circumstances in which the
Fund is permitted to redeem in kind or unless requested by the Fund.
Each investor in the Portfolio, including the Fund, may add to or reduce its
investment in the Portfolio on each business day the Portfolio determines its
NAV. At the close of business on each such day, the value of each investor's
beneficial interest in the Portfolio will be determined by multiplying the NAV
of the Portfolio by the percentage effective for that day that represents that
investor's share of the aggregate beneficial interests in the Portfolio. Any
additions or withdrawals that are to be effected as of the close of business on
that day will then be effected. The investor's percentage of the aggregate
beneficial interests in the Portfolio will then be recomputed as the percentage
equal to a fraction (a) the numerator of which is the value of the investor's
investment in the Portfolio as of the close of business on that day plus or
minus, as the case may be, the amount of net additions to or withdrawals from
the investor's investment in the Portfolio effected as of the close of business
on that day, and (b) the denominator of which is the aggregate NAV of the
Portfolio as of the close of business on that day plus or minus, as the case may
be, the amount of net additions to or withdrawals from the aggregate investments
in the Portfolio by all investors therein. The percentage so determined will
then be applied to determine the value of the investor's interest in the
Portfolio as the close of business on the following business day.
QUALIFIED REDEMPTIONS
At any time, a redemption of Fund Shares can be effected without assessment of
the Redemption Fee described in "Shareholder Transaction Expenses" in the
Prospectus, if such redemption is a "Qualified TSA Account Redemption," a
"Qualified Plan Redemption" or a "Qualified IRA Redemption." "Qualified Plan
Redemptions" are redemptions resulting from a Plan Participant's death,
disability, retirement or termination of employment or to fund loans to, or "in
service" withdrawals by, a Plan Participant.
A "Qualified TSA Account Redemption" is a redemption made by an owner of a
TSA Account to effect a distribution from his or her account that is not subject
to the 10% penalty tax imposed by section 72(t), other than a rollover from a
TSA Account to an IRA or other TSA Account and, direct trustee-to-trustee
transfers, unless the owner continues the investment of the transferred amount
in the Fund. In general, section 72(t) of the Code imposes a 10% penalty tax on
any distribution received by a taxpayer who owns a TSA Account prior to the date
on which the taxpayer reaches age 59 1/2, unless the distribution meets the
requirements of a specific exception to the penalty tax. In general, rollovers
from a TSA Account to an IRA, from one TSA Account to another and direct
trustee-to-trustee transfers from one TSA Account to another TSA Account are not
subject to tax. TSA Account owners requesting a redemption of Fund Shares will
be required to provide a written statement as to whether the proceeds of the
redemption will be subject to a penalty tax and, if not, to identify the
specific exception upon which the owner intends to rely. The information
provided by the owner will be reflected on the Form 1099-R issued to the owner
and filed with the Internal Revenue Service in connection with the redemption as
well as forming the basis for redemption as a Qualified TSA Account Redemption.
The Fund may require additional evidence, such as the opinion of a certified
public accountant or tax attorney, that any particular redemption will not be
subject to any penalty tax. TSA ACCOUNT OWNERS SHOULD CONSULT THEIR TAX ADVISERS
REGARDING THE TAX CONSEQUENCES OF ANY REDEMPTION.
Some of the exceptions to the 10% penalty taxes are described below. This
description is intended to provide only a brief summary of the principal
exceptions to the additional tax imposed on early withdrawals under the current
provisions of the Code, which may change from time to time. The Fund intends to
conform the definition of Qualified TSA Account Redemptions to changes in
applicable tax laws; however, the Fund reserves the right to continue to define
Qualified TSA Account Redemptions by reference to Code provisions now in effect
or otherwise to define such phrase independently of future Code provisions.
In general, the early withdrawal penalty tax imposed by the Code will not
apply to the following types of distributions from a TSA Account:
1. Distributions made on or after the date on which the TSA Account owner
attains age 59 1/2;
2. Distributions made to a beneficiary (or to the estate of the TSA Account
owner) on or after the death of the TSA Account owner;
3. Distributions attributable to the TSA Account owner being disabled;
4. Distributions made to the TSA Account owner after separation from service
after age 55;
5. Distributions to an alternate payee (e.g. a former spouse) pursuant to a
qualified domestic relations order;
6. Distributions that are part of a series of substantially equal periodic
payments made at least annually for the life (or life expectancy) of the
TSA Account owner, or the joint lives (or life expectancies) of the TSA
Account owner and his or her designated beneficiary, after the TSA Account
owner separates from service;
7. Distributions made to a TSA Account owner for medical care, but not in
excess of the amount allowable as a medical expense deduction by the TSA
Account owner on his or her tax return for the year;
8. Distributions timely made to correct an excess contribution; and
9. Distributions timely made to reduce an excess elective deferral.
A "Qualified IRA Redemption" is a redemption made by an IRA Owner to effect a
distribution from his or her IRA account that is not subject to the 10% penalty
tax imposed by section 72(t) or 530(d), as applicable, other than IRA rollovers,
direct trustee-to-trustee transfers and conversions of Traditional IRAs to Roth
IRAs, unless the IRA Owner continues the investment of the transferred amount in
the Fund. In general, section 72(t) of the Code imposes a 10% penalty tax on any
distribution received by a taxpayer from a Traditional IRA, SEP-IRA or SIMPLE
IRA prior to the date on which the taxpayer reaches age 59 1/2, unless the
distribution meets the requirements of a specific exception to the penalty tax.
Similar penalties apply to early withdrawals from Roth IRAs and Keogh Plans.
Section 530(d) as currently written, imposes a separate 10% penalty tax on
distributions from an education IRA not used to pay qualified higher education
expenses. In general, rollovers from one IRA to another and direct
trustee-to-trustee transfers from an IRA to another IRA (or in some cases to
other types of qualified plans) are not subject to tax. In addition, conversions
of Traditional IRAs to Roth IRAs are subject to income tax but are not subject
to the early withdrawal penalty tax. IRA Owners requesting a redemption of Fund
Shares will be required to provide a written statement as to whether the
proceeds of the redemption will be subject to a penalty tax and, if not, to
identify the specific exception upon which the IRA Owner intends to rely. The
information provided by the IRA Owner will be reflected on the Form 1099-R
issued to the IRA Owner and filed with the Internal Revenue Service in
connection with the redemption as well as forming the basis for redemption as a
Qualified IRA Redemption. The Fund may require additional evidence, such as the
opinion of a certified public accountant or tax attorney, that any particular
redemption will not be subject to any penalty tax. IRA OWNERS SHOULD CONSULT
THEIR TAX ADVISERS REGARDING THE TAX CONSEQUENCES OF ANY REDEMPTION.
Some of the exceptions to the 10% penalty taxes are described below. This
description is intended to provide only a brief summary of the principal
exceptions to the additional tax imposed on early withdrawals under the current
provisions of the Code, which may change from time to time. The Fund intends to
conform the definition of Qualified IRA Redemptions to changes in applicable tax
laws; however, the Fund reserves the right to continue to define Qualified IRA
Redemptions by reference to Code provisions now in effect or otherwise to define
such phrase independently of future Code provisions.
TRADITIONAL IRAS, SEP-IRAS AND SIMPLE IRAS -- In general, the 10% penalty tax
imposed by section 72(t) of the Code will not apply to the following types of
distributions from a Traditional IRA, SEP-IRA or SIMPLE IRA:
1. Distributions made on or after the date on which the IRA Owner attains age
59 1/2;
2. Distributions made to a beneficiary (or to the estate of the IRA Owner) on
or after the death of the IRA Owner;
3. Distributions attributable to the IRA Owner's being disabled within the
meaning of section 72(m)(7) of the Code;
4. Distributions made to the IRA Owner to the extent such distributions do not
exceed the amount of unreimbursed medical expenses allowed as a deduction
under section 213 of the Code;
5. Distributions to unemployed individuals to the extent such distributions do
not exceed the amount paid for medical insurance as described in section
213(d)(1)(D) of the Code for the IRA Owner, and his or her spouse and
dependents;
6. Distributions to an IRA Owner to the extent such distributions do not
exceed the qualified higher education expenses, as defined in section
72(t)(7), for the IRA Owner;
7. Distributions to an IRA Owner that are used to acquire a first home, and
that meet the definition of "qualified first-time homebuyer distributions"
under section 72(t) (8) of the Code; and
8. Distributions that are part of a series of substantially equal periodic
payments made at least annually for the life (or life expectancy) of the
IRA Owner, or the joint lives (or life expectancies) of the IRA Owner and
his or her designated beneficiary.
ROTH IRAS -- With respect to a Roth IRA, all "qualified distributions" are
excluded from gross income and, therefore, from the 10% penalty tax imposed by
section 72(t). In general, qualified distributions from a Roth IRA include:
1. Distributions made on or after the date on which the IRA Owner attains age
59 1/2;
2. Distributions made to a beneficiary (or to the estate of the IRA Owner) on
or after the death of the IRA Owner;
3. Distributions attributable to the IRA Owner's being disabled within the
meaning of section 72(m)(7) of the Code; and
4. Distributions to an IRA Owner that are used to acquire a first home, and
that meet the definition of "qualified first-time homebuyer distributions"
under section 72(t) (8) of the Code.
However, a distribution will not be a qualified distribution, even if it
otherwise meets the definition, if it is made within the 5-year period beginning
with the first taxable year for which the IRA Owner made a contribution to the
Roth IRA (or such person's spouse made a contribution to a Roth IRA established
for the IRA Owner). Special rules apply with respect to certain types of
rollovers.
To the extent a distribution from a Roth IRA is not a qualified distribution,
either because it does not meet the definition of a qualified distribution in
the first instance, or because it is made within the five-year period described
in section 408A(d)(2)(B), the portion of the distribution that represents
earnings will be subject to tax in accordance with section 72 of the Code,
including the 10% penalty tax imposed under section 72(t). The same exceptions
to the penalty tax that apply to Traditional IRAs will apply to nonqualified
distributions from Roth IRAs.
In the event of a nonqualified distribution from a Roth IRA, only the
earnings in the account are subject to tax; contributions may be recovered
tax-free (since no deduction is permitted for such contributions). Section
408A(d) provides that distributions from Roth IRAs are considered to come first
from contributions, to the extent that distributions do not exceed the total
amount of contributions.
KEOGH PLANS -- In general, the 10% penalty tax imposed by section 72(t) of the
Code will not apply to the following types of distributions from a Traditional
IRA:
1. Distributions made on or after the date on which the IRA Owner attains age
59 1/2;
2. Distributions made to a beneficiary (or to the estate of the IRA Owner) on
or after the death of the IRA Owner;
3. Distributions attributable to the IRA Owner's being disabled within the
meaning of section 72(m)(7) of the Code;
4. Distributions made to the IRA Owner after separation from service after age
55;
5. Distributions to unemployed individuals to the extent such distributions do
not exceed the amount of unreimbursed medical expenses allowed as a
deduction under section 213 of the Code;
6. Distributions to an alternate payee (e.g., a former spouse) pursuant to a
qualified domestic relations order; and
7. Distributions that are part of a series of substantially equal periodic
payments made at least annually for the life (or life expectancy) of the
IRA Owner, or the joint lives (or life expectancies) of the IRA Owner and
his or her designated beneficiary.
EDUCATION IRAS -- Distributions from an education IRA are included in income
unless the qualified higher education expenses of the designated beneficiary are
equal to or greater than the amount of such distributions. In addition, certain
special rules are provided that permit certain rollovers or changes in
beneficiaries. Any distribution that is subject to tax under section 530 is also
subject to the 10% penalty tax imposed by section 530(d)(4). Thus, in general,
any distribution from an education IRA that exceeds the amount of qualified
higher education expenses of the designated beneficiary will be subject to the
10% penalty tax.
MANAGEMENT OF THE FUND AND TRUST
The Board of Directors of Security Income Fund and the Board of Trustees of the
Portfolio Trust (collectively, the Directors) are each composed of persons
experienced in financial matters who meet throughout the year to oversee the
activities of the Fund or the Portfolio, respectively. In addition, the
Directors review contractual arrangements with companies that provide services
to the Fund/Portfolio and review the Fund's performance.
The Directors and officers of the Security Income Fund and the Portfolio
Trust, their birthdates, and their principal occupations during the past five
years are set forth below. Their titles may have varied during that period.
Unless otherwise indicated, the address of each officer and director of Security
Income Fund is 700 Harrison Street, Topeka, Kansas 66636-0001 and the address of
each officer of the Portfolio Trust is One South Street, Baltimore, Maryland
21202.
DIRECTORS AND OFFICERS OF SECURITY INCOME FUND --
JOHN D. CLELAND* (BIRTHDATE: MAY 1, 1936) -- President and Director of the Fund;
Senior Vice President and Managing Member Representative, Security Management
Company, LLC; Senior Vice President, Security Benefit Group, Inc. and Security
Benefit Life Insurance Company.
DONALD A. CHUBB, JR.** (BIRTHDATE: DECEMBER 14, 1946) -- Director of the Fund;
business broker, Griffith & Blair Realtors. Prior to 1997, President, Neon Tube
Light Company, Inc. His address is 2222 SW 29th Street, Topeka, Kansas 66611.
PENNY A. LUMPKIN** (BIRTHDATE: AUGUST 20, 1939) -- Director of the Fund; Vice
President, Palmer Companies, Inc. (Wholesalers, Retailers and Developers) and
Bellaire Shopping Center (Leasing and Shopping Center Management); Secretary
Treasurer, Palmer New, Inc. (Wholesale Distributors). Her address is 3616
Canterbury Town Road, Topeka, Kansas 66610.
MARK L. MORRIS, JR.** (BIRTHDATE: FEBRUARY 3, 1934) -- Director of the Fund;
Retired Former General Partner, Mark Morris Associates (Veterinary Research and
Education). His address is 5500 SW 7th Street, Topeka, Kansas 66606.
MAYNARD OLIVERIUS (BIRTHDATE: DECEMBER 18, 1943) -- Director of the Fund;
President and Chief Executive Officer, Stormont-Vail HealthCare. His address is
1500 SW 10th Avenue, Topeka, Kansas 66604.
JAMES R. SCHMANK* (BIRTHDATE: FEBRUARY 21, 1953) -- Director and Vice President
of the Fund; President and Managing Member Representative, Security Management
Company, LLC; Senior Vice President, Security Benefit Group, Inc. and Security
Benefit Life Insurance Company.
MARK E. YOUNG (BIRTHDATE: JANUARY 25, 1957) -- Vice President of the Fund; Vice
President and Senior Economist, Security Management Company, LLC; Second Vice
President, Security Benefit Group, Inc. and Security Benefit Life Insurance
Company.
JANE A. TEDDER (BIRTHDATE: OCTOBER 1, 1942) -- Vice President of the Fund; Vice
President and Senior Economist, Security Management Company, LLC; Vice
President, Security Benefit Group, Inc. and Security Benefit Life Insurance
Company.
AMY J. LEE (BIRTHDATE: JUNE 5, 1961) -- Secretary of the Fund; Secretary,
Security Management Company, LLC; Vice President, Associate General Counsel and
Assistant Secretary, Security Benefit Group, Inc. and Security Benefit Life
Insurance Company.
BRENDA M. HARWOOD (BIRTHDATE: NOVEMBER 3, 1963) -- Treasurer of the Fund;
Assistant Vice President and Treasurer, Security Management Company, LLC;
Assistant Vice President, Security Benefit Group, Inc. and Security Benefit Life
Insurance Company.
STEVEN M. BOWSER (BIRTHDATE: FEBRUARY 11, 1960) -- Vice President of the Fund;
Second Vice President and Portfolio Manager, Security Management Company, LLC;
Second Vice President, Security Benefit Group, Inc. and Security Benefit Life
Insurance Company. Prior to October 1992, Assistant Vice President and Portfolio
Manager, Federal Home Loan Bank.
THOMAS A. SWANK (BIRTHDATE: JANUARY 10, 1960) -- Vice President of the Fund;
Vice President and Portfolio Manager, Security Management Company, LLC; Vice
President and Chief Investment Officer, Security BenefitGroup, Inc. and Security
Benefit Life Insurance Company.
DAVID ESHNAUR (BIRTHDATE: OCTOBER 8, 1960) -- Vice President of the Fund;
Assistant Vice President and Portfolio Manager, Security Management Company,
LLC. Prior to July 1997, Assistant Vice President and Assistant Portfolio
Manager, Waddell & Reed.
CHRISTOPHER D. SWICKARD (BIRTHDATE: OCTOBER 9, 1965) -- Assistant Secretary of
the Fund; Assistant Secretary, Security Management Company, LLC; Assistant Vice
President and Assistant Counsel, Security Benefit Group, Inc. and Security
Benefit Life Insurance Company. Prior to June 1992, student at Washburn
University School of Law.
*These directors are deemed to be "interested persons" of the Fund.
**These directors serve on the Fund's audit committee, the purpose of which
(among other things) is to meet with independent auditors, to review the work
of the auditors, and to oversee the handling by Security Management Company,
LLC of the accounting function for the Fund.
The officers of Security Income Fund hold identical offices with each of the
other mutual funds in the Security Funds Family, except Ms. Tedder who holds the
same office only with respect to SBL Fund and Security Equity Fund, Mr. Eshnaur
who holds the same office only with respect to SBL Fund and Security Equity
Fund, Mr. Bowser who holds the same office only with respect to SBL Fund and
Security Equity Fund and Mr. Swank who holds the same office only with respect
to SBL Fund. The directors of Security Income Fund also serve as directors of
each of the other Security Funds. Ms. Lee is also Secretary of the Distributor,
Messrs. Cleland, Schmank and Young are directors and Vice Presidents of the
Distributor and Ms. Harwood is a director and Treasurer of the Distributor.
TRUSTEES OF BT INVESTMENT PORTFOLIOS --
CHARLES P. BIGGAR (BIRTHDATE: OCTOBER 14, 1930) -- Trustee; Retired; Director of
Chase/NBW Bank Advisory Board; Director, Batemen, Eichler, Hill Richards, Inc.;
formerly Vice President of International Business Machines and President of the
National Services and the Field Engineering Divisions of IBM. His address is 12
Hitching Post Lane, Chappaqua, New York 10514.
S. LELAND DILL (BIRTHDATE: MARCH 28, 1930) -- Trustee; Retired; director, Coutts
Group; Coutts (U.S.A.) International; Coutts Trust Holdings Ltd; Director, Zweig
Series Trust; formerly Partner of KPMG Peat Marwick; Director, Vinters
International Company Inc.; General Partner of Pemco (an investment company
registered under the 1940 Act). His address is 5070 North Ocean Drive, Singer
Island, Florida 33404.
PHILIP SAUNDERS, JR. (BIRTHDATE: OCTOBER 11, 1935) -- Trustee; Principal, Philip
Saunders Associates (Consulting); former director of Financial Industry
Consulting, Wolf & Company; President, John Hancock Home Mortgage Corporation;
and Senior Vice President of Treasury and Financial Services, John Hancock
Mutual Life Insurance Company, Inc. His address is 445 Glen Road, Weston,
Massachusetts 02193.
OFFICERS OF BT INVESTMENT PORTFOLIOS --
Unless otherwise specified, each officer listed below holds the same position
with the Trust and BT Investment Portfolios.
JOHN Y. KEFFER (BIRTHDATE: JULY 15, 1942) -- President and Chief Executive
Officer; President, Forum Financial Group. His address is Two Portland Square,
Portland, Maine 04101.
JOSEPH A. FINELLI (BIRTHDATE: JANUARY 24, 1957) -- Treasurer; Vice President, BT
Alex. Brown Incorporated and Vice President, Investment Company Capital Corp.
(registered investment adviser), September 1995-Present; Formerly, Vice
President, Delaware Management Company Inc. (investments), 1980-August 1995. His
address is One South Street, Baltimore, Maryland 21202.
DANIEL O. HIRSCH (BIRTHDATE: MARCH 27, 1954) -- Secretary; Principal, BT Alex.
Brown since July 1998; Assistant General Counsel in the Office of the General
Counsel at the United States Securities and Exchange Commission from 1993 to
1998. His address is 2901 Dorset Avenue, Chevy Chase, Maryland 20815.
No person who is an officer or director of Bankers Trust is an officer or
Trustee of the Trust or the Portfolio. No director, officer or employee of ICC
Distributors or any of its affiliates will receive any compensation from the
Trust or the Portfolios for serving as an officer or Trustee of the Trust or a
Portfolio.
SECURITY INCOME FUND DIRECTOR COMPENSATION TABLE --
----------------------------------------------------------
AGGREGATE TOTAL
COMPENSATION COMPENSATION
FROM SECURITY FROM SECURITY
NAME INCOME FUND FUND COMPLEX
----------------------------------------------------------
Donald A. Chubb, Jr. ..... $13,000 $26,000
John D. Cleland .......... N/A N/A
Penny A. Lumpkin ......... 13,000 26,000
Mark L. Morris, Jr. ...... 13,212 26,294
Maynard Oliverius ........ 9,000 18,000
James R. Schmank ......... N/A N/A
----------------------------------------------------------
As of January 31, 1999 the officers and directors of Security Income Fund as
a group beneficially owned none of the total outstanding voting shares of the
Fund.
BT INVESTMENT PORTFOLIO TRUSTEE COMPENSATION TABLE --
- --------------------------------------------------------------------------------
TOTAL
COMPENSATION
FROM FUND
AGGREGATE AGGREGATE COMPLEX**
NAME OF COMPENSATION COMPENSATION PAID TO
PERSON, POSITION FROM TRUST*+ FROM PORTFOLIOS+ TRUSTEES***
- --------------------------------------------------------------------------------
Philip Saunders, Jr., $13,125 $13,750 $27,500
Trustee of Trust
and Portfolios
Charles Biggar, N/A $13,750 $27,500
Trustee of
Portfolios
S. Leland Dill, $13,125 $13,750 $27,500
Trustee of Trust
and Portfolios
- --------------------------------------------------------------------------------
*The aggregate compensation is provided for the BT Investment Funds which is
comprised of 17 funds.
+Information is provided for the Trust's and the Portfolio's most recent
fiscal years ended December 31, 1998.
**Aggregated information is furnished for the BT Family of Funds which
consists of the following: BT Investment Funds, BT Institutional Funds, BT
Pyramid Funds, BT Advisor Funds, BT Investment Portfolios, Cash Management
Portfolio, Treasury Money Portfolio, Tax Free Money Portfolio, NY Tax Free
Money Portfolio, International Equity Portfolio, Short Intermediate U.S.
Government Securities Portfolio, Intermediate Tax Free Portfolio, Asset
Management Portfolio, Equity 500 Index Portfolio, and Capital Appreciation
Portfolio.
***The compensation is provided for the calendar year ended December 31, 1998.
- --------------------------------------------------------------------------------
As of January 31, 1999, the Trustees and Officers of the Trust and the
Portfolio owned in the aggregate less than 1% of the shares of any Fund or the
Trust (all series taken together).
INVESTMENT ADVISER -- Under the terms of the Portfolio's investment advisory
agreement with Bankers Trust (the "Advisory Agreement"), Bankers Trust manages
the Portfolio subject to the supervision and direction of the Board of Trustees
of the Portfolio. Bankers Trust will: (i) act in strict conformity with the
Portfolio's Declaration of Trust, the 1940 Act and the Investment Advisers Act
of 1940, as the same may from time to time be amended; (ii) manage the Portfolio
in accordance with the Portfolio's investment objectives, restrictions and
policies; (iii) make investment decisions for the Portfolio; and (iv) place
purchase and sale orders for securities and other financial instruments on
behalf of the Portfolio.
Bankers Trust bears all expenses in connection with the performance of
services under the Advisory Agreement. The Trust and the Portfolio bears certain
other expenses incurred in its operation, including: taxes, interest, brokerage
fees and commissions, if any; fees of Trustees of the Trust or the Portfolio who
are not officers, directors or employees of Bankers Trust, FAS, FI or any of
their affiliates; SEC fees and state Blue Sky qualification fees; charges of
custodians and transfer and dividend disbursing agents; certain insurance
premiums; outside auditing and legal expenses; costs of maintenance of corporate
existence; costs attributable to investor services, including, without
limitation, telephone and personnel expenses; costs of preparing and printing
prospectuses and SAIs for regulatory purposes and for distribution to existing
shareholders; costs of shareholders' reports and meetings of shareholders,
officers and Trustees of the Trust or the Portfolio; and any extraordinary
expenses.
Bankers Trust may have deposit, loan and other commercial banking
relationships with the issuers of obligations which may be purchased on behalf
of the Portfolio, including outstanding loans to such issuers which could be
repaid in whole or in part with the proceeds of securities so purchased. Such
affiliates deal, trade and invest for their own accounts in such obligations and
are among the leading dealers of various types of such obligations. Bankers
Trust has informed the Portfolio that, in making its investment decisions, it
does not obtain or use material inside information in its possession or in the
possession of any of its affiliates. In making investment recommendations for
the Portfolio, Bankers Trust will not inquire or take into consideration whether
an issuer of securities proposed for purchase or sale by the Portfolio is a
customer of Bankers Trust, its parent or its subsidiaries or affiliates and, in
dealing with its customers, Bankers Trust, its parent, subsidiaries and
affiliates will not inquire or take into consideration whether securities of
such customers are held by any fund managed by Bankers Trust or any such
affiliate.
ADMINISTRATOR -- Pursuant to an Administrative Services and Transfer Agency
Agreement with Security Income Fund, dated April 1, 1987 as amended April 30,
1999, Security Management Company, LLC ("SMC") acts as the administrative agent
for the Fund and as such performs administrative functions and the bookkeeping,
accounting and pricing function for the Fund. For these services SMC receives,
on an annual basis .09% of the average net assets of the fund, calculated daily
and payable monthly. Under this Agreement SMC also performs the transfer agency
function for the Fund. As such, SMC performs all shareholder servicing
functions, mailing shareholder communications and acting as dividend disbursing
agent. For the transfer agency services, SMC receives an annual maintenance fee
of $8 per account, a fee of $1 per shareholder transaction, and a fee of $1 per
dividend transaction. Under a sub-administration agreement between SMC and
Bankers Trust, Bankers Trust has agreed to provide certain fund accounting
services to the fund, including calculation of the Fund's daily NAV. For these
services, SMC pays Bankers Trust a fee of $14,000 per year.
Under an administration and services agreements, Bankers Trust is obligated
on a continuous basis to provide such administrative services as the Board of
Trustees of the Portfolio reasonably deem necessary for the proper
administration of the Portfolio. Bankers Trust will generally assist in all
aspects of the Portfolio's operations; supply and maintain office facilities
(which may be in Bankers Trust's own offices), statistical and research data,
data processing services, clerical, accounting, bookkeeping and record keeping
services (including without limitation the maintenance of such books and records
as are required under the 1940 Act and the rules thereunder, except as
maintained by other agents), executive and administrative services, and
stationery and office supplies; prepare reports to shareholders or investors;
prepare and file tax returns; supply financial information and supporting data
for reports to and filings with the SEC and various state Blue Sky authorities;
supply supporting documentation for meetings of the Board of Trustees; provide
monitoring reports and assistance regarding compliance with Declarations of
Trust, by-laws, investment objectives and policies and with Federal and state
securities laws; arrange for appropriate insurance coverage; calculate net asset
values, net income and realized capital gains or losses; and negotiate
arrangements with, and supervise and coordinate the activities of, agents and
others to supply services.
Pursuant to a sub-administration agreement (the "Sub-Administration
Agreement"), FSC performs such sub-administration duties for the Portfolio as
from time to time may be agreed upon by Bankers Trust and FSC. The
Sub-Administration Agreement provides that FSC will receive such compensation as
from time to time may be agreed upon by FSC and Bankers Trust. All such
compensation will be paid by Bankers Trust.
Pursuant to a separate Management Services Agreement, SMC also performs
certain other services on behalf of the Fund. Under this Agreement, SMC provides
feeder fund management and administrative services to the Fund which include
monitoring the performance of the Portfolio, coordinating the Fund's
relationship with the Portfolio, communicating with the Fund's Board of
Directors and shareholders regarding the Portfolio's performance and the Fund's
two tier structure, and in general, assisting the Board of Directors of the Fund
in all aspects of the administration and operation of the Fund. For these
services, the Fund pays SMC a fee at the annual rate of .20% of its average
daily net assets, calculated daily and payable monthly.
CUSTODIAN -- Bankers Trust, 130 Liberty Street (One Bankers Trust Plaza), New
York, New York 10006, serves as Custodian for the Portfolio pursuant to the
administration and services agreements. As Custodian, it holds the Portfolio's
assets. Bankers Trust also serves as transfer agent of the Portfolio pursuant to
the respective administration and services agreement. Bankers Trust may be
reimbursed by the Portfolio for its out-of-pocket expenses. Bankers Trust will
comply with the self-custodian provisions of Rule 17f-2 under the 1940 Act. UMB
Bank, N.A. 928 Grand Avenue, Kansas City, Missouri 64106 serves as Custodian for
the Fund and as such, holds all the Fund's assets.
BANKING REGULATORY MATTERS -- Bankers Trust has been advised by its counsel that
in its opinion Bankers Trust may perform the services for the Portfolio
contemplated by the Advisory Agreement and other activities for the Portfolio
described in the Prospectus and this SAI without violation of the Glass-Steagall
Act or other applicable banking laws or regulations. However, counsel has
pointed out that future changes in either Federal or state statutes and
regulations concerning the permissible activities of banks or trust companies,
as well as future judicial or administrative decisions or interpretations of
present and future statutes and regulations, might prevent Bankers Trust from
continuing to perform those services for the Portfolio. State laws on this issue
may differ from the interpretations of relevant Federal law and banks and
financial institutions may be required to register as dealers pursuant to state
securities law. If the circumstances described above should change, the Boards
of Trustees would review the relationships with Bankers Trust and consider
taking all actions necessary in the circumstances.
INDEPENDENT ACCOUNTANTS -- Ernst & Young LLP, One Kansas City Place, 1200 Main
Street, Kansas City, Missouri 64105, acts as independent accountants of Security
Income Fund. Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019,
acts as independent accountants of the Portfolio.
ORGANIZATION OF SECURITY INCOME FUND
The Articles of Incorporation of Security Income Fund provides for the issuance
of shares of common stock in one or more classes or series.
Security Income Fund has authorized the issuance of an indefinite number of
shares of capital stock of $1.00 part value and currently issues its shares in
five series, Corporate Bond Fund, Limited Maturity Bond Fund, U.S. Government
Fund, High Yield Fund and Capital Preservation Fund. The shares of each Series
of Security Income Fund represent a pro rata beneficial interest in that Series'
net assets and in the earnings and profits or losses derived from the investment
of such assets.
Each Series of Security Income Fund currently issues two classes of shares
except Capital Preservation Fund which issues three classes of shares. Each
class of shares participates proportionately based on their relative net asset
values in dividends and distributions and have equal voting, liquidation and
other rights except that (i) expenses related to the distribution of each class
of shares or other expenses that the Board of Directors may designate as class
expenses from time to time, are borne solely by each class; (ii) each class of
shares has exclusive voting rights with respect to any Distribution Plan adopted
for that class; (iii) each class has different exchange privileges; and (iv)
each class has a different designation. When issued and paid for, the shares of
each Series of Security income Fund will be fully paid and nonassessable. Shares
may be exchanged as described under "Exchange Privilege," in the prospecting but
will have no other preference, conversion, exchange or preemptive rights. Shares
are transferable, redeemable and assignable and have cumulative voting
privileges for the election of directors.
On certain matters, such as the election of directors, all shares of the
Series of Security Income Fund vote together with each share having one vote.
Under certain circumstances, the shareholders of one series of Security Income
Fund could control the outcome of these votes. On other matters affecting a
particular Series, such as the investment advisory contract or the fundamental
policies, only shares of that Series are entitled to vote, and a majority vote
of the shares of that Series is required for approval of the proposal.
Security Income Fund does not generally hold annual meetings of shareholders
and will do so only when required by law. Shareholders may remove directors from
office by vote cast in person or by proxy at a meeting of shareholders. Such a
meeting will be called at the written request of 10% of Security Income Fund's
outstanding shares.
ORGANIZATION OF THE TRUST
BT Investment Funds was organized on July 21, 1986, under the name BT Tax-Free
Investment Trust, and assumed its current name on May 16, 1988. The shares of
each series participate equally in the earnings, dividends and assets of the
particular series. The Trusts may create and issue additional series of shares.
Each Trust's Declaration of Trust permits the Trustees to divide or combine the
shares into a greater or lesser number of shares without thereby changing the
proportionate beneficial interest in series. Each share represents an equal
proportionate interest in a series with each other share. Shares when issued are
fully paid and non-assessable, except as set forth below. Shareholders are
entitled to one vote for each share held.
Shares of the Trust do not have cumulative voting rights, which means that
holders of more than 50% of the shares voting for the election of Trustees can
elect all Trustees. Shares are transferable but have no preemptive, conversion
or subscription rights. Shareholders generally vote by Fund, except with respect
to the election of Trustees and the ratification of the selection of independent
accountants.
Massachusetts law provides that shareholders could under certain
circumstances be held personally liable for the obligations of the Trust.
However, the Trust's Declaration of Trust disclaims shareholder liability for
acts or obligations of the Trust and requires that notice of this disclaimer be
given in each agreement, obligation or instrument entered into or executed by
the Trust or a Trustee. The Declaration of Trust provides for indemnification
from the Trust's property for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder's incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations, a possibility that the Trust believes is remote. Upon payment of
any liability incurred by the Trust, the shareholder paying the liability will
be entitled to reimbursement from the general assets of the Trust. The Trustees
intend to conduct the operations of the Trust in a manner so as to avoid, as far
as possible, ultimate liability of the shareholders for liabilities of the
Trust.
Whenever a Trust is requested to vote on matters pertaining to a Portfolio,
the Trust will vote its shares without a meeting of shareholders of the
respective Fund if the proposal is one, which if made with respect to the Fund,
would not require the vote of shareholders of the Fund as long as such action is
permissible under applicable statutory and regulatory requirements. For all
other matters requiring a vote, a Trust will hold a meeting of shareholders of
its respective Fund and, at the meeting of the investors in the Portfolio, the
Trust will cast all of its votes in the same proportion as votes in all its
shares at the Portfolio meeting, other investors with a greater pro rata
ownership of the Portfolio could have effective voting control of the operations
of the Portfolio.
TAXATION
TAXATION OF THE FUND -- The Fund intends to qualify annually to be treated as a
regulated investment company under the Code. To qualify for that treatment, the
Fund must, among other things, (a) derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities loans
and gains from the sale or other disposition of securities or foreign
currencies, or other income (including gains from options, futures or forward
contracts) derived with respect to its business of investing in securities or
those currencies (the "Income Requirement"), (b) diversify its holdings so that,
at the end of each quarter of its taxable year, (i) at least 50% of the value of
its assets is represented by cash and cash items (including receivables), U.S.
government securities, securities of other regulated investment companies and
other securities, with such other securities of any one issuer limited to an
amount not greater than 5% of the value of the Fund's total assets and not
greater than 10% of the issuer's outstanding voting securities and (ii) not more
than 25% of the value of its total assets is invested in the securities of any
one issuer (other than U.S. government securities or the securities of other
regulated investment companies), and (c) distribute for each taxable year at
least 90% of its investment company taxable income (generally consisting of
interest, dividends and the excess of net short-term capital gain over net
long-term capital loss).
The Fund will be subject to a nondeductible 4% federal excise tax to the
extent it fails to distribute by the end of any calendar year substantially all
of its ordinary income for that year and capital gain net income for the
one-year period ending on October 31 of that year, plus any undistributed amount
from the prior year.
The Fund, as an investor in the Portfolio, will be deemed to own a
proportionate share of the Portfolio's assets, and to earn a proportionate share
of the Portfolio's income, for purposes of determining whether the Fund
satisfies all the requirements described above to qualify as a regulated
investment company. See the next section for a discussion of the tax
consequences to the Fund of hedging transactions engaged in by the Portfolio.
TAXATION OF THE PORTFOLIO -- The Portfolio will be treated as a separate
partnership for federal income tax purposes and will not be a "publicly traded
partnership." As a result, the Portfolio will not be subject to federal income
tax. Instead, the Fund and other investors in the Portfolio will be required to
take into account, in computing their federal income tax liability, their
respective shares of the Portfolio's income, gains, losses, deductions and
credits, without regard to whether they have received any cash distributions
from the Portfolio. The Portfolio also will not be subject to state income or
franchise tax.
Because, as noted above, the Fund will be deemed to own a proportionate share
of the Portfolio's assets, and to earn a proportionate share of the Portfolio's
income, for purposes of determining whether the Fund satisfies the requirements
to qualify as a regulated investment company, the Portfolio intends to conduct
its operations so that the Fund will be able to satisfy all those requirements.
Distributions received by the Fund from the Portfolio (whether pursuant to a
partial or complete withdrawal or otherwise) generally will not result in the
Fund's recognizing any gain or loss for federal income tax purposes, except that
(a) gain will be recognized to the extent any cash that is distributed exceeds
the Fund's basis for its interest in the Portfolio prior to the distribution,
(b) income or gain will be realized if the distribution is in liquidation of the
Fund's entire interest in the Portfolio and includes a disproportionate share of
any unrealized receivables held by the Portfolio, and (c) gain or loss will be
recognized if a liquidation distribution consists solely of cash and/or
unrealized receivables. The Fund's basis for its interest in the Portfolio
generally will equal the amount of cash and the basis of any property the Fund
invests in the Portfolio, increased by the Fund's share of the Portfolio's net
income and gains and decreased by (i) the amount of any cash and the basis of
any property distributed from the Portfolio to the Fund and (ii) the Fund's
share of the Portfolio's losses, if any.
The Portfolio's use of hedging strategies, such as writing (selling) and
purchasing options and futures contracts, involves complex rules that will
determine for income tax purposes the amount, character and timing of
recognition of the gains and losses it realizes in connection therewith. Gains
from options and futures contracts derived by the Portfolio with respect to its
business of investing in securities will qualify as permissible income for the
Fund under the Income Requirement.
Certain futures and foreign currency contracts in which the Portfolio may
invest may be subject to section 1256 of the Code ("section 1256 contracts").
Any section 1256 contracts held by the Portfolio at the end of each taxable
year, other than contracts subject to a "mixed straddle" election made by the
Portfolio, must be "marked-to-market" (that is, treated as having been sold at
that time for their fair market value) for federal income tax purposes, with the
result that unrealized gains or losses will be treated as though they were
realized. Sixty percent of any net gain or loss recognized on these deemed
sales, and 60% of any net realized gain or loss from any actual sales of section
1256 contracts, will be treated as long-term capital gain or loss, and the
balance will be treated as short-term capital gain or loss. Section 1256
contracts also may be marked-to-market for purposes of the 4% excise tax
mentioned above.
Code section 1092 (dealing with straddles) also may affect the taxation of
options and futures contracts in which the Portfolio may invest. Section 1092
defines a "straddle" as offsetting positions with respect to personal property;
for these purposes, options and futures contracts are personal property. Under
that section, any loss from the disposition of a position in a straddle
generally may be deducted only to the extent the loss exceeds the unrealized
gain on the offsetting position(s) of the straddle; in addition, these rules may
apply to postpone the recognition of loss that otherwise would be recognized
under the mark-to-market rules discussed above. The regulations under section
1092 also provide certain "wash sale" rules, which apply to transactions where a
position is sold at a loss and a new offsetting position is acquired within a
prescribed period, and "short sale" rules applicable to straddles. If the
Portfolio makes certain elections, the amount, character and timing of
recognition of gains and losses from the affected straddle positions would be
determined under rules that vary according to the elections made. Because only a
few of the regulations implementing the straddle rules have been promulgated,
the tax consequences to the Portfolio of straddle transactions are not entirely
clear.
If the Portfolio has an "appreciated financial position" -- generally, an
interest (including an interest through an option, futures or forward contract,
or short sale) with respect to any debt instrument (other than "straight debt")
or partnership interest the fair market value of which exceeds its adjusted
basis -- and enters into a "constructive sale" of the same or substantially
similar property, the Portfolio will be treated as having made an actual sale
thereof, with the result that gain will be recognized at that time. A
constructive sale generally consists of a short sale, an offsetting notional
principal contract, or a futures or forward contract entered into by the
Portfolio or a related person with respect to the same or substantially similar
property. In addition, if the appreciated financial position is itself a short
sale or such a contract, acquisition of the underlying property or substantially
similar property will be deemed a constructive sale. The foregoing will not
apply, however, to any transaction during any taxable year that otherwise would
be treated as a constructive sale if the transaction is closed within 30 days
after the end of that year and the Portfolio holds the appreciated financial
position unhedged for 60 days after that closing (I.E., at no time during that
60-day period is the Portfolio's risk of loss regarding that position reduced by
reason of certain specified transactions with respect to substantially similar
or related property, such as having an option to sell, being contractually
obligated to sell, making a short sale or granting an option to buy
substantially identical stock or securities).
OTHER TAXATION -- The investment by the Fund in the Portfolio should not cause
the Fund to be liable for any income or franchise tax in the State of New York.
The Portfolio is organized as a New York trust. The Portfolio is not subject
to any income or franchise tax in the State of New York or the State of Kansas.
FOREIGN WITHHOLDING TAXES -- Income received and gains realized by the Portfolio
from sources within foreign countries may be subject to withholding and other
taxes imposed by those countries that would reduce the yield and/or total return
on its securities. Tax conventions between certain countries and the United
States may reduce or eliminate these foreign taxes, however, and many foreign
countries do not impose taxes on capital gains in respect of investments by
foreign investors.
FINANCIAL STATEMENTS
Neither the Portfolio nor the Fund have audited financial statements at this
time.
<PAGE>
APPENDIX
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DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
Aaa -- Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa -- Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds rated A possess many favorable investment attributes and are to be
considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds rated Baa are considered as medium-grade obligations, i.e. they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such, bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba -- Bonds rated Ba are judged to have speculative elements. Their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both (good and bad times over the future). Uncertainty of position characterizes
bonds in this class.
B -- Bonds rated B generally lack characteristics of a desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa -- Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca -- Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked short-comings.
C -- Bonds rated C are the lowest-rated class of bonds and issued so rated can
be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through B in its corporate bond system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
DESCRIPTION OF S&P'S CORPORATE BOND RATINGS
AAA -- Debt rated AAA has the highest rating assigned by Standard & Poor's to a
debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher-rated issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to weakened capacity to pay interest and repay principal for debt
in this category than in higher-rated categories.
BB -- Debt rate BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
B -- Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB- rating.
CCC -- Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal.
CC -- Debt rated CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C -- The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed but debt service
payments are continued.
CI -- The rating CI is reserved for income bonds on which no interest is being
paid.
D -- Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating will also be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
DUFF & PHELPS' LONG-TERM DEBT RATINGS
AAA -- Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA- -- High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
A+, A, A- -- Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB+, BBB, BBB- -- Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB- -- Below investment grade but deemed likely to meet obligation when
due. Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B+, B, B- -- Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or into
a higher or lower rating grade.
CCC -- Well below investment-grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD -- Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP -- Preferred stock with dividend arrearages.
DESCRIPTION OF MOODY'S SHORT-TERM DEBT RATINGS
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: leasing
market positions in well-established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; well-established access to
a range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rates Prime-3 (or related supporting institutions) have an acceptable
capacity for repayment of short-term promissory obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
DESCRIPTION OF S&P SHORT-TERM ISSUER CREDIT RATINGS
A-1 -- An obligor rated `A-1' has STRONG capacity to meet its financial
commitments. It is rated in the highest category by Standard & Poor's. Within
this category, certain obligors are designated with a plus sign (+). This
indicates that the obligor's capacity to meet its financial commitments is
EXTREMELY STRONG.
A-2 -- An obligor rated `A-2' has SATISFACTORY capacity to meet its financial
commitments. However, it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligors in the highest
rating category.
A-3 -- An obligor rated `A-3' has ADEQUATE capacity to meet its financial
obligations. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitments.
DESCRIPTION OF DUFF & PHELPS' COMMERCIAL PAPER RATINGS
D-1+ -- Highest certainty of timely payment. Short term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk free U.S.Treasury short term
obligations.
D-1 -- Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
D-1- -- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
D-2 -- Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
D-3 -- Satisfactory liquidity and other protection factors qualify issues as to
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
DESCRIPTION OF MOODY'S INSURANCE FINANCIAL STRENGTH RATINGS
Aaa -- Insurance companies rated Aaa offer exceptional financial security. While
the financial strength of these companies is likely to change, such changes as
can be visualized are most unlikely to impair their fundamentally strong
position.
Aa -- Insurance companies rated Aa offer excellent financial security. Together
with the Aaa group they constitute what are generally known as high grade
companies. They are rated lower than Aaa companies because long-term risks
appear somewhat larger.
A -- Insurance companies rated A offer good financial security. However,
elements may be present which suggest a susceptibility to impairment sometime in
the future.
Baa -- Insurance companies rated Baa offer adequate financial security. However,
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time.
Ba -- Insurance companies rated Ba offer questionable financial security. Often
the ability of these companies to meet policyholder obligations maybe very
moderate and thereby not well safeguarded in the future.
B -- Insurance companies rated B offer poor financial security. Assurance of
punctual payment of policyholder obligations over any long period of time is
small.
Caa -- Insurance companies rated Caa offer very poor financial security. They
may be in default on their policyholder obligations or there may be present
elements of danger with respect to punctual payment of policyholder obligations
and claims.
Ca -- Insurance companies rated Ca offer extremely poor financial security. Such
companies are often in default on their policyholder obligations or have other
marked shortcomings.
C -- Insurance companies rated C are the lowest rated class of insurance company
and can be regarded as having extremely poor prospects of ever offering
financial security.
Numeric modifiers: Numeric modifiers are used to refer to the ranking within
the group -- one being the highest and three being the lowest. However, the
financial strength of companies within a generic rating symbol (Aa, for example)
is broadly the same.
DESCRIPTION OF S&P CLAIMS PAYING ABILITY RATING DEFINITIONS
SECURE RANGE -- AAA to BBB
"AAA" -- Superior financial security on an absolute and relative basis. Capacity
to meet policyholder obligations is overwhelming under a variety of economic and
underwriting conditions.
"AA" -- Excellent financial security. Capacity to meet policyholder obligations
is strong under a variety of economic and underwriting conditions.
"A" -- Good financial security, but capacity to meet policyholder obligations is
somewhat susceptible to adverse economic and underwriting conditions.
"BBB" -- Adequate financial security, but capacity to meet policyholder
obligations is susceptible to adverse economic and underwriting conditions.
VULNERABLE RANGE -- BB to CCC
"BB" -- Financial security may be adequate, but capacity to meet policyholder
obligations, particularly with respect to long-term or "long-tail" policies, is
vulnerable to adverse economic and underwriting conditions.
"B" -- Vulnerable financial security. Currently able to meet policyholder
obligations, but capacity to meet policyholder obligations is particularly
vulnerable to adverse economic and underwriting conditions.
"CCC" -- Extremely vulnerable financial security. Continued capacity to meet
policyholder obligations is highly questionable unless favorable economic and
underwriting conditions prevail.
"R" -- Regulatory action. As of the date indicated, the insurer is under
supervision of insurance regulators following rehabilitation, receivership,
liquidation, or any other action that reflects regulatory concern about the
insurer's financial condition. Information on this status is provided by the
National Association of Insurance Commissioners and other regulatory bodies.
Although believed to be accurate, this information is not guaranteed. The "R"
rating does not apply to insurers subject only to nonfinancial actions such as
market conduct violations.
Plus (+) or minus (-) Ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
DUFF & PHELPS' CLAIMS PAYING ABILITY RATINGS
AAA -- Highest claims paying ability. Risk factors are negligible.
AA+, AA, AA- -- Very high claims paying ability. Protection factors are strong.
Risk is modest, but may vary slightly over time due to economic and/or
underwriting conditions.
A+, A, A- -- High claims paying ability. Protection factors are average and
there is an expectation of variability in risk over time due to economic and/or
underwriting conditions.
BBB+, BBB, BBB- -- Adequate claims paying ability. Protection factors are
adequate. There is considerable variability in risk over time due to economic
and/or underwriting conditions.
BB+, BB, BB- -- Uncertain claims paying ability and less than investment grade
quality. However, the company is deemed likely to meet these obligations when
due. Protection factors will vary widely with changes in economic and/or
underwriting conditions.
B+, B, B- -- Possessing risk that policyholder and contractholder obligations
will not be paid when due. Protection factors will vary widely with changes in
economic and underwriting conditions or company fortunes.
CCC -- There is substantial risk that policyholder and contractholder
obligations will not be paid when due. Company has been or is likely to be
placed under state insurance department supervision.
DD -- Company is under an order of liquidation.
