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SECURITY
FUNDS
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PROSPECTUS
January 31, 1997
As Supplemented August 1, 1997
* Security Asset
Allocation Fund
[SDI Logo]
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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 August 1, 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, as supplemented
August 1, 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 (785) 431-3127 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................................................. 13
Portfolio Management............................................ 15
How to Purchase Shares................................................. 15
Alternative Purchase Options.................................... 15
Class A Shares.................................................. 16
Class B Shares.................................................. 17
Class B Distribution Plan....................................... 17
Calculation and Waiver of Contingent Deferred Sales Charges..... 18
Arrangements with Broker-Dealers and Others..................... 19
Purchases at Net Asset Value.................................... 19
How to Redeem Shares................................................... 20
Telephone Redemptions........................................... 21
Dividends and Taxes.................................................... 22
Foreign Taxes................................................... 23
Determination of Net Asset Value....................................... 23
Trading Practices and Brokerage........................................ 23
Performance............................................................ 24
Shareholder Services................................................... 25
Accumulation Plan............................................... 25
Systematic Withdrawal Program................................... 25
Exchange Privilege.............................................. 26
Retirement Plans................................................ 27
General Information.................................................... 27
Organization.................................................... 27
Stockholder Inquiries........................................... 27
Appendix A - Class A Shares Reduced Sales Charges...................... 28
Rights of Accumulation.......................................... 28
Statement of Intention.......................................... 28
Reinstatement Privilege......................................... 28
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SECURITY FUNDS
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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 16.
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 20 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 13. See
"How to Purchase Shares," page 15, 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
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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, pay a "spread" or "mark-up" rather than a commission and are
therefore excluded from this calculation. 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. Prior to 1996, average
commission information was not required to be disclosed.
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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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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 Fund's Sub-Adviser, Meridian Investment Management Corporation
("Meridian"), conducts quantitative investment research and uses the research to
strategically allocate 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 Sub-Adviser then determines 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.
The Sub-Adviser identifies sectors of the domestic and international
economy in which the Fund will invest and then determines which equity
securities to purchase within the identified countries and/or sectors.
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
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
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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 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
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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 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,
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6
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SECURITY FUNDS
PROSPECTUS
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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 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.
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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 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," page 13.
REPURCHASE AGREEMENTS -- A repurchase agreement is a contract under which
the Fund
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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 and Sub-Adviser believe 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.
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
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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 Sub-Adviser 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 Sub-Adviser 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).
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 or
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
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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 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 or 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
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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 or 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. 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 Sub-Adviser 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
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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 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.
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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 sub-advisory agreement with
Meridian Investment Management Corporation, 12835 East Arapahoe Road, Tower II,
7th Floor, Englewood, Colorado 80112 ("Meridian"). Pursuant to the agreement,
Meridian furnishes investment advisory, statistical and research faciliites,
supervises and arranges for the purchase and sale of equity securities on behalf
of the Fund and provides for the compilation and maintenance of records
pertaining to such investment advisory services, subject to the control and
supervision of the Board of Directors of the Fund and the Investment Manager.
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 Investment Manager pays Meridian an annual fee equal to a percentage of
the average daily closing value of the net assets of the Fund, 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%
Subject to the supervision and direction of the Fund's Board of Directors,
the Investment Manager manages the fixed income portion of the Fund's portfolio
in accordance with the Fund's stated investment objective and policies and
supervises the investment advisory services of Meridian. 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 in which shares of the Fund are then
qualified for sale. (The Investment Manager is not aware of any state that
currently imposes limits on the level of mutual fund expenses.) 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 $60,000.
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.
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PORTFOLIO MANAGEMENT
The Fund is managed by an investment management team of Portfolio Managers
of the Investment Manager and Sub-Adviser. Jane Tedder, Senior Economist of the
Investment Manager, has day-to-day responsibility for managing the fixed-income
portion of the Fund's portfolio. She has had responsibility for the Fund since
January 1996. Pat Boyle, Portfolio Manager of the Sub-Adviser, has day-to-day
responsibility for managing the equity portion of the Fund's portfolio. He has
had day-to-day responsibility for managing the equity portion of the Fund since
August 1997.
Ms. Tedder, Vice President and Senior Economist 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.
Mr. Boyle is a research analyst and portfolio manager of the Sub-Adviser
He has four years of investment experience and is a Chartered Financial Analyst
Mr. Boyle graduated from the University of Denver with a B.S.B.A. degree in
Finance.
HOW TO PURCHASE SHARES
Security Distributors, Inc. (the "Distributor"), 700 Harrison Street,
Topeka, Kansas, a wholly-owned subsidiary of Security Benefit Group, Inc., 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
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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 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
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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 18.
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
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SECURITY FUNDS
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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 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
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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.
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
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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 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 25 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
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with Security Benefit Life Insurance Company; spouses or minor children of any
such agents; as well as the following relatives of any such directors, officers
and employees (and their spouses): spouses, grandparents, parents, children,
grandchildren, siblings, nieces and nephews; (2) any trust, pension, profit
sharing or other benefit plan established by any of the foregoing corporations
for persons described above; (3) retirement plans where third party
administrators of such plans have entered into certain arrangements with the
Distributor or its affiliates provided that no commission is paid to dealers;
and (4) officers, directors, partners or registered representatives (and their
spouses and minor children) of broker-dealers who have a selling agreement with
the Distributor. Such sales are made upon the written assurance of the purchaser
that the purchase is made for investment purposes and that the securities will
not be transferred or resold except through redemption or repurchase by or on
behalf of the Fund.
Class A shares of the Fund may also be purchased at net asset value when
the purchase is made on the recommendation of (i) a registered investment
adviser, trustee or financial intermediary who has authority to make investment
decisions on behalf of the investor; or (ii) a certified financial planner or
registered broker-dealer who either charges periodic fees to its customers for
financial planning, investment advisory or asset management services, or
provides such services in connection with the establishment of an investment
account for which a comprehensive "wrap fee" is imposed. The Distributor must be
notified when a purchase is made that qualifies under this provision.
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.
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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 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
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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
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.
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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.
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
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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 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
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SECURITY FUNDS
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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 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
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SECURITY FUNDS
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shares requested while Free Systematic Withdrawals are being made will be
calculated as described under "Calculation and Waiver of Contingent Deferred
Sales Charges," page 18. 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 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
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SECURITY FUNDS
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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 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 five series, Equity Fund, Global Fund,
Social Awareness Fund, Asset Allocation Fund and Value 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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27
<PAGE>
SECURITY FUNDS
PROSPECTUS APPENDIX A
================================================================================
APPENDIX A
CLASS 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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28
<PAGE>
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SECURITY GROWTH AND INCOME FUND
(formerly Security Investment Fund)
SECURITY EQUITY FUND
o Equity Series
o Global Series
o Asset Allocation Series
o Social Awareness Series
o Value Series
SECURITY ULTRA FUND
Statement of Additional Information
May 1, 1997, As Supplemented August 1, 1997
RELATING TO THE PROSPECTUS DATED MAY 1, 1997, AS IT MAY BE SUPPLEMENTED
FROM TIME TO TIME
(785) 431-3127
(800) 888-2461
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INVESTMENT MANAGER
Security Management Company, LLC
700 SW Harrison Street
Topeka, Kansas 66636-0001
UNDERWRITER
Security Distributors, Inc.
700 SW Harrison Street
Topeka, Kansas 66636-0001
CUSTODIAN
UMB Bank, N.A.
928 Grand Avenue
Kansas City, Missouri 64106
The Chase Manhattan Bank
4 Chase MetroTech Center
Brooklyn, New York 11245
INDEPENDENT AUDITORS
Ernst & Young LLP
One Kansas City Place
1200 Main Street
Kansas City, Missouri 64105-2143
<PAGE>
Security Growth and Income Fund
(formerly Security Investment Fund)
Security Equity Fund
Security Ultra Fund
Members of The Security Benefit Group of Companies
700 SW Harrison, Topeka, Kansas 66636-0001
Statement of
Additional Information
May 1, 1997,
As Supplemented August 1, 1997
(RELATING TO THE PROSPECTUS DATED MAY 1, 1997,
AS IT MAY BE SUPPLEMENTED FROM TIME TO TIME)
This Statement of Additional Information is not a Prospectus. It should be
read in conjunction with the Prospectus dated May 1, 1997, as it may be
supplemented from time to time. A Prospectus may be obtained by writing or
calling Security Distributors, Inc., 700 SW Harrison Street, Topeka, Kansas
66636-0001, or by calling (785) 431-3127 or (800) 888-2461, ext. 3127.
TABLE OF CONTENTS
Page
General Information........................................................ 1
Investment Objective and Policies of the Funds............................. 2
Security Growth and Income Fund......................................... 2
Security Equity Fund.................................................... 3
Equity Fund........................................................... 4
Global Fund........................................................... 4
Asset Allocation Fund................................................. 6
Social Awareness Fund................................................. 7
Value Fund............................................................ 9
Security Ultra Fund..................................................... 9
Investment Methods and Risk Factors........................................ 10
Investment Policy Limitations.............................................. 23
Security Growth and Income Fund's Fundamental Policies.................. 24
Security Equity Fund's Fundamental Policies............................. 24
Security Ultra Fund's Fundamental Policies.............................. 26
Officers and Directors..................................................... 26
Remuneration of Directors and Others....................................... 28
How to Purchase Shares..................................................... 29
Alternative Purchase Options............................................ 29
Class A Shares.......................................................... 30
Class B Shares.......................................................... 30
Class B Distribution Plan............................................... 31
Calculation and Waiver of Contingent Deferred Sales Charges............. 31
Arrangements With Broker-Dealers and Others............................. 32
Purchases at Net Asset Value............................................ 33
Accumulation Plan.......................................................... 33
Systematic Withdrawal Program.............................................. 33
Investment Management...................................................... 34
Portfolio Management.................................................... 37
Code of Ethics.......................................................... 38
Distributor................................................................ 38
Allocation of Portfolio Brokerage.......................................... 39
How Net Asset Value is Determined.......................................... 41
How to Redeem Shares....................................................... 42
Telephone Redemptions................................................... 43
How to Exchange Shares..................................................... 44
Exchange by Telephone................................................... 44
Dividends and Taxes........................................................ 45
Organization............................................................... 48
Legal Proceedings.......................................................... 49
Custodian, Transfer Agent and Dividend-Paying Agent........................ 49
Independent Auditors....................................................... 49
Performance Information.................................................... 49
Retirement Plans........................................................... 51
Individual Retirement Accounts (IRAs)...................................... 51
SIMPLE IRAs................................................................ 52
Pension and Profit-Sharing Plans........................................... 52
403(b) Retirement Plans.................................................... 52
Simplified Employee Pension Plans (SEPPs).................................. 52
Financial Statements....................................................... 53
Appendix A................................................................. 54
Appendix B................................................................. 56
<PAGE>
GENERAL INFORMATION
Security Growth and Income Fund (formerly Security Investment Fund),
Security Equity Fund and Security Ultra Fund were organized as Kansas
corporations on February 2, 1944, November 27, 1961 and April 20, 1965,
respectively. The name of Security Growth and Income Fund (formerly Security
Investment Fund) was changed effective July 6, 1993. The Funds are registered
with the Securities and Exchange Commission ("SEC") as investment companies.
Such registration does not involve supervision by the SEC of the management or
policies of the Funds. The Funds are open-end investment companies that, upon
the demand of the investor, must redeem their shares and pay the investor the
current net asset value thereof. (See "How to Redeem Shares," page 42.)
Each of Security Growth and Income Fund ("Growth and Income Fund"), the
Equity Series ("Equity Fund"), Global Series ("Global Fund"), Asset Allocation
Series ("Asset Allocation Fund"), Social Awareness Series ("Social Awareness
Fund"), and Value Series ("Value Fund") of Security Equity Fund, and Security
Ultra Fund ("Ultra Fund") (collectively, the "Funds") has its own investment
objective and policies which are described below. While there is no present
intention to do so, the investment objective and policies of each Fund, unless
otherwise noted, may be changed by its Board of Directors without the approval
of stockholders. Each of the Funds is also required to operate within
limitations imposed by its fundamental investment policies which may not be
changed without stockholder approval. These limitations are set forth below
under "Investment Policy Limitations," page 23. An investment in one of the
Funds does not constitute a complete investment program.
The value of the shares of each Fund fluctuates, reflecting fluctuations in
the value of the portfolio securities and, to the extent it is invested in
foreign securities, its net currency exposure. Each Fund may realize losses or
gains when it sells portfolio securities and will earn income to the extent that
it receives dividends or interest from its investments. (See "Dividends and
Taxes," page 45.)
The Funds' shares are sold to the public at net asset value, plus a sales
commission which is allocated between the principal underwriter and dealers who
sell the shares ("Class A Shares"), or at net asset value with a contingent
deferred sales charge ("Class B Shares"). (See "How to Purchase Shares," page
29.)
Professional investment advice is provided to each Fund by Security
Management Company, LLC (the "Investment Manager"). The Investment Manager has
appointed Lexington Management Corporation ("Lexington") to provide certain
investment advisory services to Global Fund. The Investment Manager has
appointed Meridian Investment Management Corporation ("Meridian") to provide
quantitative investment research and investment advisory services to the Asset
Allocation Fund.
The Funds receive investment advisory, administrative, accounting, and
transfer agency services from the Investment Manager for a fee. The fee for each
of the Growth and Income, Equity and Ultra Funds, on an annual basis, is 2% of
the first $10 million of the average net assets, 1 1/2% of the next $20 million
of the average net assets and 1% of the remaining average net assets of the
respective Funds, determined daily and payable monthly. The fee paid by Global
Fund, on an annual basis, is 2% of the first $70 million of the average net
assets, and 1 1/2% of the remaining average net assets, determined daily and
payable monthly.
Separate fees are paid by Asset Allocation, Social Awareness, and Value
Funds, to the Investment Manager for investment advisory, administrative and
transfer agency services. The investment advisory fee for Asset Allocation,
Social Awareness, and Value Funds on an annual basis is equal to 1% of the
average daily net assets of each Fund, calculated daily and payable monthly. The
administrative fee for Asset Allocation Fund on an annual basis is equal to
.045% of the average daily net assets of the Fund plus the greater of .10% of
its average net assets or $60,000. The administrative fee for the Social
Awareness and Value Funds on an annual basis is equal to .09% of the average
daily net assets of each respective Fund. The transfer agency fee for the Asset
Allocation Fund, the Social Awareness Fund and the Value Fund consists of an
annual maintenance fee of $8.00 per account, and a transaction fee of $1.00 per
transaction.
The Investment Manager bears all expenses of the Funds (except Asset
Allocation, Social Awareness and Value Funds) except for its fees and the
expenses of brokerage commissions, interest, taxes, Class B distribution fees,
and extraordinary expenses approved by the Board of Directors of the Funds. The
Asset Allocation, Social Awareness and Value Funds pay all of their expenses not
assumed by the Investment Manager or Security Distributors, Inc. (the
"Distributor") as described under "Investment Management," page 34.
The Investment Manager has agreed that the total annual expenses of any
class or Series of a Fund (including the management fee and its other fees, but
excluding interest, taxes, brokerage commissions,
1
<PAGE>
extraordinary expenses and Class B distribution fees) will not exceed any
expense limitation imposed by any state. See "Investment Management," page 34
for a discussion of the Investment Manager and the Investment Management and
Services Agreements.
Under Distribution Plans adopted with respect to the Class B shares of the
Funds, pursuant to Rule 12b-1 under the Investment Company Act of 1940, each
Fund is authorized to pay the Distributor an annual fee of 1.00% of the average
daily net assets of the Class B shares of the respective Funds to finance
various distribution-related activities. (See "Class B Distribution Plan," page
31.)
INVESTMENT OBJECTIVE AND POLICIES OF THE FUNDS
SECURITY GROWTH AND INCOME FUND
The investment objective of Growth and Income Fund is long-term growth of
capital with a secondary emphasis on income. The value of Growth and Income
Fund's shares will fluctuate with changes in the market value of the Fund's
investments. The investment objective and policies of Growth and Income Fund may
be altered by the Board of Directors without the approval of stockholders of the
Fund. There can be no assurance that the stated investment objective will be
achieved.
The policy of Growth and Income Fund is to invest in a diversified
portfolio which will ordinarily consist principally of common stocks (which may
include ADRs), but may also include other securities when deemed advisable. Such
other securities may include (i) securities convertible into common stocks; (ii)
preferred stocks; (iii) debt securities issued by U.S. corporations; (iv)
securities issued by the U.S. Government or any of its agencies or
instrumentalities, including Treasury bills, certificates of indebtedness, notes
and bonds; (v) securities issued by foreign governments, their agencies, and
instrumentalities, and foreign corporations, provided that such securities are
denominated in U.S. dollars; (vi) higher yielding, high risk debt securities
(commonly referred to as "junk bonds"); and (vii) zero coupon securities. The
Fund may also invest in warrants. However, such investment may not exceed 5% of
its total assets valued at the lower of cost or market. Included in that amount,
but not to exceed 2% of the value of the Fund's assets may be warrants which are
not listed on the New York or American Stock Exchange. Warrants acquired by the
Fund in units or attached to securities may be deemed to be without value. In
the selection of securities for investment, the potential for appreciation and
future dividends is given more weight than current dividends.
Except when in a temporary defensive position, Growth and Income Fund will
maintain at least 25% of its assets invested in securities selected for their
capital growth potential, principally common stocks, and at least another 25% of
its total assets invested in securities which provide income.
With respect to Growth and Income Fund's investment in debt securities,
there is no percentage limitation on the amount of the Fund's assets that may be
invested in securities within any particular rating classification (see Appendix
A for a more complete description of the corporate bond ratings), and the Fund
may invest without limit in unrated securities. Growth and Income Fund may
invest in securities rated Baa by Moody's Investors Service, Inc., or BBB by
Standard & Poor's Corporation. Baa securities are considered to be "medium
grade" obligations by Moody's and BBB is the lowest classification which is
still considered an "investment grade" rating by Standard & Poor's. Bonds rated
Baa by Moody's or BBB by Standard & Poor's have speculative characteristics and
may be more susceptible than higher grade bonds to adverse economic conditions
or other adverse circumstances which may result in a weakened capacity to make
principal and interest payments. In addition, the Fund may invest in higher
yielding, longer-term debt securities in the lower rating (higher risk)
categories of the recognized rating services (commonly referred to as "junk
bonds"). These include securities rated Ba or lower by Moody's or BB or lower by
Standard & Poor's and are regarded as predominantly speculative with respect to
the ability of the issuer to meet principal and interest payments. However, the
Investment Manager will not rely principally on the ratings assigned by the
rating services. Because Growth and Income Fund may invest in lower rated
securities and unrated securities of comparable quality, the achievement of the
Fund's investment objective may be more dependent on the Investment Manager's
own credit analysis than would be the case if investing in higher rated
securities.
As discussed above, Growth and Income Fund may invest in foreign debt
securities that are denominated in U.S. dollars. Such foreign debt securities
may include debt of foreign governments, including Brady Bonds, and debt of
foreign corporations. The Fund expects to limit its investment in foreign debt
securities, excluding
2
<PAGE>
Canadian securities, to not more than 15% of its total assets and its investment
in debt securities of issuers in emerging markets, excluding Brady Bonds, to not
more than 5% of its net assets. See the discussion of the risks associated with
investing in foreign securities and, in particular, Brady Bonds and emerging
markets under "Investment Methods and Risk Factors."
Growth and Income Fund may purchase securities on a "when issued" or
"delayed delivery basis" in excess of customary settlement periods for the type
of security involved. The Fund may purchase securities that are restricted as to
disposition under the federal securities laws, provided that such securities are
eligible for resale to qualified institutional investors pursuant to Rule 144A
under the Securities Act of 1933 and subject to the Fund's policy that not more
than 15% of its total assets will be invested in illiquid securities. From time
to time, Growth and Income Fund may purchase government bonds or commercial
notes for temporary defensive purposes. The Fund may also utilize repurchase
agreements on an overnight basis or bank demand accounts, pending investment in
securities or to meet potential redemptions or expenses. See the discussion of
when issued securities, Rule 144A securities, and repurchase agreements under
"Investment Methods and Risk Factors" and see the discussion of restricted
securities under the same heading in the prospectus.
The Fund may invest in zero coupon securities which are debt securities
that pay no cash income but are sold at substantial discounts from their face
value. Certain zero coupon securities also provide for the commencement of
regular interest payments at a deferred date. See "Investment Methods and Risk
Factors" for a discussion of zero coupon securities.
Growth and Income Fund's policy is to diversify its investments among
various industries, but freedom of action is reserved (at times when deemed
appropriate for the attainment of its investment objectives) to invest up to 25%
of its assets in one industry. This is a fundamental policy of Growth and Income
Fund which cannot be changed without stockholder approval.
There is no restriction on Growth and Income Fund's portfolio turnover, but
it is the Fund's practice to invest its funds for long-term growth and
secondarily for income. The portfolio turnover rate of Class A shares for the
fiscal years ended September 30, 1996, 1995 and 1994 was as follows: 1996 - 69%,
1995 - 130% and 1994 - 163%. The portfolio turnover rate of Class B shares of
Growth and Income Fund for the fiscal years ended September 30, 1996 and 1995
was 69% and 130%, respectively. The portfolio turnover rate of Class B shares
for the period October 19, 1993 to September 30, 1994 was 178%. Portfolio
turnover is the percentage of the lower of security sales or purchases to the
average portfolio value and would be 100% if all securities in the Fund were
replaced within a period of one year. The Fund will not usually trade securities
for short-term profits.
SPECIAL RISKS OF HIGH YIELD INVESTING. Because Growth and Income Fund
invests in the high yield, high risk debt securities (commonly referred to as
"junk bonds") described above, its share price and yield are expected to
fluctuate more than the share price and yield of a fund investing in higher
quality, shorter-term securities. High yield bonds may be more susceptible to
real or perceived adverse economic and competitive industry conditions than
investment grade bonds. A projection of an economic downturn, or higher interest
rates, for example, could cause a decline in high yield bond prices because an
advent of such events could lessen the ability of highly leveraged companies to
make principal and interest payments on its debt securities. In addition, the
secondary trading market for high yield bonds may be less liquid than the market
for higher grade bonds, which can adversely affect the ability of Growth and
Income Fund to dispose of its portfolio securities. Bonds for which there is
only a "thin" market can be more difficult to value inasmuch as objective
pricing data may be less available and judgment may play a greater role in the
valuation process. Debt securities issued by governments in emerging markets can
differ from debt obligations issued by private entities in that remedies from
defaults generally must be pursued in the courts of the defaulting government,
and legal recourse is therefore somewhat diminished. Political conditions, in
terms of a government's willingness to meet the terms of its debt obligations,
also are of considerable significance. There can be no assurance that the
holders of commercial bank debt may not contest payments to the holders of debt
securities issued by governments in emerging markets in the event of default by
the governments under commercial bank loan agreements.
SECURITY EQUITY FUND
Security Equity Fund currently issues its shares in five series -- Equity
Series ("Equity Fund"), Global Series ("Global Fund"), Asset Allocation Series
("Asset Allocation Fund"), Social Awareness Series ("Social Awareness Fund") and
Value Series ("Value Fund"). The assets of each Series are held separate from
the assets of the other
3
<PAGE>
Series and each Series has an investment objective which differs from that of
the other Series. The investment objective and policies of each Series are
described below. There are risks inherent in the ownership of any security and
there can be no assurance that such investment objective will be achieved.
Although there is no present intention to do so, the investment objective
of the Funds may be altered by the Board of Directors without the approval of
stockholders of the Fund.
EQUITY FUND
The investment objective of Equity Fund is to provide a medium for
investment in equity securities to complement fixed-obligation types of
investments. Emphasis will be placed upon selection of those securities which in
the opinion of the Investment Manager offer basic value and have the most
long-term capital growth potential. Income potential will be considered in
selecting investments, to the extent doing so is consistent with Equity Fund's
investment objective of long-term capital growth.
Equity Fund ordinarily will have at least 90% of its total assets invested
in a broadly diversified selection of common stocks (which may include ADRs) and
of preferred stocks convertible into common stocks. However, the Fund reserves
the right to invest temporarily in fixed income securities or in cash and money
market instruments. Equity Fund may invest in certificates of deposit issued by
banks or other bank demand accounts, pending investment in other securities or
to meet potential redemptions or expenses. Equity Fund's investment policy, with
emphasis on investing in securities for potential capital enhancement
possibilities, may involve a more rapid portfolio turnover than other investment
companies.
The portfolio turnover rate of Class A shares of Equity Fund for fiscal
years ended September 30, 1996, 1995 and 1994 was as follows: 1996 - 64%, 1995 -
95% and 1994 - 79%. The portfolio turnover rate for Class B shares of Equity
Fund for the fiscal years ended September 30, 1996 and 1995 was 64% and 95%,
respectively. The portfolio turnover rate of Class B shares for the period
October 19, 1993 to September 30, 1994 was 80%. Portfolio turnover is the
percentage of the lower of security sales or purchases to the average portfolio
value and would be 100% if all securities in the Fund were replaced within a
period of one year.
It is not the policy of Equity Fund to purchase securities for trading
purposes. Nevertheless, securities may be disposed of without regard to the
length of time held if such sales are deemed advisable in order to meet the
Fund's investment objective. Equity Fund does not intend to purchase restricted
stock.
GLOBAL FUND
The investment objective of Global Fund is to seek long-term growth of
capital primarily through investment in securities of companies domiciled in
foreign countries and the United States. Global Fund will seek to achieve its
objective through investment in a diversified portfolio of securities which
under normal circumstances will consist primarily of various types of common
stocks and equivalents (the following constitute equivalents: convertible debt
securities, real estate investment trusts (REITs), warrants and options). The
Fund may also invest in preferred stocks, bonds and other debt obligations,
which include money market instruments of foreign and domestic companies and the
U.S. Government and foreign governments, governmental agencies and international
organizations. For a full description of the Fund's investment objective and
policies, see the Prospectus.
In seeking to achieve its investment objective, Global Fund may from time
to time engage in the following investment practices:
SETTLEMENT TRANSACTIONS. Global Fund may, for a fixed amount of United
States dollars, enter into a forward foreign exchange contract for the purchase
or sale of the amount of foreign currency involved in the underlying securities
transactions. In so doing, the Fund will attempt to insulate itself against
possible losses and gains resulting from a change in the relationship between
the United States dollar and the foreign currency during the period between the
date a security is purchased or sold and the date on which payment is made or
received. This process is known as "transaction hedging."
To effect the translation of the amount of foreign currencies involved in
the purchase and sale of foreign securities and to effect the "transaction
hedging" described above, the Fund may purchase or sell foreign currencies on a
"spot" (i.e. cash) basis or on a forward basis whereby the Fund purchases or
sells a specific amount of foreign currency, at a price set at the time of the
contract, for receipt of delivery at a specified date which may be any fixed
number of days in the future.
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<PAGE>
Such spot and forward foreign exchange transactions may also be utilized to
reduce the risk inherent in fluctuations in the exchange rate between the United
States dollar and the relevant foreign currency when foreign securities are
purchased or sold for settlement beyond customary settlement time (as described
below). Neither type of foreign currency transaction will eliminate fluctuations
in the prices of the Fund's portfolio or securities or prevent loss if the price
of such securities should decline.
PORTFOLIO HEDGING. When, in the opinion of the Fund's Sub-Adviser,
Lexington Management Corporation ("Lexington"), it is desirable to limit or
reduce exposure in a foreign currency in order to moderate potential changes in
the United States dollar value of the portfolio, Global Fund may enter into a
forward foreign currency exchange contract by which the United States dollar
value of the underlying foreign portfolio securities can be approximately
matched by an equivalent United States dollar liability. The Fund may also enter
into forward currency exchange contracts to increase its exposure to a foreign
currency that Lexington expects to increase in value relative to the United
States dollar. The Fund will not attempt to hedge all of its portfolio positions
and will enter into such transactions only to the extent, if any, deemed
appropriate by Lexington. Hedging against a decline in the value of currency
does not eliminate fluctuations in the prices of portfolio securities or prevent
losses if the prices of such securities decline. The Fund intends to limit such
transactions to not more than 70% of its total assets.
FORWARD COMMITMENTS. Global Fund may make contracts to purchase securities
for a fixed price at a future date beyond customary settlement time ("forward
commitments") because new issues of securities are typically offered to
investors on that basis. Forward commitments involve a risk of loss if the value
of the security to be purchased declines prior to the settlement date. This risk
is in addition to the risk of decline in value of the Fund's other assets.
Although the Fund will enter into such contracts with the intention of acquiring
the securities, it may dispose of a commitment prior to settlement if Lexington
deems it appropriate to do so.
COVERED CALL OPTIONS. Global Fund may seek to preserve capital by writing
covered call options on securities which it owns. Such an option on an
underlying security would obligate the Fund to sell, and give the purchaser of
the option the right to buy, that security at a stated exercise price at any
time until a stated expiration date of the option.
REPURCHASE AGREEMENTS. A repurchase agreement is a contract under which
Global Fund would acquire a security for a relatively short period (usually not
more than 7 days) subject to the obligation of the seller to repurchase and the
Fund to resell such security at a fixed time and price (representing the Fund's
cost plus interest). Although the Fund may enter into repurchase agreements with
respect to any portfolio securities which it may acquire consistent with its
investment policies and restrictions, it is the Fund's present intention to
enter into repurchase agreements only with respect to obligations of the United
States Government or its agencies or instrumentalities to meet anticipated
redemptions or pending investment or reinvestment of Fund assets in portfolio
securities. The Fund will enter into repurchase agreements only with member
banks of the Federal Reserve System and with "primary dealers" in United States
Government securities. 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 Global 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. The Fund may enter into repurchase agreements only with
(a) securities dealers that have a total capitalization of at least $40,000,000
and a ratio of aggregate indebtedness to net capital of no more than 4 to 1, or,
alternatively, net capital equal to 6% of aggregate debit balances, or (b) banks
that have at least $1,000,000,000 in assets and a net worth of at least
$100,000,000 as of its most recent annual report. In addition, the aggregate
repurchase price of all repurchase agreements held by the Fund with any broker
shall not exceed 15% of the total assets of the Fund or $5,000,000, whichever is
greater. The Fund will not enter into repurchase agreements maturing in more
than seven days if the aggregate of such repurchase agreements and other
illiquid investments would exceed 10%. The operating expenses of Global Fund can
be expected to be higher than those of an investment company investing
exclusively in United States securities.
RULE 144A SECURITIES. Global Fund may purchase securities that are
restricted as to disposition under the federal securities laws, provided that
such restricted securities are eligible for resale to qualified institutional
investors pursuant to Rule 144A under the Securities Act of 1933 and subject to
the Fund's investment policy
5
<PAGE>
limitation that not more than 10% of its total assets will be invested in
restricted securities. The Investment Manager, under procedures adopted by the
Board of Directors, will determine whether securities eligible for resale under
Rule 144A are liquid or not.
Portfolio turnover rates for Global Fund, Class A shares, for the fiscal
years ended September 30, 1996 and 1995 was 142% and 141%, respectively. The
portfolio turnover rate of Class A shares for the period October 5, 1993 to
September 30, 1994 was 73%. The portfolio turnover rate for Global Fund, Class B
shares, for the fiscal years ended September 30, 1996 and 1995 was 142% and
141%, respectively. The portfolio turnover rate of Class B shares for the period
October 19, 1993 to September 30, 1994 was 73%. Portfolio turnover is the
percentage of the lower of security sales or purchases to the average portfolio
value and would be 100% if all securities in the Fund were replaced within a
period of one year.
ASSET ALLOCATION FUND
The investment objective of Asset Allocation 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, ADRs, 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"); zero coupon securities and domestic money
market instruments. See "Investment Methods and Risk Factors" in the Prospectus
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, will maintain under normal
circumstances a minimum of 35% of its total assets in equity securities and 10%
in debt securities. The Fund will not invest more than 55% of its total assets
in money market instruments (except for temporary defensive purposes), more than
80% of its total assets in foreign securities, nor more than 20% of its total
assets in gold stocks. The Fund will not invest 25% or more of its assets in the
securities of any single country other than the United States.
The Fund's Sub-Adviser, Meridian Investment Management Corporation
("Meridian"), conducts quantitative investment research and uses the research to
strategically allocate 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. Meridian then
determines 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.
Meridian identifies sectors of the domestic and international economy in
which the Fund will invest and then determines which equity securities to
purchase within the identified sectors.
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
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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 S&P or Baa or better by Moody's or that
are unrated by S&P and Moody's but considered by the Investment Manager to be of
equivalent credit quality. 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% of its net assets. Securities
rated BBB by S&P or Baa by Moody's have speculative characteristics as described
in Appendix A.
Asset Allocation 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% 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" in the Prospectus.
The Fund may invest up to 10%, 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"
in the Prospectus 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 invest in zero coupon securities which are debt securities
that pay no cash income but are sold at substantial discounts from their face
value. Certain zero coupon securities also provide for the commencement of
regular interest payments at a deferred date. See "Investment Methods and Risk
Factors" for a discussion of zero coupon securities.
The Fund may write covered call options and purchase put options on
securities, financial indices and foreign currencies and may enter into futures
contracts. 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. 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% of
the Fund's net assets. The total market value of securities against which the
Fund has written call options may not exceed 25% of its total assets. The Fund
will not commit more than 5% 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 may not purchase securities of unseasoned issuers, including their
predecessors, which have been in operation for less than three years, or equity
securities of issuers which are not readily marketable if, at the time of
investment, its aggregate investment in such securities would exceed 5% of its
total assets.
The Fund's investment in warrants may not exceed 5% of the value of the
Fund's net assets. Included in that amount, but not to exceed 2.0% of the value
of the Fund's net assets, may be warrants which are not listed on the New York
or American Stock Exchange. Warrants acquired by the Fund in units or attached
to securities are deemed to be without value. The portfolio turnover rate for
Asset Allocation Fund, for the fiscal year ended September 30, 1996 was 75%. The
portfolio turnover rate for Asset Allocation Fund, for the period June 1, 1995
(inception) to September 30, 1995 was 129%. Portfolio turnover is the percentage
of the lower of security sales or purchases to the average portfolio value and
would be 100% if all securities in the Fund were replaced within a period of one
year.
SOCIAL AWARENESS FUND
The investment objective of Social Awareness Fund is to seek capital
appreciation by investing in various types of securities which meet certain
social criteria established for the Fund. Social Awareness Fund will invest in a
diversified portfolio of common stocks (which may include ADRs), convertible
securities, preferred stocks and debt securities. See "Investment Methods and
Risk Factors" - "American Depositary Receipts." From time to
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time, the Fund may purchase government bonds or commercial notes on a temporary
basis for defensive purposes.
Securities selected for their appreciation possibilities will be primarily
common stocks or other securities having the investment characteristics of
common stocks, such as securities convertible into common stocks. Securities
will be selected on the basis of their appreciation and growth potential.
Securities considered to have capital appreciation and growth potential will
often include securities of smaller and less mature companies. Such companies
may present greater opportunities for capital appreciation because of high
potential earnings growth, but may also involve greater risk. They may have
limited product lines, markets or financial resources, and they may be dependent
on a limited management group. Their securities may trade less frequently and in
limited volume, and only in the over-the-counter ("OTC") market or on smaller
securities exchanges. As a result, the securities of smaller companies may have
limited marketability and may be subject to more abrupt or erratic changes in
value than securities of larger, more established companies. The Fund may also
invest in larger companies where opportunities for above-average capital
appreciation appear favorable and the Fund's social criteria are satisfied.
The Social Awareness Fund may enter into futures contracts (a type of
derivative) (or options thereon) to hedge all or a portion of its portfolio or
as an efficient means of adjusting its exposure to the stock market. The Fund
will limit its use of futures contracts so that initial margin deposits or
premiums on such contracts used for non-hedging purposes will not equal more
than 5% of the Fund's net assets. The Fund may also write call and put options
on a covered basis and purchase put and call options on securities and financial
indices. The aggregate market value of the Fund's portfolio securities covering
call or put options will not exceed 25% of the Fund's net assets. See the
discussion of options and futures contracts under "Investment Methods and Risk
Factors." Under normal circumstances, the Social Awareness Fund will invest all
of its assets in issuers that meet its social criteria as set forth below and
that offer investment potential. Because of the limitations on investment
imposed by the social criteria, the availability of investment opportunities for
the Fund may be limited as compared to those of similar funds which do not
impose such restrictions on investment.
The Social Awareness Fund will not invest in securities of companies that
engage in the production of nuclear energy, alcoholic beverages or tobacco
products.
In addition, the Fund will not invest in securities of companies that
significantly engage in: (1) the manufacture of weapon systems; (2) practices
that, on balance, have a detrimental effect on the environment; or (3) the
gambling industry. The Fund will monitor the activities identified above to
determine whether they are significant to an issuer's business. Significance may
be determined on the basis of the percentage of revenue generated by, or the
size of operations attributable to, such activities. The Fund may invest in an
issuer that engages in the activities set forth above, in a degree that is not
deemed significant by the Investment Manager. In addition, the Fund will seek
out companies that have contributed substantially to the communities in which
they operate, have a positive record on employment relations, have made
substantial progress in the promotion of women and minorities or in the
implementation of benefit policies that support working parents, or have taken
notably positive steps in addressing environmental challenges.
The Investment Manager will evaluate an issuer's activities to determine
whether it engages in any practices prohibited by the Fund's social criteria. In
addition to its own research with respect to an issuer's activities, the
Investment Manager will also rely on other organizations that publish
information for investors concerning the social policy implications of corporate
activities. The Investment Manager may rely upon information provided by
advisory firms that provide social research on U.S. corporations, such as
Kinder, Lydenberg & Domini & Co., Inc., Franklin Insight, Inc. and
Prudential-Bache Capital Funding. Investment selection on the basis of social
attributes is a relatively new practice and the sources for this type of
information are not well established. The Investment Manager will continue to
identify and monitor sources of such information to screen issuers which do not
meet the social investment restrictions of the Fund.
If after purchase of an issuer's securities by Social Awareness Fund, it is
determined that such securities do not comply with the Fund's social criteria,
the securities will be eliminated from the Fund's portfolio within a reasonable
time. This requirement may cause the Fund to dispose of a security at a time
when it may be disadvantageous to do so. The annualized portfolio turnover rate
for the period November 4, 1996, to March 31, 1997, was 22% for Social Awareness
Fund. Portfolio turnover is the percentage of the lower of security sales or
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purchases to the average portfolio value and would be 100% if all securities in
the Fund were replaced within a period of one year.
VALUE FUND
The investment objective of the Value Fund is to seek long-term growth of
capital. The Value Fund will seek to achieve its objective through investment in
a diversified portfolio of securities. Under normal circumstances the Fund will
consist primarily of various types of common stock, which may include ADRs, and
securities convertible into common stocks which the Investment Manager believes
are undervalued relative to assets, earnings, growth potential or cash flows.
See the discussion of ADRs under "Investment Methods and Risk Factors." Under
normal circumstances, the Fund will invest at least 65% of its total assets in
the securities of companies which the Investment Manager believes are
undervalued.
The Value Fund may also invest in (i) preferred stocks; (ii) warrants; and
(iii) investment grade debt securities (or unrated securities of comparable
quality). The Value Fund may purchase securities on a "when-issued" or "delayed
delivery basis" in excess of customary settlement periods for the type of
security involved. The Fund may purchase securities which are restricted as to
disposition under the federal securities laws, provided that such securities are
eligible for resale to qualified institutional investors pursuant to Rule 144A
under the Securities Act of 1933 and subject to the Fund's policy that not more
than 15% of its net assets will be invested in illiquid securities. The Value
Fund reserves the right to invest its assets temporarily in cash and money
market instruments when, in the opinion of the Investment Manager, it is
advisable to do so on account of current or anticipated market conditions. The
Fund may utilize repurchase agreements on an overnight basis or bank demand
accounts, pending investment in securities or to meet potential redemptions or
expenses. See the discussion of when-issued securities, Rule 144A securities and
repurchase agreements under "Investment Methods and Risk Factors."
The annual portfolio turnover of the Value Fund will generally be less than
150%. Portfolio turnover is the percentage of the lower of security sales or
purchases to the average portfolio value and would be 100% if all securities in
the Fund were replaced within a period of one year. A 100% turnover rate is
substantially greater than that of most mutual funds.
SECURITY ULTRA FUND
The investment objective of Ultra Fund is to seek capital appreciation.
Investment securities will be selected on the basis of their appreciation
possibilities. Current income will not be a factor in selecting investments and
any such income should be considered incidental.
There can be no assurance that the investment objective of Ultra Fund will
be achieved. Nevertheless, Ultra Fund hopes, by careful selection of individual
securities and by supervision of the investment portfolio, to increase the value
of the Fund's shares.
Stocks considered to have growth potential will include securities of
newer, unseasoned companies and may involve greater risks than investments in
companies with demonstrated earning power. At times Ultra Fund may invest in
warrants to purchase (or securities convertible into) common stocks or in other
classes of securities which the Investment Manager believes will contribute to
the attainment of its investment objective. Securities other than common stock
may be held, but Ultra Fund will not normally invest in fixed income securities
except for defensive purposes or to employ uncommitted cash balances. Ultra Fund
expects that it may invest in certificates of deposit issued by banks or other
bank demand accounts, pending investment in other securities or to meet
potential redemptions or expenses. Ultra Fund will not concentrate its
investments in a particular industry or group of industries. As a matter of
operating policy, Ultra Fund may not invest in illiquid securities in excess of
15% of its net assets.
The Fund may enter into futures contracts to hedge all or a portion of its
portfolio, or as an efficient means of adjusting its exposure to the stock
market. The Fund will limit its use of futures contracts so that initial margin
deposits or premiums on such contracts used for non-hedging purposes will not
equal more than 5% of the Fund's net asset value. Futures contracts and the
risks associated with such instruments are described in further detail under
"Investment Methods and Risk Factors" below.
In seeking capital appreciation, Ultra Fund expects to trade to a
substantial degree in securities for the short term. That is, Ultra Fund will be
engaged essentially in trading operations based on short term market
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considerations, as distinct from long-term investments, based upon fundamental
evaluation of securities. Investments for long-term profits are made when such
action is considered to be sound and helpful to Ultra Fund's overall objective.
This investment policy is very speculative and involves substantial risk. An
investor should not consider a purchase of Ultra Fund's shares as equivalent to
a complete investment program. Ultra Fund does not presently purchase letter or
restricted stock.
Since Ultra Fund will trade securities for the short term, the annual
portfolio turnover rate generally may be expected to be greater than 100%.
Portfolio turnover is the percentage of the lower of security sales or purchases
to the average portfolio value and would be 100% if all securities in Ultra Fund
were replaced within a period of one year. A 100% turnover rate is substantially
greater than that of most mutual funds. The portfolio turnover rate of Class A
shares of Ultra Fund for the fiscal years ended September 30, 1996, 1995 and
1994 was as follows: 1996 - 161%, 1995 - 180% and 1994 - 111%. The portfolio
turnover rate of Class B shares of Ultra Fund for the fiscal years ended
September 30, 1996 and 1995 was 161% and 180%, respectively. The portfolio
turnover rate of Class B shares for the period October 19, 1993 to December 30,
1994 was 110%.
Short-term investments increase portfolio turnover and brokerage costs to
Ultra Fund and thus to its stockholders. Moreover, to the extent short-term
transactions result in the realization of net gains in securities held less than
one year, Ultra Fund's stockholders will be taxed on any such gains at ordinary
income tax rates.
Ultra Fund will not make short sales of securities unless at the time of
such sales it owns or has the right to acquire, as a result of the ownership of
convertible or exchangeable securities and without the payment of further
consideration, an equal amount of such securities, and it will retain such
securities so long as it is in a short position as to them. Should such
securities be sold short, the underlying security will be valued at the asked
price. Such short sales will be used by Ultra Fund only for the purpose of
deferring recognition of gain or loss for federal income tax purposes.
The foregoing investment objective and policies of Ultra Fund may be
altered by the Board of Directors without the approval of stockholders.
INVESTMENT METHODS AND RISK FACTORS
Some of the risk factors related to certain securities, instruments and
techniques that may be used by one or more of the Funds are described in the
"Investment Objectives and Policies" and "Investment Methods and Risk Factors"
sections of the applicable Prospectus and in this Statement of Additional
Information. The following is a description of certain additional risk factors
related to various securities, instruments and techniques. The risks so
described only apply to those Funds which may invest in such securities and
instruments or which use such techniques. Also included is a general description
of some of the investment instruments, techniques and methods which may be used
by one or more of the Funds. The methods described only apply to those Funds
which may use such methods. Although a Fund may employ the techniques,
instruments and methods described below, consistent with its investment
objective and policies and any applicable law, no Fund will be required to do
so.
SHARES OF OTHER INVESTMENT COMPANIES. The Fund may invest in shares of
other investment companies. The Fund's investment in shares of 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.
REPURCHASE AGREEMENTS. Each of the Funds may utilize repurchase agreements
on an overnight basis (or with maturities of up to seven days in the case of
Global Fund) wherein the Fund acquires a debt instrument for the short period,
subject to the obligation of the seller to repurchase and the Fund to resell
such debt instrument at a fixed price. The Funds will enter into repurchase
agreements only with (i) banks which are members of the Federal Reserve System,
or (ii) securities dealers (if permitted to do so under the Investment Company
Act of 1940) who are members of a national securities exchange or market makers
in government securities--in either case, only where the debt instrument subject
to the repurchase agreement is a U.S. Treasury or agency obligation. Such
repurchase agreements may subject the Funds to the risks that (i) they may not
be able to liquidate the securities immediately upon the insolvency of the other
party, or (ii) that amounts received in closing out a repurchase transaction
might be deemed voidable preferences upon the bankruptcy of the other party. In
the opinion of the Investment Manager, such risks are not material.
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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 Funds will enter into when issued and forward commitments only with the
intention of actually receiving or delivering the securities, as the case may
be; however, a 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 a 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 a 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.
AMERICAN DEPOSITARY RECEIPTS. Each of the Funds may purchase American
Depositary Receipts ("ADRs") which are dollar-denominated receipts issued
generally by U.S. banks and 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. Although the Funds intend to invest only in nations which are
considered to have relatively stable and friendly governments, there is the
possibility of expropriation, nationalization or confiscatory taxation, foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country), political or social instability or diplomatic
developments which could affect investment in securities of issuers in those
nations. In addition, in many countries there is less publicly available
information about issuers than is available in reports about companies in the
United States. Foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards, and auditing practices
and requirements may not be comparable to those applicable to U.S. companies. In
many foreign countries, there is less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the United States. Foreign investments may be subject to taxation
abroad. In addition, the foreign securities markets of many of the countries in
which the Funds may invest may also be smaller, less liquid, and subject to
greater price volatility than those in the United States.
RULE 144A SECURITIES. Certain of the Funds may invest in restricted
securities which are securities that are restricted as to disposition under the
federal securities laws, provided that such securities are eligible for resale
to qualified institutional investors pursuant to Rule 144A under the Securities
Act of 1933. Rule 144A permits the resale to "qualified institutional buyers" of
"restricted securities" that, when issued, were not of the same class as
securities listed on a U.S. securities exchange or quoted in the National
Association of Securities Dealers Automated Quotation System (the "Rule 144A
Securities"). A "qualified institutional buyer" is defined by Rule 144A
generally as an institution, acting for its own account or for the accounts of
other qualified institutional buyers, that in the aggregate owns and invests on
a discretionary basis at least $100 million in securities of issuers not
affiliated with the institution. A dealer registered under the Securities
Exchange Act of 1934 (the "Exchange Act"), acting for its own account or the
accounts of other qualified institutional buyers, that in the aggregate owns and
invests on a discretionary basis at least $10 million in securities of issuers
not affiliated with the dealer may also qualify as a qualified institutional
buyer, as well as an Exchange Act registered dealer acting in a riskless
principal transaction on behalf of a qualified institutional buyer.
The Funds' 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
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Rule 144A Securities could have the effect of increasing the amount of a Fund's
assets invested in illiquid securities to the extent that qualified
institutional buyers become uninterested, for a time, in purchasing these
securities.
REAL ESTATE INVESTMENT TRUSTS (REITs). Certain of the Funds may invest in
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.
ZERO COUPON SECURITIES. Certain of the Funds may invest in certain zero
coupon securities that are "stripped" U.S. Treasury notes and bonds. These Funds
also may invest in zero coupon and other deep discount securities issued by
foreign governments and domestic and foreign corporations, including certain
Brady Bonds and other foreign debt and payment-in-kind securities. Zero coupon
securities pay no interest to holders prior to maturity, and payment-in-kind
securities pay interest in the form of additional securities. However, a portion
of the original issue discount on zero coupon securities and the "interest" on
payment-in-kind securities will be included in the investing Fund's income.
Accordingly, for the Fund to qualify for tax treatment as a regulated investment
company and to avoid certain taxes (see "Taxes" in the Statement of Additional
Information), the Fund may be required to distribute an amount that is greater
than the total amount of cash it actually receives. These distributions must be
made from the Fund's cash assets or, if necessary, from the proceeds of sales of
portfolio securities. The Fund will not be able to purchase additional
income-producing securities with cash used to make such distributions and its
current income ultimately may be reduced as a result. Zero coupon and
payment-in-kind securities usually trade at a deep discount from their face or
par value and will be subject to greater fluctuations of market value in
response to changing interest rates than debt obligations of comparable
maturities that make current distributions of interest in cash.
FOREIGN INVESTMENT RISKS. Investment in foreign securities involves 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. Foreign securities markets, while growing in
volume, have for the most part substantially less volume than United States
securities markets and securities of foreign companies are generally less liquid
and at times their prices may be more volatile than prices of comparable United
States companies. Foreign stock exchanges, brokers and listed companies
generally are subject to less government supervision and regulation than in the
United States. The customary settlement time for foreign securities may be
longer than the customary settlement time for United States securities. A 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.
BRADY BONDS. Growth and Income Fund may invest in "Brady Bonds," which are
debt restructurings that provide for the exchange of cash and loans for newly
issued bonds. Brady Bonds are securities created through the exchange of
existing commercial bank loans to public and private entities in certain
emerging markets for new bonds in connection with debt restructuring under a
debt restructuring plan introduced by former U.S. Secretary of the Treasury,
Nicholas F. Brady. Brady Bonds recently have been issued by the governments of
Argentina, Brazil, Bulgaria, Costa Rica, Dominican Republic, Jordan, Mexico,
Nigeria, The Philippines, Uruguay, Venezuela,
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Ecuador and Poland, and are expected to be issued by other emerging market
countries. Approximately $150 billion in principal amount of Brady Bonds has
been issued to date, the largest proportion having been issued by Mexico and
Venezuela. Investors should recognize that Brady Bonds have been issued only
recently and, accordingly, do not have a long payment history. Brady Bonds may
be collateralized or uncollateralized, are issued in various currencies
(primarily the U.S. dollar) and are actively traded in the secondary market for
Latin American debt. The Salomon Brothers Brady Bond Index provides a benchmark
that can be used to compare returns of emerging market Brady Bonds with returns
in other bond markets, e.g., the U.S. bond market.
Growth and Income Fund may invest in collateralized Brady Bonds denominated
in U.S. dollars. U.S. dollar-denominated, collateralized Brady Bonds, which may
be fixed rate par bonds or floating rate discount bonds, are collateralized in
full as to principal by U.S. Treasury zero coupon bonds having the same maturity
as the bonds. Interest payments on such bonds generally are collateralized by
cash or securities in an amount that, in the case of fixed rate bonds, is equal
to at least one year of rolling interest payments or, in the case of floating
rate bonds, initially is equal to at least one year's rolling interest payments
based on the applicable interest rate at the time and is adjusted at regular
intervals thereafter.
EMERGING COUNTRIES. Growth and Income Fund may invest in debt securities in
emerging markets. Investing in securities in emerging countries may entail
greater risks than investing in debt securities in developed countries. These
risks include (i) less social, political and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict the
Fund's investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (iv) foreign taxation; and
(v) the absence of developed structures governing private or foreign investment
or allowing for judicial redress for injury to private property.
POLITIAL AND ECONOMIC RISKS. Investing in securities of non-U.S. companies
may entail additional risks due to the potential political and economic
instability of certain countries and the risks of expropriation,
nationalization, confiscation or the imposition of restrictions on foreign
investment and on repatriation of capital invested. In the event of such
expropriation, nationalization or other confiscation by any country, Growth and
Income Fund could lose its entire investment in any such country.
An investment in the Fund is subject to the political and economic risks
associated with investments in emerging markets. Even though opportunities for
investment may exist in emerging markets, any change in the leadership or
policies of the governments of those countries or in the leadership or policies
of any other government which exercises a significant influence over those
countries, may halt the expansion of or reverse the liberalization of foreign
investment policies now occurring and thereby eliminate any investment
opportunities which may currently exist.
Investors should note that upon the accession to power of authoritarian
regimes, the governments of a number of emerging market countries previously
expropriated large quantities of real and personal property similar to the
property which will be represented by the securities purchased by Growth and
Income Fund. The claims of property owners against those governments were never
finally settled. There can be no assurance that any property represented by
securities purchased by the Fund will not also be expropriated, nationalized, or
otherwise confiscated. If such confiscation were to occur, the Fund could lose a
substantial portion of its investments in such countries. The Fund's investments
would similarly be adversely affected by exchange control regulation in any of
those countries.
RELIGIOUS AND ETHNIC INSTABILITY. Certain countries in which Growth and
Income Fund may invest may have vocal minorities that advocate radical religious
or revolutionary philosophies or support ethnic independence. Any disturbance on
the part of such individuals could carry the potential for wide-spread
destruction or confiscation of property owned by individuals and entities
foreign to such country and could cause the loss of the Fund's investment in
those countries.
FOREIGN INVESTMENT RESTRICTIONS. Certain countries prohibit or impose
substantial restrictions on investments in their capital markets, particularly
their equity markets, by foreign entities such as Growth and Income Fund. As
illustrations, certain countries require governmental approval prior to
investments by foreign persons, or limit the amount of investment by foreign
persons in a particular company, or limit the investments by foreign persons to
only a specific class of securities of a company that may have less advantageous
terms than securities of the company available for purchase by nationals.
Moreover, the national policies of certain countries
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may restrict investment opportunities in issuers or industries deemed sensitive
to national interests. In addition, some countries require governmental approval
for the repatriation of investment income, capital or the proceeds of securities
sales by foreign investors. The Fund could be adversely affected by delays in,
or a refusal to grant, any required governmental approval for repatriation, as
well as by the application to it of other restrictions on investments.
NON-UNIFORM CORPORATE DISCLOSURE STANDARDS AND GOVERNMENTAL REGULATION.
Foreign companies are subject to accounting, auditing and financial standards
and requirements that differ, in some cases significantly, from those applicable
to U.S. companies. In particular, the assets, liabilities and profits appearing
on the financial statements of such a company may not reflect its financial
position or results of operations in the way they would be reflected had such
financial statements been prepared in accordance with U.S. generally accepted
accounting principles. Such securities held by Growth and Income Fund will not
be registered with the SEC or regulators of any foreign country, nor will the
issuers thereof be subject to the SEC's reporting requirements. Thus, there will
be less available information concerning foreign issuers of such securities held
by the Fund than is available concerning U.S. issuers. In instances where the
financial statements of an issuer are not deemed to reflect accurately the
financial situation of the issuer, the Investment Manager will take appropriate
steps to evaluate the proposed investment, which may include interviews with its
management and consultations with accountants, bankers and other specialists.
There is substantially less publicly available information about foreign
companies than there are reports and ratings published about U.S. companies and
the U.S. Government. In addition, where public information is available, it may
be less reliable than such information regarding U.S. issuers.
ADVERSE MARKET CHARACTERISTICS. Securities of many foreign issuers may be
less liquid and their prices more volatile than securities of comparable U.S.
issuers. In addition, foreign securities exchanges and brokers generally are
subject to less governmental supervision and regulation than in the U.S., and
foreign securities exchange transactions usually are subject to fixed
commissions, which generally are higher than negotiated commissions on U.S.
transactions. In addition, foreign securities exchange transactions may be
subject to difficulties associated with the settlement of such transactions.
Delays in settlement could result in temporary periods when assets of Growth and
Income Fund are uninvested and no return is earned thereon. The inability of the
Fund to make intended security purchases due to settlement problems could cause
it to miss attractive opportunities. Inability to dispose of a portfolio
security due to settlement problems either could result in losses to the Fund
due to subsequent declines in value of the portfolio security or, if the Fund
has entered into a contract to sell the security, could result in possible
liability to the purchaser. The Investment Manager will consider such
difficulties when determining the allocation of the Fund's assets.
NON-U.S. WITHHOLDING TAXES. The Fund's investment income and gains from
foreign issuers may be subject to non-U.S. withholding and other taxes, thereby
reducing Growth and Income Fund's investment income and gains.
PUT AND CALL OPTIONS:
WRITING (SELLING) COVERED CALL OPTIONS. A call option gives the holder
(buyer) the "right to purchase" a security or currency at a specified price (the
exercise price) at any time until a certain date (the expiration date). So long
as the obligation of the writer of a call option continues, he may be assigned
an exercise notice by the broker-dealer through whom such option was sold,
requiring him to deliver the underlying security or currency against payment of
the exercise price. This obligation terminates upon the expiration of the call
option, or such earlier time at which the writer effects a closing purchase
transaction by repurchasing an option identical to that previously sold.
Certain Funds may write (sell) "covered" call options and purchase options
to close out options previously written by the Fund. In writing covered call
options, the Fund expects to generate additional premium income which should
serve to enhance the Fund's total return and reduce the effect of any price
decline of the security or currency involved in the option. Covered call options
will generally be written on securities or currencies which, in the opinion of
the Investment Manager or relevant Sub-Adviser, are not expected to have any
major price increases or moves in the near future but which, over the long term,
are deemed to be attractive investments for the Fund.
The Fund will 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
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the term of the option, an account consisting of cash or liquid securities
having a value equal to the fluctuating market value of the optioned securities
or currencies. In order to comply with the requirements of several states, the
Fund will not write a covered call option if, as a result, the aggregate market
value of all Fund securities or currencies covering call or put options exceeds
25% of the market value of the Fund's net assets. Should these state laws change
or should the Fund obtain a waiver of their application, the Fund reserves the
right to increase this percentage. In calculating the 25% limit, the Fund will
offset, against the value of assets covering written calls and puts, the value
of purchased calls and puts on identical securities or currencies with identical
maturity dates.
Fund securities or currencies on which call options may be written will be
purchased solely on the basis of investment considerations consistent with the
Fund's investment objectives. The writing of covered call options is a
conservative investment technique believed to involve relatively little risk (in
contrast to the writing of naked or uncovered options, which the Fund will not
do), but capable of enhancing the Fund's total return. When writing a covered
call option, the Fund, in return for the premium, gives up the opportunity for
profit from a price increase in the underlying security or currency above the
exercise price, but conversely, retains the risk of loss should the price of the
security or currency decline. Unlike one who owns securities or currencies not
subject to an option, the Fund has no control over when it may be required to
sell the underlying securities or currencies, since it may be assigned an
exercise notice at any time prior to the expiration of its obligations as a
writer. If a call option which the Fund has written expires, the Fund will
realize a gain in the amount of the premium; however, such gain may be offset by
a decline in the market value of the underlying security or currency during the
option period. If the call option is exercised, the Fund will realize a gain or
loss from the sale of the underlying security or currency.
Call options written by the Fund will normally have expiration dates of
less than nine months from the date written. The exercise price of the options
may be below, equal to, or above the current market values of the underlying
securities or currencies at the time the options are written. From time to time,
the Fund may purchase an underlying security or currency for delivery in
accordance with an exercise notice of a call option assigned to it, rather than
delivering such security or currency from its portfolio. In such cases,
additional costs may be incurred.
The premium received is the market value of an option. The premium the Fund
will receive from writing a call option will reflect, among other things, the
current market price of the underlying security or currency, the relationship of
the exercise price to such market price, the historical price volatility of the
underlying security or currency, and the length of the option period. Once the
decision to write a call option has been made, the Investment Manager or
relevant Sub-Adviser, in determining whether a particular call option should be
written on a particular security or currency, will consider the reasonableness
of the anticipated premium and the likelihood that a liquid secondary market
will exist for those options. The premium received by the Fund for writing
covered call options will be recorded as a liability of the Fund. This liability
will be adjusted daily to the option's current market value, which will be the
latest sale price at the time at which the net asset value per share of the Fund
is computed (close of the New York Stock Exchange), or, in the absence of such
sale, the latest asked price. The option will be terminated upon expiration of
the option, the purchase of an identical option in a closing transaction, or
delivery of the underlying security or currency upon the exercise of the option.
The Fund will realize a profit or loss from a closing purchase transaction
if the cost of the transaction is less or more than the premium received from
the writing of the option. Because increases in the market price of a call
option will generally reflect increases in the market price of the underlying
security or currency, any loss resulting from the repurchase of a call option is
likely to be offset in whole or in part by appreciation of the underlying
security or currency owned by the Fund.
WRITING (SELLING) COVERED PUT PPTIONS. A put option gives the purchaser of
the option the right to sell, and the writer (seller) has the obligation to buy,
the underlying security or currency at the exercise price during the option
period (American style) or at the expiration of the option (European style). So
long as the obligation of the writer continues, he may be assigned an exercise
notice by the broker-dealer through whom such option was sold, requiring him to
make payment of the exercise price against delivery of the underlying security
or currency. The operation of put options in other respects, including their
related risks and rewards, is substantially identical to that of call options.
Certain Funds may write American or European style covered put options and
purchase options to close out options previously written by the Fund.
Certain Funds may write put options on a covered basis, which means that
the Fund would either (i) maintain in a segregated account cash or liquid
securities in an amount not less than the exercise price at all times while the
put option is outstanding; (ii) sell short the security or currency underlying
the put option at the same or higher
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price than the exercise price of the put option; or (iii) purchase an option to
sell the underlying security or currency subject to the option having an
exercise price equal to or greater than the exercise price of the "covered"
option at all times while the put option is outstanding.(The rules of a clearing
corporation currently require that such assets be deposited in escrow to secure
payment of the exercise price.) The Fund would generally write covered put
options in circumstances where the Investment Manager wishes to purchase the
underlying security or currency for the Fund's portfolio at a price lower than
the current market price of the security or currency. In such event the Fund
would write a put option at an exercise price which, reduced by the premium
received on the option, reflects the lower price it is willing to pay. Since
the Fund would also receive interest on debt securities or currencies maintained
to cover the exercise price of the option, this technique could be used to
enhance current return during periods of market uncertainty. The risk in such a
transaction would be that the market price of the underlying security or
currency would decline below the exercise price less the premiums received. Such
a decline could be substantial and result in a significant loss to the Fund. In
addition, the Fund, because it does not own the specific securities or
currencies which it may be required to purchase in the exercise of the put,
cannot benefit from appreciation, if any, with respect to such specific
securities or currencies. In order to comply with the requirements of several
states, the Fund will not write a covered put option if, as a result, the
aggregate market value of all portfolio securities or currencies covering put or
call options exceeds 25% of the market value of the Fund's net assets. Should
these state laws change or should the Fund obtain a waiver of their application,
the Fund reserves the right to increase this percentage. In calculating the 25%
limit, the Fund will offset against the value of assets covering written puts
and calls, the value of purchased puts and calls on identical securities or
currencies.
PREMIUM RECIEVED FROM WRITING CALL OR PUT OPTIONS. A Fund will receive a
premium from writing a put or call option, which increases such Fund's return in
the event the option expires unexercised or is closed out at a profit. The
amount of the premium will reflect, among other things, the relationship of the
market price of the underlying security to the exercise price of the option, the
term of the option and the volatility of the market price of the underlying
security. By writing a call option, a Fund limits its opportunity to profit from
any increase in the market value of the underlying security above the exercise
price of the option. By writing a put option, a Fund assumes the risk that it
may be required to purchase the underlying security for an exercise price higher
than its then current market value, resulting in a potential capital loss if the
purchase price exceeds the market value plus the amount of the premium received,
unless the security subsequently appreciates in value.
CLOSING TRANSACTIONS. Closing transactions may be effected in order to
realize a profit on an outstanding call option, to prevent an underlying
security or currency from being called, or, to permit the sale of the underlying
security or currency. A Fund may terminate an option that it has written prior
to its expiration by entering into a closing purchase transaction in which it
purchases an option having the same terms as the option written. A Fund will
realize a profit or loss from such transaction if the cost of such transaction
is less or more than the premium received from the writing of the option.
Because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from the purchase of a call option is likely to be offset in whole or in part by
unrealized appreciation of the underlying security owned by such Fund.
Furthermore, effecting a closing transaction will permit the Fund to write
another call option on the underlying security or currency with either a
different exercise price or expiration date or both. If the Fund desires to sell
a particular security or currency from its portfolio on which it has written a
call option, it will seek to effect a closing transaction prior to, or
concurrently with, the sale of the security or currency. There is, of course, no
assurance that the Fund will be able to effect such closing transactions at a
favorable price. If the Fund cannot enter into such a transaction, it may be
required to hold a security or currency that it might otherwise have sold. When
the Fund writes a covered call option, it runs the risk of not being able to
participate in the appreciation of the underlying securities or currencies above
the exercise price, as well as the risk of being required to hold on to
securities or currencies that are depreciating in value. This could result in
higher transaction costs. The Fund will pay transaction costs in connection with
the writing of options to close out previously written options. Such transaction
costs are normally higher than those applicable to purchases and sales of
portfolio securities.
PURCHASE CALL OPTIONS. Certain Funds may purchase American or European
call options. The Fund may enter into closing sale transactions with respect to
such options, exercise them or permit them to expire. The Fund may purchase call
options for the purpose of increasing its current return.
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Call options may also be purchased by a Fund for the purpose of acquiring
the underlying securities or currencies for its portfolio. Utilized in this
fashion, the purchase of call options enables the Fund to acquire the securities
or currencies at the exercise price of the call option plus the premium paid. At
times the net cost of acquiring securities or currencies in this manner may be
less than the cost of acquiring the securities or currencies directly. This
technique may also be useful to a Fund in purchasing a large block of securities
or currencies that would be more difficult to acquire by direct market
purchases. So long as it holds such a call option rather than the underlying
security or currency itself, the Fund is partially protected from any unexpected
decline in the market price of the underlying security or currency and in such
event could allow the call option to expire, incurring a loss only to the extent
of the premium paid for the option.
To the extent required by the laws of certain states, the Fund may not be
permitted to commit more than 5% of its assets to premiums when purchasing call
and put options. Should these state laws change or should the Fund obtain a
waiver of their application, the Fund may commit more than 5% of its assets to
premiums when purchasing call and put options. The Fund may also purchase call
options on underlying securities or currencies it owns in order to protect
unrealized gains on call options previously written by it. Call options may also
be purchased at times to avoid realizing losses. For example, where the Fund has
written a call option on an underlying security or currency having a current
market value below the price at which such security or currency was purchased by
the Fund, an increase in the market price could result in the exercise of the
call option written by the Fund and the realization of a loss on the underlying
security or currency with the same exercise price and expiration date as the
option previously written.
PURCHASING PUT OPTIONS. Certain Funds may purchase put options. The Fund
may enter into closing sale transactions with respect to such options, exercise
them or permit them to expire. A Fund may purchase a put option on an underlying
security or currency (a "protective put") owned by the Fund as a defensive
technique in order to protect against an anticipated decline in the value of the
security or currency. Such hedge protection is provided only during the life of
the put option when the Fund, as the holder of the put option, is able to sell
the underlying security or currency at the put exercise price regardless of any
decline in the underlying security's market price or currency's exchange value.
The premium paid for the put option and any transaction costs would reduce any
capital gain otherwise available for distribution when the security or currency
is eventually sold.
A Fund may purchase put options at a time when the Fund does not own the
underlying security or currency. By purchasing put options on a security or
currency it does not own, the Fund seeks to benefit from a decline in the market
price of the underlying security or currency. If the put option is not sold when
it has remaining value, and if the market price of the underlying security or
currency remains equal to or greater than the exercise price during the life of
the put option, the Fund will lose its entire investment in the put option. In
order for the purchase of a put option to be profitable, the market price of the
underlying security or currency must decline sufficiently below the exercise
price to cover the premium and transaction costs, unless the put option is sold
in a closing sale transaction.
DEALER OPTIONS. Certain Funds may engage in transactions involving dealer
options. Certain risks are specific to dealer options. While the Fund would look
to a clearing corporation to exercise exchange-traded options, if the Fund were
to purchase a dealer option, it would rely on the dealer from whom it purchased
the option to perform if the option were exercised. Exchange-traded options
generally have a continuous liquid market while dealer options have none.
Consequently, the Fund will generally be able to realize the value of a dealer
option it has purchased only by exercising it or reselling it to the dealer who
issued it. Similarly, when the Fund writes a dealer option, it generally will be
able to close out the option prior to its expiration only by entering into a
closing purchase transaction with the dealer to which the Fund originally wrote
the option. While the Fund will seek to enter into dealer options only with
dealers who will agree to and which are expected to be capable of entering into
closing transactions with the Fund, there can be no assurance that the Fund will
be able to liquidate a dealer option at a favorable price at any time prior to
expiration. Failure by the dealer to do so would result in the loss of the
premium paid by the Fund as well as loss of the expected benefit of the
transaction. Until the Fund, as a covered dealer call option writer, is able to
effect a closing purchase transaction, it will not be able to liquidate
securities (or other assets) used as cover until the option expires or is
exercised. In the event of insolvency of the contra party, the Fund may be
unable to liquidate a dealer option. With respect to options written by the
Fund, the inability to enter into a closing transaction may result in material
losses to the Fund. For example, since the Fund must maintain a secured position
with respect to any call option on a security it writes, the Fund may not sell
the
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assets which it has segregated to secure the position while it is obligated
under the option. This requirement may impair the Fund's ability to sell
portfolio securities at a time when such sale might be advantageous.
The Staff of the SEC has taken the position that purchased dealer options
and the assets used to secure the written dealer options are illiquid
securities. The Fund may treat the cover used for written OTC options as liquid
if the dealer agrees that the Fund may repurchase the OTC option it has written
for a maximum price to be calculated by a predetermined formula. In such cases,
the OTC option would be considered illiquid only to the extent the maximum
repurchase price under the formula exceeds the intrinsic value of the option. To
this extent, the Fund will treat dealer options as subject to the Fund's
limitation on illiquid securities. If the SEC changes its position on the
liquidity of dealer options, the Fund will change its treatment of such
instrument accordingly.
CERTAIN RISK FACTORS IN WRITING CALL OPTIONS AND IN PURCHASING CALL AND PUT
OPTIONS: During the option period, a Fund, as writer of a call option has, in
return for the premium received on the option, given up the opportunity for
capital appreciation above the exercise price should the market price of the
underlying security increase, but has retained the risk of loss should the price
of the underlying security decline. The writer has no control over the time when
it may be required to fulfill its obligation as a writer of the option. The risk
of purchasing a call or put option is that the Fund may lose the premium it paid
plus transaction costs. If the Fund does not exercise the option and is unable
to close out the position prior to expiration of the option, it will lose its
entire investment.
An option position may be closed out only on an exchange which provides a
secondary market. There can be no assurance that a liquid secondary market will
exist for a particular option at a particular time and that the Fund, can close
out its position by effecting a closing transaction. If the Fund is unable to
effect a closing purchase transaction, it cannot sell the underlying security
until the option expires or the option is exercised. Accordingly, the Fund may
not be able to sell the underlying security at a time when it might otherwise be
advantageous to do so. Possible reasons for the absence of a liquid secondary
market include the following: (i) insufficient trading interest in certain
options; (ii) restrictions on transactions imposed by an exchange; (iii) trading
halts, suspensions or other restrictions imposed with respect to particular
classes or series of options or underlying securities; (iv) inadequacy of the
facilities of an exchange or the clearing corporation to handle trading volume;
and (v) a decision by one or more exchanges to discontinue the trading of
options or impose restrictions on orders. In addition, the hours of trading for
options may not conform to the hours during which the underlying securities are
traded. To the extent that the options markets close before the markets for the
underlying securities, significant price and rate movements can take place in
the underlying markets that cannot be reflected in the options markets. The
purchase of options is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary Fund
securities transactions.
Each exchange has established limitations governing the maximum number of
call options, whether or not covered, which may be written by a single investor
acting alone or in concert with others (regardless of whether such options are
written on the same or different exchanges or are held or written on one or more
accounts or through one or more brokers). An exchange may order the liquidation
of positions found to be in violation of these limits and it may impose other
sanctions or restrictions.
OPTIONS ON STOCK INCIDES. Options on stock indices are similar to options
on specific securities except that, rather than the right to take or make
delivery of the specific security at a specific price, an option on a stock
index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of that stock index is greater than, in the
case of a call, or less than, in the case of a put, the exercise price of the
option. This amount of cash is equal to such difference between the closing
price of the index and the exercise price of the option expressed in dollars
multiplied by a specified multiple. The writer of the option is obligated, in
return for the premium received, to make delivery of this amount. Unlike options
on specific securities, all settlements of options on stock indices are in cash
and gain or loss depends on general movements in the stocks included in the
index rather than price movements in particular stocks. A stock index futures
contract is an agreement in which one party agrees to deliver to the other an
amount of cash equal to a specific amount multiplied by the difference between
the value of a specific stock index at the close of the last trading day of the
contract and the price at which the agreement is made.
No physical delivery of securities is made.
RISK FACTORS IN OPTIONS ON INCICES. Because the value of an index option
depends upon the movements in the level of the index rather than upon movements
in the price of a particular security, whether the Fund will realize a gain or a
loss on the purchase or sale of an option on an index depends upon the movements
in the level of
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prices in the market generally or in an industry or market segment rather
than upon movements in the price of the individual security. Accordingly,
successful use of positions will depend upon the ability of the Investment
Manager or relevant Sub-Adviser to predict correctly movements in the direction
of the market generally or in the direction of a particular industry. This
requires different skills and techniques than predicting changes in the prices
of individual securities.
Index prices may be distorted if trading of securities included in the
index is interrupted. Trading in index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number of
securities in the index. If this occurred, a Fund would not be able to close out
options which it had written or purchased and, if restrictions on exercise were
imposed, might be unable to exercise an option it purchased, which would result
in substantial losses.
Price movements in Fund securities will not correlate perfectly with
movements in the level of the index and therefore, a Fund bears the risk that
the price of the securities may not increase as much as the level of the index.
In this event, the Fund would bear a loss on the call which would not be
completely offset by movements in the prices of the securities. It is also
possible that the index may rise when the value of the Fund's securities does
not. If this occurred, a Fund would experience a loss on the call which would
not be offset by an increase in the value of its securities and might also
experience a loss in the market value of its securities.
Unless a Fund has other liquid assets which are sufficient to satisfy the
exercise of a call on the index, the Fund will be required to liquidate
securities in order to satisfy the exercise.
When a Fund has written a call on an index, there is also the risk that the
market may decline between the time the Fund has the call exercised against it,
at a price which is fixed as of the closing level of the index on the date of
exercise, and the time the Fund is able to sell securities. As with options on
securities, the Investment Manager or relevant Sub-Adviser will not learn that a
call has been exercised until the day following the exercise date, but, unlike a
call on securities where the Fund would be able to deliver the underlying
security in settlement, the Fund may have to sell part of its securities in
order to make settlement in cash, and the price of such securities might decline
before they could be sold.
If a Fund exercises a put option on an index which it has purchased before
final determination of the closing index value for the day, it runs the risk
that the level of the underlying index may change before closing. If this change
causes the exercised option to fall "out-of-the-money" the Fund will be required
to pay the difference between the closing index value and the exercise price of
the option (multiplied by the applicable multiplier) to the assigned writer.
Although the Fund may be able to minimize this risk by withholding exercise
instructions until just before the daily cutoff time or by selling rather than
exercising an option when the index level is close to the exercise price, it may
not be possible to eliminate this risk entirely because the cutoff time for
index options may be earlier than those fixed for other types of options and may
occur before definitive closing index values are announced.
TRADING IN FUTURES. Certain Funds may enter into futures contracts,
including stock index, interest rate and currency futures ("futures" or "futures
contracts"). A futures contract provides for the future sale by one party and
purchase by another party of a specific financial instrument (e.g., units of a
stock index) for a specified price, date, time and place designated at the time
the contract is made. Brokerage fees are incurred when a futures contract is
bought or sold and margin deposits must be maintained. Entering into a contract
to buy is commonly referred to as buying or purchasing a contract or holding a
long position. Entering into a contract to sell is commonly referred to as
selling a contract or holding a short position.
An example of a stock index futures contract follows. The Standard & Poor's
500 Stock Index ("S&P 500 Index") is composed of 500 selected common stocks,
most of which are listed on the New York Stock Exchange. The S&P 500 Index
assigns relative weightings to the common stocks included in the Index, and the
Index fluctuates with changes in the market values of those common stocks. In
the case of the S&P 500 Index, contracts are to buy or sell 500 units. Thus, if
the value of the S&P 500 Index were $150, one contract would be worth $75,000
(500 units x $150). The stock index futures contract specifies that no delivery
of the actual stock making up the index will take place. Instead, settlement in
cash occurs. Over the life of the contract, the gain or loss realized by the
Fund will equal the difference between the purchase (or sale) price of the
contract and the price at which the contract is terminated. For example, if the
Fund enters into a futures contract to buy 500 units of the S&P 500 Index at a
specified future date at a contract price of $150 and the S&P 500 Index is at
$154 on that future date, the Fund will gain $2,000 (500 units x gain of $4). If
the Fund enters into a futures contract to sell
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<PAGE>
500 units of the stock index at a specified future date at a contract price of
$150 and the S&P 500 Index is at $152 on that future date, the Fund will lose
$1,000 (500 units x loss of $2).
Unlike when the Fund purchases or sells a security, no price would be paid
or received by the Fund upon the purchase or sale of a futures contract. Upon
entering into a futures contract, and to maintain the Fund's open positions in
futures contracts, the Fund would be required to deposit with its custodian in a
segregated account in the name of the futures broker an amount of cash or liquid
securities known as "initial margin." The margin required for a particular
futures contract is set by the exchange on which the contract is traded, and may
be significantly modified from time to time by the exchange during the term of
the contract. Futures contracts are customarily purchased and sold on margins
that may range upward from less than 5% of the value of the contract being
traded.
Margin is the amount of funds that must be deposited by the Fund with its
custodian in a segregated account in the name of the futures commission merchant
in order to initiate futures trading and to maintain the Fund's open position in
futures contracts. A margin deposit is intended to ensure the Fund's performance
of the futures contract. The margin required for a particular futures contract
is set by the exchange on which the futures contract is traded, and may be
significantly modified from time to time by the exchange during the term of the
futures contract.
If the price of an open futures contract changes (by increase in the case
of a sale or by decrease in the case of a purchase) so that the loss on the
futures contract reaches a point at which the margin on deposit does not satisfy
margin requirements, the broker will require an increase in the margin. However,
if the value of a position increases because of favorable price changes in the
futures contract so that the margin deposit exceeds the required margin, the
broker will pay the excess to the Fund.
These subsequent payments, called "variation margin," to and from the
futures broker, are made on a daily basis as the price of the underlying assets
fluctuate making the long and short positions in the futures contract more or
less valuable, a process known as "marking to the market." The Fund expects to
earn interest income on its margin deposits.
Although certain futures contracts, by their terms, require actual future
delivery of and payment for the underlying instruments, in practice most futures
contracts are usually closed out before the delivery date. Closing out an open
futures contract sale or purchase is effected by entering into an offsetting
futures contract purchase or sale, respectively, for the same aggregate amount
of the identical securities and the same delivery date. If the offsetting
purchase price is less than the original sale price, the Fund realizes a gain;
if it is more, the Fund realizes a loss. Conversely, if the offsetting sale
price is more than the original purchase price, the Fund realizes a gain; if it
is less, the Fund realizes a loss. The transaction costs must also be included
in these calculations. There can be no assurance, however, that the Fund will be
able to enter into an offsetting transaction with respect to a particular
futures contract at a particular time. If the Fund is not able to enter into an
offsetting transaction, the Fund will continue to be required to maintain the
margin deposits on the futures contract.
Options on futures are similar to options on underlying instruments except
that options on futures give the purchaser the right, in return for the premium
paid, to assume a position in a futures contract (a long position if the option
is a call and a short position if the option is a put), rather than to purchase
or sell the futures contract, at a specified exercise price at any time during
the period of the option. Upon exercise of the option, the delivery of the
futures position by the writer of the option to the holder of the option will be
accompanied by the delivery of the accumulated balance in the writer's futures
margin account which represents the amount by which the market price of the
futures contract, at exercise, exceeds (in the case of a call) or is less than
(in the case of a put) the exercise price of the option on the futures contract.
Alternatively, settlement may be made totally in cash. Purchasers of options who
fail to exercise their options prior to the exercise date suffer a loss of the
premium paid.
The writer of an option on a futures contract is required to deposit margin
pursuant to requirements similar to those applicable to futures contracts. Upon
exercise of an option on a futures contract, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's margin
account. This amount will be equal to the amount by which the market price of
the futures contract at the time of exercise exceeds, in the case of a call, or
is less than, in the case of a put, the exercise price of the option on the
futures contract.
Commissions on financial futures contracts and related options transactions
may be higher than those which would apply to purchases and sales of securities
directly. From time to time, a single order to purchase or sell
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<PAGE>
futures contracts (or options thereon) may be made on behalf of the Fund and
other mutual funds or series of mutual funds for which the Investment Manager or
relevant Sub-Adviser serves as adviser or sub-adviser, respectively. Such
aggregated orders would be allocated among the Fund and such other mutual funds
or series of mutual funds in a fair and non-discriminatory manner.
A public market exists in interest rate futures contracts covering
primarily the following financial instruments: U.S. Treasury bonds; U.S.
Treasury notes; Government National Mortgage Association ("GNMA") modified
pass-through mortgage-backed securities; three-month U.S. Treasury bills; 90-day
commercial paper; bank certificates of deposit; and Eurodollar certificates of
deposit. It is expected that futures contracts trading in additional financial
instruments will be authorized. The standard contract size is generally $100,000
for futures contracts in U.S. Treasury bonds, U.S. Treasury notes, and GNMA
pass-through securities and $1,000,000 for the other designated futures
contracts. A public market exists in futures contracts covering a number of
indexes, including, but not limited to, the Standard & Poor's 500 Index, the
Standard & Poor's 100 Index, the NASDAQ 100 Index, the Value Line Composite
Index and the New York Stock Exchange Composite Index.
Stock index futures contracts may be used to provide a hedge for a portion
of the Fund's portfolio, as a cash management tool, or as an efficient way for
the Investment Manager or relevant Sub-Adviser to implement either an increase
or decrease in portfolio market exposure in response to changing market
conditions. Stock index futures contacts are currently traded with respect to
the S&P 500 Index and other broad stock market indices, such as the New York
Stock Exchange Composite Stock Index and the Value Line Composite Stock Index.
The Fund may, however, purchase or sell futures contracts with respect to any
stock index. Nevertheless, to hedge the Fund's portfolio successfully, the Fund
must sell futures contracts with respect to indexes or subindexes whose
movements will have a significant correlation with movements in the prices of
the Fund's securities.
Interest rate or currency futures contracts may be used as a hedge against
changes in prevailing levels of interest rates or currency exchange rates in
order to establish more definitely the effective return on securities or
currencies held or intended to be acquired by the Fund. In this regard, the Fund
could sell interest rate or currency futures as an offset against the effect of
expected increases in interest rates or currency exchange rates and purchase
such futures as an offset against the effect of expected declines in interest
rates or currency exchange rates.
The Fund may enter into futures contracts which are traded on national or
foreign futures exchanges and are standardized as to maturity date and
underlying financial instrument. The principal financial futures exchanges in
the United States are the Board of Trade of the City of Chicago, the Chicago
Mercantile Exchange, the New York Futures Exchange, and the Kansas City Board of
Trade. Futures exchanges and trading in the United States are regulated under
the Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC").
Futures are traded in London at the London International Financial Futures
Exchange, in Paris at the MATIF and in Tokyo at the Tokyo Stock Exchange.
Although techniques other than the sale and purchase of futures contracts could
be used for the above-referenced purposes, futures contracts offer an effective
and relatively low cost means of implementing the Fund's objectives in these
areas.
CERTAIN RISKS RELATING TO FUTURES CONTRACTS AND RELATED TOPICS. There are
special risks involved in futures transactions.
SPECIAL RISKS OF TRANSACTIONS IN FUTURES CONTRACTS
VOLATILITY AND LEVERAGE. The prices of futures contracts are volatile and
are influenced, among other things, by actual and anticipated changes in the
market and interest rates, which in turn are affected by fiscal and monetary
policies and national and international policies and economic events.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses.
Because of the low margin deposits required, futures trading involves an
extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss or
21
<PAGE>
gain, to the investor. For example, if at the time of purchase, 10% of the value
of the futures contract is deposited as margin, a subsequent 10% decrease in the
value of the futures contract would result in a total loss of the margin
deposit, before any deduction for the transaction costs, if the account were
then closed out. A 15% decrease would result in a loss equal to 150% of the
original margin deposit, if the contract were closed out. Thus, a purchase or
sale of a futures contract may result in losses in excess of the amount invested
in the futures contract. However, the Fund would presumably have sustained
comparable losses if, instead of the futures contract, it had invested in the
underlying financial instrument and sold it after the decline. Furthermore, in
the case of a futures contract purchase, in order to be certain that the Fund
has sufficient assets to satisfy its obligations under a futures contract, the
Fund earmarks to the futures contract cash or liquid securities equal in value
to the current value of the underlying instrument less the margin deposit.
LIQUIDITY. The Fund may elect to close some or all of its futures positions
at any time prior to their expiration. The Fund would do so to reduce exposure
represented by long futures positions or increase exposure represented by short
futures positions. The Fund may close its positions by taking opposite positions
which would operate to terminate the Fund's position in the futures contracts.
Final determinations of variation margin would then be made, additional cash
would be required to be paid by or released to the Fund, and the Fund would
realize a loss or a gain.
Futures contracts may be closed out ONLY on the exchange or board of trade
where the contracts were initially traded. For example, stock index futures
contracts can currently be purchased or sold with respect to the S&P 500 Index
on the Chicago Mercantile Exchange, the New York Stock Exchange Composite Stock
Index on the New York Futures Exchange and the Value Line Composite Stock Index
on the Kansas City Board of Trade. Although the Fund intends to purchase or sell
futures contracts only on exchanges or boards of trade where there appears to be
an active market, there is no assurance that a liquid market on an exchange or
board of trade will exist for any particular contract at any particular time. In
such event, it might not be possible to close a futures contract, and in the
event of adverse price movements, the Fund would continue to be required to make
daily cash payments of variation margin. However, in the event futures contracts
have been used to hedge portfolio securities, the Fund would continue to hold
securities subject to the hedge until the futures contracts could be terminated.
In such circumstances, an increase in the price of the securities, if any, might
partially or completely offset losses on the futures contract. However, as
described below, there is no guarantee that the price of the securities will, in
fact, correlate with the price movements in the futures contract and thus
provide an offset to losses on a futures contract.
HEDGING RISK. A decision of whether, when, and how to hedge involves skill
and judgment, and even a well-conceived hedge may be unsuccessful to some degree
because of unexpected market behavior or market trends. There are several risks
in connection with the use by the Fund of futures contracts as a hedging device.
One risk arises because of the imperfect correlation between movements in the
prices of the futures and movements in the prices of the underlying instruments
which are the subject of the hedge. The Investment Manager or relevant
Sub-Adviser will, however, attempt to reduce this risk by entering into futures
contracts whose movements, in its judgment, will have a significant correlation
with movements in the prices of the Fund's underlying instruments sought to be
hedged.
Successful use of futures contracts by the Fund for hedging purposes is
also subject to the Investment Manager's or relevant Sub-Adviser's ability to
correctly predict movements in the direction of the market. It is possible that,
when the Fund has sold futures to hedge its portfolio against a decline in the
market, the index, indices, or instruments underlying futures might advance and
the value of the underlying instruments held in the Fund's portfolio might
decline. If this were to occur, the Fund would lose money on the futures and
also would experience a decline in value in its underlying instruments. However,
while this might occur to a certain degree, the Investment Manager believes that
over time the value of the Fund's portfolio will tend to move in the same
direction as the market indices used to hedge the portfolio. It is also possible
that if the Fund were to hedge against the possibility of a decline in the
market (adversely affecting the underlying instruments held in its portfolio)
and prices instead increased, the Fund would lose part or all of the benefit of
increased value of those underlying instruments that it had hedged, because it
would have offsetting losses in its futures positions. In addition, in such
situations, if the Fund had insufficient cash, it might have to sell underlying
instruments to meet daily variation margin requirements. Such sales of
underlying instruments might be, but would not necessarily be, at increased
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<PAGE>
prices (which would reflect the rising market). The Fund might have to sell
underlying instruments at a time when it would be disadvantageous to do so.
In addition to the possibility that there might be an imperfect
correlation, or no correlation at all, between price movements in the futures
contracts and the portion of the portfolio being hedged, the price movements of
futures contracts might not correlate perfectly with price movements in the
underlying instruments due to certain market distortions. First, all
participants in the futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit requirements,
investors might close future contracts through offsetting transactions which
could distort the normal relationship between the underlying instruments and
futures markets. Second, the margin requirements in the futures market are less
onerous than margin requirements in the securities markets, and as a result the
futures market might attract more speculators than the securities markets do.
Increased participation by speculators in the futures market might also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market and also because of the imperfect correlation between movements
in the underlying instruments and movements in the prices of futures contracts,
even a correct forecast of general market trends by the Investment Manager or
relevant Sub-Adviser might not result in a successful hedging transaction over a
very short time period.
CERTAIN RISKS OF OPTIONS ON FUTURES CONTRACTS. The Fund may seek to close
out an option position by writing or buying an offsetting option covering the
same index, underlying instruments, or contract and having the same exercise
price and expiration date. The ability to establish and close out positions on
such options will be subject to the maintenance of a liquid secondary market.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options, or underlying instruments; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange or
a clearing corporation may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in the class or series of options) would
cease to exist, although outstanding options on the exchange that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. There is no assurance
that higher than anticipated trading activity or other unforeseen events might
not, at times, render certain of the facilities of any of the clearing
corporations inadequate, and thereby result in the institution by an exchange of
special procedures which may interfere with the timely execution of customers'
orders.
REGULATORY LIMITATIONS. The Funds will engage in transactions in futures
contracts and options thereon only for bona fide hedging, yield enhancement and
risk management purposes, in each case in accordance with the rules and
regulations of the CFTC.
The Funds may not enter into futures contracts or options thereon if, with
respect to positions which do not qualify as bona fide hedging under applicable
CFTC rules, the sum of the amounts of initial margin deposits on the Fund's
existing futures and premiums paid for options on futures would exceed 5% of the
net asset value of the Funds after taking into account unrealized profits and
unrealized losses on any such contracts it has entered into; provided, however,
that in the case of an option that is in-the-money at the time of purchase, the
in-the-money amount may be excluded in calculating the 5% limitation.
To the extent necessary to comply with applicable regulations, in instances
involving the purchase of futures contracts or call options thereon or the
writing of put options thereon by the Fund, an amount of cash or liquid
securities, equal to the market value of the futures contracts and options
thereon (less any related margin deposits), will be identified in an account
with the Fund's custodian to cover the position, or alternative cover will be
employed.
In addition, CFTC regulations may impose limitations on the Funds' ability
to engage in certain yield enhancement and risk management strategies. If the
CFTC or other regulatory authorities adopt different (including less stringent)
or additional restrictions, the Funds would comply with such new restrictions.
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<PAGE>
INVESTMENT POLICY LIMITATIONS
Each of the Funds operates within certain fundamental investment policy
limitations which may not be changed without the approval of the lesser of (i)
67% or more of the voting securities present at a meeting if the holders of more
than 50% of the outstanding voting securities of the Fund are present or
represented by proxy, or (ii) more than 50% of the outstanding voting securities
of the Fund. Investments bound by the following limitations are adhered to at
the time of investment, but later increases or decreases in percentages
resulting from change in value or net assets will not result in violation of
such limitations.
SECURITY GROWTH AND INCOME FUND'S FUNDAMENTAL POLICIES
Growth and Income Fund's fundamental investment policy limitations are:
1. Not to invest more than 5% of its total assets in the securities of any
one issuer.
2. Not to purchase more than 10% of the outstanding voting securities of any
one issuer.
3. Not to purchase securities for the purpose of exercising control over the
issuers thereof.
4. Not to act as an underwriter, either directly or indirectly.
5. Not to borrow money or securities for any purpose except to the extent
that borrowing up to 5% of the Fund's total assets is permitted for
emergency purposes, provided such borrowing is made on a temporary basis
from commercial banks and is not used for investment purposes.
6. Not to lend money or securities to any person, corporation, securities
dealer, or bank, other than the purchase of publicly distributed debt
securities which are not considered loans, or by entry into repurchase
agreements.
7. Not to buy securities on margin or effect short sales of securities.
8. Not to mortgage, pledge or hypothecate any securities or funds of the Fund
other than as might become necessary to furnish bond to governmental
agencies required for the conduct of the business of the Fund.
9. Not to purchase any security other than securities listed on a national
securities exchange registered under the Securities Exchange Act of 1934,
or actively traded over-the-counter.
10. Not to invest in companies having a record of less than three years'
continuous operation, which may include the operations of predecessor
companies.
11. Not to invest in the securities of an issuer if the officers and directors
of the Fund, Underwriter or Manager own more than 1/2 of 1% of such
securities, or if all such persons together own more than 5% of such
securities.
12. Not to invest in the securities of other investment companies except
in the open market at ordinary broker's commissions.
13. Not to allow officers or directors of the Fund, Underwriter or Manager to
purchase shares of the Fund except for investment at current net asset
value.
14. Not to own, buy or sell real estate, commodities or commodity contracts.
15. Not to invest in puts, calls, straddles, spreads or any combination
thereof.
16. Not to invest in limited partnerships or similar interests in oil, gas,
mineral leases, and other mineral exploration development programs;
provided, however, that the Fund may invest in the securities of other
corporations whose activities include such exploration and development.
Although Fundamental Policy 16 is intended to apply only to certain oil,
gas and other mineral exploration development programs and not to securities
traded on national securities exchanges, the Board of Directors reviewed and
considered in 1986 the scope of this limitation. Prior to that time, the Fund
had made an investment, which incurred a loss, in an oil and gas company which
was organized as a limited partnership with its securities traded on the New
York Stock Exchange. The directors concluded that the limitation was not
intended to apply to such investments, but in order to avoid possible future
questions regarding the permissibility of such investments, have determined that
Growth and Income Fund will not purchase limited partnership securities of any
type in the future. The Fund does not interpret Fundamental Policy 7 or 14 as
prohibiting transactions in financial futures contracts.
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<PAGE>
SECURITY EQUITY FUND'S FUNDAMENTAL POLICIES
Security Equity Fund's fundamental policy limitations, which are applicable
to each of Equity Fund, Global Fund, Asset Allocation Fund, Social Awareness
Fund and Value Fund, are:
1. Not to invest more than 5% of its total assets in the securities of any
one issuer; provided, however, that for Asset Allocation Fund, Social
Awareness Fund and Value Fund this limitation applies only with respect to
75% of its total assets.
2. Not to purchase more than 10% of the outstanding voting securities of any
one issuer.
3. Not to purchase securities for the purpose of exercising control over the
issuers thereof.
4. Not to underwrite securities of other issuers, provided that this policy
shall not be construed to prevent or limit
in any manner the right of the Fund to purchase securities for investment
purposes.
5. With respect to Equity Fund and Global Fund, not to borrow money or
securities for any purpose except to the extent that borrowing up to 10%
of the Fund's total assets is permitted for emergency purposes on a
temporary basis from banks and will not be made for investment purposes.
Asset Allocation Fund, Social Awareness Fund and Value Fund may borrow up
to 33 1/3% of total assets and may borrow for emergency, temporary or
investment purposes from a variety of sources, including banks. Each of
the Funds may also obtain such short-term credits as are necessary for the
clearance of portfolio transactions.
6. Not to make loans to other persons other than the purchase of publicly
distributed debt securities which are not considered loans, or by entry
into repurchase agreements; provided, however, that this investment
limitation does not apply to Asset Allocation Fund, Social Awareness Fund
and Value Fund.
7. Not to buy securities on margin or effect short sales of securities;
provided, however, that Asset Allocation Fund, Social Awareness Fund and
Value Fund may make margin deposits in connection with transactions in
options, futures, and options on futures.
8. Not to issue senior securities; provided, however, that Asset Allocation
Fund, Social Awareness Fund and Value Fund may issue senior securities in
compliance with the Investment Company Act of 1940.
9. Not to invest in the securities of other investment companies; provided,
however, that this investment limitation does not apply to Asset
Allocation Fund, Social Awareness Fund and Value Fund which may invest in
the securities of other investment companies. (Social Awareness Fund does
not presently intend to invest in the securities of other investment
companies.)
10. Not to invest in companies having a record of less than three years'
continuous operation, which may include the operations of predecessor
companies; provided, however, that this investment limitation does not
apply to Asset Allocation Fund, Social Awareness Fund and Value Fund.
11. Not to invest in the securities of an issuer if the officers and directors
of the Fund, the Underwriter or Investment Manager own more than 1/2 of 1%
of such securities, or if all such persons together own more than 5% of
such securities.
12. Not to allow officers or directors of the Fund, the Underwriter or
Investment Manager to purchase shares of the Fund except for investment at
current net asset value.
13. Not to invest 25% or more of the Fund's total assets in a particular
industry.
14. Not to own, buy or sell real estate, commodities or commodity contracts;
provided, however, that Asset Allocation Fund, Social Awareness Fund and
Value Fund may enter into forward currency contracts and forward
commitments, and transactions in futures, options, and options on futures.
(This policy shall not prevent any of the Funds from investing in
securities or other instruments backed by real estate or in securities of
companies engaged in the real estate business.)
15. Not to invest in warrants unless acquired as a unit or attached to other
securities; provided, however, that this investment limitation does not
apply to Asset Allocation Fund, Social Awareness Fund and Value Fund.
16. Not to invest more than 10% of its total assets in restricted securities;
provided, however, that this investment limitation does not apply to Asset
Allocation Fund, Social Awareness Fund and Value Fund which may invest in
restricted securities. (Restricted securities are those securities for
which an active and substantial market does not exist at the time of
purchase or upon subsequent valuation, or for which there are legal or
contractual restrictions as to disposition.)
17. Not to invest more than 2% of its total assets in puts, calls, straddles,
spreads, or any combination thereof; provided, however, that this
investment limitation does not apply to Asset Allocation Fund, Social
Awareness
25
<PAGE>
Fund and Value Fund which may invest in such instruments. (With respect to
Equity Fund and Global Fund, there is no present intention to invest any
of the Fund's assets in puts,calls, straddles, spreads, or any combination
thereof.)
18. Not to invest in limited partnerships or similar interests in oil, gas,
mineral leases or other mineral exploration development programs;
provided, however, that the Funds may invest in the securities of other
corporations whose activities include such exploration and development.
The Fund interprets Fundamental Policy 14 to prohibit the purchase of real
estate limited partnerships. The Fund does not interpret Fundamental Policy 7 or
14 as prohibiting transactions in options, financial futures contracts or
options on financial futures contracts; however, with respect to Equity and
Global Funds, transactions in options and options on financial futures contracts
are subject to the limits set forth in Fundamental Policy 17.
SECURITY ULTRA FUND'S FUNDAMENTAL POLICIES
Ultra Fund's fundamental policy limitations are:
1. Not to invest more than 5% of its total assets in the securities of any
one issuer (other than the United States of America).
2. Not to purchase more than 10% of the outstanding voting securities (or
of any class of outstanding securities) of any one issuer.
3. Not to purchase securities for the purpose of exercising control over the
issuers thereof.
4. Not to underwrite securities of other issuers.
5. Not to purchase restricted securities.
6. Not to pledge any portion of its assets.
7. Not to make loans to other persons other than the purchase of publicly
distributed debt securities which are not considered loans, or by entry
into repurchase agreements.
8. Not to buy securities on margin but it may obtain such short-term credits
as may be necessary for the clearance of purchases and sales of
securities.
9. Not to issue senior securities, except that it may borrow money from banks
for temporary or emergency purposes in an amount up to 5% of the Fund's
total assets, provided that the Fund will not purchase portfolio
securities at any time it has outstanding borrowings.
10. Not to invest in the securities of other investment companies.
11. Not to make short sales of securities unless at the time it owns an equal
amount of such securities, or by virtue of ownership of convertible or
exchangeable securities, it has the right to obtain through the conversion
or exchange of such other securities an equal amount of securities sold
short.
12. Not to invest more than 25% of the Fund's total assets in a particular
industry.
13. Not to own, buy or sell real estate, commodities or commodity contracts.
14. Not to invest more than 5% of the value of the Fund's net assets in
warrants, valued at the lower of cost or market. Included within that
amount (but not to exceed 2% of the value of the Fund's net assets) may be
warrants which are not listed on the New York or American Stock Exchanges.
Warrants acquired by the Fund in units or attached to securities may be
deemed to be without value.
15. Not to invest more than 5% of its total assets in any issuer or issuers
having a record of less than three years continuous operation, which may
include the operations of predecessor companies.
16. Not to invest in puts, calls, straddles, spreads, or any combination there
of.
17. Not to invest in limited partnerships or similar interests in oil, gas,
mineral leases, and other mineral exploration or development programs;
provided, however, that the Fund may invest in the securities of other
corporations whose activities include such exploration and development.
The Fund does not interpret Fundamental Policy 8 or 13 as prohibiting
transactions in financial futures contracts.
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OFFICERS AND DIRECTORS
The officers and directors of the Funds and their principal occupations for
at least the last five years are as follows. Unless otherwise noted, the address
of each officer and director is 700 Harrison Street, Topeka, Kansas 66636-0001.
<TABLE>
<CAPTION>
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NAME, ADDRESS AND POSITIONS HELD WITH THE FUNDS PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
JOHN D. CLELAND,* Senior Vice President and Managing Member Representative, Security Management
President and Director Company, LLC; Senior Vice President, Security Benefit Group, Inc. and Security
Benefit Life Insurance Company.
DONALD A. CHUBB, JR.,** Director Business broker, Griffith & Blair Realtors. Prior to 1997, President,
2222 SW 29th Street Neon Tube Light Company, Inc.
Topeka, Kansas 66611
DONALD L. HARDESTY, Director President, Central Research Corporation.
900 Bank IV Tower
Topeka, Kansas 66603
PENNY A. LUMPKIN,** Director Vice President, Palmer News, Inc. Prior to October 1991, Secretary and
3616 Canterbury Town Road Director, Palmer Companies, Inc.
Topeka, Kansas 66610
MARK L. MORRIS, JR.,** Director (Wholesale Periodicals). President, Mark Morris Associates (Veterinary Research
5500 SW 7th Street and Education).
Topeka, Kansas 66606
JEFFREY B. PANTAGES,* Director President and Chief Investment Officer, Security Management Company, LLC; Senior
Vice President, Security Benefit Group, Inc. and Security Benefit Life Insurance
Company. Prior to April 1992, Managing Director, Prudential Life.
HUGH L. THOMPSON, Director President Emeritus, Washburn University. Prior to June 1997, President,
2728 Newfound Harbour Drive Washburn University.
Merritt Island, Florida 32952
JAMES R. SCHMANK, Vice President Senior Vice President, Treasurer, Chief Fiscal Officer and Managing Member
and Treasurer Representative, Security Management Company, LLC; Vice President, Security
Benefit Group, Inc. and Security Benefit Life Insurance Company.
MARK E. YOUNG, Vice President Vice President, Security Management Company, LLC; Assistant Vice President,
Security Benefit Group, Inc. and Security Benefit Life Insurance Company.
JANE A. TEDDER, Vice President Vice President and Senior Economist, Security Management Company, LLC; Vice
(Equity Fund only) President, Security Benefit Group, Inc. and Security Benefit Life Insurance
Company.
TERRY A. MILBERGER, Vice President Vice President and Senior Portfolio Manager, Security Management Company, LLC;
(Equity Fund only) Senior Vice President, Security Benefit Group, Inc. and Security Benefit Life
Insurance Company.
AMY J. LEE, Secretary Secretary, Security Management Company, LLC; Vice President, Associate General
Counsel and Assistant Secretary, Security Benefit Group, Inc. and Security
Benefit Life Insurance Company.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
NAME, ADDRESS AND POSITIONS HELD WITH THE FUNDS PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
BRENDA M. HARWOOD, Assistant Treasurer Assistant Vice President, Assistant Treasurer and Assistant Secretary, Security
and Assistant Secretary Management Company, LLC; Assistant Vice President, Security Benefit Group, Inc.
and Security Benefit Life Insurance Company.
CINDY L. SHIELDS, Assistant Vice President Assistant Vice President and Portfolio Manager, Security Management Company,
(Equity and Ultra Fund only) LLC; Assistant Vice President, Security Benefit Group, Inc. and Security Benefit
Life Insurance Company. Prior to August 1994, Junior Portfolio Manager,
Research Analyst, Junior Research Analyst and Portfolio Assistant, Security
Management Company.
THOMAS A. SWANK, Assistant Vice President Second Vice President and Portfolio Manager, Security Management Company, LLC;
(Growth and Income Fund only) Vice President, Security Benefit Group, Inc. and Security Benefit Life Insurance
Company.
JIM SCHIER, Assistant Vice President Assistant Vice President and Portfolio Manager, Security Management Company,
(Equity Fund only) LLC; Assistant Vice President, Security Benefit Group, Inc. and Security Benefit
Life Insurance Company. Prior to February 1997, Assistant Vice President and
Senior Research Analyst, Security Management Company, LLC. Prior to August
1995, Portfolio Manager, Mitchell Capital Management. Prior to March 1993, Vice
President and Portfolio Manager, Fourth Financial.
CHRISTOPHER D. SWICKARD, Assistant Secretary Assistant Vice President and Assistant Counsel, Security Benefit Group, Inc. and
Security Benefit Life Insurance Company. Prior to June 1992, student at
Washburn University School of Law.
- ------------------------------------------------------------------------------------------------------------------------------------
*These directors are deemed to be "interested persons" of the Funds under the Investment Company Act of 1940, as amended, by reason
of their positions with the Funds' Investment Manager and/or the parent of the Investment Manager.
**These directors serve on the Funds' joint audit committee, the purpose of which is to meet with the independent auditors, to
review the work of the auditors, and to oversee the handling by Security Management Company, LLC of the accounting functions for
the Funds.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The directors and officers of the Funds hold identical offices in the other
Funds managed by the Investment Manager, except Ms. Tedder who is also Vice
President of SBL Fund and Security Income Fund, Mr. Milberger who is also Vice
President of SBL Fund, Ms. Shields who is Assistant Vice President of SBL Fund
and Security Equity Fund, and Messrs. Swank and Schier who are Assistant Vice
President of SBL Fund and Security Income Fund. (See the table under "Investment
Management," on page 34, for positions held by such persons with the Investment
Manager.) Mr. Young and Ms. Lee hold identical offices for the Funds'
distributor, Security Distributors, Inc., and Messrs. Cleland and Schmank serve
as Vice President and Director, while Ms. Harwood serves as Treasurer of the
distributor.
REMUNERATION OF DIRECTORS AND OTHERS
The Funds' directors, except those directors who are "interested persons"
of the Funds, receive from each of Security Growth and Income Fund, Security
Equity Fund and Security Ultra Fund an annual retainer of $1,042 and a fee of
$133 per meeting, plus reasonable travel costs, for each meeting of the board
attended. In addition, certain directors who are members of the Funds' joint
audit committee receive a fee of $100 per hour with a minimum fee of $200 and
reasonable travel costs for each meeting of the Funds' audit committee attended.
Such fees and travel costs are paid by the Investment Manager for each Fund,
except Asset Allocation Fund and Social Awareness Fund, pursuant to its
Investment Management and Services Agreements with the Funds which provide that
the Investment Manager will bear all Fund expenses except for its fee and the
expenses of brokerage commissions, interest, taxes, extraordinary expenses
approved by the Board of Directors and Class B distribution
28
<PAGE>
fees. Asset Allocation and Social Awareness Funds pay their respective share of
directors' fees and travel costs. (See page 34, "Investment Management.")
The Funds do not pay any fees to, or reimburse expenses of, directors who
are considered "interested persons" of the Funds. The aggregate compensation
paid by the Funds to each of the directors during the fiscal year ended
September 30, 1996, and the aggregate compensation paid to each of the directors
during calendar year 1996 by all seven of the registered investment companies to
which the Investment Manager provides investment advisory services
(collectively, the "Security Fund Complex"), are set forth below. Each of the
directors is a director of each of the other registered investment companies in
the Security Fund Complex.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
AGGREGATE COMPENSATION TOTAL
------------------------------------------ COMPENSATION
SECURITY ESTIMATED FROM THE
GROWTH ANNUAL SECURITY FUND
AND SECURITY SECURITY BENEFITS COMPLEX,
NAME OF DIRECTOR INCOME EQUITY ULTRA UPON INCLUDING
OF THE FUND FUND FUND FUND RETIREMENT THE FUNDS
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Willis A. Anton, Jr. $1,508 $1,508 $1,508 $0 $18,100
Donald A. Chubb, Jr. 1,541 1,591 1,518 0 18,300
John D. Cleland 0 0 0 0 0
Donald L. Hardesty 1,508 1,508 1,508 0 18,100
Penny A. Lumpkin 1,541 1,591 1,518 0 18,300
Mark L. Morris, Jr. 1,541 1,591 1,518 0 18,300
Jeffrey B. Pantages 0 0 0 0 0
Hugh Thompson 788 788 788 0 9,450
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The Investment Manager compensates its officers and directors who may also
serve as officers or directors of the Funds. On March 1, 1997, the Funds'
officers and directors (as a group) beneficially owned 26,626; 219,934; 13,725;
2,756; 0; and 48,736 of Class A shares of Growth and Income Fund, Equity Fund,
Global Fund, Asset Allocation Fund, Social Awareness Fund and Ultra Fund,
respectively, which represented approximately .315%, .266%, .742%, .953%, 0% and
.534% of the total outstanding Class A shares of each Fund on that date.
HOW TO PURCHASE SHARES
Investors may purchase shares of the Funds through authorized dealers who
are members of the National Association of Securities Dealers, Inc. In addition,
banks and other financial institutions may make shares of the Funds available to
their customers. (Banks and other financial institutions that make shares of the
Funds available to their customers in Texas must be registered with that state
as securities dealers.) The minimum initial investment is $100. The minimum
subsequent investment is $100 unless made through an Accumulation Plan which
allows for subsequent investments of $20. (See "Accumulation Plan," page 33.) An
application may be obtained from the Investment Manager.
As a convenience to investors and to save operating expenses, the Funds do
not issue certificates for full shares except upon written request by the
investor or his or her investment dealer. Certificates will be issued at no cost
to the stockholder. No certificates will be issued for fractional shares and
fractional shares may be withdrawn only by redemption for cash.
Orders for the purchase of shares of the Funds 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 Security Distributors, Inc. (the
"Distributor") (generally as of the close of the Exchange on that day) plus the
sales charge in the case of Class A shares. Orders received by dealers or other
firms prior to the close of the Exchange and received by the Distributor prior
to the close of its business day will be confirmed at the offering price
effective as of the close of the Exchange on that day.
Dealers and other financial services firms are obligated to transmit orders
promptly.
The Funds reserve the right to withdraw all or any part of the offering
made by this prospectus and to reject purchase orders.
29
<PAGE>
ALTERNATIVE PURCHASE OPTIONS
The Funds offer 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 B for a discussion
of "Rights of Accumulation" and "Statement of Intention," which options may
serve to reduce the front-end sales charge.
CLASS B SHARES - BACK-END LOAD OPTION. Class B shares are sold without a
sales charge at the time of purchase, but are subject to a deferred sales charge
if they are redeemed within five years of the date of purchase. Class B shares
will automatically convert 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% of the purchase price is invested
immediately, depending on the amount of the purchase and the intended length of
investment. The Funds will not normally accept any purchase of Class B shares in
the amount of $500,000 or more.
Dealers or others may 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 PERCENTAGE PERCENTAGE
AMOUNT OF PURCHASE OF OFFERING OF NET AMOUNT REALLOWABLE
AT 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 and over............... None None (See below)
- --------------------------------------------------------------------------------
The Underwriter will pay a commission to dealers on purchases of $1,000,000 or
more as follows: 1.00% on sales up to $5,000,000, plus .50% on sales of
$5,000,000 or more up to $10,000,000, and .10% 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 Funds and
certain other Security Funds during prior periods and certain other factors,
including providing to their clients who are stockholders of the Funds certain
services, which include assisting in maintaining records, processing purchase
and redemption requests and establishing shareholder accounts, assisting
shareholders in changing account options or enrolling in specific plans, and
providing shareholders with information regarding the Funds and related
developments. Service fees are paid quarterly and may be discontinued at any
time.
CLASS B SHARES
Class B shares are offered at net asset value, without an initial sales
charge. With certain exceptions, the Funds may impose a deferred sales charge on
shares redeemed within five years of the date of purchase. No deferred sales
charge is imposed on amounts redeemed thereafter. If imposed, the deferred sales
charge is deducted from the redemption proceeds otherwise payable to you. The
deferred sales charge is retained by the Distributor.
30
<PAGE>
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 Funds' 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
Each 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% of
the average daily net asset value of Class B shares. Amounts paid by the Funds
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% 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%
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 Funds.
Rules of the National Association of Securities Dealers, Inc. ("NASD")
limit the aggregate amount that a Fund may pay annually in distribution costs
for the sale of its Class B shares to 6.25% of gross sales of Class B shares
since the inception of the Distribution Plan, plus interest at the prime rate
plus 1% on such amount (less any contingent deferred sales charges paid by Class
B shareholders to the Distributor). The Distributor intends, but is not
obligated, to continue to 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 Funds. The
Distributor intends to seek full payment of such charges from the Fund (together
with annual interest thereon at the prime rate plus 1%) at such time in the
future as, and to the extent that, payment thereof by the Funds would be within
permitted limits.
Each 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 Funds' 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
31
<PAGE>
Distributor. The Funds make no payments in connection with the sales of their
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 amounts 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 amounts 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
contingent deferred sales charge), (iv) "financial hardship" of a participant in
the plan, as that term is defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time, (v) termination of employment of
a participant in the plan, (vi) any other permissible withdrawal under the terms
of the plan. The contingent deferred sales charge will also be waived in the
case of certain redemptions of Class B shares of the Funds pursuant to a
systematic withdrawal program. (See "Systematic Withdrawal Program," page 33.)
ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS
The Investment Manager or Distributor, from time to time, will provide
promotional incentives or pay a bonus, to certain dealers whose representatives
have sold or are expected to sell significant amounts of the Funds 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. Bonus compensation may include reallowance of the entire sales charge
and may also include, with respect to Class A shares, an amount which exceeds
the entire sales charge and, with respect to Class B shares, an amount which
exceeds the maximum commission. The Distributor, or the Investment Manager, may
also provide financial assistance to certain dealers in connection with
conferences, sales or training programs for their employees, seminars for the
public, advertising, sales campaigns, and/or shareholder services and programs
regarding one or more of the funds managed by the Investment Manager. Certain of
the promotional incentives or bonuses may be financed by payments to the
Distributor under a Rule 12b-1 Distribution Plan. The payment of promotional
incentives and/or bonuses will not change the price an investor will pay for
shares or the amount that the Funds will receive from such sale. 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 Funds 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.
32
<PAGE>
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 and may be discontinued
at any time. 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 applicable marketing allowance factors are set forth below.
- --------------------------------------------------------------------------------
APPLICABLE MARKETING
AGGREGATE NEW SALES ALLOWANCE FACTOR*
- --------------------------------------------------------------------------------
Less than $2 million................................... .00%
$2 million but less than $5 million.................... .15%
$5 million but less than $10 million................... .25%
$10 million but less than $15 million.................. .35%
$15 million but less than $20 million.................. .50%
or $20 million or more................................. .75%
- --------------------------------------------------------------------------------
*The maximum marketing allowance factor applicable per this schedule will be
applied to all new sales in the calendar year to determine the marketing
allowance payable for such year.
- --------------------------------------------------------------------------------
PURCHASES AT NET ASSET VALUE
Class A shares of the Funds may be purchased at net asset value by (1)
directors, officers and employees of the Funds, the Funds' 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 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 Funds 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 these provisions.
A stockholder of Equity Fund who formerly invested in the Bondstock
Investment Plans or Life Insurance Investors Investment Plans received Class A
shares of Equity Fund in liquidation of the Plans. Such a stockholder may
purchase Class A shares of Equity Fund at net asset value provided that such
stockholder maintains his or her Equity Fund account.
ACCUMULATION PLAN
Investors may purchase shares on a periodic basis under an Accumulation
Plan which provides for an initial investment of $100 minimum and subsequent
investments of $20 minimum at any time. An Accumulation Plan is a voluntary
program, involving 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 the day such payment is received. A confirmation
and statement of account will be sent to the investor following each investment.
Certificates for whole shares will be issued upon request. No certificates will
be issued for fractional shares which may be withdrawn only by redemption for
cash. Investors may choose to use "Secur-O-Matic" (automatic bank draft) to make
their Fund purchases. There is no additional charge for using Secur-O-Matic. An
application may be obtained from the Funds.
33
<PAGE>
SYSTEMATIC WITHDRAWAL PROGRAM
A Systematic Withdrawal Program may be established by stockholders who wish
to receive regular monthly, quarterly, semiannual or annual payments of $25 or
more. A stockholder may elect a payment that is a specified percentage of the
initial or current account value or a specified dollar amount. The Program may
also be based upon the liquidation of a fixed or variable number of shares
provided that the amount withdrawn monthly is at least $25. However, the Funds
do not recommend this (or any other amount) as an appropriate monthly
withdrawal. Shares with a current aggregate offering price of $5,000 or more
must be deposited with the Investment Manager acting as agent for the
stockholder under the Program. There is no service charge on the Program.
Sufficient shares will be liquidated at net asset value to meet the
specified withdrawals. Liquidation of shares may deplete the investment,
particularly in the event of a market decline. Payments cannot be considered as
actual yield or income since part of such payments is a return of capital. Such
withdrawals constitute a taxable event to the stockholder. The maintenance of a
Withdrawal Program concurrently with purchases of additional shares of the Fund
would be disadvantageous because of the sales commission payable in respect to
such purchases. During the withdrawal period, no payments will be accepted under
an Accumulation Plan. Income dividends and capital gains distributions are
automatically reinvested at net asset value. If an investor has an Accumulation
Plan in effect, it must be terminated before a Systematic Withdrawal Program may
be initiated.
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% 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% of the value of the account in
any Program year and, as a result, all withdrawals under such a Program are
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 31.
The stockholder receives confirmation of each transaction showing the
source of the payment and the share balance remaining in the Program. A Program
may be terminated on written notice by the stockholder or by the Fund, and it
will terminate automatically if all shares are liquidated or withdrawn from the
account.
INVESTMENT MANAGEMENT
Security Management Company, LLC (the "Investment Manager"), 700 SW
Harrison Street, Topeka, Kansas, has served as investment adviser to Security
Growth and Income Fund (formerly Security Investment Fund), Security Equity
Fund, and Security Ultra Fund, respectively, since April 1, 1964, January 1,
1964, and April 22, 1965. The Investment Manager also acts as investment adviser
to Security Income Fund, Security Cash Fund, SBL Fund, and Security Tax-Exempt
Fund. The Investment Manager is a limited liability company controlled by its
members, Security Benefit Life Insurance Company and Security Benefit Group,
Inc. ("SBG"). SBG is an insurance and financial services holding company
wholly-owned by Security Benefit Life Insurance Company, 700 SW Harrison Street,
Topeka, Kansas 66636-0001. Security Benefit Life, a mutual life insurance
company with $15.5 billion of insurance in force, is incorporated under the laws
of Kansas.
The Investment Manager serves as investment adviser to Security Growth and
Income Fund, Security Equity Fund and Security Ultra Fund, respectively, under
Investment Management and Services Agreements, which were approved by the
shareholders of the Funds on March 29, 1989, December 8, 1988 and December 30,
1988, and which became effective on March 31, 1989, January 31, 1989 and
February 28, 1989. Security Equity Fund's Agreement was amended by its Board of
Directors at a regular meeting held on July 23, 1993, to provide for the
Investment Manager to serve as investment adviser to Global Fund and on April 3,
1995, July 26, 1996 and February 7, 1997, respectively, to provide for the
Investment Manager to serve as investment adviser to Asset Allocation Fund,
Social Awareness Fund and Value Fund. The Agreements were last renewed by the
Funds' Board of Directors at a regular meeting held on November 1, 1996.
Pursuant to the Investment Management and Services Agreements, the
Investment Manager furnishes investment advisory, statistical and research
services to the Funds, supervises and arranges for the purchase and
34
<PAGE>
sale of securities on behalf of the Funds, and provides for the compilation
and maintenance of records pertaining to the investment advisory function.
The Investment Manager has retained Lexington Management Corporation
("Lexington"), Park 80 West, Plaza Two, Saddle Brook, New Jersey 07663, to
furnish certain advisory services to Global Fund pursuant to a Sub-Advisory
Agreement, dated October 1, 1993. Pursuant to this agreement, Lexington
furnishes investment advisory, statistical and research facilities, supervises
and arranges for the purchase and sale of securities on behalf of Global Fund
and provides for the compilation and maintenance of records pertaining to such
investment advisory services, subject to the control and supervision of the
Funds' Board of Directors and the Investment Manager. For such services, the
Investment Manager pays Lexington an amount equal to .50% of the average net
assets of Global Fund, computed on a daily basis and payable monthly. The
Sub-Advisory Agreement may be terminated without penalty at any time by either
party on 60 days' written notice and is automatically terminated in the event of
its assignment or in the event that the Investment Advisory Contract between the
Investment Manager and the Fund is terminated, assigned or not renewed.
Lexington is a wholly-owned subsidiary of Lexington Global Asset Managers,
Inc., a Delaware corporation with offices at Park 80 West, Plaza Two, Saddle
Brook, New Jersey 07663. Descendants of Lunsford Richardson, Sr., their spouses,
trusts and other related entities have a majority voting control of the
outstanding shares of Lexington Global Asset Managers, Inc. Lexington was
established in 1938 and currently manages over $3.5 billion in assets.
The Investment Manager has entered into a sub-advisory research agreement
with Meridian Investment Management Corporation ("Meridian"), 12835 East
Arapahoe Road, Tower II, 7th Floor, Englewood, Colorado 80112. Pursuant to the
agreement, Meridian furnishes investment advisory, statistical and research
facilities, supervises and arranges for the purchase and sale of equity
securities on behalf of the Fund and provides for the compilation and
maintenance of records pertaining to such investment advisory services, subject
to the control and supervision of the Board of Directors of the Fund and the
Investment Manager. 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 Investment Manager pays Meridian an annual fee
equal to a percentage of the average daily closing value of the net assets of
Asset Allocation Fund, computed on a daily basis, according to the following
schedule:
------------------------------------------------------------------
AVERAGE DAILY NET ASSETS OF THE FUND 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%
------------------------------------------------------------------
Pursuant to the Investment Management and Services Agreements, the
Investment Manager also performs administrative functions and the bookkeeping,
accounting and pricing functions for the Funds, and performs all shareholder
servicing functions, including transferring record ownership, processing
purchase and redemption transactions, answering inquiries, mailing shareholder
communications and acting as the dividend disbursing agent. The Investment
Manager has arranged for Lexington to provide certain administrative services to
Global Fund, including certain accounting and pricing functions.
The Investment Manager has also agreed to arrange for others (or itself) to
provide to the Funds, except Asset Allocation, Social Awareness and Value Funds,
all other services, including custodian and independent accounting services,
required by the Funds. The Investment Manager will when necessary engage the
services of third parties such as a custodian bank or independent auditors, in
accordance with applicable legal requirements, including approval by the Funds'
Board of Directors. The Investment Manager bears the expenses of providing the
services it is required to furnish under the Agreement for each Fund, except
Asset Allocation, Social Awareness and Value Funds. Thus, those Funds' expenses
include only fees paid to the Investment Manager as well as expenses of
brokerage commissions, interest, taxes, extraordinary expenses approved by the
Board of Directors, and Class B distribution fees.
Asset Allocation, Social Awareness and Value Funds will pay all of their
respective expenses not assumed by the Investment Manager or the Distributor,
including organization expenses; directors' fees; fees of its custodian; taxes
and governmental fees; interest charges; any membership dues; brokerage
commissions; expenses of
35
<PAGE>
preparing and distributing reports to shareholders; costs of shareholder and
other meetings; Class B distribution fees; and legal, auditing and accounting
expenses. Asset Allocation, Social Awareness and Value Funds will also pay for
the preparation and distribution of the prospectus to their shareholders and all
expenses in connection with registration under the Investment Company Act of
1940 and the registration of their capital stock under federal and state
securities laws. Asset Allocation, Social Awareness and Value Funds will pay
nonrecurring expenses as may arise,including litigation expenses affecting them.
The Investment Manager has agreed to reimburse the Funds or waive a portion
of its management fee for any amount by which the total annual expenses of the
Funds (including management fees, but excluding interest, taxes, brokerage
commissions, extraordinary expenses and Class B distribution fees) for any
fiscal year that exceeds the level of expenses which the Funds are permitted to
bear under the most restrictive expense limitation imposed by any state in which
shares of the Funds are then qualified for sale. (The Investment Manager is not
aware of any state that currently imposes limits on the level of mutual fund
expenses.)
As compensation for its services, the Investment Manager receives with
respect to Growth and Income, Equity and Ultra Funds, on an annual basis, 2% of
the first $10 million of the average net assets, 1 1/2% of the next $20 million
of the average net assets and 1% of the remaining average net assets of the
Funds, determined daily and payable monthly. The Investment Manager receives
with respect to the Global Fund, on an annual basis, 2% of the first $70 million
of the average net assets and 1 1/2% of the remaining average net assets,
determined daily and payable monthly.
Separate fees are paid by Asset Allocation, Social Awareness and Value
Funds to the Investment Manager for investment advisory, administrative and
transfer agency services. With respect to Asset Allocation Fund the Investment
Manager receives, on an annual basis, an investment advisory fee equal to 1% 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% of the average daily net assets of the Asset Allocation Fund plus
the greater of .10% of its average net assets or $60,000. With respect to the
Social Awareness and Value Funds, the Investment Manager receives, on an annual
basis, an investment advisory fee equal to 1% of the average daily net assets of
the respective Funds, calculated daily and payable monthly. The Investment
Manager has agreed to waive the investment advisory fee of Social Awareness and
Value Funds for the fiscal year ending September 30, 1997. The Investment
Manager also receives, on an annual basis, an administrative fee equal to .09%
of the average daily net assets of the Social Awareness and Value Funds. For
transfer agency services provided to each of the Asset Allocation, Social
Awareness and Value Funds, the Investment Manager receives an annual maintenance
fee of $8.00 per account, and a transaction fee of $1.00 per transaction.
During the fiscal years ended September 30, 1996, 1995 and 1994, the Funds
paid the following amounts to the Investment Manager for its services: 1996 -
$919,674, 1995 - $839,358 and 1994 - $948,953 for Growth and Income Fund; 1996 -
$5,528,818, 1995 - $4,185,144 and 1994 - $3,926,084 for Equity Fund; and 1996 -
$862,190, 1995 - $816,039 and 1994 - $819,550 for Ultra Fund. Global Fund paid
the Investment Manager for its services for 1996 - $470,077, 1995 - $457,489,
and for the period October 5, 1993 to September 30, 1994 - $346,421. Asset
Allocation Fund paid the Investment Manager for investment advisory,
administrative and transfer agency services for fiscal year ended September 30,
1996 - $39,560, $36,957 and $5,571, respectively. For this period, the
Investment Manager waived $24,236 of the investment advisory fee and reimbursed
the Fund $19,620 of the Administrative and transfer agency fees. Asset
Allocation Fund paid the Investment Manager for investment advisory,
administrative and transfer agency services for the period June 1, 1995 (date of
inception) to September 30, 1995 - $10,134, $10,456 and $790, respectively. For
this period, the Investment Manager reimbursed the Fund $16,615 of the
administrative and transfer agency fees. For the period November 4, 1996 (date
of inception) to March 31, 1997, the Investment Manager waived its entire
advisory fee for the Social Awareness Fund in the amount of $10,785. For the
same period, the Social Awareness Fund paid the Investment Manager for
administrative and transfer agency services, $972 and $860, respectively.
The total expenses for Growth and Income Fund, Equity Fund, Global Fund,
Asset Allocation Fund and Ultra Fund, respectively, for the fiscal year ended
September 30, 1996 were 1.29%, 1.04%, 2.00%, 2.00% and 1.31% of the average net
assets of each Fund's Class A shares for the fiscal year. Total expenses of
Class B shares for Growth and Income Fund, Equity Fund, Global Fund, Asset
Allocation Fund and Ultra Fund, respectively, for the fiscal year ended
September 30, 1996 were 2.29%, 2.04%, 3.00%, 3.00% and 2.31% of the average net
assets of each Fund's Class B shares for the fiscal year. The total expenses for
Class A and Class B shares of Social
36
<PAGE>
Awareness Fund for the period November 1, 1996 (date of inception) to March 31,
1997, were 1.42% and 2.17%, respectively, of the average net assets for the
period. Expense information is not yet available for Value Fund as it did not
begin operations until May of 1997.
The Funds' Investment Management and Services Agreements are renewable
annually by the Funds' Board of Directors or by a vote of a majority of the
individual Fund's outstanding securities and, in either event, by a majority of
the board who are not parties to the Agreement or interested persons of any such
party. The Agreements provide that they may be terminated without penalty at any
time by either party on 60 days' notice and are automatically terminated in the
event of assignment.
The following persons are affiliated with the Funds and also with the
Funds' investment adviser, Security Management Company, LLC, in these
capacities:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
NAME POSITION(S) WITH THE FUNDS POSITION(S) WITH SECURITY MANAGEMENT COMPANY, LLC
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Jeffrey B. Pantages Director President and Chief Investment Officer
James R. Schmank Vice President and Treasurer Senior Vice President, Treasurer, Chief Fiscal
Officer and Managing Member Representative
John D. Cleland President and Director Senior Vice President and Managing Member
Representative
Jane A. Tedder Vice President (Equity Fund only) Vice President and Senior Economist
Terry A. Milberger Vice President (Equity Fund only) Vice President and Senior Portfolio Manager
Mark E. Young Vice President Vice President
Amy J. Lee Secretary Secretary
Brenda M. Harwood Assistant Treasurer and Assistant Secretary Assistant Vice President, Assistant Treasurer
and Assistant Secretary
Cindy L. Shields Assistant Vice President Assistant Vice President and Portfolio Manager
(Equity and Ultra Fund only)
Thomas A. Swank Assistant Vice President Second Vice President and Portfolio Manager
(Growth and Income Fund only)
James P. Schier Assistant Vice President (Equity Fund only) Assistant Vice President and Portfolio Manager
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
PORTFOLIO MANAGEMENT
The common stock portion of the GROWTH AND INCOME FUND portfolio is managed
by the Investment Manager's Large Capitalization Team consisting of John
Cleland, Chief Investment Strategist, Terry Milberger, Jim Schier and Chuck
Lauber. Terry Milberger, Senior Portfolio Manager has had day-to-day
responsibility for managing this portion of the portfolio since 1995. The fixed
income portion of the Growth and Income Fund portfolio is managed by the Fixed
Income Team of the Investment Manager consisting of John Cleland, Chief
Investment Strategist, Jane Tedder, Tom Swank, Steve Bowser, Barb Davison, David
Eshnaur, Elaine Miller and Paulette Schwerdt. Tom Swank, Assistant Vice
President and Portfolio Manager of the Investment Manager, has had day-to-day
responsibility for managing the fixed income portion of the Growth and Income
Fund portfolio since 1994. EQUITY FUND is managed by the Large Capitalization
Team of the Investment Manager described above. Mr. Milberger has had day-to-day
responsibility for managing the Equity Fund since 1981. GLOBAL FUND is managed
by an investment management team of Lexington. Alan Wapnick and Richard T.
Saler, the lead managers, have had day-to-day responsibility for managing Global
Fund since 1994. ASSET ALLOCATION FUND is managed by an investment management
team of Portfolio Managers of the Investment Manager and Meridian. The team is
responsible for day-to-day management of the Fund. Jane Tedder, Senior
Economist, has day-to-day responsibility for managing the fixed-income portion
of the Fund's portfolio. She has had responsibility for the Fund since January
1996. Pat Boyle, Portfolio Manager of Meridian, has day-to-day responsibility
for managing the equity portion of the Fund's portfolio. He has had day-to-day
responsibility for the equity portion of the Fund since August 1997. SOCIAL
AWARENESS FUND AND ULTRA FUND are managed by the Investment Manager's Small
Capitalization Team and Social Responsibility Team, respectively, each of which
consists of John Cleland, Chief Investment Strategist, Cindy Shields, Larry
Valencia and Frank Whitsell. Cindy Shields, Portfolio Manager, has had
day-to-day responsibility for managing the Ultra Fund since 1994 and for
managing Social Awareness Fund
37
<PAGE>
since its inception in 1996. VALUE FUND is managed by the Large Capitalization
Team of the Investment Manager described above. Jim Schier, Portfolio Manager,
has had day-to-day responsibility for managing the Value Fund since its
inception in 1997.
Pat Boyle is a research analyst and portfolio manager of Meridian. He has
four years of investment experience and is a Chartered Financial Analyst. Mr.
Boyle graduated from the University of Denver with a B.S.B.A. degree in Finance.
John D. Cleland has been involved in the securities industry for more than
30 years. Before joining the Investment Manager in 1968, he was involved in the
investment business in securities and residential and commercial real estate for
approximately ten years. Mr. Cleland earned a Bachelor of Science degree from
the University of Kansas and an M.B.A. from Wharton School of Finance,
University of Pennsylvania.
Terry A. Milberger is a Vice President and Senior Portfolio Manager of the
Investment Manager. Mr. Milberger has more than 20 years of investment
experience and has managed Equity Fund's portfolio since 1981. He began his
career as an investment analyst in the insurance industry and from 1974 through
1978 he served as an assistant portfolio manager for the Investment Manager. He
was then employed as Vice President of Texas Commerce Bank and managed its
pension fund assets until he returned to the Investment Manager in 1981. Mr.
Milberger holds a bachelor's degree in business and an M.B.A. from the
University of Kansas and is a Chartered Financial Analyst. His investment
philosophy is based on patience and opportunity for the long-term investor.
James P. Schier, Assistant Vice President and Portfolio Manager of the
Investment Manager, has 13 years experience in the investment field and is a
Chartered Financial Analyst. While employed by the Investment Manager, he also
served as a research analyst. Prior to joining the Investment Manager in 1995,
he was a portfolio manager for Mitchell Capital Management from 1993 to 1995.
From 1988 to 1995 he served as Vice President and Portfolio Manager for Fourth
Financial. Prior to 1988, Mr. Schier served in various positions in the
investment field for Stifel Financial, Josepthal & Company and Mercantile Trust
Company. Mr. Schier earned a Bachelor of Business degree from the University of
Notre Dame and an M.B.A. from Washington University.
Cindy L. Shields is a Portfolio Manager of the Investment Manager. Ms.
Shields has eight years experience in the securities field and joined the
Investment Manager in 1989. She has been a portfolio manager since 1994, and
prior to that time, she served as a research analyst for the Investment Manager.
Ms. Shields graduated from Washburn University with a Bachelor of Business
Administration degree, majoring in finance and economics. She is a Chartered
Financial Analyst.
Tom Swank has over ten years of experience in the investment field. Prior
to joining the Investment Manager in 1992, he was an Investment Underwriter and
Portfolio Manager for U.S. West Financial Services, Inc. from 1986 to 1992. From
1984 to 1986, he was a Commercial Credit Officer for United Bank of Denver. From
1982 to 1984, he was employed as a Bank Holding Company Examiner for the Federal
Reserve Bank of Kansas City - Denver Branch. Mr. Swank graduated from Miami
University in Ohio with a Bachelor of Science degree in finance in 1982. He
earned a Master of Business Administration degree from the University of
Colorado and is a Chartered Financial Analyst.
Jane Tedder, Vice President and Senior Economist 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.
Alan Wapnick is a Senior Vice President of Lexington and is responsible for
portfolio management. He has 27 years investment experience. Prior to joining
Lexington in 1986, Mr. Wapnick was an equity analyst with Merrill Lynch, J. & W.
Seligman, Dean Witter and most recently Union Carbide Corporation. Mr. Wapnick
is a graduate of Dartmouth College and received a Master's degree in Business
Administration from Columbia University.
Richard Saler is a Senior Vice President of Lexington and is responsible
for international investment analysis and portfolio management. He has eleven
years of investment experience. Mr. Saler has focused on international markets
since first joining Lexington in 1986. Most recently he was a strategist with
Nomura Securities and rejoined Lexington in 1992. Mr. Saler is a graduate of New
York University with a B.S. degree in Marketing and an M.B.A. in Finance from
New York University's Graduate School of Business Administration.
38
<PAGE>
CODE OF ETHICS
The Funds, the Investment Manager and the Distributor have a written Code
of Ethics which requires all access persons to obtain prior clearance before
engaging in any personal securities transactions. Access persons include
officers and directors of the Funds and Investment Manager and employees that
participate in, or obtain information regarding, the purchase or sale of
securities by the Funds or whose job relates to the making of any
recommendations with respect to such purchases or sales. All access persons must
report their personal securities transactions within ten days of the end of each
calendar quarter. Access persons will not be permitted to effect transactions in
a security if it: (a) is being considered for purchase or sale by the Funds; (b)
is being purchased or sold by the Funds; or (c) is being offered in an initial
public offering. In addition, portfolio managers are prohibited from purchasing
or selling a security within seven calendar days before or after a Fund that he
or she manages trades in that security. Any material violation of the Code of
Ethics is reported to the Board of the Funds. The Board also reviews the
administration of the Code of Ethics on an annual basis.
DISTRIBUTOR
Security Distributors, Inc. (the "Distributor"), a Kansas corporation and
wholly-owned subsidiary of Security Benefit Group, Inc., serves as the principal
underwriter for shares of Growth and Income Fund, Equity Fund, Global Fund,
Asset Allocation Fund, Social Awareness Fund and Ultra Fund pursuant to
Distribution Agreements with the Funds. The Distributor also acts as principal
underwriter for Security Income Fund and Security Tax-Exempt Fund.
The Distributor receives a maximum commission on sales of Class A shares of
5.75% and allows a maximum discount of 5% from the offering price to authorized
dealers on the Fund shares sold. The discount is the same for all dealers, but
the Distributor at its discretion may increase the discount for specific
periods. Salespersons employed by dealers may also be licensed to sell insurance
with Security Benefit Life.
For the fiscal years ended September 30, 1996, 1995 and 1994, the
Distributor received gross underwriting commissions on the sale of Class A
shares of the Funds of: 1996 - $38,156, 1995 - $30,840 and 1994 - $80,457 for
Growth and Income Fund; 1996 - $869,310, 1995 - $610,460 and 1994 - $597,792 for
Equity Fund; 1996 - $42,335, 1995 - $86,682 and 1994 - $75,084 for Ultra Fund.
For these years, the Distributor retained net underwriting commissions as
follows: 1996 - $7,615, 1995 - $5,020 and 1994 - $12,674 for Growth and Income
Fund; 1996 - $107,976, 1995 - $96,169 and 1994 - $98,610 for Equity Fund; and
1996 - $9,163, 1995 - $14,803 and 1994 - $15,554 for Ultra Fund. For 1996, 1995
and the period October 5, 1993 through September 30, 1994, the Distributor
received gross underwriting commissions on the sale of Class A shares of
$29,472, $25,278 and $93,332, respectively, for Global Fund and retained net
underwriting commissions of $,3,907, $4,002 and $14,560, respectively. For the
fiscal year ended September 30, 1996 and the period June 1, 1995 through
September 30, 1995, the Distributor received gross underwriting commissions on
the sale of Class A shares of $7,393 and $819, respectively, for Asset
Allocation Fund and retained net underwriting commissions of $911 and $198,
respectively. For the period November 4, 1996 through March 31, 1997, the
Distributor received gross underwriting commissions on the sale of Class A
shares and contingent deferred sales charges on redemptions of Class B shares of
$30,799 for Social Awareness Fund and retained net underwriting commissions of
$1,572. The Distributor also receives compensation from Lexington Management
Corporation ("Lexington") to defray expenses it incurs in the distribution of
certain mutual funds sub-advised by Lexington and variable insurance products
certain underlying funds of which are sub-advised by Lexington and for the
access which the Distributor permits Lexington to have to its network of brokers
and dealers. The Agreement is currently in effect with respect to the Global
Series of Security Equity Fund and Series D of SBL Fund, the underlying
investment vehicle for certain variable insurance products distributed by the
Distributor (collectively referred to as the "Sub-Advised Portfolios"). Pursuant
to the terms of the Agreement, Lexington pays the Distributor a fee, ranging
from 0% of the average daily net assets of the Sub-Advised Portfolios below $50
million to .25% of the average daily net assets of the Sub-Advised Portfolios of
$400 million or more. The fee is calculated daily and payable monthly.
The Distributor, on behalf of the Funds, may act as a broker in the
purchase and sale of securities not effected on a securities exchange, provided
that any such transactions and any commissions shall comply with requirements of
the Investment Company Act of 1940 and all rules and regulations of the SEC. The
Distributor has not acted as a broker.
39
<PAGE>
The Funds' Distribution Agreements are renewable annually either by the
Board of Directors or by the vote of a majority of the Fund's outstanding
securities, and, in either event, by a majority of the board who are not parties
to the contract or interested persons of any such party. The contract may be
terminated by either party upon 60 days' written notice.
ALLOCATION OF PORTFOLIO BROKERAGE
Transactions in portfolio securities shall be effected in such manner as
deemed to be in the best interests of the respective Funds. In reaching a
judgment relative to the qualifications of a broker-dealer ("broker") to obtain
the best execution of a particular transaction, all relevant factors and
circumstances will be taken into account by the Investment Manager or relevant
Sub-Adviser, including the overall reasonableness of commissions paid to a
broker, the firm's general execution and operational capabilities, and its
reliability and financial condition. Subject to the foregoing considerations,
the execution of portfolio transactions may be directed to brokers who furnish
investment information or research services to the Investment Manager or
relevant Sub-Adviser. Such investment information and research services include
advice as to the value of securities, the advisability of investing in,
purchasing or selling securities, and the availability of securities and
purchasers or sellers of securities, and furnishing analyses and reports
concerning issues, industries, securities, economic factors and trends,
portfolio strategy and performance of accounts. Such investment information and
research services may be furnished by brokers in many ways, including: (1)
on-line data base systems, the equipment for which is provided by the broker,
that enable the Investment Manager to have real-time access to market
information, including quotations; (2) economic research services, such as
publications, chart services and advice from economists concerning macroeconomic
information; and (3) analytical investment information concerning particular
corporations. If a transaction is directed to a broker supplying such
information or services, the commission paid for such transaction may be in
excess of the commission another broker would have charged for effecting that
transaction provided that the Investment Manager or relevant Sub-Adviser shall
have determined in good faith that the commission is reasonable in relation to
the value of the investment information or the research services provided,
viewed in terms of either that particular transaction or the overall
responsibilities of the Investment Manager or relevant Sub-Adviser with respect
to all accounts as to which it exercises investment discretion. The Investment
Manager or relevant Sub-Adviser may use all, none, or some of such information
and services in providing investment advisory services to each of the mutual
funds under its management, including the Funds.
In addition, brokerage transactions may be placed with broker-dealers who
sell shares of the Funds managed by the Investment Manager and who may or may
not also provide investment information and research services. The Investment
Manager may, consistent with the NASD Rules of Fair Practice, consider sales of
shares of the Funds in the selection of a broker.
The Funds may also buy securities from, or sell securities to, dealers
acting as principals or market makers. The Investment Manager generally will not
purchase investment information or research services in connection with such
principal transactions.
Securities held by the Funds may also be held by other investment advisory
clients of the Investment Manager and/or relevant Sub-Adviser, including other
investment companies. In addition, Security Benefit Life Insurance Company
("SBL"), may also hold some of the same securities as the Funds. When selecting
securities for purchase or sale for a Fund, the Investment Manager may at the
same time be purchasing or selling the same securities for one or more of such
other accounts, subject to the Investment Manager's obligation to seek best
execution, such purchases or sales may be executed simultaneously or "bunched."
It is the policy of the Investment Manager not to favor one account over the
other. Any purchase or sale orders executed simultaneously (which may also
include orders from SBL) are allocated at the average price and as nearly as
practicable 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 by each
account. In those instances where it is not practical to allocate purchase or
sale orders on a pro rata basis, then the allocation will be made on a rotating
or other equitable basis. While it is conceivable that in certain instances this
procedure could adversely affect the price or number of shares involved in the
Fund's transaction, it is believed that the procedure generally contributes to
better overall execution of the Fund's portfolio transactions. The Board of
Directors of the Funds has adopted guidelines governing this procedure and will
monitor the procedure to determine that the guidelines are being followed and
that the procedure continues to be in the best interest of the Fund and its
stockholders. With respect to the allocation of
40
<PAGE>
initial public offerings ("IPOs"), the Investment Manager may determine not to
purchase such offerings for certain of its clients (including investment company
clients) due to the limited number of shares typically available to the
Investment Manager in an IPO.
The following table sets forth the brokerage fees paid by the Funds during
the last three fiscal years and certain other information:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FUND TRANSACTIONS DIRECTED
TO AND COMMISSIONS PAID TO
FUND BROKERAGE BROKER-DEALERS WHO ALSO
COMMISSIONS PAID PERFORMED SERVICES
CLASS A SHARES FUND TO SECURITY -----------------------------------
ANNUAL PORTFOLIO TOTAL BROKERAGE DISTRIBUTORS INC., BROKERAGE
YEAR TURNOVER RATE COMMISSIONS PAID THE UNDERWRITER TRANSACTIONS COMMISSIONS
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Security Growth
and Income Fund
- ------------------------------------------------------------------------------------------------------------------------------------
1996 69% $ 98,516 0 $ 15,375,167 $ 22,566
1995 130% 257,300 0 33,932,170 57,450
1994 163% 448,925 0 21,666,518 53,256
- ------------------------------------------------------------------------------------------------------------------------------------
Security Equity Fund
Equity Series
- ------------------------------------------------------------------------------------------------------------------------------------
1996 64% $ 919,879 0 $181,146,205 $227,747
1995 95% 1,234,947 0 168,226,033 327,825
1994 79% 1,073,763 0 74,497,202 182,980
- ------------------------------------------------------------------------------------------------------------------------------------
Security Equity Fund
Global Series
- ------------------------------------------------------------------------------------------------------------------------------------
1996 142% $ 194,768 0 $ 11,476,297 $ 20,493
1995 141% 193,540 0 11,472,063 32,292
1994 73% 186,281 0 7,774,273 16,685
- ------------------------------------------------------------------------------------------------------------------------------------
Security Equity Fund
Asset Allocation
Series
- ------------------------------------------------------------------------------------------------------------------------------------
1996 75% $ 10,674 0 $ 259,602 $ 724
1995* 129% 3,904 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Security Equity Fund
Social Awareness
Series
- ------------------------------------------------------------------------------------------------------------------------------------
1997** 22% $ 2,396 0 $ 501,208 $ 665
- ------------------------------------------------------------------------------------------------------------------------------------
Security Ultra Fund
- ------------------------------------------------------------------------------------------------------------------------------------
1996 161% $ 200,614 0 $ 45,866,810 $ 76,520
1995 180% 277,069 0 24,047,026 42,679
1994 111% 296,484 0 10,321,410 44,151
- ------------------------------------------------------------------------------------------------------------------------------------
*Asset Allocation Fund's figures are based on the period June 1, 1995 (date of inception) to September 30, 1995. **Social Awareness
Fund's figures are based on the period November 4, 1996 (date of inception) to March 31, 1997.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Class B shares' annual portfolio turnover rates for the fiscal years ended
September 30, 1996 and 1995 were the same as Class A shares. Class B shares'
annual portfolio turnover rates for the period October 19, 1993 to September 30,
1994 were 178%, 80%, 73% and 110% for Growth and Income Fund, Equity Fund,
Global Fund and Ultra Fund, respectively. The annual portfolio turnover rate for
the period June 1, 1995 to September 30, 1995 was 129% for Asset Allocation
Fund. The annualized portfolio turnover rate for the period November 4, 1996 to
March 31, 1997 was 22% for Social Awareness Fund. Portfolio turnover information
is not yet available for Value Fund as it did not begin operations until May of
1997.
HOW NET ASSET VALUE IS DETERMINED
The per share net asset value of each Fund is determined by dividing the
total value of its securities and other assets, less liabilities, by the total
number of shares outstanding. The public offering price for each Fund is its net
asset value per share plus, in the case of Class A shares, the applicable sales
charge. The net asset value and offering price are computed once daily as of the
close of regular trading hours on the New York Stock Exchange (normally 3:00
p.m. Central time) on each day the Exchange is open for trading, which is Monday
through Friday, except for the following dates when the exchange is closed in
observance of federal holidays: New Year's Day,
41
<PAGE>
President's Day, Martin Luther King, Jr. Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The offering price determined at the close of business on the New York
Stock Exchange on each day on which the Exchange is open will be applicable to
all orders for the purchase of Fund shares received by the dealer prior to such
close of business and transmitted to the Funds prior to the close of their
business day (normally 5:00 p.m. Central time unless the Exchange closes early).
Orders accepted by the dealer after the close of business of the Exchange or on
a day when the Exchange is closed will be filled on the basis of the offering
price determined as of the close of business of the Exchange on the next day on
which the Exchange is open. It is the responsibility of the dealer to promptly
transmit orders to the Funds.
In determining net asset value, securities listed or traded on a national
securities exchange are valued on the basis of the last sale price. If there are
no sales on a particular day, then the securities shall be valued at the last
bid price. 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 to be unsatisfactory by the Board of Directors or the
Funds' Investment Manager, then the securities shall be valued in good faith by
such method as the Board of Directors determines will reflect their fair market
value.
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.
HOW TO REDEEM SHARES
Stockholders may turn in their shares directly to the Investment Manager
for redemption at net asset value (which may be more or less than the investor's
cost, depending upon the market value of the portfolio securities at the time of
redemption). The redemption price in cash will be 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 Investment Manager, which serves as the Funds' 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. 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 signature guarantee must be provided by an eligible guarantor institution,
such as a bank, broker, credit union, national securities exchange or savings
association. 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.
The Articles of Incorporation of Security Equity Fund provide that the
Board of Directors, without the vote or consent of the stockholders, may adopt a
plan to redeem at net asset value all shares in any stockholder account in which
there has been no investment (other than the reinvestment of income dividends or
capital gains distributions) for the last six months and in which there are
fewer than 25 shares or such fewer number of shares as may be specified by the
Board of Directors. Any plan of involuntary redemption adopted by the Board of
Directors shall provide that the plan is in the economic best interests of the
Fund or is necessary to reduce disproportionately burdensome expenses in
servicing stockholder accounts. Such plan shall further provide that prior
notice of at least six months shall be given to a stockholder before involuntary
redemption, and that the stockholder will have at least six months from the date
of the notice to avoid redemption by increasing his or her
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account to at least the minimum number of shares established in the Articles of
Incorporation, or such fewer shares as are specified in the plan.
When investing in the Funds, stockholders are required to furnish their tax
identification number and to state whether or not they are subject to
withholding for prior underreporting, certified under penalties of perjury as
prescribed by the Internal Revenue Code. To the extent permitted by law, the
redemption proceeds of stockholders who fail to furnish this information will be
reduced by $50 to reimburse for the IRS penalty imposed for failure to report
the tax identification number on information reports.
Payment in cash of the amount due on redemption, less any applicable
deferred sales charge, for shares redeemed will be made within seven days after
tender, except that the Funds may suspend the right of redemption during any
period when trading on the New York Stock Exchange is restricted or such
Exchange is closed for other than weekends or holidays, or any emergency is
deemed to exist by the Securities and Exchange Commission. When a redemption
request is received, the redemption proceeds are deposited into a redemption
account established by the Distributor and the Distributor sends a check in the
amount of redemption proceeds to the stockholder. The Distributor earns interest
on the amounts maintained in the redemption account. Conversely, the Distributor
causes payments to be made to the Funds in the case of orders for purchase of
Fund shares before it actually receives federal funds.
The Funds have committed themselves to pay in cash all requests for
redemptions by any stockholder of record limited in amount during any 90-day
period to the lesser of $250,000 or 1% of the net asset value of the Fund at the
beginning of such period.
In addition to the foregoing redemption procedure, the Funds repurchase
shares from broker-dealers at the price determined as of the close of business
on the day such offer is confirmed. The Distributor has been authorized, as
agent, to make such repurchases for the Funds' account. Dealers may charge a
commission on the repurchase of shares.
The repurchase or redemption of shares held in a tax-qualified retirement
plan must be effected through the trustee of the plan and may result in adverse
tax consequences. (See "Retirement Plans," page 51.)
At various times the Funds may be requested to redeem shares for which they
have not yet received good payment. Accordingly, the Funds may delay the mailing
of a redemption check until such time as they have assured themselves that good
payment (e.g., cash or certified check on a U.S. bank) has been collected for
the purchase of such shares.
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 Funds 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 3:00 p.m. Central time) will be treated as if received
on the next business day. Telephone redemptions are not accepted for IRA and
403(b)(7) accounts. A stockholder who authorizes telephone redemptions
authorizes the Investment Manager to act upon the instructions of any person
identifying themselves as the owner of the 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 redemption by telephone provide the account registration and
number, the owner's tax identification number, and the dollar amount or number
of shares to be redeemed, and such instructions must be received on a recorded
line. Neither the Fund, the Investment Manager, nor the Distributor will be
liable for any loss, liability, cost or expense arising out of any redemption
request provided that 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
Funds.
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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" above.
HOW TO EXCHANGE SHARES
Pursuant to arrangements with the Distributor and with Security Cash Fund,
stockholders of the Funds may exchange their shares for shares of another of the
Funds, for shares of the other mutual funds distributed by the Distributor or
for shares of Security Cash Fund at net asset value. The other mutual funds
currently distributed by the Distributor currently include Security Corporate
Bond, Limited Mautrity Bond, U.S. Government, High Yield, Emerging Markets Total
Return, Global Asset Allocation, Global High Yield and Tax-Exempt Funds.
Exchanges may be made only in those states where shares of the fund into which
an exchange is to be made are qualified for sale.
Class A and Class B shares of the Funds may be exchanged for Class A and
Class B shares, respectively, of another Fund distributed by the Distributor 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. Such transactions generally
have the same tax consequences as ordinary sales and purchases. No service fee
is presently imposed on such an exchange. They are not tax-free exchanges.
Exchanges are made promptly upon receipt of a properly completed Exchange
Authorization form and (if issued) share certificates in good order for
transfer. If the stockholder is a corporation, partnership, agent, fiduciary or
surviving joint owner, additional documentation of a customary nature, such as a
stock power and guaranteed signature, will be required. (See "How to Redeem
Shares," page 42.)
This privilege may be changed or discontinued at any time at the discretion
of the management of the Funds upon 60 days' notice to stockholders. It is
contemplated, however, that the privilege will be extended in the absence of
objection by regulatory authorities and provided shares of the respective
companies are available and may be legally sold in the jurisdiction in which the
stockholder resides. A current prospectus of the Fund into which an exchange is
made will be given each stockholder exercising this privilege.
EXCHANGE BY TELEPHONE
To exchange shares by telephone, a shareholder must have completed either
the Telephone Exchange section of the application or a Telephone Transfer
Authorization form which may be obtained from the Investment Manager.
Authorization must be on file with the Investment Manager before exchanges may
be made by telephone. Once authorization has been received by the Investment
Manager, a stockholder may exchange shares by telephone by calling the Funds 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 after the
close of the New York Stock Exchange (normally 3:00 p.m. Central time) will be
treated as if received on the next business day. Shares which are held in
certificate form may not be exchanged by telephone.
The telephone exchange privilege is only permitted between accounts with
identical registration. 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, the tax identification number, the dollar amount or number of shares
to be exchanged, and the names of the Security Funds from which and into which
the exchange is to be made, and such instructions must be received on a recorded
line. Neither the Funds, the Investment Manager nor the Distributor will 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 in the event of a fraudulent or unauthorized request. This
telephone exchange privilege may be changed or discontinued at any time at the
discretion of the management of the Funds. In particular, the Funds may set
limits on the amount and frequency of such exchanges, in general or as to any
individual who abuses such privilege.
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DIVIDENDS AND TAXES
It is each Fund's policy to pay dividends from net investment income as
from time to time declared by the Board of Directors, and to distribute realized
capital gains (if any) in excess of any capital losses and capital loss
carryovers, at least once a year. Because Class A shares of the Funds bear most
of the costs of distribution of such shares through payment of a front-end sales
charge, while Class B shares of the Funds bear such costs through a higher
distribution fee, expenses attributable to Class B shares, generally, will be
higher and as a result, income distributions paid by the Funds with respect to
Class B shares generally will be lower than those paid with respect to Class A
shares. Because the value of a share is based directly on the amount of the net
assets rather than on the principle of supply and demand, any distribution of
capital gains or payment of an income dividend will result in a decrease in the
value of a share equal to the amount paid. All such dividends and distributions
are automatically reinvested on the payable date in shares of the Funds 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. A
stockholder who elected not to reinvest dividends or distributions paid with
respect to Class A shares may, at any time within 30 days after the payment
date, reinvest a dividend check without imposition of a sales charge.
For federal income tax purposes, dividends paid by the Funds from net
investment income may qualify for the corporate stockholder's dividends received
deduction to the extent the Funds designate the amount distributed as a
qualified dividend. The aggregate amount designated as a qualified dividend by
the Funds cannot exceed the aggregate amount of dividends received by the Funds
from domestic corporations for the taxable year. The corporate dividends
received deduction will be limited if the shares with respect to which the
dividends are received are treated as debt-financed or are deemed to have been
held less than 46 days. In addition, a corporate stockholder must hold Fund
shares for at least 46 days to be eligible to claim the dividends received
deduction. All dividends from net investment income, together with distributions
of any realized net short-term capital gains, whether paid direct to the
stockholder or reinvested in shares of the Funds, are taxable as ordinary
income.
Stockholders will report as long-term capital gains income any realized net
long-term capital gains in excess of any capital loss carryover which is
distributed to them and designated by the Fund as a capital gain dividend,
whether or not reinvested in the Fund, and regardless of the period of time such
shares have been owned by the stockholders. Advice as to the tax status of each
year's dividends and distributions will be mailed annually. At March 31, 1997,
Social Awareness Fund had accumulated net realized losses on sales of
investments of $103,870.
A purchase of shares shortly before payment of a dividend or distribution
is disadvantageous because the dividend or distribution to the purchaser has the
effect of reducing the per share net asset value of the shares by the amount of
the dividends or distributions. In addition, all or a portion of such dividends
or distributions (although in effect a return of capital) may be taxable.
Each Fund intends to qualify annually and to elect to be treated as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code").
To qualify as a regulated investment company, each Fund must, among other
things: (i) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to certain securities loans, and
gains from the sale or other disposition of stock, securities or foreign
currencies, or other income derived with respect to its business of investing in
such stock, securities, or currencies ("Qualifying Income Test"); (ii) derive in
each taxable year less than 30% of its gross income from the sale or other
disposition of certain assets held less than three months (namely (a) stock or
securities, (b) options, futures and forward contracts (other than those on
foreign currencies), and (c) foreign currencies (including options, futures, and
forward contracts on such currencies) not directly related to a Fund's principal
business of investing in stocks or securities (or options and futures with
respect to stocks and securities)); (iii) diversify its holdings so that, at the
end of each quarter of the taxable year, (a) at least 50% of the market value of
the Fund's assets is represented by cash, cash items, U.S. Government
securities, the securities of other regulated investment companies, and other
securities, with such other securities of any one issuer limited for the
purposes of this calculation to an amount not greater than 5% of the value of
the Fund's total assets and 10% of the outstanding voting securities of such
issuer, and
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(b) not more than 25% of the value of its total assets is invested in the
securities of any one issuer (other than U.S. Government securities or the
securities of other regulated investment companies), or of two or more issuers
which the Fund controls (as that term is defined in the relevant provisions of
the Code) and which are determined to be engaged in the same or similar trades
or businesses or related trades or businesses; and (iv) distribute at least 90%
of the sum of its investment company taxable income (which includes, among other
items, dividends, interest, and net short-term capital gains in excess of any
net long-term capital losses) and its net tax-exempt interest each taxable year.
The Treasury Department is authorized to promulgate regulations under which
foreign currency gains would constitute qualifying income for purposes of the
Qualifying Income Test only if such gains are directly related to investing in
securities (or options and futures with respect to securities). To date, no such
regulations have been issued.
Certain requirements relating to the qualification of a Fund as a regulated
investment company may limit the extent to which a Fund will be able to engage
in certain investment practices, including transactions in futures contracts and
other types of derivative securities transactions. In addition, if a Fund were
unable to dispose of portfolio securities due to settlement problems relating to
foreign investments or due to the holding of illiquid securities, the Fund's
ability to qualify as a regulated investment company might be affected.
A Fund qualifying as a regulated investment company generally will not be
subject to U.S. federal income tax on its investment company taxable income and
net capital gains (any net long-term capital gains in excess of the net
short-term capital losses), if any, that it distributes to shareholders. Each
Fund intends to distribute to its shareholders, at least annually, substantially
all of its investment company taxable income and any net capital gains.
Generally, regulated investment companies, like the Fund, must distribute
amounts on a timely basis in accordance with a calendar year distribution
requirement in order to avoid a nondeductible 4% excise tax. Generally, to avoid
the tax, a regulated investment company must distribute during each calendar
year, (i) at least 98% of its ordinary income (not taking into account any
capital gains or losses) for the calendar year, (ii) at least 98% of its capital
gains in excess of its capital losses (adjusted for certain ordinary losses) for
the 12-month period ending on October 31 of the calendar year, and (iii) all
ordinary income and capital gains for previous years that were not distributed
during such years. To avoid application of the excise tax, each Fund intends to
make its distributions in accordance with the calendar year distribution
requirement. A distribution is treated as paid on December 31 of the calendar
year if it is declared by a Series in October, November or December of that year
to shareholders of record on a date in such a month and paid by the Fund during
January of the following calendar year. Such distributions are taxable to
shareholders in the calendar year in which the distributions are declared,
rather than the calendar year in which the distributions are received.
If, as a result of exchange controls or other foreign laws or restrictions
regarding repatriation of capital, a Fund were unable to distribute an amount
equal to substantially all of its investment company taxable income (as
determined for U.S. tax purposes) within applicable time periods, the Fund would
not qualify for the favorable federal income tax treatment afforded regulated
investment companies, or, even if it did so qualify, it might become liable for
federal taxes on undistributed income. In addition, the ability of a Fund to
obtain timely and accurate information relating to its investments is a
significant factor in complying with the requirements applicable to regulated
investment companies in making tax-related computations. Thus, if a Fund were
unable to obtain accurate information on a timely basis, it might be unable to
qualify as a regulated investment company, or its tax computations might be
subject to revisions (which could result in the imposition of taxes, interest
and penalties).
Generally, gain or loss realized upon the sale or redemption of shares
(including the exchange of shares for shares of another fund) will be capital
gain or loss if the shares are capital assets in the shareholder's hands, and
will be long-term capital gain or loss if the shares have been held for more
than one year. Investors should be aware that any loss realized upon the sale or
redemption of shares held for six months or less will be treated as a long-term
capital loss to the extent of any distribution of long-term capital gain to the
shareholder with respect to such shares. In addition, any loss realized on a
sale or exchange of shares will be disallowed to the extent the shares disposed
of are replaced within a period of 61 days, beginning 30 days before and ending
30 days after the date the shares are disposed of, such as pursuant to the
reinvestment of dividends. In such case, the basis of the shares acquired will
be adjusted to reflect the disallowed loss.
Under certain circumstances, the sales charge incurred in acquiring Class A
shares of the Funds may not be taken into account in determining the gain or
loss on the disposition of those shares. This rule applies in
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circumstances when shares of the Fund are exchanged within 90 days after the
date they were purchased and new shares in a regulated investment company are
acquired without a sales charge or at a reduced sales charge. In that case, the
gain or loss recognized on the exchange will be determined by excluding from the
tax basis of the shares exchanged all or a portion of the sales charge incurred
in acquiring those shares. This exclusion applies to the extent that the
otherwise applicable sales charge with respect to the newly acquired shares is
reduced as a result of having incurred the sales charge initially. Instead,
the portion of the sales charge affected by this rule will be treated as an
amount paid for the new shares.
The Funds are required by law to withhold 31% of taxable dividends and
distributions to shareholders who do not furnish their correct taxpayer
identification numbers, or are otherwise subject to the backup withholding
provisions of the Internal Revenue Code.
Each series of Security Equity Fund will be treated separately in
determining the amounts of income and capital gains distributions. For this
purpose, each series will reflect only the income and gains, net of losses of
that series.
PASSIVE FOREIGN INVESTMENT COMPANIES. Some of the Funds may invest in
stocks of foreign companies that are classified under the Code as passive
foreign investment companies ("PFICs"). In general, a foreign company is
classified as a PFIC if at least one half of its assets constitutes
investment-type assets or 75% or more of its gross income is investment-type
income. Under the PFIC rules, an "excess distribution" received with respect to
PFIC stock is treated as having been realized ratably over a period during which
the Fund held the PFIC stock. The Fund itself will be subject to tax on the
portion, if any, of the excess distribution that is allocated to the Fund's
holding period in prior taxable years (an interest factor will be added to the
tax, as if the tax had actually been payable in such prior taxable years) even
though the Fund distributes the corresponding income to shareholders. Excess
distributions include any gain from the sale of PFIC stock as well as certain
distributions from a PFIC. All excess distributions are taxable as ordinary
income.
A Fund may be able to elect alternative tax treatment with respect to PFIC
stock. Under an election that currently may be available, a Fund generally would
be required to include in its gross income its share of the earnings of a PFIC
on a current basis, regardless of whether any distributions are received from
the PFIC. If this election is made, the special rules, discussed above, relating
to the taxation of excess distributions, would not apply. In addition, another
election may be available that would involve marking to market a Fund's PFIC
stock at the end of each taxable year (and on certain other dates prescribed in
the Code), with the result that unrealized gains are treated as though they were
realized. If this election were made, tax at the Fund level under the PFIC rules
would be eliminated, but a Fund could, in limited circumstances, incur
nondeductible interest charges. A Fund's intention to qualify annually as a
regulated investment company may limit the Fund's elections with respect to PFIC
stock.
Because the application of the PFIC rules may affect, among other things,
the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC stock, as well as subject a Fund
itself to tax on certain income from PFIC stock, the amount that must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not invest in PFIC stock.
OPTIONS, FUTURES AND FORWARD CONTRACTS AND SWAP AGREEMENTS. Certain
options, futures contracts, and forward contracts in which a Fund may invest may
be "Section 1256 contracts." Gains or losses on Section 1256 contracts generally
are considered 60% long-term and 40% short-term capital gains or losses;
however, foreign currency gains or losses arising from certain Section 1256
contracts may be treated as ordinary income or loss. Also, Section 1256
contracts held by a Fund at the end of each taxable year (and at certain other
times as prescribed pursuant to the Code) are "marked to market" with the result
that unrealized gains or losses are treated as though they were realized.
Generally, the hedging transactions undertaken by a Fund may result in
"straddles" for U.S. federal income tax purposes. The straddle rules may affect
the character of gains (or losses) realized by a Fund. In addition, losses
realized by a Fund on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which such losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences of transactions in options, futures, forward
contracts, swap agreements and other financial contracts to a Fund are
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not entirely clear. The transactions may increase the amount of short-term
capital gain realized by a Fund which is taxed as ordinary income when
distributed to shareholders.
A Fund may make one or more of the elections available under the Code which
are applicable to straddles. If a Fund makes any of the elections, the amount,
character and timing of the recognition of gains or losses from the affected
straddle positions will be determined under rules that vary according to the
election(s) made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of gains
or losses, defer losses and/or accelerate the recognition of gains or losses
from the affected straddle positions, the amount which must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased as compared to a fund that
did not engage in such hedging transactions.
Because only a few regulations regarding the treatment of swap agreements,
and related caps, floors and collars, have been implemented, the tax
consequences of such transactions are not entirely clear. The Funds intend to
account for such transactions in a manner deemed by them to be appropriate, but
the Internal Revenue Service might not necessarily accept such treatment. If it
did not, the status of a Fund as a regulated investment company might be
affected.
The requirements applicable to a Fund's qualification as a regulated
investment company may limit the extent to which a Fund will be able to engage
in transactions in options, futures contracts, forward contracts, swap
agreements and other financial contracts.
FOREIGN TAXATION. Income received by a Fund from sources within a foreign
country may be subject to withholding and other taxes imposed by that country.
Tax conventions between certain countries and the U.S. may reduce or eliminate
such taxes.
FOREIGN CURRENCY TRANSACTIONS. Under the Code, gains or losses attributable
to fluctuations in exchange rates which occur between the time a Fund accrues
income or other receivables or accrues expenses or other liabilities denominated
in a foreign currency and the time that a Fund actually collects such
receivables or pays such liabilities, generally are treated as ordinary income
or ordinary loss. Similarly, on disposition of debt securities denominated in a
foreign currency and on disposition of certain futures contracts, forward
contracts and options, gains or losses attributable to fluctuations in the value
of foreign currency between the date of acquisition of the security or contract
and the date of disposition also are treated as ordinary gain or loss. These
gains or losses, referred to under the Code as "Section 988" gains or losses,
may increase or decrease the amount of a Fund's investment company taxable
income to be distributed to its shareholders as ordinary income.
OTHER TAXES. The foregoing discussion is general in nature and is not
intended to provide an exhaustive presentation of the tax consequences of
investing in a Fund. Distributions may also be subject to additional state,
local and foreign taxes, depending on each shareholder's particular situation.
Depending upon the nature and extent of a Fund's contacts with a state or local
jurisdiction, the Fund may be subject to the tax laws of such jurisdiction if it
is regarded under applicable law as doing business in, or as having income
derived from, the jurisdiction. Shareholders are advised to consult their own
tax advisers with respect to the particular tax consequences to them of an
investment in a Fund.
ORGANIZATION
The Articles of Incorporation of each 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 five series, Equity Fund, Global Fund, Asset
Allocation Fund, Social Awareness Fund and Value 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. Growth and Income and Ultra Funds have not issued shares in any
additional series at the present time. Growth and Income and Ultra Funds each
have authorized capital stock of $1.00 par value and $.50 par value,
respectively.
Each of the Funds 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 each class; (ii) each class of shares has
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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 Funds. Shares may be exchanged as described under
"How to Exchange Shares," page 44,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, Equity Fund, Global Fund, Asset Allocation Fund,
Social Awareness Fund and Value 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 Funds do 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% of a Fund's outstanding shares.
LEGAL PROCEEDINGS
Ultra Fund has been named as a class defendant in an adversary proceeding
filed on March 14, 1995 in a pending bankruptcy, captioned In re: Integra Realty
Resources, Inc., Integra-a Hotel and Restaurant Company, and BHC of Denver,
Inc., United States Bankruptcy Court for the District of Colorado. The adversary
proceeding was brought by Jeffrey A. Weinman, as Trustee for the Integra
Unsecured Creditors against the principal defendant Fidelity Capital
Appreciation Fund and over 6,000 other class defendants, including the Ultra
Fund. The Trustee alleges that the defendants, former shareholders of Integra
Realty Resources, Inc., improperly received a distribution of Integra's assets
in December 1988 when Integra distributed all of the shares of its subsidiary,
ShowBiz Pizza Time, to its shareholders, leaving insufficient resources for
Integra to continue to operate to the detriment of the Integra Unsecured
Creditors. Ultra Fund has been advised that its maximum exposure in the lawsuit
should be less than $361,000.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND-PAYING AGENT
UMB Bank, N.A., 928 Grand Avenue, Kansas City, Missouri, acts as the
custodian for the portfolio securities of Growth and Income Fund, Equity Fund,
Social Awareness Fund, Value Fund and Ultra Fund. Chase Manhattan Bank, 4 Chase
MetroTech Center, Brooklyn, New York 11245 acts as custodian for the portfolio
securities of Global and Asset Allocation Funds, including those held by foreign
banks and foreign securities depositories which qualify as eligible foreign
custodians under the rules adopted by the SEC. Security Management Company, LLC
acts as the Funds' transfer and dividend-paying agent.
INDEPENDENT AUDITORS
The firm of Ernst & Young LLP, One Kansas City Place, 1200 Main Street,
Kansas City, Missouri, has been selected by the Funds' Board of Directors to
serve as the Funds' independent auditors, and as such, the firm will perform the
annual audit of the Funds' financial statements.
PERFORMANCE INFORMATION
The Funds may, from time to time, include performance information in
advertisements, sales literature or reports to shareholders or prospective
investors. Performance information in advertisements or sales literature may be
expressed as average annual total return or aggregate total return.
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
Funds over periods of 1, 5 and 10 years (up to the life of the Fund), calculated
pursuant to the following formula:
P(1 + T)n = ERV
(where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years, and ERV = the ending redeemable value of
a hypothetical $1,000 payment made at the beginning of the period). All total
return figures will reflect the deduction of the maximum initial sales load of
5.75% in the case of quotations of performance of Class A shares or the
applicable contingent deferred sales charge in the case of quotations of
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performance of Class B shares and a proportional share of Fund expenses on an
annual basis, and assume that all dividends and distributions are reinvested
when paid.
For the 1-, 5- and 10-year periods ended September 30, 1996, respectively,
the average annual total return of Class A shares of Growth and Income Fund was
13.45%, 8.78% and 9.00%. For the 1-year period ended September 30, 1996, the
average annual total return of Class B shares of Growth and Income Fund was
14.01%. For the period October 19, 1993 (date of inception) to September 30,
1996, the average annual total return for Class B shares of Growth and Income
Fund was 8.55%.
For the 1-, 5- and 10-year periods ended September 30, 1996, respectively,
the average annual total return of Class A shares of Equity Fund was 17.71%,
15.70% and 15.24%. For the 1-year period ended September 30, 1996, the average
annual total return of Class B shares of Equity Fund was 18.57%. For the period
October 19, 1993 (date of inception) to September 30, 1996, the average annual
total return for Class B shares of Equity Fund was 15.58%.
For the 1-year period ended September 30, 1996, the average annual total
return of Class A shares of Global Fund was 10.94%. For the period October 5,
1993 (date of inception) to September 30, 1996, the average annual total return
of Class A shares of Global Fund was 7.33%. For the 1-year period ended
September 30, 1996, the average annual total return of Class B shares of Global
Fund was 11.57%. For the period October 19, 1993 (date of inception) to
September 30, 1996, the average annual total return of Class B shares of Global
Fund was 7.88%.
For the 1-, 5- and 10-year periods ended September 30, 1996, respectively,
the average annual total return of Class A shares of Ultra Fund was 8.73%,
10.61% and 6.70%. For the 1-year period ended September 30, 1996, the average
annual total return of Class B shares of Ultra Fund was 8.81%. For the period
October 19, 1993 (date of inception) to September 30, 1996, the average annual
total return for Class B shares of Ultra Fund was 8.56%.
For the 1-year period ended September 30, 1996 the average annual total
return of Class A and Class B shares of Asset Allocation Fund was 3.69% and
3.97%, respectively. For the period June 1, 1995 (date of inception) through
September 30, 1996, the average annual total return of Class A and Class B
shares of Asset Allocation Fund was 6.88% and 7.71%, respectively.
For the period November 4, 1996 (date of inception) through March 31, 1997,
the average annual total return of Class A and Class B shares of Social
Awareness Fund was -22.3% and -21.4%, respectively.
Quotations of aggregate total return will be calculated for any specified
period pursuant to the following formula:
ERV - P
------- = T
P
(where P = a hypothetical initial payment of $1,000, T = the total return, and
ERV = the ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the period). All total return figures will assume that all
dividends and distributions are reinvested when paid. The Funds may, from time
to time, include quotations of aggregate total return that do not reflect
deduction of the sales load. The sales load, if reflected, would reduce the
total return.
The aggregate total return on an investment made in Class A shares of
Growth and Income Fund, Equity Fund and Ultra Fund calculated as described above
for the period from September 30, 1986 through September 30, 1996 was 136.82%,
313.00% and 91.27%, respectively. Aggregate total return on an investment made
in Class A shares of Global Fund calculated as described above for the period
October 1, 1993 through September 30, 1996 was 23.66%. Aggregate total return on
an investment made in Class B shares of Growth and Income, Equity, Global and
Ultra Funds calculated as described above for the period October 19, 1993
through September 30, 1996 was 27.40%, 53.31%, 25.07% and 27.42%, respectively.
Aggregate total return made on an investment made in Class A and Class B shares
of Asset Allocation Fund calculated as described above for the period June 1,
1995 through September 30, 1996 was 9.29% and 10.42%, respectively. Aggregate
total return on an investment made in Class A and Class B shares of Social
Awareness Fund calculated as described above for the period November 4, 1996
through March 31, 1997 was -4.4% and -4.7%, respectively. These figures reflect
deduction of the maximum sales load. Performance information is not yet
available for Value Fund as it did not begin operations until May of 1997.
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In addition, quotations of total return will 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.
Quotations of average annual total return and aggregate total return will
reflect only the performance of a hypothetical investment in the Funds during
the particular time period shown. Such quotations for the Funds will vary based
on changes in market conditions and the level of the Funds' 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 or
aggregate total return to current or prospective shareholders, the Funds also
may compare these figures to the performance of other mutual funds tracked by
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. Each Fund will include performance data for
both Class A and Class B Shares of the Fund in any advertisement or report
including performance data of the Fund. Such mutual fund rating services include
the following: Lipper Analytical Services; Morningstar, Inc.; Investment Company
Data; Schabacker Investment Management; Wiesenberger Investment Companies
Service; Computer Directions Advisory (CDA); and Johnson's Charts. Such
unmanaged indexes include the following: S&P 500; the Dow Jones Industrial
Average; NASDAQ 100 and NASDAQ 200; Russell 2000 and Russell 2500; the Wilshire
1750 and Wilshire 4500; and the Domini Social Index. When comparing the Funds'
performance with that of other alternatives, investors should understand that
shares of the Funds may be subject to greater market risks than are certain
other types of investments.
RETIREMENT PLANS
The Funds offer tax-qualified retirement plans for individuals (Individual
Retirement Accounts, known as IRAs), several prototype retirement plans for the
self-employed (Keogh plans), pension and profit-sharing plans for corporations,
and custodial account plans for employees of public school systems and
organizations meeting the requirements of Section 501(c)(3) of the Internal
Revenue Code. Actual documents and detailed materials about the plans will be
provided upon request to the Distributor.
Purchases of the Funds' shares under any of these plans are made at the
public offering price next determined after contributions are received by the
Distributor. The Funds' shares owned under any of the plans have full dividend,
voting and redemption privileges. Depending on the terms of the particular plan,
retirement benefits may be paid in a lump sum or in installment payments over a
specified period. There are possible penalties for premature distributions from
such plans.
Security Management Company, LLC is available to act as custodian for the
plans on a fee basis. For IRAs, SIMPLE IRAs, Section 403(b) Retirement Plans,
and Simplified Employee Pension Plans (SEPPs), service fees for such custodial
services currently are: (1) $10 for annual maintenance of the account and (2)
benefit distribution fee of $5 per distribution. Service fees for other types of
plans will vary. These fees will be deducted from the plan assets. Optional
supplemental services are available from Security Benefit Life Insurance Company
for additional charges.
Retirement investment programs involve commitments covering future years.
It is important that the investment objectives and structure of the Funds be
considered by the investors for such plans. A brief description of the available
tax-qualified retirement plans is provided below. However the tax rules
applicable to such qualified plans vary according to the type of plan and the
terms and conditions of the plan itself. Therefore, no attempt is made to
provide more than general information about the various types of qualified
plans.
Investors are urged to consult their own attorneys or tax advisers when
considering the establishment and maintenance of any such plans.
INDIVIDUAL RETIREMENT ACCOUNTS (IRAs)
Individual Retirement Account Custodial Agreements are available to provide
investment in shares of the Funds or in other Funds in the Security Group. An
individual may initiate an IRA through the Underwriter by executing the
custodial agreement and making a minimum initial investment of at least $100. A
$10 annual fee is charged for maintaining the account.
An individual may make a contribution to an IRA each year of up to the
lesser of $2,000 or 100% of earned income under current tax law. Spousal IRAs
allow an individual and his or her spouse to contribute up to $2,000 to
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their respective IRAs so long as a joint tax return is filed and joint income
is $4,000 or more. The maximum amount the higher compensated spouse may
contribute for the year is the lesser of $2,000 or 100% of that spouse's
compensation. The maximum the lower compensated spous e may contribute is the
lesser of (i) $2,000 or (ii) 100% of that spouse's compensation plus the amount
by which the higher compensated spouse's compensation exceeds the amount the
higher compensated spouse contributes to his or her IRA.
Deductions for IRA contributions are limited for taxpayers who are covered
by an employer-sponsored retirement plan. However, these limitations do not
apply to a single taxpayer with adjusted gross income of $25,000 or less or
married taxpayers with adjusted gross income of $40,000 or less (if they file a
joint tax return). Taxpayers with adjusted gross income less than $10,000 in
excess of these amounts may deduct a portion of their IRA contributions. The
nondeductible portion is calculated by reference to the amount of the taxpayer's
income above $25,000 (single) or $40,000 (married) as a percentage of $10,000.
Contributions must be made in cash no later than April 15 following the
close of the tax year. No annual contribution is permitted for the year in which
the investor reaches age 70 1/2 or any year thereafter.
In addition to annual contributions, total distributions and certain
partial distributions from certain employer-sponsored retirement plans may be
eligible to be reinvested into an IRA if the reinvestment is made within 60 days
of receipt of the distribution by the taxpayer. Such rollover contributions are
not subject to the limitations on annual IRA contributions described above.
SIMPLE IRAS
The Small Business Job Protection Act of 1996 created a new retirement
plan, the Savings Incentive Match Plan for Employees of Small Employers (SIMPLE
Plans). SIMPLE Plan participants must establish a SIMPLE IRA into which plan
contributions will be deposited.
The Investment Manager makes available SIMPLE IRAs to provide investment in
shares of the Funds. Contributions to a SIMPLE IRA may be either salary deferral
contributions or employer contributions. Contributions must be made in cash and
cannot exceed the maximum amount allowed under the Internal Revenue Code. On a
pre-tax basis, up to $6,000 of compensation (through salary deferrals) may be
contributed to a SIMPLE IRA. In addition, employers are required to make either
(1) a dollar-for-dollar matching contribution or (2) a nonelective contribution
to each participant's account each year. In general, matching contributions must
equal up to 3% of compensation, but under certain circumstances, employers may
make lower matching contributions. Instead of the match, employers may make a
nonelective contribution equal to 2% of compensation (compensation for purposes
of any nonelective contribution is limited to $160,000, as indexed).
Distributions from a SIMPLE IRA are (1) taxed as ordinary income; (2)
includable in gross income; and (3) subject to applicable state tax laws.
Distributions prior to age 59 1/2 may be subject to a 10% penalty tax which
increases to 25% for distributions made before a participant has participated in
the SIMPLE Plan for at least two years. An annual fee of $10 is charged for
maintaining the SIMPLE IRA.
PENSION AND PROFIT-SHARING PLANS
Prototype corporate pension or profit-sharing plans meeting the
requirements of Internal Revenue Code Section 401(a) are available. Information
concerning these plans may be obtained from the Distributor.
403(b) RETIREMENT PLANS
Employees of public school systems and tax-exempt organizations meeting the
requirements of Internal Revenue Code Section 501(c)(3) may purchase shares of
the Funds or of the other Funds in the Security Group under a Section 403(b)
Plan. Section 403(b) Plans are subject to numerous restrictions on the amount
that may be contributed, the persons who are eligible to participate and on the
time when distributions may commence.
SIMPLIFIED EMPLOYEE PENSION PLANS (SEPPs)
A prototype SEPP is available for corporations, partnerships or sole
proprietors desiring to adopt such a plan for purchases of IRAs for their
employees. Employers establishing a SEPP may contribute a maximum of $30,000 a
year to an IRA for each employee. This maximum is subject to a number of
limitations.
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FINANCIAL STATEMENTS
The audited financial statements of the Funds (except Social Awareness Fund
and Value Fund), which are contained in the Funds' September 30, 1996 Annual
Report, and the unaudited financial statements of the Social Awareness Fund for
the period November 4, 1996 (date of inception) to March 31, 1997, are
incorporated herein by reference. Financial information is not yet available for
Value Fund as it did not begin operations until May of 1997. Copies of the
Annual Report and the unaudited financial statements of Social Awareness Fund
are provided to every person requesting a Statement of Additional Information.
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APPENDIX A
DESCRIPTION OF CORPORATE BOND RATINGS
Moody's Investors Service, Inc.
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
STANDARD & POOR'S CORPORATION
AAA - Bonds rated AAA have the highest rating assigned by Standard & Poor's
to a debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA - Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
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A - Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominately speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C - The rating C is reserved for income bonds on which no interest is being
paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
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APPENDIX B
REDUCED SALES CHARGES
CLASS A SHARES
Initial sales charges may be reduced or eliminated for persons or
organizations purchasing Class A shares of the Funds 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 (also referred to
as a "Letter of Intent"), the term "Purchaser" includes the following persons:
an individual, his or her spouse and children under the age 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
A Purchaser may combine all previous purchases with his or her contemplated
current purchases of Class A Shares of a Fund, for the purpose of determining
the sales charge applicable to the current purchase. For example, an investor
who already owns Class A shares of a Fund either worth $30,000 at the applicable
current offering price or purchased for $30,000 and who invests an additional
$25,000, is entitled to a reduced front-end sales charge of 4.75% on the latter
purchase. The Underwriter must be notified when a sale takes place which would
qualify for the reduced charge on the basis of previous purchases subject to
confirmation of the investor's holding through the Fund's records. Rights of
accumulation apply also to purchases representing a combination of the Class A
shares of the Funds, Security Income Fund or Security Tax-Exempt Fund in those
states where shares of the Fund being purchased are qualified for sale.
STATEMENT OF INTENTION
A Purchaser may sign a Statement of Intention, which may be signed within
90 days after the first purchase to be included thereunder, in the form provided
by the Underwriter covering purchases of Class A shares of the Funds, Security
Income Fund or Security Tax-Exempt Fund to be made within a period of 13 months
(or a 36-month period for purchases of $1 million or more) and thereby become
eligible for the reduced front-end sales charge applicable to the actual amount
purchased under the Statement. Five percent of the amount specified in the
Statement of Intention will be held in escrow shares until the Statement is
completed or terminated. The shares so held may be redeemed by the Funds if the
investor is required to pay additional sales charges which may be due if the
amount of purchases made by the Purchaser during the period the Statement is
effective is less than the total specified in the Statement of Intention.
A Statement of Intention may be revised during the 13-month period (or a
36-month period for purchases of $1 million or more). 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. The
Statement is not a binding obligation upon the investor to purchase or any Fund
to sell the full indicated amount. A Statement of Intention form may be obtained
from the Funds. An investor considering signing such an agreement should read
the Statement of Intention carefully.
REINSTATEMENT PRIVILEGE
Stockholders who redeem their Class A shares of the Funds have a one-time
privilege (1) to reinstate their accounts by purchasing 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 Funds, Security Income Fund and
Security Tax-Exempt Fund, without a sales charge up to the dollar amount of the
redemption proceeds. Written notice and a check in the amount of the
reinvestment from eligible stockholders wishing to exercise this reinstatement
privilege must be received by a fund within 30
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days after the redemption request was received (or such longer period as may be
permitted by rules and regulations promulgated under the Investment Company Act
of 1940). The reinstatement or exchange will be made at the net asset value next
determined after the reinvestment is received by the Fund. Stockholders making
use of the reinstatement privilege should note that any gains realized upon the
redemption will be taxable while any losses may be deferred under the "wash
sale" provision of the Internal Revenue Code.
57
