<PAGE> 1
Security
Funds
ANNUAL REPORT
September 30, 2000
* SECURITY CAPITAL
PRESERVATION FUND
[Security Benefit Logo]
Security Distributors, Inc.
A Member of The Security
Benefit Group of Companies
<PAGE> 2
PRESIDENT'S COMMENTARY
--------------------------------------------------------------------------------
November 15, 2000
SECURITY
FUNDS
TO OUR SHAREHOLDERS:
We are pleased to include Security Capital Preservation Fund as an investment
option in our mutual fund family. Security Management Company, LLC is among the
first to offer this type of fund, which employs a stable value strategy having
the objective of seeking a high level of current income while seeking to
maintain a stable value per share.(1) The Security Capital Preservation Fund in
the year ended September 30, 2000 achieved this dual objective handily, proving
itself to be an attractive investment vehicle for use in tax-sheltered
retirement plans. Its attractiveness is reflected in the rapid growth of assets
in the Fund, exceeding $200 million in assets at the close of the fiscal year.
Mutual funds employing a stable value strategy have presented a level of risk
somewhere between money market funds and short-term bond funds.(1) We believe
that as the retirement planning market shifts its focus from asset accumulation
to wealth management, funds employing a stable value strategy such as Security
Capital Preservation Fund will be a valuable option for use in providing
financial solutions for consumers' retirement decisions.
Portfolio Manager Eric Kirsch provides a performance review in his letter
accompanying this report. We appreciate the opportunity to help your achieve
your investment goals with this and our other funds, and we welcome your
questions and comments at any time.
Sincerely,
James R. Schmank, President
Security Management Company, LLC
(1)The Security Capital Preservation Fund is not a money market fund and there
can be no assurance that it will be able to maintain a stable share price.
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1
<PAGE> 3
MANAGER'S COMMENTARY
--------------------------------------------------------------------------------
November 15, 2000
SECURITY
FUNDS
TO OUR SHAREHOLDERS:
For the fiscal year ended September 30, 2000, Security Capital Preservation Fund
returned +6.65%.(1) This compares favorably to its benchmark index, the Lehman
Brothers One to Three Year Government/Credit Index return of +5.99%.
Security Capital Preservation Fund seeks to deliver returns above those of money
market funds while maintaining a constant share price.(2) The Fund is offered to
tax sheltered annuity custodial accounts, traditional Individual Retirement
Accounts (IRAs), Roth IRAs, education IRAs, simplified employee pension IRAs,
savings incentive match plans for employees (SIMPLE IRAs), Keogh plans, and
other qualified retirement plans.
PERFORMANCE IN THE FIXED INCOME MARKETS
The dominant market technicals in the first half of 2000 shifted during the
third quarter of the calendar year as the Federal Reserve Bank's policy-making
Open Market Committee (FOMC) appeared to have engineered a comfortable "soft
landing" for the U.S. economy. Benign inflation, coupled with lackluster
performance for the equity market, paved the way for the FOMC to end its cycle
of interest rate increases. This backdrop created a suitable environment for
investors to re-enter the fixed income markets. The supply of Treasury bonds
shrank as the U.S. Treasury Department continued its buyback program which began
in mid-March. Since its beginning, $22.25 billion of outstanding Treasury
securities have been repurchased by the Treasury, keeping the department on
schedule to meet its previously announced $30 billion target of securities
repurchased during the calendar year 2000.
Over the twelve-month period ended September 30, 2000, the yield on the two-year
Treasury note declined by 37 basis points to 5.97%, five year notes dropped 9
basis points to 5.84%, and ten-year notes fell 8 basis points to 5.80%. At the
same time the thirty-year Treasury bond yield fell from 6.05% to 5.88%. On a
calendar basis Treasury securities are on track to have their best yearly return
since 1995. Over the same period commercial mortgage-backed securities (CMBS)
and mortgage-backed securities (MBS) outperformed other fixed income sectors in
the Lehman Brothers U.S. Aggregate Bond Index, with annual returns of 7.80% and
7.42%, respectively. Still, the same market factors, combined with the ongoing
"flight to quality" that favored U.S. Treasury securities, caused the corporate
and asset-backed sectors to comparatively underperform. Higher quality corporate
bonds significantly outperformed lower quality credits as investors sought the
safety of better quality.
PORTFOLIO INVESTMENT REVIEW
As of the end of the fiscal year the portfolio's allocation of fixed income
securities was intentionally weighted toward the corporate and mortgage sectors,
which have historically offered higher yields than U.S. government securities.
The allocations to these sectors were 43% in corporate bonds, 40% in
mortgage-backed and asset-backed securities, 14% in cash equivalents and 3% in
U.S. Government Agency Securities.(3)
PORTFOLIO MANAGERS' OUTLOOK
As the new fiscal year begins, the U.S. economy is showing signs of coming
into better balance, with consumer demand moderating and productivity rising. We
believe the Federal Open Market Committee is most likely finished with its cycle
of interest rate increases as economic data now point to a slowing in the U.S.
economy. At present, a favorable "soft landing" psychology is overtaking the
U.S. fixed income markets.
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2
<PAGE> 4
MANAGER'S COMMENTARY
--------------------------------------------------------------------------------
November 15, 2000
SECURITY
FUNDS
Indeed, we feel more confident now that the economy will be able to achieve a
relatively smooth adjustment to a more sustainable growth path by 2001. Still,
recent developments could easily prove ephemeral, and we continue to expect that
some additional increases in interest rates will yet be needed to correct the
economy's lingering imbalances. Thus, we remain cautious about the outlook for
the U.S. fixed income markets, particularly in the light of the constructive
supply/demand picture for U.S. bonds.
Sincerely,
Eric M. Kirsch
Portfolio Manager
Bankers Trust Company
(1) Performance figures are based on Class A shares and do not reflect deduction
of the sales charge. Fee waivers and/or reimbursements reduced Fund expenses and
in the absence of such waivers, the performance quoted would be reduced.
(2)The Security Capital Preservation Fund is not a money market fund and there
can be no assurance that it will be able to maintain a stable share price.
(3)The information about the allocation of investments among various sectors
pertains to the BT PreservationPlus Income Portfolio, the underlying investment
of the Security Capital Preservation Fund.
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3
<PAGE> 5
MANAGER'S COMMENTARY
--------------------------------------------------------------------------------
NOVEMBER 15, 2000
SECURITY
FUNDS
---------------------------------------------PERFORMANCE------------------------
Security Capital Preservation Fund vs.
Lehman 1-3 yr. Government/Credit Index
[PERFORMANCE GRAPH]
End Security Capital Lehman 1-3 yr.
Date Preservation Fund Government/Credit Index
5/31/99 9,686.05 9,992.00
6/30/99 9,723.90 10,021.98
7/31/99 9,771.29 10,051.04
8/31/99 9,818.83 10,077.17
9/30/99 9,868.70 10,144.69
10/31/99 9,919.64 10,175.12
11/30/99 9,970.25 10,197.51
12/31/99 10,022.63 10,207.71
1/31/00 10,074.66 10,207.71
2/29/00 10,124.86 10,278.14
3/31/00 10,182.00 10,336.72
4/30/00 10,237.45 10,356.36
5/31/00 10,295.02 10,393.65
6/30/00 10,353.81 10,507.98
7/31/00 10,407.90 10,579.43
8/31/00 10,466.51 10,663.01
9/30/00 10,524.91 10,750.45
This chart assumes a $10,000 investment in Class A shares of Security Capital
Preservation Fund on 5/3/1999 and assumes deduction of the maximum front-end
sales charge of 3.5% but does not reflect deduction of the 2% redemption fee
that may apply in some circumstances. As of 9/30/2000, the value of your
investment in Class A shares of the fund (with dividends reinvested) would have
grown to $10,524. In comparison, the same $10,000 investment would have grown to
$10,750 based on the Lehman 1-3 yr. Government/Credit Index.
The Lehman 1-3 year Government/Credit Index is an unmanaged total return index
consisting of U.S. Government agency securities, U.S. Government Treasury
securities and investment grade corporate debt securities with maturities of one
to three years.
Average Annual Returns
As of September 30, 2000
1 year Since Inception
------ ---------------
A Shares 6.65% 6.31% (5-3-99)
A Shares with sales charge 2.94% 3.68% (5-3-99)
B Shares 6.12% 5.78% (5-3-99)
B Shares with CDSC 1.12% 3.00% (5-3-99)
C Shares 6.39% 6.04% (5-3-99)
C Shares with CDSC 5.39% 6.04% (5-3-99)
The performance data above represents past performance which is not predictive
of future results. The investment return and principal value of an investment in
the fund will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost. The figures above do not reflect
deduction of the maximum front-end sales charge of 3.50% for Class A shares or
the contingent deferred sales charge of 5% for Class B shares and 1% for Class C
shares, as applicable, except where noted. Such figures would be lower if the
maximum sales charge were deducted. Fee waivers reduced expenses of the Fund and
in the absence of such waiver, the performance quoted would be reduced.
See accompanying notes.
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4
<PAGE> 6
SECURITY CAPITAL PRESERVATION FUND
STATEMENT OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------
SEPTEMBER 30, 2000
ASSETS
Investments in PreservationPlus Income Portfolio,
at value................................................ $ 200,872,482
Fund Shares Sold.......................................... 1,264,097
-------------
Total assets............................................ 202,136,579
-------------
LIABILITIES
Dividends payable......................................... 1,078,910
Fund Shares Redeemed...................................... 101,312
Accrued expenses and other liabilities.................... 233,935
-------------
Total liabilities....................................... 1,414,157
-------------
Net assets................................................ $ 200,722,422
=============
NET ASSETS CONSIST OF:
Paid-in Capital........................................... $ 200,722,422
Accumulated net realized gain from Investments,
Futures Contracts, Foreign Currency
and Forward Foreign Currency Transactions............... 22,785
Net unrealized appreciation on Investments,
Futures Contracts, Foreign Currency
and Forward Foreign Currency Contracts.................. 2,242,261
Unrealized depreciation on Wrapper
Agreements.............................................. (2,265,046)
-------------
Total net assets...................................... $ 200,722,422
=============
CLASS "A" SHARES
Capital shares outstanding................................ 19,823,497
Net assets................................................ $ 198,234,972
Net asset value per share................................. $ 10.00
=============
Offering price per share (net asset value
divided by 96.5%)....................................... $ 10.36
=============
CLASS "B" SHARES
Capital shares outstanding................................ 79,053
Net assets................................................ $ 790,533
Net asset value per share................................. $ 10.00
=============
CLASS "C" SHARES
Capital shares outstanding................................ 169,692
Net assets................................................ $ 1,696,917
Net asset value per share................................. $ 10.00
=============
See accompanying notes.
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5
<PAGE> 7
SECURITY CAPITAL PRESERVATION FUND
STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30, 2000
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income net of expenses allocated
from PreservationPlus Income Portfolio ................................... $ 7,947,579
EXPENSES:
Administration and management services fees ................................ 318,943
12b-1 distribution fees .................................................... 278,788
Registration fees .......................................................... 65,712
Reports to shareholders .................................................... 2,862
Transfer Agent fees ........................................................ 14,543
Professional fees .......................................................... 27,932
Trustee fees ............................................................... 5,883
Other fees ................................................................. 7,793
-----------
Total expenses ........................................................... 722,456
-----------
Net investment income .................................................. 7,225,123
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS)ON INVESTMENTS AND WRAPPER AGREEMENT:
Net realized gain/(loss) from:
Investment Transactions .................................................. (741,362)
Foreign Currency Transactions ............................................ 82,152
Forward Foreign Currency Transactions .................................... (77,891)
Futures Transactions ..................................................... 792,536
-----------
Net realized gain ........................................................ 55,435
Net change in unrealized appreciation/depreciation on:
Investments, Foreign Currency, Forward
Foreign Currency Contracts and
Futures Contracts ........................................................ 2,572,170
Wrapper Agreements ....................................................... (2,627,605)
-----------
Net Realized and Unrealized Gain (Loss) on
Investments, Futures, Foreign Currencies, Forward
Foreign Currency Contracts and
Wrapper Agreements ....................................................... 0
-----------
Net increase in net assets from operations ................................. $7,225,123
===========
</TABLE>
See accompanying notes.
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6
<PAGE> 8
SECURITY CAPITAL PRESERVATION FUND
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE PERIOD MAY 3, 1999(1)
SEPTEMBER 30, 2000 THROUGH SEPTEMBER 30, 1999
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS:
Net investment income ............................................ $ 7,225,123 $ 425,376
Net realized gain/(loss) from investment,
futures, foreign currency and
forward foreign currency transactions .......................... 55,435 (32,650)
Net change in unrealized appreciation/depreciation on
investments, foreign currency, forward foreign
currency contracts and futures contracts ....................... 2,572,170 (329,909)
Net change in unrealized appreciation/depreciation on
Wrapper Agreements ............................................. (2,627,605) 362,559
------------- -------------
Net increase in net assets resulting
from operations ............................................ 7,225,123 425,376
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A ........................................................ (7,162,049) (291,497)
Class B ........................................................ (30,550) (65,870)
Class C ........................................................ (32,524) (68,009)
------------- -------------
Total distributions to shareholders .......................... (7,225,123) (425,376)
------------- -------------
CAPITAL TRANSACTIONS IN SHARES
OF BENEFICIAL INTEREST:
Proceeds from sale of shares:
Class A ........................................................ 187,459,860 25,126,081
Class B ........................................................ 456,680 8,399,792
Class C ........................................................ 1,634,311 8,333,343
Dividends reinvested:
Class A ........................................................ 7,300,934 154,171
Class B ........................................................ 35,126 63,246
Class C ........................................................ 26,519 65,690
Cost of shares redeemed:
Class A ........................................................ (21,786,532) (19,545)
Class B ........................................................ (25,083) (8,139,228)
Class C ........................................................ (157,943) (8,205,000)
------------- -------------
Net increase in net assets from capital
transactions in shares of beneficial interest .................. 174,943,872 25,778,550
------------- -------------
Net increase in net assets ....................................... 174,943,872 25,778,550
NET ASSETS:
Beginning of period .............................................. 25,778,550 --
------------- -------------
End of period .................................................... $ 200,722,422 $ 25,778,550
============= =============
</TABLE>
(1)Inception of Fund
See accompanying notes.
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7
<PAGE> 9
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
SECURITY CAPITAL PRESERVATION FUND (CLASS A SHARES)
<TABLE>
<CAPTION>
FISCAL PERIOD ENDED
----------------------
9-30-00 9-30-99 (a)
------- -----------
<S> <C> <C>
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD ............................ $ 10.00 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income .......................................... 0.65 0.22
DISTRIBUTIONS TO SHAREHOLDERS:
Net Investment Income .......................................... (0.65) (0.22)
-------- -------
NET ASSET VALUE END OF PERIOD .................................. $ 10.00 $ 10.00
======== =======
TOTAL INVESTMENT RETURN (b) .................................... 6.65% 2.24%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) ........................... $198,235 $25,261
Ratio of Net Investment Income
to Average Net Assets ......................................... 6.51% 6.16%
Ratio of Expenses to Average Net Assets (c) .................... 1.00% 1.26%
Ratio of Expenses to Average Net Assets
Before Waivers (c) ............................................ 1.64% 2.18%
SECURITY CAPITAL PRESERVATION FUND (CLASS B SHARES)
FISCAL PERIOD ENDED
----------------------
9-30-00 9-30-99 (a)
------- -----------
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD ............................ $ 10.00 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income .......................................... 0.60 0.20
DISTRIBUTIONS TO SHAREHOLDERS:
Net Investment Income .......................................... (0.60) (0.20)
-------- -------
NET ASSET VALUE END OF PERIOD .................................. $ 10.00 $ 10.00
======== =======
TOTAL INVESTMENT RETURN (B) .................................... 6.12% 2.03%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) ........................... $ 790 $ 324
Ratio of Net Investment Income
to Average Net Assets ......................................... 6.01% 5.27%
Ratio of Expenses to Average Net Assets (c) .................... 1.50% 1.89%
Ratio of Expenses to Average Net Assets
Before Waivers (c) ............................................ 2.14% 2.81%
SECURITY CAPITAL PRESERVATION FUND (CLASS C SHARES)
FISCAL PERIOD ENDED
----------------------
9-30-00 9-30-99 (a)
------- -----------
PER SHARE DATA
NET ASSET VALUE BEGINNING OF PERIOD ............................ $ 10.00 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income .......................................... 0.62 0.21
DISTRIBUTIONS TO SHAREHOLDERS:
Net Investment Income .......................................... (0.62) (0.21)
-------- -------
NET ASSET VALUE END OF PERIOD .................................. $ 10.00 $ 10.00
======== =======
TOTAL INVESTMENT RETURN (B) .................................... 6.39% 2.12%
RATIOS/SUPPLEMENTAL DATA
Net Assets End of Period (thousands) ........................... $ 1,697 $ 194
Ratio of Net Investment Income
to Average Net Assets ......................................... 6.26% 5.51%
Ratio of Expenses to Average Net Assets (c) .................... 1.25% 1.64%
Ratio of Expenses to Average Net Assets
Before Waivers (c) ............................................ 1.89% 2.56%
</TABLE>
(a) Security Capital Preservation Fund Class A, B and C Shares were initially
capitalized on May 3, 1999, with a net asset value of $10 per share.
Amounts presented are for the period May 3, 1999 through September 30,
1999. Percentage amounts, except for total return, have been annualized.
(b) Total return information does not reflect deduction of any sales charges
imposed at the time of purchase for Class A shares or upon redemption for
Class B and C shares.
(c) Ratio of expenses to average net assets include expenses of the
PreservationPlus Income Portfolio.
See accompanying notes.
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8
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE I - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION
Security Capital Preservation Fund (the "Fund") seeks to provide investors
with a high level of current income while seeking to maintain a stable net asset
value ("NAV") per share. Security Income Fund is an open-end management
investment company (mutual fund). The Fund is a separate series of Security
Income Fund and currently offers three classes of shares (the "Shares"). The
Shares are offered exclusively to retirement accounts such as tax-sheltered
annuity custodial accounts ("TSA Accounts"), individual retirement accounts
("IRAs"), and to employees investing through participant-directed employee
benefit plans. The Fund began operations on May 3, 1999. Class A shares are sold
with a sales charge at the time of purchase. Class A shares are not subject to a
sales charge when they are redeemed. Class B and C shares are offered without a
front- end sales charge but incur additional class-specific expenses.
Redemptions of the shares within 5 years of acquisition for Class B shares and
redemptions within 1 year of acquisition for Class C shares incur a contingent
deferred sales charge.
The Fund seeks to achieve its investment objective by investing substantially
all of its assets in the PreservationPlus Income Portfolio (the "Portfolio").
The Portfolio is an open-end management investment company registered under the
Investment Company Act of 1940 (the "Act"), as amended. The value of such
investment in the Portfolio reflects the Fund's proportionate interest in the
net assets of the Portfolio. At September 30, 2000, the Fund's investment was
approximately 99.9% of the Portfolio.
The financial statements of the Portfolio, including a list of assets held,
are contained elsewhere in this report and should be read in conjunction with
the Fund's financial statements.
B. VALUATION OF SECURITIES, SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Valuation of securities by the Portfolio is discussed in Note 1 of the
Portfolio's Notes to Financial Statements, which are included elsewhere in this
report.
The Fund earns income, net of expenses, on its investment in the Portfolio.
All of the net investment income and net realized and unrealized gains and
losses (including Wrapper Agreements) of the Portfolio are allocated pro rata
among the investors in the Portfolio on a daily basis.
Security transactions are accounted for on a trade date basis. Realized gains
and losses on investments sold are computed on the basis of identified cost. The
realized and unrealized gains and losses in the Statement of Operations
represent the Fund's pro rata interest in the realized and unrealized gains and
losses of the Portfolio, including the offsetting valuation change of the
Wrapper Agreements.
C. DISTRIBUTIONS
It is the Fund's policy to declare dividends daily and distribute dividends
monthly to shareholders from net investment income. Dividends payable to
shareholders are recorded by the Fund on the ex-dividend date. Distributions of
net realized short-term and long-term capital gains, if any, will be made
annually.
D. FEDERAL INCOME TAXES
It is the Fund's policy to comply with the requirements of the Internal
Revenue Code and distribute all of its income to shareholders. Therefore, no
federal income tax provision is required. The Fund may periodically make
reclassifications among certain of its capital accounts as a result of
differences in the characterization and allocation of certain income and capital
gains determined in accordance with federal tax regulations which may differ
from accounting principles generally accepted in the United States.
E. OTHER
Security Income Fund accounts separately for the assets, liabilities and
operations of each fund. Expenses directly attributable to a fund are charged to
that fund, while expenses which are attributable to all of the funds are
allocated among them on the basis of relative net assets. The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that
affect the reported amounts in the financial statements. Actual results could
differ from those estimates.
NOTE 2 - FEES AND TRANSACTIONS WITH AFFILIATES
The Fund has entered into an Administration and Services Agreement with
Security Management Company, LLC ("SMC"). Under this agreement, SMC provides
administrative functions and transfer agency services. This agreement provides
for the Fund to pay SMC an administration fee, accrued daily and paid monthly,
equal to .09% per year of the average daily net assets of the Fund. SMC is paid
an annual fixed charge per account as well as transaction fees for shareholder
activity and dividend payments.
Under a Sub-Accounting Agreement between SMC and Bankers Trust Company,
Bankers Trust has agreed to provide certain accounting services to the Fund,
including the daily calculation of the Fund's NAV. The Sub-Accounting Agreement
provides for SMC to pay Bankers Trust a fee, equal to $14,000 per year.
Pursuant to a separate Management Services Agreement, SMC also performs
certain other services on behalf of the Fund. Under this Agreement, SMC
provides, among other things, feeder fund management and administrative services
to the Fund which include monitoring the performance of the Portfolio,
coordinating the Fund's relationship with the Portfolio, communicating with the
Fund's Board of Directors and shareholders regarding the Portfolio's performance
and the Fund's two tier structure, and in general, assisting the Board of
Directors of the Fund in all aspects of the administration and operation of the
Fund. For
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9
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
NOTE 2 - FEES AND TRANSACTIONS WITH AFFILIATES (CONTINUED)
these services, the Fund pays SMC a fee at the annual rate of .20% of its
average daily net assets, calculated daily and payable monthly.
Bankers Trust has contractually agreed to waive its fees and reimburse
expenses of the Portfolio through January 31, 2010, to the extent necessary, to
limit all expenses to .35% of the average daily net assets of the Portfolio. In
addition, SMC has agreed to cap the annual expenses of the Fund at 1.50% of
average daily net assets, exclusive of interest, taxes, brokerage fees and
commissions, extraordinary expenses and 12b-1 fees.
The Fund has adopted Distribution Plans related to the offering of Class A, B
and C shares pursuant to Rule 12b-1 of The Act. The Plans provide for payments
at an annual rate of 0.25% of the average daily net assets of Class A shares,
0.75% of the average daily net assets of Class B shares and 0.50% of the average
daily net assets of Class C shares.
Security Distributors, Inc. ("SDI") is national distributor for the Income
Fund. For the period October 1, 1999 through September 30, 2000, SDI received
net underwriting commissions on sales of Class A shares and contingent deferred
sales charges (CDSC) on redemptions of Class B and Class C shares, after
allowances to brokers and dealers in the amounts presented in the following
table:
SDI Underwriting (Class A) $380
SDI CDSC (Class C) $106
Broker/Dealer (Class A) $10,984
Broker/Dealer (Class B) $12,663
Broker/Dealer (Class C) $3,468
Certain officers and directors of the Fund are also officers and/or directors of
Security Benefit Life Insurance Company and its subsidiaries, which include SMC
and SDI.
NOTE 3 - SHARES OF BENEFICIAL INTEREST
At September 30, 2000, there were an unlimited number of shares of beneficial
interest authorized. Transactions in shares of beneficial interest were as
follows:
Year Ended September 30, 2000
<TABLE>
<CAPTION>
Shares Shares Shares Increase (Decrease)
Sold Reinvested Redeemed Shares
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A 18,745,986 730,093 (2,178,653) 17,297,426
Class B 45,668 3,513 (2,509) 46,672
Class C 163,431 2,652 (15,794) 150,289
Period ended May 3, 1999(*) through September 30, 1999
Shares Shares Shares Increase (Decrease)
Sold Reinvested Redeemed Shares
-------------------------------------------------------------------
Class A 2,512,608 15,417 (1,954) 2,526,071
Class B 839,979 6,325 (813,923) 32,381
Class C 833,334 6,569 (820,500) 19,403
* Commencement of operations.
</TABLE>
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10
<PAGE> 12
REPORT OF INDEPENDENT AUDITORS
--------------------------------------------------------------------------------
To The Shareholders and Board of Directors
Security Income Fund - Security Capital Preservation Fund
We have audited the accompanying statement of assets and liabilities of Security
Capital Preservation Fund (the "Fund") as of September 30, 2000, and the related
statement of operations for the year then ended and the statements of changes in
net assets and the financial highlights for the year then ended and for the
period May 3, 1999 (commencement of operations) through September 30, 1999.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Security Capital Preservation Fund at September 30, 2000, the results of its
operations for the year then ended, and the changes in its net assets and its
financial highlights for the year then ended and for the period May 3, 1999
(commencement of operations) through September 30, 1999, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
November 3, 2000
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11
<PAGE> 13
SCHEDULE OF PORTFOLIO INVESTMENTS
--------------------------------------------------------------------------------
SEPTEMBER 30, 2000
PreservationPlus Income Portfolio
<TABLE>
<CAPTION>
PRINCIPAL MARKET
ASSET-BACKED SECURITIES AMOUNT VALUE
----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSET-BACKED SECURITIES - 9.3%
------------------------------
California Infrastructure PG&E,
6.38%, 9/25/08 ................................................... $ 2,000,000 $ 1,966,440
6.42%, 9/25/08 ................................................... 2,000,000 1,966,390
Chase Funding Mortgage Loan,
7.674%, 10/25/19 ................................................. 3,000,000 3,024,180
Chemical Credit Card Master Trust,
7.09%, 2/15/09.................................................... 3,000,000 3,024,360
Copelco Capital Funding Corp.,
7.12%, 8/18/03.................................................... 3,000,000 3,014,055
Providian Master Trust,
7.49%, 8/17/09 ................................................... 2,500,000 2,560,087
Residential Funding Mortgage
Securities, 8.00%, 5/25/13 ....................................... 3,000,000 3,019,995
------------
Total asset-backed securities
(cost $18,220,672) ............................................................. 18,575,507
CORPORATE DEBT - 40.7%
----------------------
FINANCIAL SERVICES - 18.1%
Abbey National PLC,
6.69%, 10/17/05 .................................................. 1,000,000 982,711
ABN Amro Bank, NV,
7.25%, 5/31/05 ................................................... 1,000,000 1,005,925
Allstate Corp.,
7.20%, 12/1/09 ................................................... 1,000,000 972,080
American General Finance,
5.875%, 12/15/05 ................................................. 1,440,000 1,355,926
Aristar, Inc.,
6.00%, 5/15/02 ................................................... 1,600,000 1,575,234
Associates Corp.,
8.55%, 7/15/09 ................................................... 1,500,000 1,579,605
Avco Financial Services,
6.00%, 8/15/02 ................................................... 425,000 417,035
Bank of Tokyo - Mitsubishi,
8.40%, 4/15/10 ................................................... 1,000,000 1,017,345
BankBoston, 6.50%, 12/19/07 ......................................... 1,000,000 951,701
Bear Stearns Company, Inc.,
7.625%, 2/1/05 ................................................... 1,000,000 1,012,470
Bombardier Capital, Inc.,
7.30%, 12/15/02 .................................................. 1,000,000 993,978
CIT Group, Inc.,
7.125%, 10/15/04 ................................................. 1,000,000 997,355
Citifinancial,
6.50%, 8/1/04 .................................................... 1,000,000 981,051
CNA Financial,
6.45%, 1/15/08 ................................................... 1,000,000 884,230
Deutsche Telekom International Finance,
7.75%, 6/15/05 ................................................... 1,000,000 1,023,691
Everest Reins Holding, Co.,
8.75%, 3/15/10 ................................................... 1,000,000 1,044,333
Ford Motor Credit Corp.,
7.50%, 6/15/03 ................................................... 1,000,000 1,009,468
7.375%, 10/28/09 ................................................. 2,000,000 1,955,760
General Electric Capital Corp.,
6.75%, 9/11/03 ................................................... 1,000,000 1,002,039
General Motors Acceptance
Corp., 7.75%, 1/19/10 ............................................ 2,000,000 2,022,820
Heller Financial Inc.,
7.875%, 5/15/03 .................................................. 1,000,000 1,015,025
Household Finance Corporation,
6.50%, 11/15/08 .................................................. 1,000,000 937,710
J.P. Morgan & Co., Inc.,
6.00%, 1/15/09 ................................................... 1,000,000 920,038
Lehman Brothers Holdings,
6.625%, 12/27/02 ................................................. 950,000 943,040
8.25%, 6/15/07 ................................................... 775,000 802,265
Merrill Lynch & Co.,
6.64%, 9/19/02 ................................................... 1,000,000 997,314
Morgan Stanley Dean Witter,
7.00%, 10/1/13 ................................................... 1,600,000 1,535,699
Paine Webber Group, Inc.,
6.375%, 5/15/04 .................................................. 1,000,000 977,028
Santander Finance Issuance,
6.80%, 7/15/05 ................................................... 1,500,000 1,466,496
Suntrust Banks, Inc.,
7.75%, 5/1/10 .................................................... 1,000,000 1,024,672
Transamerica Finance Corp.,
7.25%, 8/15/02 ................................................... 1,000,000 1,001,849
Wells Fargo & Co.,
7.25%, 8/24/05 ................................................... 1,000,000 1,012,063
Westdeutsche Landesbank NY,
6.05%, 1/15/09 ................................................... 1,000,000 913,927
------------
36,331,883
------------
INDUSTRIAL - 6.4%
Delphi Auto Systems Corp.,
6.50%, 5/1/09 .................................................... 1,000,000 914,038
News America Holdings,
8.50%, 2/15/05 ................................................... 1,000,000 1,043,724
Northrop-Grumman Corp.,
7.00%, 3/1/06 .................................................... 1,000,000 975,052
Paramount Communications,
7.50%, 1/15/02 ................................................... 1,000,000 1,003,538
Pepsi Bottling Holdings,
5.625%, 2/17/09 .................................................. 1,000,000 894,216
Raytheon Co.(144a),
7.90%, 3/1/03 .................................................... 1,000,000 1,016,893
Tele-Commun Inc.,
9.25%, 4/15/02 ................................................... 1,000,000 1,033,361
Time Warner, Inc.,
7.48%, 1/15/08 ................................................... 1,000,000 998,776
</TABLE>
See accompanying notes.
--------------------------------------------------------------------------------
12
<PAGE> 14
SCHEDULE OF PORTFOLIO INVESTMENTS
--------------------------------------------------------------------------------
SEPTEMBER 30, 2000
PreservationPlus Income Portfolio
(continued)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
CORPORATE DEBT(CONTINUED) AMOUNT VALUE
----------------------------------------------------------------------------------------
<S> <C> <C>
TYCO International Group,
5.875%, 11/1/04 ...................................... $ 1,000,000 $ 955,097
Tyson Foods Inc.,
6.75%, 6/1/05 ........................................ 1,000,000 969,865
Union Pacific Corp.,
7.25%, 11/1/08 ....................................... 1,000,000 977,120
USX Corporation,
9.375%, 2/15/12 ...................................... 1,000,000 1,109,554
Viacom, Inc.,
7.70%, 7/30/10 ....................................... 1,000,000 1,020,291
------------
12,911,525
------------
UTILITIES - 4.9%
AT&T Corp.,
6.50%, 3/15/29 ....................................... 1,000,000 832,165
Clear Channel Communications,
7.25%, 9/15/03 ....................................... 1,000,000 1,001,834
Coastal Corp,
7.75%, 6/15/10 ....................................... 1,000,000 1,014,905
Conoco Inc.,
6.35%, 4/15/09 ....................................... 1,000,000 947,877
Dynegy Holdings, Inc.,
8.125%, 3/15/05 ...................................... 1,000,000 1,025,802
GTE California, Inc.,
5.50%, 1/15/09 ....................................... 1,000,000 882,915
MCI Worldcom, Inc.,
6.95%, 8/15/06 ....................................... 1,000,000 984,894
Nigara Mohawk Power,
7.75%, 10/1/08 ....................................... 1,000,000 1,005,649
Southern Carolina Electric & Gas,
7.50%, 6/15/05 ....................................... 1,000,000 1,016,676
Tosco Corp.,
7.625%, 5/15/06 ...................................... 1,250,000 1,257,296
------------
9,970,013
------------
OTHER - 11.3%
Atlantic Richfield Bpa,
10.875%, 7/15/05 ..................................... 1,000,000 1,167,770
Compaq Computer,
7.45%, 8/1/02 ........................................ 1,000,000 1,003,899
Cox Communication, Inc.,
7.50%, 8/15/04 ....................................... 1,000,000 1,008,591
DaimlerChrysler NA Holdings:
6.59%, 6/18/02 ....................................... 1,000,000 999,424
7.125%, 4/10/03 ...................................... 1,000,000 1,002,518
Deere & Co.,
7.85%, 5/15/10 ....................................... 1,000,000 1,018,241
Delta Air Lines, 7.90%, 12/15/09 ........................ 1,000,000 957,431
Duke Capital Corp.,
7.50%, 10/1/09 ....................................... 1,000,000 1,002,585
Federated Department Stores,
6.90%, 4/1/29 ........................................ 1,000,000 783,027
Goodyear Tire & Rubber,
8.50%, 3/15/07 ....................................... 1,000,000 1,028,577
Hertz Corp.,
7.00%, 7/1/04 ........................................ 850,000 839,834
Kroger Co.,
7.45%, 3/1/08 ........................................ 1,000,000 967,269
Lockheed Martin Corporation,
7.25%, 5/15/06 ....................................... 1,137,000 1,126,196
Marriot International,
6.875%, 11/15/05 ..................................... 1,000,000 966,446
Occidental Petroleum,
7.375%, 11/15/08 ..................................... 1,000,000 987,262
Phillips Petro,
8.50%, 5/25/05 ....................................... 1,000,000 1,056,080
PP&L Capital Funding, Inc.,
8.375%, 6/15/07 ...................................... 1,000,000 1,007,045
Seagrams & Sons,
6.25%, 12/15/01 ...................................... 1,000,000 988,951
Sears Roebuck Acceptance,
6.00%, 3/20/03 ....................................... 1,000,000 971,635
Sprint Capital Corp.,
6.875%, 11/15/28 ..................................... 1,000,000 853,295
TRW, Inc., 6.50%, 6/1/02 ................................ 1,000,000 984,271
Vodafone Airtouch PLC,
7.75%, 2/15/10 ....................................... 1,000,000 1,019,210
Wal-Mart Stores,
6.875%, 8/10/09 ...................................... 1,000,000 987,450
-----------
(22,727,007)
-----------
Total corporate debt (cost $80,879,930) ................................ (81,940,428)
-----------
FOREIGN DEBT- 2.2%
Celulosa Arauco y Constitu,
6.75%, 12/15/03 ...................................... 1,000,000 962,445
Corp Andina de Fomento,
7.75%, 3/1/04 ........................................ 1,000,000 1,007,887
Hanson Overseas B.V.,
7.375%, 1/15/03 ...................................... 1,000,000 1,003,481
HSBC Holding PLC,
7.50%, 7/15/09 ....................................... 1,000,000 995,530
Koninklijke Kpn NV (144a),
7.50%, 10/1/05 ....................................... 500,000 502,250
-----------
Total foreign debt (cost $4,448,865) ................................... 4,471,593
-----------
</TABLE>
See accompanying notes.
--------------------------------------------------------------------------------
13
<PAGE> 15
SCHEDULE OF PORTFOLIO INVESTMENTS
--------------------------------------------------------------------------------
SEPTEMBER 30, 2000
PreservationPlus Income Portfolio
(continued)
<TABLE>
<CAPTION>
COLLATERALIZED MORTGAGE PRINCIPAL MARKET
OBLIGATIONS AMOUNT VALUE
-----------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS - 14.5%
-------------------------------------------
<S> <C> <C>
Bank of America Mortgage Securities,
5.90%, 4/25/29 ........................................ $ 3,000,000 $ 2,873,220
Bear Stearns Commercial
Mortgage Securities:
7.64%, 2/15/09 ........................................ 112,485 115,611
7.78%, 2/15/10 ........................................ 2,000,000 2,079,858
7.11%, 1/15/32 ........................................ 1,000,000 1,002,500
Chase Mortgage Finance Corp.,
6.75%, 8/25/29 ........................................ 3,000,000 2,898,060
Citigroup Mortgage Securities, Inc.,
6.50%, 7/25/28 ........................................ 3,000,000 2,899,998
First Union, Lehman Brothers Bank
of America,
6.28%, 6/18/07 ........................................ 348,659 341,738
First Union National Bank
Commercial Mortgage,
7.184%, 9/15/08 ....................................... 1,176,612 1,187,697
GE Capital Mortgage Services, Inc.,
6.00%, 7/25/29 ........................................ 885,267 846,276
LB-UBS Commercial Mortgage Trust,
7.95%, 7/15/09 ........................................ 2,483,604 2,593,794
LB Comm Conduit Mortgage Trust,
6.41%, 8/15/07 ........................................ 2,938,963 2,882,878
Morgan Stanley Capital, Inc.,
6.76%, 11/15/08 ....................................... 2,589,508 2,561,515
Vendee Mortgage Trust,
7.50%, 8/15/17 ........................................ 134,958 135,133
PNC Mortgage Acceptance Corp.,
7.52%, 7/15/08 ........................................ 1,974,920 2,015,935
Residential Funding Mortgage Securities:
6.75%, 4/25/29 ........................................ 890,490 856,683
7.10%, 12/25/29 ....................................... 3,000,000 2,936,790
Norwest Asset Securities Corp.,
6.75%, 8/25/29 ........................................ 949,991 929,457
----------
Total Collateralized Mortgage
Obligations (cost $28,608,339) ........................................ 29,157,143
----------
MORTGAGE BACKED SECURITIES - 16.2%
----------------------------------
FGLMC GOLD,
7.50%, 10/1/24 ........................................ 4,530,948 4,557,834
FHLMC GOLD,
8.00%, 3/1/27 ......................................... 883,167 897,848
FNCL,
8.00%, 5/1/25 ......................................... 3,957,620 4,012,531
8.00%, 9/1/26 ......................................... 2,198,135 2,228,634
7.50%, 7/1/27 ......................................... 2,048,096 2,045,151
7.50%, 9/1/27 ......................................... 5,497,106 5,489,201
8.00%, 9/1/27 ......................................... 5,502,180 5,578,523
6.50%, 9/1/28 ......................................... 953,664 916,706
PRINCIPAL
AMOUNT
MORTGAGE BACKED OR NUMBER MARKET
SECURITIES (CONTINUED) OF SHARES VALUE
-------------------------------------------------------------------------------------------
6.50%, 10/1/28 ........................................ $ 991,535 $ 953,110
6.50%, 12/1/28 ........................................ 950,530 913,694
FNMA, 7.369%, 1/17/13 .................................... 4,881,987 4,985,180
-------------
Total mortgage backed securities
(cost $32,397,584) ................................... 32,578,412
-------------
U.S. TREASURY SECURITY - 0.2%
-----------------------------
U.S. Treasury Note,
5.25%, 5/15/04
(cost $431,613) ...................................... 440,000 430,513
-------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS - 2.5%
-------------------------------------------
FHLB, 6.875%, 7/18/02 .................................... 1,000,000 1,006,398
FHLMC, 6.25%, 7/15/04 .................................... 4,000,000 3,961,912
-------------
Total U.S. government &
agency obligations (cost $4,895,298) .................................. 4,968,310
-------------
SHORT-TERM INSTRUMENTS - 14.4%
------------------------------
U.S. TREASURY BILLS - 0.8%
U.S. Treasury Bill,
5.945%, 10/19/00 ...................................... 1,675,000 1,670,436
INVESTMENTS IN AFFILIATED INVESTMENT COMPANIES -
MUTUAL FUNDS - 13.6%
Cash Management Institutional, ........................... 27,349,793 27,349,793
-------------
Total short-term instruments
(cost $29,020,351) ..................................................... 29,020,229
-------------
Total investments
(cost $198,902,652) - 100.0% ........................................... 201,142,135
-------------
WRAPPER AGREEMENTS(*)
Bank of America NT&SA ..................................................... (289,672)
Caisse Des Depots et Consignation ......................................... (932,194)
TransAmerica Life Insurance
& Annuity Company ...................................................... (430,302)
-------------
Total Wrapper Agreements - (0.9%) ...................................... (1,652,168)
-------------
Other assets in excess of liabilities - 0.9% ........................... 1,660,506
-------------
(Net assets - 100.0% ................................................... $ 201,150,473
=============
</TABLE>
(*)Wrapper Agreements - Each Wrapper Agreement obligates the wrapper provider to
maintain the book value of a portion of the Portfolio's assets up to a
specified maximum dollar amount, upon the occurrence of certain specified
events.
The following abbreviations are used in portfolio descriptions:
FGLMC - Federal Government Loan Mortgage Company
FHLMC - Federal Home Loan Mortgage Corporation
FNCL - Federal National Mortgage Association Class Loan
FNMA - Federal National Mortgage Association
See accompanying notes.
--------------------------------------------------------------------------------
14
<PAGE> 16
--------------------------------------------------------------------------------
PRESERVATIONPLUS INCOME PORTFOLIO
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES September 30, 2000
-----------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Investment in Unaffiliated Issuers at Value (Cost $171,552,859) .............. $173,792,342
Investment in Affiliated Investment Company, at Value (Cost $27,349,793) ..... 27,349,793
Interest Receivable(1) ....................................................... 2,362,139
Cash ......................................................................... 834,702
Unrealized Appreciation on Forward Foreign Currency Contracts ................ 101,634
Prepaid Expenses and Other ................................................... 71,734
Due from Bankers Trust ....................................................... 136,657
------------
Total Assets ................................................................... 204,649,001
------------
LIABILITIES
Payable for Securities Purchased ............................................. 1,504,494
Wrapper Agreements ........................................................... 1,652,168
Variation Margin Payable on Futures Transactions ............................. 244,836
Accrued Expenses and Other ................................................... 97,030
------------
Total Liabilities .............................................................. 3,498,528
------------
NET ASSETS ..................................................................... $201,150,473
============
</TABLE>
(1)Includes $142,450 from the Portfolio's investment in Cash Management
Institutional.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS For the Year Ended September 30, 2000
-----------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest Income ........................................................................... $ 7,781,365
Credited Rate Interest .................................................................... 567,056
-----------
Total Investment Income ..................................................................... 8,348,421
-----------
EXPENSES:
Advisory Fees ............................................................................. 721,834
Wrapper Fees .............................................................................. 221,268
Professional Fees ......................................................................... 55,476
Administration and Service Fees ........................................................... 55,317
Trustees Fees ............................................................................. 3,261
Miscellaneous ............................................................................. 16,187
-----------
Total Expenses .............................................................................. 1,073,343
Less: Fee Waivers or Expense Reimbursements ................................................. (687,148)
-----------
Net Expenses ............................................................................ 386,195
-----------
NET INVESTMENT INCOME ....................................................................... 7,962,226
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, FOREIGN CURRENCIES,
FORWARD FOREIGN CURRENCY TRANSACTIONS, FUTURES AND WRAPPER AGREEMENTS
Net Realized Gain (Loss) from:
Investment Transactions ............................................................... (742,746)
Foreign Currency Transactions ......................................................... 82,319
Forward Foreign Currency Transactions ................................................. (78,093)
Futures Transactions .................................................................. 793,273
Net Change in Unrealized Appreciation/Depreciation on Investments, Foreign Currency,
Forward Foreign Currency and Futures Transactions ..................................... 2,575,837
Net Change in Unrealized Appreciation/Depreciation on Wrapper Agreements ................ (2,630,590)
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, FOREIGN CURRENCIES,
FORWARD FOREIGN CURRENCY TRANSACTIONS, FUTURES AND WRAPPER AGREEMENTS ..................... --
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS .................................................. $ 7,962,226
===========
</TABLE>
See notes to financial statements
--------------------------------------------------------------------------------
15
<PAGE> 17
--------------------------------------------------------------------------------
PRESERVATIONPLUS INCOME PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
For the December 23, 1998(1)
year ended through
September 30, 2000 September 30, 1999
------------------ ------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM:
OPERATIONS
Net Investment Income ................................................. $ 7,962,226 $ 597,975
Net Realized Gain (Loss) from Investment, Foreign Currency,
Forward Foreign Currency and Futures Transactions ................... 54,753 (32,820)
Net Change in Unrealized Appreciation/Depreciation on Investments,
Foreign Currencies, Forward Foreign Currencies and
Futures ............................................................. 2,575,837 (329,564)
Net Unrealized Appreciation/Depreciation on Wrapper Agreements ........ (2,630,590) 362,384
------------- -------------
Net Increase in Net Assets from Operations .............................. 7,962,226 597,975
------------- -------------
CAPITAL TRANSACTIONS
Proceeds from Capital Invested ........................................ 186,286,635 44,761,026
Value of Capital Withdrawn ............................................ (19,193,385) (19,264,004)
------------- -------------
Net Increase in Net Assets from Capital Transactions .................... 167,093,250 25,497,022
------------- -------------
TOTAL INCREASE IN NET ASSETS ............................................ 175,055,476 26,094,997
NET ASSETS
Beginning of Period ................................................... 26,094,997 --
------------- -------------
End of Period ......................................................... $ 201,150,473 $ 26,094,997
============= =============
</TABLE>
(1) Commencement of operations
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Contained below are selected supplemental data and ratios to average net assets
for the periods indicated for the PreservationPlus Income Portfolio.
<TABLE>
<CAPTION>
For the Period
For the December 23, 1998(1)
year ended through
September 30, 2000 September 30, 1999
------------------ ------------------
<S> <C> <C>
SUPPLEMENTAL DATA AND RATIOS
Net Assets, End of Period (000s omitted) $ 201,150 $ 26,095
Ratios to Average Net Assets
Net Investment Income ................ 7.33% 6.47%(2)
Expenses After Waivers ............... 0.35% 0.49%(2)
Expenses Before Waivers .............. 0.99% 1.41%(2)
Portfolio Turnover Rate ................ 0%(3) 149%
</TABLE>
(1) Commencement of operations.
(2) Annualized.
(3) Less than 1%.
See notes to financial statements
--------------------------------------------------------------------------------
16
<PAGE> 18
----------------------------------------------------------------------------
PRESERVATIONPLUS INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
----------------------------------------------------------------------------
NOTE 1 -- ORGANIZATION AND SIGNIFICANT
ACCOUNTING POLICIES
A. ORGANIZATION
The BT Investment Portfolios (the "Portfolio Trust") is registered under the
Investment Company Act of 1940 (the "Act"), as amended, as an open-end
management investment company. The Portfolio Trust was organized as an
unincorporated trust under the laws of New York. The PreservationPlus Income
Portfolio (the "Portfolio"), one of the series of the Portfolio Trust, was
organized and began operations on December 23, 1998. The Declaration of Trust
permits the Board of Trustees (the "Trustees") to issue beneficial interests in
the Portfolio.
B. VALUATION OF SECURITIES
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 are normally
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 Company
pursuant to procedures adopted by the Portfolio's Board of Trustees.
Wrapper Agreements generally will be equal to the difference between the Book
Value and Market Value (plus the crediting rate adjustment) on the applicable
covered assets and will either be reflected as an asset or a liability of the
Portfolio. The Portfolio's Board of Trustees, in performing its fair value
determination of the Portfolio's Wrapper Agreements, considers the
creditworthiness and the ability of Wrapper Providers to pay amounts due under
the Wrapper Agreements.
C. SECURITIES TRANSACTIONS AND INTEREST INCOME
Securities transactions are accounted for on a trade date basis. Interest income
is recorded on the accrual basis and includes amortization of premium and
accretion of discount on investments. Realized gains and losses from securities
transactions are recorded on the identified cost basis. The credited rate
interest represents the actual interest earned on covered assets under the
Portfolio's Wrapper Agreements (the "agreements") plus or minus an adjustment
for an amount receivable from or payable to the wrapper provider based on
fluctuations in the market value of covered assets under the agreements.
All of the net investment income and net realized and unrealized gains and
losses (including the Wrapper Agreements) of the Portfolio are allocated pro
rata to the investors in the Portfolio on a daily basis.
D. TBA PURCHASE COMMITMENTS
The Portfolio may enter into "TBA" (to be announced) commitments to purchase
securities for a fixed price at a future date, typically not exceeding 45 days.
TBA purchase commitments may be considered securities in themselves, and involve
a risk of loss if the value of the security to be purchased declines prior to
settlement date. This risk is in addition to the risk of decline in the value of
the Portfolio's other assets.
Unsettled TBA purchase commitments are valued at the current market value of the
underlying securities, according to the procedures described under "Valuation of
Securities" above.
E. FOREIGN CURRENCY TRANSACTIONS
The books and records of the Portfolio are maintained in U.S. dollars. All
assets and liabilities initially expressed in foreign currencies are converted
into U.S. dollars at prevailing exchange rates. Purchases and sales of
investment securities, dividend and interest income, and certain expenses are
translated at the rates of exchange prevailing on the respective dates of such
transactions.
F. FORWARD FOREIGN CURRENCY CONTRACTS
The Portfolio may enter into forward foreign currency contracts for the purpose
of settling specific purchases or sales of securities denominated in a foreign
currency or with respect to the Portfolio's investments. The net U.S. dollar
value of foreign currency underlying all contractual commitments held by the
Portfolio and the resulting unrealized appreciation or depreciation are
determined using prevailing exchange rates. With respect to forward foreign
currency contracts, losses in excess of amounts recognized in the Statement of
Assets and Liabilities may arise due to changes in the value of the foreign
currency or if the counterparty does not perform under the contract.
G. OPTION CONTRACTS
The Portfolio may enter into option contracts. Upon the purchase of a put option
or a call option by the Portfolio, the premium paid is recorded as an investment
and marked-to-market daily to reflect the current market value. When a purchased
option expires, the Portfolio will realize a loss in the amount of the cost of
the option. When the Portfolio enters into a closing sale transaction, the
Portfolio will realize a gain or loss depending on whether the sale proceeds
from the closing sale transaction are greater or less than the cost of the
option. When the Portfolio exercises a put option, it realizes a gain or loss
from the sale of the underlying security and the proceeds from such sale will be
decreased by the premium originally paid. When the Portfolio exercises a call
option, the cost of the security which the Portfolio purchases upon exercise
will be increased by the premium originally paid.
H. FUTURES CONTRACTS
The Portfolio may enter into financial futures contracts, which are contracts to
buy or sell a standard quantity of securities at a specified price on a future
date. The Portfolio is required to make initial margin deposits either in cash
or securities in an amount equal to a certain percentage of the contract amount.
Variation margin payments are made or received by the Portfolio each day,
depending on the daily fluctuations in the value of the underlying security, and
are recorded for financial statement purposes as unrealized gains or losses by
the Portfolio.
Futures contracts involve certain risks. These risks could include a lack of
correlation between the futures contract and the corresponding securities
market, a potential lack of liquidity in the secondary market and incorrect
assessments of market trends which may result in poorer overall performance than
if a futures contract had not been entered into. Futures contracts are valued at
the settlement price established each day by the board of trade or exchange on
which they are traded.
I. FEDERAL INCOME TAXES
The Portfolio is considered a partnership under the Internal Revenue Code.
Therefore, no federal income tax provision is necessary.
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PRESERVATIONPLUS INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
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J. ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts in the financial statements.
Actual results could differ from those estimates.
NOTE 2 -- FEES AND TRANSACTIONS WITH AFFILIATES
The Portfolio has entered into an Administration and Services Agreement with
Bankers Trust Company ("Bankers Trust"), an indirect wholly owned subsidiary of
Deutsche Bank AG. Under this agreement, Bankers Trust provides administrative
and custody services to the Portfolio. These services are provided in return for
a fee computed daily and paid monthly at an annual rate of .05% of the
Portfolio's average daily net assets.
The Portfolio has entered into an Advisory Agreement with Bankers Trust. Under
this agreement, the Portfolio pays Bankers Trust a fee computed daily and paid
monthly at an annual rate of .70% of the Portfolio's average daily net assets,
less advisor fees paid for the pro rata amount due to investment in Cash
Management Institutional.
Bankers Trust has contractually agreed to waive its fees and reimburse expenses
of the Portfolio through January 31, 2010, to the extent necessary, to limit all
expenses to .35% of the average daily net assets of the Portfolio.
The Portfolio may invest in Cash Management Institutional ("Cash Management"),
an open-end management investment company managed by Bankers Trust. Cash
Management is offered as a cash management option to the Portfolio and other
accounts managed by Bankers Trust. Distributions from Cash Management to the
Portfolio for the year ended September 30, 2000 amounted to $1,146,506, and are
included in interest income.
At September 30, 2000, the Portfolio was a participant with other affiliated
entities in a revolving credit facility in the amount of $200,000,000, which
expires April 27, 2001. A commitment fee on the average daily amount of the
available commitment is payable on a quarterly basis and apportioned among all
participants based on net assets. No amounts were drawn down or outstanding for
the Portfolio under the credit facility for the year ended September 30, 2000.
NOTE 3 -- PURCHASES AND SALES OF
INVESTMENT SECURITIES
The aggregate cost of purchases and proceeds from sales of investments, other
than short-term obligations, for the year ended September 30, 2000, were
$151,662,183 and $250,000, respectively.
For federal income tax purposes, the tax basis of investments held at September
30, 2000, was $198,902,652. The aggregate gross unrealized appreciation was
$2,624,555, and the aggregate gross unrealized depreciation for all investments
was $385,072 as of September 30, 2000.
NOTE 4 -- WRAPPER AGREEMENTS
The Portfolio will enter into Wrapper Agreements with insurance companies, banks
or other financial institutions ("Wrapper Providers") that are rated, at the
time of purchase, in one of the top two long-term rating categories by Moody's
or S&P. A wrapper agreement is a derivative instrument that is designed to
protect the portfolio from investment losses and, under most circumstances,
permit the Fund to maintain a constant NAV per share. There is no active trading
market for Wrapper Agreements, and none is expected to develop; therefore, they
are considered illiquid.
A default by the issuer of a Portfolio Security or a Wrapper Provider on its
obligations may result in a decrease in the value of the Portfolio assets. The
Wrapper Agreements generally do not protect the Portfolio from loss if an issuer
of Portfolio Securities defaults on payments of interest or principal.
Additionally, a Fund shareholder may realize more or less than the actual
investment return on the Portfolio Securities depending upon the timing of the
shareholder's purchases and redemption of Shares, as well as those of other
shareholders.
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PRESERVATIONPLUS INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
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NOTE 5 -- FUTURES CONTRACTS
As of September 30, 2000, the Portfolio had the following obligations under
these financial instruments.
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
TYPES OF FUTURES EXPIRATION CONTRACTS POSITION MARKET VALUE (DEPRECIATION)
<S> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------
S&P/Toronto Stock Exchange 60 Index Futures December 18, 2000 85 Long $ 7,057,713 $(350,508)
SPI Futures January 2, 2000 58 Long 2,610,019 (23,573)
U.S. 10 Year Note Futures December 20, 2000 32 Long 3,207,000 4,856
Euro Bond Futures December 8, 2000 20 Long 1,857,700 3,898
CAC 40 10 Euro Index Futures November 1, 2000 20 Long 1,110,121 (62,638)
Long Gilt Futures December 28, 2000 8 Long 1,338,039 6,620
DAX Index Futures December 18, 2000 4 Long 606,355 (31,112)
Topix Index Futures December 8, 2000 (3) Short (408,220) 3,712
S&P 500 Index Futures December 15, 2000 (16) Short (5,814,800) 246,104
FTSE 100 Index Futures December 18, 2000 (25) Short (2,346,692) 102,366
Australian 10 Year Bond Futures December 18, 2000 (41) Short (3,171,966) 23,057
Canadian 10 Year Bond Futures December 29, 2000 (99) Short (6,689,083) (22,241)
------------------------------------------------------------------------------------------------------------------
Total $ (99,459)
------------------------------------------------------------------------------------------------------------------
</TABLE>
The use of futures contracts involves elements of market risk and risks in
excess of the amount recognized in the Statement of Assets and Liabilities. The
"market value" presented above represents the Portfolio's total exposure in such
contracts at September 30, 2000, whereas only the net unrealized appreciation
(depreciation) is reflected in the Portfolio's net assets.
NOTE 6 -- FORWARD FOREIGN CURRENCY CONTRACTS
As of September 30, 2000, the Portfolio had the following open forward foreign
currency contracts:
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
CONTRACTS IN EXCHANGE FOR SETTLEMENT DATE VALUE (U.S.$) (DEPRECIATION) (U.S.$)
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------------
CONTRACTS TO DELIVER
-------------------------------------------------------------------------------------------------------------------
Australian Dollar 1,170,000 U.S. Dollars $ 661,202 10/6/2000 $ 633,619 $ 27,583
British Pound 584,000 U.S. Dollars 845,801 10/6/2000 863,444 (17,643)
Canadian Dollar 7,419,000 U.S. Dollars 5,008,946 10/5/2000 4,930,770 78,176
Japanese Yen 5,487,000 U.S. Dollars 337,409 10/6/2000 328,401 9,008
-------------------------------------------------------------------------------------------------------------------
Total $ 97,124
-------------------------------------------------------------------------------------------------------------------
CONTRACTS TO RECEIVE
-------------------------------------------------------------------------------------------------------------------
Euro 2,408,000 U.S. Dollars $2,120,365 10/6/2000 $2,124,875 $ 4,510
-------------------------------------------------------------------------------------------------------------------
Total 4,510
-------------------------------------------------------------------------------------------------------------------
Total Unrealized Appreciation $101,634
-------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 7 -- PORTFOLIO NAME CHANGE
On January 31, 2000, the Portfolio changed its name from BT PreservationPlus
Income Portfolio to PreservationPlus Income Portfolio.
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PRESERVATIONPLUS INCOME PORTFOLIO
REPORT OF INDEPENDENT AUDITORS
The Shareholders and Board of Trustees
BT Investment Portfolios - PreservationPlus Income Portfolio
We have audited the accompanying statement of assets and liabilities of
PreservationPlus Income Portfolio (the "Portfolio") as of September 30, 2000,
and the related statement of operations for the year then ended and the
statements of changes in net assets and the financial highlights for the year
then ended and for the period December 23, 1998 (commencement of operations)
through September 30, 1999. These financial statements and financial highlights
are the responsibility of the Portfolio's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
confirmation of securities owned as of September 30, 2000, by correspondence
with the Portfolio's custodian and brokers. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
PreservationPlus Income Portfolio at September 30, 2000, the results of its
operations for the year then ended and the changes in its net assets and its
financial highlights for the year then ended and for the period December 23,
1998 (commencement of operations) through September 30, 1999, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
November 3, 2000
--------------------------------------------------------------------------------
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THE SECURITY GROUP OF
MUTUAL FUNDS
Security Growth and Income Fund
Security Equity Fund
- Equity Series
- Global Series
- Total Return Series
- Social Awareness Series
- Value Series
- Small Company Series
- Enhanced Index Series
- International Series
- Select 25 Series
- Large Cap Growth Series
- Technology Series
Security Ultra Fund
Security Income Fund
- Diversified Income Series
- High Yield Series
- Capital Preservation Series
Security Municipal Bond Fund
Security Cash Fund
This report is submitted for the general information of the shareholders of the
Funds. The report is not authorized for distribution to prospective investors in
the Funds unless preceded or accompanied by an effective prospectus which
contains details concerning the sales charges and other pertinent information.
----------------------------------
[LOGO] SECURITY DISTRIBUTORS, INC.
----------------------------------
700 SW Harrison St.
Topeka, KS 66636-0001
SECURITY FUNDS
OFFICERS AND DIRECTORS
DIRECTORS
Donald A. Chubb, Jr.
John D. Cleland
Penny A. Lumpkin
Mark L. Morris, Jr., D.V.M.
Maynard F. Oliverius
James R. Schmank
OFFICERS
John D. Cleland, Chairman of the Board
James R. Schmank, President
Steven M. Bowser, Vice President
Thomas A. Swank, Vice President
Amy J. Lee, Secretary
Christopher D. Swickard, Assistant Secretary
Brenda M. Harwood, Treasurer
SDI 803 (R9-00)
46-08031-00
