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SECURITY
FUNDS
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PROSPECTUS
January 31, 1997
As Supplemented May 15, 1997
* Security Asset
Allocation Fund
* Application
[SDI Logo]
SECURITY DISTRIBUTORS, INC.
A Member of The Security Benefit
Group of Companies
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SECURITY FUNDS
PROSPECTUS
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SECURITY EQUITY FUND
ASSET ALLOCATION SERIES
A MEMBER OF THE SECURITY BENEFIT GROUP OF COMPANIES
700 HARRISON, TOPEKA, KANSAS 66636-0001
PROSPECTUS
January 31, 1997
As Supplemented May 15, 1997
Security Asset Allocation Fund (the "Fund") is a series of a diversified,
open-end management investment company.
The Fund seeks high total return, consisting of capital appreciation and current
income. The Fund seeks this objective by following an asset allocation strategy
that contemplates shifts among a wide range of investment categories and market
sectors. The Fund will invest in the following investment categories: equity
securities of domestic and foreign issuers, including common stocks, preferred
stocks, convertible securities and warrants; debt securities of domestic and
foreign issuers, including mortgage-related and other asset-backed securities;
exchange-traded real estate investment trusts (REITs); equity securities of
companies involved in the exploration, mining, development, production and
distribution of gold ("gold stocks"); and domestic money market instruments. An
investment in the Fund involves risk which is described more fully in this
Prospectus and the Fund's Statement of Additional Information.
This Prospectus sets forth concisely the information that a prospective investor
should know about the Fund. It should be read and retained for future reference.
Certain additional information is contained in a "Statement of Additional
Information" about the Fund, dated January 31, 1997, which has been filed with
the Securities and Exchange Commission. The Statement of Additional Information,
as it may be supplemented from time to time, is incorporated by reference in
this Prospectus. It is available at no charge by writing Security Distributors,
Inc., 700 Harrison, Topeka, Kansas 66636-0001, or by calling (913) 295-3127 or
(800) 888-2461.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
AN INVESTMENT IN THE FUND INVOLVES RISK, INCLUDING LOSS OF PRINCIPAL, AND IS NOT
A DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR ENDORSED BY, ANY BANK. THE FUND IS
NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER AGENCY.
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SECURITY FUNDS
CONTENTS
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Page
Transaction and Operating Expense Table..................................... 1
Financial Highlights........................................................ 2
Investment Objective and Policies of the Fund............................... 3
Investment Methods and Risk Factors......................................... 5
Management of the Fund...................................................... 14
Proposed Sub-Advisory Agreement for the Fund............................. 15
Portfolio Management..................................................... 15
How to Purchase Shares...................................................... 16
Alternative Purchase Options............................................. 16
Class A Shares........................................................... 17
Class B Shares........................................................... 17
Class B Distribution Plan................................................ 18
Calculation and Waiver of Contingent Deferred Sales Charges.............. 19
Arrangements with Broker-Dealers and Others.............................. 20
Purchases at Net Asset Value............................................. 20
How to Redeem Shares........................................................ 21
Telephone Redemptions.................................................... 22
Dividends and Taxes......................................................... 22
Foreign Taxes............................................................ 24
Determination of Net Asset Value............................................ 24
Trading Practices and Brokerage............................................. 24
Performance................................................................. 25
Shareholder Services........................................................ 26
Accumulation Plan........................................................ 26
Systematic Withdrawal Program............................................ 26
Exchange Privilege....................................................... 26
Retirement Plans......................................................... 27
General Information......................................................... 28
Organization............................................................. 28
Stockholder Inquiries.................................................... 28
Appendix A - Class A Shares Reduced Sales Charges........................... 29
Rights of Accumulation................................................... 29
Statement of Intention................................................... 29
Reinstatement Privilege.................................................. 29
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SECURITY FUNDS
PROSPECTUS
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TRANSACTION AND OPERATING EXPENSE TABLE
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<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A SHARES CLASS B SHARES(1)
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<S> <C> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of offering price) 5.75% None
Maximum Sales Load Imposed on Reinvested Dividends None None
Deferred Sales Load (as a percentage of original purchase price or None(2) 5% during the first year,
redemption proceeds, whichever is lower) decreasing to 0% in the
sixth and following years
CLASS A SHARES CLASS B SHARES
-------------- --------------
ANNUAL FUND OPERATING EXPENSES (as a percentage of net assets)
Management Fees (after fee waiver) 0.30% 0.30%
12b-1 Fees(3) None 1.00%
Other Expenses (after expense reimbursement) 1.70% 1.70%
----- -----
Total Fund Operating Expenses(4) 2.00% 3.00%
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EXAMPLE
You would pay the following expenses on a 1 Year $ 77 $ 80
$1,000 investment, assuming (1) 5 percent 3 Years 117 123
annual return and (2) redemption at the 5 Years 159 178
end of each time period(5) 10 Years 277 332
EXAMPLE
You would pay the following expenses on a 1 Year $ 77 $ 30
$1,000 investment, assuming (1) 5 percent 3 Years 117 93
annual return and (2) no redemption 5 Years 159 158
10 Years 277 332
</TABLE>
(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 contingent deferred sales
charge of 1% is imposed in the event of redemption within one year of
purchase. See "Class A Shares" on page 17.
(3) The 12b-1 fee of 1.00% consists of .75% for distribution expense and .25%
for service fees. Long-term holders of Class B shares may pay more than the
equivalent of the maximum front-end sales charge otherwise permitted by
NASD Rules.
(4) During the fiscal year ending September 30, 1996, the Investment Manager
waived a portion of the Fund's management fee and reimbursed certain
expenses; absent such fee waiver, the management fee would have been .75%
and absent such expense reimbursement, "Total Fund Operating Expenses"
would have been 3.1% for Class A shares and 3.9% for Class B shares.
(5) This example does not reflect deduction of (i) the $15 wire transfer fee
discussed under "How to Redeem Shares" on page 21 or (ii) the contingent
deferred sales charge which is imposed upon redemption of Class A shares
purchased in amounts of $1,000,000 or more.
THE ABOVE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES AS ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN. THE
ASSUMED FIVE PERCENT ANNUAL RETURN IS HYPOTHETICAL AND SHOULD NOT BE CONSIDERED
A REPRESENTATION OF PAST OR FUTURE ANNUAL RETURN. THE ACTUAL RETURN MAY BE
GREATER OR LESSER THAN THE ASSUMED AMOUNT.
The purpose of the foregoing fee table is to assist the investor in
understanding the various costs and expenses that an investor in the Fund will
bear directly or indirectly. For a more detailed discussion of the Fund's fees
and expenses, see the discussion under "Management of the Fund," page 14. See
"How to Purchase Shares," page 16, for more information concerning the sales
load. Also, see Appendix A for a discussion of "Rights of Accumulation" and
"Statement of Intention," which options may serve to reduce the front-end sales
load on purchases of Class A shares.
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SECURITY FUNDS
FINANCIAL HIGHLIGHTS
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The following financial highlights for each of the years in the period
ended September 30, 1996, has been audited by Ernst & Young LLP. Such
information should be read in conjunction with the financial statements of the
Fund and the report of Ernst & Young LLP, the Fund's independent auditors,
appearing in the September 30, 1996 Annual Report to Stockholders which is
incorporated by reference in this Prospectus. The Fund's Annual Report to
Stockholders also contains additional information about the performance of the
Fund and may be obtained without charge by calling Security Distributors, Inc.
at 1-800-888-2461.
<TABLE>
<CAPTION>
Ratio
of net
Net gains Total Net Ratio of income Average
Fiscal (losses) from Dividends Distri- Net assets expenses (loss) Port- commission
year Net asset Net on invest- (from net butions asset end of to to folio paid per
ended value invest- securities ment invest- (from Total value Total period average average turn- investment
Septem- beginning ment (realized & opera- ment capital distri- end of return (thou- net net over security
ber 30 of period income unrealized) tions income) gains) butions period (a) sands) assets assets rate traded(e)
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SECURITY ASSET ALLOCATION FUND (CLASS A)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 $10.00 $0.04 $0.50 $0.54 $--- $--- $--- $10.54 5.40% $1,906 2.00% 1.33% 129% ---
(b)(c)(d)
1996(c)(d) 10.54 0.25 0.765 1.015 (0.328) (0.167) (0.495) 11.06 10.01% 2,449 2.00% 2.32% 75% 0.0247
SECURITY ASSET ALLOCATION FUND (CLASS B)
1995 $10.00 $0.01 $0.49 $0.50 $--- $--- $--- $10.50 5.00% $1,529 3.00% 0.31% 129% ---
(b)(c)(d)
1996(c)(d) 10.50 0.14 0.77 0.91 (0.273) (0.167) (0.44) 10.97 8.97% 2,781 3.00% 1.32% 75% 0.0247
</TABLE>
(a) Total return information does not reflect deduction of any sales charges
imposed at the time of purchase for Class A shares or upon redemption for
Class B shares.
(b) Security Asset Allocation Fund was initially capitalized on June 1, 1995,
with a net asset value of $10 per share. Percentage amounts for the period
have been annualized, except for total return.
(c) Fund expenses were reduced by the Investment Manager during the period and
expense ratios absent such reimbursement would have been as follows:
1995 1996
---- ----
Class A 3.6% 3.1%
Class B 4.7% 3.9%
(d) Net investment income (loss) was computed using average shares outstanding
throughout the period.
(e) Brokerage commissions paid on portfolio transactions increase the cost of
securities purchased or reduce the proceeds of securities sold and are not
reflected in the Fund's statement of operations. Shares traded on a
principal basis, such as most over-the-counter and fixed-income
transactions, are excluded. Generally, non-U.S. commissions are lower than
U.S. commissions when expressed as cents per share but higher when
expressed as a percentage of transactions because of the lower per-share
prices of many non-U.S. securities.
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INVESTMENT OBJECTIVE AND
POLICIES OF THE FUND
Security Asset Allocation Fund (the "Fund") is a series of Security Equity
Fund, a diversified, open-end management investment company of the series type,
which was organized as a Kansas corporation on November 27, 1961. The Fund's
investment objective and policies are described below. There, of course, can be
no assurance that such investment objective will be achieved. While there is no
present intention to do so, the Fund's investment objective and policies, unless
otherwise noted, may be changed by its Board of Directors without the approval
of stockholders. If there is a change in investment objective, stockholders
should consider whether the Fund remains an appropriate investment in light of
their then current financial position and needs. The Fund is subject to certain
investment policy limitations which may not be changed without stockholder
approval. Among these limitations, some of the more important ones are that the
Fund will not, with respect to 75 percent of its total assets, invest more than
5 percent of the value of its assets in any one issuer or purchase more than 10
percent of the outstanding voting securities of any one issuer. In addition, the
Fund will not invest 25 percent or more of its total assets in any one industry.
The full text of the investment policy limitations of the Fund is set forth in
the Statement of Additional Information.
The investment objective of the Fund is to seek high total return,
consisting of capital appreciation and current income. The Fund seeks this
objective by following an asset allocation strategy that contemplates shifts
among a wide range of investment categories and market sectors. The Fund will
invest in the following investment categories: equity securities of domestic and
foreign issuers, including common stocks, preferred stocks, convertible
securities and warrants; debt securities of domestic and foreign issuers,
including mortgage-related and other asset-backed securities; exchange-traded
real estate investment trusts (REITs); equity securities of companies involved
in the exploration, mining, development, production and distribution of gold
("gold stocks"); and domestic money market instruments. See "Investment Methods
and Risk Factors" for a discussion of the additional risks associated with
investment in foreign securities and REITs, and see the discussion of the risks
associated with investment in gold stocks below.
Investment in gold stocks presents risks, because the prices of gold have
fluctuated substantially over short periods of time. Prices may be affected by
unpredictable monetary and political policies, such as currency devaluations or
revaluations, economic and social conditions within an individual country, trade
imbalances, or trade or currency restrictions between countries. The unstable
political and social conditions in South Africa and unsettled political
conditions prevailing in neighboring countries may have disruptive effects on
the market prices of securities of South African companies.
The Fund is not required to maintain a portion of its assets in each of the
permitted investment categories. The Fund, however, under normal circumstances,
will maintain a minimum of 35 percent of its total assets in equity securities
and 10 percent in debt securities. The Fund will not invest more than 55 percent
of its total assets in money market instruments (except when in a
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No dealer, salesperson, or other person has been authorized to give any
information or to make any representations, other than those contained in this
Prospectus and in the Fund's Statement of Additional Information, and if given
or made, such other information or representations must not be relied upon as
having been authorized by the Fund, the Investment Manager, or the Distributor.
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3
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temporary defensive position), more than 80 percent of its total assets in
foreign securities, nor more than 20 percent of its total assets in gold stocks.
The Fund will not invest 25 percent or more of its assets in the securities of
any single country, other than the United States.
The Investment Manager receives quantitative investment research from
Meridian Investment Management Corporation ("Meridian"), which research the
Investment Manager uses in strategically allocating the Fund's assets among the
investment categories identified above, primarily on the basis of a quantitative
asset allocation model. With respect to equity securities, the model analyzes a
large number of equity securities based on the following factors: current
earnings, earnings history, long-term earnings projections, current price, and
risk.
The Investment Manager then determines (based on the results of Meridian's
analysis) which sectors within an identified investment category are deemed to
be the most attractive relative to other sectors. For example, the model may
indicate that a portion of the Fund's assets should be invested in the domestic
equity category of the market and within this category that pharmaceutical
stocks represent a sector with an attractive total return potential. Although
the Investment Manager anticipates relying on much of the research provided by
Meridian, the Investment Manager has ultimate responsibility for the selection
of the investment categories and the sectors within those categories.
The Investment Manager identifies sectors of the domestic and international
economy (based on the research provided by Meridian) in which the Fund will
invest and then determines which equity securities to purchase within the
identified countries and/or sectors. The Investment Manager may utilize certain
analytical research provided by Templeton/Franklin Investment Services, Inc.
("Templeton") in selecting equity securities, including gold stocks, for the
Fund. Templeton analyzes and monitors analytical research provided by third
parties and makes recommendations regarding equity securities in the identified
sectors based on such research. The Investment Manager has ultimate
responsibility for all buy and sell decisions of the Fund and may determine not
to use analytical research provided by Templeton.
With respect to the selection of debt securities for the Fund, the asset
allocation model provided by Meridian analyzes the prices of commodities and
finished goods to arrive at an interest rate projection. The Investment Manager
will determine the portion of the portfolio to allocate to debt securities and
the duration of those securities based on the model's interest rate projections.
Gold stocks and REITs will be analyzed in a manner similar to that used for
equity securities. Money market instruments will be analyzed based on current
returns and the current yield curve. The asset allocation model and stock
selection techniques used by the Fund may evolve over time or be replaced by
other asset allocation models and/or stock selection techniques. There is no
assurance that the model will correctly predict market trends or enable the Fund
to achieve its investment objective.
The debt securities, including convertible securities, in which the Fund
may invest will, at the time of investment, consist of "investment grade" bonds,
which are bonds rated BBB or better by Standard & Poor's Corporation ("S&P") or
Baa or better by Moody's Investors Service, Inc. ("Moody's") or that are unrated
by S&P and Moody's but considered by the Investment Manager to be of equivalent
credit quality. Securities rated BBB by S&P or Baa by Moody's have speculative
characteristics and may be more susceptible than higher grade bonds to adverse
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economic conditions or other adverse circumstances which may result in a
weakened capacity to make principal and interest payments. If the Fund holds a
security whose rating drops below Baa or BBB, the Investment Manager will
reevaluate the credit risk of the security in light of then current market
conditions and determine whether to retain or dispose of the security. The Fund
will not retain securities rated below Baa or BBB in an amount that exceeds 5
percent of its net assets.
The Fund may invest in investment grade mortgage-backed securities (MBSs),
including mortgage pass-through securities and collateralized mortgage
obligations (CMOs). The Fund will not invest in an MBS if, as a result of such
investment, 25 percent or more of its total assets would be invested in MBSs,
including CMOs and mortgage pass-through securities. For a discussion of MBSs
and the risks associated with such securities, see "Investment Methods and Risk
Factors" -- "Mortgage-Backed Securities," below.
The Fund may invest up to 10 percent, at the time of investment, of its
total assets in restricted securities, that are eligible for resale pursuant to
Rule 144A under the Securities Act of 1933. See "Investment Methods and Risk
Factors" for a discussion of restricted securities. The Fund may also invest in
shares of other investment companies as discussed under "Investment Methods and
Risk Factors," below.
The Fund may write covered call options and purchase put options and may
buy and sell futures contracts (and options on such contracts). The Fund may
purchase a futures contract or option to hedge a position. It is the Fund's
operating policy that initial margin deposits and premiums on options used for
non-hedging purposes will not equal more than 5 percent of the Fund's net
assets. The total market value of securities against which the Fund has written
call options may not exceed 25 percent of its total assets. The Fund will not
commit more than 5 percent of its total assets to premiums when purchasing put
options. Futures contracts and options may not always be successful hedges and
their prices can be highly volatile. Using futures contracts and options 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. Futures contracts and
options and the risks associated with such derivative securities are described
in further detail under "Investment Methods and Risk Factors" below.
The Fund does not intend to lend any of its assets other than by purchase
of publicly distributed debt securities which are not considered loans, or by
entry into repurchase agreements.
INVESTMENT METHODS AND RISK FACTORS
Some of the risk factors related to certain securities, instruments and
techniques are described in the "Investment Objective and Policies" section of
this Prospectus and in the Fund's Statement of Additional Information. The
following is a description of certain additional risk factors related to various
securities, instruments and techniques. Also included is a general description
of some of the investment instruments, techniques and methods which may be used
by the Fund. Although the Fund may employ the techniques, instruments and
methods described below, consistent with its investment objective and policies
and any applicable law, it is not required to do so.
INVESTMENT VEHICLES
SHARES OF OTHER INVESTMENT COMPANIES -- The Fund may invest in shares of
other investment companies. The Fund's investment in shares of
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other investment companies may not exceed immediately after purchase 10 percent
of the Fund's total assets and no more than 5 percent of its total assets may be
invested in the shares of any one investment company. Investment in the shares
of other investment companies has the effect of requiring shareholders to pay
the operating expenses of two mutual funds.
CONVERTIBLE SECURITIES AND WARRANTS -- Convertible securities are 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. In
recent years, convertibles have been developed which combine higher or lower
current income with options and other features. Warrants are options to buy a
stated number of shares of common stock at a specified price any time during the
life of the warrants (generally two or more years).
MORTGAGE-BACKED SECURITIES -- Mortgage-backed securities (MBSs), including
mortgage pass-through securities and collateralized mortgage obligations (CMOs),
include certain securities issued or guaranteed by the United States government
or one of its agencies or instrumentalities, such as the Government National
Mortgage Association (GNMA), Federal National Mortgage Association (FNMA), or
Federal Home Loan Mortgage Corporation (FHLMC); securities issued by private
issuers that represent an interest in or are collateralized by mortgage-backed
securities issued or guaranteed by the U.S. government or one of its agencies or
instrumentalities; and securities issued by private issuers that represent an
interest in or are collateralized by mortgage loans. A mortgage pass-through
security is a pro rata interest in a pool of mortgages where the cash flow
generated from the mortgage collateral is passed through to the security holder.
CMOs are obligations fully collateralized by a portfolio of mortgages or
mortgage-related securities. The Fund will not invest in securities known as
"inverse floating obligations," "residual interest bonds," or "interest-only"
(IO) and "principal-only" (PO) bonds, the market values of which will generally
be more volatile than the market values of most MBSs. MBSs have been referred to
as "derivatives" because the performance of MBSs is dependent upon and derived
from underlying securities.
Investment in MBSs poses several risks, including prepayment, market and
credit risks. PREPAYMENT RISK reflects the chance that borrowers may prepay
their mortgages faster than expected, thereby affecting the investment's average
life and perhaps its yield. Borrowers are most likely to exercise their
prepayment options at a time when it is least advantageous to investors,
generally prepaying mortgages as interest rates fall, and slowing payments as
interest rates rise. Certain classes of CMOs may have priority over others with
respect to the receipt of prepayments on the mortgages and the Fund may invest
in CMOs which are subject to greater risk of prepayment. MARKET RISK reflects
the chance that the price of the security may fluctuate over time. The price of
MBSs may be particularly sensitive to prevailing interest rates, the length of
time the security is expected to be outstanding and the liquidity of the issue.
In a period of unstable interest rates, there may be decreased demand for
certain types of MBSs, and a fund invested in such securities wishing to sell
them may find it difficult to find a buyer, which may in turn decrease the price
at which they may be sold. CREDIT RISK reflects the chance that the Fund may not
receive
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SECURITY FUNDS
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all or part of its principal because the issuer or credit enhancer has defaulted
on its obligations. Obligations issued by U.S. Government-related entities are
guaranteed as to the payment of principal and interest by the agency or
instrumentality, and some, such as GNMA certificates, are supported by the full
faith and credit of the U.S. Treasury; others are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the FNMA, are
supported by the discretionary authority of the U.S. Government to purchase the
agency's obligations; still others, are supported only by the credit of the
instrumentality. Although securities issued by U.S. Government-related agencies
are guaranteed by the U.S. Government, its agencies or instrumentalities, shares
of the Fund are not so guaranteed in any way. The performance of private label
MBSs, issued by private institutions, is based on the financial health of those
institutions. There is no guarantee the Fund's investment in MBSs will be
successful, and the Fund's total return could be adversely affected as a result.
ASSET-BACKED SECURITIES -- Asset-backed securities represent a
participation in, or are secured by and payable from, a stream of payments
generated by particular assets, for example, automobile, credit card or trade
receivables. Asset-backed commercial paper, one type of asset-backed security,
is issued by a special purpose entity, organized solely to issue the commercial
paper and to purchase interests in the assets. The credit quality of these
securities depends primarily upon the quality of the underlying assets and the
level of credit support and/or enhancement provided.
The underlying assets (e.g., loans) are subject to prepayments which
shorten the securities' weighted average life and may lower their return. If the
credit support or enhancement is exhausted, losses or delays in payment may
result if the required payments of principal and interest are not made. The
value of these securities also may change because of changes in the market's
perception of the creditworthiness of the servicing agent for the pool, the
originator of the pool, or the financial institution providing the credit
support or enhancement.
REAL ESTATE INVESTMENT TRUSTS (REITS) -- A REIT is a trust that invests in
a diversified portfolio of real estate holdings. Investment in REITs involves
certain special risks. Equity REITs may be affected by any changes in the value
of the underlying property owned by the trusts, while mortgage REITs may be
affected by the quality of any credit extended. Further, equity and mortgage
REITs are dependent upon management skill, are not diversified, and are
therefore subject to the risk of financing single or a limited number of
projects. Such trusts are also subject to heavy cash flow dependency, defaults
by borrowers, self liquidation, and the possibility of failing to qualify for
special tax treatment under Subchapter M of the Internal Revenue Code and to
maintain an exemption under the Investment Company Act of 1940. Finally, certain
REITs may be self-liquidating in that a specific term of existence is provided
for in the trust document. Such trusts run the risk of liquidating at an
economically inopportune time.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES -- Purchase or sale of
securities on a "forward commitment" basis may be used to hedge against
anticipated changes in interest rates and prices. The price, which is generally
expressed in yield terms, is fixed at the time the commitment is made, but
delivery and payment for the securities take place at a later date. When-issued
securities and forward commitments may be sold prior to the settlement date, but
the Fund will enter into when-issued and forward
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commitments only with the intention of actually receiving or delivering the
securities, as the case may be; however, the Fund may dispose of a commitment
prior to settlement if the Investment Manager deems it appropriate to do so. No
income accrues on securities which have been purchased pursuant to a forward
commitment or on a when-issued basis prior to delivery of the securities. If the
Fund disposes of the right to acquire a when-issued security prior to its
acquisition or disposes of its right to deliver or receive against a forward
commitment, it may incur a gain or loss. At the time the Fund enters into a
transaction on a when-issued or forward commitment basis, a segregated account
consisting of cash or liquid securities equal to the value of the when-issued or
forward commitment securities will be established and maintained with its
custodian and will be marked to market daily. There is a risk that the
securities may not be delivered and that the Fund may incur a loss.
RESTRICTED SECURITIES -- Restricted securities are acquired through private
placement transactions, directly from the issuer or from security holders,
generally at higher yields or on terms more favorable to investors than
comparable publicly traded securities. However, the restrictions on resale of
such securities may make it difficult for the Fund to dispose of such securities
at the time considered most advantageous, and/or may involve expenses that would
not be incurred in the sale of securities that were freely marketable. The Fund
may purchase only restricted securities that are eligible for resale to
qualified institutional investors pursuant to Rule 144A under the Securities Act
of 1933. Trading restricted securities pursuant to Rule 144A may enable the Fund
to dispose of restricted securities at a time considered to be advantageous
and/or at a more favorable price than would be available if such securities were
not traded pursuant to Rule 144A. However, the Rule 144A market is relatively
new and liquidity of the Fund's investment in such market could be impaired if
trading does not develop or declines. Risks associated with restricted
securities include the potential obligation to pay all or part of the
registration expenses in order to sell certain restricted securities. A
considerable period of time may elapse between the time of the decision to sell
a security and the time the Fund may be permitted to sell it under an effective
registration statement. If, during a period, adverse conditions were to develop,
a Fund might obtain a less favorable price than prevailing when it decided to
sell.
The Board of Directors is responsible for developing and establishing
guidelines and procedures for determining the liquidity of Rule 144A securities.
As permitted by Rule 144A, the Board of Directors has delegated this
responsibility to the Investment Manager. In making the determination regarding
the liquidity of Rule 144A securities, the Investment Manager will consider
trading markets for the specific security taking into account the unregistered
nature of a Rule 144A security. In addition, the Investment Manager may
consider: (1) the frequency of trades and quotes; (2) the number of dealers and
potential purchasers; (3) dealer undertakings to make a market; and (4) the
nature of the security and of the market place trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
transfer). Investing in Rule 144A securities could have the effect of increasing
the amount of the Fund's assets invested in illiquid securities to the extent
that qualified institutional buyers become uninterested, for a time, in
purchasing these securities. It is the Fund's policy that not more than 15
percent of its net assets will be invested in illiquid securities. Included in
this
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category are "restricted" securities deemed illiquid by the Investment Manager
under procedures adopted by the Board, and any other assets for which an active
and substantial market does not exist at the time of purchase or subsequent
valuation.
AMERICAN DEPOSITARY RECEIPTS (ADRS) -- The ADRs in which the Fund invests
are dollar-denominated receipts sponsored by U.S. banks which represent the
deposit with the bank of a foreign company's securities. ADRs are publicly
traded on exchanges or over-the-counter in the United States. Investors should
consider carefully the substantial risks involved in investing in securities
issued by companies of foreign nations, which are in addition to the usual risks
inherent in domestic investments. See "Foreign Investment Risks," below.
REPURCHASE AGREEMENTS -- A repurchase agreement is a contract under which
the Fund would acquire a security for a relatively short period (usually not
more than seven days) subject to the obligation of the seller to repurchase and
the Fund to resell such security at a fixed time and price. The resale price is
in excess of the purchase price and reflects an agreed-upon market rate
unrelated to the coupon rate of the purchased security. Repurchase agreements
will be fully collateralized including interest earned thereon during the entire
term of the agreement. If the institution defaults on the repurchase agreement,
the Fund will retain possession of the underlying securities. If bankruptcy
proceedings are commenced with respect to the seller, realization on the
collateral by the Fund may be delayed or limited and the Fund may incur
additional costs. In such case, the Fund will be subject to risks associated
with changes in market value of the collateral securities.
MANAGEMENT PRACTICES
CASH RESERVES -- The Fund may establish and maintain reserves as the
Investment Manager believes is advisable to facilitate the Fund's cash flow
needs (e.g., redemptions, expenses, and purchases of portfolio securities) or
for temporary, defensive purposes. Such reserves will be invested in domestic
money market instruments rated within the top two credit categories by a
national rating organization, or if unrated, the Investment Manager equivalent.
The Fund may also invest in certificates of deposit issued by banks and bank
demand accounts.
BORROWING -- The Fund can 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 policies. As a fundamental
policy which may not be changed without stockholder approval, the Fund's
borrowings may not exceed 33 1/3 percent of the Fund's total assets; the Fund,
however, does not expect borrowings to exceed 10 percent of total assets. To the
extent that the 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. The 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.
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FORWARD CURRENCY TRANSACTIONS -- In seeking to protect against currency
exchange rate or interest rate changes that are adverse to their present or
prospective positions, the Fund may employ certain risk management practices
involving the use of forward currency contracts and options contracts, futures
contracts and options on futures contracts on U.S. and foreign government
securities and currencies. There can be no assurance that such risk management
practices will succeed.
To attempt to hedge against adverse movements in exchange rates between
currencies, the Fund may enter into forward currency contracts for the purchase
or sale of a specified currency at a specified future date. Such contracts may
involve the purchase or sale of a foreign currency against the U.S. dollar or
may involve two foreign currencies. The Fund may enter into forward currency
contracts either with respect to specific transactions or with respect to the
Fund's portfolio positions. For example, when the Fund anticipates making a
purchase or sale of a security, it may enter into a forward currency contract in
order to set the rate (either relative to the U.S. dollar or another currency)
at which a currency exchange transaction related to the purchase or sale will be
made. Further, if the Investment Manager believes that a particular currency may
decline compared to the U.S. dollar or another currency, the Fund may enter into
a forward contract to sell the currency the Investment Manager expects to
decline in an amount up to the value of the portfolio securities held by the
Fund denominated in a foreign currency.
The Fund's use of forward currency contracts or options and futures
transactions involve certain investment risks and transaction costs to which it
might not otherwise be subject. These risks include: dependence on the
Investment Manager's ability to predict movements in exchange rates; imperfect
correlation between movements in exchange rates and movements in the currency
hedged; and the fact that the skills needed to effectively hedge against the
Fund's currency risks are different from those needed to select the securities
in which the Fund invests. The Fund also may conduct foreign currency exchange
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market.
OPTIONS -- The Fund may purchase put options and write covered call options
on securities that are traded on recognized securities exchanges and
over-the-counter ("OTC") markets. When the Fund writes a covered call option, it
gives the purchaser of the option the right, but not the obligation, to buy the
underlying security owned by the Fund at the agreed upon exercise price at any
time prior to the expiration of the contract, regardless of the market price of
the security during the option period. The purchase price (premium) paid to the
Fund is the consideration for undertaking the obligations of the option
contract. The Fund forgoes the opportunity to profit from an increase in the
market price of the underlying security above the exercise price so long as the
option remains open and covered, except insofar as the premium represents
profit. By writing a call option, the Fund assumes the risk that it may be
required to deliver the security having a market value higher than its market
value at the time the option was written. The Fund will write call options in
order to obtain a return on its investments from the premiums received and will
retain the premiums whether or not the options are exercised. Any decline in the
market value of the Fund's portfolio securities will be offset to the extent of
the premiums received (net of transaction costs).
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The Fund may write only covered call options. This means that the Fund will
own the security or currency subject to the option or an option to purchase the
same underlying security or currency, having an exercise price equal to or less
than the exercise price of the "covered" option, or will establish and maintain
with its custodian for the term of the option, an account consisting of cash,
U.S. Government securities or other liquid securities having a value equal to
the fluctuating market value of the optioned securities or currencies. During
the option period, the writer of a call option has given up the opportunity for
capital appreciation above the exercise price should market price of the
underlying security increase, but has retained the risk of loss should the price
of the underlying security decline. Writing call options also involves the risk
relating to the Fund's ability to close out options it has written.
A put option gives the Fund the right, but not the obligation, to sell the
underlying security to the writer of the option at the exercise price at any
time prior to the expiration of the contract, regardless of the market price of
the security during the option period. The writer may be forced to purchase a
security from the Fund at a price much higher than the market price at the time
the option is exercised. The Fund in purchasing a put option risks the loss of
the entire purchase price (premium) of the option. The Fund may sell a put
option which it has previously purchased prior to sale of the underlying
security. Any such sale would result in a net gain or loss depending on whether
the amount received on the sale is more or less than the premium and other
transaction costs paid on the put which is sold.
FUTURES CONTRACTS AND RELATED OPTIONS -- The Fund may buy and sell futures
contracts (and options on such contracts) to manage exposure to changes in
securities prices and foreign currencies and as an efficient means of adjusting
overall exposure to certain markets. A financial futures contract calls for
delivery of a particular security at a certain time in the future. The seller of
the contract agrees to make delivery of the type of security called for in the
contract and the buyer agrees to take delivery at a specified future time. The
Fund may also write call options and purchase put options on financial futures
contracts as a hedge to attempt to protect the Fund's securities from a decrease
in value. When the Fund writes a call option on a futures contract, it is
undertaking the obligation of selling a futures contract at a fixed price at any
time during a specified period if the option is exercised. Conversely, the
purchaser of a put option on a futures contract is entitled (but not obligated)
to sell a futures contract at a fixed price during the life of the option.
Financial futures contracts include interest rate futures contracts and
stock index futures contracts. An interest rate futures contract obligates the
seller of the contract to deliver, and the purchaser to take delivery of,
interest rate securities called for in a contract at a specified future time at
a specified price. A stock index assigns relative values to common stocks
included in the index and the index fluctuates with changes in the market values
of the common stocks included. A stock index futures contract is a bilateral
contract pursuant to which two parties agree to take or make delivery of an
amount of cash equal to a specified dollar amount times the difference between
the stock index value at the close of the last trading day of the contract and
the price at which the futures contract is originally struck. An option on a
financial futures contract gives the purchaser the right to assume a position in
the contract (a long position if the option is a call and a short position if
the option is a put) at a
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specified exercise price at any time during the period of the option.
REGULATORY MATTERS RELATED TO FUTURES AND OPTIONS -- In connection with its
proposed futures and options transactions, the Fund filed with the CFTC a notice
of eligibility for exemption from the definition of (and therefore from CFTC
regulation as) a "commodity pool operator" under the Commodity Exchange Act. The
Fund represents in its notice of eligibility that: (i) it will not purchase or
sell futures or options on futures contracts or stock indices if as a result the
sum of the initial margin deposits on its existing futures contracts and related
options positions and premiums paid for options on futures contracts or stock
indices would exceed 5 percent of its assets; and (ii) with respect to each
futures contract purchased or long position in an option contract, the Fund will
set aside in a segregated account cash, cash equivalents, U.S. Government
securities or other liquid securities, in an amount equal to the market value of
such contract less the initial margin deposit.
The Staff of the Securities and Exchange Commission ("SEC") has taken the
position that the purchase and sale of futures contracts and the writing of
related options may involve senior securities for the purposes of the
restrictions contained in Section 18 of the Investment Company Act of 1940 on
investment companies' issuing senior securities. However, the Staff has issued
letters declaring that it will not recommend enforcement action under Section 18
if an investment company: (i) sells futures contracts to offset expected
declines in the value of the investment company's securities, provided the value
of such futures contracts does not exceed the total market value of those
securities (plus such additional amount as may be necessary because of
differences in the volatility factor of the securities vis-a-vis the futures
contracts); (ii) writes call options on futures contracts, stock indexes or
other securities, provided that such options are covered by the investment
company's holding of a corresponding long futures position, by its ownership of
securities which correlate with the underlying stock index, or otherwise; (iii)
purchases futures contracts, provided the investment company establishes a
segregated account ("segregated account") consisting of cash, cash equivalents,
U.S. Government securities or other liquid securities, in an amount equal to the
total market value of such futures contracts less the initial margin deposited
therefor; and (iv) writes put options on futures contracts, stock indexes or
other securities, provided that such options are covered by the investment
company's holding of a corresponding short futures position, by establishing a
segregated account in an amount equal to the value of its obligation under the
option, or otherwise.
The fund will conduct its purchases and sales of any futures contracts and
writing of related options transactions in accordance with the foregoing.
RISK FACTORS
GENERAL -- The Fund's net asset value will fluctuate, reflecting
fluctuations in the market value of its portfolio positions and, if invested in
foreign securities, its net currency exposure. The value of fixed income
securities generally fluctuates inversely with interest rate movements. Longer
term bonds held by the Fund are subject to greater interest rate risk. There is
no assurance that the Fund will achieve its investment objective.
FUTURES AND OPTIONS RISK -- Futures contracts and options can be highly
volatile and could result in reduction of the Fund's total return, and the
Fund's attempt to use such investments for hedging purposes may not be
successful.
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Successful futures strategies require the ability to predict future movements in
securities prices, interest rates and other economic factors. Losses from
futures could be significant if the Fund is unable to close out its position due
to distortions in the market or lack of liquidity. The Fund's risk of loss from
the use of futures extends beyond its initial investment and could potentially
be unlimited.
The use of futures and options involves investment risks and transaction
costs to which the Fund would not be subject absent the use of these strategies.
If the Investment Manager seeks to protect the Fund against potential adverse
movements in the securities or interest rate markets using these instruments and
such markets do not move in a direction adverse to the Fund, the Fund could be
left in a less favorable position than if such strategies had not been used.
Risks inherent in the use of futures and options include: (1) the risk that
interest rates or securities prices will not move in the directions anticipated;
(2) imperfect correlation between the price of futures and options and movements
in the prices of the securities being hedged; (3) the fact that skills needed to
use these strategies are different from those needed to select portfolio
securities; (4) the possible absence of a liquid secondary market for any
particular instrument at any time; and (5) the possible need to defer closing
out certain hedged positions to avoid adverse tax consequences. The Fund's
ability to terminate option positions established in the over-the-counter market
may be more limited than in the case of exchange-traded options and may also
involve the risk that securities dealers participating in such transactions
would fail to meet their obligations to the Fund. Certain provisions of the
Internal Revenue Code of 1986, as amended ("Code"), limit the extent to which
the Fund may enter into futures contracts or engage in options transactions.
FOREIGN INVESTMENT RISKS -- Investment in foreign securities may involve
risks and considerations not present in domestic investments. Foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards, practices and requirements comparable to those applicable
to U.S. companies. The securities of non-U.S. issuers generally are not
registered with the SEC, nor are the issuers thereof usually subject to the
SEC's reporting requirements. Accordingly, there may be less publicly available
information about foreign securities and issuers than is available with respect
to U.S. securities and issuers. The Fund's income and gains from foreign issuers
may be subject to non-U.S. withholding or other taxes, thereby reducing its
income and gains. In addition, with respect to some foreign countries, there is
the increased possibility of expropriation or confiscatory taxation, limitations
on the removal of funds or other assets of the Fund, political or social
instability, or diplomatic developments which could affect the investments of
the Fund in those countries. Moreover, individual foreign economies may differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross national product, rate of inflation, rate of savings and capital
reinvestment, resource self-sufficiency and balance of payments positions.
CURRENCY RISK -- Because the Fund invests in securities denominated in
currencies other than the U.S. dollar and may hold foreign currencies, it will
be affected favorably or unfavorably by exchange control regulations or changes
in the exchange rates between such currencies and the U.S. dollar. Changes in
currency exchange rates will influence the value of the Fund's shares, and also
may affect the value of dividends and interest
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earned by the Fund and gains and losses realized by the Fund. In addition, the
Fund may incur costs in connection with the conversion or transfer of foreign
currencies. Currencies generally are evaluated on the basis of fundamental
economic criteria (e.g., relative inflation and interest rate levels and trends,
growth rate forecasts, balance of payments status and economic policies) as well
as technical and political data. The exchange rates between the U.S. dollar and
other currencies are determined by supply and demand in the currency exchange
markets, the international balance of payments, governmental intervention,
speculation and other economic and political conditions. If the currency in
which a security is denominated appreciates against the U.S. dollar, the dollar
value of the security will increase. Conversely, a decline in the exchange rate
of the currency would adversely affect the value of the security expressed in
U.S. dollars.
MANAGEMENT OF THE FUND
The management of the Fund's business and affairs is the responsibility of
the Board of Directors. Security Management Company, LLC (the "Investment
Manager"), 700 Harrison Street, Topeka, Kansas, is responsible for selection and
management of the Fund's portfolio investments. The Investment Manager is a
limited liability company, which is ultimately controlled by Security Benefit
Life Insurance Company, a mutual life insurance company with over $15 billion of
insurance in force. The Investment Manager also acts as investment adviser to
Security Growth and Income Fund, Security Ultra Fund, Security Income Fund,
Security Tax-Exempt Fund, Security Cash Fund and SBL Fund. On September 30,
1996, the aggregate assets of all of the Funds under the investment management
of the Investment Manager were approximately $3.4 billion.
The Investment Manager has entered into a quantitative research agreement
with Meridian Investment Management Corporation, 12835 East Arapahoe Road, Tower
II, 7th Floor, Englewood, Colorado 80112 ("Meridian"). Meridian provides
research which the Investment Manager uses in strategically allocating the
assets of the Fund among investment categories and market sectors. The
Investment Manager pays Meridian an annual fee equal to .20 percent of the
average daily net assets of the Fund, calculated daily and payable quarterly.
Meridian is a wholly-owned subsidiary of Meridian Management & Research
Corporation.
The Investment Manager has entered into an analytical research agreement
with Templeton/ Franklin Investment Services, Inc., 777 Mariners Island
Boulevard, San Mateo, California 94404 ("Templeton"). Templeton provides
research used by the Investment Manager in the selection of equity securities
for the Fund. The Investment Manager pays Templeton an annual fee equal to .30
percent of the average net assets of the Fund invested in equity securities.
Templeton is an indirect wholly-owned subsidiary of Templeton Worldwide, Inc.
which in turn is a direct wholly-owned subsidiary of Franklin Resources, Inc.
Subject to the supervision and direction of the Fund's Board of Directors,
the Investment Manager manages the Fund's portfolio in accordance with the
Fund's stated investment objective and policies and makes all investment
decisions. The Investment Manager has agreed that total annual expenses of the
Fund (including for any fiscal year, the management fee, but excluding interest,
taxes, brokerage commissions, extraordinary expenses and Class B distribution
fees) shall not exceed the level of expenses which the Fund is permitted to bear
under the most restrictive expense limitation imposed by any state
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in which shares of the Fund are then qualified for sale. The Investment Manager
will contribute such funds to the Fund or waive such portion of its compensation
as may be necessary to insure that such total annual expenses do not exceed any
such limitation.
The Investment Manager also acts as the administrative agent and transfer
agent for the Fund, and as such performs administrative functions, transfer
agency and dividend disbursing services, and the bookkeeping, accounting and
pricing functions for the Fund.
For its services, the Investment Manager receives, on an annual basis, an
investment advisory fee equal to 1.00 percent of the average daily net assets of
the Fund, calculated daily and payable monthly. The Investment Manager also
receives, on an annual basis, an administrative fee equal to .045 percent of the
average daily net assets of the Fund plus the greater of .10 percent of its
average net assets or (i) $30,000 in the year ended April 29, 1996; (ii) $45,000
in the year ending April 29, 1997; and (iii) $60,000 thereafter.
For the year ended September 30, 1996, the total expenses of the Fund, as a
percentage of average net assets, were 2.0 percent for Class A shares and 3.0
percent for Class B shares.
PROPOSED SUB-ADVISORY AGREEMENT FOR THE FUND
The Board of Directors of Security Equity Fund has approved a new
sub-advisory agreement between the Investment Manager and Meridian Investment
Management Corporation ("Meridian"). Meridian currently provides research which
the Investment Manager uses in strategically allocating the assets of the Fund
among investment categories and market sectors. Templeton/Franklin Investment
Services, Inc. ("Templeton") also currently provides research used by the
Investment Manager in the selection of equity securities for the Fund. The new
sub-advisory agreement provides for Meridian to provide sub-advisory services to
the Fund. Meridian is a wholly-owned subsidiary of Meridian Management &
Research Corporation which is controlled by its two stockholders, Michael J.
Hart and Craig T. Callahan.
The Board of Directors, including a majority of the disinterested directors
of Security Equity Fund, approved the agreement at a meeting of the Board held
on May 2, 1997. The stockholders will vote on approval of the proposed
sub-advisory agreement at a special meeting of stockholders to be held August 1,
1997. If the stockholders approve the new sub-advisory agreement, the existing
research agreements with Templeton and Meridian will terminate effective August
1, 1997, and the proposed agreement will be in effect on that date. The terms of
the new sub-advisory agreement provide for the Investment Manager to pay
Meridian an annual fee equal to a percentage of the average daily closing value
of the net assets of the Series, computed on a daily basis, according to the
following schedule:
AVERAGE DAILY NET
ASSETS OF THE SERIES ANNUAL FEE
-------------------- ----------
Less than $100 Million .40%, plus
$100 Million but less
than $200 Million .35%, plus
$200 Million but less
than $400 Million .30%, plus
$400 Million or more .25%
See "Management of the Fund" above for more information about the existing
research agreements.
PORTFOLIO MANAGEMENT
The Fund is managed by an investment management team of Portfolio Managers
and
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Research Analysts of the Investment Manager. The team meets regularly to review
portfolio holdings and to discuss purchase and sale activity. The team is
responsible for the day-to-day management of the Fund's portfolio. Jane Tedder,
Senior Portfolio Manager, has day-to-day responsibility for managing the
fixed-income portion of the Fund's portfolio and for supervising the services
provided by Meridian and Templeton. She has had responsibility for the Fund
since January 1996.
Ms. Tedder, Vice President and Senior Portfolio Manager of the Investment
Manager, has 20 years of experience in the investment field. Prior to joining
the Investment Manager in 1983, she served as Vice President and Trust Officer
of Douglas County Bank in Kansas. Ms. Tedder earned a bachelor's degree in
education from Oklahoma State University and advanced diplomas from National
Graduate Trust School, Northwestern University, and Stonier Graduate School of
Banking, Rutgers University. She is a Chartered Financial Analyst.
HOW TO PURCHASE SHARES
Security Distributors, Inc. (the "Distributor"), 700 Harrison Street,
Topeka, Kansas, a wholly-owned subsidiary of the Investment Manager, is
principal underwriter of the Fund. Shares of the Fund may be purchased through
authorized investment dealers. In addition, banks and other financial
institutions that have an agreement with the Distributor, may make shares of the
Fund available to their customers. The minimum initial purchase must be $100.
Subsequent purchases must be $100 unless made through an Accumulation Plan which
allows subsequent purchases of $20.
Orders for the purchase of shares of the Fund will be confirmed at an
offering price equal to the net asset value per share next determined after
receipt of the order in proper form by the Distributor (generally as of the
close of the New York Stock Exchange on that day) plus the sales charge in the
case of Class A shares. Orders received by dealers or other firms prior to the
close of the Exchange and received by the Distributor prior to the close of its
business day will be confirmed at the offering price effective as of the close
of the Exchange on that day.
Orders for shares received by broker-dealers prior to that day's close of
trading on the New York Stock Exchange and transmitted to the Fund prior to its
close of business that day will receive the offering price equal to the net
asset value per share computed at the close of trading on the Exchange on the
same day plus, in the case of Class A shares, the sales charge. Orders received
by broker-dealers after that day's close of trading on the Exchange and
transmitted to the Fund prior to the close of business on the next business day
will receive the next business day's offering price.
The Fund reserves the right to withdraw all or any part of the offering
made by this prospectus and to reject purchase orders.
ALTERNATIVE PURCHASE OPTIONS The Fund offers two classes of shares:
CLASS A SHARES -- FRONT-END LOAD OPTION -- Class A shares are sold with a
sales charge at the time of purchase. Class A shares are not subject to a sales
charge when they are redeemed (except that shares sold in an amount of
$1,000,000 or more without a front-end sales charge will be subject to a
contingent deferred sales charge for one year). See Appendix A for a discussion
of "Rights of Accumulation" and "Statement of Intention," which options may
reduce the front-end sales charge on purchases of Class A shares.
CLASS B SHARES -- BACK-END LOAD OPTION -- Class B shares are sold without a
sales charge at
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the time of purchase, but are subject to a deferred sales charge if they are
redeemed within five years of the date of purchase. Class B shares will
automatically convert tax-free to Class A shares at the end of eight years after
purchase.
The decision as to which class is more beneficial to an investor depends on
the amount and intended length of the investment. Investors who would rather pay
the entire cost of distribution at the time of investment, rather than spreading
such cost over time, might consider Class A shares. Other investors might
consider Class B shares, in which case 100 percent of the purchase price is
invested immediately, depending on the amount of the purchase and the intended
length of investment. The Fund will not normally accept any purchase of Class B
shares in the amount of $500,000 or more.
Dealers or others receive different levels of compensation depending on
which class of shares they sell.
CLASS A SHARES
Class A shares are offered at net asset value plus an initial sales charge
as follows:
SALES CHARGE
---------------------------------------
PERCENTAGE
AMOUNT OF PERCENTAGE OF NET PERCENTAGE
TRANSACTION AT OF OFFERING AMOUNT REALLOWABLE
OFFERING PRICE PRICE INVESTED TO DEALERS
- -----------------------------------------------------------
Less than $50,000 5.75% 6.10% 5.00%
$50,000 but less
than $100,000 4.75% 4.99% 4.00%
$100,000 but less
than $250,000 3.75% 3.90% 3.00%
$250,000 but less
than $500,000 2.75% 2.83% 2.25%
$500,000 but less
than $1,000,000 2.00% 2.04% 1.75%
$1,000,000 or more None None (See below)
Purchases of Class A shares in an amount of $1,000,000 or more are at net
asset value (without a sales charge), but are subject to a contingent deferred
sales charge of 1.00 percent in the event of redemption within one year
following purchase. For a discussion of the contingent deferred sales charge,
see "Calculation and Waiver of Contingent Deferred Sales Charges" on page 19.
The Distributor will pay a commission to dealers on Class A purchases of
$1,000,000 or more as follows: 1.00 percent on sales up to $5,000,000, plus .50
percent on sales of $5,000,000 or more up to $10,000,000 and .10 percent on any
amount of $10,000,000 or more.
The Investment Manager may, at its expense, pay a service fee to dealers
who satisfy certain criteria established by the Investment Manager from time to
time relating to the volume of their sales of Class A shares of the Fund and
certain other Security Funds during prior periods and certain other factors,
including providing certain services to their clients who are stockholders of
the Fund. Such services include assisting in maintaining records, processing
purchase and redemption requests and establishing stockholder accounts,
assisting stockholders in changing account options or enrolling in specific
plans, and providing stockholders with information regarding the Fund and
related developments.
Currently, service fees are paid at the following annual rates: .25 percent
of aggregate net asset value for amounts of $100,000 but less than $5,000,000
and .30 percent for amounts of $5,000,000 or more.
Additional information may be obtained by referring to the Fund's Statement
of Additional Information.
CLASS B SHARES
Class B shares are offered at net asset value, without an initial sales
charge. With certain exceptions, the Fund may impose a deferred sales charge on
shares redeemed within five years of the date of purchase. No deferred sales
charge is
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imposed on amounts redeemed thereafter. If imposed, the deferred sales charge is
deducted from the redemption proceeds otherwise payable. The deferred sales
charge is retained by the Distributor.
Whether a contingent deferred sales charge is imposed and the amount of the
charge will depend on the number of years since the investor made a purchase
payment from which an amount is being redeemed, according to the following
schedule:
YEAR SINCE PURCHASE CONTINGENT DEFERRED
PAYMENT WAS MADE SALES CHARGE
------------------- -------------------
First 5%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth and following 0%
Class B shares (except shares purchased through the reinvestment of
dividends and other distributions paid with respect to Class B shares) will
automatically convert on the eighth anniversary of the date such shares were
purchased to Class A shares which are subject to a lower distribution fee. This
automatic conversion of Class B shares will take place without imposition of a
front-end sales charge or exchange fee. (Conversion of Class B shares
represented by stock certificates will require the return of the stock
certificates to the Investment Manager.) All shares purchased through
reinvestment of dividends and other distributions paid with respect to Class B
shares ("reinvestment shares") will be considered to be held in a separate
subaccount. Each time any Class B shares (other than those held in the
subaccount) convert to Class A shares, a pro rata portion of the reinvestment
shares held in the subaccount will also convert to Class A shares. Class B
shares so converted will no longer be subject to the higher expenses borne by
Class B shares. Because the net asset value per share of the Class A shares may
be higher or lower than that of the Class B shares at the time of conversion,
although the dollar value will be the same, a shareholder may receive more or
less Class A shares than the number of Class B shares converted. Under current
law, it is the Fund's opinion that such a conversion will not constitute a
taxable event under federal income tax law. In the event that this ceases to be
the case, the Board of Directors will consider what action, if any, is
appropriate and in the best interests of the Class B stockholders.
CLASS B DISTRIBUTION PLAN
The Fund bears some of the costs of selling its Class B shares under a
Distribution Plan adopted with respect to its Class B shares ("Class B
Distribution Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940 ("1940 Act"). This Plan provides for payments at an annual rate of 1.00
percent of the average daily net asset value of Class B shares. Amounts paid by
the Fund are currently used to pay dealers and other firms that make Class B
shares available to their customers (1) a commission at the time of purchase
normally equal to 4.00 percent of the value of each share sold and (2) a service
fee for account maintenance and personal service to shareholders payable for the
first year, initially, and for each year thereafter, quarterly, in an amount
equal to .25 percent annually of the average daily net asset value of Class B
shares sold by such dealers and other firms and remaining outstanding on the
books of the Fund. Amounts paid under the Fund's Class B Distribution Plan may
exceed actual distribution expenses.
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NASD Rules limit the aggregate amount that the Fund may pay annually in
distribution costs for the sale of its Class B shares to 6.25 percent of gross
sales of Class B shares since the inception of the Distribution Plan, plus
interest at the prime rate plus one percent on such amount (less any contingent
deferred sales charges paid by Class B shareholders to the Distributor). The
Distributor intends, but is not obligated, to continue to pay or accrue
distribution charges incurred in connection with the Class B Distribution Plan
which exceed current annual payments permitted to be received by the Distributor
from the Fund. The Distributor intends to seek full payment of such charges from
the Fund (together with annual interest thereon at the prime rate plus one
percent) at such time in the future as, and to the extent that, payment thereof
by the Fund would be within permitted limits.
The Fund's Class B Distribution Plan may be terminated at any time by vote
of its directors who are not interested persons of the Fund as defined in the
1940 Act or by vote of a majority of the outstanding Class B shares. In the
event the Class B Distribution Plan is terminated by the Class B stockholders or
the Fund's Board of Directors, the payments made to the Distributor pursuant to
the Plan up to that time would be retained by the Distributor. Any expenses
incurred by the Distributor in excess of those payments would be absorbed by the
Distributor. The Fund makes no payments in connection with the sale of its
shares other than the distribution fee paid to the Distributor.
CALCULATION AND WAIVER OF CONTINGENT DEFERRED SALES CHARGES
Any contingent deferred sales charge imposed upon redemption of Class A
shares (purchased in an amount of $1,000,000 or more) and Class B shares is a
percentage of the lesser of (1) the net asset value of the shares redeemed or
(2) the net cost of such shares. No contingent deferred sales charge is imposed
upon redemption of amounts derived from (1) increases in the value above the net
cost of such shares due to increases in the net asset value per share of the
Fund; (2) shares acquired through reinvestment of income dividends and capital
gain distributions; or (3) Class A shares (purchased in an amount of $1,000,000
or more) held for more than one year or Class B shares held for more than five
years. Upon request for redemption, shares not subject to the contingent
deferred sales charge will be redeemed first. Thereafter, shares held the
longest will be the first to be redeemed.
The contingent deferred sales charge is waived (1) following the death of a
stockholder if redemption is made within one year after death; (2) upon the
disability (as defined in Section 72(m)(7) of the Internal Revenue Code) of a
stockholder prior to age 65 if redemption is made within one year after the
disability, provided such disability occurred after the stockholder opened the
account; (3) in connection with required minimum distributions in the case of an
IRA, SAR-SEP or Keogh or any other retirement plan qualified under section
401(a), 401(k) or 403(b) of the Code; and (4) in the case of distributions from
retirement plans qualified under section 401(a) or 401(k) of the Internal
Revenue Code due to (i) returns of excess contributions to the plan, (ii)
retirement of a participant in the plan, (iii) a loan from the plan (repayment
of loans, however, will constitute new sales for purposes of assessing the
CDSC), (iv) "financial hardship" of a participant in the plan, as that term is
defined in Treasury Regulation section 1.401(k)-1(d)(2), as amended from time to
time, (v) termination of employment of a participant in the plan, (vi) any other
permissible withdrawal under the terms of the plan. The contingent deferred
sales charge
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will also be waived in the case of redemptions of Class B shares of the Fund
pursuant to a systematic withdrawal program. See "Systematic Withdrawal
Program," page 26 for details.
ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS
The Investment Manager or Distributor, from time to time, will provide
promotional incentives or pay a bonus, including reallowance of up to the entire
sales charge, to certain dealers whose representatives have sold or are expected
to sell significant amounts of the Fund and/or certain other funds managed by
the Investment Manager. Such promotional incentives will include payment for
attendance (including travel and lodging expenses) by qualifying registered
representatives (and members of their families) at sales seminars at luxury
resorts within or without the United States. The Distributor may also provide
financial assistance to dealers in connection with advertising. No compensation
will be offered to the extent it is prohibited by the laws of any state or
self-regulatory agency, such as the National Association of Securities Dealers,
Inc. ("NASD"). A dealer to whom substantially the entire sales charge of Class A
shares is reallowed may be deemed to be an "underwriter" under federal
securities laws.
The Distributor also may pay banks and other financial services firms that
facilitate transactions in shares of the Fund for their clients a transaction
fee up to the level of the payments made allowable to dealers for the sale of
such shares as described above. Banks currently are prohibited under the
Glass-Steagall Act from providing certain underwriting or distribution services.
If banking firms were prohibited from acting in any capacity or providing any of
the described services, the Fund's Board of Directors would consider what
action, if any, would be appropriate.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law. The
Investment Manager or Distributor also may pay a marketing allowance to dealers
who meet certain eligibility criteria. This allowance is paid with reference to
new sales of Fund shares in a calendar year. To be eligible for this allowance
in any given year, the dealer must sell a minimum of $2,000,000 of Class A and
Class B shares during that year. The marketing allowance ranges from .15 percent
to .75 percent of aggregate new sales depending upon the volume of shares sold.
See the Fund's Statement of Additional Information for more detailed information
about the marketing allowance.
PURCHASES AT NET ASSET VALUE
Class A shares of the Fund may be purchased at net asset value by (1)
directors, officers and employees of the Fund, the Fund's Investment Manager or
Distributor; directors, officers and employees of Security Benefit Life
Insurance Company and its subsidiaries; agents licensed with Security Benefit
Life Insurance Company; spouses or minor children of any such agents; as well as
the following relatives of any such directors, officers and employees (and their
spouses): spouses, grandparents, parents, children, grandchildren, siblings,
nieces and nephews; (2) any trust, pension, profit sharing or other benefit plan
established by any of the foregoing corporations for persons described above;
(3) retirement plans where third party administrators of such plans have entered
into certain arrangements with the Distributor or its affiliates provided that
no commission is paid to dealers; and (4) officers, directors, partners or
registered representatives (and their spouses and
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minor children) of broker-dealers who have a selling agreement with the
Distributor. Such sales are made upon the written assurance of the purchaser
that the purchase is made for investment purposes and that the securities will
not be transferred or resold except through redemption or repurchase by or on
behalf of the Fund.
Class A shares of the Fund may also be purchased at net asset value when
the purchase is made on the recommendation of (i) a registered investment
adviser, trustee or financial intermediary who has authority to make investment
decisions on behalf of the investor; or (ii) a certified financial planner or
registered broker-dealer who either charges periodic fees to its customers for
financial planning, investment advisory or asset management services, or
provides such services in connection with the establishment of an investment
account for which a comprehensive "wrap fee" is imposed. The Distributor must be
notified when a purchase is made that qualifies under this provision.
HOW TO REDEEM SHARES
A stockholder may redeem shares at the net asset value next determined
after the time when such shares are tendered for redemption.
Shares will be redeemed on request of the stockholder in proper order to
the Fund's Investment Manager, Security Management Company, LLC, 700 Harrison
Street, Topeka, Kansas 66636-0001, which serves as the Fund's transfer agent. A
request is made in proper order by submitting the following items to the
Investment Manager: (1) a written request for redemption signed by all
registered owners exactly as the account is registered, including fiduciary
titles, if any, and specifying the account number and the dollar amount or
number of shares to be redeemed; (2) a guarantee of all signatures on the
written request or on the share certificate or accompanying stock power; (3) any
share certificates issued for any of the shares to be redeemed; and (4) any
additional documents which may be required by the Investment Manager for
redemption by corporations or other organizations, executors, administrators,
trustees, custodians or the like. Transfers of shares are subject to the same
requirements. The signature guarantee must be provided by an eligible guarantor
institution, such as a bank, broker, credit union, national securities exchange
or savings association. A signature guarantee is not required for redemptions of
$10,000 or less, requested by and payable to all stockholders of record for an
account, to be sent to the address of record. The Investment Manager reserves
the right to reject any signature guarantee pursuant to its written procedures
which may be revised in the future. To avoid delay in redemption or transfer,
stockholders having questions should contact the Investment Manager by calling
1-800-888-2461, extension 3127.
The redemption price will be the net asset value of the shares next
computed after the redemption request in proper order is received by the
Investment Manager. Payment of the amount due, less any applicable deferred
sales charge, will be made by check within seven days after receipt of the
redemption request in proper order. Payment may also be made by wire at the sole
discretion of the Investment Manager. If a wire transfer is requested, the
Investment Manager must be provided with the name and address of the
stockholder's bank as well as the account number to which payment is to be
wired. Checks will be mailed to the stockholder's registered address (or as
otherwise directed). Remittance by wire (to a commercial bank account in the
same name(s) as the shares are registered), by certified
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or cashier's check, or by express mail, if requested, will be at a charge of
$15, which will be deducted from the redemption proceeds.
In addition to the foregoing redemption procedure, the Fund repurchases
shares from broker-dealers at the price determined as of the close of business
on the day such offer is confirmed. Dealers may charge a commission on the
repurchase of shares.
At various times, requests may be made to redeem shares for which good
payment has not yet been received. Accordingly, the mailing of a redemption
check may be delayed until such time as good payment has been collected for the
purchase of the shares in question, which may take up to 15 days from the date
of purchase.
Requests may also be made to redeem shares in an account for which the
stockholder's tax identification number has not been provided. To the extent
permitted by law, the redemption proceeds from such an account will be reduced
by $50 to reimburse for the penalty imposed by the Internal Revenue Service for
failure to report the tax identification number.
TELEPHONE REDEMPTIONS
A stockholder may redeem uncertificated shares in amounts up to $10,000 by
telephone request, provided the stockholder has completed the Telephone
Redemption section of the application or a Telephone Redemption form which may
be obtained from the Investment Manager. The proceeds of a telephone redemption
will be sent to the stockholder at his or her address as set forth in the
application or in a subsequent written authorization with a signature guarantee.
Once authorization has been received by the Investment Manager, a stockholder
may redeem shares by calling the Fund at (800) 888-2461, extension 3127, on
weekdays (except holidays) between the hours of 7:00 a.m. and 6:00 p.m. Central
time. Redemption requests received by telephone after the close of the New York
Stock Exchange (normally 3 p.m. Central time) will be treated as if received on
the next business day. A stockholder who authorizes telephone redemptions
authorizes the Investment Manager to act upon the instructions of any person
identifying themselves as the owner of an account or the owner's broker. The
Investment Manager has established procedures to confirm that instructions
communicated by telephone are genuine and may be liable for any losses due to
fraudulent or unauthorized instructions if it fails to comply with its
procedures. The Investment Manager's procedures require that any person
requesting a telephone redemption provide the account registration and number
and the owner's tax identification number, and such instructions must be
received on a recorded line. Neither the Fund, the Investment Manager, nor the
Distributor shall be liable for any loss, liability, cost or expense arising out
of any redemption request, provided the Investment Manager complied with its
procedures. Thus, a stockholder who authorizes telephone redemptions may bear
the risk of loss from a fraudulent or unauthorized request. The telephone
redemption privilege may be changed or discontinued at any time by the
Investment Manager or the Fund.
During periods of severe market or economic conditions, telephone
redemptions may be difficult to implement and stockholders should make
redemptions by mail as described under "How to Redeem Shares."
DIVIDENDS AND TAXES
It is the Fund's policy to distribute realized capital gains, if any, in
excess of any capital losses and capital loss carryovers, at least once a year
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and to pay dividends from net investment income as the Fund's Board of Directors
may declare from time to time. Because Class A shares of the Fund bear most of
the costs of distribution of such shares through payment of a front-end sales
charge, while Class B shares of the Fund bear such costs through a higher
distribution fee, expenses attributable to Class B shares will generally be
higher and, as a result, income distributions paid by the Fund with respect to
Class B shares generally will be lower than those paid with respect to Class A
shares. Any dividend payment or capital gain distribution will result in a
decrease of the net asset value of the shares in an amount equal to the payment
or distribution. All dividends and distributions are automatically reinvested on
the payable date in shares of the Fund at net asset value as of the record date
(reduced by an amount equal to the amount of the dividend or distribution),
unless the Investment Manager is previously notified in writing by the
stockholder that such dividends or distributions are to be received in cash. A
stockholder may request that such dividends or distributions be directly
deposited to the stockholder's bank account. Dividends or distributions paid
with respect to Class A shares and received in cash may, within 30 days of the
payment date, be reinvested without a sales charge.
The Fund is to be treated separately from the other series of Security
Equity Fund in determining the amounts of income and capital gains
distributions, and for this purpose, each series will reflect only the income
and gains, net of losses, of that series.
The Fund intends to qualify as a "regulated investment company" under the
Internal Revenue Code. Such qualification generally removes the liability for
federal income taxes from the Fund, and generally makes federal income tax upon
income and capital gains generated by the Fund's investments, the sole
responsibility of its stockholders provided the Fund continues to so qualify and
distributes all of its net investment income and net realized capital gain to
its stockholders. Furthermore, the Fund generally will not be subject to excise
taxes imposed on certain regulated investment companies provided that it
distributes 98 percent of its ordinary income and 98 percent of its net capital
gain income each year.
Distributions of net investment income and realized net short-term capital
gain are taxable to stockholders as ordinary income whether received in cash or
reinvested in additional shares. Distributions (designated by the Fund as
"capital gain dividends") of the excess, if any, of net long-term capital gains
over net short-term capital losses are taxable to stockholders as long-term
capital gains regardless of how long a stockholder has held the Fund's shares
and regardless of whether received in cash or reinvested in additional shares.
Stockholders should consult their tax adviser to determine the federal, state
and local tax consequences to them from an investment in the Fund.
Certain dividends declared in October, November or December of a calendar
year are taxable to stockholders as though received on December 31 of that year
if paid to stockholders during January of the following calendar year.
Advice as to the tax status of each year's distributions will be mailed on
or before January 31, of the following year. The Fund is required by law to
withhold 31 percent of taxable dividends and distributions (including redemption
proceeds) to stockholders who do not furnish their correct taxpayer
identification numbers, or are otherwise subject to the backup withholding
provisions of the Internal Revenue Code.
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FOREIGN TAXES
Investment income and gains received from sources within foreign countries
may be subject to foreign income and other taxes. In this regard, withholding
tax rates in countries with which the United States does not have a tax treaty
are often as high as 30 percent or more. The United States has entered into tax
treaties with many foreign countries which entitle certain investors to a
reduced tax rate (generally 10 to 15 percent) or to certain exemptions from tax.
The Fund intends to operate so as to qualify for such reduced tax rates or tax
redemptions whenever possible. While stockholders will bear indirectly the cost
of any foreign tax withholding, they will not be able to claim foreign tax
credit or deduction for taxes paid by the Fund.
DETERMINATION OF NET ASSET VALUE
The net asset value of the 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 net asset value per share is computed by adding the value of all
securities and other assets in the portfolio, deducting any liabilities and
dividing by the number of shares outstanding. In determining the Fund's total
net assets, securities listed or traded on a recognized securities exchange will
be valued on the basis of the last sale price. If there are no sales on a
particular day, then the securities are valued at the last bid price. If a
security is traded on multiple exchanges, its value will be based on prices from
the principal exchange where it is traded. All other securities for which market
quotations are available are valued on the basis of the last current bid price.
If there is no bid price, or if the bid price is deemed unsatisfactory by the
Board of Directors or by the Investment Manager, then the securities are valued
in good faith by such method as the Board of Directors determines will reflect
the fair market value. Valuations of the Fund's securities are supplied by a
pricing service approved by the Fund's Board of Directors.
Because the expenses of distribution are borne by Class A shares through a
front-end sales charge and by Class B shares through an ongoing distribution
fee, the expenses attributable to each class of shares will differ, resulting in
different net asset values. The net asset value of Class B shares will generally
be lower than the net asset value of Class A shares as a result of the
distribution fee charged to Class B shares. It is expected, however, that the
net asset value per share will tend to converge immediately after the payment of
dividends which will differ in amount for Class A and B shares by approximately
the amount of the different distribution expenses attributable to Class A and B
shares.
TRADING PRACTICES AND BROKERAGE
The portfolio turnover rate for the Fund for the fiscal year ended
September 30, 1996, was 75 percent for Class A and Class B shares. Higher
portfolio turnover (over 100 percent) subjects a Fund to increased brokerage
costs and may, in some cases, have adverse tax effects on the Fund or its
stockholders. The annual portfolio turnover of the Fund generally will be more
than 100 percent but is not expected to exceed 200 percent.
Transactions in portfolio securities for the Fund are effected in the
manner deemed to be in the best interests of the Fund. In selecting a broker to
execute a specific transaction, all relevant factors will be considered.
Portfolio transactions may be directed to brokers who furnish investment
information or research services to the Investment Manager or who sell shares of
the
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Fund. The Investment Manager may, consistent with the NASD Rules of Fair
Practice, consider sales of Fund shares in the selection of a broker. Securities
held by the Fund may also be held by other investment advisory clients of the
Investment Manager, including other investment companies, and by the Investment
Manager's parent company, Security Benefit Life Insurance Company ("SBL").
Purchases or sales of the same security occurring on the same day (which may
include orders from SBL) may be aggregated and executed as a single transaction,
subject to the Investment Manager's obligation to seek best execution.
Aggregated purchases or sales are generally effected at an average price and on
a pro rata basis (transaction costs will also be shared on a pro rata basis) in
proportion to the amounts desired to be purchased or sold. See the Fund's
Statement of Additional Information for a more detailed description of
aggregated transactions.
PERFORMANCE
The Fund may, from time to time, include quotations of its average annual
total return and aggregate total return in advertisements or reports to
stockholders or prospective investors.
Quotations of average annual total return will be expressed in terms of the
average annual compounded rate of return of a hypothetical investment in the
Fund over periods of one, five and ten years (up to the life of the Fund). Such
total return figures will reflect the deduction of the maximum sales charge and
a proportional share of Fund expenses on an annual basis, and will assume that
all dividends and distributions are reinvested when paid.
Quotations of aggregate total return will be calculated for any specified
period by assuming a hypothetical investment in the Fund on the date of the
commencement of the period and assuming that all dividends and distributions are
reinvested when paid. The net increase or decrease in the value of the
investment over the period will be divided by its beginning value to arrive at
total return. Total return calculated in this manner reflects actual performance
over a stated period of time while average annual total return is a hypothetical
rate of return that, if achieved annually, would have produced the same
aggregate total return.
In addition, quotations of aggregate total return may also be calculated
for several consecutive one-year periods, expressing the total return as a
percentage increase or decrease in the value of the investment for each year
relative to the ending value for the previous year. The Fund may from time to
time quote total return that does not reflect deduction of any applicable sales
charge, which charges, if reflected, would reduce the total return quoted.
Quotations of average annual total return or aggregate total return reflect
only the performance of a hypothetical investment in the Fund during the
particular time period on which the calculations are based. Such quotations for
the Fund will vary based on changes in market conditions and the level of the
Fund's expenses, and no reported performance figure should be considered an
indication of performance which may be expected in the future.
In connection with communicating its average annual total return and
aggregate total return to current or prospective stockholders, the Fund also may
compare these figures to the performance of other mutual fund rating services or
to other unmanaged indexes which may assume reinvestment of dividends, but
generally do not reflect deductions for administrative and management costs and
expenses. The Fund will include performance data for both Class A and
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Class B shares of the Fund in any advertisement or report including performance
data of the Fund.
For a more detailed description of the methods used to calculate the
average annual total return and aggregate total return of the Fund, see the
Fund's Statement of Additional Information.
SHAREHOLDER SERVICES
ACCUMULATION PLAN
An investor may choose to invest in the Fund through a voluntary
Accumulation Plan. This allows for an initial investment of $100 minimum and
subsequent investments of $20 minimum at any time. An Accumulation Plan involves
no obligation to make periodic investments, and is terminable at will.
Payments are made by sending a check to the Distributor who (acting as an
agent for the dealer) will purchase whole and fractional shares of the Fund as
of the close of business on such day as the payment is received. The investor
will receive a confirmation and statement after each investment.
Investors may choose to use "Secur-O-Matic" (automatic bank draft) to make
their Fund purchases. There is no additional charge for choosing to use
Secur-O-Matic. An application for Secur-O-Matic may be obtained from the Fund.
SYSTEMATIC WITHDRAWAL PROGRAM
Stockholders who wish to receive regular monthly, quarterly, semiannual, or
annual payments of $25 or more may establish a Systematic Withdrawal Program. A
stockholder may elect a payment that is a specified percentage of the initial or
current account value or a specified dollar amount. A Systematic Withdrawal
Program will be allowed only if shares with a current offering price of $5,000
or more are deposited with the Investment Manager, which will act as agent for
the stockholder under the Program. Shares are liquidated at net asset value. The
Program may be terminated on written notice, or it will terminate automatically
if all shares are liquidated or withdrawn from the account.
A stockholder may establish a Systematic Withdrawal Program with respect to
Class B shares without the imposition of any applicable contingent deferred
sales charge, provided that such withdrawals do not in any 12-month period,
beginning on the date the Program is established, exceed 10 percent of the value
of the account on that date ("Free Systematic Withdrawals"). Free Systematic
Withdrawals are not available if a Program established with respect to Class B
shares provides for withdrawals in excess of 10 percent of the value of the
account in any Program year and, as a result, all withdrawals under such a
Program would be subject to any applicable contingent deferred sales charge.
Free Systematic Withdrawals will be made first by redeeming those shares that
are not subject to the contingent deferred sales charge and then by redeeming
shares held the longest. The contingent deferred sales charge applicable to a
redemption of Class B shares requested while Free Systematic Withdrawals are
being made will be calculated as described under "Calculation and Waiver of
Contingent Deferred Sales Charges," page 19. A Systematic Withdrawal form may be
obtained from the Fund.
EXCHANGE PRIVILEGE
Stockholders who own shares of the Fund may exchange those shares for
shares of another series of Security Equity Fund, Security Ultra Fund, Security
Growth and Income Fund, Security Income Fund, Security Tax-Exempt Fund, or
Security Cash Fund (the "Security Funds") at net
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asset value. Exchanges may be made only in those states where shares of the fund
into which an exchange is to be made are qualified for sale. No service fee is
presently imposed on such an exchange. Class A and Class B shares of the Fund
may be exchanged for Class A and Class B shares, respectively, of another fund
or for shares of Security Cash Fund, a money market fund that offers a single
class of shares. Any applicable contingent deferred sales charge will be imposed
upon redemption and calculated from the date of the initial purchase without
regard to the time shares were held in Security 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 are made
upon receipt of a properly completed Exchange Authorization form. A current
prospectus of the fund into which an exchange is made will be given to each
stockholder exercising this privilege.
To exchange shares by telephone, a stockholder 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 the Investment Manager. Once authorization has been received by
the Investment Manager, a stockholder may exchange shares by telephone by
calling the Fund at (800) 888-2461, extension 3127, on weekdays (except
holidays) between the hours of 7:00 a.m. and 6:00 p.m. Central time. Exchange
requests received by telephone after the close of the New York Stock Exchange
(normally 3 p.m. Central time) will be treated as if received on the next
business day on which the Exchange is open. A stockholder who authorizes
telephone exchanges authorizes the Investment Manager to act upon the
instructions of any person by telephone to exchange shares between any
identically registered accounts with the Security Funds. The Investment Manager
has established procedures to confirm that instructions communicated by
telephone are genuine and may be liable for any losses due to fraudulent or
unauthorized instructions if it fails to comply with its procedures. The
Investment Manager's procedures require that any person requesting an exchange
by telephone provide the account registration and number and the owner's tax
identification number and such instructions must be received on a recorded line.
Neither the Fund, the Investment Manager nor the Distributor shall be liable for
any loss, liability, cost or expense arising out of any request, including any
fraudulent request, provided the Investment Manager complied with its
procedures. Thus, a stockholder who authorizes telephone exchanges may bear the
risk of loss from a fraudulent or unauthorized request. The exchange privilege,
including telephone exchanges, may be changed or discontinued at any time by
either the Investment Manager or the Fund upon 60 days' notice to stockholders.
In periods of severe market or economic conditions, the telephone exchange
of shares may be difficult to implement and stockholders should make exchanges
by writing to Security Distributors, Inc., 700 Harrison Street, Topeka, Kansas
66636-0001.
RETIREMENT PLANS
The Fund has 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
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27
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SECURITY FUNDS
PROSPECTUS
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information concerning these plans is contained in the Fund's Statement of
Additional Information.
GENERAL INFORMATION
ORGANIZATION
The Articles of Incorporation of Security Equity Fund provide for the
issuance of an indefinite number of shares of common stock in one or more
classes or series. Security Equity Fund has authorized capital stock of $.25 par
value and currently issues its shares in four series, Equity Fund, Global Fund,
Social Awareness Fund, and Asset Allocation Fund. The shares of each series of
Security Equity Fund represent a pro rata beneficial interest in that series'
net assets and in the earnings and profits or losses derived from the investment
of such assets.
The Fund currently issues two classes of shares which participate
proportionately based on their relative net asset values in dividends and
distributions and have equal voting, liquidation and other rights except that
(i) expenses related to the distribution of each class of shares or other
expenses that the Board of Directors may designate as class expenses from time
to time, are borne solely by that class; (ii) each class of shares has exclusive
voting rights with respect to any Distribution Plan adopted for that class;
(iii) each class has different exchange privileges; and (iv) each class has a
different designation. When issued and paid for, the shares will be fully paid
and nonassessable by the Fund. Shares may be exchanged as described above under
"Exchange Privilege," but will have no other preference, conversion, exchange or
preemptive rights. Shares are transferable, redeemable and assignable and have
cumulative voting privileges for the election of directors.
On certain matters, such as the election of directors, all shares of the
series of Security Equity Fund vote together, with each share having one vote.
On other matters affecting a particular series, such as the investment advisory
contract or the fundamental policies, only shares of that series are entitled to
vote, and a majority vote of the shares of that series is required for approval
of the proposal.
The Fund does not generally hold annual meetings of stockholders and will
do so only when required by law. Stockholders may remove directors from office
by vote cast in person or by proxy at a meeting of stockholders. Such a meeting
will be called at the written request of 10 percent of Security Equity Fund's
outstanding shares.
STOCKHOLDER INQUIRIES
Stockholders who have questions concerning their account or wish to obtain
additional information, may call the Fund (see back cover for address and
telephone numbers), or contact their securities dealer.
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SECURITY FUNDS
PROSPECTUS APPENDIX A
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APPENDIX ACLASS A SHARES
REDUCED SALES CHARGES
Initial sales charges may be reduced or eliminated for persons or
organizations purchasing Class A shares of the Fund alone or in combination with
Class A shares of certain other Security Funds.
For purposes of qualifying for reduced sales charges on purchases made
pursuant to Rights of Accumulation or a Statement of Intention, the term
"Purchaser" includes the following persons: an individual, his or her spouse and
children under the age of 21; a trustee or other fiduciary of a single trust
estate or single fiduciary account established for their benefit; an
organization exempt from federal income tax under Section 501(c)(3) or (13) of
the Internal Revenue Code; or a pension, profit-sharing or other employee
benefit plan whether or not qualified under Section 401 of the Internal Revenue
Code.
RIGHTS OF ACCUMULATION
To reduce sales charges on purchases of Class A shares of the Fund, a
Purchaser may combine all previous purchases of the Fund with a contemplated
current purchase and receive the reduced applicable front-end sales charge. The
Distributor must be notified when a sale takes place which might qualify for the
reduced charge on the basis of previous purchases.
Rights of accumulation also apply to purchases representing a combination
of the Class A shares of the Fund and other Security Funds, except Security Cash
Fund, in those states where shares of the fund being purchased are qualified for
sale.
STATEMENT OF INTENTION
A Purchaser may choose to sign a Statement of Intention within 90 days
after the first purchase to be included thereunder, which will cover future
purchases of Class A shares of the Fund and other Security Funds, except
Security Cash Fund. The amount of these future purchases shall be specified and
must be made within a 13-month period (or 36-month period for purchases of $1
million or more) to become eligible for the reduced front-end sales charge
applicable to the actual amount purchased under the Statement. Five percent (5%)
of the amount specified in the Statement of Intention will be held in escrow
shares until the statement is completed or terminated. These shares may be
redeemed by the Fund if the Purchaser is required to pay additional sales
charges.
A Statement of Intention may be revised during the 13-month (or if
applicable, 36-month) period. Additional Class A shares received from
reinvestment of income dividends and capital gains distributions are included in
the total amount used to determine reduced sales charges. A Statement of
Intention may be obtained from the Fund.
REINSTATEMENT PRIVILEGE
Stockholders who redeem their Class A shares of the Fund have a one-time
privilege (1) to reinstate their accounts by purchasing Class A shares without a
sales charge up to the dollar amount of the redemption proceeds; or (2) to the
extent the redeemed shares would have been eligible for the exchange privilege,
to purchase Class A shares of another of the Security Funds without a sales
charge up to the dollar amount of the redemption proceeds. To exercise this
privilege, a stockholder must provide written notice and a check in the amount
of the reinvestment to the Fund within thirty days after the redemption request;
the reinstatement will be made at the net asset value on the date received by
the Fund.
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29
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SECURITY FUNDS
APPLICATION
1. ACCOUNT REGISTRATION (THE OWNER(S) MUST COMPLETE SECTION 10 "CERTIFICATION
AND SIGNATURE" TO ESTABLISH AN ACCOUNT.)
I hereby authorize the establishment of the account marked below and acknowledge
receipt of the Fund's current prospectus. Check is enclosed for
$ (minimum $100) payable to SECURITY DISTRIBUTORS, INC. as
------------------
an initial investment. I am of legal age in the state of my residence and wish
to purchase shares of the Fund indicated below. By the execution of this
application, the undersigned represents and warrants that the investor has full
right, power and authority to make this investment and the undersigned is duly
authorized to sign this application and to purchase or redeem shares of the Fund
on behalf of the investor. No stock certificate is to be issued unless I so
request. See the prospectus for information about an Accumulation Plan which
allows a minimum investment of $100 and subsequent investments of $20.
- -------------------------------------------------------------
Owner/Custodian/Trustee Name (Print)
- -------------------------------------------------------------
Social Security Number Date of Birth
- -------------------------------------------------------------
Joint Owner/Minor Name (Print) [ ] Check if UGMA/UTMA Account
- -------------------------------------------------------------
Social Security Number Date of Birth
2. ADDRESS AND TELEPHONE NUMBER
- ------------------------------ -----------------------------------------------
Street Address Daytime Telephone
(for first individual)
- ------------------------------ Citizenship [ ] U.S. [ ] Other
City, State, Zip Code ----------------
Indicate Country
3. INITIAL INVESTMENT
CLASS OF SHARES (MUST SELECT ONE ONLY) ( ) A SHARES ( ) B SHARES (IF NO CLASS IS
SELECTED, PURCHASE(S) WILL BE MADE OF A SHARES)
<TABLE>
<S> <C> <C> <C>
SECURITY EQUITY FUND $ SECURITY LIMITED MATURITY BOND FUND $
------ ------
SECURITY GLOBAL FUND $ SECURITY U.S. GOVERNMENT FUND $
------ ------
SECURITY ASSET ALLOCATION FUND $ SECURITY GLOBAL AGGRESSIVE BOND FUND $
------ ------
SECURITY GROWTH & INCOME FUND $ SECURITY HIGH YIELD FUND $
------ ------
SECURITY ULTRA FUND $ SECURITY TAX-EXEMPT FUND $
------ ------
SECURITY CASH FUND $ SECURITY SOCIAL AWARENESS FUND $
------ ------
SECURITY CORPORATE BOND FUND $
------
</TABLE>
4. DIVIDEND OPTION (CHECK ONE ONLY)
(If no option is selected, distributions will be reinvested into the Fund that
pays them.)
[ ] Reinvest all dividends and capital gains
[ ] Reinvest only capital gains and pay dividends in cash
[ ] Cash payment of dividends and capital gains
[ ] Invest dividends and capital gains into another Security Fund account
(must be same class of shares; if new account, number will be assigned)
Fund Name Account Number
------------------------------------ ------------------
[ ] Send distributions to third party below
Account No. (if applicable)
----------------------------------------------------
Name
---------------------------------------------------------------------------
Address
------------------------------------------------------------------------
5. SYSTEMATIC WITHDRAWAL PROGRAM (FOR ACCOUNTS OF $5,000 OR MORE)
You are hereby authorized to send a check(s) beginning:
Month Day [ ] 11th or [ ] 26th 19
---------------- ----
(if no date is selected withdrawal will be made on the 26th)
Payable: [ ] monthly [ ] quarterly [ ] semi-annually [ ] annually
Fund Name Fund Name
----------------------------- ------------------------------
Account No. (if known) Account No. (if known)
---------------- ---------------
(if 3 or more funds, please send written instructions)
Level Payment $ ($25 minimum) Level Payment $ ($25 minimum)
-------- --------
Variable Payment based on fixed number Variable Payment based on fixed number
of shares or a percentage of account of shares or a percentage of account
value ($25 minimum) value ($25 minimum)
Number of shares: or Number of shares: or
----------- -----------
Percentage of account value: Percentage of account value:
--------- ---------
Note: For Class B shares, annual withdrawals in excess of 10% of value of
account at time program is established may be subject to a contingent deferred
sales charge.
Complete this section only if you want check payable and sent to another address
(please print):
Name Signature(s) of all registered owners required
----------------------------
Address Individual Signature
------------------------- -------------------------
City, State, Zip Code Joint Owner Signature
------------ ------------------------
6. SECUR-O-MATIC[Registration Mark] BANK DRAFT PLAN
I wish to make investments directly from my checking account. (Please attach a
voided check to this application.)
Fund Name Account Number (if known) Amount $
------------------ ------- -------
Fund Name Account Number (if known) Amount $
------------------ ------- -------
Date: [ ] 7th Day of Month [ ] 14th Day of Month [ ] 21st Day of Month
[ ] 28th Day of Month
(if no date is selected investment will be made on the 21st)
Mode: [] Monthly ($20 minimum) [] Bi-Monthly ($40 minimum)
[] Quarterly ($50 minimum) [] Semiannually ($100 minimum)
[] Annually ($200 minimum)
You should notify your bank that you are going to use this service to ensure
they accept preauthorized electronic drafts.
(continued on back)
<PAGE>
7. RIGHTS OF ACCUMULATION
I own shares in other Security Funds which may entitle this purchase to have a
reduced sales charge under the provisions in the Fund Prospectus.
- -------------------------------- --------------------------- -----------------
Current Account Registration Fund Name Account Number(s)
- -------------------------------- --------------------------- -----------------
- -------------------------------- --------------------------- -----------------
8. STATEMENT OF INTENTION
[ ] Please check here if you wish to receive a Statement of Intention. This form
allows you to purchase shares at reduced sales charges if you plan to invest
more than: (Please check one) [ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $500,000
[ ] $1,000,000 in installments during the next 13 months (36 months for
purchases of $1 million or more). See the current prospectus for more
information.
9. TELEPHONE EXCHANGE AND REDEMPTION PRIVILEGE
If you would like to have telephone exchange and/or redemption privileges,
please mark one or more of the boxes below:
Yes, I want [ ] telephone exchange [ ] telephone redemption privileges.
By checking the applicable box(es) and signing this Application, you authorize
the Investment Manager to honor any telephone request for the exchange and/or
redemption of Fund shares (maximum telephone redemption is $10,000), subject to
the terms of the Fund prospectus. The Investment Manager has established
reasonable procedures to confirm that instructions communicated by telephone are
genuine and may be liable for any losses due to fraudulent or unauthorized
instructions if it fails to comply with its procedures. The procedures require
that any person requesting a telephone redemption or exchange provide the
account registration and number and owner's tax identification number and such
request must be received on a recorded line. Neither the Fund, the Investment
Manager nor the Underwriter will be liable for any loss, liability, cost or
expense arising out of any telephone request, provided that the Investment
Manager complied with its procedures. Thus, a stockholder may bear the risk of
loss from a fraudulent or unauthorized request.
10. CERTIFICATION AND SIGNATURE
TAX IDENTIFICATION NUMBER CERTIFICATION
UNDER PENALTIES OF PERJURY I CERTIFY THAT:
1. The number shown on this form is my correct taxpayer identification number
(or I am waiting for a number to be issued to me); and
2. I am not subject to backup withholding because: (a) I am exempt from backup
withholding, or (b) I have not been notified by the Internal Revenue Service
(IRS) that I am subject to backup withholding as a result of a failure to
report all interest or dividends, or (c) the IRS has notified me that I am no
longer subject to backup withholding.
The Internal Revenue Service does not require your consent to any provision of
this document other than the certifications required to avoid backup
withholding.
- --------------------------------------------------------------------------------
Signature of Owner Date
- --------------------------------------------------------------------------------
Signature of Joint Owner Date
In case of joint ownership, both must sign. If no form of ownership is indicated
then it will be assumed the ownership is as "joint tenants, with right of
survivorship" and not as "tenants in common."
CERTIFICATION INSTRUCTIONS - You must cross out item (2) to the left if you have
been notified by IRS that you are currently subject to backup withholding
because of underreporting interest or dividends on your tax return.
11. INVESTMENT DEALER
I (we) agree to act as dealer under this account in accordance with the
provisions of the Dealer Agreement and appoint Security Distributors, Inc. to
act as my (our) agent pursuant thereto. I (we) represent that the appropriate
prospectus was delivered to the above indicated owner(s).
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Name of Firm (Print)
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Business Address
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City, State, Zip Code
- --------------------------------------------------------------------------------
Signature of Authorized Dealer
- ----------------------------------------------------- ------------------------
Representative's Name Account Executive Number
- --------------------------------------------------------------------------------
Business Address
- --------------------------------------------------------------------------------
City, State, Zip Code
- --------------------------------------------------------------------------------
Representative's Telephone Number
SEND COMPLETED APPLICATION TO SECURITY DISTRIBUTORS, INC., 700 SW HARRISON ST.,
TOPEKA, KS 66636-0001
1-800-888-2461, EXT. 3127
Attach Voided Check Here
(Check must be preprinted with the bank account registration)
<PAGE>
[SDI LOGO} BULK RATE
U.S. POSTAGE
700 SW Harrison St. PAID
Topeka, KS 66636-0001 TOPEKA, KS
(913) 295-3127 PERMIT NO. 385
