<PAGE>
CORPORATE BOND FUND AND LIMITED MATURITY BOND FUND OF
SECURITY INCOME FUND
700 SW HARRISON STREET
TOPEKA, KS 66636
(800) 888-2461
April 3, 2000
Dear Shareholder:
Your Board of Directors has called a special meeting of Shareholders of the
Corporate Bond Fund and Limited Maturity Bond Fund of Security Income Fund, to
be held at 9:30 a.m., local time, on April 26, 2000, at the offices of the
Funds, Security Benefit Group Building, 700 SW Harrison Street, Topeka, Kansas
66636.
The Board of Directors of Security Income Fund has approved a reorganization of
each of the Corporate Bond Fund and Limited Maturity Bond Fund, into the
Diversified Income Fund of Security Income Fund, which is managed by Security
Management Company, LLC and is part of the Security Group of Mutual Funds (the
"Reorganization"). The Diversified Income Fund of Security Income Fund has
investment objectives and policies that are similar in many respects to those of
the Corporate Bond Fund and Limited Maturity Bond Fund of Security Income Fund.
The Reorganization is expected to result in operating expenses that are lower
for shareholders.
You are asked to vote to approve a Plan of Reorganization. The accompanying
document describes the proposed transaction and compares the policies and
expenses of each of the Funds for your evaluation.
After careful consideration, the Board of Directors of Security Income Fund
unanimously approved this proposal with respect to each of its Corporate Bond
Fund and Limited Maturity Bond Fund and recommended that shareholders of each of
those Funds vote "FOR" the proposal.
A Proxy Statement/Prospectus that describes the Reorganization is enclosed. We
urge you to vote your shares by completing and returning the enclosed proxy in
the envelope provided, or vote by Internet or telephone, at your earliest
convenience.
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. IN ORDER TO
AVOID THE ADDED COST OF FOLLOW-UP SOLICITATIONS AND POSSIBLE ADJOURNMENTS,
PLEASE TAKE A FEW MINUTES TO READ THE PROXY STATEMENT/PROSPECTUS AND CAST YOUR
VOTE. IT IS IMPORTANT THAT YOUR VOTE BE RECEIVED NO LATER THAN APRIL 25, 2000.
The Funds are using Shareholder Communications Corporation, a professional proxy
solicitation firm, to assist shareholders in the voting process. As the date of
the meeting approaches, if we have not already heard from you, you may receive a
telephone call from Shareholder Communications Corporation reminding you to
exercise your right to vote.
We appreciate your participation and prompt response in this matter and thank
you for your continued support.
Sincerely,
James R. Schmank
President
<PAGE>
Corporate Bond Fund and Limited Maturity Bond Fund of
Security Income Fund
700 SW Harrison Street
Topeka, KS 66636
(800) 888-2461
NOTICE OF SPECIAL MEETINGS OF SHAREHOLDERS OF
CORPORATE BOND FUND AND LIMITED MATURITY BOND FUND
OF SECURITY INCOME FUND
TO BE HELD ON APRIL 26, 2000
To the Shareholders:
Special meetings of Shareholders of the Corporate Bond Fund and the Limited
Maturity Bond Fund of Security Income Fund will be held on April 26, 2000 at
9:30 a.m., local time, at the Security Benefit Group Building, 700 SW Harrison
Street, Topeka, Kansas 66636.
The purposes of the special meeting of the Corporate Bond Fund of Security
Income Fund are as follows:
1. To approve a Plan of Reorganization providing for the acquisition of all of
the assets and liabilities of the Corporate Bond Fund by the Diversified
Income Fund of Security Income Fund solely in exchange for shares of the
Diversified Income Fund, followed by the complete liquidation of the
Corporate Bond Fund; and
2. To transact such other business as may properly come before the special
meeting of Shareholders or any adjournments thereof.
The purposes of the special meeting of the Limited Maturity Bond Fund of
Security Income Fund are as follows:
1. To approve a Plan of Reorganization providing for the acquisition of all of
the assets and liabilities of the Limited Maturity Bond Fund by the
Diversified Income Fund of Security Income Fund solely in exchange for
shares of the Diversified Income Fund, followed by the complete liquidation
of the Limited Maturity Bond Fund; and
2. To transact such other business as may properly come before the special
meeting of Shareholders or any adjournment thereof.
Shareholders of record at the close of business on February 28, 2000 are
entitled to notice of, and to vote at, their respective meetings. Your attention
is called to the accompanying Proxy Statement/Prospectus. Regardless of whether
you plan to attend your meeting, PLEASE COMPLETE, SIGN AND RETURN PROMPTLY THE
ENCLOSED PROXY CARD OR VOTE BY TELEPHONE OR INTERNET so that a quorum will be
present and a maximum number of shares may be voted. If you are present at your
meeting, you may change your vote, if desired, at that time.
By Order of the Board of Directors
Amy J. Lee
Secretary
April 3, 2000
<PAGE>
TABLE OF CONTENTS
INTRODUCTION............................................................... 3
SUMMARY.................................................................... 4
The Proposed Reorganization............................................. 4
Purchase, Redemption, and Exchange Information.......................... 5
Federal Income Tax Consequences of the Reorganization................... 5
COMPARISON OF RISKS INVOLVED IN INVESTING IN THE FUNDS..................... 5
INVESTMENT OBJECTIVES AND POLICIES......................................... 6
Comparison of Objectives and Primary Investment Strategies.............. 6
Comparison of Portfolio Characteristics................................. 8
Relative Performance.................................................... 8
Comparisons of Securities and Investment Techniques..................... 9
COMPARISON OF FEES AND EXPENSES............................................ 12
Operating Expenses...................................................... 12
General Information..................................................... 14
ADDITIONAL INFORMATION ABOUT DIVERSIFIED INCOME FUND....................... 14
Investment Manager...................................................... 14
Investment Personnel.................................................... 14
Performance of Diversified Income Fund.................................. 15
INFORMATION ABOUT THE REORGANIZATION....................................... 16
The Reorganization Plan................................................. 16
Reasons for the Reorganization.......................................... 16
Board Consideration..................................................... 17
Tax Considerations...................................................... 17
Expenses of the Reorganization.......................................... 17
ADDITIONAL INFORMATION ABOUT THE FUNDS..................................... 17
Form of Organization.................................................... 17
Dividends and Other Distributions....................................... 18
GENERAL INFORMATION ABOUT THE PROXY STATEMENT.............................. 18
Solicitation of Proxies................................................. 18
Voting Rights........................................................... 18
Other Matters to Come Before the Special Meeting........................ 19
Shareholder Proposals................................................... 19
Reports to Shareholders................................................. 19
MORE INFORMATION REGARDING THE FUNDS....................................... 20
APPENDIX A................................................................. 30
APPENDIX B................................................................. 39
APPENDIX C................................................................. 40
<PAGE>
PROXY STATEMENT/PROSPECTUS
SECURITY INCOME FUND
700 SW HARRISON STREET
TOPEKA, KANSAS 66636
(800) 888-2461
SPECIAL MEETINGS OF SHAREHOLDERS TO BE HELD ON
APRIL 26, 2000
CORPORATE BOND FUND AND LIMITED MATURITY BOND FUND
OF SECURITY INCOME FUND
relating to the reorganization into
DIVERSIFIED INCOME FUND (FORMERLY "U.S. GOVERNMENT FUND")
OF SECURITY INCOME FUND(COLLECTIVELY, THE "FUNDS")
INTRODUCTION
This Proxy Statement/Prospectus provides you with information about the proposed
transactions. The transactions involve the transfer of all of the assets and
liabilities of Corporate Bond Fund ("Corporate Bond Fund") and Limited Maturity
Bond Fund ("Limited Maturity Bond Fund") to Diversified Income Fund
("Diversified Income Fund") (formerly "U.S. Government Fund") of Security Income
Fund, an open-end investment company, solely in exchange for shares of
Diversified Income Fund (the "Reorganization"). The Corporate Bond Fund and/or
Limited Maturity Bond Fund would then distribute to you your portion of the
shares of Diversified Income Fund it received in the Reorganization. The result
would be a liquidation of Corporate Bond Fund and Limited Maturity Bond Fund.
You would receive shares of the Diversified Income Fund having an aggregate
value equal to the aggregate value of the shares of Corporate Bond Fund and/or
Limited Maturity Bond Fund held by you as of the close of business on the
business day preceding the closing of the Reorganization. You are being asked to
vote on the Plan of Reorganization through which these transactions would be
accomplished.
Because you, as a shareholder of Corporate Bond Fund and/or Limited Maturity
Bond Fund are being asked to approve a transaction that will result in your
holding shares of Diversified Income Fund, this Proxy Statement also serves as a
Prospectus for Diversified Income Fund.
This Proxy Statement/Prospectus, which you should retain for future reference,
contains important information about Diversified Income Fund that you should
know before investing. A Statement of Additional Information dated April 3,
2000, containing additional information about the Reorganization has been filed
with the SEC and is available, without charge, by calling (800) 888-2461. For a
more detailed discussion of the investment objectives, policies, restrictions
and risks of each of the Funds, see the Prospectus (the "Security Income Fund
Prospectus") and the Statement of Additional Information for each of the Funds
dated April 30, 1999, as supplemented November 1, 1999 and February 7, 2000,
which may be obtained, without charge, by calling (800) 888-2461. Each of the
Funds also provides periodic reports to its shareholders, which highlight
certain important information about the Funds, including investment results and
financial information. The annual report for the Funds dated December 31, 1999,
is included herewith and is incorporated herein by reference.
You may also obtain proxy materials, reports and other information filed by
Diversified Income Fund from the SEC's Public Reference Room (1-800-SEC-0330) or
from the SEC's internet website at www.sec.gov.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES, OR DETERMINED THAT THIS PROXY STATEMENT/PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
DATE: APRIL 3, 2000
<PAGE>
SUMMARY
You should read this entire Proxy Statement/Prospectus carefully. For additional
information, you should consult the Security Income Fund Prospectus and the Plan
of Reorganization, which is attached hereto as Appendix A.
THE PROPOSED REORGANIZATION -- On February 4, 2000, the Board of Directors of
Security Income Fund approved with respect to each of the Funds a Plan of
Reorganization (the "Reorganization Plan"). Subject to approval of Corporate
Bond Fund shareholders, the Reorganization Plan provides for:
o the transfer of all of the assets of Corporate Bond Fund to Diversified
Income Fund, in exchange for shares of Diversified Income Fund;
o the assumption by Diversified Income Fund of all of the liabilities of
Corporate Bond Fund;
o the distribution of shares of the Diversified Income Fund to the shareholders
of Corporate Bond Fund; and
o complete liquidation of Corporate Bond Fund.
Subject to approval of Limited Maturity Bond Fund shareholders, the
Reorganization Plan provides for:
o the transfer of all of the assets of Limited Maturity Bond Fund to
Diversified Income Fund, in exchange for shares of Diversified Income Fund;
o the assumption by Diversified Income Fund of all of the liabilities of
Limited Maturity Bond;
o the distribution of shares of the Diversified Income Fund to the shareholders
of Limited Maturity Bond Fund; and
o complete liquidation of Limited Maturity Bond Fund.
The Reorganization is expected to be effective upon the opening of business on
May 1, 2000, or on a later date as the parties may agree (the "Closing"). As a
result of the Reorganization, each shareholder of Class A and Class B shares of
Corporate Bond Fund and Limited Maturity Bond Fund would become a shareholder of
the same class of shares of Diversified Income Fund. Each shareholder would
hold, immediately after the Closing, shares of each class of Diversified Income
Fund having an aggregate value equal to the aggregate value of the shares of
that same class of shares of Corporate Bond Fund and/or Limited Maturity Bond
Fund held by that shareholder as of the close of business on the business day
preceding the Closing.
The Reorganization is intended to eliminate duplication of costs and other
inefficiencies arising from having three substantially similar mutual funds
within the same group of funds, as well as to assist in achieving economies of
scale. Shareholders in Corporate Bond and Limited Maturity Bond Funds (as well
as those in Diversified Income Fund) are expected to benefit from the
elimination of this duplication and from the larger asset base that will result
from the Reorganization.
Approval of the Reorganization Plan with respect to each of Corporate Bond Fund
and Limited Maturity Bond Fund requires the affirmative vote of a majority of
the outstanding shares of that Fund. In the event that the shareholders of only
one of the Corporate Bond and Limited Maturity Bond Funds approve the
Reorganization, that particular Fund whose shareholders approved the
Reorganization would be reorganized into Diversified Income Fund. The Fund not
approving the Reorganization would continue to operate as a separate entity.
AFTER CAREFUL CONSIDERATION, THE BOARD OF DIRECTORS OF SECURITY INCOME FUND
UNANIMOUSLY APPROVED THE PROPOSED REORGANIZATION. THE BOARD RECOMMENDS THAT YOU
VOTE "FOR" THE PROPOSED REORGANIZATION.
In considering whether to approve the Reorganization, you should note that:
o Corporate Bond Fund and Limited Maturity Bond Fund have investment objectives
and policies that are similar in many respects to the investment objectives
and policies of Diversified Income Fund. Corporate Bond Fund seeks to
preserve capital while generating income. Limited Maturity Bond Fund seeks a
high level of income consistent with moderate price fluctuation. Diversified
Income Fund seeks to provide a high level of interest income with security of
principal. Each of the Funds invests primarily in investment grade debt
securities.
o The proposed Reorganization offers actual or potential reductions in total
operating expenses for shareholders of each of the Funds. This chart compares
the current operating expenses, management fees, and distribution and
shareholder service fees of the Funds.
- --------------------------------------------------------------------------------
MANAGEMENT DISTRIBUTION AND
FEES(1) SERVICE FEES OTHER EXPENSES(2)
- --------------------------------------------------------------------------------
Class of Shares....... All Classes Class A Class B Class A Class B
Corporate Bond........ 0.50% 0.25% 1.00% 0.35% 0.65%
Limited Maturity Bond. 0.50% 0.25% 1.00% 0.52% 0.91%
Diversified Income.... 0.35%(3) 0.25% 1.00% 0.62% 0.86%
- --------------------------------------------------------------------------------
(1) During the year ended December 31, 1999, Security Management Company, LLC
("Security Management"), the investment adviser for each Fund, waived its
management fee for Limited Maturity Bond and Diversified Income Funds and
reimbursed certain operating expenses for Class B shares of Limited
Maturity Bond and Diversified Income Fund and Class A and B shares of
Corporate Bond Fund. As a result, the after waiver or reimbursement total
expense ratios for the Corporate Bond, Limited Maturity Bond and
Diversified Income Funds, respectively, were 1.09%, 0.77% and 0.87% for
Class A shares and 1.85%, 1.85% and 1.85% for Class B shares.
(2) Other Expenses are expressed as a ratio of expenses to average daily net
assets ("expense ratio") based on the one-year period ended December 31,
1999.
(3) Effective February 4, 2000, the management fee for Diversified Income Fund
was reduced from 0.50% to 0.35%.
(4) Fees are expressed as an annual rate of average daily net assets.
- --------------------------------------------------------------------------------
This chart shows an estimate of the likely expenses after the Reorganization.
Combining the Funds should lower expenses because of economies of scale realized
from a larger asset base.
- --------------------------------------------------------------------------------
MANAGEMENT DISTRIBUTION AND
FEES SERVICE FEES OTHER EXPENSES
- --------------------------------------------------------------------------------
Class of Shares .......... All Classes Class A Class B Class A Class B
PRO FORMA - Diversified
Income including
Corporate Bond and
Limited Maturity Bond .... 0.35% 0.25% 1.00% 0.40% 0.40%
- --------------------------------------------------------------------------------
o A voluntary expense waiver arrangement is in place for each of the Limited
Maturity Bond and Diversified Income Funds, under which Security Management
waives its management fee. The expense waiver arrangement is described below
under the table "Annual Fund Operating Expenses." The current expense waiver
arrangement for the Funds may be terminated by Security Management at any
time.
o Security Management also reimburses expenses of the Funds on a voluntary
basis. The expense reimbursement arrangement is described below under the
table "Annual Fund Operating Expenses." For the year ended December 31, 1999,
Security Management reimbursed certain operating expenses of Class B shares
of Diversified Income and Limited Maturity Bond Funds and Class A and B
shares of Corporate Bond Fund. The current expense reimbursement arrangement
for the Funds may be terminated by Security Management at any time.
o The current sales load structure for the each of the Funds is identical. See
the "Comparison of Fees and Expenses," page 12.
For further information on fees and expenses, see "Comparison of Fees and
Expenses."
o The Funds have the same investment manager, Security Management Company, LLC,
700 SW Harrison Street, Topeka, Kansas. The Portfolio Manager for Diversified
Income Fund is co-manager of the other Funds.
PURCHASE, REDEMPTION, AND EXCHANGE INFORMATION -- The purchase, redemption and
exchange provisions and privileges for the Funds are the same. For additional
information on purchase, redemption and exchange procedures see "Comparison of
Fees and Expenses," page 12 and "More Information Regarding the Funds," page 20.
FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION -- The Funds expect that
the Reorganization will be considered a tax-free reorganization within the
meaning of section 368(a)(1) of the Internal Revenue Code of 1986, as amended
(the "Code"). As such you will not recognize gain or loss as a result of the
Reorganization. See "Information About The Reorganization - Tax Considerations."
COMPARISON OF RISKS INVOLVED IN INVESTING IN THE FUNDS
Because the Funds have similar investment objectives and policies, the risks of
an investment in the Funds are substantially similar. The principal risk of an
investment in one of the Funds is fluctuation in the net asset value of the
Fund's shares. Market conditions, investment policies, portfolio management, and
other factors affect such fluctuations.
Each Fund is subject to risks associated with investing in debt securities,
including changes in interest rates, credit risks, prepayment risks, and risks
of mortgage-backed securities, foreign securities, restricted securities and
high yield securities as described below.
o Investments in fixed-income securities are subject to the possibility that
interest rates could rise, causing the value of the Funds' securities, and
share price, to decline. Longer term bonds and zero coupon bonds are
generally more sensitive to interest rate changes than shorter-term bonds.
Generally, the longer the average maturity of the bonds in a Fund, the more a
Fund's share price will fluctuate in response to interest rate changes.
Accordingly, Diversified Income Fund may be exposed to interest rate risk to
a greater degree than Limited Maturity Bond Fund, as Diversified Income Fund
typically is expected to invest in debt securities with longer durations than
the securities in which Limited Maturity Bond Fund typically invests. For the
same reason, Corporate Bond Fund may be exposed to interest rate risk to a
greater degree than Diversified Income Fund.
o It is possible that some issuers of fixed-income securities will not make
payments on fixed income securities held by a Fund, or there could be
defaults on repurchase agreements held by a Fund. Also, an issuer may suffer
adverse changes in financial condition that could lower the credit quality of
a security, leading to greater volatility in the price of the security and in
shares of a Fund. A change in the quality rating of a bond can affect the
bond's liquidity and make it more difficult for the Fund to sell.
o Each of the Funds may invest in mortgage-backed securities, and Diversified
Income Fund may invest in asset-backed securities, each of which can be paid
off early if the borrowers on the underlying obligations pay off their
mortgages sooner than scheduled. The issuers of securities may be able to
prepay principal due on the securities, particularly during periods of
declining interest rates. Securities subject to prepayment risk generally
offer less potential for gains when interest rates decline, and may offer a
greater potential for loss when interest rates rise. In addition, rising
interest rates may cause prepayments to occur at a slower than expected rate,
thereby effectively lengthening the maturity of the security and making the
security more sensitive to interest rate changes. Prepayment risk is a major
risk of mortgage-backed securities. Diversified Income Fund may be exposed to
the risks of investing in mortgage-backed and asset-backed securities to a
greater degree than the other Funds, as its investments in such securities
are not subject to the same limitations applicable to the Corporate Bond and
Limited Maturity Bond Funds.
o Mortgage-backed securities make payments that are part interest and part
return of principal. These payments may vary based on the rate at which
homeowners pay off their loans. When a homeowner makes a prepayment, the Fund
receives a larger portion of its principal investment back, which means that
there will be a decrease in monthly interest payments. Some mortgage-backed
securities may have structures that make their reaction to interest rates and
other factors difficult to predict, making their prices very volatile.
o Diversified Income Fund may invest in total return swap agreements which
entail both interest rate risk and credit risk. There is a risk, based on
movements of interest rates in the future, that payments made by the Fund
under a swap agreement will be greater than the payments it received. Credit
risk arises from the possibility that the counterparty will default. If the
counterparty defaults, the Fund's loss will consist of the net amount of
contractual interest payments that the Fund has not yet received.
o Each Fund may invest in dollar-denominated foreign securities. Investments in
foreign securities may involve risks in addition to those of U.S.
investments, including increased political and economic risk.
o Each Fund may invest in securities that are restricted as to disposition
under the federal securities laws. Since restricted securities may be sold
only in privately negotiated transactions or in a public offering with
respect to which a registration statement is in effect under the Securities
Act, their sale may entail substantial delays and the liquidity of these
securities may be limited.
o Each Fund may invest in higher yielding, high risk debt securities. These
investments may present additional risk because they may be less liquid than
investment grade bonds. In addition, the price of high yield securities tends
to be more susceptible to interest rate changes and to real or perceived
adverse economic and competitive industry conditions. High yield securities
are subject to more credit risk than higher quality securities.
INVESTMENT OBJECTIVES AND POLICIES
COMPARISON OF OBJECTIVES AND PRIMARY INVESTMENT STRATEGIES -- The investment
objectives, policies and restrictions of the Funds are similar, although there
are certain differences. There can be no assurance that any Fund will achieve
its stated objective.
INVESTMENT OBJECTIVE. The Funds have similar investment objectives and policies.
o Corporate Bond Fund seeks to preserve capital while generating income.
o Limited Maturity Bond Fund seeks a high level of income consistent with
moderate price fluctuations.
o Diversified Income Fund seeks to provide a high level of interest income with
security of principal.
PRIMARY INVESTMENT STRATEGIES.
o Each Fund primarily invests in investment grade debt securities, I.E. those
which are rated BBB or higher by Standard & Poor's Corporation or Baa or
higher by Moody's Investors Service.
o For each Fund, Security Management, the Funds' adviser, uses a "bottom-up"
approach in selecting asset classes and individual securities for the Fund's
portfolio. A bottom-up approach means that Security Management looks
primarily at individual issuers against the context of broader market
factors. When analyzing individual issuers, Security Management may consider
relative earnings growth, profitability trends, financial strength, valuation
analysis and strength of management. Security Management also considers cash
flow, an issuer's position in its market, capital structure, general economic
factors, and market conditions.
o In selecting securities for each Fund, Security Management compares the
credit risk and yield of a security to the credit risk and yield of
securities of the same or another asset class, for example, a corporate debt
security versus a mortgage-backed security.
DIVERSIFIED INCOME FUND.
o Generally, Diversified Income Fund invests primarily in a diversified
portfolio of investment grade debt securities. Such debt securities are
primarily domestic securities but may also include dollar denominated foreign
securities.
o Diversified Income Fund seeks to diversify its holdings among asset classes
and individual securities. Some of the asset classes in which the Fund may
invest include investment grade corporate debt securities, high yield debt
securities (also known as "junk bonds"), investment grade mortgage-backed
securities, investment grade asset-backed securities, U.S. Government
securities and total return swap agreements.
CORPORATE BOND FUND.
o Under normal conditions, Corporate Bond Fund invests primarily in a
diversified portfolio of investment grade corporate debt securities. Under
normal circumstances, Corporate Bond Fund holds at least 65% of its total
assets in corporate debt securities which have at the time of issuance a
maturity greater than one year. Such securities are primarily domestic
securities but may also include dollar denominated foreign securities.
o Corporate Bond Fund seeks to diversify its holdings among asset classes and
individual securities. Some of the asset classes in which the Fund may invest
include investment grade corporate debt securities, high yield debt
securities (also known as "junk bonds"), mortgage-backed securities, and U.S.
Government securities.
LIMITED MATURITY BOND FUND.
o Under normal conditions, Limited Maturity Bond Fund invests in a broad range
of debt securities with maturities of 15 years or less. Under normal
circumstances, Limited Maturity Bond Fund holds at least 65% of its total
assets in short- to intermediate-term bonds (those with maturities of 15
years or less). Such securities are primarily domestic securities but may
also include dollar denominated foreign securities.
o Limited Maturity Bond Fund seeks to diversify its holdings among asset
classes and individual securities. Some of the asset classes in which the
Fund may invest include investment grade corporate debt securities, high
yield debt securities (also known as "junk bonds"), mortgage-backed
securities, and U.S. Government securities.
DURATION/MATURITY.
o Diversified Income Fund is expected to have a dollar-weighted average
duration of 4 to 10 years.
o Corporate Bond Fund is expected to have a dollar-weighted average maturity
between 5 and 15 years.
o Limited Maturity Bond Fund's dollar-weighted average maturity is expected to
be between 2 and 10 years.
Following the Reorganization and in the ordinary course of business as a mutual
fund, certain holdings of the Corporate Bond Fund and Limited Maturity Bond Fund
that were transferred to the Diversified Income Fund in connection with the
Reorganization may be sold. Such sales may result in increased transactional
costs for Diversified Income Fund, and the realization of taxable gains or
losses.
COMPARISON OF PORTFOLIO CHARACTERISTICS -- The following tables compare certain
characteristics of the portfolios of the Funds as of December 31, 1999:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
DIVERSIFIED CORPORATE LIMITED MATURITY
INCOME FUND* BOND FUND BOND FUND
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Assets $15,078,186 $58,614,431 $6,895,312
- -----------------------------------------------------------------------------------------------------------------
Number of Holdings 35 97 97
- -----------------------------------------------------------------------------------------------------------------
Average Credit Quality AAA A A+
- -----------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate (12 months ended 12/31/99) 65% 36% 31%
- -----------------------------------------------------------------------------------------------------------------
As a percentage of net assets:
o Treasury bonds, bills and notes 4.3% 7.8% 0
o Mortgage-Related Securities 43.0% 27.8% 19.8%
o U.S. Gov. Securities not backed by full faith and credit 49.4% 2.1% 3.0%
o Corporate Debt 0 61.0% 75.7%
o Others Assets and Liabilities, net 3.3% 1.3% 1.5%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
TOP 10 HOLDINGS (AS A % OF NET ASSETS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
DIVERSIFIED INCOME FUND* CORPORATE BOND FUND LIMITED MATURITY BOND FUND
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FNMA 6.5% due 2004 6.6% U.S. treasury note 2.8% FNMA 6.5% due 2004 3.6%
5.75% due 2003
- -----------------------------------------------------------------------------------------
GNMA 7.5% due 2029 6.5% GNMA 7.5% due 2029 2.6% FNMA 6.25% due 2004 3.5%
- -----------------------------------------------------------------------------------------
Fed. Home Loan Mort. 6.4% Chase Commercial 2.5% Province of Quebec 2.3%
Note 6.63% due 2009 Mort. Secs. Corp 8.63% due 2005
- -----------------------------------------------------------------------------------------
GNMA 6.5% due 2028 4.7% FNMA 6.38% 2.4% Vastar Resources 2.3%
8.75% due 2005
- -----------------------------------------------------------------------------------------
GNMA 7% due 2026 4.4% S I Financing Trust 2.1% Household Finance 2.2%
9.5% due 2026 Corp. 8% due 2004
- -----------------------------------------------------------------------------------------
U.S. treasury bond 4.3% HUD 6.93% due 2013 2.1% Int'l Lease Finance 2.2%
8.75% due 2008 Corp. 8.25% due 2000
- -----------------------------------------------------------------------------------------
Financing Corp. 4.1% Panamerican Beverage 2.0% GNMA 7% due 2028 2.2%
9.65% due 2018 8.13% due 2003
- -----------------------------------------------------------------------------------------
FNMA 7.4% due 2004 4.1% United Airlines 1.9% Consol. Edison Co. 2.2%
11.21% due 2014 6.63% due 2002
- -----------------------------------------------------------------------------------------
FNMA 7.875% due 2024 3.5% Anhueser Busch 7.1% 1.9% Sears Roebuck 2.1%
due 2007 Acceptance 6.41%
due 2001
- -----------------------------------------------------------------------------------------
GNMA 7.5% due 2034 3.4% Abbey National PLC 1.9% Freddie Mac 5.75% 2.1%
6.69% due 2005 due 2003
- -----------------------------------------------------------------------------------------
</TABLE>
*The Board of Directors of Security Income Fund approved a change in the
investment policies of Diversified Income Fund, effective February 4, 2000.
Prior to that change, the Fund had a policy of investing at least 80% of its
total assets in U.S. Government securities. The Fund may now invest in a more
diversified portfolio of debt securities, including investment grade corporate
debt securities, high yield debt securities (also known as "junk bonds"),
investment grade mortgage-backed securities, investment grade asset-backed
securities, U.S. Government securities and total return swap agreements.
RELATIVE PERFORMANCE -- The following table shows, for each calendar year since
1990, the average annual total return for (a) Class A shares of Diversified
Income Fund, (b) Class A shares of Corporate Bond Fund, (c) Class A shares of
Limited Maturity Bond Fund, (d) the Lehman Brothers Aggregate Bond Index, (e)
the Lehman Brothers Government Bond Index, (f) the Lehman Brothers Corporate
Bond Index, and (g) the Lehman Brothers Intermediate Term Corporate Bond Index.
Performance of the Funds in the table below does not reflect the deduction of
sales loads. The Lehman Brothers Indexes have an inherent performance advantage
over the Funds, since an index has no cash in its portfolio, and incurs no
operating expenses. An investor cannot invest in an index. Total return is
calculated assuming reinvestment of all dividends and capital gain distributions
at net asset value and excluding the deduction of any sales charges.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
LEHMAN BROTHERS
LIMITED -----------------------------------------------------------------------
CALENDAR YEAR/ DIVERSIFIED CORPORATE MATURITY AGGREGATE GOVERNMENT CORPORATE INTERMEDIATE TERM
PERIOD ENDED INCOME FUND(1) BOND FUND BOND FUND(2) BOND INDEX(3) BOND INDEX(4) BOND INDEX(5) CORPORATE BOND INDEX(6)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
12/31/90 9.8% 6.6% N/A 8.95% 8.72% 7.06% 7.62%
12/31/91 13.8% 16.1% N/A 16.00% 15.33% 18.52% 16.61%
12/31/92 5.0% 9.0% N/A 7.40% 7.23% 8.69% 8.19%
12/31/93 10.9% 13.4% N/A 9.75% 10.66% 12.17% 11.13%
12/31/94 -6.5% -8.3% N/A -2.92% -3.37% -3.92% -2.65%
12/31/95 21.9% 18.2% 13.0% 18.48% 18.33% 22.24% 19.01%
12/31/96 1.3% -0.5% 2.1% 3.61% 2.77% 3.28% 3.98%
12/31/97 9.2% 9.7% 9.0% 9.68% 9.58% 10.23% 8.38%
12/31/98 9.1% 7.6% 7.5% 8.67% 9.85% 8.59% 8.30%
12/31/99 -3.6% -3.7% -1.8% -0.83% -2.25% -1.94% 0.16%
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Prior to February 4, 2000, the Diversified Income Fund was named the "U.S. Government Fund" and, under normal conditions,
invested at least 80% of the value of its total assets in U.S. Government securities.
(2) From the Limited Maturity Bond Fund's inception on November 7, 1995.
(3) The Lehman Brothers Aggregate Bond Index is comprised of debt securities which include U.S. Government securities, corporate
debt securities, asset-backed securities, mortgage-backed securities and total return swaps.
(4) The Lehman Brothers Government Bond Index is comprised of public obligations of the U.S. Treasury with maturities of more than
one year and publicly issued debt of U.S. Government Agencies.
(5) The Lehman Brothers Corporate Bond Index is comprised of publicly issued U.S. corporate and Yankee debentures and secured
notes.
(6) The Lehman Brothers Intermediate Term Corporate Bond Index is a subset of the Lehman Brothers Corporate Bond Index comprised of
securities of shorter maturities.
</FN>
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
COMPARISON OF SECURITIES AND INVESTMENT TECHNIQUES -- The following is a summary
of the types of securities in which the Funds may invest and strategies the
Funds may employ in pursuit of their investment objectives. As with any
security, an investment in a Fund's shares involves certain risks, including
loss of principal. The Funds are subject to varying degrees of financial, market
and credit risk. An investment in the Funds is not a deposit of a bank and is
not insured by the Federal Deposit Insurance Corporation or any other government
agency.
CONVERTIBLE SECURITIES. Each Fund may invest in debt or preferred equity
securities convertible into, or exchangeable for, equity securities.
Traditionally, convertible securities have paid dividends or interest at rates
higher than common stocks but lower than non-convertible securities. They
generally participate in the appreciation or depreciation of the underlying
stock into which they are convertible, but to a lesser degree.
FOREIGN SECURITIES. Each Fund may invest up to 25% of its net assets in foreign
securities denominated in U.S. dollars. Foreign investments increase a Fund's
diversification and may enhance return, but they also involve some special
risks, such as exposure to potentially adverse local political and economic
developments; nationalization and exchange controls; potentially lower liquidity
and higher volatility; and possible problems arising from accounting,
disclosure, settlement and regulatory practices that differ from U.S. standards.
These risks are heightened for investments in developing countries.
ASSET-BACKED SECURITIES. Each of Corporate Bond Fund and Limited Maturity Bond
Fund may invest up to 15% of its total assets, and Diversified Income Series may
invest without limit, in investment grade asset-backed securities. An underlying
pool of assets, such as credit card receivables, automobile loans, or corporate
loans or bonds back these bonds and provides the interest and principal payments
to investors. On occasion, the pool of assets may also include a swap
obligation, which is used to change the cash flows on the underlying assets. As
an example, a swap may be used to allow floating rate assets to back a fixed
rate obligation. Credit quality depends primarily on the quality of the
underlying assets, the level of credit support, if any, provided by the issuer,
and the credit quality of the swap counterparty, if any. The underlying assets
(i.e., loans) are subject to prepayments, which can shorten the securities'
weighted average life and may lower their return. The value of these securities
also may change because of actual or perceived changes in the creditworthiness
of the originator, the servicing agent, the financial institution providing
credit support, or swap counterparty.
MORTGAGE-BACKED SECURITIES. Each of Corporate Bond Fund and Limited Maturity
Bond Fund may invest up to 35% of its total assets, and Diversified Income Fund
may invest without limit, in a variety of mortgage-backed securities. Mortgage
lenders pool individual home mortgages with similar characteristics to back a
certificate or bond, which is sold to investors such as the Funds. Interest and
principal payments generated by the underlying mortgages are passed through to
the investors. The three largest issuers of these securities are the Government
National Mortgage Association (GNMA), the Federal National Mortgage Association
(Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). GNMA
certificates are backed by the full faith and credit of the U.S. Government,
while others, such as Fannie Mae and Freddie Mac certificates, are only
supported by the ability to borrow from the U.S. Treasury or supported only by
the credit of the agency. Private mortgage bankers and other institutions also
issue mortgage-backed securities. Mortgage-backed securities are subject to
scheduled and unscheduled principal payments as homeowners pay down or prepay
their mortgages. As these payments are received, they must be reinvested when
interest rates may be higher or lower than on the original mortgage security.
Therefore, these securities are not an effective means of locking in long-term
interest rates. In addition, when interest rates fall, the pace of mortgage
prepayments picks up. These refinanced mortgages are paid off at face value
(par), causing a loss for any investor who may have purchased the security at a
price above par. In such an environment, this risk limits the potential price
appreciation of these securities and can negatively affect a Fund's net asset
value. When rates rise, the prices of mortgage-backed securities can be expected
to decline, although historically these securities have experienced smaller
price declines than comparable quality bonds. In addition, when rates rise and
prepayments slow, the effective duration of mortgage-backed securities extends,
resulting in increased volatility.
Additional mortgage-backed securities in which the Funds may invest include
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOs) and stripped mortgage securities.
CMOs are debt securities that are fully collateralized by a portfolio of
mortgages or mortgage-backed securities. All interest and principal payments
from the underlying mortgages are passed through to the CMOs in such a way as to
create, in most cases, more definite maturities than is the case with the
underlying mortgages. CMOs may pay fixed or variable rates of interest, and
certain CMOs have priority over others with respect to the receipt of
prepayments. Stripped mortgage securities (a type of potentially high-risk
derivative) are created by separating the interest and principal payments
generated by a pool of mortgage-backed securities or a CMO to create additional
classes of securities. Generally, one class receives only interest payments
(IOs) and another receives principal payments (POs). Unlike with other
mortgage-backed securities and POs, the value of IOs tends to move in the same
direction as interest rates. The fund can use IOs as a hedge against falling
prepayment rates (interest rates are rising) and/or a bear market environment.
POs can be used as a hedge against rising prepayment rates (interest rates are
falling) and/or a bull market environment. IOs and POs are acutely sensitive to
interest rate changes and to the rate of principal prepayments. A rapid or
unexpected increase in prepayments can severely depress the price of IOs, while
a rapid or unexpected decrease in prepayments could have the same effect on POs.
These securities are very volatile in price and may have lower liquidity than
most other mortgage-backed securities. Certain non-stripped CMOs may also
exhibit these qualities, especially those that pay variable rates of interest
that adjust inversely with, and more rapidly than, short-term interest rates. In
addition, if interest rates rise rapidly and prepayment rates slow more than
expected, certain CMOs, in addition to losing value, can exhibit characteristics
of longer-term securities and become more volatile. There is no guarantee a
Fund's investment in CMOs, IOs, or POs will be successful, and a Fund's total
return could be adversely affected as a result. Each Fund may invest up to 10%
of its net assets in IOs, POs, inverse floating obligations and residual
interest bonds.
RESTRICTED SECURITIES. Each Fund may invest in restricted securities that are
eligible for resale under Rule 144A of the Securities Act of 1933. These
securities are sold directly to a small number of investors, usually
institutions. Unlike public offerings, restricted securities are not registered
with the SEC. Although restricted securities which are eligible for resale under
Rule 144A may be readily sold to qualified buyers, there may not always be a
market for them and their sale may involve substantial delays and additional
costs. In addition, the Funds may invest in restricted securities that are not
eligible for resale under Rule 144A. Because there is no active market for these
types of securities, selling a security that is not a Rule 144A security may be
difficult and/or may involve expenses that would not be incurred in the sale of
securities that were freely marketable.
LOWER-RATED DEBT SECURITIES. Each Fund may invest in higher yielding debt
securities in the lower rating (higher risk) categories of the recognized rating
services (commonly referred to as "junk bonds"). The total return and yield of
junk bonds can be expected to fluctuate more than the total return and yield of
higher-quality bonds. Junk bonds (those rated below BBB or in default) are
regarded as predominantly speculative with respect to the issuer's continuing
ability to meet principal and interest payments. Successful investment in
lower-medium- and low-quality bonds involves greater investment risk and is
highly dependent on Security Management's credit analysis. A real or perceived
economic downturn or higher interest rates could cause a decline in high-yield
bond prices by lessening the ability of issuers to make principal and interest
payments. These bonds are often thinly traded and can be more difficult to sell
and value accurately than high-quality bonds. Because objective pricing data may
be less available, judgment may play a greater role in the valuation process. In
addition, the entire junk bond market can experience sudden and sharp price
swings due to a variety of factors, including changes in economic forecasts,
stock market activity, large or sustained sales by major investors, a
high-profile default, or just a change in the market's psychology. This type of
volatility is usually associated more with stocks than bonds, but junk bond
investors should be prepared for it.
U.S. GOVERNMENT SECURITIES. Each Fund may invest in U.S. Government securities
and Diversified Income Fund will invest at least 35% of its net assets in
securities issued by the U.S. or Canadian Governments. U.S. Government
securities include direct obligations of the U.S. Treasury (such as U.S.
Treasury bills, notes and bonds) and obligations issued or guaranteed by U.S.
Government agencies or instrumentalities. While U.S. Government securities
provide substantial protection against credit risk, they do not protect
investors against price declines in the securities due to changing interest
rates. Additionally, obligations of some U.S. Government agencies, such as FNMA
and FHLMC, are not backed by the full faith and credit of the U.S. Government,
and are subject to somewhat greater credit risk than direct obligations of the
U.S. Treasury.
ILLIQUID SECURITIES. Each Fund may invest up to 15% of its net assets in
illiquid securities, which do not include restricted securities that are readily
marketable. Generally, a security is considered illiquid if it cannot be
disposed of within seven days at approximately the value at which it is carried.
Illiquidity might prevent the sale of the security at a time when the adviser
might wish to sell, and these securities could have the effect of decreasing the
overall level of a Fund's liquidity. Further, the lack of an established
secondary market may make it more difficult to value illiquid securities.
SWAPS, CAPS, FLOORS AND COLLARS. Diversified Income Fund may enter into interest
rate, total return and index swaps. Diversified Income Fund would enter into
these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio as a technique for managing the
portfolio's duration (I.E. the price sensitivity to changes in interest rates)
or to protect against any increase in the price of securities the Fund
anticipates purchasing at a later date. To the extent the Diversified Income
Fund enters into these types of transactions, it will be done to hedge and not
as a speculative investment, and the Fund will not sell interest rate caps or
floors if it does not own securities or other instruments providing the income
the Fund may be obligated to pay. Interest rate swaps involve the exchange by
the Fund with another party of their respective commitments to pay or receive
interest on a notional amount of principal. The purchase of a cap entitles the
purchaser to receive payments on a notional principal amount from the party
selling the cap to the extent that a specified index exceeds a predetermined
interest rate. The purchase of an interest rate floor entitles the purchaser to
receive payments on a notional principal amount from the party selling the floor
to the extent that a specified index falls below a predetermined interest rate
or amount. A collar is a combination of a cap and a floor that preserves a
certain return within a predetermined range of interest rates or values.
FUTURES AND OPTIONS. Diversified Income Fund may utilize futures contracts. The
Diversified Income Fund may also utilize options on futures, and may purchase
call and put options and write call and put options on a "covered" basis.
Futures (a type of potentially high-risk derivative) are often used to manage or
hedge risk because they enable the investor to buy or sell an asset in the
future at an agreed-upon price. Options (another type of potentially high-risk
derivative) give the investor the right (where the investor purchases the
options), or the obligation (where the investor writes (sells) the options), to
buy or sell an asset at a predetermined price in the future. Futures and options
contracts may be bought or sold for any number of reasons, including: to manage
exposure to changes in interest rates and bond prices; as an efficient means of
adjusting overall exposure to certain markets; in an effort to enhance income;
to protect the value of portfolio securities; and to adjust portfolio duration.
The Diversified Income Fund may purchase, sell, or write call and put options on
securities and financial indices. Futures contracts and options may not always
be successful hedges; their prices can be highly volatile. Using them could
lower the Fund's total return, and the potential loss from the use of futures
can exceed the Fund's initial investment in such contracts.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENT CONTRACTS. Each Fund may purchase
and sell securities on a "when issued," "forward commitment" or "delayed
delivery" basis. The price of these securities is fixed at the time of the
commitment to buy, but delivery and payment can take place a month or more
later. During the interim period, the market value of the securities can
fluctuate, and no interest accrues to the purchaser. At the time of delivery,
the value of the securities may be more or less than the purchase or sale price.
When a Fund purchases securities on this basis, there is a risk that the
securities may not be delivered and that the Fund may incur a loss.
BORROWING. Each Fund may borrow money from banks as a temporary measure for
emergency purposes, to facilitate redemption requests, or for other purposes
consistent with the Fund's investment objective and program. Such borrowings may
be collateralized with Fund assets. To the extent that a Fund purchases
securities while it has outstanding borrowings, it is using leverage, i.e.,
using borrowed funds for investment. Leveraging will exaggerate the effect on
net asset value of any increase or decrease in the market value of the Fund's
portfolio. Money borrowed for leveraging will be subject to interest costs that
may or may not be recovered by appreciation of the securities purchased; in
certain cases, interest costs may exceed the return received on the securities
purchased. A Fund also may be required to maintain minimum average balances in
connection with such borrowing or to pay a commitment or other fee to maintain a
line of credit; either of these requirements would increase the cost of
borrowing over the stated interest rate.
COMPARISON OF FEES AND EXPENSES
The following describes and compares the fees and expenses that you may pay if
you buy and hold shares of the Funds. It is expected that combining the Funds
would allow shareholders to realize economies of scale. For further information
on the fees and expenses of Diversified Income Fund, see "More Information
Regarding the Funds," page 20.
OPERATING EXPENSES -- The total fund operating expenses of each class of
Corporate Bond Fund, expressed as a ratio of expenses to average daily net
assets ("expense ratio"), before taking into account the expense reimbursement
arrangement, currently are lower than the expenses of the corresponding classes
of Diversified Income Fund. The expense ratio of each class of Limited Maturity
Bond Fund, before taking into account the management fee waiver, currently is
higher than that of the corresponding classes of Diversified Income Fund.
o After a voluntary management fee waiver by Security Management, the net
expense ratio for the Class A shares of Diversified Income Fund for the year
ended December 31, 1999, was lower by 0.22% than that of the Class A shares
of the Corporate Bond Fund and was higher by 0.10% than that of the Class A
shares of the Limited Maturity Bond Fund.
o After a voluntary management fee waiver by Security Management, the net
expense ratio for the Class B shares of Diversified Income Fund for the year
ended December 31, 1999 was the same as the net expense ratio for the Class B
shares of Corporate Bond Fund and Limited Maturity Bond Fund.
o The management fee for the Diversified Income Fund was the same as the
management fee for Corporate Bond and Limited Maturity Bond Funds for the
year ended December 31, 1999. Effective February 4, 2000, the management fee
for the Diversified Income Fund was 0.15% lower than that of Corporate Bond
and Limited Maturity Bond Funds.
o The fees for distribution and shareholder servicing for Diversified Income
Fund are the same as Corporate Bond and Limited Maturity Bond Funds.
It is expected that combining the Funds will adjust the operating expense ratio
to a lower level than the operating expense ratio of any of the Funds prior to
the Reorganization. For more information, see estimated PRO FORMA expenses in
the table, "Annual Fund Operating Expenses."
An expense waiver arrangement is in place for Limited Maturity Bond Fund and
Diversified Income Fund, under which Security Management waives its management
fee for each such Fund. The expense waiver arrangement is described below under
the table "Annual Fund Operating Expenses." The current expense waiver
arrangement for Limited Maturity Bond Fund and Diversified Income Fund may be
terminated at any time by Security Management.
An expense reimbursement arrangement is in place for the Funds under which
Security Management reimburses certain operating expenses of the Funds on a
voluntary basis. The expense reimbursement arrangement is described below under
the table "Annual Fund Operating Expenses." The current expense reimbursement
arrangement may be terminated at any time by Security Management.
The current expenses of each Fund and estimated PRO FORMA expenses giving effect
to the proposed Reorganization are shown in the table below. Expenses for the
Funds are based on the operating expenses incurred for the year ended December
31, 1999, except that the management fee for Diversified Income Fund is based
upon the fee in effect as of February 4, 2000. PRO FORMA fees and expenses show
estimated fees and expenses of Diversified Income Fund after giving effect to
the proposed Reorganization. PRO FORMA numbers are estimated in good faith and
are hypothetical.
<TABLE>
- ---------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets, shown as a ratio of expenses to average daily net assets)(1)
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
DISTRIBUTION AND TOTAL FUND
MANAGEMENT SHAREHOLDER SERVICING OTHER OPERATING
FEES (12B-1) FEES(2) EXPENSES EXPENSES(3)
<S> <C> <C> <C> <C>
CLASS A
Diversified Income Fund ..................... 0.35% 0.25% 0.62% 1.22%
Corporate Bond Fund ......................... 0.50% 0.25% 0.35% 1.10%
Limited Maturity Bond Fund .................. 0.50% 0.25% 0.52% 1.27%
PRO FORMA - Diversified Income including
Corporate Bond and Limited Maturity Bond .... 0.35% 0.25% 0.40% 1.00%
CLASS B
Diversified Income Fund ..................... 0.35% 1.00% 0.86% 2.21%
Corporate Bond Fund ......................... 0.50% 1.00% 0.65% 2.15%
Limited Maturity Bond Fund .................. 0.50% 1.00% 0.91% 2.41%
PRO FORMA - Diversified Income including
Corporate Bond and Limited Maturity Bond .... 0.35% 1.00% 0.40% 1.75%
- ---------------------------------------------------------------------------------------------------------------
<FN>
(1) Expenses are shown for each Fund, and on a pro forma basis, based upon expenses incurred by each Fund for
the 12 months ended December 31, 1999, except that the management fee for Diversified Income Fund is based
upon the fee in effect as of February 4, 2000. Effective on that date, the Board of Directors of Security
Income Fund approved an amendment to the investment advisory agreement with Security Management to reduce
the management fee for Diversified Income Fund from 0.50% to 0.35%.
(2) As a result of distribution (Rule 12b-1) fees, a long term investor may pay more than the economic
equivalent of the maximum sales charge allowed by the Rules of the National Association of Securities
Dealers, Inc. (NASD).
(3) Each Fund's total annual operating expenses for the most recent fiscal year were less than the amount
shown, because of voluntary fee waivers and/or reimbursements by Security Management. Security Management
has waived its management fee for Limited Maturity Bond Fund and Diversified Income Fund and has
reimbursed certain operating expenses of Class B shares of Limited Maturity Bond Fund and Diversified
Income Fund and Class A and B shares of Corporate Bond Fund. After the waiver, the management fee would be
0.00% and the total fund operating expenses would be 0.77% for Class A and 1.85% for Class B shares of
Limited Maturity Bond Fund and would be 0.87% for Class A and 1.85% for Class B shares of Diversified
Income Fund. After the expense reimbursement, the total fund operating expenses would be 1.09% for Class A
shares and 1.85% for Class B shares of Corporate Bond Fund. The fee waiver and expense reimbursement
arrangements are voluntary and not contractual commitments, and can be terminated by Security Management
at any time.
</FN>
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
EXAMPLE.
This example is intended to help you compare the cost of investing in the Funds
and in the combined Funds on a PRO FORMA basis. The example assumes that you
invest $10,000 in each Fund and in the surviving Fund after the Reorganization
for the time periods indicated. For each Fund, expenses prior to a voluntary fee
waiver or reimbursement by Security Management are presented. The Example also
assumes that your investment has a 5% return each year and that the Fund's
operating expenses remain the same. The 5% return is an assumption and is not
intended to portray past or future investment results. Based on the above
assumptions, you would pay the following expenses if you redeemed your shares at
the end of such period shown; your actual costs may be higher or lower.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS*
------------------ ------------------ ------------------ ------------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Corporate Bond Fund ...................... $582 $718 $808 $ 973 $1,052 $1,354 $1,752 $2,212
Limited Maturity Bond Fund ............... 598 744 859 1,051 1,139 1,485 1,936 2,459
Diversified Income Fund .................. 593 724 844 991 1,113 1,385 1,882 2,290
PRO FORMA - Diversified Income including
Corporate Bond and Limited Maturity Bond.. 572 678 778 851 1,001 1,149 1,641 1,864
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
*The ten year calculations for Class B shares assume conversion of the Class B shares to Class A shares at the end of the eighth
year following the date of purchase.
</FN>
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
You would pay the following expenses if you did not redeem your shares:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS*
------------------ ------------------ ------------------ ------------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Corporate Bond Fund ...................... $582 $218 $808 $673 $1,052 $1,154 $1,752 $2,212
Limited Maturity Bond Fund ............... 598 244 859 751 1,139 1,285 1,936 2,459
Diversified Income Fund .................. 593 224 844 691 1,113 1,185 1,882 2,290
PRO FORMA - Diversified Income including
Corporate Bond and Limited Maturity Bond.. 572 178 778 551 1,001 949 1,641 1,864
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
*The ten year calculations for Class B shares assume conversion of the Class B shares to Class A shares at the end of the eighth
year following the date of purchase.
</FN>
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
GENERAL INFORMATION -- Class A and Class B shares of Diversified Income Fund
issued to a shareholder in connection with the Reorganization will be subject to
the same contingent deferred sales charge, if any, applicable to the
corresponding shares of Corporate Bond Fund and Limited Maturity Bond Fund held
by that shareholder immediately prior to the Reorganization.
In addition, the period that the shareholder held shares of Corporate Bond Fund
and Limited Maturity Bond Fund would be included in the holding period of
Diversified Income Fund shares for purposes of calculating any contingent
deferred sales charge. Similarly, Class B shares of Corporate Bond Fund and
Limited Maturity Bond Fund issued to a shareholder in connection with the
Reorganization will convert to Class A shares eight years after the date that
the corresponding Class B shares of Corporate Bond Fund and Limited Maturity
Bond Fund were purchased by the shareholder. Purchases of shares of Diversified
Income Fund after the Reorganization will be subject to the sales load structure
described in the table below for Diversified Income Fund. This is the same sales
load structure that is currently in effect for Corporate Bond Fund and Limited
Maturity Bond Fund.
- --------------------------------------------------------------------------------
TRANSACTION FEES ON NEW INVESTMENTS (fees paid directly from your investment)
- --------------------------------------------------------------------------------
CLASS A CLASS B(1)
Maximum sales charge (load) imposed on purchases
(as a percentage of offering price) ................... 4.75% None
Maximum deferred sales charge (load)
(as a percentage of the lower of
original purchase price or redemption proceeds) ....... None(2) 5.00%(3)
- --------------------------------------------------------------------------------
1 Class B shares convert tax-free to Class A shares automatically after eight
years.
2 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.
3 The deferred sales charge is 5% during the first year, 4% during the second
year, 3% during the third and fourth years and 2% in the fifth year,
decreasing to 0% in the sixth and following years.
- --------------------------------------------------------------------------------
None of the Funds has any redemption fees, exchange fees or sales charges on
reinvested dividends.
ADDITIONAL INFORMATION ABOUT DIVERSIFIED INCOME FUND
INVESTMENT MANAGER -- Security Management, each Fund's investment manager, is a
Kansas limited liability company. On December 31, 1999, the aggregate assets of
all of the mutual funds under the investment management of Security Management
were approximately $6.3 billion. Security Management has overall responsibility
for the management of the Funds. Security Income Fund and Security Management
have entered into an agreement that requires Security Management to provide
investment advisory, statistical and research services to the Funds, supervise
and arrange for the purchase and sale of securities on behalf of the Funds, and
provide for the maintenance and compilation of records pertaining to the
investment advisory function. The agreement with Security Management can be
canceled by the Board of Directors of Security Income Fund upon 60 days written
notice. Investment management fees are computed and accrued daily and paid
monthly.
INVESTMENT PERSONNEL -- The following individuals have responsibility for the
day-to-day management of the Funds:
o Steve Bowser, Vice President and Portfolio Manager of Security Management,
has managed the Diversified Income Fund's portfolio since 1995. Mr. Bowser
has also co-managed the Corporate Bond Fund and Limited Maturity Bond Fund
portfolios since June 1997. Mr. Bowser joined Security Management in 1992.
Prior to joining Security Management, he was Assistant Vice President and
Portfolio Manager with the Federal Home Loan Bank of Topeka from 1989 to
1992. He was employed at the Federal Reserve Bank of Kansas City in 1988 and
began his career with the Farm Credit System from 1982 to 1987, serving as a
Senior Financial Analyst and Assistant Controller. He graduated with a
bachelor of science degree from Kansas State University in 1982. He is a
Chartered Financial Analyst.
o David Eshnaur, Second Vice President and Portfolio Manager of Security
Management, has co-managed the Corporate Bond Fund and Limited Maturity Bond
Fund portfolios since June 1997. Mr. Eshnaur has 15 years of investment
experience. Prior to joining Security Management in 1997, he worked at
Waddell & Reed in the positions of Assistant Vice President, Assistant
Portfolio Manager, Senior Analyst, Industry Analyst and Account
Administrator. Mr. Eshnaur earned a bachelor of arts degree in Business
Administration from Coe College and an M.B.A. degree in Finance from the
University of Missouri - Kansas City.
PERFORMANCE OF DIVERSIFIED INCOME FUND -- The bar chart and table shown below
provide an indication of the risks of investing in the Diversified Income Fund
by showing (on a calendar year basis) changes in Diversified Income Fund's
annual total return from year to year and by showing (on a calendar year basis)
how Diversified Income Fund's average annual returns for one year, five years
and ten years compare to those of abroad-based securities market index--the
Lehman Brothers Government Bond Index. The information in the bar chart and
table reflects the Fund's performance prior to its recent change of investment
policies. The information in the bar chart is based on the performance of the
Class A shares of Diversified Income Fund, although the bar chart does not
reflect the deduction of the sales load on Class A shares. If the bar chart
included the sales load, returns would be less than those shown. The Fund's past
performance is not an indication of how the Fund will perform in the future.
[BAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
9.80% 13.80% 5.00% 10.90% -6.50% 21.86% 1.26% 9.19% 9.09% -3.60%
*During the period shown in the chart, the Fund's best quarterly performance was
7.34% for the quarter ended June 30, 1995, and the Fund's worst quarterly
performance was -3.92% for the quarter ended March 31, 1994.
The table below shows the average annual total returns of Diversified Income
Fund if you average out actual performance over various lengths of time,
compared to the Lehman Brothers Government Bond Index, an unmanaged index. An
index has an inherent performance advantage over the Diversified Income Fund
since it has no cash in its portfolio, imposes no sales charges and incurs no
operating expenses. An investor cannot invest directly in an index. The
Diversified Income Fund's performance reflected in the table assumes the
deduction of the maximum sales charge in all cases.
<TABLE>
- --------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1999
- --------------------------------------------------------------------------------------------------
<CAPTION>
SINCE INCEPTION
OF CLASS B
1 YEAR 5 YEARS 10 YEARS (10/19/93)
<S> <C> <C> <C> <C>
Diversified Income, Class A(1) ............. -8.23% 6.17% 6.35% ---
Diversified Income, Class B(2) ............. -9.36% 5.79% --- 3.20%
Lehman Brothers Government Bond Index(3) ... -2.15% 7.60% 7.66% 5.38%
- --------------------------------------------------------------------------------------------------
<FN>
(1) Reflects deduction of sales charge of 4.75%.
(2) Reflects deduction of a deferred sales charge of 5% for the 1-year and 2% for the 5-year
returns.
(3) The Lehman Brothers Government Bond Index is comprised of public obligations of the U.S.
Treasury with maturities of more than one year and publicly issued debt of U.S. Government
Agencies.
</FN>
- --------------------------------------------------------------------------------------------------
</TABLE>
The table below shows the non-standardized performance of Diversified Income
Fund, which does not reflect deduction of sales charges. If sales charges were
reflected, the performance figures would be lower than those shown. The Fund's
past performance is not an indication of how the Fund will perform in the
future.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1999
- --------------------------------------------------------------------------------
SINCE INCEPTION
OF CLASS B
1 YEAR 5 YEARS 10 YEARS (10/19/93)
Diversified Income, Class A -3.60% 7.22% 6.86% ---
Diversified Income, Class B -4.59% 6.10% --- 3.20%
- --------------------------------------------------------------------------------
Additional information about Diversified Income Fund is included in the section,
"More Information Regarding the Funds," page 20.
INFORMATION ABOUT THE REORGANIZATION
THE REORGANIZATION PLAN -- The Reorganization Plan provides for the transfer of
all of the assets and liabilities of each of Corporate Bond Fund and Limited
Maturity Bond Fund to Diversified Income Fund solely in exchange for Class A and
Class B shares of Diversified Income Fund. Each of Corporate Bond Fund and
Limited Maturity Bond Fund will distribute the shares of Diversified Income Fund
received in the exchange to its shareholders, and then Corporate Bond Fund and
Limited Maturity Bond Fund will be liquidated.
After the Reorganization, each shareholder of Corporate Bond Fund and Limited
Maturity Bond Fund will own shares in Diversified Income Fund having an
aggregate value equal to the aggregate value of each respective class of shares
of Corporate Bond Fund and Limited Maturity Bond Fund held by that shareholder
as of the close of business on the business day preceding the Closing.
Shareholders of Class A and B shares of Corporate Bond Fund and Limited Maturity
Bond Fund will receive shares of the corresponding class of Diversified Income
Fund. In the interest of economy and convenience, shares of Diversified Income
Fund generally will not be represented by physical certificates.
Until the Closing, shareholders of Corporate Bond Fund and Limited Maturity Bond
Fund will continue to be able to redeem their shares. Redemption requests
received after the Closing will be treated as requests received by the
Diversified Income Fund for the redemption of its shares received by the
shareholder in the Reorganization.
The obligations of the Funds under the Reorganization Plan are subject to
various conditions, including approval of the shareholders of each of the
Corporate Bond Fund and Limited Maturity Bond Fund. The Reorganization Plan also
requires that the Funds take, or cause to be taken, all actions, and do or cause
to be done, all things reasonably necessary, proper or advisable to consummate
and make effective the transactions contemplated by the Reorganization Plan. The
Reorganization Plan may be terminated by mutual agreement of the parties or on
certain other grounds. For a complete description of the terms and conditions of
the Reorganization, see the Reorganization Plan at Appendix A.
REASONS FOR THE REORGANIZATION -- The Funds have similar investment objectives,
strategies and risks and are relatively small in asset size. Because the
Corporate Bond Fund and Limited Maturity Bond Fund may invest in substantially
the same types of securities as Diversified Income Fund, the Funds are
duplicative in the same group of funds. In addition, the reorganization would
create a larger Fund, which should benefit shareholders of the Funds by
spreading costs across a larger, combined asset base. Also, a larger fund offers
the benefit of a more diversified portfolio of securities and may improve
trading efficiency. Based upon these considerations, the Board of Directors of
Security Income Fund determined that the Funds should be reorganized.
The proposed Reorganization was presented to the Board of Directors of Security
Income Fund for consideration and approval at a meeting held February 4, 2000.
For the reasons discussed below, the Directors, including all of the Directors
who are not "interested persons" (as defined in the Investment Company Act of
1940) of Security Income Fund, determined that the interests of the shareholders
of the respective Funds would not be diluted as a result of the proposed
Reorganization, and that the proposed Reorganization was in the best interests
of each of the Funds and its shareholders.
The Reorganization would allow shareholders of Corporate Bond Fund and Limited
Maturity Bond Fund to continue to participate in a professionally-managed
portfolio which invests primarily in investment grade debt securities. As Class
A and Class B shareholders of Diversified Income Fund, these shareholders would
continue to be able to exchange into other mutual funds in the larger Security
Group of Mutual Funds that offer the same class of shares in which such
shareholder is currently invested. A list of the current Security Group of
Mutual Funds, and their available classes, is attached as Appendix B.
BOARD CONSIDERATION -- The Board of Directors of Security Income Fund, in
recommending the proposed transaction, considered a number of factors, including
the following:
1. expense ratios and information regarding fees and expenses of Corporate Bond
Fund, Limited Maturity Bond Fund and Diversified Income Fund;
2. estimates that show that combining the Funds should result in lower expense
ratios because of economies of scale;
3. elimination of duplication of costs and inefficiencies of having three
similar funds;
4. the Reorganization would not dilute the interests of the Funds' current
shareholders;
5. the relative investment performance and risks of Diversified Income Fund as
compared to Corporate Bond Fund and Limited Maturity Bond Fund;
6. the similarity of Diversified Income Fund's investment objectives, policies
and restrictions to those of Corporate Bond Fund and Limited Maturity Bond
Fund and the fact that the Funds are duplicative within the overall group of
funds;
7. the tax-free nature of the Reorganization to Corporate Bond Fund and Limited
Maturity Bond Fund and their shareholders.
THE BOARD OF DIRECTORS OF SECURITY INCOME FUND RECOMMENDS THAT SHAREHOLDERS OF
THE CORPORATE BOND FUND AND LIMITED MATURITY BOND FUND, RESPECTIVELY, APPROVE
THE REORGANIZATION.
TAX CONSIDERATIONS -- The Reorganization is intended to qualify for Federal
income tax purposes as a tax-free reorganization under Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code"). Accordingly, pursuant to
this treatment, neither the Corporate Bond Fund, Limited Maturity Bond Fund, nor
their respective shareholders, nor the Diversified Income Fund is expected to
recognize any gain or loss for federal income tax purposes from the transactions
contemplated by the Reorganization Plan. As a condition to the closing of the
Reorganization, the Funds will receive an opinion from the law firm of Dechert
Price & Rhoads to the effect that the Reorganization will qualify as a tax-free
reorganization for Federal income tax purposes. That opinion will be based in
part upon certain assumptions and upon certain representations made by the
Funds.
Immediately prior to the Reorganization, each of the Corporate Bond Fund and
Limited Maturity Bond Fund will pay a dividend or dividends which, together with
all previous dividends, will have the effect of distributing to their respective
shareholders all of the Corporate Bond Fund's and Limited Maturity Bond Fund's
investment company taxable income for taxable years ending on or prior to the
Reorganization (computed without regard to any deduction for dividends paid) and
all of its net capital gains, if any, realized in taxable years ending on or
prior to the Reorganization (after reduction for any available capital loss
carryforward). Such dividends will be included in the taxable income of the
Corporate Bond Fund's and Limited Maturity Bond Fund's shareholders.
As of December 31, 1999, Corporate Bond Fund had accumulated capital loss
carryforwards in the amount of approximately $12,374,110 and Limited Maturity
Bond Fund in the amount of approximately $10,661. After the Reorganization,
these losses will be available to Diversified Income Fund to offset its capital
gains, although the amount of these losses which may offset Diversified Income
Fund's capital gains in any given year may be limited. As a result of this
limitation, it is possible that Diversified Income Fund may not be able to use
these losses as rapidly as Corporate Bond Fund and Limited Maturity Bond Fund
might have, and part of these losses may not be useable at all. The ability of
Diversified Income Fund to absorb losses in the future depends upon a variety of
factors that cannot be known in advance, including the existence of capital
gains against which these losses may be offset. In addition, the benefits of any
capital loss carryforwards currently are available only to shareholders of
Corporate Bond Fund and Limited Maturity Bond Fund, respectively. After the
Reorganization, however, these benefits will inure to the benefit of all
shareholders of Diversified Income Fund.
EXPENSES OF THE REORGANIZATION -- The Funds will bear the expenses relating to
the proposed Reorganization, including but not limited to the costs of the proxy
solicitation, which will be allocated ratably on the basis of their relative net
asset values immediately before Closing.
ADDITIONAL INFORMATION ABOUT THE FUNDS
FORM OF ORGANIZATION -- Each of the Funds is a series of Security Income Fund, a
Kansas corporation. Security Income Fund is governed by a Board of Directors,
which consists of six directors.
DIVIDENDS AND OTHER DISTRIBUTIONS -- Each Fund pays dividends from net
investment income on a monthly basis, and distributes net capital gains, if any,
at least annually. Dividends and distributions of each Fund are automatically
reinvested in additional shares of the respective class of that Fund, unless the
shareholder elects to receive distributions in cash.
If the Reorganization Plan is approved by shareholders of Corporate Bond Fund
and Limited Maturity Bond Fund, then as soon as practicable before the Closing,
each of Corporate Bond Fund and Limited Maturity Bond Fund will pay its
shareholders a cash distribution of all undistributed 2000 net investment income
and undistributed realized net capital gains.
CAPITALIZATION -- The following table shows on an unaudited basis the
capitalization of each Fund as of December 31, 1999 and on a PRO FORMA basis as
of December 31, 1999, giving effect to the Reorganization:
- --------------------------------------------------------------------------------
NET ASSET
VALUE PER SHARES
NET ASSETS SHARE OUTSTANDING
- --------------------------------------------------------------------------------
DIVERSIFIED INCOME FUND
Class A ......................... $12,722,594 $4.52 2,812,887
Class B ......................... $2,355,592 $4.51 522,448
CORPORATE BOND FUND
Class A ......................... $49,476,637 $6.47 7,645,684
Class B ......................... $9,137,794 $6.51 1,404,036
LIMITED MATURITY BOND FUND
Class A ......................... $5,570,226 $9.57 581,851
Class B ......................... $1,325,086 $9.54 138,869
PRO FORMA - DIVERSIFIED INCOME
INCLUDING CORPORATE BOND AND
LIMITED MATURITY BOND FUNDS
Class A ......................... $67,769,457 $4.52 14,993,243
Class B ......................... $12,818,472 $4.51 2,842,377
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE PROXY STATEMENT
SOLICITATION OF PROXIES -- Proxies are being solicited at the request of the
Board of Directors of Security Income Fund. Solicitation of proxies is being
made primarily by the mailing of this Notice and Proxy Statement with its
enclosures on or about April 4, 2000. Shareholders of Corporate Bond Fund and
Limited Maturity Bond Fund whose shares are held by nominees, such as brokers,
can vote their proxies by contacting their respective nominee. In addition to
the solicitation of proxies by mail, employees of Security Management and its
affiliates, without additional compensation, may solicit proxies in person or by
telephone, telegraph, facsimile, or oral communication. The Funds have retained
Shareholder Communications Corporation, a professional proxy solicitation firm,
to assist with any necessary solicitation of proxies. Shareholders of Corporate
Bond Fund and Limited Maturity Bond Fund may receive a telephone call from the
professional proxy solicitation firm asking the shareholder to vote.
A shareholder may revoke the accompanying proxy at any time prior to its use by
filing with Corporate Bond Fund or Limited Maturity Bond Fund, as applicable, a
written revocation or duly executed proxy bearing a later date. In addition, any
shareholder who attends the meeting of Corporate Bond Fund or Limited Maturity
Bond Fund shareholders, as applicable, in person may vote by ballot at the
Meeting, thereby canceling any proxy previously given. The cost of soliciting
proxies will be borne by Security Management, which will be reimbursed by the
Funds. The persons named in the accompanying proxy will vote as directed by the
proxy, but in the absence of voting directions in any proxy that is signed and
returned, they intend to vote "FOR" the Reorganization proposal and may vote in
their discretion with respect to other matters not now known to the Board of
Directors of Security Income Fund that may be presented at the respective
meetings.
VOTING RIGHTS -- Shares of the Funds entitle their holders to one vote per share
as to any matter on which the holder is entitled to vote, and each fractional
share shall be entitled to a proportionate fractional vote. Shares have
cumulative voting rights and no preemptive or subscription rights.
Shareholders of each of the Corporate Bond and Limited Maturity Bond Funds at
the close of business on February 28, 2000 (the "Record Date") will be entitled
to be present and give voting instructions for the Funds at their respective
meetings with respect to their shares owned as of that Record Date. As of the
Record Date, 9,128,419.973 shares of the Corporate Bond Fund were outstanding
and entitled to vote and 692,234.205 shares of the Limited Maturity Bond Fund
were outstanding and entitled to vote.
Approval of the Reorganization with respect to each of Corporate Bond Fund and
Limited Maturity Bond Fund requires the affirmative vote of a majority of the
outstanding shares of that Fund. In the event that the shareholders of only one
of the Corporate Bond and Limited Maturity Bond Funds approve the
Reorganization, that particular Fund whose shareholders approved the
Reorganization would be reorganized into Diversified Income Fund. The Fund not
approving the Reorganization would continue to operate as a separate entity.
Each of Corporate Bond Fund and Limited Maturity Bond Fund must have a quorum to
conduct its business at the meeting. The holders of a MAJORITY of outstanding
shares present in person or by proxy shall constitute a quorum. In the absence
of a quorum, a majority of outstanding shares of either Fund entitled to vote,
in person or by proxy, may adjourn the meeting from time to time until a quorum
shall be present. An adjournment of the meeting for one of the Funds shall not
prevent the other Fund from holding its meeting.
If a shareholder abstains from voting as to any matter, or if a broker returns a
"non-vote" proxy, indicating a lack of authority to vote on a matter, the shares
represented by the abstention or non-vote will be deemed present at the meeting
for purposes of determining a quorum. However, abstentions and broker non-votes
will not be deemed represented at the meeting for purposes of calculating the
vote on any matter. As a result, an abstention or broker non-vote will have the
same effect as a vote against the Reorganization. Prior to the meeting, the
Funds expect that broker-dealer firms holding their shares of the Funds in
"street name" for their customers will request voting instructions from their
customers and beneficial owners.
To the knowledge of Security Income Fund, as of August 31, 1999, no Director of
Security Income Fund owns 1% or more of the outstanding shares of the Corporate
Bond Fund or Limited Maturity Bond Fund, and the officers and Directors of
Security Income Fund own, as a group, less than 1% of the shares of the
Corporate Bond Fund or Limited Maturity Bond Fund.
Appendix C hereto lists the persons that, as of February 28, 2000, owned
beneficially, or of record 5% or more of the outstanding shares of Corporate
Bond Fund or Limited Maturity Bond Fund.
OTHER MATTERS TO COME BEFORE THE MEETINGS -- The Funds do not know of any
matters to be presented at the meetings other than those described in this Proxy
Statement/Prospectus. If other business should properly come before the
meetings, the proxy holders will vote thereon in accordance with their best
judgment.
SHAREHOLDER PROPOSALS -- The Funds are not required to hold regular annual
meetings and, in order to minimize their costs, do not intend to hold meetings
of shareholders unless so required by applicable law, regulation, regulatory
policy or if otherwise deemed advisable by the Funds' management. Therefore it
is not practicable to specify a date by which shareholder proposals must be
received in order to be incorporated in an upcoming proxy statement for an
annual meeting or to be submitted to shareholders of the Funds.
INFORMATION ABOUT THE FUNDS -- Proxy materials, reports and other information
filed by the Funds can be inspected and copied at the Public Reference
Facilities maintained by the SEC at 450 Fifth Street, NW, Washington, DC 20549;
7 World Trade Center, Suite 1300, New York, New York 10048; and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can also be
obtained from the Public Reference Branch, Office of Consumer Affairs and
Information Services, Securities and Exchange Commission, Washington, DC 20549
at prescribed rates. The SEC maintains an Internet World Wide Web site (at
http://www.sec.gov) which contains other information about the Funds.
REPORTS TO SHAREHOLDERS -- Security Management will furnish, without charge, a
copy of the most recent Annual Report regarding the Funds upon request. Requests
for such reports should be directed to Security Management at 700 SW Harrison
Street, Topeka, KS 66636 or at (800) 888-2461.
IN ORDER THAT THE PRESENCE OF A QUORUM AT THE MEETINGS MAY BE ASSURED, PROMPT
EXECUTION AND RETURN OF THE ENCLOSED PROXY IS REQUESTED. A SELF-ADDRESSED,
POSTAGE-PAID ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE.
Amy J. Lee, Secretary
April 3, 2000
700 SW Harrison
Topeka, KS 66636
<PAGE>
MORE INFORMATION REGARDING THE FUNDS
SHAREHOLDER GUIDE
PURCHASE OPTIONS -- This Proxy Statement/Prospectus relates to the two separate
classes of Diversified Income Fund: Class A and Class B, each of which
represents an identical interest in the Fund's investment portfolio, but is
offered with different sales charges and distribution fee (Rule 12b-1)
arrangements. As described below and elsewhere in this Proxy Statement/
Prospectus, the contingent deferred sales load structure and conversion
characteristics of the Diversified Income Fund shares issued to you in the
Reorganization will be the same as those that applied to the Corporate Bond Fund
and/or Limited Maturity Bond Fund shares held by you immediately prior to the
Reorganization, and the period that you held the Corporate Bond Fund and/or
Limited Maturity Bond Fund shares will be included in the holding period of the
Diversified Income Fund shares for purposes of calculating contingent deferred
sales charges and determining conversion rights. Purchases of the shares of
Diversified Income Fund after the Reorganization will be subject to the sales
load structure and conversion rights discussed below.
The sales charges and fees for Class A and Class B shares are shown and
contrasted in the chart below.
- --------------------------------------------------------------------------------
CLASS A CLASS B
- --------------------------------------------------------------------------------
Maximum Initial Sales Charge on Purchases ............ 4.75%(1) None
Contingent Deferred Sales Charge ("CDSC") ............ None(2) 5.00%(3)
Annual Distribution (12b-1) Fee and Service Fee(4) ... 0.25% 1.00%
Automatic Conversion to Class A ...................... N/A 8 Years(5)
- --------------------------------------------------------------------------------
(1) Imposed upon purchase. Reduced for purchases of $50,000 and more.
(2) For investments of $1 million or more, a CDSC of 1% may be assessed on
redemptions of shares that were purchased without an initial sales charge.
See "Class A shares: Initial Sales Charge Alternative," below.
(3) Imposed upon redemption within 5 years from purchase. Fee has scheduled
reductions after the first year. See "Class B shares: Deferred Sales Charge
Alternative," below.
(4) Annual asset-based distribution charge.
(5) Class B shares of the Diversified Income Fund issued to shareholders of the
Corporate Bond Fund and/or Limited Maturity Bond Fund in the Reorganization
will convert to Class A shares in the eighth year from the original date of
purchase of the Class B shares of the Corporate Bond Fund and/or Limited
Maturity Bond Fund, as applicable.
- --------------------------------------------------------------------------------
The relative impact of the initial sales charges and ongoing annual expenses
will depend on the length of time a share is held.
CLASS A SHARES.
INITIAL SALES CHARGE ALTERNATIVE. Class A shares of the Funds are sold at the
net asset value ("NAV") per share in effect plus a sales charge as described in
the following table. For waivers or reductions of the Class A shares sales
charges, see "Special Purchases without a Sales Charge" and "Reduced Sales
Charges."
- --------------------------------------------------------------------------------
AS A % OF AS A % DEALERS' REALLOWANCE AS
YOUR INVESTMENT OFFERING PRICE OF NAV A % OF OFFERING PRICE
- --------------------------------------------------------------------------------
Less than $50,000 ......... 4.75% 4.99% 4.00%
$50,000 - $99,999 ......... 3.75% 3.90% 3.00%
$100,000 - $249,999 ....... 2.75% 2.83% 2.20%
$250,000 - $999,999 ....... 1.75% 1.78% 1.40%
$1,000,000 or more ........ None None (See below)
- --------------------------------------------------------------------------------
There is no initial sales charge on purchases of $1,000,000 or more. However,
the Funds' Distributor will pay Authorized Dealers of record commissions as
follows: 1.00% on purchases of $1,000,000 up to $5,000,000, plus 0.50% on
amounts above $5,000,000 up to $10,000,000, plus 0.10% for any amount above
$10,000,000. If shares are redeemed within one year of purchase, a CDSC of 1.00%
will be imposed.
REDUCED SALES CHARGES. An investor may immediately qualify for a reduced sales
charge on a purchase of Class A shares of the Funds or other funds in the
Security Group of Mutual Funds which offer Class A shares, by completing a
Statement of Intention to purchase Fund shares. Executing the Statement of
Intention expresses an intention to invest during the next 13 months (or 36
months for purchases of $1,000,000 or more) a specified amount, which, if made
at one time, would qualify for a reduced sales charge. An amount equal to five
percent of the amount specified in the Statement of Intention will be restricted
within your account to cover additional sales charges that may be due if your
actual total investment fails to qualify for the reduced sales charges. See the
Statement of Additional Information for the Funds for details on the Statement
of Intention option or contact Security Management at (800) 888-2461 for more
information.
A sales charge may also be reduced by taking into account your previous
purchases of Class A shares of the Funds or any other funds in the Security
Group of Mutual Funds (excluding Security Cash Fund) ("Rights of Accumulation").
The reduced sales charges apply to quantity purchases made at one time or on a
cumulative basis over any period of time. See the Statement of Additional
Information for the Funds for details or contact Security Management at (800)
888-2461 for more information.
SPECIAL PURCHASE WITHOUT A SALES CHARGE. Class A shares may be purchased at NAV
without a sales charge by certain individuals and institutions. For additional
information, contact Security Management at (800) 888-2461, or see the Funds'
Statement of Additional Information.
CLASS B SHARES.
DEFERRED SALES CHARGE ALTERNATIVE. Class B shares may be purchased at their NAV
per share without an initial sales charge at the time of purchase. Class B
shares that are redeemed within five years of purchase, however, will be subject
to a CDSC as described in the table that follows. Class B shares of the Funds
are subject to a distribution (12b-1) fee at an annual rate of 1.00% of the
average daily net assets of the Class, which is higher than the distribution
fees of Class A shares. The higher distribution (12b-1) fees mean a higher
expense ratio, so Class B shares pay correspondingly lower dividends and may
have a lower NAV than Class A shares. In connection with sales of Class B
shares, the Distributor compensates Authorized Dealers at a rate of 4% of
purchase payments subject to a CDSC. The amount of the CDSC is determined as a
percentage of the lesser of the NAV of the Class B shares at the time of
original purchase or redemption. No charge will be imposed for any net increase
in the value of shares purchased during the preceding six years in excess of the
purchase price of such shares or for shares acquired either by reinvestment of
net investment income dividends or capital gain distributions. The percentage
used to calculate the CDSC will depend on the number of years since you invested
the dollar amount being redeemed according to the following table:
-----------------------------------------------
YEAR OF REDEMPTION AFTER PURCHASE CDSC
-----------------------------------------------
First .................................. 5%
Second ................................. 4%
Third .................................. 3%
Fourth ................................. 3%
Fifth .................................. 2%
Sixth and following .................... 0%
-----------------------------------------------
Class B shares will automatically convert into Class A shares eight years after
purchase, except that Class B shares of the Diversified Income Fund issued in
connection with the Reorganization with respect to Class B shares of the
Corporate Bond Fund and/or Limited Maturity Bond Fund will convert to Class A
shares eight years after the purchase of the original shares of the Corporate
Bond Fund and/or Limited Maturity Bond Fund, as applicable. For additional
information on the CDSC and the conversion of Class B shares, see the Funds'
Statement of Additional Information.
WAIVERS OF CDSC. The CDSC on Class A and Class B shares will be waived in the
following cases. In determining whether a CDSC is applicable, it will be assumed
that shares held in the shareholder's account that are not subject to such
charge are redeemed first.
o Upon the death of the shareholder if shares are redeemed within one year of
the shareholder's death
o Upon the disability of the shareholder prior to age 65 if shares are redeemed
within one year of the shareholder becoming disabled and the shareholder was
not disabled when the shares were purchased
o In connection with required minimum distributions from a retirement plan
qualified under Section 401(a), 401(k), 403(b) or 408 of the Internal Revenue
Code
o In connection with distributions from retirement plans qualified under
Section 401(a) or 401(k) of the Internal Revenue Code for:
- returns of excess contributions to the plan
- retirement of a participant in the plan
- a loan from the plan (loan repayments are treated as new sales for
purposes of the deferred sales charge)
o Upon the financial hardship (as defined in regulations under the Code) of a
participant in a plan
o Upon termination of employment of a participant in a plan
o Upon any other permissible withdrawal under the terms of the plan.
If you think you may be eligible for a CDSC waiver, contact Security Management
at (800) 888-2461.
REINSTATEMENT PRIVILEGE. Class A shareholders who have redeemed their shares in
any fund in the Security Group of Mutual Funds may reinvest some or all of the
proceeds in the same share class within 30 days without a sales charge. See the
Statement of Additional Information for the Funds for details or contact
Security Management at (800) 888-2461.
RULE 12B-1 PLAN. Each Fund has a distribution plan pursuant to Rule 12b-1 under
the 1940 Act applicable to each class of shares of the Fund ("Rule 12b-1 Plan").
Under the Rule 12b-1 Plans, the Distributor may receive from each Fund an annual
fee in connection with the offering, sale and shareholder servicing of the
Fund's Class A and Class B shares.
DISTRIBUTION AND SERVICING FEES. In connection with the distribution of shares
of the Fund and services rendered to shareholders, the Fund pays the Distributor
servicing fees and distribution fees up to the annual rates set forth below
(calculated as a percentage of the Fund's average daily net assets attributable
to that class):
----------------------------------------------
SERVICING FEE DISTRIBUTION FEE
----------------------------------------------
Class A .... 0.25% None
Class B .... 0.25% 0.75%
----------------------------------------------
Fees paid under the Rule 12b-1 Plan may be used to cover the expenses of the
Distributor from the sale of Class A and Class B shares of the Fund, including
payments to Authorized Dealers, and for shareholder servicing. Because these
fees are paid out of the Fund's assets on an on-going basis, over time these
fees will increase the cost of your investment and may cost you more than paying
other types of sales charges.
Under the Rule 12b-1 Plan, ongoing payments will be made on a quarterly basis to
Authorized Dealers for distribution and shareholder servicing as set forth
below.
----------------------------------------------
SERVICING FEE DISTRIBUTION FEE
----------------------------------------------
Class A .... 0.25% 0.00%
Class B .... 0.25% 0.00%
----------------------------------------------
OTHER EXPENSES. In addition to the management fee and other fees described
previously, each Fund pays other expenses, such as legal, audit, transfer agency
and custodian fees, proxy solicitation costs, and the compensation of Directors
who are not affiliated with Security Management. Most Fund expenses are
allocated proportionately among all of the outstanding shares of the Fund.
However, the Rule 12b-1 Plan fees for each class of shares are charged
proportionately only to the outstanding shares of that class.
PURCHASING SHARES -- The minimum initial investment in the Funds is $100.
Subsequent investments must be $100 (or $20 under an Accumulation Plan). The
Funds and the Distributor reserve the right to reject any order to purchase
shares. Purchase and sale requests are executed at the next NAV determined after
the order is received in proper form by the Transfer Agent or the Distributor.
PRICE OF SHARES. When you buy shares, you pay the NAV plus any applicable sales
charge. When you sell shares, you receive the NAV minus any applicable CDSC.
Exchange orders are effected at NAV.
RETIREMENT PLANS. The Funds have available tax-qualified retirement plans for
individuals, prototype plans for the self-employed, pension and profit sharing
plans for corporations and custodial accounts for employees of public school
systems and organizations meeting the requirements of Section 501(c)(3) of the
Internal Revenue Code. Further information concerning these plans is contained
in the Funds' Statement of Additional Information. For further information,
contact Security Management at (800) 888-2461.
DETERMINATION OF NET ASSET VALUE. The NAV per share of each Fund is computed as
of the close of regular trading hours on the New York Stock Exchange (normally 3
p.m. Central time) on days when the Exchange is open. The Exchange is open
Monday through Friday, except on observation of the following holidays: New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Each Fund's NAV is generally based upon the market value of securities held in
the Fund's portfolio. If market prices are not available, the fair value of
securities is determined using procedures approved by the Board of Directors of
Security Income Fund.
EXCHANGE PRIVILEGES AND RESTRICTIONS. Shareholders who own shares of the Funds
may exchange those shares for shares of another of the funds in the Security
Group of Mutual 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 or sales charge is presently imposed on such an exchange. Shares of
a particular class of a Fund may be exchanged only for shares of the same class
of another fund in the Security Group of Mutual Funds or for shares of Security
Cash Fund, a money market fund, which offers a single class of shares. Any
applicable CDSC will be imposed upon redemption and calculated from the date of
the initial purchase without regard to the time shares were held in Cash Fund.
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 of Class A shares of the Funds 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 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, other
than those described above, are made at net asset value plus the sales charge
described in the prospectus of the other fund being acquired, less the sales
charge paid on the shares of the fund at the time of original purchase.
Shareholders should contact the Funds 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, Security Management would
first cause to be exchanged those shares that would not be subject to any sales
charges. Exchanges are made upon receipt of a properly completed Exchange
Authorization form.
To exchange shares by telephone, a shareholder must hold shares in
non-certificate form and must either have completed the Telephone Exchange
section of the application or a Telephone Transfer Authorization form which may
be obtained from Security Management. The exchange privilege, including
telephone exchanges, may be changed or discontinued at any time by either
Security Management or the Fund upon 60 days' notice to shareholders.
SELLING SHARES -- Shares of the Funds will be redeemed at the NAV (less any
applicable CDSC and/or federal income tax withholding) next determined after
receipt of a redemption request in good form on any day the New York Stock
Exchange is open for business. Any share certificates representing fund shares
sold must be returned with a request to sell the shares.
SYSTEMATIC WITHDRAWAL PLAN. You may elect to receive monthly, quarterly,
semi-annual or annual payments in any fixed amount in excess of $25, as long as
the account has a current value of at least $5,000. For additional information,
contact Security Management at (800) 888-2461, or see the Funds' Statement of
Additional Information.
PAYMENTS. Payments may be made by check. Redemption proceeds will be sent to the
shareholder(s) of record at the address of record within seven days after
receipt of a valid redemption request. For a charge of $15 deducted from
redemption proceeds, Security Management will provide a certified or cashier's
check, or send the redemption proceeds by express mail, upon the shareholder's
request.
MANAGEMENT OF THE FUND
INVESTMENT MANAGER -- Security Management, each Fund's investment manager, is a
Kansas limited liability company. On December 31, 1999, the aggregate assets of
all of the mutual funds under the investment management of Security Management
were approximately $6.3 billion. Security Management has overall responsibility
for the management of the Funds. Security Income Fund and Security Management
have entered into an agreement that requires Security Management to provide
investment advisory, statistical and research services to the Funds, supervise
and arrange for the purchase and sale of securities on behalf of the Funds, and
provide for the maintenance and compilation of records pertaining to the
investment advisory function. The agreement with Security Management can be
canceled by the Board of Directors of Security Income Fund upon 60 days written
notice. Investment management fees are computed and accrued daily and paid
monthly. For the year ended December 31, 1999, Diversified Income Fund did not
pay investment management fees to Security Management, which waived such fees.
PARENT COMPANY AND DISTRIBUTOR -- Security Management is controlled by its
members, Security Benefit Life Insurance Company and Security Benefit Group,
Inc. ("SBG"). SBG is an insurance and financial services holding company
wholly-owned by Security Benefit Life Insurance Company, 700 Harrison Street,
Topeka, Kansas 66636-0001. Security Benefit Life, a life insurance company, is
incorporated under the laws of Kansas. Security Management is a direct, and the
Distributor, the Fund's principal underwriter, is an indirect, wholly owned
subsidiary of Security Benefit Life Insurance Company ("Security Benefit").
ADMINISTRATIVE AGENT -- Security Management also acts as the administrative
agent for the Fund and as such performs administrative functions and the
bookkeeping, accounting and pricing functions for the Funds. For these services
Security Management receives, on an annual basis, a fee of 0.09% of the average
net assets of each Fund, calculated daily and payable monthly.
Security Management also acts as the transfer agent for the Funds. As such,
Security Management performs all shareholder servicing functions, including
transferring record ownership, processing purchase and redemption transactions,
answering inquiries, mailing shareholder communications and acting as the
dividend disbursing agent. For these services, the Investment Manager receives
an annual maintenance fee of $8.00 per account, a fee of $1.00 per shareholder
transaction, and a fee of $1.00 per dividend transaction.
PORTFOLIO TRANSACTIONS -- Security Management will place orders to execute
securities transactions that are designed to implement each Fund's investment
objectives and policies. Security Management uses its reasonable efforts to
place all purchase and sale transactions with brokers and dealers ("brokers")
that provide "best execution" of these orders. In placing purchase and sale
transactions, Security Management may consider brokerage and research services
provided by a broker to Security Management or its affiliates, and the Fund may
pay a commission for effecting a securities transaction that is in excess of the
amount another broker would have charged if Security Management determines in
good faith that the amount of commission is reasonable in relation to the value
of the brokerage and research services provided by the broker viewed in terms of
either that particular transaction or the overall responsibilities of Security
Management with respect to all accounts as to which it exercises investment
discretion. Security Management may use all, none, or some of such information
and services in providing investment advisory services to each of the mutual
funds under its management, including each Fund. In addition, Security
Management also may consider a broker's sale of Fund shares if Security
Management is satisfied that the Fund would receive best execution of the
transaction from that broker.
Securities held by the Funds may also be held by other investment advisory
clients of Security Management, including other investment companies. In
addition, Security Management's parent company, Security Benefit, may also hold
some of the same securities as the Funds. When selecting securities for purchase
or sale for a Fund, Security Management may at the same time be purchasing or
selling the same securities for one or more of such other accounts. Subject to
Security Management's obligation to seek best execution, such purchases or sales
may be executed simultaneously or "bunched." It is the policy of Security
Management not to favor one account over the other. Any purchase or sale orders
executed simultaneously (which may also include orders from Security Benefit)
are allocated at the average price and as nearly as practicable on a pro rata
basis (transaction costs will also generally be shared on a pro rata basis) in
proportion to the amounts desired to be purchased or sold by each account. In
those instances where it is not practical to allocate purchase or sale orders on
a pro rata basis, then the allocation will be made on a rotating or other
equitable basis. While it is conceivable that in certain instances this
procedure could adversely affect the price or number of shares involved in a
Fund's transaction, it is believed that the procedure generally contributes to
better overall execution of the Funds' portfolio transactions.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS -- Each Fund pays its shareholders dividends from
its net investment income monthly, and distributes any net capital gains that it
has realized, at least annually. Your dividends and distributions will be
reinvested in shares of the Fund, unless you instruct Security Management
otherwise. There are no fees or sales charges on reinvestments.
FEDERAL TAXES -- Fund dividends and distributions are taxable to shareholders
(unless your investment is in an Individual Retirement Account ("IRA") or other
tax-advantaged retirement account) whether you reinvest your dividends or
distributions or take them in cash.
In addition to federal tax, dividends and distributions may be subject to state
and local taxes. If a Fund declares a dividend or distribution in October,
November or December but pays it in January, you may be taxed on that dividend
or distribution as if you received it in the previous year. In general,
dividends and distributions from the Funds are taxable as follows:
- --------------------------------------------------------------------------------
TAX RATE FOR 28%
TYPE OF DISTRIBUTION TAX RATE FOR 15% BRACKET BRACKET OR ABOVE
- --------------------------------------------------------------------------------
Income dividends Ordinary Income rate Ordinary Income rate
Short-term capital gains Ordinary Income rate Ordinary Income rate
Long-term capital gains 10% 20%
- --------------------------------------------------------------------------------
A Fund has "short-term capital gains" when it sells a security within 12 months
after buying it. A Fund has "long-term capital gains" when it sells a security
that it has owned for more than 12 months. When a Fund earns interest from bonds
and other debt securities and distributes these earnings to shareholders, the
Fund has "ordinary income." The Funds expect that their distributions will
consist primarily of ordinary income. You generally are required to report all
Fund distributions on your federal income tax return.
Tax-deferred retirement accounts do not generate a tax liability unless you are
taking a distribution or making a withdrawal.
The Funds mail information concerning the tax status of the distributions for
each calendar year on or before January 31 of the following year.
This is a brief summary of some of the tax laws that affect your investment in
the Funds. Please see the Funds' Statement of Additional Information and your
tax adviser for further information.
<PAGE>
FINANCIAL HIGHLIGHTS FOR DIVERSIFIED INCOME FUND,
CORPORATE BOND FUND AND LIMITED MATURITY BOND FUND
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
The financial highlights table is intended to help you understand the Funds'
financial performance for their Class A shares and Class B shares during the
past five years, or the period since commencement of a Fund. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned (or lost) on an
investment in the Fund assuming reinvestment of all dividends and distributions.
This information has been audited by Ernst & Young LLP, whose report, along with
the Funds' financial statements, are included in the annual report, which is
available upon request.
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
CORPORATE BOND FUND (CLASS A)
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31
--------------------------------------------------------------------
1999(B)(C) 1998(C) 1997(C) 1996(C)(E) 1995(C)(E)
---------- ------- ------- ---------- ----------
PER SHARE DATA
<S> <C> <C> <C> <C> <C>
Net asset value beginning of period.................. $ 7.14 $ 7.05 $ 6.87 $ 7.39 $ 6.68
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)......................... 0.41 0.43 0.45 0.47 0.47
Net gain (loss) on securities (realized & unrealized) (0.67) 0.09 0.19 (0.52) 0.71
----- ----- ----- ----- -----
Total from investment operations..................... (0.26) 0.52 0.64 (0.05) 1.18
LESS DISTRIBUTIONS
Dividends (from net investment income)............... (0.41) (0.43) (0.46) (0.47) (0.47)
Distributions (from realized gains).................. --- --- --- --- ---
----- ----- ----- ----- -----
Total distributions.................................. (0.41) (0.43) (0.46) (0.47) (0.47)
----- ----- ----- ----- -----
Net asset value end of period........................ $ 6.47 $ 7.14 $ 7.05 $ 6.87 $ 7.39
===== ===== ===== ===== =====
Total return (a)..................................... (3.7)% 7.6% 9.7% (0.5)% 18.2%
RATIOS/SUPPLEMENTAL DATA
Net assets end of period (thousands)................. $49,477 $53,055 $56,487 $73,360 $93,701
Ratio of expenses to average net assets.............. 1.09% 1.06% 1.07% 1.01% 1.02%
Ratio of net investment income
(loss) to average net assets....................... 6.03% 6.01% 6.50% 6.54% 6.62%
Portfolio turnover rate.............................. 36% 64% 120% 292% 200%
</TABLE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
CORPORATE BOND FUND (CLASS B)
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31
----------------------------------------------------------------------------
1999(B)(C) 1998(B)(C) 1997(B)(C) 1996(B)(C)(E) 1995(B)(C)(E)
---------- ---------- ---------- ------------- -------------
PER SHARE DATA
<S> <C> <C> <C> <C> <C>
Net asset value beginning of period.................. $ 7.19 $ 7.09 $ 6.90 $ 7.43 $ 6.71
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)......................... 0.36 0.37 0.40 0.40 0.40
Net gain (loss) on securities (realized & unrealized) (0.68) 0.10 0.19 (0.52) 0.73
----- ----- ----- ----- -----
Total from investment operations..................... (0.32) 0.47 0.59 (0.12) 1.13
LESS DISTRIBUTIONS
Dividends (from net investment income)............... (0.36) (0.37) (0.40) (0.41) (0.41)
Distributions (from realized gains).................. --- --- --- --- ---
----- ----- ----- ----- -----
Total distributions.................................. (0.36) (0.37) (0.40) (0.41) (0.41)
----- ----- ----- ----- -----
Net asset value end of period........................ $ 6.51 $ 7.19 $ 7.09 $ 6.90 $ 7.43
===== ===== ===== ===== =====
Total return (a)..................................... (4.5)% 6.9% 8.7% (1.4)% 17.3%
RATIOS/SUPPLEMENTAL DATA
Net assets end of period (thousands)................. $9,138 $7,982 $6,493 $7,303 $5,743
Ratio of expenses to average net assets.............. 1.85% 1.85% 1.85% 1.85% 1.85%
Ratio of net investment income
(loss) to average net assets....................... 5.30% 5.18% 5.72% 5.70% 5.80%
Portfolio turnover rate.............................. 36% 64% 120% 292% 200%
</TABLE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
LIMITED MATURITY BOND FUND (CLASS A)
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FISCAL PERIOD ENDED DECEMBER 31
-----------------------------------------------------------------------------
1999(B)(C) 1998(B)(C)(E) 1997(B)(C)(E) 1996(B)(C)(E) 1995(B)(C)(D)(E)
---------- ------------- ------------- ------------- ----------------
PER SHARE DATA
<S> <C> <C> <C> <C> <C>
Net asset value beginning of period.................. $10.40 $10.30 $10.14 $10.66 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)......................... 0.64 0.65 0.72 0.72 0.62
Net gain (loss) on securities (realized & unrealized) (0.82) 0.10 0.16 (0.51) 0.65
----- ----- ----- ----- -----
Total from investment operations..................... (0.18) 0.75 0.88 0.21 1.27
LESS DISTRIBUTIONS
Dividends (from net investment income)............... (0.65) (0.65) (0.72) (0.72) (0.61)
Distributions (from realized gains).................. --- --- --- --- ---
Return of capital.................................... --- --- --- (0.01) ---
----- ----- ----- ----- -----
Total distributions.................................. (0.65) (0.65) (0.72) (0.73) (0.61)
----- ----- ----- ----- -----
Net asset value end of period........................ $ 9.57 $10.40 $10.30 $10.14 $10.66
===== ===== ===== ===== =====
Total return (a)..................................... (1.8)% 7.5% 9.0% 2.1% 13.0%
RATIOS/SUPPLEMENTAL DATA
Net assets end of period (thousands)................. $5,570 $6,365 $5,490 $4,938 $3,322
Ratio of expenses to average net assets.............. 0.77% 0.87% 0.55% 0.90% 0.84%
Ratio of net investment income
(loss) to average net assets....................... 6.34% 6.30% 7.10% 6.97% 5.97%
Portfolio turnover rate.............................. 31% 58% 76% 105% 4%
</TABLE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
LIMITED MATURITY BOND FUND (CLASS B)
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FISCAL PERIOD ENDED DECEMBER 31
-----------------------------------------------------------------------------
1999(B)(C) 1998(B)(C)(E) 1997(B)(C)(E) 1996(B)(C)(E) 1995(B)(C)(D)(E)
---------- ------------- ------------- ------------- ----------------
PER SHARE DATA
<S> <C> <C> <C> <C> <C>
Net asset value beginning of period.................. $10.37 $10.27 $10.14 $10.67 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)......................... 0.53 0.53 0.61 0.63 0.53
Net gain (loss) on securities (realized & unrealized) (0.82) 0.11 0.14 (0.52) 0.66
----- ----- ----- ----- -----
Total from investment operations..................... (0.29) 0.64 0.75 0.11 1.19
LESS DISTRIBUTIONS
Dividends (from net investment income)............... (0.54) (0.54) (0.62) (0.63) (0.52)
Distributions (from realized gains).................. --- --- --- --- ---
Return of capital.................................... --- --- --- (0.01) ---
----- ----- ----- ----- -----
Total distributions.................................. (0.54) (0.54) (0.62) (0.64) (0.52)
----- ----- ----- ----- -----
Net asset value end of period........................ $ 9.54 $10.37 $10.27 $10.14 $10.67
===== ===== ===== =====
Total return (a)..................................... (2.9)% 6.4% 7.7% 1.1% 12.2%
RATIOS/SUPPLEMENTAL DATA
Net assets end of period (thousands)................. $1,325 $1,354 $1,054 $761 $752
Ratio of expenses to average net assets.............. 1.85% 1.89% 1.50% 1.88% 1.71%
Ratio of net investment income
(loss) to average net assets....................... 5.27% 5.18% 6.15% 5.99% 5.12%
Portfolio turnover rate.............................. 31% 58% 76% 105% 4%
</TABLE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED INCOME FUND (CLASS A)
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31
----------------------------------------------------------------------------
1999(B)(C) 1998(B)(C) 1997(B)(C) 1996(B)(C)(E) 1995(B)(C)(E)
---------- ---------- ---------- ------------- -------------
PER SHARE DATA
<S> <C> <C> <C> <C> <C>
Net asset value beginning of period.................. $ 4.96 $ 4.81 $ 4.71 $ 4.97 $ 4.35
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)......................... 0.26 0.27 0.32 0.31 0.30
Net gain (loss) on securities (realized & unrealized) (0.44) 0.16 0.10 (0.26) 0.62
----- ----- ----- ----- -----
Total from investment operations..................... (0.18) 0.43 0.42 0.05 0.92
LESS DISTRIBUTIONS
Dividends (from net investment income)............... (0.26) (0.28) (0.32) (0.31) (0.30)
Distributions (from realized gains).................. --- --- --- --- ---
----- ----- ----- ----- -----
Total distributions.................................. (0.26) (0.28) (0.32) (0.31) (0.30)
----- ----- ----- ----- -----
Net asset value end of period........................ $ 4.52 $ 4.96 $ 4.81 $ 4.71 $ 4.97
===== ===== ===== ===== =====
Total return (a)..................................... (3.6)% 9.1% 9.2% 1.3% 21.9%
RATIOS/SUPPLEMENTAL DATA
Net assets end of period (thousands)................. $12,723 $12,644 $7,652 $8,036 $10,080
Ratio of expenses to average net assets.............. 0.87% 0.93% 0.60% 0.65% 1.11%
Ratio of net investment income
(loss) to average net assets....................... 5.58% 5.62% 6.10% 6.44% 6.41%
Portfolio turnover rate.............................. 65% 78% 39% 75% 81%
</TABLE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED INCOME FUND (CLASS B)
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31
----------------------------------------------------------------------------
1999(B)(C) 1998(B)(C) 1997(B)(C) 1996(B)(C)(E) 1995(B)(C)(E)
---------- ---------- ---------- ------------- -------------
PER SHARE DATA
<S> <C> <C> <C> <C> <C>
Net asset value beginning of period.................. $ 4.95 $ 4.80 $ 4.71 $ 4.97 $ 4.35
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)......................... 0.22 0.22 0.26 0.25 0.26
Net gain (loss) on securities (realized & unrealized) (0.44) 0.16 0.10 (0.25) 0.63
----- ----- ----- ----- -----
Total from investment operations..................... (0.22) 0.38 0.36 (0.00) 0.89
LESS DISTRIBUTIONS
Dividends (from net investment income)............... (0.22) (0.23) (0.27) (0.26) (0.27)
Distributions (from realized gains).................. --- --- --- --- ---
----- ----- ----- ----- -----
Total distributions.................................. (0.22) (0.23) (0.27) (0.26) (0.27)
----- ----- ----- ----- -----
Net asset value end of period........................ $ 4.51 $ 4.95 $ 4.80 $ 4.71 $ 4.97
===== ===== ===== ===== =====
Total return (a)..................................... (4.6)% 8.0% 7.9% (0.02)% 20.9%
RATIOS/SUPPLEMENTAL DATA
Net assets end of period (thousands)................. $2,356 $3,668 $1,091 $661 $582
Ratio of expenses to average net assets.............. 1.85% 1.85% 1.68% 1.86% 1.87%
Ratio of net investment income
(loss) to average net assets....................... 4.55% 4.66% 5.02% 5.23% 5.69%
Portfolio turnover rate.............................. 65% 78% 39% 75% 81%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Total return information does not reflect deduction of any sales charge
imposed at the time of purchase for Class A shares or upon redemption for
Class B shares.
(b) Fund expenses were reduced by the Investment Manager during the period, and
expense ratios absent such reimbursement would have been as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
----------------- ----------------- ----------------- ----------------- -----------------
Class A Class B Class A Class B Class A Class B Class A Class B Class A Class B
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Corporate Bond ......... N/A 2.19% N/A 2.05% N/A 2.10% N/A 2.32% 1.10% 2.15%
Diversified Income ..... 1.22% 3.70% 1.17% 3.26% 1.06% 2.14% 1.43% 3.03% 1.37% 2.36%
Limited Maturity Bond .. 1.04% 2.12% 1.40% 2.60% 1.04% 1.99% 1.38% 2.70% 1.27% 2.41%
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(c) Net investment income was computed using the average month-end shares
outstanding throughout the period.
(d) Limited Maturity Bond Fund was initially capitalized on January 17, 1995,
with a net asset value of $10 per share. Percentage amounts for the period
have been annualized, except total return.
(e) Expense ratios including reimbursements, were calculated without the
reduction for custodian fees earnings credits beginning February 1, 1995.
Expense ratios with such reductions would have been as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
1995 1996 1997 1998
----------------- ----------------- ----------------- -----------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Corporate Bond .......... 1.02% 1.85% 1.01% 1.85% --- --- --- ---
Diversified Income ...... 1.10% 1.85% 0.64% 1.85% --- --- --- ---
Limited Maturity Bond ... 0.81% 1.65% 0.87% 1.85% 0.51% 1.46% 0.83% 1.85%
---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
APPENDIX A
FORM OF PLAN OF REORGANIZATION
THIS PLAN OF REORGANIZATION (the "Plan") is adopted as of this 4th day of
February, 2000, by Security Income Fund (the "Company") with its principal place
of business at 700 SW Harrison, Topeka, Kansas 66636-0001, on behalf of Security
Diversified Income Fund (formerly, "Security U. S. Government Fund") (the
"Acquiring Fund"), a separate series of the Company, Security Limited Maturity
Bond Fund (an "Acquired Fund"), a separate series of the Company, and Security
Corporate Bond Fund (also an "Acquired Fund"), another separate series of the
Company.
This Plan is intended to be and is adopted as a plan of reorganization and
liquidation within the meaning of Section 368(a)(1) of the United States
Internal Revenue Code of 1986, as amended (the "Code"). The reorganization (the
"Reorganization") will consist of the transfer of all of the assets of each
Acquired Fund to the Acquiring Fund in exchange solely for Class A and Class B
voting shares ($1.00 par value per share) of the Acquiring Fund (the "Acquiring
Fund Shares"), the assumption by the Acquiring Fund of all liabilities of each
Acquired Fund, and the distribution of the Acquiring Fund Shares to the
shareholders of each of the Acquired Funds in complete liquidation of each
Acquired Fund as provided herein, all upon the terms and conditions hereinafter
set forth in this Plan.
WHEREAS, the Company is an open-end, registered investment company of the
management type and each Acquired Fund owns securities which generally are
assets of the character in which the Acquiring Fund is permitted to invest;
WHEREAS, the Directors of the Company have determined that the exchange of all
of the assets of each Acquired Fund for Acquiring Fund Shares and the assumption
of all liabilities of each Acquired Fund by the Acquiring Fund is in the best
interests of the Acquiring Fund and its shareholders and that the interests of
the existing shareholders of the Acquiring Fund would not be diluted as a result
of this transaction; and
WHEREAS, the Directors of the Company also have determined, with respect to each
Acquired Fund, that the exchange of all of the assets of the Acquired Fund for
Acquiring Fund Shares and the assumption of all liabilities of the Acquired Fund
by the Acquiring Fund is in the best interests of the Acquired Fund and its
shareholders and that the interests of the existing shareholders of the Acquired
Fund would not be diluted as a result of this transaction;
NOW, THEREFORE, the Company, on behalf of the Acquiring Fund and each Acquired
Fund separately, hereby approves the Plan on the following terms and conditions,
such terms and conditions applying in full force to the Reorganization with
respect to each Acquired Fund:
1. TRANSFER OF ASSETS OF THE ACQUIRED FUND TO THE ACQUIRING FUND IN EXCHANGE
FOR THE ACQUIRING FUND SHARES, THE ASSUMPTION OF ALL ACQUIRED FUND
LIABILITIES AND THE LIQUIDATION OF THE ACQUIRED FUND
1.1 Subject to the requisite approvals of the shareholders of the
Acquired Fund and Acquiring Fund and the other terms and conditions
herein set forth and on the basis of the representations and
warranties contained herein, the Company will transfer all of the
Acquired Fund's assets, as set forth in paragraph 1.2, to the
Acquiring Fund, and the Acquiring Fund agrees in exchange therefor:
(i) to deliver to the Acquired Fund the number of full and fractional
Class A and Class B Acquiring Fund Shares determined by dividing the
value of the Acquired Fund's net assets with respect to each class,
computed in the manner and as of the time and date set forth in
paragraph 2.1, by the net asset value of one Acquiring Fund Share of
the same class, computed in the manner and as of the time and date
set forth in paragraph 2.2; and (ii) to assume all liabilities of the
Acquired Fund. Such transactions shall take place at the closing
provided for in paragraph 3.1 (the "Closing").
1.2 The assets of the Acquired Fund to be acquired by the Acquiring Fund
shall consist of all assets and property, including, without
limitation, all cash, securities, commodities and futures interests
and dividends or interests receivable that are owned by the Acquired
Fund and any deferred or prepaid expenses shown as an asset on the
books of the Acquired Fund on the closing date provided for in
paragraph 3.1 (the "Closing Date").
1.3 The Acquired Fund will endeavor to discharge all of its known
liabilities and obligations prior to the Closing Date. The Acquiring
Fund shall also assume all of the liabilities of the Acquired Fund,
whether accrued or contingent, known or unknown, existing at the
Valuation Date. On or as soon as practicable prior to the Closing
Date, the Acquired Fund will declare and pay to its shareholders of
record one or more dividends and/or other distributions that,
together with all previous distributions, shall have the effect of
distributing to its shareholders (i) all of its investment company
taxable income and all of its net realized capital gains, if any, for
the period from the close of its last taxable year to the end of the
business day on the Closing; and (ii) any undistributed investment
company taxable income and net capital gain from any period to the
extent not otherwise distributed.
1.4 Immediately after the transfer of assets provided for in paragraph
1.1, the Acquired Fund will distribute to the Acquired Fund's
shareholders of record with respect to each class of its shares,
determined as of immediately after the close of business on the
Closing Date (the "Acquired Fund Shareholders"), on a pro rata basis
within that class, the Acquiring Fund Shares of the same class
received by the Acquired Fund pursuant to paragraph 1.1, and will
completely liquidate. Such distribution and liquidation will be
accomplished, with respect to each class of the Acquired Fund's
shares, by the transfer of the Acquiring Fund Shares then credited to
the account of the Acquired Fund on the books of the Acquiring Fund
to open accounts on the share records of the Acquiring Fund in the
names of the Acquired Fund Shareholders. The aggregate net asset
value of Class A and Class B Acquiring Fund Shares to be so credited
to Class A and Class B Acquired Fund Shareholders shall, with respect
to each class, be equal to the aggregate net asset value of the
Acquired Fund shares of that same class owned by such shareholders on
the Closing Date. All issued and outstanding shares of the Acquired
Fund will simultaneously be canceled on the books of the Acquired
Fund, although share certificates representing interests in Class A
and Class B shares of the Acquired Fund will represent a number of
the same class of Acquiring Fund Shares after the Closing Date, as
determined in accordance with Section 2.3. The Acquiring Fund shall
not issue certificates representing the Class A and Class B Acquiring
Fund Shares in connection with such exchange.
1.5 Ownership of Acquiring Fund Shares will be shown on the books of the
Acquiring Fund's transfer agent. Shares of the Acquiring Fund will be
issued in the manner described in the Acquiring Fund's then-current
prospectus and statement of additional information.
1.6 Any reporting responsibility of the Acquired Fund including, but not
limited to, the responsibility for filing of regulatory reports, tax
returns, or other documents with the Securities and Exchange
Commission (the "Commission"), any state securities commission, and
any federal, state or local tax authorities or any other relevant
regulatory authority, is and shall remain the responsibility of the
Acquired Fund.
2. VALUATION
2.1 The value of the Acquired Fund's assets to be acquired by the
Acquiring Fund hereunder shall be the value of such assets computed
as of immediately after the close of business of the New York Stock
Exchange and after the declaration of any dividends on the Closing
Date (such time and date being hereinafter called the "Valuation
Date"), using the valuation procedures set forth in the Company's
Articles of Incorporation, as amended (the "Articles of
Incorporation"), and the then-current prospectus or statement of
additional information with respect to the Acquiring Fund, and
valuation procedures established by the Company's Board of Directors.
2.2 The net asset value of a Class A and Class B Acquiring Fund Share
shall be the net asset value per share computed with respect to that
class as of immediately after the close of business of the New York
Stock Exchange and after the declaration of any dividends on the
Valuation Date, using the valuation procedures set forth in the
Company's Articles of Incorporation and the then-current prospectus
or statement of additional information with respect to the Acquiring
Fund, and valuation procedures established by the Company's Board of
Directors.
2.3 The number of the Class A and Class B Acquiring Fund Shares to be
issued (including fractional shares, if any) in exchange for the
Acquired Fund's assets shall be determined with respect to each such
class by dividing the value of the net assets with respect to the
Class A and Class B shares of the Acquired Fund, as the case may be,
determined using the same valuation procedures referred to in
paragraph 2.1, by the net asset value of an Acquiring Fund Share,
determined in accordance with paragraph 2.2.
2.4 All computations of value shall be made by the Acquiring Fund's
designated record keeping agent.
3. CLOSING AND CLOSING DATE
3.1 The Closing Date shall be April 28, 2000, or such other date as the
parties may agree to in writing. All acts taking place at the Closing
shall be deemed to take place simultaneously as of immediately after
the close of business on the Closing Date unless otherwise agreed to
by the parties. The close of business on the Closing Date shall be as
of 4:00 p.m., Eastern Time. The Closing shall be held at the offices
of the Company or at such other time and/or place as the Board of
Directors or officers of the Company may designate.
3.2 The Company shall direct UMB Bank, N.A., as custodian for the
Acquired Fund (the "Custodian"), to deliver, at the Closing, a
certificate of an authorized officer stating that (i) the Acquired
Fund's portfolio securities, cash, and any other assets ("Assets")
shall have been delivered in proper form to the Acquiring Fund within
two business days prior to or on the Closing Date, and (ii) all
necessary taxes in connection with the delivery of the Assets,
including all applicable federal and state stock transfer stamps, if
any, have been paid or provision for payment has been made. The
Acquired Fund's portfolio securities represented by a certificate or
other written instrument shall be transferred and delivered by the
Acquired Fund as of the Closing Date for the account of the Acquiring
Fund duly endorsed in proper form for transfer in such condition as
to constitute good delivery thereof. The Acquired Fund shall direct
the Custodian to deliver portfolio securities and instruments
deposited with a securities depository, as defined in Rule 17f-4
under the Investment Company Act of 1940, as amended (the "1940 Act")
as of the Closing Date by book entry in accordance with the customary
practices of such depositories and the custodian for Acquiring Fund.
3.3 Security Management Company, LLC, as transfer agent for the Acquired
Fund (the "Transfer Agent"), shall deliver, on behalf of the Acquired
Fund, at the Closing a certificate of an authorized officer stating
that its records contain the names and addresses of the Acquired Fund
Shareholders and the number and percentage ownership of outstanding
Class A and Class B shares owned by each such shareholder immediately
prior to the Closing.
3.4 In the event that on the Valuation Date (a) the New York Stock
Exchange or another primary trading market for portfolio securities
of the Acquiring Fund or the Acquired Fund shall be closed to trading
or trading thereupon shall be restricted, or (b) trading or the
reporting of trading on such Exchange or elsewhere shall be disrupted
so that, in the judgment of the Board of Directors of the Company,
accurate appraisal of the value of the net assets of the Acquiring
Fund or the Acquired Fund is impracticable, the Closing Date shall be
postponed until the first business day after the day when trading
shall have been fully resumed and reporting shall have been restored.
4. REPRESENTATIONS AND WARRANTIES
4.1 The Company, on behalf of the Acquired Fund, represents and warrants
to the Acquiring Fund as follows:
(a) The Acquired Fund is duly organized as a series of the Company,
which is a corporation duly organized and validly existing under
the laws of the State of Kansas, with power under the Company's
Articles of Incorporation to own all of its properties and
assets and to carry on its business as it is now being
conducted;
(b) The Company is a registered investment company classified as a
management company of the open-end type, and its registration
with the Commission as an investment company under the 1940 Act,
and the registration of its shares under the Securities Act of
1933, as amended ("1933 Act"), are in full force and effect;
(c) No consent, approval, authorization, or order of any court or
governmental authority is required for the consummation by the
Acquired Fund of the transactions contemplated herein, except
such as have been obtained under the 1933 Act, the Securities
Exchange Act of 1934, as amended (the "1934 Act") and the 1940
Act, and such as may be required by state securities laws;
(d) The current prospectus and statement of additional information
of the Acquired Fund and each prospectus and statement of
additional information of the Acquired Fund used during the
three years previous to the date of this Plan conforms or
conformed at the time of its use in all material respects to the
applicable requirements of the 1933 Act and the 1940 Act and the
rules and regulations of the Commission thereunder and does not
or did not at the time of its use include any untrue statement
of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were
made, not materially misleading;
(e) On the Closing Date, the Acquired Fund will have good and
marketable title to the Acquired Fund's assets to be transferred
to the Acquiring Fund pursuant to paragraph 1.2 and full right,
power, and authority to sell, assign, transfer and deliver such
assets hereunder free of any liens or other encumbrances, and
upon delivery and payment for such assets, the Acquiring Fund
will acquire good and marketable title thereto, subject to no
restrictions on the full transfer thereof, including such
restrictions as might arise under the 1933 Act, other than as
disclosed to the Acquiring Fund;
(f) The Acquired Fund is not engaged currently, and the execution,
delivery and performance of this Plan will not result, in (i) a
material violation of the Company's Articles of Incorporation or
By-Laws or of any agreement, indenture, instrument, contract,
lease or other undertaking to which the Acquired Fund is a party
or by which it is bound, or (ii) the acceleration of any
obligation, or the imposition of any penalty, under any
agreement, indenture, instrument, contract, lease, judgment or
decree to which the Acquired Fund is a party or by which it is
bound;
(g) The Acquired Fund has no material contracts or other commitments
(other than this Plan) that will be terminated with liability to
it prior to the Closing Date;
(h) Except as otherwise disclosed in writing to and accepted by the
Acquiring Fund, no litigation or administrative proceeding or
investigation of or before any court or governmental body is
presently pending or, to its knowledge, threatened against the
Acquired Fund or any of its properties or assets that, if
adversely determined, would materially and adversely affect its
financial condition or the conduct of its business. The Acquired
Fund knows of no facts which might form the basis for the
institution of such proceedings and is not a party to or subject
to the provisions of any order, decree or judgment of any court
or governmental body which materially and adversely affects its
business or its ability to consummate the transactions herein
contemplated;
(i) The Statement of Assets and Liabilities, Statements of
Operations and Changes in Net Assets, and Schedule of
Investments of the Acquired Fund at December 31, 1999 have been
audited by Ernst & Young, LLP, independent accountants. Such
statements are in accordance with generally accepted accounting
principles ("GAAP") consistently applied, and such statements
(copies of which have been furnished to the Acquiring Fund)
present fairly, in all material respects, the financial
condition of the Acquired Fund as of such date in accordance
with GAAP, and there are no known contingent liabilities of the
Acquired Fund required to be reflected on the balance sheet or
in the notes thereto;
(j) Since December 31, 1999, there has not been any material adverse
change in the Acquired Fund's financial condition, assets,
liabilities or business, other than changes occurring in the
ordinary course of business, or any incurrence by the Acquired
Fund of indebtedness maturing more than one year from the date
such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Acquiring Fund. For the purposes of this
subparagraph (j), a decline in net asset value per share of the
Acquired Fund due to declines in market values of securities in
the Acquired Fund's portfolio, the discharge of Acquired Fund
liabilities, or the redemption of Acquired Fund shares by
shareholders of the Acquired Fund shall not constitute a
material adverse change;
(k) On the Closing Date, all Federal and other tax returns and
reports of the Acquired Fund required by law to have been filed
by such date (including any extensions) shall have been filed
and are or will be correct in all material respects, and all
Federal and other taxes shown as due or required to be shown as
due on said returns and reports shall have been paid or
provision shall have been made for the payment thereof, and to
the best of the Acquired Fund's knowledge, no such return is
currently under audit and no assessment has been asserted with
respect to such returns;
(l) For each taxable year of its operation (including the taxable
year ending on the Closing Date), the Acquired Fund has met the
requirements of Subchapter M of the Code for qualification as a
regulated investment company and has elected to be treated as
such, has been eligible to and has computed its Federal income
tax under Section 852 of the Code, and will have distributed all
of its investment company taxable income and net capital gain
(as defined in the Code) that has accrued through the Closing
Date, and before the Closing Date will have declared dividends
sufficient to distribute all of its investment company taxable
income and net capital gain for the period ending on the Closing
Date;
(m) All issued and outstanding shares of the Acquired Fund are, and
on the Closing Date will be, duly and validly issued and
outstanding, fully paid and non-assessable by the Company and
have been offered and sold in every state and the District of
Columbia in compliance in all material respects with applicable
registration requirements of the 1933 Act and state securities
laws. All of the issued and outstanding shares of the Acquired
Fund will, at the time of Closing, be held by the persons and in
the amounts set forth in the records of the Transfer Agent, on
behalf of the Acquired Fund, as provided in paragraph 3.3. The
Acquired Fund does not have outstanding any options, warrants or
other rights to subscribe for or purchase any of the shares of
the Acquired Fund, nor is there outstanding any security
convertible into any of the Acquired Fund shares;
(n) The adoption and performance of this Plan will have been duly
authorized prior to the Closing Date by all necessary action, if
any, on the part of the Directors of the Company, and, subject
to the approval of the shareholders of the Acquired Fund, this
Plan will constitute a valid and binding obligation of the
Acquired Fund, enforceable in accordance with its terms,
subject, as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or
affecting creditors' rights and to general equity principles;
(o) The information to be furnished by the Acquired Fund for use in
registration statements, proxy materials and other documents
filed or to be filed with any federal, state or local regulatory
authority (including the National Association of Securities
Dealers, Inc.), which may be necessary in connection with the
transactions contemplated hereby, shall be accurate and complete
in all material respects and shall comply in all material
respects with Federal securities and other laws and regulations
thereunder applicable thereto.
4.2 The Company, on behalf of the Acquiring Fund, represents and warrants
to the Acquired Fund as follows:
(a) The Acquiring Fund is duly organized as a series of the Company,
which is a corporation duly organized and validly existing under
the laws of the State of Kansas, with power under the Company's
Articles of Incorporation to own all of its properties and
assets and to carry on its business as it is now being
conducted;
(b) The Company is a registered investment company classified as a
management company of the open-end type, and its registration
with the Commission as an investment company under the 1940 Act
and the registration of its shares under the 1933 Act, including
the shares of the Acquiring Fund, are in full force and effect;
(c) No consent, approval, authorization, or order of any court or
governmental authority is required for the consummation by the
Acquiring Fund of the transactions contemplated herein, except
such as have been obtained under the 1933 Act, the 1934 Act and
the 1940 Act and such as may be required by state securities
laws;
(d) The current prospectus and statement of additional information
of the Acquiring Fund and each prospectus and statement of
additional information of the Acquiring Fund used during the
three years previous to the date of this Plan conforms or
conformed at the time of its use in all material respects to the
applicable requirements of the 1933 Act and the 1940 Act and the
rules and regulations of the Commission thereunder and does not
or did not at the time of its use include any untrue statement
of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were
made, not materially misleading;
(e) On the Closing Date, the Acquiring Fund will have good and
marketable title to the Acquiring Fund's assets, free of any
liens of other encumbrances, except those liens or encumbrances
as to which the Acquired Fund has received notice and necessary
documentation at or prior to the Closing;
(f) The Acquiring Fund is not engaged currently, and the execution,
delivery and performance of this Plan will not result, in (i) a
material violation of the Company's Articles of Incorporation or
By-Laws or of any agreement, indenture, instrument, contract,
lease or other undertaking to which the Acquiring Fund is a
party or by which it is bound, or (ii) the acceleration of any
obligation, or the imposition of any penalty, under any
agreement, indenture, instrument, contract, lease, judgment or
decree to which the Acquiring Fund is a party or by which it is
bound;
(g) Except as otherwise disclosed in writing to and accepted by the
Acquired Fund, no litigation or administrative proceeding or
investigation of or before any court or governmental body is
presently pending or, to its knowledge, threatened against the
Acquiring Fund or any of its properties or assets that, if
adversely determined, would materially and adversely affect its
financial condition or the conduct of its business. The
Acquiring Fund knows of no facts which might form the basis for
the institution of such proceedings and is not a party to or
subject to the provisions of any order, decree or judgment of
any court or governmental body which materially and adversely
affects its business or its ability to consummate the
transactions herein contemplated;
(h) The Statement of Assets and Liabilities, Statements of
Operations and Changes in Net Assets and Schedule of Investments
of the Acquiring Fund at December 31, 1999 have been audited by
Ernst & Young LLP, independent accountants. Such statements are
in accordance with GAAP consistently applied, and such
statements (copies of which have been furnished to the Acquired
Fund) present fairly, in all material respects, the financial
condition of the Acquiring Fund as of such date in accordance
with GAAP, and there are no known contingent liabilities of the
Acquiring Fund required to be reflected on the balance sheet or
in the notes thereto;
(i) Since December 31, 1999, there has not been any material adverse
change in the Acquiring Fund's financial condition, assets,
liabilities or business, other than changes occurring in the
ordinary course of business, or any incurrence by the Acquiring
Fund of indebtedness maturing more than one year from the date
such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Acquired Fund. For purposes of this
subparagraph (i), a decline in net asset value per share of the
Acquiring Fund due to declines in market values of securities in
the Acquiring Fund's portfolio, the discharge of Acquiring Fund
liabilities, or the redemption of Acquiring Fund Shares by
shareholders of the Acquiring Fund, shall not constitute a
material adverse change;
(j) On the Closing Date, all Federal and other tax returns and
reports of the Acquiring Fund required by law to have been filed
by such date (including any extensions) shall have been filed
and are or will be correct in all material respects, and all
Federal and other taxes shown as due or required to be shown as
due on said returns and reports shall have been paid or
provision shall have been made for the payment thereof, and to
the best of the Acquiring Fund's knowledge no such return is
currently under audit and no assessment has been asserted with
respect to such returns;
(k) For each taxable year of its operation, the Acquiring Fund has
met the requirements of Subchapter M of the Code for
qualification as a regulated investment company and has elected
to be treated as such, has been eligible to and has computed its
Federal income tax under Section 852 of the Code, has
distributed all of its investment company taxable income and net
capital gain (as defined in the Code) for periods ending prior
to the Closing Date, and will do so for the taxable year
including the Closing Date;
(l) All issued and outstanding Acquiring Fund Shares are, and on the
Closing Date will be, duly and validly issued and outstanding,
fully paid and non-assessable by the Company and have been
offered and sold in every state and the District of Columbia in
compliance in all material respects with applicable registration
requirements of the 1933 Act and state securities laws. The
Acquiring Fund does not have outstanding any options, warrants
or other rights to subscribe for or purchase any Acquiring Fund
Shares, nor is there outstanding any security convertible into
any Acquiring Fund Shares;
(m) The adoption and performance of this Plan will have been fully
authorized prior to the Closing Date by all necessary action, if
any, on the part of the Directors of the Company on behalf of
the Acquiring Fund and this Plan will constitute a valid and
binding obligation of the Acquiring Fund, enforceable in
accordance with its terms, subject, as to enforcement, to
bankruptcy, insolvency, reorganization, moratorium and other
laws relating to or affecting creditors' rights and to general
equity principles;
(n) The Class A and Class B Acquiring Fund Shares to be issued and
delivered to the Acquired Fund, for the account of the Acquired
Fund Shareholders, pursuant to the terms of this Plan, will on
the Closing Date have been duly authorized and, when so issued
and delivered, will be duly and validly issued Acquiring Fund
Shares, and will be fully paid and non-assessable by the
Company;
(o) The information to be furnished by the Acquiring Fund for use in
the registration statements, proxy materials and other documents
that may be necessary in connection with the transactions
contemplated hereby shall be accurate and complete in all
material respects and shall comply in all material respects with
Federal securities and other laws and regulations applicable
thereto; and
(p) That insofar as it relates to Company or the Acquiring Fund, the
Registration Statement relating to the Acquiring Fund Shares
issuable hereunder, and the proxy materials of the Acquired Fund
to be included in the Registration Statement, and any amendment
or supplement to the foregoing, will, from the effective date of
the Registration Statement through the date of the meeting of
shareholders of the Acquired Fund contemplated therein (i) not
contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under
which such statements were made, not materially misleading
provided, however, that the representations and warranties in
this subparagraph (p) shall not apply to statements in or
omissions from the Registration Statement made in reliance upon
and in conformity with information that was furnished by the
Acquired Fund for use therein, and (ii) comply in all material
respects with the provisions of the 1933 Act, the 1934 Act and
the 1940 Act and the rules and regulations thereunder.
5. COVENANTS OF THE ACQUIRING FUND AND THE ACQUIRED FUND
5.1 The Acquiring Fund and the Acquired Fund each will operate its
business in the ordinary course between the date hereof and the
Closing Date, it being understood that such ordinary course of
business will include the declaration and payment of customary
dividends and distributions, and any other distribution that may be
advisable.
5.2 To the extent required by applicable law, the Company will call a
meeting of the shareholders of the Acquired Fund and the Acquiring
Fund to consider and act upon this Plan and to take all other action
necessary to obtain approval of the transactions contemplated herein.
5.3 The Acquired Fund covenants that the Class A and Class B Acquiring
Fund Shares to be issued hereunder are not being acquired for the
purpose of making any distribution thereof, other than in accordance
with the terms of this Plan.
5.4 The Acquired Fund will assist the Acquiring Fund in obtaining such
information as the Acquiring Fund reasonably requests concerning the
beneficial ownership of the Acquired Fund shares.
5.5 Subject to the provisions of this Plan, the Acquiring Fund and the
Acquired Fund will each take, or cause to be taken, all action, and
do or cause to be done, all things reasonably necessary, proper or
advisable to consummate and make effective the transactions
contemplated by this Plan.
5.6 As soon as is reasonably practicable after the Closing, the Acquired
Fund will make a liquidating distribution to its shareholders
consisting of the Class A and Class B Acquiring Fund Shares received
at the Closing.
5.7 The Acquiring Fund and the Acquired Fund shall each use its
reasonable best efforts to fulfill or obtain the fulfillment of the
conditions precedent to effect the transactions contemplated by this
Plan as promptly as practicable.
5.8 The Acquired Fund covenants that it will, from time to time, as and
when reasonably requested by the Acquiring Fund, execute and deliver
or cause to be executed and delivered all such assignments and other
instruments, and will take or cause to be taken such further action
as the Acquiring Fund may reasonably deem necessary or desirable in
order to vest in and confirm the Acquiring Fund's title to and
possession of all the assets and otherwise to carry out the intent
and purpose of this Plan.
5.9 The Acquiring Fund will use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act, the 1940 Act
and such of the state blue sky or securities laws as may be necessary
in order to continue its operations after the Closing Date.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED FUND
The obligations of the Acquired Fund to consummate the transactions
provided for herein shall be subject, at the Acquired Fund's election, to
the performance by the Acquiring Fund of all the obligations to be
performed by it hereunder on or before the Closing Date, and, in addition
thereto, the following further conditions:
6.1 All representations and warranties of the Acquiring Fund and the
Company contained in this Plan shall be true and correct in all
material respects as of the date hereof and, except as they may be
affected by the transactions contemplated by this Plan, as of the
Closing Date, with the same force and effect as if made on and as of
the Closing Date;
6.2 The Company and the Acquiring Fund shall have performed all of the
covenants and complied with all of the provisions required by this
Plan to be performed or complied with by the Company and the
Acquiring Fund on or before the Closing Date; and
6.3 The Acquired Fund and the Acquiring Fund shall have agreed on the
number of full and fractional Acquiring Fund Shares of each Class to
be issued in connection with the Reorganization after such number has
been calculated in accordance with paragraph 1.1.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to complete the transactions provided
for herein shall be subject, at the Acquiring Fund's election, to the
performance by the Acquired Fund of all of the obligations to be performed
by it hereunder on or before the Closing Date and, in addition thereto, the
following conditions:
7.1 All representations and warranties of the Company and the Acquired
Fund contained in this Plan shall be true and correct in all material
respects as of the date hereof and, except as they may be affected by
the transactions contemplated by this Plan, as of the Closing Date,
with the same force and effect as if made on and as of the Closing
Date;
7.2 The Company and the Acquired Fund shall have performed all of the
covenants and complied with all of the provisions required by this
Plan to be performed or complied with by the Company or the Acquired
Fund on or before the Closing Date;
7.3 The Acquired Fund and the Acquiring Fund shall have agreed on the
number of full and fractional Acquiring Fund Shares of each Class to
be issued in connection with the Reorganization after such number has
been calculated in accordance with paragraph 1.1;
7.4 The Acquired Fund shall have declared and paid a distribution or
distributions prior to the Closing that, together with all previous
distributions, shall have the effect of distributing to its
shareholders (i) all of its investment company taxable income and all
of its net realized capital gains, if any, for the period from the
close of its last taxable year to 4:00 p.m. Eastern Time on the
Closing; and (ii) any undistributed investment company taxable income
and net realized capital gains from any period to the extent not
otherwise already distributed.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND AND THE
ACQUIRED FUND
If any of the conditions set forth below do not exist on or before the
Closing Date with respect to the Acquired Fund or the Acquiring Fund, the
other party to this Plan shall, at its option, not be required to
consummate the transactions contemplated by this Plan:
8.1 The Plan and the transactions contemplated herein shall have been
approved by the requisite vote, if any, of the holders of the
outstanding shares of the Acquired Fund and the Acquiring Fund in
accordance with the provisions of the Company's Articles of
Incorporation, By-Laws, applicable Kansas law and the 1940 Act, and
certified copies of the resolutions evidencing such approval shall
have been delivered to the Acquiring Fund. Notwithstanding anything
herein to the contrary, neither the Acquiring Fund nor the Acquired
Fund may waive the conditions set forth in this paragraph 8.1;
8.2 On the Closing Date, no action, suit or other proceeding shall be
pending or, to its knowledge, threatened before any court or
governmental agency in which it is sought to restrain or prohibit, or
obtain damages or other relief in connection with, this Plan or the
transactions contemplated herein;
8.3 All consents of other parties and all other consents, orders and
permits of Federal, state and local regulatory authorities deemed
necessary by the Acquiring Fund or the Acquired Fund to permit
consummation, in all material respects, of the transactions
contemplated hereby shall have been obtained, except where failure to
obtain any such consent, order or permit would not involve a risk of
a material adverse effect on the assets or properties of the
Acquiring Fund or the Acquired Fund, provided that either party
hereto may for itself waive any of such conditions;
8.4 The Registration Statement shall have become effective under the 1933
Act and no stop orders suspending the effectiveness thereof shall
have been issued and, to the best knowledge of the parties hereto, no
investigation or proceeding for that purpose shall have been
instituted or be pending, threatened or contemplated under the 1933
Act; and
8.5 Dechert Price & Rhoads shall deliver an opinion addressed to the
Company substantially to the effect that, based upon certain facts,
assumptions, and representations, the transaction contemplated by
this Plan shall constitute a tax-free reorganization for Federal
income tax purposes, unless, based on the circumstances existing at
the time of the Closing, Dechert Price & Rhoads determines that the
transaction contemplated by this Plan does not qualify as such. The
delivery of such opinion is conditioned upon receipt by Dechert Price
& Rhoads of representations it shall request of the Company.
Notwithstanding anything herein to the contrary, the Company may not
waive the condition set forth in this paragraph 8.5.
9. BROKERAGE FEES AND EXPENSES
9.1 The Acquiring Fund represents and warrants to the other that there
are no brokers or finders entitled to receive any payments in
connection with the transactions provided for herein.
9.2 The expenses relating to the proposed Reorganization will be paid by
the Acquired Fund and the Acquiring Fund pro rata based upon the
relative net assets of the Funds as of the close of business on the
record date for determining the shareholders of the Acquired Fund
entitled to vote on the Reorganization. The costs of the
Reorganization shall include, but not be limited to, costs associated
with obtaining any necessary order of exemption from the 1940 Act,
preparation of the Registration Statement, printing and distributing
the Acquiring Fund's prospectus and the Acquired Fund's proxy
materials, legal fees, accounting fees, securities registration fees,
and expenses of holding shareholders' meetings. Notwithstanding any
of the foregoing, expenses will in any event be paid by the party
directly incurring such expenses if and to the extent that the
payment by the other party of such expenses would result in the
disqualification of such party as a "regulated investment company"
within the meaning of Section 851 of the Code.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
The representations, warranties and covenants contained in this Plan or in
any document delivered pursuant hereto or in connection herewith shall
survive the consummation of the transactions contemplated hereunder. The
covenants to be performed after the Closing shall survive the Closing.
11. TERMINATION
This Plan and the transactions contemplated hereby may be terminated and
abandoned by resolution of the Board of Directors, at any time prior to the
Closing Date, if circumstances should develop that, in the opinion of the
Board, make proceeding with the Plan inadvisable.
12. AMENDMENTS
This Plan may be amended, modified or supplemented in such manner as may be
set forth in writing by the authorized officers of the Company; provided,
however, that following any meeting of the shareholders called by the
Acquired Fund pursuant to paragraph 5.2 of this Plan, no such amendment may
have the effect of changing the provisions for determining the number of
the Class A or Class B Acquiring Fund Shares to be issued to the Acquired
Fund Shareholders under this Plan to the detriment of such shareholders
without their further approval.
13. HEADINGS; GOVERNING LAW; ASSIGNMENT; LIMITATION OF LIABILITY
13.1 The Article and paragraph headings contained in this Plan are for
reference purposes only and shall not affect in any way the meaning
or interpretation of this Plan.
13.2 This Plan shall be governed by and construed in accordance with the
laws of the State of Kansas without regard to its principles of
conflicts of laws.
13.3 This Plan shall bind and inure to the benefit of the parties hereto
and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be
made by any party without the written consent of the other party.
Nothing herein expressed or implied is intended or shall be construed
to confer upon or give any person, firm or corporation, other than
the parties hereto and their respective successors and assigns, any
rights or remedies under or by reason of this Plan.
13.4 It is expressly agreed that the obligations of the parties hereunder
shall not be binding upon any of the Directors, shareholders,
nominees, officers, agents, or employees of the Company personally,
but shall bind only property of such party. The execution and
delivery by such officers shall not be deemed to have been made by
any of them individually or to impose any liability on any of them
personally, but shall bind only the property of each party.
IN WITNESS WHEREOF, the Board of Directors of the Company has caused this Plan
to be approved on behalf of the Acquiring Fund and the Acquired Funds.
SECURITY INCOME FUND
By:
--------------------------------
Name:
Title:
<PAGE>
APPENDIX B
The following is a list of the current funds in the Security Group of Mutual
Funds and the classes of shares that are currently offered by each fund:
- --------------------------------------------------------------------------------
FUND CLASSES OFFERED
- --------------------------------------------------------------------------------
Security Equity Fund.......................................... A, B and C
Security Global Fund.......................................... A, B and C
Security Total Return Fund.................................... A, B and C
Security Mid Cap Value Fund................................... A, B and C
Security Small Cap Growth Fund................................ A, B and C
Security Enhanced Index Fund.................................. A, B and C
Security International Fund................................... A, B and C
Security Select 25 Fund....................................... A, B and C
Security Ultra Fund........................................... A, B and C
Security Growth and Income Fund............................... A, B and C
Security Municipal Bond Fund.................................. A and B
Security High Yield Fund...................................... A and B
Security Cash Fund............................................ A
Security Capital Preservation Fund............................ A, B and C
- --------------------------------------------------------------------------------
<PAGE>
APPENDIX C
As of February 28, 2000, the following persons owned beneficially or of record
5% or more of the outstanding shares of the Diversified Income Fund:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
% OF DIVERSIFIED % OF DIVERSIFIED
INCOME FUND BEFORE INCOME FUND AFTER
NAME AND ADDRESS CLASS REORGANIZATION REORGANIZATION
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Capitol Federal Foundation A 18% 12%
Attention: Jack Hamilton
700 South Kansas Avenue, Suite 517
Topeka, KS 66603-3823
- ---------------------------------------------------------------------------------------------
Oklahoma Co. Emp. Ret. Fund A 21% 5%
Attention: Betty Hurt/Forrest Freeman
320 Robert S. Kerr, Room 307
Oklahoma City, OK 73102-3441
- ---------------------------------------------------------------------------------------------
Security Benefit Life A 11% 3%
SBL Employee Pension Plan
Attention: John R. Wood - FI
700 SW Harrison Street
Topeka, KS 66636-0001
- ---------------------------------------------------------------------------------------------
</TABLE>
As of February 28, 2000, the following persons owned of record 5% or more of the
outstanding shares of the Corporate Bond Fund:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
% OF CORPORATE % OF DIVERSIFIED
BOND FUND BEFORE INCOME FUND AFTER
NAME AND ADDRESS CLASS REORGANIZATION REORGANIZATION
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Capitol Federal Foundation A 11% 12%
Attention: Jack Hamilton
700 South Kansas Avenue, Suite 517
Topeka, KS 66603-3823
- -------------------------------------------------------------------------------------------
Mercantile Bank of St. Louis A 11% 7%
Attention: Trust Securities Unit 17-1
P.O. Box 387
St. Louis, MO 63166-0387
Theresa A. Young
- -------------------------------------------------------------------------------------------
Security Benefit Life Ins. Co. Trste. A 7% 5%
Agent for Security Benefit Life
700 SW Harrison Street
Topeka, KS 66636-0001
House Account
- -------------------------------------------------------------------------------------------
</TABLE>
As of February 28, 2000, the following persons owned beneficially or of record
5% or more of the outstanding shares of the Limited Maturity Bond Fund:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
% OF LIMITED MATURITY % OF DIVERSIFIED
BOND FUND BEFORE INCOME FUND AFTER
NAME AND ADDRESS CLASS REORGANIZATION REORGANIZATION
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Security Benefit Group, Inc. A 50% 5%
Attention: Finance Reporting
700 SW Harrison Street
Topeka, KS 66636-0002
House Account
- ------------------------------------------------------------------------------------------------
Security Benefit Group, Inc. A 7% .3%
Trst. SBL Charitable Trust
700 SW Harrison Street
Topeka, KS 66636-0002
House Account
- ------------------------------------------------------------------------------------------------
Sisters of St. Francis Ministry Fund A 19% 1%
3390 Windsor Avenue
Dubuque, IA 52001-1326
Attention: Sharon S. Rettig
- ------------------------------------------------------------------------------------------------
Security Benefit Group, Inc. B 50% 3%
Attention: Finance Reporting
700 SW Harrison Street
Topeka, KS 66636-0002
House Account
- ------------------------------------------------------------------------------------------------
Sterling Trust Company B 8% .5%
Cust. Kaminer Findley Ltd. Partnership
P.O. Box 2526
Waco, TX 76702-2526
Attention: Mark Doroff
- ------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
PART B
SECURITY INCOME FUND
- --------------------------------------------------------------------------------
Statement of Additional Information
April 3, 2000
- --------------------------------------------------------------------------------
Acquisition of the Assets and Liabilities By and in Exchange for Shares of
of Corporate Bond Series ("Corporate Bond Diversified Income Series
Fund"), and Limited Maturity Bond Series (formerly U.S. Government Series)
("Limited Maturity Bond Fund"), of ("Diversified Income Fund") of
Security Income Fund Security Income Fund
700 SW Harrison Street 700 SW Harrison Street
Topeka, Kansas 66636 Topeka, Kansas 66636
This Statement of Additional Information is available to the Shareholders of
Corporate Bond Fund and Limited Maturity Bond Fund in connection with a proposed
transaction whereby all of the assets and liabilities of Corporate Bond Fund and
Limited Maturity Bond Fund will be transferred to Diversified Income Fund in
exchange for shares of Diversified Income Fund.
This Statement of Additional Information of the Diversified Income Fund consists
of this cover page and the following documents, each of which was filed
electronically with the Securities and Exchange Commission and is incorporated
by reference herein:
1. The Statement of Additional Information for Diversified Income Fund,
Corporate Bond Fund and Limited Maturity Bond Fund dated April 30, 1999, as
supplemented November 1, 1999 and February 7, 2000.
2. The Financial Statements of Diversified Income Fund, Corporate Bond Fund and
Limited Maturity Bond Fund are included in the Funds' Annual Report filed on
Form N-30D for the year ended December 31, 1999, Registration No. 2-38414
(filed February 28, 2000).
This Statement of Additional Information is not a prospectus. A Prospectus/Proxy
Statement dated April 3, 2000 relating to the reorganization of the of Corporate
Bond Fund and Limited Maturity Bond Fund may be obtained, without charge, by
writing to Security Management at 700 SW Harrison Street, Topeka, Kansas 66636
or calling (800) 888-2461. This Statement of Additional Information should be
read in conjunction with the Prospectus/Proxy Statement.
<PAGE>
The following tables set forth the unaudited pro forma statements of assets
and liabilities and unaudited pro forma statements of operations of the Funds as
of and for the year ended December 31, 1999 and as adjusted to give effect to
the reorganization.
<TABLE>
PRO FORMA STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
(UNAUDITED)
<CAPTION>
LIMITED COMBINED
CORPORATE DIVERSIFIED MATURITY PRO FORMA DIVERSIFIED
BOND SERIES INCOME SERIES BOND SERIES ADJUSTMENTS INCOME SERIES
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments, at value (identified cost $61,341,582,
$15,268,046, $7,189,528, $0 and $83,799,156
respectively)...................................... $ 57,858,846 $14,573,950 $6,794,583 --- $ 79,227,379
Cash................................................. --- 298,257 --- --- 298,257
Receivables:
Fund shares sold................................... 1,304 93 1,097 --- 2,494
Interest .......................................... 945,396 214,446 133,564 --- 1,293,406
Security Management Company........................ 3,605 138 --- --- 3,743
Prepaid expenses..................................... 10,072 9,144 4,159 --- 23,375
----------- ---------- --------- --------- -----------
Total assets..................................... $ 58,819,223 $15,096,028 $6,933,403 $ 0 $ 80,848,654
----------- ---------- --------- --------- -----------
LIABILITIES
Payable for:
Fund shares redeemed............................. $ 27,530 $ 1,284 $ --- $--- $ 28,814
Cash Overdraft................................... 14,256 --- 13,035 --- ---
Management fees.................................. 25,309 --- --- --- 25,309
Custodian fees................................... 645 504 435 --- 1,584
Transfer and administration fees................. 12,971 6,649 1,113 --- 20,733
Professional fees................................ 4,000 4,000 4,000 --- 12,000
12B-1distribution plan fees...................... 105,534 3,504 18,668 --- 127,706
Security Management Company...................... --- --- 217 --- 217
Miscellaneous fees............................... 14,547 1,901 623 --- 17,071
----------- ---------- --------- --------- -----------
Total liabilities.............................. 204,792 17,842 38,091 0 260,725
----------- ---------- --------- --------- -----------
NET ASSETS $ 58,614,431 $15,078,186 $6,895,312 $ 0 $ 80,587,929
=========== ========== ========= ========= ===========
NET ASSETS CONSIST OF:
Paid in capital...................................... $ 74,595,336 $17,126,033 $7,318,712 $ 0 $ 99,040,081
Undistributed net investment income (loss)........... (6,864) 11,083 0 0 17,947
Accumulated undistributed net realized gain (loss)
on sale of investments............................. 12,505,033 (1,364,835) (28,455) 0 13,898,323
Net unrealized appreciation (depreciation) in value
of investments..................................... (3,482,736) (694,095) (394,945) 0 (4,571,776)
----------- ---------- --------- --------- -----------
Total net assets................................. $ 58,614,431 $15,078,186 $6,895,312 $ 0 $ 80,587,929
=========== ========== ========= ========= ===========
Class "A" Shares
Capital shares outstanding........................... 7,645,684 2,812,887 581,851 3,950,975(A) 14,991,397
Net assets .......................................... $ 49,476,637 $12,722,594 $5,570,226 $0 $ 67,769,459
----------- ---------- --------- --------- -----------
Net asset value per share............................ $6.47 $4.52 $9.57 $0.00 $4.52
=========== ========== ========= ========= ===========
Offering price per share (net asset value divided by
95.25%)............................................ $6.79 $4.75 $10.05 $0.00 $4.75
Class "B" Shares
Capital shares outstanding........................... 1,404,036 522,448 138,869 777,024(A) 2,842,377
Net assets ......................................... $ 9,137,794 $ 2,355,592 $1,325,086 $0 $ 12,818,472
----------- ---------- --------- --------- -----------
Net asset value per share............................ $6.51 $4.51 $9.54 $0.00 $4.51
=========== ========== ========= ========= ===========
<FN>
(A) Reflects new shares issued, net of retired shares of Corporate Bond and Limited Maturity Series.
</FN>
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(UNAUDITED)
<CAPTION>
LIMITED COMBINED
CORPORATE DIVERSIFIED MATURITY PRO FORMA DIVERSIFIED
BOND SERIES INCOME SERIES BOND SERIES ADJUSTMENTS(A) INCOME SERIES
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends............................................ $ 0 $ 0 $ 8,287 $ 0 $ 8,287
Interest............................................. 4,128,740 1,229,894 506,278 0 5,864,912
---------- ---------- -------- -------- ----------
Total investment income............................ 4,128,740 1,229,894 514,565 0 5,873,199
EXPENSES:
Management fees...................................... 289,863 95,618 36,156 (126,491) 295,146
Custodian fees....................................... 4,530 2,369 2,341 --- 9,240
Transfer/maintenance fees............................ 119,987 74,590 6,799 --- 201,376
Administration fees.................................. 52,175 17,211 6,508 --- 75,894
Directors' fees...................................... 5,434 1,804 668 --- 7,906
Professional fees.................................... 9,959 7,595 6,643 (17,447) 6,750
Reports to shareholders.............................. 6,699 3,072 1,135 --- 10,906
Registration fees.................................... 25,866 22,062 18,599 (41,527) 25,000
Other expenses....................................... 3,069 645 329 --- 4,043
12b-1 distribution plan fees......................... 206,771 83,250 28,376 --- 318,397
---------- ---------- -------- -------- ----------
724,353 308,216 107,554 (185,465) 954,658
Less: Reimbursement of expenses........................ (30,967) (96,445) (37,027) 164,439 ---
---------- ---------- -------- -------- ----------
Total expenses................................... 693,386 211,771 70,527 (21,026) 954,658
---------- ---------- -------- -------- ----------
Net investment income............................ 3,435,354 1,018,123 444,038 21,026 4,918,541
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) during the period on
investments.......................................... (415,756) (585,644) (19,107) 0 (1,020,507)
Net change in unrealized appreciation (depreciation)
during the period on investments..................... (5,315,075) (1,172,192) (561,159) 0 (7,048,426)
---------- ---------- -------- -------- ----------
Net gain (loss)...................................... (5,730,831) (1,757,836) (580,266) 0 (8,068,933)
---------- ---------- -------- -------- ----------
Net increase decreasing in net assets resulting
from operations.................................. $(2,295,477) $ (739,713) $(136,228) $ 21,026 $(3,150,392)
========== ========== ======== ======== ==========
<FN>
(a) Reflects estimated reduction in expenses due to lower management fee, larger net assets and greater economies of scale, and
assumes the Diversified Income Series' fee structure was in effect for the year ended December 31, 1999.
</FN>
</TABLE>
<PAGE>
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: BASIS OF COMBINATION - On February 4, 2000, the Board of Security Income
Fund approved an Agreement and Plan of Reorganization (the "Plan") whereby,
subject to approval by the shareholders of Corporate Bond Series and Limited
Maturity Bond Series, Diversified Income Series will acquire all the assets of
the Corporate Bond Series and Limited Maturity Bond Series subject to the
liabilities of such Series, in exchange for a number of shares equal to the pro
rata net assets of shares of the Diversified Income Series (the "Merger").
The Merger will be accounted for as a tax-free merger of investment companies.
The pro forma combined financial statements are presented for the information of
the reader and may not necessarily be representative of what the actual combined
financial statements would have been had the reorganization occurred at December
31, 1999. The unaudited pro forma portfolio of investments and statement of
assets and liabilities reflect the financial position of the Corporate Bond
Series, Limited Maturity Bond Series, and the Diversified Income Series at
December 31, 1999. The unaudited pro forma statement of operations reflects the
results of operations of the Corporate Bond Series, Limited Maturity Bond
Series, and the Diversified Income Series for the year ended December 31, 1999.
These statements have been derived from the Funds' respective books and records
utilized in calculating daily net asset value at the dates indicated above for
Corporate Bond Series, Limited Maturity Bond Series, and Diversified Income
Series under generally accepted accounting principles. The historical cost of
investment securities will be carried forward to the surviving entity and
results of operations of Diversified Income Series for pre-combination periods
will not be restated.
The pro forma portfolio of investments and statements of assets and liabilities
and operations should be read in conjunction with the historical financial
statements of the Funds incorporated by reference in the Statements of
Additional Information.
NOTE 2: SECURITY VALUATION - Valuations of Diversified Income, Corporate Bond
and Limited Maturity Bond Series' securities are supplied by pricing services
approved by the Board of Directors. Securities listed or traded on a national
securities exchange are valued on the basis of the last sales price. If there
are no sales on a particular day, then the securities are valued at the last bid
price. Securities for which market quotations are not readily available are
valued by a pricing service considering securities with similar yields, quality,
type of issue, coupon, duration and rating. If there is no bid price or if the
bid price is deemed to be unsatisfactory by the Board of Directors or by the
Funds' investment manager, then the securities are valued in good faith by such
method as the Board of Directors determines will reflect the fair value. The
Funds' officers, under the general supervision of the Board of Directors,
regularly review procedures used by, and valuations provided by, the pricing
service.
NOTE 3: CAPITAL SHARES - The pro forma net asset value per share assumes
additional shares of common stock issued in connection with the proposed
acquisition of Corporate Bond Series and Limited Maturity Bond Series by
Diversified Income Series as of December 31, 1999. The number of additional
shares issued was calculated by dividing the net asset value of each Class of
Corporate Bond Series and Limited Maturity Bond Series by the respective Class
net asset value per share of Diversified Income Series.
NOTE 4: PRO FORMA ADJUSTMENTS - The accompanying pro forma financial statements
reflect changes in fund shares as if the merger had taken place on December 31,
1999. Corporate Bond Series and Limited Maturity Bond Series expenses were
adjusted assuming Diversified Income Series' fee structure was in effect for the
year ended December 31, 1999.
NOTE 5: COSTS OF REORGANIZATION - The costs of the reorganization are estimated
at approximately $72,000 and are not included in the pro forma statement of
operations since these costs are nonrecurring. These costs represent the
estimated expense of all Series carrying out their obligations under the Plan
and consist of management's estimate of legal fees, accounting fees, printing
costs and mailing charges related to the proposed merger.
It is the policy of the Funds, to comply with the requirements of the Internal
Revenue Code that are applicable to regulated investment companies and to
distribute substantially all of their net investment income and any net realized
gains to their shareholders. Therefore, a federal income tax or excise tax
provision is not required. In addition, by distributing during each calendar
year substantially all of its net investment income and net realized capital
gains, each Fund intends not to be subject to any federal excise tax.
The Board of Directors intends to offset any net capital gains with any
available capital loss carryforward until each carryforward has been fully
utilized or expires. In addition, no capital gain distribution shall be made
until the capital loss carryforward has been fully utilized or expires.
Corporate Bond Series, Limited Maturity Bond Series, and the Diversified Income
Series will distribute substantially all their investment income and any
realized gains prior to the merger date.
<PAGE>
<TABLE>
PROFORMA SCHEDULE OF INVESTMENTS
AS OF DECEMBER 31, 1999
(UNAUDITED)
<CAPTION>
PRINCIPAL AMOUNT OR NUMBER OF SHARES MARKET VALUE
- ----------------------------------------------- -----------------------------------------------------
COMBINED COMBINED
CORPORATE DIVERSIFIED LIMITED DIVERSIFIED CORPORATE DIVERSIFIED LIMITED DIVERSIFIED
BOND INCOME MATURITY INCOME BOND INCOME MATURITY INCOME
SERIES SERIES SERIES SERIES SERIES SERIES SERIES SERIES
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <S> <C> <C> <C> <C>
CORPORATE BONDS AND
MORTGAGE BACKED SECURITIES
AIRLINES - 2.8%
$1,075,000 $1,075,000 Southwest Airlines
Company, 7.875% - 2007.. 1,088,437 1,088,437
$950,000 $950,000 United Air Lines,
11.21% - 2014........... 1,126,938 1,126,938
-----------------------------------------------------
2,215,375 0 0 2,215,375
AUTOMOTIVE - 2.0%
$250,000 $25,000 $275,000 Federal-Mogul Corporation,
7.875% - 2010........... 228,437 22,844 251,281
$1,000,000 $100,000 $1,100,000 General Motors
Corporation,
7.70% - 2016............ 998,750 99,875 1,098,625
$250,000 $25,000 $275,000 Mark IV Industries,
7.75% - 2006............ 240,000 22,688 262,688
-----------------------------------------------------
1,467,187 0 145,407 1,612,594
BANKING - 1.5%
$13,000 $13,000 B.F. Saul REIT,
9.75% - 2008............ 12,269 12,269
$100,000 $100,000 Bank of New York, Inc.,
6.50% - 2003............ 97,500 97,500
$110,000 $110,000 First Union Corporation,
8.125% - 2002........... 112,063 112,063
$25,000 $25,000 Golden State Holdings,
7.125% - 2005........... 22,656 22,656
$1,000,000 $1,000,000 Washington Mutual
Capital I, 8.375% - 2027 936,250 936,250
-----------------------------------------------------
936,250 0 244,488 1,180,738
BASIC INDUSTRY-OTHER-1.0%
$800,000 $125,000 $925,000 Pioneer Hi Bred
International, Inc.,
5.75% - 2009............ 713,000 111,406 824,406
BEVERAGE - 1.6%
$1,150,000 $100,000 $1,250,000 Anheuser-Busch Companies,
Inc.,7.10% - 2007....... 1,115,500 97,000 1,212,500
$100,000 $100,000 Pepsi Bottling Holdings,
Inc., 5.25% - 2009...... 88,250 88,250
-----------------------------------------------------
1,115,500 0 185,250 1,300,750
BROKERAGE - 1.7%
48,910 4,560 53,470 SI Financing, Inc.,
9.50% - 2026............ 1,247,205 116,280 1,363,485
BUILDING MATERIALS - 2.5%
$600,000 $50,000 $650,000 LaFarge Corporation,
6.375% - 2005........... 562,500 46,875 609,375
$850,000 $850,000 Martin Marietta Material,
5.875% - 2008........... 758,625 758,625
$25,000 $25,000 Nortek, Inc., 8.875%- 2008 23,750 23,750
$500,000 $100,000 $600,000 Vulcan Materials Company,
5.75% - 2004............ 476,250 95,250 571,500
-----------------------------------------------------
1,797,375 0 165,875 1,963,250
CONSTRUCTION
MACHINERY - 0.8%
$250,000 $25,000 $275,000 AGCO Corporation,
8.50% - 2006............ 232,812 23,281 256,093
$25,000 $25,000 Columbus McKinnon
Corporation, 8.5% - 2006 21,563 21,563
$150,000 $25,000 $175,000 SEQUA Corporation,
9.00% - 2009............ 145,688 24,281 169,969
$250,000 $250,000 Titan Wheel International,
8.75% - 2007............ 210,313 210,313
-----------------------------------------------------
588,813 0 69,125 657,938
CONSUMER CYCLICAL -
OTHER - 0.0%
$25,000 $25,000 American ECO Corporation,
9.625% - 2008........... 12,938 12,938
ENERGY - OTHER - 0.0%
$25,000 $25,000 P & L Coal Holdings
Corporation,
8.875% - 2008........... 24,438 24,438
ENERGY - REFINING - 0.2%
$150,000 $150,000 Vastar Resources, Inc.,
8.75% - 2005............ 156,750 156,750
ENTERTAINMENT - 1.1%
$1,000,000 $1,000,000 Paramount Communications,
7.50% - 2023............ 882,500 882,500
FINANCIAL COMPANIES - 6.3%
23,000 3,900 26,900 American RE Capital,
8.50% - 2025............ 552,000 93,600 645,600
$875,000 $100,000 $975,000 Associates Corporation,
N.A., 7.55% - 2006...... 873,906 99,875 973,781
$250,000 $25,000 $275,000 CB Richard Ellis Service,
8.875% - 2006........... 225,625 22,562 248,187
$1,000,000 $1,000,000 Countrywide Capital,
8.00% - 2026............ 891,250 891,250
$150,000 $150,000 Household Financial
Corporation, 8.0% - 2004 152,438 152,438
$150,000 $150,000 International Lease
Finance Corporation,
8.25% - 2000............ 150,080 150,080
$100,000 $100,000 $200,000 Merrill Lynch & Company,
Inc., 7.375% - 2006..... 99,250 99,250 198,500
Morgan Stanley Dean Witter
$1,050,000 $100,000 $1,150,000 Discover & Company,
6.875% - 2007........... 1,014,563 96,625 1,111,188
$700,000 $700,000 PNC Funding Corporation,
7.75% - 2004............ 706,125 706,125
-----------------------------------------------------
4,362,719 0 714,430 5,077,149
FINANCE - OTHER - 0.1%
$100,000 $100,000 EOP Operating Limited
Partnership, REIT,
6.625% - 2005........... 94,875 94,875
FOOD - 1.8%
$1,000,000 $100,000 $1,100,000 Archer-Daniels-Midland
Company, 8.875% - 2011.. 1,092,500 109,250 1,201,750
$75,000 $75,000 Cargill Corporation,
6.15% - 2008............ 68,250 68,250
$250,000 $250,000 Chiquita Brands
International, Inc.,
10.25% - 2006........... 180,625 180,625
-----------------------------------------------------
1,273,125 0 177,500 1,450,625
GAMING - 2.3%
$250,000 $25,000 $275,000 Boyd Gaming Corporation,
9.25% - 2003............ 251,875 25,187 277,062
$25,000 $25,000 Circus Circus Enterprise,
9.25% - 2005............ 25,375 25,375
$25,000 $25,000 Harrahs Operating, Inc.,
7.875% - 2005........... 24,063 24,063
$600,000 $75,000 $675,000 MGM Grand Inc.,
6.95% - 2005............ 552,750 69,094 621,844
$600,000 $65,000 $665,000 Mirage Resorts Inc.,
6.625% - 2005........... 550,500 59,638 610,138
$250,000 $25,000 $275,000 Park Place Entertainment,
7.875% - 2005........... 239,375 23,937 263,312
-----------------------------------------------------
1,594,500 --- 227,294 1,821,794
HEALTHCARE - 0.2%
$125,000 $125,000 Rural/Metro Corporation,
7.875% - 2008........... 98,125 98,125
$25,000 $25,000 Tenet Healthcare,
8.125% - 2008........... 23,344 23,344
-----------------------------------------------------
98,125 --- 23,344 121,469
HOME CONSTRUCTION - 0.5%
$50,000 $50,000 D.R. Horton, Inc.,
8.375% - 2004........... 48,875 48,875
$125,000 $12,000 $137,000 MDC Holdings, 8.375%- 2008 113,906 10,935 124,841
$250,000 $250,000 Oakwood Homes Corporation,
8.125% - 2009........... 128,750 128,750
$75,000 $13,000 $88,000 Toll Corporation,
7.75% - 2007............ 70,313 12,187 82,500
-----------------------------------------------------
361,844 0 23,122 384,966
INDEPENDENT ENERGY - 0.9%
$700,000 $50,000 $750,000 Seagull Energy
Corporation,
8.625% - 2005........... 700,875 50,062 750,937
INSURANCE - LIFE - 1.6%
$100,000 $100,000 $200,000 Chubb Corporation,
6.15% - 2005............ 94,500 94,500 189,000
$950,000 $100,000 $1,050,000 Hartford Life, Inc.,
7.10% - 2007............ 914,375 96,250 1,010,625
$100,000 $100,000 Transamerica Capital II,
7.65% - 2026............ 91,250 91,250
-----------------------------------------------------
1,100,125 0 190,750 1,290,875
LODGING - 0.6%
$250,000 $25,000 $275,000 HMH Properties,
7.875% - 2008........... 223,125 22,312 245,437
$250,000 $250,000 Prime Hospitality
Corporation, 9.25%- 2006 249,375 249,375
-----------------------------------------------------
472,500 0 22,312 494,812
MEDIA - CABLE - 2.0%
$25,000 $25,000 Adelphia Communications,
8.375% - 2008........... 23,250 23,250
$250,000 $25,000 $275,000 Century Communications,
8.375% - 2007........... 236,875 23,688 260,563
$100,000 $100,000 Comcast Corporation,
9.125% - 2006........... 104,125 104,125
$250,000 $25,000 $275,000 Jones Intercable, Inc.,
7.625% - 2008........... 248,125 24,812 272,937
$250,000 $250,000 Lenfest Communications,
Inc., 10.50% - 2006..... 280,625 280,625
$250,000 $250,000 Rogers Cablesystems, Ltd.,
9.625% - 2002........... 259,375 259,375
$250,000 $25,000 $275,000 Rogers Communications,
Inc., 9.125% - 2006..... 250,625 25,062 275,687
$60,000 $50,000 $110,000 Time Warner Entertainment,
10.15% - 2012........... 70,350 58,625 128,975
-----------------------------------------------------
1,450,100 0 155,437 1,605,537
MEDIA - NON-CABLE - 0.7%
$100,000 $100,000 Heritage Media
Corporation,
8.75% - 2006............ 101,875 101,875
$300,000 $75,000 $375,000 KIII Communications
Corporation,
10.25% - 2004........... 296,625 74,156 370,781
$75,000 $75,000 News American Holdings,
8.625% - 2003........... 77,437 77,437
$25,000 $25,000 USA Networks, 6.75% - 2005 23,844 23,844
-----------------------------------------------------
374,062 0 199,875 573,937
METALS - 0.1%
$25,000 $25,000 AK Steel Corporation,
7.875% - 2009........... 23,750 23,750
$25,000 $25,000 California Steel
Industries, 8.50% - 2009 24,188 24,188
$25,000 $25,000 WHX Corporation,
10.50% - 2005........... 24,437 24,437
-----------------------------------------------------
0 0 72,375 72,375
MORTGAGE BACKED
SECURITIES - 2.1%
Chase Capital Mortgage
Securities Company,
$1,500,000 $1,500,000 1997-1 B, 7.37% - 2007
CMO..................... 1,473,945 1,473,945
Chase Capital Mortgage
Securities Company,
$225,000 $225,000 1998-1 B, 6.56% - 2008
CMO..................... 210,892 210,892
$44,343 $44,343 Global Rated Eligible
Asset Trust,
7.33% - 2006............ 9,755 9,755
-----------------------------------------------------
1,684,837 --- 9,755 1,694,592
OIL FIELD SERVICES - 1.2%
$1,000,000 $1,000,000 Transocean Offshore, Inc.,
8.00% - 2027............ 981,250 981,250
PACKAGING - 0.0%
$25,000 $25,000 Ball Corporation,
7.75% - 2006............ 24,437 24,437
RETAILERS - 2.7%
$850,000 $100,000 $950,000 Lowe's Companies, Inc.,
6.70% - 2007............ 811,750 95,500 907,250
$300,000 $300,000 Mattel, Inc., 6.125%- 2005 274,125 274,125
$150,000 $150,000 Sears & Roebuck Company,
6.41% - 2001............ 148,125 148,125
$450,000 $100,000 $550,000 Tandy Corporation,
6.95% - 2007............ 430,875 95,750 526,625
$250,000 $100,000 $350,000 Zale Corporation,
8.50% - 2007............ 247,813 99,125 346,938
-----------------------------------------------------
1,764,563 0 438,500 2,203,063
SERVICES - 0.7%
$550,000 $50,000 $600,000 Loewen Group
International,
Inc., 8.25% - 2003*.... 288,750 26,250 315,000
$25,000 $25,000 Protection One Alarm,
7.375% - 2005........... 19,875 19,875
$250,000 $250,000 Unisys Corporation,
7.875% - 2008........... 240,625 240,625
-----------------------------------------------------
529,375 0 46,125 575,500
SUPERMARKETS - 0.1%
$100,000 $100,000 Safeway, Inc., 6.50%- 2008 92,125 92,125
TECHNOLOGY - 0.6%
$500,000 $500,000 Electronic Data Systems,
7.125% - 2009........... 488,125 488,125
TELECOMMUNICATIONS - 3.3%
$100,000 $100,000 $200,000 AT&T Corporation,
7.00% - 2005............ 98,125 98,125 196,250
$25,000 $25,000 ALESTRA S.A.,
12.625% - 2009.......... 25,094 25,094
$250,000 $50,000 $300,000 Cable & Wireless
Communications,
6.75% - 2008............ 247,500 49,500 297,000
$1,000,000 $1,000,000 GTE Corporation,
7.51% - 2009............ 998,750 998,750
$250,000 $25,000 $275,000 Mastec, Inc., 7.75% - 2008 243,125 24,312 267,437
$50,000 $100,000 $150,000 New Jersey Bell Telephone,
6.625% - 2008........... 46,687 93,375 140,062
$675,000 $100,000 $775,000 SBC Communications
Capital Corporation,
6.625% - 2007........... 648,000 96,000 744,000
-----------------------------------------------------
2,282,187 0 386,406 2,668,593
TEXTILES - 0.0%
$25,000 $25,000 Westpoint Stevens, Inc.,
7.875% - 2008........... 22,437 22,437
TOBACCO - 0.1%
$50,000 $50,000 Dimon, Inc., 8.875% - 2006 44,625 44,625
$50,000 $50,000 Standard Commercial
Tobacco Corporation,
8.875% - 2005........... 40,625 40,625
-----------------------------------------------------
0 0 85,250 85,250
TRANSPORTATION -
AIRLINES - 0.2%
$100,000 $100,000 Southwest Airlines
Company, 7.875% - 2007.. 101,250 101,250
$75,000 $75,000 United Airlines,
11.21% - 2014........... 88,969 88,969
-----------------------------------------------------
0 0 190,219 190,219
TRANSPORTATION-OTHER- 0.3%
$250,000 $25,000 $275,000 Allied Holdings, Inc.,
8.625% - 2007........... 221,875 22,187 244,062
UTILITIES-ELECTRIC - 0.9%
$500,000 $500,000 AES Corporation,
10.25% - 2006........... 505,000 505,000
$25,000 $25,000 CMS Energy Corporation,
6.75% - 2004............ 23,187 23,187
$25,000 $25,000 Calpine Corporation,
8.75% - 2007............ 25,094 25,094
$150,000 $150,000 Consolidated Edison
Company, 6.625% - 2002.. 148,500 148,500
-----------------------------------------------------
505,000 0 196,781 701,781
UTILITIES-NATURAL GAS-1.4%
$75,000 $150,000 $225,000 MCN Investment
Corporation,
6.32% - 2003............ 72,281 144,563 216,844
$1,000,000 $1,000,000 National Fuel Gas Company,
6.303% - 2008........... 901,250 901,250
-----------------------------------------------------
973,531 0 144,563 1,118,094
YANKEE - CANADIAN - 1.4%
$1,100,000 $100,000 1,200,000 Quebecor Printing Capital,
7.25% - 2007............ 1,027,125 93,375 1,120,500
YANKEE - CORPORATE - 5.6%
$1,150,000 $1,150,000 Abbey National PLC,
6.69% - 2005............ 1,102,563 1,102,563
$1,000,000 $100,000 $1,100,000 ABN AMRO Bank NV,
7.55% - 2006............ 995,000 99,500 1,094,500
$1,000,000 $1,000,000 BCH Cayman Islands, Ltd.,
7.70% - 2006............ 996,250 996,250
$100,000 $100,000 Den Danske Bank,
7.40% - 2010............ 96,250 96,250
$1,200,000 $100,000 $1,300,000 Panamerican Beverages,
Inc., 8.125% - 2003..... 1,146,000 95,500 1,241,500
-----------------------------------------------------
4,239,813 --- 291,250 4,531,063
-----------------------------------------------------
TOTAL CORPORATE BONDS AND
MORTGAGE BACKED - 52.9%... 37,448,861 --- 5,226,743 42,675,604
GOVERNMENT AGENCIES AND
GOVERNMENT SECURITIES
FEDERAL HOME LOAN
BANK - 1.2%
$800,000 $800,000 6.375% - 2006............. 773,792 773,792
$150,000 $150,000 8.29% - 2015.............. 165,001 165,001
-----------------------------------------------------
773,792 165,001 --- 938,793
FEDERAL HOME LOAN MORTGAGE
CORPORATION - 5.2%
$57,524 $57,524 FHG #42 K, 8.00%- 2024 CMO 57,955 57,955
$1,050,000 $100,000 $1,150,000 FHR 1311 J, 7.50% - 2021
CMO..................... 1,037,085 98,770 1,135,855
$235,958 $17,350 $253,308 FHR 1930 AB, 7.50% - 2023
CMO..................... 237,270 17,446 254,716
$1,000,000 $400,000 $1,400,000 FHLMC, 6.25% - 2004....... 977,500 391,000 1,368,500
$1,000,000 $1,000,000 FHLMC, 6.625% - 2009...... 971,250 971,250
$150,000 $150,000 Freddie Mac, 5.75% - 2003. 145,304 145,304
$250,000 $250,000 Federal Home Loan
Mortgage, 6.25% - 2004.. 244,375 244,375
-----------------------------------------------------
2,251,855 1,362,250 563,850 4,177,955
FEDERAL NATIONAL MORTGAGE
ASSOCIATION - 9.6%
$543,254 $543,254 FNR 1990-108 G,
7.00% - 2020 CMO........ 525,403 525,403
$100,000 $100,000 FNMA, 5.45% - 2003........ 95,571 95,571
$1,000,000 $1,000,000 $250,000 $2,250,000 FNMA, 6.50% - 2004........ 987,790 987,790 246,948 2,222,528
$600,000 $600,000 FNMA, 7.40% - 2004........ 613,272 613,272
$285,000 $285,000 FNMA, 7.49% - 2005........ 292,649 292,649
$250,000 $250,000 FNMA, 7.65% - 2005........ 258,452 258,452
$500,000 $500,000 FNMA, 7.875% - 2005....... 521,590 521,590
$400,000 $400,000 FNMA, 6.00% - 2008........ 374,468 374,468
$1,500,000 $1,500,000 FNMA, 6.375% - 2009....... 1,431,915 1,431,915
$1,000,000 $1,000,000 FNMA, 6.625% - 2009....... 972,500 972,500
$500,000 $500,000 FNMA, 6.16% - 2028........ 437,830 437,830
-----------------------------------------------------
3,917,608 3,486,051 342,519 7,746,178
FINANCING CORPORATION-0.8%
$500,000 $500,000 9.65% - 2018.............. 615,000 615,000
GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION -
18.1%
$736,096 $736,096 GNMA 313107, 7.00% - 2022. 721,204 721,204
$213,217 $213,217 GNMA 328618, 7.00% - 2022. 208,169 208,169
$151,159 $151,159 GNMA II 1260, 7.00% - 2023 147,249 147,249
$679,459 $679,459 GNMA 352022, 7.00% - 2023. 656,099 656,099
$652,089 $65,209 $717,298 GNMA 369303, 7.00% - 2023. 638,115 63,811 701,926
$373,299 $373,299 GNMA 347017, 7.00% - 2024. 363,858 363,858
$205,649 $205,649 GNMA 371006, 7.00% - 2024. 200,897 200,897
$371,619 $371,619 GNMA 371012, 7.00% - 2024. 362,488 362,488
$158,892 $158,892 GNMA II 1849, 8.50% - 2024 163,076 163,076
$242,884 $242,884 GNMA 411643, 7.75% - 2025. 242,797 242,797
$681,941 $85,243 $767,184 GNMA 780454, 7.00% - 2026. 658,925 82,366 741,291
$328,171 $328,171 GNMA 2320, 7.00% - 2026... 318,365 318,365
$267,345 $267,345 GNMA II 2270, 8.00% - 2026 267,968 267,968
$149,549 $149,549 GNMA II 9365, 8.25% - 2026 152,410 152,410
$380,246 $380,246 GNMA 2689, 6.50% - 2028... 356,153 356,153
$754,216 $754,216 GNMA 464356, 6.50% - 2028. 708,647 708,647
$866,352 $86,635 $952,987 GNMA 462680, 7.00%- 2028.. 839,218 83,922 923,140
$1,057,200 $154,175 $1,211,375 GNMA 482668, 7.00% - 2028. 1,023,739 149,295 1,173,034
$476,820 $476,820 GNMA 2616, 7.00% - 2028... 460,465 460,465
$997,508 $997,508 GNMA 518436, 7.25% - 2029. 974,784 974,784
$989,755 $989,755 GNMA 491492, 7.50% - 2029. 978,689 978,689
$1,545,686 $1,545,686 GNMA 494109, 7.50% - 2029. 1,528,328 1,528,328
$997,758 $299,328 $99,776 $1,396,862 GNMA 510704, 7.50% - 2029. 986,544 295,963 98,654 1,381,161
$257,588 $61,821 $319,409 GNMA II 2445, 8.00% - 2027 258,194 61,967 320,161
$515,070 $515,070 GNMA 365608, 7.50% - 2034. 509,842 509,842
$21,744 $21,744 GNR 1997-10 B, 7.50%- 2019
CMO..................... 21,696 21,696
-----------------------------------------------------
7,647,921 6,479,883 456,093 14,583,897
PRIVATE EXPORT FUNDING
CORPORATION - 0.5%
$100,000 $100,000 6.31% - 2004.............. 97,250 97,250
$350,000 $350,000 7.01% - 2004.............. 350,000 350,000
-----------------------------------------------------
--- 447,250 --- 447,250
STUDENT LOAN MARKETING
ASSOCIATION - 0.6%
$420,000 $420,000 9.25% - 2004.............. 457,729 457,729
TENNESSEE VALLEY
AUTHORITY - 1.1%
$500,000 $500,000 6.00% - 2013.............. 448,750 448,750
$500,000 $500,000 6.75% - 2025.............. 470,000 470,000
-----------------------------------------------------
--- 918,750 --- 918,750
U.S. TREASURY BOND - 2.4%
$1,000,000 $1,000,000 6.25% - 2023.............. 942,890 942,890
$1,000,000 $1,000,000 6.625% - 2027............. 991,180 991,180
-----------------------------------------------------
1,934,070 --- --- 1,934,070
U.S. TREASURY NOTES - 4.1%
$1,700,000 $1,700,000 5.75% - 2003.............. 1,668,686 1,668,686
$1,000,000 $1,000,000 6.50% - 2005.............. 1,000,160 1,000,160
$600,000 $600,000 8.75% - 2008.............. 642,036 642,036
-----------------------------------------------------
2,668,846 642,036 --- 3,310,882
U.S. DEPARTMENT OF
HOUSING AND URBAN
DEVELOPMENT - 1.6%
$1,290,000 $50,000 $1,340,000 6.93%- 2013............... 1,215,893 47,128 1,263,021
CANADIAN GOVERNMENT
SECURITIES - 0.2%
$150,000 $150,000 Province of Quebec,
8.625% - 2005........... 158,250 158,250
-----------------------------------------------------
TOTAL GOVERNMENT
SECURITIES - 45.4%........ 20,409,985 14,573,950 1,567,840 36,551,775
TOTAL INVESTMENTS - 98.3%. 57,858,846 14,573,950 6,794,583 79,227,379
CASH AND OTHER ASSETS,
LESS LIABILITIES - 1.7%. 755,585 504,236 100,729 1,360,550
-----------------------------------------------------
TOTAL NET ASSETS - 100.0%. 58,614,431 15,078,186 6,895,312 80,587,929
=====================================================
</TABLE>
<PAGE>
PROFORMA FEE TABLE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
TOTAL
ANNUAL FUND NET
MANAGEMENT DISTRIBUTION OTHER OPERATING REIMBURSMENT/ EXPENSE
FEES (12B-1) FEES EXPENSES EXPENSES WAIVERS RATIO
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999 ACTUAL CLASS A
Corporate Bond 0.50% 0.25% 0.35% 1.10% 0.01% 1.09%
Limited Maturity 0.50% 0.25% 0.52% 1.27% 0.50% 0.77%
Diversified Income 0.50% 0.25% 0.62% 1.37% 0.50% 0.87%
1999 ACTUAL CLASS B
Corporate Bond 0.50% 1.00% 0.65% 2.15% 0.30% 1.85%
Limited Maturity 0.50% 1.00% 0.91% 2.41% 0.56% 1.85%
Diversified Income 0.50% 1.00% 0.86% 2.36% 0.51% 1.85%
PROFORMA-CLASS A
Diversified Income(1) 0.35% 0.25% 0.40% 1.00% 0.00% 1.00%
Corporate Bond (only)(2) 0.35% 0.25% 0.42% 1.02% --- 1.02%
Limited Maturity (only)(3) 0.35% 0.25% 0.57% 1.17% 0.07% 1.10%
PROFORMA-CLASS B
Diversified Income(1) 0.35% 1.00% 0.40% 1.75% 0.00% 1.75%
Corporate Bond (only)(2) 0.35% 1.00% 0.42% 1.77% 0.00% 1.77%
Limited Maturity (only)(3) 0.35% 1.00% 0.57% 1.92% 0.07% 1.85%
- -----------------------------------------------------------------------------------------------------------
<FN>
(1) Pro forma fee table assuming reorganization of Corporate Bond and Limited Maturity Bond into
Diversified Income Fund.
(2) Pro forma fee table assuming reorganization of only Corporate Bond into Diversified Income Fund.
(3) Pro forma fee table assuming reorganization of only Limited Maturity Bond into Diversified Income
Fund.
</FN>
- -----------------------------------------------------------------------------------------------------------
</TABLE>
