<PAGE>
Registration No. 811-1316
Registration No. 2-32791
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |_|
Post-Effective Amendment No. 42 |X|
------
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |_|
Amendment No. 42 |X|
------
(Check appropriate box or boxes)
SECURITY ULTRA FUND
(Exact Name of Registrant as Specified in Charter)
700 HARRISON STREET, TOPEKA, KANSAS 66636-0001
(Address of Principal Executive Offices/Zip Code)
Registrant's Telephone Number, including area code:
(913) 295-3127
Copies To:
John D. Cleland, President Amy J. Lee, Secretary
Security Ultra Fund Security Ultra Fund
700 Harrison Street 700 Harrison Street
Topeka, KS 66636-0001 Topeka, KS 66636-0001
(Name and address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
|_| immediately upon filing pursuant to paragraph (b)
|X| on January 29, 1997, pursuant to paragraph (b)
|_| 60 days after filing pursuant to paragraph (a)(i)
|_| on January 29, 1997, pursuant to paragraph (a)(i)
|_| 75 days after filing pursuant to paragraph (a)(ii)
|_| on January 29, 1997, pursuant to paragraph (a)(ii) of Rule 485
If appropriate, check the following box:
|_| this post-effective amendment designates a new effective date
for a previously filed post-effective amendment
--------------------
The Registrant has registered an indefinite amount of securities under the
Securities Act of 1933 pursuant to Section 24(f) under the Investment Company
Act of 1940; accordingly, no fee is payable herewith. The Registrant the Notice
required by 24f-2 on November 26, 1996.
<PAGE>
SECURITY ULTRA FUND
FORM N-1A
CROSS REFERENCE SHEET
Form N-1A
ITEM NUMBER CAPTION
PART A PROSPECTUS
1. Cover Page
2. Not Applicable
2a. Transaction and Operating Expense Table
3. Financial Highlights; Performance
4. Investment Objective and Policies of the Funds
5. Management of the Funds; Trading Practices and Brokerage
6. General Information; Dividends and Taxes; Foreign Taxes
7. How to Purchase Shares; Determination of Net Asset Value;
Shareholder Services; Appendix A
8. How to Redeem Shares
9. Not Applicable
PART B STATEMENT OF ADDITIONAL INFORMATION
10. Cover Page
11. Table of Contents
12. Not Applicable
13. Investment Objective and Policies of the Funds; Investment
Policy Limitations
14. Officers and Directors
15. Remuneration of Directors and Others
16. Investment Management; Distributor; Custodian, Transfer Agent
and Dividend-Paying Agent
17. Allocation of Portfolio Brokerage
18. Organization
19. How to Purchase Shares; How Net Asset Value is Determined; How
to Redeem Shares; How to Exchange Shares; Systematic
Withdrawal Program; Accumulation Plan; Retirement Plans;
Individual Retirement Accounts (IRAs); Pension and Profit
Sharing Plans; 403(b) Retirement Plans; Simplified Employee
Pension Plans (SEPPs); Appendix B
20. Dividends and Taxes
21. Distributor
22. Performance Information
23. Financial Statements; Independent Auditors
<PAGE>
SECURITY
FUNDS
================================================================================
PROSPECTUS
January 31, 1997
* Security Growth
and Income Fund
* Security Equity
Fund
- Equity Series
- Global Series
* Security Ultra
Fund
* Application
[SDI Logo]
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
SECURITY GROWTH AND INCOME FUND
SECURITY EQUITY FUND PROSPECTUS
EQUITY SERIES JANUARY 31, 1997
GLOBAL SERIES
SECURITY ULTRA FUND
MEMBERS OF THE SECURITY BENEFIT GROUP OF COMPANIES
700 HARRISON, TOPEKA, KANSAS 66636-0001
The investment objective of Security Growth and Income Fund ("Growth and
Income Fund") is long-term growth of capital with a secondary emphasis on
income. Growth and Income Fund seeks to achieve this objective through
investment in a diversified portfolio which will ordinarily consist principally
of common stocks but may also include other securities when deemed advisable.
Such other securities may include securities convertible into common stocks,
preferred stocks and U.S. and foreign debt securities, which may include higher
yielding, higher risk securities ("junk bonds") ordinarily characteristic of
securities in the lower rating categories of the recognized rating services.
BECAUSE GROWTH AND INCOME FUND INVESTS IN SUCH JUNK BONDS, IT MAY NOT BE
SUITABLE FOR ALL INVESTORS. IN ADDITION TO OTHER RISKS, JUNK BONDS ARE SUBJECT
TO GREATER FLUCTUATIONS IN VALUE AND RISK OF LOSS OF INCOME AND PRINCIPAL DUE TO
DEFAULT BY THE ISSUER THAN ARE LOWER YIELDING, HIGHER RATED BONDS.
The investment objective of Security Equity Fund ("Equity Fund") is
long-term capital growth. Equity Fund seeks this objective primarily through
investment in equity securities, and emphasis is placed upon the selection of
those securities which, in the opinion of the Investment Manager, offer basic
value or above-average capital growth potential.
The investment objective of Security Global Fund ("Global Fund") is
long-term growth of capital. Global Fund seeks this objective primarily through
investment in common stocks and equivalents of companies domiciled in foreign
countries and the United States. Investments in foreign securities may involve
risks not present in domestic investments.
The investment objective of Security Ultra Fund ("Ultra Fund") is capital
appreciation. Ultra Fund seeks this objective primarily through investment in
equity securities. Ultra Fund will ordinarily invest in a diversified portfolio
of common stocks and securities convertible into common stocks, and the
portfolio may include the securities of smaller and less mature companies. ULTRA
FUND MAY ENGAGE IN SHORT-TERM TRADING WHICH MAY BE CONSIDERED SPECULATIVE, AND
INCREASES RISKS TO ULTRA FUND.
This Prospectus sets forth concisely the information that a prospective
investor should know about the Funds. It should be read and retained for future
reference. Certain additional information is contained in a "Statement of
Additional Information" about the Funds, dated January 31, 1997, which has been
filed with the Securities and Exchange Commission. The Statement of Additional
Information, as it may be supplemented from time to time, is incorporated by
reference in this Prospectus. It is available at no charge by writing Security
Distributors, Inc., 700 Harrison, Topeka, Kansas 66636-0001, or by calling (913)
295-3127 or (800) 888-2461.
- --------------------------------------------------------------------------------
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 FUNDS INVOLVES RISK, INCLUDING LOSS OF PRINCIPAL, AND IS
NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR ENDORSED BY, ANY BANK. THE
FUNDS ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
- --------------------------------------------------------------------------------
<PAGE>
Page
SECURITY FUNDS
CONTENTS
================================================================================
Transaction and Operating Expense Table................................... 1
Financial Highlights...................................................... 2
Investment Objective and Policies of the Funds............................ 4
Growth and Income Fund............................................. 4
Equity Fund........................................................ 7
Global Fund........................................................ 7
Ultra Fund......................................................... 10
Investment Methods and Risk Factors....................................... 11
Management of the Funds................................................... 16
Portfolio Management............................................... 17
How to Purchase Shares.................................................... 18
Alternative Purchase Options....................................... 19
Class A Shares..................................................... 19
Class B Shares..................................................... 20
Class B Distribution Plan.......................................... 21
Calculation and Waiver of Contingent Deferred Sales Charges........ 21
Arrangements with Broker-Dealers and Others........................ 22
Purchases at Net Asset Value....................................... 23
How to Redeem Shares...................................................... 23
Telephone Redemptions ............................................. 24
Dividends and Taxes....................................................... 25
Foreign Taxes...................................................... 26
Determination of Net Asset Value.......................................... 27
Trading Practices and Brokerage........................................... 27
Performance............................................................... 28
Shareholder Services...................................................... 29
Accumulation Plan.................................................. 29
Systematic Withdrawal Program...................................... 29
Exchange Privilege................................................. 29
Retirement Plans................................................... 30
General Information....................................................... 30
Organization....................................................... 30
Stockholder Inquiries.............................................. 31
Appendix A - Class A Shares Reduced Sales Charges......................... 32
Rights of Accumulation............................................. 32
Statement of Intention............................................. 32
Reinstatement Privilege............................................ 32
- --------------------------------------------------------------------------------
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
TRANSACTION AND OPERATING EXPENSE TABLE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES (ALL FUNDS) CLASS A SHARES CLASS B SHARES(1)
<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 redemption proceeds, whichever is lower) None(2) 5% during the first year,
decreasing to 0% in the
sixth and following years
</TABLE>
<TABLE>
<CAPTION>
GROWTH AND
INCOME FUND EQUITY FUND GLOBAL FUND ULTRA FUND
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of netassets)
Management Fees 1.29% 1.29% 1.04% 1.04% 2.00% 2.00% 1.31% 1.31%
12b-1 Fees(3) None 1.00% None 1.00% None 1.00% None 1.00%
Other Expenses None None None None None None None None
----- ----- ----- ----- ----- ----- ----- -----
Total Fund Operating Expenses 1.29% 2.29% 1.04% 2.04% 2.00% 3.00% 1.31% 2.31%
===== ===== ===== ===== ===== ===== ===== =====
EXAMPLE
You would pay the following 1 Year $ 70 $ 73 $ 68 $ 71 $ 77 $ 80 $ 70 $ 73
expenses on a $1,000 invest- 3 Years 96 102 89 94 117 123 97 102
ment assuming (1) 5 percent 5 Years 124 143 112 130 159 178 125 144
annual return and (2) redemp- 10 Years 204 263 177 237 277 332 206 265
tion at the end of each
time period
EXAMPLE
You would pay the following 1 Year $ 70 $ 23 $ 68 $ 21 $ 77 $ 30 $ 70 $ 23
expenses on a $1,000 3 Years 96 72 89 64 117 93 97 72
investment, assuming 5 Years 124 123 112 110 159 158 125 124
(1) 5 percent annual 10 Years 204 263 177 237 277 332 206 265
return and (2) no redemption
</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 19.
(3) 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.
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 Growth and
Income, Equity, Global and Ultra Funds will bear directly or indirectly. For a
more detailed discussion of the Funds' fees and expenses, see the discussion
under "Management of the Funds," page 16. See "How to Purchase Shares," page 18,
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.
- --------------------------------------------------------------------------------
1
<PAGE>
SECURITY FUNDS
FINANCIAL HIGHLIGHTS
================================================================================
The following financial highlights, for each of the years in the period ended
September 30, 1996, have been audited by Ernst & Young LLP. Such information for
each of the five years in the period ended September 30, 1996, should be read in
conjunction with the financial statements of the Funds and the report of Ernst &
Young LLP, the Funds' independent auditors, appearing in the September 30, 1996
Annual Report to Stockholders which is incorporated by reference in this
prospectus. The Funds' Annual Report to Stockholders also contains additional
information about the performance of the Funds and may be obtained without
charge by calling Security Distributors, Inc. at 1-800-888-2461. The information
for each of the years in the period ended September 30, 1991, is not covered by
the report of Ernst & Young LLP.
<TABLE>
<CAPTION>
Average
com-
Net Ratio mission
gains Ratio of paid
Net (losses) Divi- of net per
asset on sec- Total dends Net expenses income invest-
Fiscal value urities from (from Distri- Net assets to (loss) Port- ment
year begin- Net (real- invest- net butions Return asset end of aver- to folio secu-
ended ning invest- ized & ment invest- (from of Total value Total period age average turn- rity
Septem- of ment unreal- opera- ment capital capi- distri- end of return (thou- net net over traded
ber 30 period income ized) tions income) gains) tal butions period (a) sands) assets assets rate (h)
- ------------------------------------------------------------------------------------------------------------------------------------
SECURITY GROWTH AND INCOME FUND (CLASS A)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1987 $9.61 $.51 $(.87) $(.36) $(.50) $(.42) $--- $(.92) $8.33 (4.7%) $84,493 .74% 5.02% 32% ---
1988 8.33 .54 .55 1.09 (.54) (.45) --- (.99) 8.43 13.8% 81,357 .78% 6.22% 47% ---
1989(b) 8.43 .44 1.114 1.554 (.537) (.387) --- (.924) 9.06 19.9% 84,964 1.10% 5.93% 49% ---
1990 9.06 .52 (.978) (.458) (.509) (.663) --- (1.172) 7.43 (5.8%) 70,588 1.28% 6.24% 66% ---
1991 7.43 .45 .992 1.442 (.474) (1.088) --- (1.562) 7.31 22.3% 77,418 1.28% 6.14% 103% ---
1992 7.31 .35 (.016) .334 (.343) (.171) --- (.514) 7.13 4.7% 75,436 1.27% 4.79% 74% ---
1993 7.13 .21 .876 1.086 (.218) (.158) --- (.376) 7.84 15.6% 81,982 1.26% 2.80% 135% ---
1994(g) 7.84 .13 (.713) (.583) (.128) (.169) --- (.297) 6.96 (7.6%) 65,328 1.28% 1.70% 163% ---
1995(g) 6.96 .16 1.183 1.343 (.158) (.215) --- (.373) 7.93 20.25% 67,430 1.31% 2.21% 130% ---
1996(g) 7.93 .18 1.373 1.553 (.158) (.275) --- (.433) 9.05 20.31% 73,273 1.29% 2.09% 69% .0625
SECURITY GROWTH AND INCOME FUND (CLASS B)
1994(e) $7.83 $0.05 $(0.694) $(0.644) $(0.117) $(0.169) $--- $(0.286) $6.90 (8.00%) $668 2.27% 1.03% 178% ---
1995(g) 6.90 0.08 1.179 1.259 (0.094) (0.215) --- (0.309) 7.85 19.07% 1,130 2.31% 1.21% 130% ---
1996(g) 7.85 0.09 1.353 1.443 (0.078) (0.275) --- (0.353) 8.94 19.01% 2,247 2.29% 1.09% 69% .0625
SECURITY EQUITY FUND (CLASS A)
1987 $5.39 $.14 $1.88 $2.02 $(.14) $(.32) $--- $(.46) $6.95 40.1% $288,431 .66% 2.15% 151% ---
1988 6.95 .14 (1.05) (.91) (.11) (1.19) --- (1.30) 4.74 (10.6%) 231,807 .72% 2.78% 142% ---
1989 4.74 .15 1.758 1.908 (.118) --- --- (.118) 6.53 41.2% 283,662 .99% 2.62% 86% ---
1990 6.53 .15 (1.115) (.965) (.166) (.579) --- (.745) 4.82 (15.9%) 226,186 1.08% 2.72% 97% ---
1991 4.82 .12 1.403 1.523 (.148) (.375) --- (.523) 5.82 34.2% 295,030 1.08% 2.34% 61% ---
1992 5.82 .09 .475 .565 (.132) (.393) --- (.525) 5.86 10.2% 313,582 1.06% 1.48% 83% ---
1993 5.86 .12 1.165 1.285 (.053) (.362) --- (.415) 6.73 22.7% 375,565 1.06% 1.95% 95% ---
1994(g) 6.73 .05 .085 .135 (.120) (1.205) --- (1.325) 5.54 1.95% 358,237 1.06% .86% 79% ---
1995(g) 5.54 .04 1.377 1.417 --- (.407) --- (.407) 6.55 27.77% 440,339 1.05% .87% 95% ---
1996(g) 6.55 .05 1.482 1.532 (.060) (.482) --- (.542) 7.54 24.90% 575,680 1.04% .75% 64% .0609
SECURITY EQUITY FUND (CLASS B)
1994(e) $6.81 $0.01 $(0.005) $0.005 $(0.12) $(1.205) $--- $(1.325) $5.49 (0.15%) $7,452 2.07% (0.01%) 80% ---
1995(g) 5.49 (0.01) 1.357 1.347 --- (0.407) --- (0.407) 6.43 26.69% 19,288 2.05% (0.13%) 95% ---
1996(g) 6.43 (0.02) 1.449 1.429 (0.017) (0.482) --- (0.499) 7.36 23.57% 38,822 2.04% (0.25%) 64% .0609
</TABLE>
- --------------------------------------------------------------------------------
2
<PAGE>
SECURITY FUNDS
FINANCIAL HIGHLIGHTS (CONTINUED)
================================================================================
<TABLE>
<CAPTION>
Average
com-
Net Ratio mission
gains Ratio of paid
Net (losses) Divi- of net per
asset on sec- Total dends Net expenses income invest-
Fiscal value urities from (from Distri- Net assets to (loss) Port- ment
year begin- Net (real- invest- net butions Return asset end of aver- to folio secu-
ended ning invest- ized & ment invest- (from of Total value Total period age average turn- rity
Septem- of ment unreal- opera- ment capital capi- distri- end of return (thou- net net over traded
ber 30 period income ized) tions income) gains) tal butions period (a) sands) assets assets rate (h)
- ------------------------------------------------------------------------------------------------------------------------------------
SECURITY GLOBAL FUND (CLASS A)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1994(f) $10.00 $(0.03) $.87 $0.84 $--- $--- $--- $--- $10.84 8.40% $20,128 2.00% (0.01%) 73% ---
1995(g) 10.84 (0.02) .31 0.29 --- (.19) --- (.19) 10.94 2.80% 16,261 2.00% (0.17%) 141% ---
1996(g) 10.94 0.01 1.874 1.884 (0.248) (.156) --- (.404) 12.42 17.73% 19,644 2.00% 0.07% 142% .0338
SECURITY GLOBAL FUND (CLASS B)
1994 $9.96 $(0.12) $.91 $0.79 $--- $--- $--- $--- $10.75 7.90% $3,960 3.00% (0.01%) 73% ---
(e)(f)
1995(g) 10.75 (0.12) .30 0.18 --- (.19) --- (.19) 10.74 1.79% 5,433 3.00% (1.17%) 141% ---
1996(g) 10.74 (0.10) 1.841 1.741 (0.145) (.156) --- (.301) 12.18 16.57% 7,285 3.00% (0.93%) 142% .0338
SECURITY ULTRA FUND (CLASS A)
1987 $9.35 $.13 $(1.89) $(1.76) $(.35) $(1.88) $--- $(2.23) $5.36 (24.1%) 62,246 .84% 1.45% 301% ---
1988(c) 5.36 (.02) 1.135 1.115 (.125) (.06) --- (.185) 6.29 21.4% 68,700 1.54% (0.24%) 120% ---
1989(b)(c)6.29 (.12) 1.72 1.60 --- --- --- --- 7.89 25.4% 66,841 3.53% (1.66%) 89% ---
1990(c) 7.89 (.14) (2.845) (2.985) --- (.445) --- (.445) 4.46 (39.6%) 31,486 2.58% (1.82%) 96% ---
1991(c)(d)4.46 (.03) 2.525 2.495 --- (.235) --- (.235) 6.72 58.4% 65,449 1.61% (0.51%) 163% ---
1992 6.72 (.09) .202 .112 --- (.172) --- (.172) 6.66 1.5% 57,128 1.32% (0.46%) 142% ---
1993 6.66 (.028) 1.791 1.763 --- (.293) --- (.293) 8.13 26.8% 71,056 1.30% (0.50%) 101% ---
1994(g) 8.13 (.056) (.188) (.244) --- (1.066) --- (1.066) 6.82 (3.6%) 60,695 1.33% (0.80%) 111% ---
1995(g) 6.82 (.02) 1.535 1.515 --- (.135) --- (.135) 8.20 22.69% 66,052 1.32% (0.31%) 180% ---
1996(g) 8.20 (.05) 1.096 1.046 --- (.996) --- (.996) 8.25 15.36% 74,230 1.31% (0.61%) 161% .0606
SECURITY ULTRA FUND (CLASS B)
1994(e) $8.30 $(0.103) $(0.321) $(0.424 $--- $(1.066) $--- $(1.066) $6.81 (5.7%) $1,254 2.36% (1.76%) 110% ---
1995(g) 6.81 (0.09) 1.525 1.435 --- (.135) --- (.135) 8.11 21.53% 5,428 2.32% (1.32%) 180% ---
1996(g) 8.11 (0.13) 1.046 0.916 --- (.996) --- (.996) 8.03 13.81% 2,698 2.31% (1.61%) 161% .0606
</TABLE>
(a) Total return information does not take into account any sales charge at
time of purchase for Class A shares or upon redemption for Class B shares.
(b) Effective in 1989, the fiscal year ends of Growth and Income and Ultra
Funds were changed from November 30 and October 31, respectively, to
September 30. The information presented in the table above for the fiscal
year ended September 30, 1989, represents 10 months of performance for
Growth and Income Fund and 11 months of performance for Ultra Fund. The
data for years 1987 and 1988 are for fiscal years ended November 30 for
Growth and Income Fund and October 31 for Ultra Fund. Percentage amounts
for the period have been annualized.
<TABLE>
<CAPTION>
(c) Debt Weighted average Weighted average Average Interest
outstanding debt outstanding month-end shares debt per expense
Year at end of period during the period outstanding share per share
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Security Ultra Fund 1988 $--- $4,217,187 11,834,629 $.36 $.03
Security Ultra Fund 1989 17,742,849 13,322,428 9,374,183 1.42 .17
Security Ultra Fund 1990 8,207,425 5,948,569 7,713,750 .77 .08
Security Ultra Fund 1991 --- 970,096 8,817,652 .11 .01
</TABLE>
Borrowings and related interest, if any, were immaterial in 1987, 1992,
1993, 1994, 1995 and 1996.
(d) Portfolio turnover calculation excludes the portfolio investments acquired
in the Security Omni Fund merger. Per share data has been calculated using
the average month-end shares outstanding.
(e) Class "B" shares were initially offered on October 19, 1993. Percentage
amounts for the period, except total return, have been annualized. Per
share data has been calculated using the average month-end shares
outstanding.
(f) Security Global Fund was initially capitalized on October 1, 1993, with a
net asset value of $10 per share.
(g) Net investment income (loss) was computed using average shares outstanding
throughout the period.
(h) Brokerage commissions paid on portfolio transactions increase the cost of
securities purchased or reduce the proceeds of securities sold and are not
reflected in the Fund's statement of operations. Shares traded on a
principal basis, such as most over-the-counter and fixed-income
transactions, are excluded. Generally, non-U.S. commissions are lower than
U.S. commissions when expressed as cents per share but higher when
expressed as a percentage of transactions because of the lower per-share
prices of many non-U.S. securities.
- --------------------------------------------------------------------------------
3
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
INVESTMENT OBJECTIVE AND
POLICIES OF THE FUNDS
Security Growth and Income Fund, Security Equity Fund and Security Ultra Fund
are diversified, open-end management investment companies, which were organized
as Kansas corporations on February 2, 1944, November 27, 1961, and April 20,
1965, respectively. Equity Fund and Global Fund are series of Security Equity
Fund. Each of Growth and Income Fund, Equity Fund, Global Fund, and Ultra Fund
(collectively, the "Funds") has its own investment objective and policies which
are described below. There, of course, can be no assurance that such investment
objectives will be achieved. While there is no present intention to do so, each
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. Each of the Funds is also 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 each Fund will not
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 or invest more than 25 percent of its total assets in any one industry.
The full text of the investment policy limitations of each Fund is set forth in
the Statement of Additional Information of the Funds.
GROWTH AND INCOME FUND
The investment objective of Growth and Income Fund is long-term growth of
capital with a secondary emphasis on income. Growth and Income Fund seeks to
achieve this objective through investment in a diversified portfolio which will
ordinarily consist principally of common stocks, which may include American
Depositary Receipts ("ADRs"), but may also include other securities when deemed
advisable. (See the discussion of ADRs under "Investment Methods and Risk
Factors.") 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; and (vi) higher yielding, high
risk debt securities (commonly referred to as "junk bonds"). In the selection of
securities for investment, the potential for appreciation and future dividends
is given more weight than current dividends.
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 the
description of corporate bond ratings below), 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.
- --------------------------------------------------------------------------------
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 Funds' 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 Funds, the Investment Manager, or the Distributor.
- --------------------------------------------------------------------------------
4
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
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
true 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 Canadian securities, to not more than 15 percent of its
total assets and its investment in debt securities of issuers in emerging
markets, excluding Brady Bonds, to not more than 5 percent of its net assets.
See the discussion of the risks associated with investing in foreign securities
and, in particular, Brady Bonds 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 percent 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 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."
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. The market values of high yield securities
tend to reflect individual corporate developments to a greater extent than do
higher rated securities, which react primarily to fluctuations in the general
level of interest rates. High yield securities also tend to 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
- --------------------------------------------------------------------------------
5
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
such events could lessen the ability of highly leveraged companies to make
principal and interest payments on their 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. Many of the high yield securities traded in today's market
were issued relatively recently and have not endured a major business recession.
A long-term track record on default rates, such as that for investment grade
corporate bonds, does not exist for the high yield market. It may be that future
default rates on high yield securities will be higher than in the past,
especially during periods of deteriorating economic conditions.
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.
DESCRIPTION OF CORPORATE BOND RATINGS
MOODY'S STANDARD &
INVESTORS POOR'S
SERVICE, INC. CORPORATION DEFINITION
Aaa AAA Highest quality
Aa AA High quality
A A Upper medium grade
Baa BBB Medium grade
Ba BB Lower medium grade/
speculative elements
B B Speculative
Caa CCC More speculative/
possibly in or high
risk of default
-- D In default
Not rated Not rated Not rated
A more complete description of the corporate bond ratings is found in the
Appendix to the Funds' Statement of Additional Information.
During the year ended September 30, 1996, the dollar weighted average of
Growth and Income Fund's holdings (excluding equities) had the following credit
quality characteristics.
- --------------------------------------------------------------------------------
6
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
PERCENT OF
INVESTMENT NET ASSETS
U.S. Government Securities............... 0%
Cash and other Assets, Less Liabilities.. 2.46%
Rated Fixed Income Securities
A..................................... 0%
Baa/BBB............................... 1.13%
Ba/BB................................. 8.84%
B..................................... 7.56%
Caa/CCC............................... 0%
D..................................... 1.02%
Unrated Securities Comparable in Quality to
A..................................... 0%
Baa/BBB............................... 0%
Ba/BB................................. 0%
B..................................... 0%
Caa/CCC............................... 0%
-------
21.01%
The foregoing table is intended solely to provide disclosure about Growth and
Income Fund's asset composition during the year ended September 30, 1996. The
asset composition after this may or may not be approximately the same as shown
above.
EQUITY FUND
Equity Fund's objective is to seek long-term capital growth, and emphasis is
placed upon the selection of those securities which, in the opinion of the
Investment Manager, offer basic value or above-average capital growth potential.
Income potential will be considered in the selection of securities, to the
extent doing so is consistent with the Fund's investment objective of long-term
capital growth.
Equity Fund will ordinarily have at least 90 percent of its total assets
invested in a broadly diversified portfolio of common stocks, which may include
ADRs, and securities convertible into common stocks, although it reserves the
right to invest in fixed income securities. (See the discussion of ADRs under
"Investment Methods and Risk Factors.") Equity Fund also 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. Except when in a temporary defensive
position, Equity Fund will maintain at least 65 percent of its assets invested
in equity securities; the remaining 35 percent of the Fund's assets may be
invested in investment grade debt securities (or unrated securities of
comparable quality), which may include commercial paper or other debt securities
issued by U.S. corporations, and U.S. Government securities. Equity 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 repurchase agreements under "Investment Methods and Risk
Factors."
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, 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. The Fund may purchase
securities that are restricted as to disposition under federal securities laws,
provided that such securities are eligible for resale pursuant
- --------------------------------------------------------------------------------
7
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
to Rule 144A under the Securities Act of 1933 and subject to the Fund's policy
that not more than 10 percent of its assets will be invested in illiquid
securities. See the discussion of Rule 144A securities under "Investment Methods
and Risk Factors."
Global Fund will at all times invest at least 65 percent or more of its
assets in at least three countries, one of which may be the United States. The
Fund is not required to maintain any particular geographic or currency mix of
its investments, nor is it required to maintain any particular proportion of
stocks, bonds or other securities in its portfolio. Global Fund may invest
substantially or primarily in foreign debt securities when it appears that the
capital appreciation available from investments in such securities will equal or
exceed the capital appreciation available from investments in equity securities.
Because the market value of debt obligations can be expected to vary inversely
to changes in prevailing interest rates, investing in debt obligations may
provide an opportunity for capital appreciation when interest rates are expected
to decline. When a defensive position is deemed advisable in the judgment of
Lexington Management Corporation (the "Sub-Adviser"), Global Fund may
temporarily invest up to 100 percent of its assets in debt obligations
consisting of repurchase agreements (with maturities of up to seven days), and
money market instruments of foreign or domestic companies and the U.S.
Government and foreign governments, governmental and international
organizations. The Fund will limit its investments in debt securities to those
obligations which are considered to be investment grade by the Sub-Adviser. The
Fund will be moved into a defensive position when, in the judgment of the
Sub-Adviser, conditions in the securities markets would make pursuing the Fund's
basic investment strategy inconsistent with the best interests of the
shareholders. Global Fund may utilize bank demand accounts and repurchase
agreements, pending investment in securities or to meet potential redemptions or
expenses.
Global Fund is intended to provide investors with the opportunity to invest
in a portfolio of securities of companies and governments located throughout the
world. In making the allocation of assets among the various countries and
geographic regions, the Sub-Adviser ordinarily considers such factors as
prospects for relative economic growth between the U.S. and other countries;
expected levels of inflation and interest rates; government policies influencing
business conditions; the range of investment opportunities available to
international investors; and other pertinent financial, tax, social and national
factors--all in relation to the prevailing prices of the securities in each
country or region.
Investments may be made in companies based in (or governments of or within)
such areas and countries as the Sub-Adviser may determine from time to time.
Global Fund may invest in companies located in developing countries without
limitation. Such countries may have relatively unstable governments, economies
based on only a few industries, and securities markets which trade a small
number of companies. Prices on these exchanges tend to be volatile and in the
past these exchanges have offered greater potential for gain, as well as loss,
than exchanges in developed countries. While Global Fund invests only in
countries that it considers as having relatively stable and friendly
governments, it is possible that certain Fund investments could be subject to
foreign expropriation or exchange control restrictions. See "Investment Methods
and Risk Factors"--"Foreign Investment Risks" and "Currency Risk" for a
discussion of the risks associated with investing in foreign securities.
- --------------------------------------------------------------------------------
8
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
Although the Fund does not intend to invest for the purpose of seeking
short-term profits, the Fund's investments may be changed whenever the
Sub-Adviser deems it appropriate to do so, without regard to the length of time
a particular security has been held. The operating expenses of the Fund can be
expected to be higher than those of an investment company investing exclusively
in United States securities.
CERTAIN INVESTMENT METHODS. 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
transaction. 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.
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 Sub-Adviser, 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 the Sub-Adviser 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 the Sub-Adviser. 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. Global
Fund will not enter into forward foreign currency exchange transactions for
speculative purposes. The Fund intends to limit such transactions to not more
than 70 percent 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, such as Global Fund, 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
- --------------------------------------------------------------------------------
9
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
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
the Sub-Adviser deems it appropriate to do so. See the discussion of forward
commitments under "Investment Methods and Risk Factors."
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.
ULTRA FUND
Ultra Fund's objective is to seek capital appreciation and emphasis is placed
upon the selection of those securities which, in the opinion of the Investment
Manager, offer the greatest potential for appreciation. Current income will not
be a factor in the selection of investments and any such income should be
considered incidental.
Ultra Fund will ordinarily invest in a diversified portfolio of common
stocks, which may include ADRs, and securities convertible into common stocks,
although it reserves the right to invest in fixed income securities. (See the
discussion of ADRs under "Investment Methods and Risk Factors.") Ultra Fund also
reserves the right to invest its assets 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. Ultra Fund may utilize
repurchase agreements on an overnight basis or bank demand accounts, pending
investment in securities or to meet potential redemptions or expenses.
Stocks considered to have appreciation potential will often include
securities of smaller and less mature companies which often have a unique
proprietary product or profitable market niche and the potential to grow very
rapidly. Such companies may present greater opportunities for capital
appreciation because of high potential earnings growth, but may also involve
greater risks than investments in more established companies with demonstrated
earning power. Smaller companies may have limited product lines, markets or
financial resources and their securities may trade less frequently and in
limited volume. As a result, the securities of smaller companies may be subject
to more abrupt or erratic changes in value than securities of larger, more
established companies. In seeking capital appreciation, Ultra Fund may, during
certain periods, trade to a substantial degree in securities for the short term.
That is, Ultra Fund may be engaged essentially in trading operations based on
short-term market considerations, as distinct from long-term investments based
on fundamental evaluations of securities. This investment policy is speculative
and involves substantial risk.
Ultra Fund may buy and sell 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 percent of the Fund's net asset value. See the discussion of
futures contracts and the risks associated with investing in such contracts
under "Investment Methods and Risk Factors."
Ultra Fund may make short sales if, at the time of such sale, it owns or has
the right to acquire an equal amount of such securities without payment of any
further consideration. Short sales will be used by Ultra Fund only for the
purpose of deferring recognition of gain or loss for federal income tax
purposes. Ultra Fund may invest up to
- --------------------------------------------------------------------------------
10
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
5 percent of its assets in companies having a record of less than three years
continuous operation or in warrants.
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 Objective and Policies" section of this Prospectus and in the Funds'
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.
AMERICAN DEPOSITARY RECEIPTS (ADRS) -- 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. See "Foreign Investment Risks" below.
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 Funds, political or social instability, or diplomatic developments which
could affect the investments of the Funds 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
- --------------------------------------------------------------------------------
11
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
savings and capital reinvestment, resource self-sufficiency and balance of
payments positions.
CURRENCY RISK -- Funds that invest in securities denominated in currencies
other than the U.S. dollar, 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 a 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.
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, 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. 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.
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
- --------------------------------------------------------------------------------
12
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
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 (or Sub-Adviser) 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.
REPURCHASE AGREEMENTS -- A repurchase agreement is a contract under which a
Fund would acquire a security for a relatively short period (usually not more
than seven days) subject to the obligation of the seller to repurchase and the
Fund to resell such security at a fixed time and price (representing the Fund's
cost plus interest). Although each of the Funds may enter into repurchase
agreements with respect to any portfolio securities which it may acquire
consistent with its investment polices and restrictions, it is each 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 Funds 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 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. The Funds intend to limit repurchase agreements to
institutions believed by the Investment Manager (or Sub-Adviser) to present
minimal credit risk.
RULE 144A SECURITIES -- Certain Funds 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. 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. 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
- --------------------------------------------------------------------------------
13
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
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 a Fund's assets invested in illiquid
securities to the extent that qualified institutional buyers become
uninterested, for a time, in purchasing these securities.
CONVERTIBLE SECURITIES AND WARRANTS -- Convertible securities are debt or
preferred equity securities convertible or exchangeable for equity securities.
Traditionally, convertible securities have paid dividends or interest at rates
higher than common stocks but lower than non-convertible securities. They
generally participate in the appreciation or depreciation of the underlying
stock into which they are convertible, but to a lesser degree. In recent years,
convertibles have been developed which combine higher or lower current income
with options and other features. Warrants are options to buy a stated number of
shares of common stock at a specified price any time during the life of the
warrants (generally two or more years).
FUTURES CONTRACTS AND RELATED OPTIONS -- Certain Funds may buy and sell
futures contracts (and options on such contracts) to hedge all or a portion of
its portfolio or 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. Certain Funds 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 a
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 may include stock index futures contracts. 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, each Fund that may invest in such
instruments has 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
- --------------------------------------------------------------------------------
14
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
for options on futures contracts or stock indices would exceed 5 percent of the
Fund's net assets; and (ii) with respect to each futures contract purchased or
long position in an option contract, each Fund will set aside in a segregated
account cash, cash equivalents, U.S. Government securities or other liquid
securities in an amount equal to the market value of such contract less the
initial margin deposit.
The Staff of Securities and Exchange Commission ("SEC") has taken the
position that the purchase and sale of futures contracts and the writing of
related options may involve senior securities for the purposes of the
restrictions contained in Section 18 of the Investment Company Act of 1940 on
investment companies' issuing senior securities. However, the Staff has issued
letters declaring that it will not recommend enforcement action under Section 18
if an investment Company: (i) sells futures contracts to offset expected
declines in the value of the investment company's securities, provided the value
of such futures contracts does not exceed the total market value of those
securities (plus such additional amount as may be necessary because of
differences in the volatility factor of the securities vis-a-vis the futures
contracts); (ii) writes call options on futures contracts, stock indices 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 consisting of cash, cash equivalents, U.S. Government
securities or other liquid securities in an amount equal to the total market
value of such futures contracts less the initial margin deposited therefor; and
(iv) writes put options on futures contracts, stock indices or other securities,
provided that such options are covered by the investment company's holding of a
corresponding short futures position, by establishing a cash segregated account
in an amount equal to the value of its obligation under the option, or
otherwise.
Each Fund will conduct its purchases and sales of any futures contracts and
writing of related options transactions in accordance with the foregoing.
FUTURES AND OPTIONS RISK -- Futures contracts and options can be highly
volatile and could result in reduction of a Fund's total return, and a 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
options and futures could be significant if a Fund is unable to close out its
position due to distortions in the market or lack of liquidity. A 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 a Fund would not be subject absent the use of these strategies.
If the Investment Manager seeks to protect a Fund against potential adverse
movements in the securities markets using these instruments, and such markets do
not move in a direction adverse to such Fund, such 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: (a) the risk that securities prices will
not move in the direction anticipated; (b) imperfect correlation between the
price of futures and options and movements in the prices of the securities being
hedged; (c) the fact that skills needed to use these strategies are
- --------------------------------------------------------------------------------
15
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
different from those needed to select portfolio securities; (d) the possible
absence of a liquid secondary market for any particular instrument at any time;
and (e) the possible need to defer closing out certain hedged positions to avoid
adverse tax consequences. A 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 such
Fund.
The use of options and futures involves the risk of imperfect correlation
between movements in options and futures prices and movements in the price of
securities which are the subject of a hedge. Such correlation, particularly with
respect to options on stock indices and stock index futures, is imperfect, and
such risk increases as the composition of the Fund diverges from the composition
of the relevant index. The successful use of these strategies also depends on
the ability of the Investment Manager (or Sub-Adviser) to correctly forecast
general stock market price movements.
MANAGEMENT OF THE FUNDS
The management of the Funds' business and affairs is the responsibility of
the Board of Directors. Security Management Company, LLC (the "Investment
Manager"), 700 Harrison St., Topeka, Kansas, is responsible for selection and
management of the Funds' portfolio investments. The Investment Manager is a
limited liability company, which is ultimately controlled by Security Benefit
Life Insurance Company, a mutual life insurance company with over $15 billion of
insurance in force. The Investment Manager also acts as investment adviser to
Security Asset Allocation Fund, Security Social Awareness 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 engaged Lexington Management Corporation (the
"Sub-Adviser"), Park 80 West, Plaza Two, Saddle Brook, New Jersey 07663, to
provide certain investment advisory services to Global Fund. The Sub-Adviser 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. The Sub-Adviser was established in 1938
and currently manages over $3.5 billion in assets.
Subject to the supervision and direction of the Funds' Board of Directors,
the Investment Manager manages the Funds' portfolios in accordance with each
Fund's stated investment objective and policies and makes all investment
decisions. As to Global Fund, the Investment Manager supervises the management
of this Fund's portfolio by the Sub-Adviser. The Investment Manager has agreed
that total annual expenses of the respective Funds (including for any fiscal
year, the management fee, but excluding interest, taxes, brokerage commissions,
extraordinary expenses and Class B distribution fees) shall not for each of the
Funds exceed 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 Fund are then qualified for sale. The Investment Manager will contribute
such funds to the Funds or waive such portion of its compensation as may be
necessary to insure that
- --------------------------------------------------------------------------------
16
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
such total annual expenses do not exceed any such limitation.
The Investment Manager also acts as the administrative agent and transfer
agent and dividend disbursing agent for the Funds, and as such performs
administrative functions, transfer agency and dividend disbursing services, and
the bookkeeping, accounting and pricing functions for the Funds. The Investment
Manager has arranged for the Sub-Adviser to provide certain administrative
services to Global Fund, including performing certain accounting and pricing
functions.
For its services, the Investment Manager receives, with respect to Growth and
Income, Equity and Ultra Funds, on an annual basis, a fee of 2 percent of the
first $10 million of the average net assets, 1 1/2 percent of the next $20
million of the average net assets and 1 percent of the remaining average net
assets of these Funds, calculated daily and payable monthly. The Investment
Manager receives with respect to the Global Fund, on an annual basis, 2 percent
of the first $70 million of the average net assets and 1 1/2 percent of the
remaining average net assets of this Fund, calculated daily and payable monthly.
The Investment Manager pays the Sub-Adviser an amount equal to 1/2 percent of
the average net assets of Global Fund, calculated on a daily basis and payable
monthly.
For the year ended September 30, 1996, the total expenses, as a percentage of
average net assets, were 1.29 percent for Class A and 2.29 percent for Class B
shares of Growth and Income Fund; 1.04 percent for Class A and 2.04 percent for
Class B shares of Equity Fund; 2.0 percent for Class A and 3.0 percent for Class
B shares of Global Fund; and 1.31 percent for Class A and 2.31 percent for Class
B shares of Ultra Fund.
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, 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, Greg
Hamilton, Jane Tedder, Tom Swank, Steve Bowser, Barb Davison and Elaine Miller.
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 the
Sub-Adviser. Richard T. Saler and Alan Wapnick the lead managers, have had
day-to-day responsibility for managing Global Fund since 1994. ULTRA FUND is
managed by the Investment Manager's Small Capitalization Team 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 Fund since 1994.
MR. MILBERGER, Senior Portfolio Manager, has more than 20 years of investment
experience. 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
- --------------------------------------------------------------------------------
17
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
managed its pension assets until he returned to the Investment Manager in 1981.
Mr. Milberger holds a bachelor's degree in business and a Masters of Business
Administration 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.
MR. SALER is a Senior Vice President of the Sub-Adviser 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 the Sub-Adviser in 1986. Most recently he was a strategist
with Nomura Securities and rejoined the Sub-Adviser 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.
MS. SHIELDS joined the Investment Manager in 1989. Ms. Shields graduated from
Washburn University with a Bachelor of Business Administration degree, majoring
in finance and economics. She is a Chartered Financial Analyst with seven years
of investment experience.
MR. 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.
MR. WAPNICK is a Senior Vice President of the Sub-Adviser and is responsible
for portfolio management. He has 27 years investment experience. Prior to
joining the Sub-Adviser 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.
HOW TO PURCHASE SHARES
Security Distributors, Inc. (the "Distributor"), 700 Harrison St., Topeka,
Kansas, a wholly-owned subsidiary of Security Benefit Group, Inc., is principal
underwriter for the Funds. Shares of the Funds 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
Funds 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 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 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
- --------------------------------------------------------------------------------
18
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
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 Funds reserve the right to withdraw all or any part of the offering made
by this prospectus and to reject purchase orders.
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 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 Funds 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
---------------------------------------------
AMOUNT OF PERCENTAGE PERCENTAGE OF PERCENTAGE
TRANSACTION AT OF OFFERING NET AMOUNT REALLOWABLE
OFFERING PRICE PRICE INVESTED TO DEALERS
- --------------------------------------------------------------------------------
Less than $50,000 5.75% 6.10% 5.00%
$50,000 but less than
$100,000 4.75% 4.99% 4.00%
$100,000 but less than
$250,000 3.75% 3.90% 3.00%
$250,000 but less than
$500,000 2.75% 2.83% 2.25%
$500,000 but less than
$1,000,000 2.00% 2.04% 1.75%
$1,000,000 or more None None (See below)
Purchases of Class A shares in an amount of $1,000,000 or more are at net
asset value (without a sales charge), but are subject to a contingent deferred
sales charge of one 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 21.
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.
- --------------------------------------------------------------------------------
19
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
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 certain services to their clients who are stockholders of the Funds.
Such services include assisting in maintaining records, processing purchase and
redemption requests and establishing stockholder accounts, assisting
stockholders in changing account options or enrolling in specific plans, and
providing stockholders with information regarding the Funds and related
developments.
Currently, service fees are paid on the aggregate value of accounts opened
after July 31, 1990, in Security Equity, Ultra, Global, Growth and Income, Asset
Allocation, Social Awareness, and Tax-Exempt Funds 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 Funds' 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 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 or original purchase price,
whichever is lower, otherwise payable to the stockholder. 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
- --------------------------------------------------------------------------------
20
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
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
percent 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 percent of the value of each share sold and (2) a service
fee payable for the first year, initially, and for each year thereafter,
quarterly, in an amount equal to .25 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 Funds.
NASD Rules limit the aggregate amount that each 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 Funds. 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 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
Distributor. The Funds make no payments in connection with the sale 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 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
- --------------------------------------------------------------------------------
21
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
to the contingent deferred sales charge will be redeemed first. Thereafter,
shares held the longest will be the first to be redeemed.
The contingent deferred sales charge is waived (1) following the death of a
stockholder if redemption is made within one year after death; (2) upon the
disability (as defined in Section 72(m)(7) of the Internal Revenue Code) of a
stockholder prior to age 65 if redemption is made within one year after the
disability, provided such disability occurred after the stockholder opened the
account; (3) in connection with required minimum distributions in the case of an
IRA, SAR-SEP or Keogh or any other retirement plan qualified under section
401(a), 401(k) or 403(b) of the Code; and (4) in the case of distributions from
retirement plans qualified under section 401(a) or 401(k) of the Internal
Revenue Code due to (i) returns of excess contributions to the plan, (ii)
retirement of a participant in the plan, (iii) a loan from the plan (repayment
of loans, however, will constitute new sales for purposes of assessing the
CDSC), (iv) "financial hardship" of a participant in the plan, as that term is
defined in Treasury Regulation section 1.401(k)-1(d)(2), as amended from time to
time, (v) termination of employment of a participant in the plan, (vi) any other
permissible withdrawal under the terms of the plan. The contingent deferred
sales charge may also be waived in the case of redemptions of Class B shares of
the Funds pursuant to a systematic withdrawal program. See "Systematic
Withdrawal Program," page 29 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 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
- --------------------------------------------------------------------------------
22
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
capacity or providing any of the described services, the Funds' 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 Funds' Statement of Additional Information for more detailed information
about the marketing allowance.
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 Funds.
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 this provision.
A stockholder of Equity Fund who formerly invested in the Bondstock
Investment Plans or Life Insurance Investors Investment Plans may purchase Class
A shares of Equity Fund at net asset value provided that such stockholder
maintains his or her Equity Fund account.
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
Funds'
- --------------------------------------------------------------------------------
23
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
Investment Manager, Security Management Company, LLC, 700 Harrison St., Topeka,
Kansas 66636-0001, 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. The signature guarantee must be provided
by an eligible guarantor institution, such as a bank, broker, credit union,
national securities exchange or savings association. A signature guarantee is
not required for redemptions of $10,000 or less, requested by and payable to all
stockholders of record for an account, to be sent to the address of record. The
Investment Manager reserves the right to reject any signature guarantee pursuant
to its written procedures which may be revised in the future. To avoid delay in
redemption or transfer, stockholders having questions should contact the
Investment Manager by calling 1-800-888-2461, extension 3127.
The redemption price will be the net asset value of the shares next computed
after the redemption request in proper order is received by the Investment
Manager. Payment of the amount due, less any applicable deferred sales charge,
will be made by check within seven days after receipt of the redemption request
in proper order. Payment may also be made by wire at the sole discretion of the
Investment Manager. If a wire transfer is requested, the Investment Manager must
be provided with the name and address of the stockholder's bank as well as the
account number to which payment is to be wired. Checks will be mailed to the
stockholder's registered address (or as otherwise directed). Remittance by wire
(to a commercial bank account in the same name(s) as the shares are registered),
by certified 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 Funds repurchase
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.
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
- --------------------------------------------------------------------------------
24
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
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 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 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 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 telephone redemption request, provided the Investment Manager complied
with its procedures. Thus, a stockholder who authorizes telephone redemptions
may bear the risk of loss from a fraudulent or unauthorized request. The
telephone redemption privilege may be changed or discontinued at any time by the
Investment Manager or the Funds.
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 each 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 Funds' Board of Directors
may declare from time to time, except Growth and Income Fund which pays
dividends quarterly in March, June, September, and December. 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 will generally 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. 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 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. 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.
- --------------------------------------------------------------------------------
25
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
Each of the series of Security Equity Fund is to be treated separately 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.
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.
Each of the Funds 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 Funds generally will not be
subject to excise taxes imposed on certain regulated investment companies
provided that each Fund 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 Funds as
"capital gain dividends") of the excess, if any, of net long-term capital gains
over net short-term capital losses are taxable to stockholders as long-term
capital gains regardless of how long a stockholder has held the Fund's shares
and regardless of whether received in cash or reinvested in additional shares.
Stockholders should consult their tax adviser to determine the federal, state
and local tax consequences to them from an investment in the Fund.
Certain dividends declared in October, November or December of a calendar
year are taxable to stockholders as though received on December 31 of that year
if paid to stockholders during January of the following calendar year.
Advice as to the tax status of each year's distributions will be mailed on or
before January 31, of the following year. The Funds are 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 received from sources within foreign countries may be
subject to foreign income 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 (such as the Funds) to a
reduced tax rate (generally 10 to 15 percent) or to certain exemptions from tax.
The Funds will operate so as to qualify for such reduced tax rates or tax
redemptions whenever possible. While stockholders will bear 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.
- --------------------------------------------------------------------------------
26
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
DETERMINATION OF NET ASSET VALUE
The net asset value of each Fund is computed as of the close of regular
trading hours on the New York Stock Exchange (normally 3 p.m. Central time) on
days when the Exchange is open.
The 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 each 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 Funds' securities are supplied by a
pricing service approved by the Funds' 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 each of the Funds for the fiscal year ended
September 30, 1996, was Growth and Income Fund - 69 percent; Equity Fund - 64
percent; Global Fund - 142 percent; and Ultra Fund - 161 percent. The portfolio
turnover rates for Class A and B shares were the same for this period. Higher
portfolio turnover (portfolio turnover of 100 percent or more) 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 Growth and Income
and Global Funds generally will be less than 100 percent, that of Equity Fund
generally will be in the area of 100 percent, and that of Ultra Fund generally
will be more than 100 percent.
Transactions in portfolio securities for each 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 Funds. 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 Funds may also be held by other investment advisory clients of the
Investment Manager, including other investment companies, and by 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
- --------------------------------------------------------------------------------
27
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
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 generally be shared on a pro rata basis) in
proportion to the amounts desired to be purchased or sold. See the Funds'
Statement of Additional Information for a more detailed description of trading
and brokerage practices.
PERFORMANCE
Each 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 1, 5 and 10 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 Funds 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 Funds 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, each 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. 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.
For a more detailed description of the methods used to calculate the average
annual total return and aggregate total return of the Funds, see the Funds'
Statement of Additional Information.
- --------------------------------------------------------------------------------
28
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
SHAREHOLDER SERVICES
ACCUMULATION PLAN
An investor may choose to invest in one of the Funds 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 Funds.
SYSTEMATIC WITHDRAWAL PROGRAM
Stockholders who wish to receive regular monthly, quarterly, semiannual, or
annual payments of $25 or more may establish a Systematic Withdrawal Program. A
stockholder may elect a payment that is a specified percentage of the initial or
current account value or a specified dollar amount. A Systematic Withdrawal
Program will be allowed only if shares with a current offering price of $5,000
or more are deposited with the Investment Manager, which will act as agent for
the stockholder under the Program. Shares are liquidated at net asset value. The
Program may be terminated on written notice, or it will terminate automatically
if all shares are liquidated or withdrawn from the account.
A stockholder may establish a Systematic Withdrawal Program with respect to
Class B shares without the imposition of any applicable contingent deferred
sales charge, provided that such withdrawals do not in any 12-month period,
beginning on the date the Program is established, exceed 10 percent of the value
of the account on that date ("Free Systematic Withdrawals"). Free Systematic
Withdrawals are not available if a Program established with respect to Class B
shares provides for withdrawals in excess of 10 percent of the value of the
account in any Program year and, as a result, all withdrawals under such a
Program would be subject to any applicable contingent deferred sales charge.
Free Systematic Withdrawals will be made first by redeeming those shares that
are not subject to the contingent deferred sales charge and then by redeeming
shares held the longest. The contingent deferred sales charge applicable to a
redemption of Class B shares requested while Free Systematic Withdrawals are
being made will be calculated as described under "Calculation and Waiver of
Contingent Deferred Sales Charges," page 21. A Systematic Withdrawal form may be
obtained from the Funds.
EXCHANGE PRIVILEGE
Stockholders who own shares of the Funds may exchange those shares for shares
of another of the Funds, Security Asset Allocation Fund, Security Social
Awareness Fund, Security Income Fund, Security Tax-Exempt Fund, or Security Cash
Fund 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 Funds 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
- --------------------------------------------------------------------------------
29
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
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 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 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 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 Funds
listed above. 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 Funds upon 60
days' notice to stockholders.
In periods of severe market or economic conditions, the telephone exchange of
shares may be difficult to implement and stockholders should make exchanges by
writing to Security Distributors, Inc., 700 Harrison, Topeka, Kansas 66636-0001.
RETIREMENT PLANS
The Funds have available tax-qualified retirement plans for individuals,
prototype plans for the self-employed, pension and profit sharing plans for
corporations and custodial accounts for employees of public school systems and
organizations meeting the requirements of Section 501(c)(3) of the Internal
Revenue Code. Further information concerning these plans is contained in the
Funds' Statement of Additional Information.
GENERAL INFORMATION
ORGANIZATION
Security Growth and Income, Equity and Ultra Funds are Kansas corporations,
the Articles of Incorporation of which 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
- --------------------------------------------------------------------------------
30
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
capital stock of $.25 par value and currently issues its shares in four series,
Equity Fund, Global Fund, Asset Allocation Fund and Social Awareness 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 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 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 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 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 percent of the corporation's
outstanding shares.
Although each Fund offers only its own shares, it is possible one Fund might
become liable for any misstatement, inaccuracy, or incomplete disclosure in this
prospectus relating to another of the Funds. The Funds' Board of Directors has
considered this risk and has approved the use of a combined prospectus.
STOCKHOLDER INQUIRIES
Stockholders who have questions concerning their account or wish to obtain
additional information, may call the Funds (see back cover for address and
telephone numbers), or contact their securities dealer.
- --------------------------------------------------------------------------------
31
<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 Funds alone or in combination
with Class A shares of other Security Funds.
For purposes of qualifying for reduced sales charges on purchases made
pursuant to Rights of Accumulation or a Statement of Intention, the term
"Purchaser" includes the following persons: an individual, his or her spouse and
children under the age of 21; a trustee or other fiduciary of a single trust
estate or single fiduciary account established for their benefit; an
organization exempt from federal income tax under Section 501(c)(3) or (13) of
the Internal Revenue Code; or a pension, profit-sharing or other employee
benefit plan whether or not qualified under Section 401 of the Internal Revenue
Code.
RIGHTS OF ACCUMULATION
To reduce sales charges on purchases of Class A shares of a Fund, a Purchaser
may combine all previous purchases of the Funds with a contemplated current
purchase and receive the reduced applicable front-end sales charge. The
Distributor must be notified when a sale takes place which might qualify for the
reduced charge on the basis of previous purchases.
Rights of accumulation also apply to purchases representing a combination of
the Class A shares of the Funds, and other Security Funds, except Security Cash
Fund, in those states where shares of the fund being purchased are qualified for
sale.
STATEMENT OF INTENTION
A Purchaser may choose to sign a Statement of Intention within 90 days after
the first purchase to be included thereunder, which will cover future purchases
of Class A shares of the Funds, and other Security Funds, except Security Cash
Fund. The amount of these future purchases shall be specified and must be made
within a 13-month period (or 36-month period for purchases of $1 million or
more) to become eligible for the reduced front-end sales charge applicable to
the actual amount purchased under the Statement. 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 Funds.
REINSTATEMENT PRIVILEGE
Stockholders who redeem their Class A shares of the Funds have a one-time
privilege (1) to reinstate their accounts by purchasing Class A shares without a
sales charge up to the dollar amount of the redemption proceeds; or (2) to the
extent the redeemed shares would have been eligible for the exchange privilege,
to purchase Class A shares of another of the Security Funds, without a sales
charge up to the dollar amount of the redemption proceeds. To exercise this
privilege, a 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.
- --------------------------------------------------------------------------------
32
<PAGE>
SECURITY FUNDS
APPLICATION
1. ACCOUNT REGISTRATION (THE OWNER(S) MUST COMPLETE SECTION 10 "CERTIFICATION
AND SIGNATURE" TO ESTABLISH AN ACCOUNT.)
I hereby authorize the establishment of the account marked below and acknowledge
receipt of the Fund's current prospectus. Check is enclosed for
$ (minimum $100) payable to SECURITY DISTRIBUTORS, INC. as
------------------
an initial investment. I am of legal age in the state of my residence and wish
to purchase shares of the Fund indicated below. By the execution of this
application, the undersigned represents and warrants that the investor has full
right, power and authority to make this investment and the undersigned is duly
authorized to sign this application and to purchase or redeem shares of the Fund
on behalf of the investor. No stock certificate is to be issued unless I so
request. See the prospectus for information about an Accumulation Plan which
allows a minimum investment of $100 and subsequent investments of $20.
- -------------------------------------------------------------
Owner/Custodian/Trustee Name (Print)
- -------------------------------------------------------------
Social Security Number Date of Birth
- -------------------------------------------------------------
Joint Owner/Minor Name (Print) [ ] Check if UGMA/UTMA Account
- -------------------------------------------------------------
Social Security Number Date of Birth
2. ADDRESS AND TELEPHONE NUMBER
- ------------------------------ -----------------------------------------------
Street Address Daytime Telephone
(for first individual)
- ------------------------------ Citizenship [ ] U.S. [ ] Other
City, State, Zip Code ----------------
Indicate Country
3. INITIAL INVESTMENT
CLASS OF SHARES (MUST SELECT ONE ONLY) ( ) A SHARES ( ) B SHARES (IF NO CLASS IS
SELECTED, PURCHASE(S) WILL BE MADE OF A SHARES)
<TABLE>
<S> <C> <C> <C>
SECURITY EQUITY FUND $ SECURITY LIMITED MATURITY BOND FUND $
------ ------
SECURITY GLOBAL FUND $ SECURITY U.S. GOVERNMENT FUND $
------ ------
SECURITY ASSET ALLOCATION FUND $ SECURITY GLOBAL AGGRESSIVE BOND FUND $
------ ------
SECURITY GROWTH & INCOME FUND $ SECURITY HIGH YIELD FUND $
------ ------
SECURITY ULTRA FUND $ SECURITY TAX-EXEMPT FUND $
------ ------
SECURITY CASH FUND $ SECURITY SOCIAL AWARENESS FUND $
------ ------
SECURITY CORPORATE BOND FUND $
------
</TABLE>
4. DIVIDEND OPTION (CHECK ONE ONLY)
(If no option is selected, distributions will be reinvested into the Fund that
pays them.)
[ ] Reinvest all dividends and capital gains
[ ] Reinvest only capital gains and pay dividends in cash
[ ] Cash payment of dividends and capital gains
[ ] Invest dividends and capital gains into another Security Fund account
(must be same class of shares; if new account, number will be assigned)
Fund Name Account Number
------------------------------------ ------------------
[ ] Send distributions to third party below
Account No. (if applicable)
----------------------------------------------------
Name
---------------------------------------------------------------------------
Address
------------------------------------------------------------------------
5. SYSTEMATIC WITHDRAWAL PROGRAM (FOR ACCOUNTS OF $5,000 OR MORE)
You are hereby authorized to send a check(s) beginning:
Month Day [ ] 11th or [ ] 26th 19
---------------- ----
(if no date is selected withdrawal will be made on the 26th)
Payable: [ ] monthly [ ] quarterly [ ] semi-annually [ ] annually
Fund Name Fund Name
----------------------------- ------------------------------
Account No. (if known) Account No. (if known)
---------------- ---------------
(if 3 or more funds, please send written instructions)
Level Payment $ ($25 minimum) Level Payment $ ($25 minimum)
-------- --------
Variable Payment based on fixed number Variable Payment based on fixed number
of shares or a percentage of account of shares or a percentage of account
value ($25 minimum) value ($25 minimum)
Number of shares: or Number of shares: or
----------- -----------
Percentage of account value: Percentage of account value:
--------- ---------
Note: For Class B shares, annual withdrawals in excess of 10% of value of
account at time program is established may be subject to a contingent deferred
sales charge.
Complete this section only if you want check payable and sent to another address
(please print):
Name Signature(s) of all registered owners required
----------------------------
Address Individual Signature
------------------------- -------------------------
City, State, Zip Code Joint Owner Signature
------------ ------------------------
6. SECUR-O-MATIC[Registration Mark] BANK DRAFT PLAN
I wish to make investments directly from my checking account. (Please attach a
voided check to this application.)
Fund Name Account Number (if known) Amount $
------------------ ------- -------
Fund Name Account Number (if known) Amount $
------------------ ------- -------
Date: [ ] 7th Day of Month [ ] 14th Day of Month [ ] 21st Day of Month
[ ] 28th Day of Month
(if no date is selected investment will be made on the 21st)
Mode: [] Monthly ($20 minimum) [] Bi-Monthly ($40 minimum)
[] Quarterly ($50 minimum) [] Semiannually ($100 minimum)
[] Annually ($200 minimum)
You should notify your bank that you are going to use this service to ensure
they accept preauthorized electronic drafts.
(continued on back)
<PAGE>
7. RIGHTS OF ACCUMULATION
I own shares in other Security Funds which may entitle this purchase to have a
reduced sales charge under the provisions in the Fund Prospectus.
- -------------------------------- --------------------------- -----------------
Current Account Registration Fund Name Account Number(s)
- -------------------------------- --------------------------- -----------------
- -------------------------------- --------------------------- -----------------
8. STATEMENT OF INTENTION
[ ] Please check here if you wish to receive a Statement of Intention. This form
allows you to purchase shares at reduced sales charges if you plan to invest
more than: (Please check one) [ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $500,000
[ ] $1,000,000 in installments during the next 13 months (36 months for
purchases of $1 million or more). See the current prospectus for more
information.
9. TELEPHONE EXCHANGE AND REDEMPTION PRIVILEGE
If you would like to have telephone exchange and/or redemption privileges,
please mark one or more of the boxes below:
Yes, I want [ ] telephone exchange [ ] telephone redemption privileges.
By checking the applicable box(es) and signing this Application, you authorize
the Investment Manager to honor any telephone request for the exchange and/or
redemption of Fund shares (maximum telephone redemption is $10,000), subject to
the terms of the Fund prospectus. The Investment Manager has established
reasonable procedures to confirm that instructions communicated by telephone are
genuine and may be liable for any losses due to fraudulent or unauthorized
instructions if it fails to comply with its procedures. The procedures require
that any person requesting a telephone redemption or exchange provide the
account registration and number and owner's tax identification number and such
request must be received on a recorded line. Neither the Fund, the Investment
Manager nor the Underwriter will be liable for any loss, liability, cost or
expense arising out of any telephone request, provided that the Investment
Manager complied with its procedures. Thus, a stockholder may bear the risk of
loss from a fraudulent or unauthorized request.
10. CERTIFICATION AND SIGNATURE
TAX IDENTIFICATION NUMBER CERTIFICATION
UNDER PENALTIES OF PERJURY I CERTIFY THAT:
1. The number shown on this form is my correct taxpayer identification number
(or I am waiting for a number to be issued to me); and
2. I am not subject to backup withholding because: (a) I am exempt from backup
withholding, or (b) I have not been notified by the Internal Revenue Service
(IRS) that I am subject to backup withholding as a result of a failure to
report all interest or dividends, or (c) the IRS has notified me that I am no
longer subject to backup withholding.
The Internal Revenue Service does not require your consent to any provision of
this document other than the certifications required to avoid backup
withholding.
- --------------------------------------------------------------------------------
Signature of Owner Date
- --------------------------------------------------------------------------------
Signature of Joint Owner Date
In case of joint ownership, both must sign. If no form of ownership is indicated
then it will be assumed the ownership is as "joint tenants, with right of
survivorship" and not as "tenants in common."
CERTIFICATION INSTRUCTIONS - You must cross out item (2) to the left if you have
been notified by IRS that you are currently subject to backup withholding
because of underreporting interest or dividends on your tax return.
11. INVESTMENT DEALER
I (we) agree to act as dealer under this account in accordance with the
provisions of the Dealer Agreement and appoint Security Distributors, Inc. to
act as my (our) agent pursuant thereto. I (we) represent that the appropriate
prospectus was delivered to the above indicated owner(s).
- --------------------------------------------------------------------------------
Name of Firm (Print)
- --------------------------------------------------------------------------------
Business Address
- --------------------------------------------------------------------------------
City, State, Zip Code
- --------------------------------------------------------------------------------
Signature of Authorized Dealer
- ----------------------------------------------------- ------------------------
Representative's Name Account Executive Number
- --------------------------------------------------------------------------------
Business Address
- --------------------------------------------------------------------------------
City, State, Zip Code
- --------------------------------------------------------------------------------
Representative's Telephone Number
SEND COMPLETED APPLICATION TO SECURITY DISTRIBUTORS, INC., 700 SW HARRISON ST.,
TOPEKA, KS 66636-0001
1-800-888-2461, EXT. 3127
Attach Voided Check Here
(Check must be preprinted with the bank account registration)
<PAGE>
[SDI LOGO]
700 SW Harrison St.
Topeka, KS 66636-0001
(913) 295-3127
<PAGE>
SECURITY GROWTH AND INCOME FUND
(formerly Security Investment Fund)
SECURITY EQUITY FUND
EQUITY SERIES
GLOBAL SERIES
ASSET ALLOCATION SERIES
SOCIAL AWARENESS SERIES
SECURITY ULTRA FUND
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 31, 1997
RELATING TO THE PROSPECTUS DATED JANUARY 31, 1997,
AS IT MAY BE SUPPLEMENTED FROM TIME TO TIME
(913) 295-3127
(800) 888-2461
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
January 31, 1997
(RELATING TO THE PROSPECTUS DATED JANUARY 31, 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 January 31, 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 (913) 295-3127 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............................................ 4
Equity Fund................................................... 4
Global Fund................................................... 4
Asset Allocation Fund......................................... 6
Social Awareness Fund......................................... 8
Security Ultra Fund............................................. 8
Investment Methods and Risk Factors............................... 8
Investment Policy Limitations..................................... 8
Security Growth and Income Fund's Fundamental Policies.......... 8
Security Equity Fund's Fundamental Policies..................... 8
Security Ultra Fund's Fundamental Policies...................... 8
Officers and Directors............................................ 8
Remuneration of Directors and Others.............................. 8
How to Purchase Shares............................................ 8
Alternative Purchase Options.................................... 8
Class A Shares.................................................. 8
Class B Shares.................................................. 8
Class B Distribution Plan....................................... 8
Calculation and Waiver of Contingent Deferred Sales Charges..... 8
Arrangements With Broker-Dealers and Others..................... 8
Purchases at Net Asset Value.................................... 8
Accumulation Plan................................................. 8
Systematic Withdrawal Program..................................... 8
Investment Management............................................. 8
Portfolio Management............................................ 8
Code of Ethics.................................................. 8
Distributor....................................................... 8
Allocation of Portfolio Brokerage................................. 8
How Net Asset Value is Determined................................. 8
How to Redeem Shares.............................................. 8
Telephone Redemptions........................................... 8
How to Exchange Shares............................................ 8
Exchange by Telephone........................................... 8
Dividends and Taxes............................................... 8
Organization...................................................... 8
Legal Proceedings................................................. 8
Custodian, Transfer Agent and Dividend-Paying Agent............... 8
Independent Auditors.............................................. 8
Performance Information........................................... 8
Retirement Plans.................................................. 8
Individual Retirement Accounts (IRAs)............................. 8
Pension and Profit-Sharing Plans.................................. 8
403(b) Retirement Plans........................................... 8
Simplified Employee Pension Plans (SEPPs)......................... 8
Financial Statements.............................................. 8
Appendix A........................................................ 8
Appendix B........................................................ 8
<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 8.)
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"), and Social Awareness Series ("Social Awareness
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 8. 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 8.)
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
8.)
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 arranged
for Meridian Investment Management Corporation ("Meridian") to provide
quantitative investment research, and Templeton/Franklin Investment Services,
Inc. ("Templeton") to provide analytical research, 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
Fund, except Global, Asset Allocation and Social Awareness 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 and Social Awareness Funds to
the Investment Manager for investment advisory, administrative and transfer
agency services. The investment advisory fee for both the Asset Allocation Fund
and the Social Awareness Fund 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 (i) $30,000 in the year ended April 29, 1996; (ii)
$45,000 in the year ending April 29, 1997; or (iii) $60,000 thereafter. The
administrative fee for Social Awareness Fund on an annual basis is equal to .09%
of the average daily net assets of the Fund. The transfer agency fee for the
Asset Allocation Fund and the Social Awareness 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 and Social Awareness 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 and Social Awareness Funds pay all of their expenses not
assumed by the Investment Manager or Security Distributors, Inc. (the
"Distributor") as described under "Investment Management," page 8.
1
<PAGE>
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, extraordinary expenses and
Class B distribution fees) will not exceed any expense limitation imposed by any
state. See "Investment Management," page 8 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
8.)
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; and (vi) higher yielding, high risk debt securities
(commonly referred to as "junk bonds"). 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.
2
<PAGE>
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 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."
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 four series--Equity
Series ("Equity Fund"), Global Series ("Global Fund"), Asset Allocation Series
("Asset Allocation Fund") and Social Awareness Series ("Social Awareness Fund").
The assets of each Series are held separate from the assets of the other Series
and each Series has an investment objective which differs from that of the other
Series. The investment objective and
3
<PAGE>
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, 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.
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
4
<PAGE>
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 limitation that not more than 10% of its total
assets will be invested in restricted securities. The Investment
5
<PAGE>
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"); 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 see the
discussion of the risks associated with investment in gold stocks and REITs
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.
Asset Allocation Fund may invest in 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.
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 Investment Manager receives quantitative investment research from
Meridian Investment Management Corporation ("Meridian"), which research the
Investment Manager uses in strategically allocating the Fund's assets among the
investment categories identified above, primarily on the basis of a quantitative
asset allocation model. With respect to equity securities, the model analyzes a
large number of equity securities based on the following factors: current
earnings, earnings history, long-term earnings projections, current price, and
risk. The Investment Manager then determines (based on the results of Meridian's
analysis) which sectors within an identified investment category are deemed to
be the most attractive relative to other sectors. For example, the model may
indicate that a portion of the Fund's assets should be invested in the domestic
equity category of the market and within this category that pharmaceutical
stocks represent a sector with an attractive total return potential. Although
6
<PAGE>
the Investment Manager anticipates relying on much of the research provided by
Meridian, the Investment Manager has ultimate responsibility for the selection
of the investment categories and the sectors within those categories.
The Investment Manager identifies sectors of the domestic and international
economy (based on the research provided by Meridian) in which the Fund will
invest and then determines which equity securities to purchase within the
identified sectors. The Investment Manager may utilize certain analytical
research provided by Templeton/Franklin Investment Services, Inc. ("Templeton")
in selecting equity securities, including gold stocks, for Asset Allocation
Fund. Templeton analyzes and monitors analytical research provided by third
parties and makes recommendations regarding equity securities in the identified
sectors based on such research. The Investment Manager has ultimate
responsibility for all buy and sell decisions of Asset Allocation Fund and may
determine not to use analytical research provided by Templeton.
With respect to the selection of debt securities for the Fund, the asset
allocation model provided by Meridian analyzes the prices of commodities and
finished goods to arrive at an interest rate projection. The Investment Manager
will determine the portion of the portfolio to allocate to debt securities and
the duration of those securities based on the model's interest rate projections.
Gold stocks and REITs will be analyzed in a manner similar to that used for
equity securities. Money market instruments will be analyzed based on current
returns and the current yield curve. The asset allocation model and stock
selection techniques used by the Fund may evolve over time or be replaced by
other asset allocation models and/or stock selection techniques. There is no
assurance that the model will correctly predict market trends or enable the Fund
to achieve its investment objective.
The debt securities, including convertible securities, in which the Fund
may invest will, at the time of investment, consist of "investment grade" bonds,
which are bonds rated BBB or better by 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 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
7
<PAGE>
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 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 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
8
<PAGE>
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. and Franklin Insight, Inc. 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.
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 total 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
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.
9
<PAGE>
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.
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
10
<PAGE>
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.
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, 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,
11
<PAGE>
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.
POLITICAL 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 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
12
<PAGE>
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 the term of the option, an account consisting of
cash, U.S. Government securities or other liquid high-grade debt obligations
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
13
<PAGE>
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 OPTIONS. 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, cash
equivalents, U.S. Government securities or other high grade, liquid debt
obligations 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 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
14
<PAGE>
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 RECEIVED 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.
PURCHASING 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.
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
15
<PAGE>
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 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
16
<PAGE>
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 INDICES. 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 INDICES. 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 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.
17
<PAGE>
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 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, cash
equivalents, U.S. Government securities or other 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
18
<PAGE>
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 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,
19
<PAGE>
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 OPTIONS. 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
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, cash equivalents, U.S. Government
securities or other high grade, liquid debt securities equal in value to the
current value of the underlying instrument less the margin deposit.
20
<PAGE>
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 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 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 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,
21
<PAGE>
even a correct forecast of general market trends by the Investment Manager 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, cash equivalents,
U.S. Government securities or other 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.
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.
22
<PAGE>
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.
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 and Social Awareness
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 and Social
Awareness 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; provided, however, that for Asset Allocation Fund and Social
Awareness Fund this limitation applies only with respect to 75% of its
total assets.
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 and Social Awareness Fund may borrow up to 33 1/3% of total
assets and may borrow for emergency, temporary or
23
<PAGE>
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 and Social Awareness
Fund.
7. Not to buy securities on margin or effect short sales of securities;
provided, however, that Asset Allocation Fund and Social Awareness 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 and Social Awareness 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 and Social Awareness 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 and Social Awareness 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 and Social Awareness 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 and Social Awareness 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 and Social Awareness 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 and Social
Awareness 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.
24
<PAGE>
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
thereof.
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.
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>
- ------------------------------------------------------------------------------------------------------------------------------------
NAME, ADDRESS AND POSITIONS HELD WITH THE FUNDS PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
JOHN D. CLELAND,* President and Director Senior Vice President and Managing Member Representative, Security
Management Company, LLC; Senior Vice President, Security Benefit Group,
Inc. and Security Benefit Life Insurance Company.
WILLIS A. ANTON, JR., Director Partner, Classic Awning & Design. Prior to October 1991, President,
3616 Yorkway Classic Awning & Design.
Topeka, Kansas 66604
- ------------------------------------------------------------------------------------------------------------------------------------
25
<PAGE>
- ------------------------------------------------------------------------------------------------------------------------------------
NAME, ADDRESS AND POSITIONS HELD WITH THE FUNDS PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------------------------------
DONALD A. CHUBB, JR.,** Director President, Neon Tube Light Company, Inc.
2222 SW 29th Street
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. (Wholesale Periodicals).
Topeka, Kansas 66610
MARK L. MORRIS, JR.,** Director President, Mark Morris Associates (Veterinary Research and Education).
5500 SW 7th Street
Topeka, Kansas 66606
JEFFREY B. PANTAGES,* Director Prior to June 1996, President, Chief Investment Officer and Director,
1266 South Street Security Management Company; Senior Vice President, Security Benefit
Needham, MA 02192 Group, Inc. and Security Benefit Life Insurance Company. Prior to
April 1992, Managing Director, Prudential Life.
HUGH L. THOMPSON, Director President, Washburn University.
1700 College
Topeka, KS 66621
JAMES R. SCHMANK, Vice President and Treasurer President (Interim), Treasurer, Chief Fiscal Officer and Managing
Member Representative, Security Management Company, LLC; Vice President
and Interim Chief Investment Officer, Security Benefit Group, Inc. and
Security Benefit Life Insurance Company.
MARK E. YOUNG, Vice President Vice President - Operations, 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 Portfolio Manager, Security Management
(Equity Fund only) Company, LLC; Vice President, Security Benefit Group, Inc. and Security
Benefit Life Insurance Company.
TERRY A. MILBERGER, Vice President Vice President and Senior Portfolio Manager, Security Management
(Equity Fund only) Company, LLC; 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.
BRENDA M. HARWOOD, Assistant Treasurer Assistant Vice President, Assistant Treasurer and Assistant Secretary,
and Assistant Secretary Security 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
(Ultra Fund only) Company, 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.
- ------------------------------------------------------------------------------------------------------------------------------------
26
<PAGE>
- ------------------------------------------------------------------------------------------------------------------------------------
NAME, ADDRESS AND POSITIONS HELD WITH THE FUNDS PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------------------------------
GREGORY A. HAMILTON, Assistant Vice President Second Vice President, Security Management Company, LLC, Security
(Equity Fund only) Benefit Group, Inc. and Security Benefit Life Insurance Company. Prior
to December 1992, First Vice President and Manager of Investments
Division, Mercantile National Bank.
THOMAS A. SWANK, Assistant Vice President Second Vice President and Portfolio Manager, Security Management
(Growth and Income Fund only) Company, LLC; Second Vice President, Security Benefit Group, Inc. and
Security Benefit Life Insurance Company.
CHRISTOPHER D. SWICKARD, Assistant Secretary 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,
Mr. Swank who is Assistant Vice President of SBL Fund, and Mr. Hamilton who is
Assistant Vice President of SBL Fund, Security Tax-Exempt Fund and Security
Income Fund. (See the table under "Investment Management," on page 8, 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 fees. Asset
Allocation and Social Awareness Funds pay their respective share of directors'
fees and travel costs. (See page 8, "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.
27
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
PENSION OR RETIREMENT
BENEFITS ACCRUED AS
AGGREGATE COMPENSATION PART OF FUND EXPENSES TOTAL
----------------------------- ------------------------------- COMPENSATION
SECURITY SECURITY ESTIMATED FROM THE
GROWTH GROWTH ANNUAL SECURITY FUND
AND SECURITY SECURITY AND SECURITY SECURITY BENEFITS COMPLEX,
NAME OF DIRECTOR INCOME EQUITY ULTRA INCOME EQUITY ULTRA UPON INCLUDING
OF THE FUND FUND FUND FUND FUND FUND FUND RETIREMENT THE FUNDS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Willis A. Anton, Jr. $1,508 $1,508 $1,508 $0 $0 $0 $0 $18,100
Donald A. Chubb, Jr. 1,541 1,591 1,518 0 0 0 0 18,300
John D. Cleland 0 0 0 0 0 0 0 0
Donald L. Hardesty 1,508 1,508 1,508 0 0 0 0 18,100
Penny A. Lumpkin 1,541 1,591 1,518 0 0 0 0 18,300
Mark L. Morris, Jr. 1,541 1,591 1,518 0 0 0 0 18,300
Jeffrey B. Pantages 0 0 0 0 0 0 0 0
Hugh Thompson 788 788 788 0 0 0 0 9,450
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Investment Manager compensates its officers and directors who may also
serve as officers or directors of the Funds. On January 1, 1997, the Funds'
officers and directors (as a group) beneficially owned 26,483; 247,931; 12,714;
3,093; and 73,205 of Class A shares of Growth and Income Fund, Equity Fund,
Global Fund, Asset Allocation Fund and Ultra Fund, respectively, which
represented approximately .308%, .297%, .728%, 1.211% and .765% 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 8.) 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.
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.
28
<PAGE>
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
AMOUNT OF PURCHASE PERCENTAGE OF PERCENTAGE OF NET REALLOWABLE
AT OFFERING PRICE OFFERING PRICE AMOUNT 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.
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 PAYMENT WAS MADE CONTINGENT DEFERRED SALES CHARGE
------------------------------------ --------------------------------
First 5%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth and Following 0%
29
<PAGE>
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
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.
30
<PAGE>
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 8.)
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.
31
<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.
32
<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 8.
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 over $15 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 and July 26, 1996 respectively, to provide for the Investment Manager to
serve as investment adviser to Asset Allocation Fund and Social Awareness Fund.
The Agreements were last renewed by the Funds' Board of Directors at a regular
meeting held on November 3, 1995.
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
33
<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 quantitative research agreement
with Meridian Investment Management Corporation ("Meridian"), 12835 East
Arapahoe Road, Tower II, 7th Floor, Englewood, Colorado 80112. Meridian provides
research which the Investment Manager uses in strategically allocating the
assets of Asset Allocation Fund among investment categories and market sectors.
The Investment Manager pays Meridian an annual fee equal to .20% of the average
daily net assets of Asset Allocation Fund, calculated daily and payable
quarterly. Meridian is a wholly-owned subsidiary of Meridian Management &
Research Corporation.
The Investment Manager has entered into an agreement with Templeton/Franklin
Investment Services, Inc. ("Templeton"), 777 Mariners Island Boulevard, San
Mateo, California 94404, to provide analytical research used by the Investment
Manager in the selection of equity securities for Asset Allocation Fund. The
Investment manager pays Templeton an annual fee equal to .30% of the average net
assets of Asset Allocation Fund invested in equity securities, calculated daily
and payable monthly. Templeton is an indirect wholly-owned subsidiary of
Templeton Worldwide, Inc., which in turn is a direct wholly-owned subsidiary of
Franklin Resources, Inc.
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 and Social Awareness 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 and Social Awareness 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 and Social Awareness 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 preparing and distributing reports to shareholders; costs of
shareholder and other meetings; Class B distribution fees; and legal, auditing
and accounting expenses. Asset Allocation and Social Awareness 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
34
<PAGE>
state securities laws. Asset Allocation and Social Awareness 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 most restrictive expense limitation currently imposed by state
securities regulation, of which the Investment Manager is aware, provides that
the aggregate annual expenses of an investment company shall not exceed 2 1/2%
of the first $30 million of the average net assets, 2% of the next $70 million
of the average net assets, and 1 1/2% of the remaining average net assets of the
investment company for any fiscal year, determined at least monthly. For this
limitation, "aggregate annual expenses" include management fees, but exclude
interest, taxes, brokerage commissions, extraordinary expenses (such as
litigation) and Class B distribution fees.
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 and Social Awareness 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 (i) $30,000 in the year ended
April 29, 1996; (ii) $45,000 in the year ending April 29, 1997; and (iii)
$60,000 thereafter. With respect to the Social Awareness 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 has agreed to waive the investment advisory fee of Social
Awareness Fund 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 Fund. For transfer
agency services provided to each of the Asset Allocation and Social Awareness
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 its services for fiscal year
ended September 30, 1996 - $39,560 and the period June 1, 1995 to September 30,
1995 - $10,134.
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. Expense information is
not yet available for Social Awareness Fund as it did not begin operations until
November of 1996.
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.
35
<PAGE>
The following persons are affiliated with the Funds and also with the Funds'
investment adviser, Security Management Company, LLC, in these capacities:
- --------------------------------------------------------------------------------
POSITION(S) WITH SECURITY
NAME POSITION(S) WITH THE FUNDS MANAGEMENT COMPANY, LLC
- --------------------------------------------------------------------------------
James R. Schmank Vice President and Treasurer President (Interim),
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 Vice President and
(Equity Fund only) Senior Portfolio Manager
Terry A. Milberger Vice President Vice President and
(Equity Fund only) Senior Portfolio Manager
Mark E. Young Vice President Vice President-Operations
Amy J. Lee Secretary Secretary
Brenda M. Harwood Assistant Treasurer and Assistant Vice President,
Assistant Secretary Assistant Treasurer and
Assistant Secretary
Cindy L. Shields Assistant Vice President Assistant Vice President
(Ultra Fund only) and Portfolio Manager
Gregory A. Hamilton Assistant Vice President Second Vice President
(Equity Fund only)
Thomas A. Swank Assistant Vice President Second Vice President and
(Growth and Income Fund only) Portfolio Manager
- --------------------------------------------------------------------------------
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 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, Greg
Hamilton, Jane Tedder, Tom Swank, Steve Bowser, Barb Davison and Elaine Miller.
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 and research
analysts of the Investment Manager. The team is responsible for day-to-day
management of the Fund. Jane Tedder, Senior Portfolio Manager, has day-to-day
responsibility for managing the fixed-income portion of the Fund's portfolio and
for supervising the services provided by Meridian and Templeton. She has had
responsibility for the Fund since January 1996. 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
since its inception in 1996.
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.
Cindy L. Shields is Portfolio Manager of the Investment Manager. She has
seven years experience in the securities field and joined the Investment Manager
in 1989. Ms. Shields graduated from Washburn University with
36
<PAGE>
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 Portfolio Manager of the Investment
Manager, has 20 years of experience in the investment field. Prior to joining
the Investment Manager in 1983, she served as Vice President and Trust Officer
of Douglas County Bank in Kansas. Ms. Tedder earned a bachelor's degree in
education from Oklahoma State University and advanced diplomas from National
Graduate Trust School, Northwestern University, and Stonier Graduate School of
Banking, Rutgers University. She is a Chartered Financial Analyst.
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.
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 the following investment companies: Security Income Fund,
Security Tax-Exempt Fund, and The Parkstone Advantage 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 as follows: 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
37
<PAGE>
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 retained net underwriting commissions of $911 and $198,
respectively. 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.
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.
38
<PAGE>
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 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.
39
<PAGE>
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 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.
- ------------------------------------------------------------------------------------------------------------------------
</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. Portfolio turnover information is not yet available for Social Awareness
Fund as it did not begin operations until November of 1996.
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, President's 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.
40
<PAGE>
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 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
41
<PAGE>
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 8.)
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. 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.
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 (which also acts as principal
underwriter for Security Income Fund and Security Tax-Exempt Fund) and with
Security Cash Fund, stockholders of the Funds may exchange their shares for
shares of another of the Funds, Security Income Fund, Security Tax-Exempt Fund
or Security Cash Fund 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.
Class A and Class B shares of the Funds 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
42
<PAGE>
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 8.)
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.
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
43
<PAGE>
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.
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 (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
44
<PAGE>
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 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
45
<PAGE>
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 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 Fund 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.
46
<PAGE>
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 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 four series, Equity Fund, Global Fund, Asset
Allocation Fund and Social Awareness 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 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 8, 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
and Social Awareness 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,
47
<PAGE>
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 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
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%.
48
<PAGE>
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.
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 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. 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%. 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. 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. These figures reflect deduction of the
maximum sales load. Performance information is not yet available for Social
Awareness Fund as it did not begin operations until November 1996.
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
49
<PAGE>
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, 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
plus $15 to cover the fees for opening and maintaining the account for the first
year.
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. If
contributions are also made to an IRA of a nonworking spouse, the maximum is
raised to a total for the two accounts of $2,250; the taxpayers may choose how
to allocate the $2,250 between the accounts, as long as no more than $2,000 is
contributed to either account. If both husband and wife work, each may establish
his or her own IRA and contribute up to the maximum allowed for individuals.
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.
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.
50
<PAGE>
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.
FINANCIAL STATEMENTS
The audited financial statements of the Funds, which are contained in the
Funds' September 30, 1996 Annual Report is incorporated herein by reference. A
copy of the Annual Report dated September 30, 1996 is provided to every person
requesting a Statement of Additional Information.
51
<PAGE>
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.
52
<PAGE>
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.
53
<PAGE>
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
54
<PAGE>
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.
55
<PAGE>
SECURITY FUNDS
ANNUAL REPORT
SEPTEMBER 30, 1996
* SECURITY GROWTH AND INCOME FUND
* SECURITY EQUITY FUND
- EQUITY SERIES
- GLOBAL SERIES
- ASSET ALLOCATION SERIES
* SECURITY ULTRA FUND
[SDI LOGO]
<PAGE>
PRESIDENT'S COMMENTARY
- --------------------------------------------------------------------------------
NOVEMBER 15, 1996
SECURITY FUNDS
To Our Shareholders:
The fiscal year completed September 30 has been another very rewarding period
for equity investors. The Dow Jones Industrial Average increased 23.54% in the
past twelve months, the Standard & Poor's 500 gained 20.32%, and the Russell
2000 Index was up 12.83%. Your equity portfolios in the Security Funds family
all turned in excellent performances, with double-digit total returns.
ECONOMIC CONTRIBUTIONS TO EQUITY PERFORMANCE
The leading contributor to strong markets this fiscal year was moderate but
stable growth of the economy in an environment marked by the absence of
accelerating inflation. Moreover, the global inflation story was positive as
well, with declining rates of inflation in most of the world's major economies.
This was a powerful contributor to global economic growth and interest rate
stability throughout the year. Such a climate is extremely favorable for
corporate earnings.
A second factor encouraging equity growth was productivity improvement. As the
technological revolution has progressed, both workers and plant assets have been
employed more efficiently and costs have been reduced. This has generated
uninterrupted growth in corporate earnings and accordingly, equity market
growth.
A CORRECTION MAY BE IN THE CARDS
As the next fiscal year unfolds, we expect some changes to develop in the
economic picture. An economic slowdown, while not necessarily inevitable, may
take place in the second half of 1997 that might be sufficient to produce a
short-lived consumer recession. This would be accompanied by declining corporate
profits and the possibility of a correction in stock prices.
[PHOTO OF JOHN CLELAND]
JOHN CLELAND, PRESIDENT
We expect, however, that the correction would be short in time. In our view, the
globalization of the world's economy makes it unlikely that any one country's
economic contraction would last very long. Many companies in Europe and Asia are
early in their productivity improvement processes. Competitiveness, as well as
earnings which are global in nature, will keep companies worldwide working hard
at cost efficiency and earnings growth.
OUR VIEW OF THE LONG TERM
Volatility remains the constant companion of equity investors. Because of
ever-growing liquidity in the financial markets, traders can more rapidly
respond to reports of all kinds, moving markets oftentimes in wide swings.
However, long-term investors are able to step back and view the broader upward
trends in the market indexes without overreacting to daily changes.
We believe that the long-term bull market for financial assets remains intact.
The world in general is at peace with the United States, the only surviving
global superpower. This continues to provide a positive outlook for financial
markets as we approach the dawn of the twenty-first century.
As always, we are pleased that you have chosen us to manage your investments. We
invite your questions or comments at any time.
Sincerely,
JOHN CLELAND
John Cleland
President
- --------------------------------------------------------------------------------
1
<PAGE>
MANAGER'S COMMENTARY
- --------------------------------------------------------------------------------
NOVEMBER 15, 1996
SECURITY GROWTH AND INCOME FUND
To Our Shareholders:
At the close of the fiscal year completed September 30 we look back with
surprise at the strength of the market. A year ago we felt that corporate
earnings in 1996 would slow, in turn limiting the stock market to a modest
upside movement. Instead earnings remained strong even in the face of rising
interest rates, and the stock markets reached record highs. Your Growth and
Income Fund returned 20.31% for the year, topping last year's return and
paralleling the 20.32% gain for the Standard & Poor's 500 Index.*
CONTRIBUTORS TO STRONG PERFORMANCE
The greatest exposure in the portfolio was to companies with high quality,
consistently above-average earnings and low economic sensitivity. Our analytical
efforts paid off as we worked to identify good earnings prospects. Many, such as
Walgreens Company, a chain of retail drug stores, were in the consumer
nondurable goods sector and had low economic sensitivity.
Issues including Smithkline Beecham PLC ADR and Merck & Company, Inc. in the
health care industry generated solid earnings as they felt little impact from
rising interest rates. Albertson's, Inc., a food retailer, also was a strong
performer, showing very little sensitivity to a moderating economy.
Even though the technology sector was more volatile than many other areas, a
strong-performing stock in the portfolio was Microsoft Corporation, increasing
over 65% since purchase in early 1996. Another outstanding performer was U.S.
Industries, Inc., a manufacturing and distribution conglomerate, which posted a
75% gain in its stock price since we added it to our holdings.
THE FIXED INCOME PORTION OF THE PORTFOLIO
Consistently throughout the fiscal year about 20% of the fund's portfolio was
invested in high yield bonds. This portion contained both BB and B-rated issues,
Standard & Poor's two highest rating categories in the high yield area of the
fixed income market. Companies in these rating categories exhibit stronger
balance sheets than their lower-rated counterparts, and generally will hold
their value better in the event of an economic slowdown.
Corporate buyouts played a substantial part in the total return contribution of
the bond holdings. Cable television operator Continental Cablevision was
purchased by U.S. West, Inc., a telecommunications service provider. Because
U.S. West was rated higher, our Continental Cablevision bonds benefitted from an
upgrade after the purchase. A similar situation in the finance industry involved
Keystone Group, a mutual fund company, and its acquiror, a bank holding company
called First Union Corporation. The perception that Keystone will soon be
upgraded to First Union's ranking drove the price upward.
[PHOTO OF THE SECURITY MANAGEMENT GROWTH-INCOME TEAM]
THE SECURITY MANAGEMENT GROWTH-INCOME TEAM:
(L-R) CHUCK LAUBER, TERRY MILBERGER, TOM SWANK,
JIM SCHIER AND (SEATED) JOHN CLELAND
LOOKING AHEAD
We expect the long-awaited economic slowdown to unfold sometime in 1997. The
path we pursued in 1996-focusing on stable growth companies-should continue to
serve us well in that event. When economic strength resumes after this period of
moderation, it is likely that we will increase our exposure to stocks of a more
cyclical nature such as chemicals, paper producers, capital goods-related
industries and the housing industry.
Terry Milberger
Senior Portfolio Manager
Tom Swank
Portfolio Manager
*Performance figures are based on Class A shares and do not reflect deduction of
the sales charge.
- --------------------------------------------------------------------------------
2
<PAGE>
MANAGER'S COMMENTARY (CONTINUED)
- --------------------------------------------------------------------------------
NOVEMBER 15, 1996
SECURITY GROWTH AND INCOME FUND
PERFORMANCE -------------------------------------------------------------------
SECURITY GROWTH AND INCOME FUND VS. S&P 500
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
BLENDED INDEX
OF 80% S&P 500
AND 20% LEHMAN
BROTHERS LONG BB
SECURITY GROWTH HIGH YIELD
AND INCOME FUND S&P 500 BOND INDEX
----------------------------------------------------------------
12/31/86 9,647.52 10,558.65 10,539
3/31/87 11,073.61 12,811.51 12,471
6/30/87 11,466.66 13,452.05 12,960
9/30/87 11,765.21 14,340.79 13,608
12/31/87 9,732.90 11,108.76 11,213
3/31/88 10,287.69 11,639.74 11,898
6/30/88 10,629.71 12,411.48 12,607
9/30/88 10,482.14 12,450.80 12,732
12/31/88 10,776.56 12,830.71 13,152
3/31/89 11,437.43 13,738.04 13,920
6/30/89 12,146.18 14,948.76 15,054
9/30/89 12,714.35 16,546.27 16,427
12/31/89 12,978.10 16,882.45 16,783
3/31/90 12,493.36 16,371.56 16,418
6/30/90 12,572.14 17,396.25 17,347
9/30/90 11,978.80 15,017.92 15,365
12/31/90 12,589.17 16,355.85 16,483
3/31/91 13,681.07 18,723.54 18,691
6/30/91 13,895.14 18,684.26 19,449
9/30/91 14,645.95 19,683.96 19,743
12/31/91 15,341.48 21,321.71 21,257
3/31/92 15,050.76 20,786.06 20,991
6/30/92 14,903.63 21,182.53 21,434
9/30/92 15,329.00 21,683.89 22,092
12/31/92 16,079.63 22,770.27 23,126
3/31/93 16,803.06 23,758.75 24,163
6/30/93 16,955.43 23,873.65 24,497
9/30/93 17,721.93 24,488.58 25,191
12/31/93 17,394.03 25,053.11 25,820
3/31/94 16,974.35 24,111.23 24,852
6/30/94 15,908.79 24,217.77 24,838
9/30/94 16,368.88 25,402.86 25,888
12/31/94 16,027.39 25,397.70 25,924
3/31/95 16,967.16 27,864.59 28,376
6/30/95 18,571.77 30,516.98 31,107
9/30/95 19,683.37 32,938.57 33,285
12/31/95 20,475.35 34,917.17 35,236
3/31/96 21,867.19 36,787.15 36,693
6/30/96 22,730.29 38,433.91 38,018
9/30/96 23,681.51 39,610.93 39,196
$10,000 OVER TEN YEARS
This chart assumes a $10,000 investment in Class A shares of Growth and Income
Fund on September 30, 1986, and reflects deduction of the 5.75% sales load. On
September 30, 1996, the value of your investment in Class A shares of the fund
(with dividends reinvested) would have grown to $23,682. By comparison, the same
$10,000 investment would have grown to $39,611 based on the S&P's performance.
Comparison is also made to a blend of market indexes which reflect the asset
classes in which the Fund invests. The blended index consists of 80% S&P 500 and
20% Lehman Brothers Long BB High Yield Index. The same $10,000 investment in the
blended index would have grown to $39,005.
The performance illustrated above is based on the performance of Class A shares.
The performance of Class B shares, which were first offered on October 19, 1993,
will be greater or less than the performance shown for Class A shares as a
result of the different loads and fees associated with an investment in Class B
shares.
TOP 5 HOLDINGS**
% OF
NET ASSETS
----------
Monsanto Company 1.7%
Oracle Corporation 1.7%
American Home Products Corporation 1.7%
Chase Manhattan Corporation 1.6%
Eastman Kodak Company 1.6%
**At September 30, 1996
AVERAGE ANNUAL RETURNS
As of September 30, 1996
1 year 5 years 10 years
----------------------------
A Shares 20.31% 10.09% 9.65%
A Shares with sales charge 13.45% 8.78% 9.00%
B Shares 19.01% 9.41% N/A
(10-19-93)
B Shares with CDSC 14.01% 8.55% N/A
(10-19-93)
ONE YEAR RETURN PARALLELS INDEX
A SHARES - 20.31% S&P 500 - 20.32%
The performance data above represents past performance which is not predictive
of future results. The investment return and principal value of an investment in
the fund will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost. The figures above do not reflect
deduction of the maximum front-end sales charge of 5.75% for Class A shares or
contingent deferred sales charge of 5% for Class B shares, as applicable, except
where noted. Such figures would be lower if the maximum sales charge were
deducted.
- --------------------------------------------------------------------------------
3
<PAGE>
MANAGER'S COMMENTARY
- --------------------------------------------------------------------------------
NOVEMBER 15, 1996
SECURITY EQUITY FUND - EQUITY SERIES
To Our Shareholders:
The stock markets during the fiscal year completed September 30 surprised us
with their strength. Your Equity Series showed outstanding growth, returning
24.90% for the year compared with the Standard & Poor's 500 Index return of
20.32%.* A year ago at this time we anticipated that corporate earnings would
slow in 1996, limiting the stock market to a modest rise at best. Instead
earnings remained strong despite slightly higher interest rates, and the equity
markets reached record high levels.
GROWTH ORIENTATION PRODUCES EXCELLENT RETURNS
Throughout the year we have maintained a preference for growth companies. The
basic portfolio mix has been heavily weighted toward firms exhibiting high
quality, above-average earnings growth. For example, one of our best performers
has been Safeway, Inc. a grocery retailing chain which has been restructuring to
improve their expense structure. This realignment has produced increasing profit
margins, resulting in a stock price that more than doubled in the past twelve
months.
We have kept a large exposure to the healthcare industry, a sector which is now
reaping the benefits of cost cutting and many promising new products. The stock
of American Home Products Corporation has exhibited steady growth since the
company purchased American Cyanamid. Investors perceive that the merger will
bring cost efficiencies to the combined company which will lead to higher value.
Another company in this sector, Shering-Plough Corporation, has an excellent
outlook because of its new product flow.
In the highly volatile technology sector we held Microsoft Corporation stock
which appreciated over 65% since we purchased it. We also maintained an
overweighted position in the aerospace/defense area, including such names as
Lockheed Martin Corporation and McDonnell Douglas Corporation. On the negative
side, we held a lower weighting than the S&P 500 Index in banking and in the
energy sector. Banks were surprisingly strong performers despite rising interest
rates, and oil prices have increased much more than anticipated.
[PHOTO OF THE SECURITY MANAGEMENT LARGE CAP TEAM]
THE SECURITY MANAGEMENT LARGE CAP TEAM
JOHN CLELAND, TERRY MILBERGER, CHUCK LAUBER
PLANS FOR THE COMING YEAR
We think our blend of growth issues and selected value stocks is unique among
growth funds. We believe that over time, this combination lowers the fund's
volatility while increasing the potential for strong returns. We expect to
continue our same strategy over the coming months, given our outlook for a
moderating economy in 1997.
We plan to maintain an emphasis on companies with above-average earnings growth,
including those with exposure to foreign earnings. We think that many foreign
economies have the potential to show better growth in the months ahead than the
U.S. economy will generate.
Terry Milberger
Portfolio Manager
*Performance figures are based on Class A shares and do not reflect deduction of
the sales charge.
- --------------------------------------------------------------------------------
4
<PAGE>
MANAGER'S COMMENTARY (CONTINUED)
- --------------------------------------------------------------------------------
NOVEMBER 15, 1996
SECURITY EQUITY FUND - EQUITY SERIES
PERFORMANCE -------------------------------------------------------------------
SECURITY EQUITY SERIES VS. S&P 500
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
Equity Series S&P 500
------------------------------------------------------
12/31/86 9,821.47 10,558.65
3/31/87 11,736.94 12,811.51
6/30/87 12,233.07 13,452.05
9/30/87 13,181.37 14,340.79
12/31/87 10,238.37 11,108.76
3/31/88 10,934.18 11,639.74
6/30/88 11,331.79 12,411.48
9/30/88 11,754.25 12,450.80
12/31/88 12,200.27 12,830.71
3/31/89 13,219.09 13,738.04
6/30/89 14,543.55 14,948.76
9/30/89 16,632.11 16,546.27
12/31/89 15,953.97 16,882.45
3/31/90 15,518.86 16,371.56
6/30/90 16,505.10 17,396.25
9/30/90 13,981.48 15,017.92
12/31/90 15,215.92 16,355.85
3/31/91 17,827.12 18,723.54
6/30/91 17,859.35 18,684.26
9/30/91 18,762.00 19,683.96
12/31/91 20,576.87 21,321.71
3/31/92 20,823.93 20,786.06
6/30/92 20,541.58 21,182.53
9/30/92 20,682.76 21,683.89
12/31/92 22,781.62 22,770.27
3/31/93 24,177.18 23,758.75
6/30/93 23,988.59 23,873.65
9/30/93 25,384.15 24,488.58
12/31/93 26,113.40 25,053.11
3/31/94 25,179.11 24,111.23
6/30/94 24,758.69 24,217.77
9/30/94 25,879.83 25,402.86
12/31/94 25,444.24 25,397.70
3/31/95 27,917.98 27,864.59
6/30/95 30,694.64 30,516.98
9/30/95 33,067.42 32,938.57
12/31/95 35,220.14 34,917.17
3/31/96 38,068.41 36,787.15
6/30/96 39,711.67 38,433.91
9/30/96 41,300.13 39,610.93
$10,000 OVER TEN YEARS
This chart assumes a $10,000 investment in Class A shares of Equity Series on
September 30, 1986, and reflects deduction of the 5.75% sales load. On September
30, 1996, the value of your investment in Class A shares of the Series (with
dividends reinvested) would have grown to $41,300. By comparison, the same
$10,000 investment would have grown to $39,611 based on the S&P's performance.
The performance illustrated above is based on the performance of Class A shares.
The performance of Class B shares, which were first offered on October 19, 1993,
will be greater or less than the performance shown for Class A shares as a
result of the different loads and fees associated with an investment in Class B
shares.
TOP 5 HOLDINGS**
% OF
NET ASSETS
----------
AlliedSignal, Inc. 1.7%
American Home Products Corporation 1.7%
U.S. Industries, Inc. 1.6%
Bristol-Myers Squibb Company 1.6%
Chase Manhattan Corporation 1.6%
**At September 30, 1996
AVERAGE ANNUAL RETURNS
As of September 30, 1996
1 year 5 years 10 years
----------------------------
A Shares 24.90% 17.09% 15.92%
A Shares with sales charge 17.71% 15.70% 15.24%
B Shares 23.57% 16.34% N/A
(10-19-93)
B Shares with CDSC 18.57% 15.58% N/A
(10-19-93)
The performance data above represents past performance which is not predictive
of future results. The investment return and principal value of an investment in
the fund will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost. The figures above do not reflect
deduction of the maximum front-end sales charge of 5.75% for Class A shares or
contingent deferred sales charge of 5% for Class B shares, as applicable, except
where noted. Such figures would be lower if the maximum sales charge were
deducted.
- --------------------------------------------------------------------------------
5
<PAGE>
MANAGER'S COMMENTARY
- --------------------------------------------------------------------------------
NOVEMBER 15, 1996
SECURITY EQUITY FUND - GLOBAL SERIES
[LEXINGTON LOGO]
SUBADVISOR - LEXINGTON MANAGEMENT CORPORATION
To Our Shareholders:
The Global Series of Security Equity Fund had an outstanding year in the fiscal
year completed September 30, posting a 17.73% gain.* This compares favorably
with both the 13.01% average return of its peer group and the 12.98% advance of
its benchmark, the Morgan Stanley Capital International World Index.**
WORLD EQUITY MARKET PERFORMANCE
Stock markets in both Europe and North America performed well the past year
while many Far Eastern markets suffered. Japan and Thailand, for example, both
declined over the most recent quarter. Hong Kong, conversely, continued to post
strong gains due to an improving outlook for interest rates and property prices
there.
The Global Series portfolio benefitted from its overweighting in Europe.
Interest sensitive stocks did well as weak economies and rising expectations for
monetary union pushed interest rates lower. Our holdings in Greece and Poland
also added to overall gains. The portfolio's underweighting in the United States
dampened performance, however, as that market turned in strong results.
THE GLOBAL ECONOMIC PICTURE
The outlook for the global economy remains mixed. The U.S. economy is doing well
with growth in the 2% to 3% range and inflation remaining subdued. Global equity
markets should continue to enjoy a positive environment unless U.S. growth and
inflation accelerate, forcing global bond yields higher. The U.S. stock market
looks less appealing than those overseas due to an anemic profit outlook
combined with high prices for stocks.
[PHOTO OF RICHARD SALER] [PHOTO OF ALAN WAPNICK]
RICHARD SALER ALAN WAPNICK
PORTFOLIO MANAGER PORTFOLIO MANAGER
European communities are struggling to maintain any growth at all. Governments
are attempting to reduce budget deficits in order to qualify for European
Monetary Union membership. This fiscal drag, along with double digit
unemployment rates, is keeping growth to a minimum. Equity investors are
benefitting from several factors. Because inflation remains low and deficits are
being cut, interest rates continue to fall, propelling stock prices to record
highs in many European markets. The European profit outlook is excellent as
companies are aggressively cutting costs to improve competitiveness.
The Japanese economy has finally emerged from recession, but with government
fiscal stimulus slowing and a planned 2% increase in consumption taxes, the
outlook going forward is muted. Most Japanese companies continue to be managed
for the worker rather than the shareholder, reducing their long-term
attractiveness.
LOOKING FORWARD INTO 1997
We believe European stocks will continue to look attractive because interest
rates should remain low for some time. Profits should continue to expand rapidly
in many companies undergoing restructuring, as cost cutting will provide several
years of margin expansion. The outlook for European monetary union has improved,
and several sectors and countries will benefit from this.
Japanese stocks are less exciting. Because of a subdued long-term profit
outlook, their future remains cloudy. We believe that profits will surprise
positively only if the yen continues to decline. In the emerging markets, Poland
provides favorable opportunities. Greece is attractive also because of low
equity valuations and the potential for falling interest rates if the newly
elected government succeeds in bringing down the budget deficit. We feel that
U.S. equities may underperform given their high valuations currently and the
potential for profit disappointments.
Richard Saler and Alan Wapnick
Portfolio Managers
*Performance figures are based on Class A shares and do not reflect deduction of
the sales charge.
**Peer group performance information based on data provided by Lipper Analytical
Services, Inc.
- --------------------------------------------------------------------------------
6
<PAGE>
MANAGER'S COMMENTARY (CONTINUED)
- --------------------------------------------------------------------------------
NOVEMBER 15, 1996
SECURITY EQUITY FUND - GLOBAL SERIES
PERFORMANCE -------------------------------------------------------------------
SECURITY GLOBAL SERIES VS. MORGAN STANLEY
CAPITAL INTERNATIONAL WORLD INDEX
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
Global Series MSCI
------------------------------------------
12/93 9,745.28 9,899.23
3/94 9,773.58 9,971.48
6/94 10,009.43 10,282.89
9/94 10,226.42 10,515.81
12/94 9,869.12 10,451.79
3/95 9,744.20 10,954.69
6/95 9,955.61 11,436.49
9/95 10,512.97 12,089.93
12/95 10,892.47 12,679.75
3/96 11,590.07 13,210.98
6/96 12,217.90 13,609.02
9/96 12,377.35 14,189.26
This chart assumes a $10,000 investment in Class A shares of Global Series on
October 1, 1993, and reflects deduction of the 5.75% sales load. On September
30, 1996, the value of your investment in Class A shares of the Series (with
dividends reinvested) would have grown to $12,377. By comparison, the same
$10,000 investment would have grown to $14,189 based on the MSCI's performance.
The performance illustrated above is based on the performance of Class A shares.
The performance of Class B shares, which were first offered on October 19, 1993,
will be greater or less than the performance shown for Class A shares as a
result of the different loads and fees associated with an investment in Class B
shares.
PORTFOLIO BREAKDOWN BY COUNTRY (TOP 5)**
% OF
NET ASSETS
----------
United States 17.9%
Japan 12.8%
United Kingdom 8.1%
Germany 6.1%
France 6.0%
**At September 30, 1996
AVERAGE ANNUAL RETURNS
As of September 30, 1996
1 year Since Inception
------ ---------------
A Shares 17.73% 9.47%
(10-1-93)
A Shares with sales charge 10.94% 7.33%
(10-1-93)
B Shares 16.57% 8.75%
(10-19-93)
B Shares with CDSC 11.57% 7.88%
(10-19-93)
The performance data above represents past performance which is not predictive
of future results. The investment return and principal value of an investment in
the fund will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost. The figures above do not reflect
deduction of the maximum front-end sales charge of 5.75% for Class A shares or
contingent deferred sales charge of 5% for Class B shares, as applicable, except
where noted. Such figures would be lower if the maximum sales charge were
deducted.
Investing in foreign countries may involve risks, such as currency fluctuations
and political instability, not associated with investing exclusively in the U.S.
- --------------------------------------------------------------------------------
7
<PAGE>
MANAGER'S COMMENTARY
- --------------------------------------------------------------------------------
NOVEMBER 15, 1996
SECURITY EQUITY FUND - ASSET ALLOCATION SERIES
[TEMPLETON LOGO]
[MERIDIAN INVESTMENT MANAGEMENT LOGO]
[SECURITY MANAGEMENT COMPANY, LLC LOGO]
MANAGED BY SECURITY MANAGEMENT COMPANY, LLC
RESEARCH PROVIDED BY MERIDIAN INVESTMENT MANAGEMENT CORPORATION AND
TEMPLETON/FRANKLIN INVESTMENT SERVICES, INC. TEMPLETON/FRANKLIN'S
RESEARCH IS DERIVED FROM RESEARCH PROVIDED BY A THIRD PARTY WHICH IS
ANALYZED AND MONITORED BY TEMPLETON/FRANKLIN.
To Our Shareholders:
The newest member of the Security Equity Fund family, the Asset Allocation
Series, returned a respectable 10.01% to its shareholders in the fiscal year
ended September 30.* It is difficult in years when one asset category far
outperforms the others, as the U.S. stock market has done the past twelve
months, to compare an allocation funds results with those of other types of
portfolios. Over the longer term, however, we believe the theories of reduced
risk and favorable return that spawned the asset allocation concept will reward
its investors.
PERFORMANCE IN FISCAL YEAR 1996
The portfolio for the Asset Allocation Series can be divided among seven asset
categories: U.S. stocks, foreign stocks, U.S. bonds, foreign bonds, real estate
(through Real Estate Investment Trusts), gold stocks, and cash.** For most of
the past year we have used all of these categories except gold stocks and cash.
The sector allocations recommended by our outside provider of research, Meridian
Investment Management Corporation, have been timely. Country recommendations in
the foreign equity sector have been strong. However, certain industry choices
within the U.S. equity sector have been disappointing. It appears that some of
these shifts were too early. Meridian remains positive in their outlook for the
industries now held in the portfolio.
ALLOCATION CHANGES SINCE MID-YEAR
Since the semiannual report was written, Meridian has recommended four
allocation changes. The first, in early May, was to sell completely our position
in the United Kingdom, and to sell the chemical stock portion of the U.S. equity
portfolio. Proceeds from these sales were invested in Italy, raising exposure
there to 5.4% of the total portfolio.
[PHOTO OF JANE TEDDER]
JANE TEDDER
PORTFOLIO MANAGER
In mid-June Meridian suggested that the Fund's entire cash position (2.65% of
the total portfolio) be moved into the real estate sector. They believed that
yields were very attractive relative both to the sector's long-term averages and
to interest rates in general. This move was followed in July by sales of
holdings in the shoe and housing industries in the U.S. equity sector,
reinvesting a month later in restaurant and broadcast stocks.
THOUGHTS ABOUT NEXT YEAR
Going forward, we are considering the value of increasing exposure to bonds,
both in the U.S. and foreign sectors. The money would be taken from the U.S.
equity sector, which may be nearing a correction as economic growth slows. The
research we have been receiving from Meridian indicates that foreign equities
will likely outperform U.S. stocks in coming months, especially in Italy and
Germany.
From an economic standpoint, we believe the potential for rising inflation is
slim. Therefore a position in gold stocks, a traditional inflation hedge, is not
expected to be added.
Jane Tedder
Portfolio Manager
*Performance figures are based on Class A shares and do not reflect deduction of
the sales charge.
**Investing in foreign countries may involve risks, such as currency
fluctuations and political instability, not associated with investing
exclusively in the U.S.
- --------------------------------------------------------------------------------
8
<PAGE>
MANAGER'S COMMENTARY (CONTINUED)
- --------------------------------------------------------------------------------
NOVEMBER 15, 1996
SECURITY EQUITY FUND - ASSET ALLOCATION SERIES
PERFORMANCE -------------------------------------------------------------------
SECURITY ASSET ALLOCATION SERIES VS. S&P 500
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
ASSET MERIDIAN
ALLOCATION SERIES S&P 500 BLENDED INDEX
-----------------------------------------------------------------
6/30/95 9,500.47 10,277.96 10,083
7/31/95 9,820.92 10,604.75 10,391
8/31/95 9,811.50 10,601.17 10,348
9/30/95 9,934.02 11,090.91 10,607
10/31/95 10,056.55 11,035.31 10,520
11/30/95 10,056.55 11,488.30 10,829
12/31/95 10,158.02 11,756.45 11,109
1/31/96 10,424.82 12,139.91 11,320
2/29/96 10,464.34 12,224.09 11,348
3/31/96 10,563.16 12,385.41 11,445
4/30/96 10,770.67 12,551.95 11,599
5/31/96 10,899.12 12,838.99 11,694
6/30/96 10,790.43 12,941.36 11,784
7/31/96 10,405.06 12,349.31 11,479
8/31/96 10,592.80 12,581.65 11,640
9/30/96 10,928.77 13,339.23 12,052
This chart assumes a $10,000 investment in Class A shares of Asset Allocation
Series on June 1, 1995, and reflects deduction of the 5.75% sales load. On
September 30, 1996, the value of your investment in Class A shares of the Series
(with dividends reinvested) would have grown to $10,929. By comparison, the same
$10,000 investment would have grown to $13,339, based on the S&P's performance.
Comparison is also made to a blend of market indexes which reflect the asset
classes in which the Series has invested over the past fiscal year. The blended
index consists of 40% S&P 500, 5% U.S. 30-day Treasury, 20% Lehman Brothers
Aggregate Bond, 25% Financial Times World Index (excluding U.S.), 10% Wilshire
Real Estate Securities. The same $10,000 investment in the blended index would
have grown to $12,052.
The performance illustrated above is based on the performance of Class A shares.
The performance of Class B shares will be greater or less than the performance
shown for Class A shares as a result of the different loads and fees associated
with an investment in Class B shares.
ASSET MIX**
% OF
NET ASSETS
----------
International Equities & Equivalents 32.9%
U. S. Equities 34.5%
U. S. Bonds 15.9%
Real Estate 14.8%
Cash & Equivalents 1.9%
**At September 30, 1996
AVERAGE ANNUAL RETURNS
As of September 30, 1996
1 year Since Inception
------ ---------------
A Shares 10.01% 11.73%
(6-1-95)
A Shares with sales charge 3.69% 6.88%
(6-1-95)
B Shares 8.97% 10.63%
(6-1-95)
B Shares with CDSC 3.97% 7.71%
(6-1-95)
The performance data above represents past performance which is not predictive
of future results. The investment return and principal value of an investment in
the fund will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost. The figures above do not reflect
deduction of the maximum front-end sales charge of 5.75% for Class A shares or
contingent deferred sales charge of 5% for Class B shares, as applicable, except
where noted. In addition, the investment manager is waiving a portion of the
management fee for the Series. Performance figures would be lower if the maximum
sales charge and advisory fee were deducted.
- --------------------------------------------------------------------------------
9
<PAGE>
MANAGER'S COMMENTARY
- --------------------------------------------------------------------------------
NOVEMBER 15, 1996
SECURITY ULTRA FUND
To Our Shareholders:
The strength of the stock markets in the fiscal year completed September 30 has
surprised us all. Small-cap and mid-cap stocks have turned in a fine performance
over the year. Your Ultra Fund shares generated a 15.36% total return, strongly
outperforming the 12.32% return of the fund's benchmark, the Standard & Poor's
400 Midcap Growth Stock Index.*
CONTRIBUTORS TO A SUCCESSFUL YEAR
Our nearly 30% weighting in technology for most of the year has proven to be a
wise decision. We reduced the position prior to the summer months when the
market experienced a period of correction, and reinvested in late summer as the
upward movement resumed. Many of our holdings in this sector generated very
strong returns.
A software manufacturer called Viasoft, Inc. gained over 280% since we purchased
the stock in January. The company has developed software which helps correct the
"millenium" issue in mainframe computers. Many applications which still run on
the COBOL language (the Department of Motor Vehicles, for example, still uses
this system) will read the two-digit "00" as the year 1900 instead of 2000. The
Viasoft program determines how much of the code must be changed and where in the
program it appears.
Another issue which we purchased in February, Cascade Communications
Corporation, rose over 130% during the balance of the year. Cascade specializes
in the networking area, manufacturing switches which are used in wide-area
networks. These systems allow companies to communicate more rapidly with remote
sites by speeding up the flow of data through the telephone lines.
OTHER STRONG PERFORMING SECTORS
The health care area has helped portfolio performance this year also. Dura
Pharmaceuticals, Inc. has capitalized on the mergers of major pharmaceutical
manufacturers by buying smaller market-share drugs from them. These products
usually receive little attention from the major companies in terms of sales
efforts. Dura is purchasing these drugs after they have already received FDA
approval, and can concentrate their sales efforts to increase market
penetration. Another holding in the health care sector is Guidant Corporation, a
manufacturer of cardiac defibrillators which can be implanted in pectoral
muscles to regulate heartbeats.
[PHOTO OF THE SECURITY MANAGEMENT SMALL CAP TEAM]
THE SECURITY MANAGEMENT SMALL CAP TEAM
LARRY VALENCIA, FRANK WHITSELL, CINDY SHIELDS, JOHN CLELAND
In the business services arena, an outstanding performer is Cambridge Technology
Partners (Massachusetts), Inc. The company performs information technology
consulting and software development. They assist companies in projects such as
moving from their old mainframe computer systems to newer client/server
environments. Protecting their clients from cost overruns, Cambridge performs
these services for a guaranteed fixed cost and within a guaranteed time period.
A LOOK FORWARD TO THE NEXT YEAR
We think the U.S. economy will be slowing and inflation will remain under
control. We expect small- and mid-cap stocks to outperform the large-cap issues
in the months ahead. Large companies have been achieving earnings growth through
cutting costs, while small companies have been expanding earnings through sales
growth. In our opinion, investors may be willing to pay more for companies
showing revenue gains from sales increases than through cost reductions.
Overall, we believe the fiscal year ahead will be another favorable one for
equity investors.
Cindy Shields
Portfolio Manager
*Performance figures are based on Class A shares and do not reflect deduction of
the sales charge.
- --------------------------------------------------------------------------------
10
<PAGE>
MANAGER'S COMMENTARY (CONTINUED)
- --------------------------------------------------------------------------------
NOVEMBER 15, 1996
SECURITY ULTRA FUND
PERFORMANCE -------------------------------------------------------------------
SECURITY ULTRA FUND VS. S&P MIDCAP 400
[LINE GRAPH WITH FOLLOWING INFORMATION CHARTED]
Security Ultra Fund S&P Midcap 400
----------------------------------------------------------------
Dec-86 9,349.19 10,231.21
Mar-87 11,076.90 12,371.30
Jun-87 11,076.90 12,266.45
Sep-87 11,480.96 12,816.07
Dec-87 7,654.05 10,023.15
Mar-88 8,687.99 11,328.66
Jun-88 9,492.16 11,951.35
Sep-88 9,075.72 11,794.81
Dec-88 9,414.11 12,114.83
Mar-89 9,774.53 13,271.13
Jun-89 10,178.20 14,599.23
Sep-89 11,374.78 16,192.45
Dec-89 10,538.74 16,420.52
Mar-90 10,492.52 15,908.44
Jun-90 11,678.90 16,852.55
Sep-90 6,871.76 13,856.38
Dec-90 7,647.54 15,580.30
Mar-91 10,450.55 19,156.41
Jun-91 9,948.29 19,015.77
Sep-91 10,888.02 20,826.68
Dec-91 12,215.99 23,385.48
Mar-92 12,332.17 23,267.27
Jun-92 10,606.01 22,543.45
Sep-92 11,054.15 23,419.84
Dec-92 13,157.80 26,171.07
Mar-93 13,261.27 27,028.62
Jun-93 13,209.53 27,659.14
Sep-93 14,020.03 29,051.46
Dec-93 14,464.52 29,825.72
Mar-94 13,671.95 28,694.22
Jun-94 12,443.46 27,648.94
Sep-94 13,513.43 29,521.48
Dec-94 13,506.57 28,759.69
Mar-95 13,971.61 31,112.96
Jun-95 14,901.70 33,826.76
Sep-95 16,579.92 37,128.28
Dec-95 16,112.61 37,658.64
Mar-96 17,248.61 39,976.91
Jun-96 18,662.81 41,128.06
Sep-96 19,126.48 42,325.44
$10,000 OVER TEN YEARS
This chart assumes a $10,000 investment in Class A shares of Ultra Fund on
September 30, 1986, and reflects deduction of the 5.75% sales load. On September
30, 1996, the value of your investment in Class A shares of the fund (with
dividends reinvested) would have grown to $19,126. In comparison, the same
$10,000 investment would have grown to $42,325 based on the S&P's performance.
The performance illustrated above is based on the performance of Class A shares.
The performance of Class B shares, which were first offered on October 19, 1993,
will be greater or less than the performance shown for Class A shares as a
result of the different loads and fees associated with an investment in Class B
shares.
TOP 5 HOLDINGS**
% OF
NET ASSETS
----------
Franklin Resources, Inc. 1.9%
Viasoft, Inc. 1.8%
Dura Pharmaceuticals, Inc. 1.7%
Cognos, Inc. (Cl. F) 1.7%
HFS, Inc. 1.6%
**At September 30, 1996
AVERAGE ANNUAL RETURNS
As of September 30, 1996
1 year 5 years 10 years
----------------------------
A Shares 15.36% 11.93% 7.34%
A Shares with sales charge 8.73% 10.61% 6.70%
B Shares 13.81% 9.42% N/A
(10-19-93)
B Shares with CDSC 8.81% 8.56% N/A
(10-19-93)
ONE YEAR RETURN BEATS INDEX
A SHARES - 15.36% S&P MIDCAP 400 - 12.32%
The performance data above represents past performance which is not predictive
of future results. The investment return and principal value of an investment in
the fund will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost. The figures above do not reflect
deduction of the maximum front-end sales charge of 5.75% for Class A shares or
contingent deferred sales charge of 5% for Class B shares, as applicable, except
where noted. Such figures would be lower if the maximum sales charge were
deducted.
- --------------------------------------------------------------------------------
11
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
SEPTEMBER 30, 1996
SECURITY GROWTH AND INCOME FUND
PRINCIPAL MARKET
AMOUNT CORPORATE BONDS VALUE
- --------------------------------------------------------------------------------
AUTOMOTIVE - 0.4%
$300,000 Exide Corporation,
10.75% - 2002 ...................................... $313,500
BUILDING MATERIALS - 0.4%
250,000 Knoll, Inc.,
10.875% - 2006 ..................................... 265,000
CHEMICALS - 0.4%
250,000 Environdyne Industries, Inc.,
12% - 2000 ......................................... 267,813
COMMUNICATIONS - 2.9%
250,000 Allbritton Communication Company,
11.5% - 2004 ....................................... 265,625
750,000 Century Communications Corporation,
9.5% - 2005 ........................................ 753,750
500,000 Comcast Corporation,
9.125% - 2006 ...................................... 496,250
250,000 Heritage Media Corporation,
8.75% - 2006 ....................................... 237,500
500,000 Rogers Cablesystems, Ltd.,
9.625% - 2002 ...................................... 503,750
__________
2,256,875
CONGLOMERATE - 1.0%
250,000 Jordan Industries, Inc.,
10.375% - 2003 ..................................... 245,625
500,000 Sequa Corporation,
9.375% - 2003 ...................................... 503,750
__________
749,375
CONSUMER GOODS & SERVICES - 0.6%
800,000 Semi-Tech Corporation,
0% - 2003(1) ....................................... 482,000
ELECTRIC & GAS COMPANIES - 0.8%
250,000 AES Corporation,
10.25% - 2006 ...................................... 265,000
300,000 CalEnergy Company, Inc.,
9.5% - 2006(2) ..................................... 304,500
__________
569,500
ENTERTAINMENT - 1.0%
250,000 AMF Group, Inc.,
10.875% - 2006 ..................................... 256,875
500,000 Harrah's Operating Company, Inc.,
8.75% - 2000 ....................................... 508,125
__________
765,000
FINANCE - 1.0%
1,000,000 Home Holdings,
7.75% - 1998 ....................................... 765,000
PRINCIPAL MARKET
AMOUNT CORPORATE BONDS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
FOOD & BEVERAGES - 1.4%
$500,000 Cott Corporation,
9.375% - 2005 ...................................... $500,000
500,000 TLC Beatrice International Holdings,
11.5% - 2005 ....................................... 524,375
__________
1,024,375
GROCERY STORES - 0.6%
500,000 Penn Traffic Company,
10.65% - 2004 ...................................... 443,750
INDUSTRIAL PRODUCT - 0.4%
300,000 Shop Vac Corporation,
10.625% - 2003(2) .................................. 308,250
MEDICAL & HEALTH SERVICES - 1.0%
500,000 Regency Health Services,
9.875% - 2002 ...................................... 503,750
250,000 Tenet Healthcare Corporation,
10.125% - 2005 ..................................... 271,250
__________
775,000
OIL & GAS COMPANIES - 0.7%
500,000 Seagull Energy Corporation,
8.625% - 2005 ...................................... 503,750
PUBLISHING & PRINTING - 1.3%
250,000 Golden Books Publishing,
7.65% - 2002 ....................................... 224,375
1,000,000 Marvel Holdings,
0% - 1998 .......................................... 790,000
__________
1,014,375
REFINERY - 0.7%
500,000 Crown Central Petroleum,
10.875% - 2005 ..................................... 508,125
RESTAURANTS - 0.7%
500,000 Carrols Corporation,
11.5% - 2003 ....................................... 525,000
TEXTILE - 0.7%
500,000 Westpoint Stevens Inc.,
9.375% - 2005 ...................................... 501,250
TOBACCO PRODUCTS - 0.3%
250,000 Dimon, Inc.,
8.875% - 2006 ...................................... 251,250
__________
Total corporate bonds -
(cost $12,254,780) - 16.3% ......................... 12,289,188
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
12
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
SEPTEMBER 30, 1996
SECURITY GROWTH AND INCOME FUND (CONTINUED)
NUMBER OF MARKET
SHARES PREFERRED STOCKS VALUE
- --------------------------------------------------------------------------------
BANKING & CREDIT - 1.2%
8,250 First Nationwide Bank ................................ $932,250
ENTERTAINMENT - 0.7%
524 Time Warner, Inc.,(2) ................................ 552,883
PUBLISHING & PRINTING - 0.6%
5,000 K-III Communications Corporation ..................... 467,500
RADIO & TELEVISION - 0.7%
5,139 Cablevision Systems Corporation ...................... 498,483
__________
Total preferred stocks
(cost $2,344,749) - 3.2% ........................... 2,451,116
COMMON STOCKS
-------------
ADVERTISING - 1.5%
25,000 Omnicom Group, Inc. .................................. 1,168,750
AEROSPACE & DEFENSE - 4.8%
10,000 Lockheed Martin Corporation .......................... 901,250
20,000 McDonnell Douglas Corporation ........................ 1,050,000
15,000 Raytheon Company ..................................... 834,375
15,000 Rockwell International Corporation ................... 845,625
__________
3,631,250
BANKING & FINANCE - 1.6%
15,000 Chase Manhattan Corporation .......................... 1,201,875
CHEMICALS - BASIC - 3.6%
15,000 Hercules, Inc. ....................................... 821,250
35,000 Monsanto Company ..................................... 1,277,500
8,000 Olin Corporation ..................................... 672,000
__________
2,770,750
CHEMICALS - SPECIALTY - 2.5%
20,000 Morton International, Inc. ........................... 795,000
25,000 Praxair, Inc. ........................................ 1,075,000
__________
1,870,000
COMMUNICATION EQUIPMENT - 0.9%
10,000 U.S. Robotics Corporation* ........................... 646,250
COMPUTER SERVICES - 3.5%
20,000 Ceridian Corporation* ................................ 1,000,000
10,000 Computer Sciences Corporation* ....................... 768,750
15,000 Electronic Data Systems Corporation .................. 920,625
__________
2,689,375
NUMBER OF MARKET
SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
COMPUTER SOFTWARE - 3.1%
8,000 Microsoft Corporation* ............................... $1,055,000
30,000 Oracle Corporation* .................................. 1,276,875
__________
2,331,875
CONGLOMERATE - 6.5%
15,000 AlliedSignal, Inc. ................................... 988,125
40,000 Canadian Pacific, Ltd. ............................... 925,000
20,000 Cooper Industries, Inc. .............................. 865,000
10,000 Tenneco, Inc. ........................................ 501,250
40,000 U.S. Industries, Inc.* ............................... 1,050,000
30,000 Westinghouse Electric Corporation .................... 558,750
__________
4,888,125
CONSUMER SERVICES - 0.8%
30,000 ADT Ltd.* ............................................ 573,750
ELECTRICAL MACHINERY & ELECTRONIC COMPONENTS - 1.4%
12,000 General Electric Company ............................. 1,092,000
ENTERTAINMENT - 2.1%
30,000 Carnival Corporation (Cl. A) ......................... 930,000
10,000 The Walt Disney Company .............................. 633,750
__________
1,563,750
FERTILIZER - 1.0%
10,000 Potash Corporation of Saskatchewan, Inc. ............. 731,250
FINANCIAL - 1.1%
24,000 Federal National Mortgage Association ................ 837,000
FOOD & BEVERAGES - 6.3%
30,000 Anheuser-Busch Companies, Inc. ....................... 1,128,750
15,000 CPC International, Inc. .............................. 1,123,125
20,000 ConAgra, Inc. ........................................ 985,000
30,000 PepsiCo, Inc. ........................................ 847,500
20,000 Sara Lee Corporation ................................. 715,000
__________
4,799,375
HOSPITAL MANAGEMENT & SERVICES - 1.1%
15,000 Columbia/HCA Healthcare Corporation .................. 853,125
HOUSEHOLD FURNISHINGS - 1.6%
40,000 Leggett & Platt, Inc. ................................ 1,175,000
HOUSEHOLD PRODUCTS - 1.3%
10,000 Procter & Gamble Company ............................. 975,000
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
13
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
SEPTEMBER 30, 1996
SECURITY GROWTH AND INCOME FUND (CONTINUED)
NUMBER OF MARKET
SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
INSURANCE - 2.6%
15,000 Allstate Corporation ................................. $738,750
20,000 Equitable Companies, Inc. ............................ 515,000
13,000 Jefferson-Pilot Corporation .......................... 672,750
__________
1,926,500
MACHINERY - 1.4%
25,000 Deere & Company ...................................... 1,050,000
MANUFACTURING - 1.1%
30,000 Pall Corporation ..................................... 847,500
MEDICAL INSTRUMENTS & SUPPLIES - 2.1%
20,000 Baxter International, Inc. ........................... 935,000
10,000 Medtronic, Inc. ...................................... 641,250
__________
1,576,250
NATURAL GAS - 2.8%
25,000 Coastal Corporation .................................. 1,031,250
25,000 El Paso Natural Gas Company .......................... 1,100,000
__________
2,131,250
OIL & GAS PIPELINES - 0.8%
10,000 MAPCO, Inc. .......................................... 596,250
PHARMACEUTICALS - 8.3%
15,000 Allergan, Inc. ....................................... 571,875
20,000 American Home Products Corporation ................... 1,275,000
10,000 Bristol-Myers Squibb Company ......................... 963,750
20,000 Elan Corporation PLC ADR* ............................ 597,500
13,000 Merck & Company, Inc. ................................ 914,875
25,000 Pharmacia & Upjohn, Inc. ............................. 1,031,250
15,000 SmithKline Beecham PLC ADR ........................... 913,125
__________
6,267,375
PHOTOGRAPHIC EQUIPMENT & SUPPLIES - 1.6%
15,000 Eastman Kodak Company ................................ 1,177,500
PUBLISHING & PRINTING - 0.7%
13,000 McGraw-Hill Companies, Inc. .......................... 554,125
RESTAURANTS & FOOD SERVICE - 2.4%
20,000 McDonald's Corporation ............................... 947,500
40,000 Wendy's International, Inc. .......................... 860,000
__________
1,807,500
RETAIL TRADE - 5.0%
20,000 Albertson's, Inc. .................................... 842,500
30,000 Federated Department Stores, Inc.* ................... 1,005,000
15,000 Kroger Company ....................................... 671,250
20,000 Walgreens Company .................................... 740,000
20,000 Wal-Mart Stores, Inc. ................................ 527,500
__________
3,786,250
NUMBER OF MARKET
SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
TELECOMMUNICATIONS - 1.2%
35,000 Frontier Corporation ................................. $931,875
TRANSPORTATION - 2.1%
10,000 Burlington Northern Santa Fe ......................... 843,750
10,000 Union Pacific Corporation ............................ 732,500
___________
1,576,250
___________
Total common stocks -
(cost $42,945,898) - 76.8% ......................... 58,027,125
___________
Total investments -
(cost $57,545,427) - 96.3% ......................... 72,767,429
Cash and other assets,
less liabilities - 3.7% ............................ 2,752,865
___________
Total net assets - 100.0% ............................ $75,520,294
===========
SECURITY EQUITY FUND - EQUITY SERIES
COMMON STOCKS
-------------
ADVERTISING - 1.5%
200,000 Omnicom Group, Inc. .................................. $9,350,000
AEROSPACE & DEFENSE - 5.1%
100,000 Lockheed Martin Corporation .......................... 9,012,500
160,000 McDonnell Douglas Corporation ........................ 8,400,000
100,000 Raytheon Company ..................................... 5,562,500
150,000 Rockwell International Corporation ................... 8,456,250
___________
31,431,250
BANKING & FINANCE - 3.5%
120,000 Chase Manhattan Corporation .......................... 9,615,000
60,000 Northern Trust Corporation ........................... 3,945,000
30,000 Wells Fargo & Company ................................ 7,800,000
___________
21,360,000
CHEMICALS - BASIC - 3.4%
120,000 Hercules, Inc. ....................................... 6,570,000
250,000 Monsanto Company ..................................... 9,125,000
60,000 Olin Corporation ..................................... 5,040,000
___________
20,735,000
CHEMICALS - SPECIALTY - 2.5%
170,000 Morton International, Inc. ........................... 6,757,500
200,000 Praxair, Inc. ........................................ 8,600,000
___________
15,357,500
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
14
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
SEPTEMBER 30, 1996
SECURITY EQUITY FUND - EQUITY SERIES (CONTINUED)
NUMBER OF MARKET
SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
COMMUNICATION EQUIPMENT - 0.8%
75,000 U.S. Robotics Corporation* ........................... $4,846,875
COMPUTER SERVICES - 4.0%
150,000 Ceridian Corporation* ................................ 7,500,000
100,000 Computer Sciences Corporation* ....................... 7,687,500
150,000 Electronic Data Systems Corporation .................. 9,206,250
___________
24,393,750
COMPUTER SOFTWARE - 2.2%
65,000 Microsoft Corporation* ............................... 8,571,875
112,500 Oracle Corporation* .................................. 4,788,281
___________
13,360,156
CONGLOMERATE - 6.9%
160,000 AlliedSignal, Inc. ................................... 10,540,000
400,000 Canadian Pacific, Ltd. ............................... 9,250,000
170,000 Cooper Industries, Inc. .............................. 7,352,500
380,000 U.S. Industries, Inc.* ............................... 9,975,000
300,000 Westinghouse Electric Corporation .................... 5,587,500
___________
42,705,000
CONSUMER SERVICES - 0.9%
300,000 ADT, Ltd.* ........................................... 5,737,500
ELECTRICAL MACHINERY & ELECTRONIC COMPONENTS - 1.5%
100,000 General Electric Company ............................. 9,100,000
ENTERTAINMENT - 3.2%
240,000 Carnival Corporation (Cl. A) ......................... 7,440,000
337,900 International Game Technology ........................ 6,926,950
80,000 The Walt Disney Company .............................. 5,070,000
___________
19,436,950
FERTILIZER - 1.0%
82,800 Potash Corporation of Saskatchewan, Inc. ............. 6,054,750
FINANCE - 1.3%
230,000 Federal National Mortgage Association ................ 8,021,250
FOOD & BEVERAGES - 6.3%
200,000 Anheuser-Busch Companies, Inc. ....................... 7,525,000
120,000 CPC International, Inc. .............................. 8,985,000
160,000 ConAgra, Inc. ........................................ 7,880,000
260,000 PepsiCo, Inc. ........................................ 7,345,000
200,000 Sara Lee Corporation ................................. 7,150,000
___________
38,885,000
NUMBER OF MARKET
SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
HOSPITAL MANAGEMENT - 1.2%
125,000 Columbia/HCA Healthcare Corporation .................. $7,109,375
HOUSEHOLD PRODUCTS - 3.4%
75,000 Colgate-Palmolive Company ............................ 6,515,625
100,000 Gillette Company ..................................... 7,212,500
75,000 Procter & Gamble Company ............................. 7,312,500
___________
21,040,625
INSURANCE - 6.2%
175,000 Allstate Corporation ................................. 8,618,750
80,000 American International Group, Inc. ................... 8,060,000
270,000 Equitable Companies, Inc. ............................ 6,952,500
55,000 ITT Hartford Group, Inc. ............................. 3,245,000
111,400 Jefferson-Pilot Corporation .......................... 5,764,950
150,000 Provident Companies, Inc. ............................ 5,625,000
___________
38,266,200
MACHINERY - 1.4%
210,000 Deere & Company ...................................... 8,820,000
MANUFACTURING - 1.0%
217,500 Pall Corporation ..................................... 6,144,375
MEDICAL INSTRUMENTS - 2.8%
200,000 Baxter International, Inc. ........................... 9,350,000
120,000 Medtronic, Inc. ...................................... 7,695,000
___________
17,045,000
NATURAL GAS - 1.1%
170,000 Coastal Corporation .................................. 7,012,500
OIL & GAS COMPANIES - 0.7%
100,000 Noble Affiliates, Inc. ............................... 4,225,000
OIL & GAS PIPELINES - 1.2%
120,000 MAPCO, Inc. .......................................... 7,155,000
PAINT & ALLIED PRODUCTS - 1.3%
175,000 Sherwin-Williams Company ............................. 8,115,625
PERSONNEL SERVICES - 0.5%
100,000 Manpower, Inc. ....................................... 3,325,000
PETROLEUM REFINING - 2.6%
70,000 Mobil Corporation .................................... 8,102,500
50,000 Royal Dutch Petroleum Company ADR .................... 7,806,250
___________
15,908,750
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
15
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
SEPTEMBER 30, 1996
SECURITY EQUITY FUND - EQUITY SERIES (CONTINUED)
NUMBER OF MARKET
SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
PHARMACEUTICALS - 9.9%
200,000 Allergan, Inc. ....................................... $7,625,000
160,000 American Home Products Corporation ................... 10,200,000
100,000 Bristol-Myers Squibb Company ......................... 9,637,500
140,000 Elan Corporation PLC ADR* ............................ 4,182,500
115,000 Merck & Company, Inc. ................................ 8,093,125
200,000 Pharmacia & Upjohn, Inc. ............................. 8,250,000
110,000 Schering-Plough Corporation .......................... 6,765,000
100,000 SmithKline Beecham PLC ADR ........................... 6,087,500
___________
60,840,625
PHOTOGRAPHIC EQUIPMENT & SUPPLIES - 1.8%
100,000 Eastman Kodak Company ................................ 7,850,000
60,000 Xerox Corporation .................................... 3,217,500
___________
11,067,500
PUBLISHING & PRINTING - 1.3%
30,000 Gannett Company, Inc. ................................ 2,111,250
145,000 McGraw-Hill Companies, Inc. .......................... 6,180,625
___________
8,291,875
RESTAURANTS & FOOD SERVICE - 2.4%
170,000 McDonald's Corporation ............................... 8,053,750
305,000 Wendy's International, Inc. .......................... 6,557,500
___________
14,611,250
RETAIL TRADE - 7.1%
200,000 Albertson's, Inc. .................................... 8,425,000
235,000 Federated Department Stores, Inc.* ................... 7,872,500
100,000 Kroger Company* ...................................... 4,475,000
170,000 Safeway, Inc.* ....................................... 7,246,250
90,000 TJX Companies, Inc. .................................. 3,228,750
180,000 Wal-Mart Stores, Inc. ................................ 4,747,500
200,000 Walgreens Company .................................... 7,400,000
___________
43,395,000
SEMICONDUCTORS - 1.0%
85,000 Linear Technology Corporation ........................ 3,134,375
85,000 Xilinx, Inc.* ........................................ 2,890,000
___________
6,024,375
TELECOMMUNICATIONS - 1.3%
300,000 Frontier Corporation ................................. 7,987,500
TOYS & SPORTING GOODS - 0.7%
162,500 Mattel, Inc. ......................................... 4,204,688
PRINCIPAL
AMOUNT OR
NUMBER OF MARKET
SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
TRANSPORTATION - 2.4%
85,000 Burlington Northern Santa Fe ......................... $7,171,875
100,000 Union Pacific Corporation ............................ 7,325,000
____________
14,496,875
____________
Total common stocks
(cost $413,186,524) - 95.4% ........................ 585,862,119
COMMERCIAL PAPER
----------------
$700,000 Philip Morris Companies, Inc.
5.255%, 10-15-96 ................................... 698,569
____________
Total commercial paper
(cost $698,569) - 0.1% ............................. 698,569
____________
Total investments -
(cost $413,885,093) - 95.5% ........................ 586,560,688
Cash and other assets,
less liabilities - 4.5% ............................ 27,941,988
____________
Total net assets - 100.0% ............................$614,502,676
============
SECURITY EQUITY FUND - GLOBAL SERIES
PREFERRED STOCKS
----------------
GERMANY - 2.5%
2,260 SAP AG ............................................... $380,099
618 Sto AG ............................................... 305,940
__________
Total preferred stocks -
(cost $642,693) - 2.5% ............................. 686,039
COMMON STOCKS
-------------
AUSTRALIA - 1.1%
55,625 QBE Insurance Group, Ltd. ............................ 299,271
AUSTRIA - 2.8%
3,700 Bank Austria AG ...................................... 144,517
3,300 Creditanstalt-Bankverein ............................. 203,029
2,200 Wienerberger Baustoff ................................ 403,188
__________
750,734
BRAZIL - 0.8%
26,700 Aracruz Cellulose S.A. ADR ........................... 233,625
CANADA - 1.3%
9,600 Jetform Corporation .................................. 183,600
28,200 Noranda Forest, Inc. ................................. 177,039
__________
360,639
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
16
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
SEPTEMBER 30, 1996
SECURITY EQUITY FUND - GLOBAL SERIES (CONTINUED)
NUMBER OF MARKET
SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
CHILE - 2.1%
22,800 Antofagasta Holdings PLC ............................. $128,438
18,800 Banco Santander ADR .................................. 251,450
7,500 Santa Isabel S.A. ADR ................................ 192,188
__________
572,076
FRANCE - 6.0%
3,570 Alcatel Alsthom ...................................... 301,084
8,600 Lafarge .............................................. 507,126
5,500 SGS-Thomson Microelectronics N.V. .................... 262,975
3,320 Sidel S.A. ........................................... 199,311
1,540 Societe Generale de Surveillance Holding S.A. "B" .... 170,289
2,000 Synthelabo ........................................... 170,649
__________
1,611,434
GERMANY - 3.6%
10,800 Continental AG ....................................... 197,645
5,600 Daimler-Benz AG ...................................... 308,072
4,500 Duetsche Bank AG ..................................... 212,150
1,160 G.M. Pfaff AG ........................................ 22,819
6,100 Hoechst AG ........................................... 222,705
__________
963,391
GREECE - 1.6%
3,900 Ergo Bank S.A. ....................................... 225,059
12,300 Hellenic Tellecommunications ......................... 207,068
__________
432,127
HONG KONG - 0.6%
188,000 National Mutual Asia, Ltd. ........................... 165,321
HUNGARY - 0.4%
2,600 Pick Szeged Rt. ...................................... 120,129
INDONESIA - 0.5%
51,000 PT Semen Cibinong .................................... 131,794
IRELAND - 2.6%
38,000 Allied Irish Banks PLC ............................... 223,484
172,500 Jefferson Smurfit .................................... 469,933
__________
693,417
ITALY - 0.6%
8,400 Bulgari SPA .......................................... 156,362
JAPAN - 12.8%
19,000 Amada Company, Ltd. .................................. 175,625
6,248 Amway Japan, Ltd. .................................... 271,385
4,000 CSK Corporation ...................................... 124,563
3,000 H.I.S. Company, Ltd. ................................. 176,883
28,000 Hino Motors, Ltd. .................................... 273,894
NUMBER OF MARKET
SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
JAPAN (CONTINUED)
1,700 Kokusai Denshin Denwa Company ........................ $161,715
32,000 Komatsu Forklift Company, Ltd. ....................... 211,362
2,260 Maruco Company ....................................... 148,058
16,000 Marsushita Electric Industrial Company, Ltd. ......... 268,509
17,000 Matsushita Refrigeration Company, Ltd. ............... 122,049
38,000 Mazda Motor Corporation .............................. 185,175
80 NTT Data Communications Systems Corporation .......... 248,408
9,000 National House Industrial Corporation ................ 139,729
29,000 Nippon Chemi-Con Corporation ......................... 188,684
10,000 Nitto Denko Corporation .............................. 153,459
1,500 Ryohin Keikaku Company, Ltd. ......................... 127,075
4,700 Sony Corporation ..................................... 296,517
16,000 Yamato Kogyo Company, Ltd. ........................... 166,561
__________
3,439,651
MALAYSIA - 0.9%
44,000 Malaysian Assurance .................................. 242,279
MEXICO - 1.1%
26,300 Tubos De Acero De Mexico S.A. ADR .................... 286,013
NETHERLANDS - 1.3%
9,350 Philips Electronics N.V. ............................. 337,912
NEW ZEALAND - 2.8%
215,100 Brierley Investments, Ltd. ........................... 207,489
85,500 Carter Holt Harvey, Ltd. ............................. 188,259
43,200 Fisher & Paykel Industries, Ltd. ..................... 147,964
91,900 Fletcher Challenge Building, Ltd. .................... 204,277
__________
747,989
NORWAY - 2.5%
51,400 Fokus Banken AS ...................................... 287,208
23,500 Saga Petroleum AS .................................... 379,826
__________
667,034
PHILIPPINES - 1.3%
277,100 C & P Homes, Inc. .................................... 187,729
462,750 Filinvest Land, Inc. ................................. 167,791
__________
355,520
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
17
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
SEPTEMBER 30, 1996
SECURITY EQUITY FUND - GLOBAL SERIES (CONTINUED)
NUMBER OF MARKET
SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
POLAND - 2.7%
8,700 Debica S.A. .......................................... $185,996
21,100 Elektrim S.A. ........................................ 206,753
4,403 Wedel S.A. ........................................... 235,328
1,520 Zaklady Piwowarski w Zywcu S.A. ...................... 90,447
__________
718,524
PORTUGAL - 1.1%
11,500 Portugal Telecom S.A. ................................ 295,841
RUSSIA - 0.4%
3,600 Lukoil Oil Company ADR ............................... 131,688
SINGAPORE - 1.1%
31,000 Inchcape ............................................. 103,972
21,000 United Overseas Bank ................................. 204,434
__________
308,406
SOUTH AFRICA - 0.6%
2,900 Rustenburg Platinum Holdings, Ltd. ................... 45,702
6,819 Rustenburg Platinum Holdings, Ltd. ADR ............... 107,476
__________
153,178
SPAIN - 0.7%
5,500 Repsol S.A. .......................................... 180,805
SWEDEN - 0.4%
2,660 Astra AB ............................................. 112,524
SWITZERLAND - 2.9%
283 Nestle S.A. .......................................... 315,322
42 Roche Holdings AG .................................... 309,133
140 Union Bank of Switzerland ............................ 134,677
__________
759,132
THAILAND - 2.4%
10,000 Avanced Info ......................................... 129,814
44,000 Krung Thai Bank Public Company, Ltd. ................. 188,663
9,000 Property Perfect Public Company ...................... 26,199
4,400 Securities One Public Company ........................ 31,415
16,200 Shinawatra Computer Company .......................... 278,084
__________
654,175
NUMBER OF MARKET
SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
UNITED KINGDOM - 8.1%
157,500 Aegis Group PLC ...................................... $160,813
9,700 Bluebird Toys PLC .................................... 21,326
57,900 British Telecommunication PLC ........................ 322,996
25,200 D.F.S. Furniture Company PLC ......................... 214,120
82,000 Grand Metropolitan PLC ............................... 611,415
10,700 RTZ Corporation PLC .................................. 163,833
3,300 SmithKline Beecham PLC ADR ........................... 200,888
110,900 Tomkins PLC .......................................... 480,695
__________
2,176,086
UNITED STATES - 17.9%
1,000 AMR Corporation ...................................... 79,625
1,900 Abbott Laboratories .................................. 93,575
1,600 AlliedSignal, Inc. ................................... 105,400
1,000 American International Group ......................... 100,750
2,200 American Re Corporation .............................. 139,700
2,000 B.J. Services Company* ............................... 72,500
1,600 BMC Software, Inc.* .................................. 127,400
2,400 Becton Dickenson Company ............................. 106,200
1,200 Boeing Company ....................................... 113,400
2,800 Borders Group, Inc.* ................................. 104,300
2,000 Boston Scientific Corporation* ....................... 115,000
1,200 CPC International, Inc. .............................. 89,850
2,000 Cisco Systems, Inc. .................................. 124,125
1,200 Citicorp ............................................. 108,750
1,300 Colgate-Palmolive Company ............................ 112,939
1,950 Computer Associates International, Inc. .............. 116,514
2,800 Conseco, Inc. ........................................ 137,900
3,100 Crown Cork & Seal Company, Inc. ...................... 142,988
2,100 Diamond Offshore Drilling, Inc. ...................... 115,500
2,200 Dover Corporation .................................... 105,050
3,100 Ecolab, Inc. ......................................... 104,626
2,700 Federal National Mortgage Association ................ 94,164
3,300 Gap, Inc. ............................................ 95,288
2,800 Hershey Foods Corporation ............................ 140,700
1,900 Honeywell, Inc. ...................................... 119,938
2,200 Johnson & Johnson .................................... 112,750
1,300 Lockheed Martin Corporation .......................... 117,165
900 Mobil Corporation .................................... 104,175
4,200 Monsanto Company ..................................... 153,300
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
18
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
SEPTEMBER 30, 1996
SECURITY EQUITY FUND - GLOBAL SERIES (CONTINUED)
NUMBER OF MARKET
SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
UNITED STATES (CONTINUED)
2,500 NAC Re Corporation ................................... $90,000
1,200 NationsBank Corporation .............................. 104,250
1,300 Nike, Inc. (Cl. B) ................................... 157,950
3,200 PepsiCo, Inc. ........................................ 90,400
1,000 Procter & Gamble Company ............................. 97,500
1,500 Ralston-Purina Group ................................. 102,750
3,200 Safeway, Inc.* ....................................... 136,400
1,200 Schlumberger, Ltd. ................................... 101,400
4,200 Service Corporation International .................... 127,050
2,000 Union Pacific Corporation ............................ 146,500
2,700 WMX Technologies, Inc. ............................... 88,763
1,800 Warner-Lambert Company ............................... 118,800
1,400 Willamette Industries, Inc. .......................... 91,350
2,200 Williams Companies, Inc. ............................. 112,200
___________
4,818,885
___________
Total common stocks -
(cost $20,969,213) - 85.0% ......................... 22,875,962
___________
Total investments -
(cost $21,611,906) - 87.5% ......................... 23,562,001
Cash and other assets,
less liabilities - 12.5% ........................... 3,366,511
___________
Total net assets - 100.0% ............................ $26,928,512
===========
INVESTMENT CONCENTRATION
- -------------------------
At September 30, 1996, Global Series' investment concentration, by industry, was
as follows:
Banking .......................................................... 8.7%
Capital Equipment ................................................ 6.2%
Chemicals ........................................................ 0.6%
Construction and Housing ......................................... 1.2%
Consumer Durables ................................................ 8.2%
Consumer Nondurables ............................................. 9.1%
Electrical and Electronics ....................................... 6.0%
Energy Sources ................................................... 4.1%
Financial Services ............................................... 6.3%
Healthcare ....................................................... 5.0%
Materials ........................................................ 13.1%
Merchandising .................................................... 3.2%
Metals and Mining ................................................ 0.2%
Multi-Industry ................................................... 3.8%
Real Estate ...................................................... 0.7%
Services ......................................................... 5.8%
Telecommunications ............................................... 3.7%
Trade ............................................................ 0.8%
Transportation ................................................... 0.8%
Cash and other assets, less liabilities .......................... 12.5%
_________
100.0%
=========
SECURITY EQUITY FUND - ASSET ALLOCATION SERIES
PRINCIPAL
AMOUNT OR
NUMBER OF MARKET
SHARES CORPORATE BONDS VALUE
- --------------------------------------------------------------------------------
BROKERAGE - 1.0%
$50,000 Merrill Lynch & Company, Inc.,
8.0% - 2007 ........................................ $52,188
FINANCIAL SERVICES 0.5%
$25,000 MCN Investment Corporation,
6.32% - 2003 ....................................... 24,031
__________
Total corporate bonds
(cost $78,785) - 1.5% .............................. 76,219
COMMON STOCKS
-------------
AUTO PARTS & SUPPLIES - 2.6%
600 Arvin Industries, Inc. ............................... 14,775
1,400 Dana Corporation ..................................... 42,350
400 Eaton Corporation .................................... 24,150
800 Modine Manufacturing Company ......................... 21,000
1,500 Simpson Industries ................................... 15,187
1,000 Walbro Corporation ................................... 19,000
__________
136,462
BUILDING MATERIALS - 3.6%
900 Ameron International Corporation ..................... 34,650
700 Crane Company ........................................ 31,062
1,500 Jacobs Engineering Group* ............................ 33,750
600 Owens Corning Corporation ............................ 22,125
3,500 Schuller Corporation ................................. 33,688
300 TJ International, Inc. ............................... 5,475
1,400 Thomas Industries, Inc. .............................. 27,125
__________
187,875
BROADCAST MEDIA - 2.7%
1,000 A.H. Belo Corporation - Series A ..................... 34,500
2,400 Tele-Communications, Inc.* ........................... 35,850
1,000 Time Warner, Inc. .................................... 38,625
2,000 U.S. West Media Group* ............................... 33,750
__________
142,725
COMPUTER SYSTEMS - 4.5%
600 Compaq Computer Corporation* ......................... 38,475
400 Dell Computer Corporation* ........................... 31,100
600 Hewlett-Packard Company .............................. 29,250
400 International Business Machines Corporation .......... 49,800
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
19
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
SEPTEMBER 30, 1996
SECURITY EQUITY FUND - ASSET ALLOCATION SERIES (CONTINUED)
NUMBER OF MARKET
SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
COMPUTER SYSTEMS (CONTINUED)
1,000 Quantum Corporation* ................................. $17,562
600 SCI Systems, Inc.* ................................... 33,750
600 Sun Microsystems, Inc.* .............................. 37,275
__________
237,212
ELECTRONICS - 3.9%
900 Arrow Electronics, Inc.* ............................. 40,050
800 Avnet, Inc. .......................................... 38,800
1,000 Core Industries, Inc. ................................ 13,625
900 Fluke (John) Manufacturing Company ................... 33,187
400 Harris Corporation ................................... 26,050
1,100 Pioneer Standard Electronics, Inc. ................... 12,375
600 Varian Associates, Inc. .............................. 28,800
400 Wyle Electronics ..................................... 12,850
__________
205,737
HOUSING - HOME BUILDING - 0.2%
300 Centex Corporation ................................... 9,788
MACHINERY - 3.9%
900 Bearings, Inc. ....................................... 25,425
300 Briggs & Stratton Corporation ........................ 13,312
700 Dover Corporation .................................... 33,425
500 Duriron Company, Inc. ................................ 13,250
700 GATX Corporation ..................................... 32,725
1,300 Graco, Inc. .......................................... 24,375
200 Lindsay Manufacturing Company ........................ 8,300
600 Parker-Hannifin Corporation .......................... 25,200
900 Trinova Corporation .................................. 28,350
__________
204,362
MINING & METALS - 2.3%
200 Aluminum Company of America .......................... 11,800
600 Asarco, Inc. ......................................... 15,975
1,400 Ashland Coal, Inc. ................................... 34,825
700 Phelps Dodge Corporation ............................. 44,888
300 Reynolds Metals Company .............................. 15,337
__________
122,825
RECREATION - 4.0%
2,200 Brunswick Corporation ................................ 52,800
2,000 CPI Corporation ...................................... 37,500
400 Harcourt General, Inc. ............................... 22,100
1,100 Harley-Davidson, Inc. ................................ 47,300
1,300 King World Productions, Inc.* ........................ 47,938
__________
207,638
PRINCIPAL
AMOUNT OR
NUMBER OF MARKET
SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
RESTAURANTS - 2.4%
600 Applebees International, Inc. ........................ $15,900
500 CKE Restaurants, Inc. ................................ 15,375
1,000 International Dairy Queen, Inc. (Cl. A)* ............. 20,500
1,000 Luby's Cafeterias, Inc. .............................. 24,000
1,500 Ruby Tuesday, Inc. ................................... 28,500
1,000 Wendy's International, Inc. .......................... 21,500
__________
125,775
STEEL - 2.2%
400 Carpenter Technology ................................. 14,000
400 Cleveland Cliffs, Inc. ............................... 16,000
900 Commercial Metals Company ............................ 29,475
100 Nucor Corporation .................................... 5,075
900 Oregon Steel Mills, Inc. ............................. 13,838
800 Quanex Corporation ................................... 21,500
1,000 Steel Technologies, Inc. ............................. 12,500
__________
112,388
TELECOMMUNICATIONS - 2.2%
400 Ameritech Corporation ................................ 21,050
500 Bell Atlantic Corporation ............................ 29,938
200 Bellsouth Corporation ................................ 7,400
500 GTE Corporation ...................................... 19,250
400 Nynex Corporation .................................... 17,400
300 Southern New England Telecommunications .............. 11,062
200 Sprint Corporation ................................... 7,775
__________
113,875
__________
Total common stocks -
(cost $1,749,717) - 34.5% .......................... 1,806,662
U.S. GOVERNMENT & AGENCIES
--------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION - 5.7%
$150,000 5.27% - 10/15/96 ..................................... 149,692
$100,000 7.0% - 2020 .......................................... 98,562
$50,000 7.0% - 2021 .......................................... 48,177
__________
296,431
FINANCING CORPORATION - 0.5%
$75,000 0% - 2010 ............................................ 26,441
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
20
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
SEPTEMBER 30, 1996
SECURITY EQUITY FUND - ASSET ALLOCATION SERIES (CONTINUED)
PRINCIPAL
AMOUNT OR
NUMBER OF MARKET
SHARES U.S. GOVERNMENT & AGENCIES (CONTINUED) VALUE
- --------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 6.9%
$48,043 6.5% - 2018 .......................................... $45,191
$50,000 6.5% - 2018 .......................................... 47,955
$130,000 6.95% - 2020 ......................................... 125,042
$40,000 7.5% - 2020 .......................................... 39,392
$100,000 8.8% - 2025 .......................................... 102,875
__________
360,455
U.S. TREASURY BONDS - 0.8%
$50,000 6.00% - 2026 ......................................... 43,936
U.S. TREASURY NOTES - 0.5%
$25,000 6.38% - 2002 ......................................... 24,819
__________
Total U.S. government & agencies
(cost $759,730) - 14.4% ............................ 752,082
REAL ESTATE INVESTMENT TRUSTS
-----------------------------
2,200 Bre Properties, Inc. ................................. 44,000
3,400 Cambridge Shopping Centres, Ltd. ..................... 22,837
2,500 Federal Realty Investment Trust ...................... 58,750
4,000 First Union Real Estate Investment Trust ............. 26,000
1,700 HRE Properties ....................................... 25,925
2,500 MGI Properties, Inc. ................................. 46,875
5,500 New Plan Realty Trust ................................ 118,250
1,400 Pennsylvania Real Estate Investment Trust ............ 29,750
2,000 Santa Anita Realty Enterprises, Inc. ................. 36,500
6,800 Security Capital Pacific Trust ....................... 143,650
5,300 United Dominion Realty Trust ......................... 74,200
3,350 Washington Real Estate Investment Trust .............. 53,600
2,400 Weingarten Realty Investors .......................... 93,000
__________
Total real estate investment trusts
(costs $747,996) - 14.8% ........................... 773,337
NUMBER OF MARKET
SHARES FOREIGN STOCKS VALUE
- --------------------------------------------------------------------------------
BELGIUM - 4.8%
500 Cementbedrijven Cimenteries .......................... $36,955
500 Delhaize - Le Lion ................................... 27,716
100 Electrabel ........................................... 22,332
200 Fortis AG ............................................ 28,162
250 Gevaert Photo Productions ............................ 16,486
100 Petrofina SA ......................................... 30,965
150 Royale Belgium ....................................... 29,818
100 Solvay SA ............................................ 60,210
__________
252,644
GERMANY - 8.0%
36 Allianz AG Holdings .................................. 63,561
1,081 BASF AG .............................................. 33,736
735 Bayer AG ............................................. 26,851
202 Continental AG ....................................... 3,696
850 Daimler-Benz AG* ..................................... 46,672
14 Degussa AG ........................................... 5,101
692 Deutsche Bank AG ..................................... 32,552
1,211 Dresdner Bank AG ..................................... 31,957
7 Friedrich Grohe AG - Vorzugsak ....................... 1,923
79 Heidelberger Zement AG ............................... 5,490
180 Hochtief AG .......................................... 8,497
14 Linde AG ............................................. 8,931
187 Merck KGAA ........................................... 6,737
7 Muenchener Rueckversicherungs-Gesellschaft AG ........ 15,865
72 Preussag AG .......................................... 18,056
122 SAP AG ............................................... 20,149
1,038 Siemens AG ........................................... 54,627
634 Veba AG .............................................. 33,220
__________
417,621
HONG KONG - 5.1%
3,600 Bank of East Asia .................................... 13,245
5,000 Cathay Pacific Airways ............................... 8,115
4,000 China Light and Power Company ........................ 18,622
8,000 Chinese Estates ...................................... 7,242
1,600 Dicksons Concept International ....................... 5,193
4,000 Hong Kong and Shanghai Hotels ........................ 7,216
18,410 Hong Kong Telecommunications ......................... 33,330
8,000 Hutchinson Whampoa Limited ........................... 53,795
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
21
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
SEPTEMBER 30, 1996
SECURITY EQUITY FUND - ASSET ALLOCATION SERIES (CONTINUED)
NUMBER OF MARKET
SHARES FOREIGN STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
HONG KONG (CONTINUED)
2,000 Kumagai Gumi ......................................... $1,862
2,000 Lai-Sun Garment International ........................ 2,741
3,000 Oriental Press Group ................................. 1,455
2,000 Peregrine Investments Holdings ....................... 3,168
8,000 Sun Hung Kai Properties .............................. 85,090
12,000 Tai Cheung Holdings .................................. 9,543
2,400 Wing Lung Bank ....................................... 14,121
__________
264,738
ITALY - 5.4%
2,475 Assicurazioni Generali ............................... 52,685
11,000 Banco Commerciale Italiane ........................... 21,970
4,000 Edison Spa ........................................... 24,940
7,000 Fiat Spa ............................................. 19,684
16,638 Ina-Instituto Naz Assicuraz .......................... 24,104
3,208 Instituto Mobiliare Italiano ......................... 27,273
3,500 Mediobanca* .......................................... 20,236
29,600 Montedison Spa* ...................................... 19,136
18,821 Telecom Italia Mobile Spa ............................ 41,796
15,000 Telecom Italia-Spa ................................... 33,360
__________
285,184
JAPAN - 9.6%
2,000 The Bank of Tokyo-Mitsubishi ......................... 43,636
1 East Japan Railway Company ........................... 4,831
1,000 Hitachi, Ltd. (Hit. Seisakusho) ...................... 9,697
1,000 Itoham Foods ......................................... 7,138
1,000 Japan Energy Corporation ............................. 3,529
3,000 Kawasaki Heavy Industries ............................ 14,465
1,000 Marui Company, Ltd. .................................. 19,304
1,000 Matsushita Electric Industrial Company, Ltd. ......... 16,790
2,000 Mitsubishi Corporation ............................... 25,499
2,000 Mitsubishi Heavy Industrial, Ltd. .................... 16,287
3,000 Mitsubishi Materials Corporation ..................... 14,384
1,000 Nippon Comsys Corporation ............................ 13,468
1,000 Nippon Shokubai K.K. Company ......................... 8,817
2,000 NSK Limited .......................................... 13,702
200 Oyo Corporation ...................................... 10,325
100 Sega Enterprises ..................................... 4,355
2,000 Sekisui House, Ltd. .................................. 21,908
3,000 Shimizu Corporation .................................. 29,630
1,000 Shin-Etsu Chemical Company ........................... 17,957
2,000 Sumitomo Bank ........................................ 36,992
NUMBER OF MARKET
SHARES FOREIGN STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
JAPAN (CONTINUED)
4,000 Sumitomo Chemical Company ............................ $18,532
1,000 Sumitomo Marine and Fire ............................. 7,883
1,000 Tokyo Dome Corporation ............................... 20,651
1,800 Tokyo Electric Power ................................. 43,636
3,000 Tokyu Corporation .................................... 21,118
1,000 Toyoda Auto Loom Works ............................... 19,035
1,000 Toyota Motor Corporation ............................. 25,589
2,000 Yamaichi Securities .................................. 12,301
__________
501,459
__________
Total foreign stocks
(cost $1,667,743) - 32.9% .......................... 1,721,646
FOREIGN WARRANTS
----------------
HONG KONG - 0.0%
400 Kumagai Gumi - Warrants 6/30/98 77
200 Peregrine Investments Holdings - Warrants 5/15/98 37
__________
114
__________
Total foreign warrants
(cost $0) - 0.0% ................................... 114
TEMPORARY CASH INVESTMENTS
83,000 Chase Master Note .................................... 83,000
Total temporary cash investments
(cost $83,000) - 1.6% .............................. 83,000
__________
Total investments -
(cost $5,086,971) - 99.7% .......................... 5,213,060
Cash and other assets,
liabilities - 0.3% ................................. 17,112
__________
Total net assets - 100.0% $5,230,172
==========
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
22
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
SEPTEMBER 30, 1996
SECURITY ULTRA FUND
NUMBER OF MARKET
SHARES COMMON STOCKS VALUE
- --------------------------------------------------------------------------------
ADVERTISING - 0.8%
13,500 Omnicom Group, Inc. .................................. $631,125
BANKS & TRUSTS - 1.3%
18,000 State Street Boston Corporation ...................... 1,032,750
BIOTECHNOLOGY - 1.0%
12,500 Amgen, Inc.* ......................................... 789,063
BROKERAGE - 1.4%
47,000 Schwab (Charles) Corporation ......................... 1,086,875
BUSINESS SERVICES - 9.7%
14,500 APAC Teleservices, Inc.* ............................. 743,125
11,000 Cintas Corporation ................................... 616,000
21,000 Concord EFS, Inc.* ................................... 540,750
12,750 Corestaff, Inc.* ..................................... 341,062
22,000 Corrections Corporation of America* .................. 687,500
31,500 Equifax, Inc. ........................................ 830,813
11,530 First Data Corporation ............................... 941,136
14,000 Ha-Lo Industries, Inc.* .............................. 406,000
35,250 PMT Services, Inc.* .................................. 713,813
16,500 Paychex, Inc. ........................................ 957,000
20,250 Snap-On, Inc. ........................................ 650,531
___________
7,427,730
CHEMICALS - SPECIALTY - 2.5%
16,000 IMC Global, Inc. ..................................... 626,000
16,000 Praxair, Inc. ........................................ 688,000
11,000 Sigma-Aldrich ........................................ 627,000
___________
1,941,000
COMMUNICATIONS - EQUIPMENT - 6.4%
11,000 Ascend Communications, Inc.* ......................... 727,375
15,500 Aspect Telecommunications* ........................... 964,875
12,500 Cascade Communications Corporation* .................. 1,018,750
14,500 Tellabs, Inc.* ....................................... 1,024,062
18,400 U.S. Robotics Corporation* ........................... 1,189,100
___________
4,924,162
COMPUTER SOFTWARE - 19.7%
7,500 BMC Software* ........................................ 596,250
8,000 CBT Group PLC ADR* ................................... 376,000
20,250 Cadence Design Systems, Inc.* ........................ 723,937
33,500 Cambridge Technology Partners (Massachusetts), Inc.* . 1,013,375
NUMBER OF MARKET
SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
COMPUTER SOFTWARE (CONTINUED)
8,000 Clarify, Inc.* ....................................... $496,000
39,000 Cognos, Inc. (Cl. F)* ................................ 1,272,375
9,000 Electronics For Imaging, Inc.* ....................... 645,750
15,500 HBO & Company ........................................ 1,034,625
11,000 HCIA, Inc.* .......................................... 660,000
8,000 HNC Software, Inc.* .................................. 320,000
14,500 Informix Corporation* ................................ 404,188
9,500 INSO Corporation* .................................... 515,375
10,000 McAfee Associates* ................................... 690,000
13,000 Medic Computer Systems* .............................. 472,875
10,000 Pairgain Technologies, Inc.* ......................... 781,250
25,000 Parametric Technology Corporation* ................... 1,234,375
10,500 Peoplesoft, Inc.* .................................... 874,125
14,500 Project Software & Development* ...................... 612,625
15,446 Pure Atria Corporation* .............................. 583,086
6,500 Veritas Software Corporation* ........................ 459,875
33,500 Viasoft, Inc.* ....................................... 1,407,000
___________
15,173,086
COMPUTER SYSTEMS - 2.9%
14,500 Dell Computer Corporation* ........................... 1,127,375
14,000 SCI Systems, Inc.* ................................... 787,500
7,000 Verifone, Inc.* ...................................... 313,250
___________
2,228,125
CONSUMER SERVICES - 1.3%
15,000 Apollo Group, Inc.* .................................. 401,250
17,500 Stewart Enterprises, Inc. (Cl. A) .................... 590,625
___________
991,875
ELECTRONICS - 1.2%
22,500 Thermo Electron Corporation* ......................... 911,250
FINANCIAL SERVICES - 1.9%
22,000 Franklin Resources, Inc. ............................. 1,460,250
HEALTH CARE - 4.9%
13,500 Cardinal Health, Inc. ................................ 1,115,437
16,500 OccuSystems, Inc.* ................................... 495,000
24,000 Omnicare, Inc. ....................................... 732,000
20,250 PhyCor, Inc.* ........................................ 770,765
8,500 Quintiles Transnational Corporation* ................. 622,625
___________
3,735,827
HEALTH CARE - HMO - 0.5%
7,700 Oxford Health Plans* ................................. 383,075
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
23
<PAGE>
STATEMENTS OF NET ASSETS
- --------------------------------------------------------------------------------
SEPTEMBER 30, 1996
SECURITY ULTRA FUND
NUMBER OF MARKET
SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
HOSPITAL SUPPLIES/MANAGEMENT - 1.4%
28,500 HEALTHSOUTH Corporation* ............................. $1,093,687
HOTEL/MOTEL - 2.5%
18,500 HFS, Inc.* ........................................... 1,237,188
33,750 La Quinta Inns, Inc. ................................. 658,125
___________
1,895,313
INSURANCE - 2.7%
27,500 AFLAC, Inc. .......................................... 976,250
32,000 SunAmerica, Inc. ..................................... 1,104,000
___________
2,080,250
MANUFACTURING - 1.0%
10,500 Illinois Tool Works .................................. 757,313
MEDICAL PRODUCTS - 3.0%
15,500 Guidant Corporation .................................. 856,375
19,500 Hologic, Inc.* ....................................... 546,000
25,000 Rexall Sundown, Inc.* ................................ 912,500
___________
2,314,875
OFFICE EQUIPMENT & SUPPLIES - 2.5%
15,500 Corporate Express, Inc.* ............................. 602,563
11,000 Diebold, Inc. ........................................ 642,125
23,000 Viking Office Products, Inc.* ........................ 690,000
___________
1,934,688
OIL & GAS DRILLING - 1.6%
25,000 Global Marine, Inc.* ................................. 393,750
20,000 Noble Affiliates, Inc. ............................... 845,000
___________
1,238,750
OIL & GAS EXPLORATION - 0.9%
16,500 Sonat, Inc. .......................................... 730,125
PACKAGING & CONTAINERS - 0.4%
9,000 Sealed Air Corporation* .............................. 335,250
PHARMACEUTICALS - 2.9%
36,000 Dura Pharmaceuticals, Inc.* .......................... 1,327,500
19,000 Jones Medical Industries, Inc. ....................... 921,500
___________
2,249,000
POLLUTION CONTROL - 2.1%
19,500 Superior Services, Inc.* ............................. 312,000
16,500 United States Filter Corporation* .................... 563,063
21,000 United Waste Systems, Inc.* .......................... 729,750
___________
1,604,813
RESTAURANTS - 2.0%
29,500 Landry's Seafood Restaurants* ........................ 737,500
14,750 Papa John's International, Inc.* ..................... 774,375
___________
1,511,875
NUMBER OF MARKET
SHARES COMMON STOCKS (CONTINUED) VALUE
- --------------------------------------------------------------------------------
RETAIL - 9.5%
16,000 Bed Bath & Beyond, Inc.* ............................. $438,000
9,500 CDW Computer Centers, Inc.* .......................... 648,375
18,750 Claire's Stores* ..................................... 400,781
20,000 Dollar General Corporation ........................... 622,500
5,500 Fila Holdings SPA ADR ................................ 528,687
18,000 Gadzooks* ............................................ 625,500
6,500 Jones Apparel Group, Inc. ............................ 414,375
10,000 Just For Feet, Inc.* ................................. 501,250
20,000 Kohl's Corporation* .................................. 720,000
12,000 Nine West Group, Inc.* ............................... 651,000
46,375 Staples, Inc.* ....................................... 1,028,945
8,000 Tiffany & Company .................................... 320,000
11,000 West Marine, Inc.* ................................... 363,000
___________
7,262,413
SEMICONDUCTORS - 3.4%
11,000 Altera Corporation* .................................. 556,875
27,500 Analog Devices, Inc.* ................................ 745,937
11,000 Atmel Corporation* ................................... 339,625
10,000 Linear Technology Corporation ........................ 368,750
18,000 Xilinx, Inc.* ........................................ 612,000
___________
2,623,187
TEXTILES - APPAREL - 0.9%
11,500 Tommy Hilfiger Corporation* .......................... 681,375
TRANSPORTATION - 0.6%
13,500 Illinois Central Corporation ......................... 426,939
___________
Total common stocks
(cost $54,337,203) - 92.9% ......................... 71,456,046
___________
Total investments
(cost $54,337,203) - 92.9% ......................... 71,456,046
Cash and other assets,
less liabilities - 7.1% ............................ 5,472,389
___________
Total net assets - 100.0% ............................ $76,928,435
===========
The identified cost of investments owned at September 30, 1996, was the same for
federal income tax and financial statement purposes, except for Ultra Fund for
which the identified cost of investments for federal income tax purposes was
$54,391,123.
*Securities on which no cash dividend was paid during the preceding twelve
months.
ADR (American Depositary Receipt)
(1) Deferred interest obligation; currently zero coupon under terms of initial
offering.
(2) Restricted Security (a portfolio security that may be sold privately, but
that is required to be registered with the SEC or to be exempted from such
registration before it may be sold in public distribution). The total value of
restricted securities in Security Growth and Income Fund is 1.2% of total net
assets.
SEE ACCOMPANYING NOTES.
- --------------------------------------------------------------------------------
24
<PAGE>
BALANCE SHEETS
- --------------------------------------------------------------------------------
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
SECURITY EQUITY FUND
-------------------------------------------
SECURITY ASSET SECURITY
GROWTH AND EQUITY GLOBAL ALLOCATION ULTRA
INCOME FUND SERIES SERIES SERIES FUND
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments, at value (identified cost
$57,545,427, $413,186,524,
$21,611,906, $5,086,971 and
$54,337,203, respectively) .................. $72,767,429 $585,862,119 $23,562,001 $5,213,060 $71,456,046
Commercial paper, at amortized cost
which approximates market value ............. -- 698,569 -- -- --
Cash ........................................... 2,626,784 30,227,821 3,300,894 986 5,576,094
Receivables:
Fund shares sold ............................ 7,170 698,756 185,812 28,025 65,839
Securities sold ............................. 762,411 4,204,469 35,311 -- 54,911
Foreign forward exchange contracts .......... -- -- 73,725 -- --
Dividends ................................... 326,455 799,590 54,783 7,516 15,076
Interest .................................... 4,424 130,532 11,246 5,908 15,996
Foreign taxes recoverable ................... -- -- 27,074 927 --
Prepaid expenses ............................... -- -- -- 6,532 --
___________ ____________ ___________ ____________ ___________
Total assets ......................... $76,494,673 $622,621,856 $27,250,846 $5,262,954 $77,183,962
=========== ============ =========== ============ ===========
LIABILITIES AND NET ASSETS
Liabilities:
Payable for:
Fund shares redeemed ...................... $92,842 $300,369 $64,517 $634 $34,798
Securities purchased ...................... 800,000 7,259,213 212,697 -- 137,437
Other Liabilities:
Management fees ........................... 79,730 524,858 40,330 6,326 80,777
Custodian fees ............................ -- -- -- 361 --
Transfer and administration fees .......... -- -- -- 4,400 --
12b-1 distribution plan fees .............. 1,807 30,977 4,790 2,279 2,515
Miscellaneous fees ........................ -- 3,763 -- 18,782 --
___________ ____________ ___________ ____________ ___________
Total liabilities ....................... 974,379 8,119,180 322,334 32,782 255,527
Net Assets:
Paid in capital ............................. 54,388,672 392,830,437 22,674,750 4,863,583 55,074,630
Undistributed net investment income ......... 182,698 2,728,863 671,849 112,622 --
Accumulated undistributed net realized
gain on sale of investments, futures
and foreign currency transactions ......... 5,726,922 46,267,781 1,558,961 127,889 4,734,962
Net unrealized appreciation in value
of investments, futures and
translation of assets and liabilities
in foreign currencies ..................... 15,222,002 172,675,595 2,022,952 126,078 17,118,843
___________ ____________ ___________ ____________ ___________
Net assets .............................. 75,520,294 614,502,676 26,928,512 5,230,172 76,928,435
___________ ____________ ___________ ____________ ___________
Total liabilities and net assets ...... $76,494,673 $622,621,856 $27,250,846 $5,262,954 $77,183,962
=========== ============ =========== ============ ===========
CLASS "A" SHARES
Capital shares outstanding .................. 8,099,424 76,389,986 1,582,223 221,414 8,994,692
Net assets .................................. $73,273,461 $575,680,473 $19,643,985 $2,449,515 $74,230,177
Net asset value per share (net
assets divided by shares outstanding) ..... $9.05 $7.54 $12.42 $11.06 $ 8.25
Add: Selling commission (5.75% of the
offering price) ........................... 0.55 0.46 0.76 0.67 0.50
___________ ____________ ___________ ____________ ___________
Offering price per share (net asset
value divided by 94.25%) .................. $9.60 $8.00 $13.18 $11.73 $8.75
=========== ============ =========== ============ ===========
CLASS "B" SHARES
Capital shares outstanding .................. 251,446 5,275,526 598,242 253,411 336,000
Net assets .................................. $2,246,833 $38,822,203 $7,284,527 $2,780,657 $2,698,258
Net asset value per share
(net assets divided by shares outstanding). $8.94 $7.36 $12.18 $10.97 $8.03
=========== ============ =========== ============ ===========
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
25
<PAGE>
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
SECURITY EQUITY FUND
-------------------------------------------
SECURITY ASSET SECURITY
GROWTH AND EQUITY GLOBAL ALLOCATION ULTRA
INCOME FUND SERIES SERIES SERIES FUND
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest .................................... $1,348,538 $1,238,261 $80,041 $108,168 $198,794
Dividends ................................... 1,068,605 8,213,370 455,115 86,911 260,084
___________ ____________ ___________ ____________ ___________
2,417,143 9,451,631 535,156 195,079 458,878
Less foreign tax expense .................. -- -- (47,577) (1,779) --
___________ ____________ ___________ ____________ ___________
Total investment income ................. 2,417,143 9,451,631 487,579 193,300 458,878
EXPENSES:
Management fees ............................. 919,674 5,528,818 470,077 39,560 862,190
Custodian fees .............................. -- -- -- 3,674 --
Transfer/maintenance fees ................... -- -- -- 5,571 --
Administration fees ......................... -- -- -- 36,957 --
Directors' fees ............................. -- -- -- 72 --
Professional fees ........................... -- -- -- 11,284 --
Reports to shareholders ..................... -- -- -- 974 --
Registration fees ........................... -- -- -- 25,949 --
Other expenses .............................. -- -- -- 6,286 --
12b-1 distribution plan fees (Class B) ...... 16,080 279,934 59,852 22,229 36,559
Interest .................................... -- -- -- 193 --
Reimbursement of expenses ................... -- -- -- (43,856) --
___________ ____________ ___________ ____________ ___________
Total expenses ............................ 935,754 5,808,752 529,929 108,893 898,749
___________ ____________ ___________ ____________ ___________
Net investment income (loss) ............ 1,481,389 3,642,879 (42,350) 84,407 (439,871)
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) during the year on:
Investments ............................... 6,097,347 54,909,397 2,087,000 198,823 7,783,798
Foreign currency transactions ............. -- -- 580,735 (5,918) --
Futures contracts ......................... -- -- -- 59,868 81,216
___________ ____________ ___________ ____________ ___________
Net realized gains ...................... 6,097,347 54,909,397 2,667,735 252,773 7,865,014
Net change in unrealized appreciation
(depreciation) during the year on:
Investments ............................... 5,572,992 59,008,440 1,018,925 36,071 2,292,201
Translation of assets and liabilities
in foreign currencies ................... -- -- 72,857 (11) --
Futures contracts ......................... -- -- -- 13,545 --
___________ ____________ ___________ ____________ ___________
Net unrealized appreciation ............. 5,572,992 59,008,440 1,091,782 49,605 2,292,201
___________ ____________ ___________ ____________ ___________
Net gain .............................. 11,670,339 113,917,837 3,759,517 302,378 10,157,215
___________ ____________ ___________ ____________ ___________
Net increase in net assets
resulting from operations ......... $13,151,728 $117,560,716 $3,717,167 $386,785 $9,717,344
=========== ============ =========== ============ ===========
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
26
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
SECURITY EQUITY FUND
-------------------------------------------
SECURITY ASSET SECURITY
GROWTH AND EQUITY GLOBAL ALLOCATION ULTRA
INCOME FUND SERIES SERIES SERIES FUND
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income (loss) ................ $1,481,389 $3,642,879 $(42,350) $84,407 $(439,871)
Net realized gain ........................... 6,097,347 54,909,397 2,667,735 252,773 7,865,014
Unrealized appreciation during the year ..... 5,572,992 59,008,440 1,091,782 49,605 2,292,201
___________ ____________ ___________ ____________ ___________
Net increase in net assets
resulting from operations ............... 13,151,728 117,560,716 3,717,167 386,785 9,717,344
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A ................................... (1,303,374) (4,154,225) (357,503) (59,841) --
Class B ................................... (16,567) (64,778) (72,239) (50,821) --
Net realized gain
Class A ................................... (2,290,075) (33,371,334) (224,880) (30,468) (7,109,009)
Class B ................................... (44,993) (1,836,652) (77,719) (31,088) (500,515)
___________ ____________ ___________ ____________ ___________
Total distributions to shareholders ....... (3,655,009) (39,426,989) (732,341) (172,218) (7,609,524)
CAPITAL SHARE TRANSACTIONS (A):
Proceeds from sale of shares
Class A ................................... 3,975,290 299,520,899 5,778,490 682,087 27,602,365
Class B ................................... 1,200,271 93,534,094 2,179,465 1,119,612 3,050,423
Dividends reinvested
Class A ................................... 3,265,411 34,973,081 570,969 89,987 6,772,088
Class B ................................... 60,327 1,882,247 149,212 81,908 500,487
Shares redeemed
Class A ................................... (10,667,756) (273,412,317) (5,192,505) (337,484) (28,420,959)
Class B ................................... (369,561) (79,755,552) (1,236,321) (55,397) (6,164,145)
___________ ____________ ___________ ____________ ___________
Net increase (decrease) from
capital share transactions .............. (2,536,018) 76,742,452 2,249,310 1,580,713 3,340,259
___________ ____________ ___________ ____________ ___________
Total increase in net assets .......... 6,960,701 154,876,179 5,234,136 1,795,280 5,448,079
NET ASSETS:
Beginning of year ........................... 68,559,593 459,626,497 21,694,376 3,434,892 71,480,356
___________ ____________ ___________ ____________ ___________
End of year ................................. $75,520,294 $614,502,676 $26,928,512 $5,230,172 $76,928,435
=========== ============ =========== ============ ===========
Undistributed net investment income
at end of year .............................. $182,698 $2,728,863 $671,849 $112,622 $--
=========== ============ =========== ============ ===========
(a) Shares issued and redeemed
Shares sold
Class A ............................... 474,232 43,657,565 491,586 63,688 3,632,551
Class B ............................... 143,440 13,771,902 186,645 104,927 412,321
Dividends reinvested
Class A ............................... 404,486 5,483,525 52,399 8,801 996,776
Class B ............................... 7,601 300,151 13,842 8,014 75,103
Shares redeemed
Class A ............................... (1,281,262) (39,986,054) (447,772) (31,916) (3,688,397)
Class B ............................... (43,575) (11,797,000) (107,952) (5,145) (820,769)
___________ ____________ ___________ ____________ ___________
Net increase (decrease) ............. (295,078) 11,430,089 188,748 148,369 (607,585)
=========== ============ =========== ============ ===========
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
27
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
SECURITY EQUITY FUND
-------------------------------------------
SECURITY ASSET SECURITY
GROWTH AND EQUITY GLOBAL ALLOCATION ULTRA
INCOME FUND SERIES SERIES SERIES FUND
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income (loss) ................ $1,407,287 $3,304,987 $(91,058) $13,792 $(223,015)
Net realized gain ........................... 1,984,078 27,972,416 419,260 61,764 4,989,643
Unrealized appreciation
during the period ......................... 8,482,309 69,736,879 95,995 76,473 8,466,565
___________ ____________ ___________ ____________ ___________
Net increase in net assets resulting
from operations ......................... 11,873,674 101,014,282 424,197 152,029 13,233,193
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A ................................... (1,378,072) -- -- -- --
Class B ................................... (11,951) -- -- -- --
Net realized gain
Class A ................................... (1,912,997) (26,300,092) (347,497) -- (1,149,264)
Class B ................................... (23,632) (690,558) (84,333) -- (28,504)
___________ ____________ ___________ ____________ ___________
Total distributions to shareholders ....... (3,326,652) (26,990,650) (431,830) -- (1,177,768)
CAPITAL SHARE TRANSACTIONS (A):
Proceeds from sale of shares
Class A ................................... 2,681,709 159,433,767 4,130,645 1,846,588 97,988,749
Class B ................................... 635,799 36,310,779 3,765,671 1,469,193 10,247,969
Dividends reinvested
Class A ................................... 2,965,256 24,498,993 340,567 -- 1,088,376
Class B ................................... 34,468 690,184 84,001 -- 28,502
Shares redeemed
Class A ................................... (11,959,939) (172,929,497) (8,249,891) (28,739) (105,077,941)
Class B ................................... (340,406) (28,090,274) (2,457,097) (4,179) (6,799,714)
___________ ____________ ___________ ____________ ___________
Net increase (decrease) from
capital share transactions ............ (5,983,113) 19,913,952 (2,386,104) 3,282,863 (2,524,059)
___________ ____________ ___________ ____________ ___________
Total increase (decrease)
in net assets ....................... 2,563,909 93,937,584 (2,393,737) 3,434,892 9,531,366
NET ASSETS:
Beginning of period ......................... 65,995,684 365,688,913 24,088,113 -- 61,948,990
___________ ____________ ___________ ____________ ___________
End of period ............................... $68,559,593 $459,626,497 $21,694,376 $3,434,892 $71,480,356
=========== ============ =========== ============ ===========
Undistributed net investment income
at end of period ............................ $17,267 $3,304,987 $135,605 $13,792 $--
=========== ============ =========== ============ ===========
(a) Shares issued and redeemed
Shares sold
Class A ............................... 380,257 27,957,351 395,288 183,574 13,881,834
Class B ............................... 91,007 6,432,534 366,335 146,016 1,427,321
Dividends reinvested
Class A ............................... 434,705 4,858,020 33,389 -- 164,781
Class B ............................... 5,126 138,507 8,325 -- 4,328
Shares redeemed
Class A ............................... (1,697,766) (30,292,120) (799,467) (2,733) (14,892,245)
Class B ............................... (48,979) (4,927,928) (237,369) (401) (946,401)
___________ ____________ ___________ ____________ ___________
Net increase (decrease) ............. (835,650) 4,166,364 (233,499) 326,456 (360,382)
=========== ============ =========== ============ ===========
*Period June 1, 1995 (inception) through September 30, 1995.
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
28
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
AVERAGE
NET RATIO COMMIS-
GAINS OR DIVI- RATIO OF NET SION
NET LOSSES TOTAL DENDS NET OF EX- INCOME PAID
FISCAL ASSET NET ON SEC- FROM (FROM DISTRI- NET ASSETS PENSES (LOSS) PORT- PER
YEAR VALUE INVEST- URITIES INVEST- NET BUTIONS ASSET END OF TO TO AVE- FOLIO INVEST-
ENDED BEGIN- MENT (REALIZED MENT INVEST- (FROM TOTAL VALUE TOTAL PERIOD AVERAGE RAGE TURN- MENT
SEPTEM- NING OF INCOME & UNREAL- OPERA- MENT REALIZED DISTRI- END OF RETURN (THOU- NET NET OVER SECURITY
BER 30 PERIOD (LOSS) IZED) TIONS INCOME) GAINS) BUTIONS PERIOD (A) SANDS) ASSETS ASSETS RATE TRADED
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SECURITY GROWTH AND INCOME FUND (CLASS A)(b)
1992 $7.31 $0.35 $(0.016) $0.334 $(0.343) $(0.171) $(0.514) $7.13 4.70% $75,436 1.27% 4.79% 74% $---
1993 7.13 0.21 0.876 1.086 (0.218) (0.158) (0.376) 7.84 15.60% 81,982 1.26% 2.80% 135% ---
1994(c) 7.84 0.13 (0.713) (0.583) (0.128) (0.169) (0.297) 6.96 (7.60)% 65,328 1.28% 1.70% 163% ---
1995(g) 6.96 0.16 1.183 1.343 (0.158) (0.215) (0.373) 7.93 20.25% 67,430 1.31% 2.21% 130% ---
1996(g) 7.93 0.18 1.373 1.553 (0.158) (0.275) (0.433) 9.05 20.31% 73,273 1.29% 2.09% 69% 0.0625
SECURITY GROWTH AND INCOME FUND (CLASS B)
1994(c) $7.83 $0.05 $(0.694) $(0.644) $(0.117) $(0.169) $(0.286) $6.90 (8.00%) $668 2.27% 1.03% 178% $---
1995(g) 6.90 0.08 1.179 1.259 (0.094) (0.215) (0.309) 7.85 19.07% 1,130 2.31% 1.21% 130% ---
1996(g) 7.85 0.09 1.353 1.443 (0.078) (0.275) (0.353) 8.94 19.01% 2,247 2.29% 1.09% 69% 0.0625
SECURITY EQUITY SERIES (CLASS A)
1992 $5.82 $0.09 $.475 $0.565 $(0.132) $(0.393) $(0.525) $5.86 10.20% $313,582 1.06% 1.48% 83% $---
1993 5.86 0.12 1.165 1.285 (0.053) (0.362) (0.415) 6.73 22.70% 375,565 1.06% 1.95% 95% ---
1994(c) 6.73 0.05 0.085 0.135 (0.120) (1.205) (1.325) 5.54 1.95% 358,237 1.06% 0.86% 79% ---
1995(g) 5.54 0.04 1.377 1.417 --- (0.407) (0.407) 6.55 27.77% 440,339 1.05% 0.87% 95% ---
1996(g) 6.55 0.05 1.482 1.532 (0.060) (0.482) (0.542) 7.54 24.90% 575,680 1.04% 0.75% 64% 0.0609
SECURITY EQUITY SERIES (CLASS B)
1994(c) $6.81 $0.01 $(0.005) $0.005 $(0.12) $(1.205) $(1.325) $5.49 (0.15%) $7,452 2.07% (0.01%) 80% $---
1995(g) 5.49 (0.01) 1.357 1.347 --- (0.407) (0.407) 6.43 26.69% 19,288 2.05% (0.13%) 95% ---
1996(g) 6.43 (0.02) 1.449 1.429 (0.017) (0.482) (0.499) 7.36 23.57% 38,822 2.04% (0.25%) 64% 0.0609
SECURITY GLOBAL SERIES (CLASS A)
1994 $10.00 $(0.03) $0.87 $0.84 $--- $--- $--- $10.84 8.40% $20,128 2.00% (0.01%) 73% $---
(c)(d)
1995(g) 10.84 (0.02) 0.31 0.29 --- (0.19) (0.19) 10.94 2.80% 16,261 2.00% (0.17%) 141% ---
1996(g) 10.94 0.01 1.874 1.884 (0.248) (0.156) (0.404) 12.42 17.73% 19,644 2.00% 0.07% 142% 0.0338
SECURITY GLOBAL SERIES (CLASS B)
1994 $9.96 $(0.12) $0.91 $0.79 $--- $--- $--- $10.75 7.90% $3,960 3.00% (0.01%) 73% $---
(c)(d)
1995(g) 10.75 (0.12) 0.30 0.18 --- (0.19) (0.19) 10.74 1.79% 5,433 3.00% (1.17%) 141% ---
1996(g) 10.74 (0.10) 1.841 1.741 (0.145) (0.156) (0.301) 12.18 16.57% 7,285 3.00% (0.93%) 142% 0.0338
SECURITY ASSET ALLOCATION SERIES (CLASS A)
1995 $10.00 $0.04 $0.50 $0.54 $--- $--- $--- $10.54 5.40% $1,906 2.00% 1.33% 129% $---
(e)(f)(g)
1996(g) 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 SERIES (CLASS B)
1995 $10.00 $0.01 $0.490 $0.500 $--- $--- $--- $10.50 5.00% $1,529 3.00% 0.31% 129% $---
(e)(f)(g)
1996(g) 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>
See accompanying notes.
- --------------------------------------------------------------------------------
29
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
AVERAGE
NET RATIO COMMIS-
GAINS OR DIVI- RATIO OF NET SION
NET LOSSES TOTAL DENDS NET OF EX- INCOME PAID
FISCAL ASSET NET ON SEC- FROM (FROM DISTRI- NET ASSETS PENSES (LOSS) PORT- PER
YEAR VALUE INVEST- URITIES INVEST- NET BUTIONS ASSET END OF TO TO AVE- FOLIO INVEST-
ENDED BEGIN- MENT (REALIZED MENT INVEST- (FROM TOTAL VALUE TOTAL PERIOD AVERAGE RAGE TURN- MENT
SEPTEM- NING OF INCOME & UNREAL- OPERA- MENT REALIZED DISTRI- END OF RETURN (THOU- NET NET OVER SECURITY
BER 30 PERIOD (LOSS) IZED) TIONS INCOME) GAINS) BUTIONS PERIOD (A) SANDS) ASSETS ASSETS RATE TRADED
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SECURITY ULTRA FUND (CLASS A)
1992 $6.72 $(0.090) $(0.202) $(0.292) $--- $(0.172) $(0.172) $6.66 1.50% $57,128 1.32% (0.46%) 142% $---
1993 6.66 (0.028) 1.791 1.763 --- (0.293) (0.293) 8.13 26.80% 71,056 1.30% (0.50%) 101% ---
1994(c) 8.13 (0.056) (0.188) (0.244) --- (1.066) (1.066) 6.82 (3.60%) 60,695 1.33% (0.80%) 111% ---
1995(g) 6.82 (0.02) 1.535 1.515 --- (0.135) (0.135) 8.20 22.69% 66,052 1.32% (0.31%) 180% ---
1996(g) 8.20 (0.05) 1.096 1.046 --- (0.996) (0.996) 8.25 15.36% 74,230 1.31% (0.61%) 161% 0.0606
SECURITY ULTRA FUND (CLASS B)
1994(c) $8.30 $(0.103) $(0.321) $(0.424) $--- $(1.066) $(1.066) $6.81 (5.70%) $1,254 2.36% (1.76%) 110% $---
1995(g) 6.81 (0.09) 1.525 1.435 --- (0.135) (0.135) 8.11 21.53% 5,428 2.32% (1.32%) 180% ---
1996(g) 8.11 (0.13) 1.046 0.916 --- (0.996) (0.996) 8.03 13.81% 2,698 2.31% (1.61%) 161% 0.0606
</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) Effective July 6, 1993, Security Growth and Income Fund changed its
investment objective from investing for income with secondary emphasis on
long-term capital growth to long-term capital growth with secondary
emphasis on income. Effective the same date the fund changed its name from
Security Investment Fund to Security Growth and Income Fund.
(c) Class "B" Shares were initially capitalized on October 19, 1993. Percentage
amounts for the period, except total return, have been annualized. Per
share data has been calculated using the average month-end shares
outstanding.
(d) Security Global Series was initially capitalized on October 1, 1993, with a
net asset value of $10 per share. Percentage amounts for the period, except
for total return, have been annualized.
(e) Security Asset Allocation Series 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. Per share data has been
calculated using average month-end shares outstanding.
(f) Fund expenses were reduced by the Investment Manager during the period and
expense ratios absent such reimbursement would have been as follows:
1995 1996
---- ----
Asset Allocation Series Class A 3.6% 3.1%
Class B 4.7% 3.9%
(g) Net investment income (loss) was computed using average shares outstanding
throughout the period.
See accompanying notes.
- --------------------------------------------------------------------------------
30
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
SEPTEMBER 30, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
Security Growth and Income, Equity and Ultra Funds (the Funds) are
registered under the Investment Company Act of 1940, as amended, as diversified
open-end management investment companies. The shares of Security Equity Fund are
currently issued in three Series, the Equity Series, the Global Series, and the
Asset Allocation Series, with each Series, in effect representing a separate
Fund. The Funds began offering an additional class of shares ("B" shares) to the
public on October 19, 1993. The shares are offered without a front-end sales
charge but incur additional class - specific expenses. Redemptions of the shares
within five years of acquisition incur a contingent deferred sales charge. The
following is a summary of the significant accounting policies followed by the
Funds in the preparation of their financial statements. These policies are in
conformity with generally accepted accounting principles.
A. SECURITY VALUATION - Valuations of the Funds' securities are supplied by
a pricing service approved by the Board of Directors. Securities listed or
traded on a national securities exchange are valued on the basis of the last
sales price. If there are no sales on a particular day, then the securities are
valued at the last bid price. 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 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 are valued in good faith by such method as the
Board of Directors determines will reflect the fair market value. The Funds
generally will value short-term debt securities at prices based on market
quotations for securities of similar type, yield, quality and duration, except
those securities purchased with 60 days or less to maturity are valued on the
basis of amortized cost which approximates market value.
Generally, trading in foreign securities markets is substantially completed
each day at various times prior to the close of the New York Stock Exchange. The
values of foreign securities are determined as of the close of such foreign
markets or the close of the New York Stock Exchange, if earlier. All investments
quoted in foreign currency are valued in U.S. dollars on the basis of the
foreign currency exchange rates prevailing at the close of business. The Global
Series' and Asset Allocation Series' investments in foreign securities may
involve risks not present in domestic investments. Since foreign securities may
be denominated in a foreign currency and involve settlement and pay interest or
dividends in foreign currencies, changes in the relationship of these foreign
currencies to the U.S. dollar can significantly affect the value of the
investments and earnings of the Funds. Foreign investments may also subject the
Global Series and Asset Allocation Series to foreign government exchange
restrictions, expropriation, taxation or other political, social or economic
developments, all of which could affect the market and/or credit risk of the
investments.
B. FOREIGN CURRENCY TRANSACTIONS - The accounting records of the Funds are
maintained in U.S. dollars. All assets and liabilities initially expressed in
foreign currencies are converted into U.S. dollars at prevailing exchange rates.
Purchases and sales of investment securities, dividend and interest income, and
certain expenses are translated at the rates of exchange prevailing on the
respective dates of such transactions.
The Funds do not isolate that portion of the results of operations
resulting from changes in the foreign exchange rates on investments from the
fluctuations arising from changes in the market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss on
investments.
Net realized foreign exchange gains or losses arise from sales of portfolio
securities, sales of foreign currencies, and the difference between asset and
liability amounts initially stated in foreign currencies and the U.S. dollar
value of the amounts actually received or paid. Net unrealized foreign exchange
gains or losses arise from changes in the value of portfolio securities and
other assets and liabilities at the end of the reporting period, resulting from
changes in the exchange rates.
C. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS - Global Series and Asset
Allocation Series may enter into forward foreign exchange contracts in order to
manage against foreign currency risk from purchase or sale of securities
denominated in foreign currency. Global Series and Asset Allocation Series may
also enter into such contracts to manage changes in foreign currency exchange
rates on portfolio positions. These contracts are marked to market daily, by
recognizing the difference between the contract exchange rate and the current
market rate as unrealized gains or losses. Realized gains or losses are
recognized when contracts are settled and are reflected in the statement of
operations. These contracts involve market risk in excess of the amount
reflected in the balance sheet. The face or contract amount in U.S. dollars
reflects the total exposure the Global Series and Asset Allocation Series have
in that particular currency contract. Losses may arise due to changes in the
value of the foreign currency or if the counterparty does not perform under the
contract.
D. FUTURES - Asset Allocation Series and Ultra Fund utilize futures
contracts to a limited extent, with the objectives of maintaining full exposure
to the underlying stock markets, enhancing returns, maintaining liquidity, and
minimizing transaction costs. Asset Allocation Series and Ultra Fund may
purchase futures contracts to immediately position incoming cash in the market,
thereby simulating a fully invested position in the underlying index while
maintaining a cash balance for liquidity. In the event of redemptions, the Asset
Allocation Series and Ultra Fund may pay departing shareholders from its cash
balances and reduce their futures positions accordingly. Returns may be enhanced
by purchasing futures contracts instead of the underlying securities when
futures are believed to be priced more attractively than the underlying
securities. The primary risks associated with the use of futures contracts are
imperfect correlation between changes in market values of stocks contained in
the indexes and the prices of futures contracts, and the possibility of an
illiquid market. Futures contracts are valued based upon their quoted daily
settlement prices. Upon entering into a futures contract, the Funds are required
to deposit either cash or securities, representing the initial margin, equal to
a certain percentage of the contract value. Subsequent changes in the value of
the contract, or variation margin, are recorded as unrealized gains or losses.
The variation margin is paid or received in cash daily by the Funds. The Funds
realize a gain or loss when the contract is closed or expires. There were no
futures contracts held by the Funds at September 30, 1996.
- --------------------------------------------------------------------------------
31
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
E. SECURITY TRANSACTIONS AND INVESTMENT INCOME - Security transactions are
accounted for on the date the securities are purchased or sold. Realized gains
and losses are reported on an identified cost basis. Dividend income less
foreign taxes withheld (if any) plus foreign taxes recoverable (if any) are
recorded on the ex-dividend date. Interest income is recognized on the accrual
basis. Premium and discounts (except original issue discounts) on debt
securities are not amortized.
F. DISTRIBUTIONS TO SHAREHOLDERS - Distributions to shareholders are
recorded on the ex-dividend date. The character of distributions made during the
year from net investment income or net realized gains may differ from their
ultimate characterization for federal income tax purposes. These differences are
primarily due to differing treatments relating to the expiration of net
operating losses and the recharacterization of foreign currency gains and
losses.
G. TAXES - The Funds complied with the requirements of the Internal Revenue
Code applicable to regulated investment companies and distributed all of their
taxable net income and net realized gains sufficient to relieve them from all,
or substantially all, federal income, excise and state income taxes. Therefore,
no provision for federal or state income tax is required.
2. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Under terms of the investment advisory contract, Security Management
Company (SMC) agrees to provide, or arrange for others to provide, all the
services required by the Funds for a single fee (except for the Asset Allocation
Series of Security Equity Fund), including investment advisory services,
transfer agent services and certain other administrative services. For Growth
and Income Fund, Equity Series and Ultra Fund this fee is equal to 2% of the
first $10 million of the average daily closing value of each Fund's net assets,
1 1/2% of the next $20 million, and 1% of the remaining net assets of the Fund
for the fiscal year. For Global Series this fee is equal to 2% of the first $70
million of the average daily closing value of the Series' net assets and 1 1/2%
of the remaining average net assets of the Series for the fiscal year.
Additionally, SMC agrees to assume all of the Funds' expenses, except for its
fee and the expenses of interest, taxes, brokerage commissions and extraordinary
items and Class B distribution fees. SMC also serves as Investment Advisor to
the Asset Allocation Series, and accordingly receives a fee equal to 1% of the
average net assets of this Series.
SMC also acts as the administrative agent and transfer agent for the Asset
Allocation Series, and as such performs administrative functions, transfer
agency and dividend disbursing services, and the bookkeeping, accounting and
pricing functions for the Series. For these services, the Investment Manager
receives an administrative fee equal to .045% of the average daily net assets of
the Series plus the greater of .10% of its average net assets or (i) $45,000 in
the year ending June 1, 1997; and (ii) $60,000 thereafter. For transfer agent
services, SMC is paid an annual fixed charge per account as well as a
transaction fee for all shareholder and dividend payments.
SMC pays a Sub-Advisor, Lexington Management Corporation (LMC), an annual
fee in an amount equal to .50% of the average daily net assets of Global Series,
for investment advisory and certain administrative services provided to the
Global Series. SMC pays Templeton/Franklin Investment Services, Inc. for
research provided to the Asset Allocation Series, an annual fee equal to .30% of
the first $50 million of the average net assets of the Asset Allocation Series
invested in equity securities and .25% of the average equity security assets in
excess of $50 million. SMC also pays Meridian Management Corporation for
research provided to the Asset Allocation Series an annual fee equal to .20% of
the average net assets of that Series. SMC has agreed to limit the total
expenses of the Asset Allocation Series to 2% of the average net assets,
excluding 12b-1 fees.
For the Asset Allocation Series, SMC and Meridian Management Corporation
have agreed to waive their portions of the management fees to December 31, 1996.
The Funds have adopted Distribution Plans related to the offering of Class
B shares pursuant to Rule 12b-1 under the Investment Company Act of 1940. The
Plans provide for payments at an annual rate of 1.0% of the average net assets
of each Fund's Class B shares.
Security Distributors, Inc. (SDI), a wholly-owned subsidiary of SMC and the
national distributor for the Funds, received net underwriting commissions after
allowances to brokers and dealers in the amounts presented in the following
table:
ASSET
GROWTH AND EQUITY GLOBAL ALLOCATION ULTRA
INCOME FUND SERIES SERIES SERIES FUND
-----------------------------------------------------------
SDI underwriting $7,615 $107,976 $3,907 $911 $9,163
Broker/Dealer $30,541 $761,334 $25,565 $6,482 $33,172
Certain officers and directors of the Funds are also officers and/or
directors of Security Benefit Life Insurance Company and its subsidiaries, which
include SMC and SDI.
3. FEDERAL INCOME TAX MATTERS
For federal income tax purposes, the amounts of unrealized appreciation
(depreciation) at September 30, 1996, were as follows:
ASSET
GROWTH AND EQUITY GLOBAL ALLOCATION ULTRA
INCOME FUND SERIES SERIES SERIES FUND
-------------------------------------------------------------
Gross unrealized
appreciation $15,608,749 $173,772,495 $2,757,579 $266,330 $17,462,661
Gross unrealized
depreciation (386,747) (1,096,900) (734,627) (140,252) (397,738)
-------------------------------------------------------------
Net unrealized
appreciation $15,222,002 $172,675,595 $2,022,952 $126,078 $17,064,923
=============================================================
The Growth and Income Fund, Equity Series, Global Series and Ultra Fund hereby
respectively designate $959,581, $25,710,137, $19,397, and $6,430,082 as capital
gain dividends paid during the fiscal year ended September 30, 1996, for the
purpose of the dividends paid deduction on each Fund's federal income tax
return.
- --------------------------------------------------------------------------------
32
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INVESTMENT TRANSACTIONS
Investment transactions for the year ended September 30, 1996, (excluding
overnight investments and short-term commercial paper) are as follows:
ASSET
GROWTH AND EQUITY GLOBAL ALLOCATION ULTRA
INCOME FUND SERIES SERIES SERIES FUND
-----------------------------------------------------------------
Purchases $47,200,987 $353,045,127 $30,917,967 $5,247,673 $100,294,618
Proceeds
from sales
$47,075,606 $320,288,296 $31,561,347 $2,947,521 $105,246,179
5. FORWARD FOREIGN EXCHANGE CONTRACTS
At September 30, 1996, Global Series had the following open forward foreign
exchange contracts to sell currency (excluding foreign currency contracts used
for purchase and sale settlements):
UNREALIZED
SETTLEMENT CONTRACT CONTRACT CURRENT GAIN
CURRENCY DATE AMOUNT RATE RATE (LOSS)
- --------------------------------------------------------------------------------
French Franc 3-5-97 3,717,779 5.0379 5.11460 $11,067
Japanese Yen 10-11-97 93,628,967 105.6950 111.36000 45,064
Japanese Yen 1-6-97 9,067,305 106.4600 109.92000 2,681
Japanese Yen 1-6-97 81,674,489 107.7200 109.92000 15,175
Japanese Yen 1-6-97 1,204,051 107.4950 109.92000 247
New Zealand Dollar 4-1-97 771,335 0.6859 0.68656 (509)
-------
$73,725
6. FEDERAL TAX STATUS OF DIVIDENDS
The income dividends paid by the Funds are taxable as ordinary income on
the shareholder's tax return. The portion of ordinary income of dividends
(including net short-term capital gains) attributed to fiscal year ended
September 30, 1996, that qualified for the dividends received deductions for
corporate shareholders was 22%, 31%, 3%, 19% and 22% of the amount taxable as
ordinary income for Growth and Income Fund, Equity Series, Global Series, Asset
Allocation Series and Ultra Fund respectively, in accordance with the provisions
of the Internal Revenue Code.
- --------------------------------------------------------------------------------
33
<PAGE>
REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
THE SHAREHOLDERS AND BOARD OF DIRECTORS
SECURITY GROWTH AND INCOME FUND, SECURITY EQUITY FUND, AND SECURITY ULTRA FUND
We have audited the accompanying balance sheets and statements of net
assets of Security Growth and Income Fund, Security Equity Fund (comprised of
the Equity, Global and Asset Allocation Series) and Security Ultra Fund (the
Funds) as of September 30, 1996, the related statements of operations for the
year then ended and statements of changes in net assets for each of the two
years in the period then ended of Security Growth and Income Fund, Security
Equity Series, Security Equity Global Series and Security Ultra Fund and the
statements of changes in net assets for the year then ended and for the period
June 1, 1995 (commencement of operations) to September 30, 1995 of Security
Equity Asset Allocation Series and financial highlights for each of the five
years in the period ended September 30, 1996. These financial statements and the
financial highlights are the responsibility of the Funds' management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
September 30, 1996, by correspondence with the custodian. As to securities
relating to uncompleted transactions, we performed other audit procedures. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Funds at September 30, 1996, and the results of their operations, changes in
their net assets and the financial highlights for the periods indicated above in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Kansas City, Missouri
November 1, 1996
- --------------------------------------------------------------------------------
34
<PAGE>
THE SECURITY GROUP OF MUTUAL FUNDS
Security Growth and Income Fund
Security Equity Fund
* Equity Series
* Global Series
* Asset Allocation Series
Security Ultra Fund
Security Income Fund
* Corporate Bond Series
* U.S. Government Series
* Limited Maturity Bond Series
* Global Aggressive Bond Series
* High Yield Series
Security Tax-Exempt Fund
Security Cash Fund
This report is submitted for the general information of the shareholders of the
Funds. The report is not authorized for distribution to prospective investors in
the Funds unless preceded or accompanied by an effective prospectus which
contains details concerning the sales charges and other pertinent information.
SECURITY FUNDS
OFFICERS AND DIRECTORS
DIRECTORS
- ---------
Willis A. Anton
Donald A. Chubb, Jr.
John D. Cleland
Donald L. Hardesty
Penny A. Lumpkin
Mark L. Morris, Jr., D.V.M.
Jeffrey B. Pantages
Hugh L. Thompson, Ph.D.
OFFICERS
- --------
John D. Cleland, PRESIDENT
James R. Schmank, VICE PRESIDENT AND TREASURER
Mark E. Young, VICE PRESIDENT
Terry A. Milberger, VICE PRESIDENT, EQUITY FUND
Jane A. Tedder, VICE PRESIDENT
Greg A. Hamilton, ASSISTANT VICE PRESIDENT
Cindy L. Shields, ASSISTANT VICE PRESIDENT
Thomas A. Swank, ASSISTANT VICE PRESIDENT
Amy J. Lee, SECRETARY
Christopher D. Swickard, ASSISTANT SECRETARY
Brenda M. Luthi, ASSISTANT TREASURER AND ASSISTANT SECRETARY
BULK RATE
U.S. POSTAGE PAID
[SDI LOGO] TOPEKA, KS
PERMIT NO. 385
700 SW HARRISON ST.
TOPEKA, KS 66636-0001
(913) 295-3127
(800) 888-2461
<PAGE>
SECURITY ULTRA FUND
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
a. Financial Statements
Included in Part A of this Registration Statement:
Per Share Income and Capital Changes
Included in Part B of this Registration Statement:
The audited financial statements contained in the most recent
Annual Report of Security Ultra Fund are incorporated by reference
in Part B of this Registration Statement.
b. Exhibits:
(1) Articles of Incorporation.(c)
(2) Corporate Bylaws of Registrant.(c)
(3) Not applicable.
(4) Specimen copy of share certificate for Registrant's shares
of capital stock.(c)
(5) Investment Management and Services Agreement.
(6) Distribution Agreement.(a)
Class B Distribution Agreement.(a)
(7) Non-Qualified Deferred Compensation Plan.(a)
(8) Custodian Agreement.
(9) Not applicable.
(10) Opinion of counsel as to the legality of the securities
offered.(c)
(11) Consent of Independent Auditors.
(12) Not applicable.
(13) Not applicable.
(14) Not applicable.
(15) Distribution Plan.(a)
(16) Schedule of Computation of Performance.
(17) Financial Data Schedules.
(18) Multiple Class Plan.(c)
(a) Incorporated herein by reference to the Exhibits filed with the
Registrant's Post-Effective Amendment No. 39 to Registration Statement No.
2-32791 (January 28, 1994).
(b) Incorporated herein by reference to the Exhibits filed with the
Registrant's Post-Effective Amendment No. 40 to Registration Statement No.
2-32791 (January 27, 1995).
(c) Incorporated herein by reference to the Exhibits filed with the
Registrant's Post-Effective Amendment No. 41 to Registration Statement No.
2-32791 (December 1, 1995).
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES AS OF DECEMBER 31, 1996.
(1) (2)
NUMBER OF RECORD
TITLE OF CLASS SHAREHOLDERS
- --------------------------------------------------------------------------------
Shares of Common Stock 23,432 Class A
727 Class B
ITEM 27. INDEMNIFICATION.
A policy of insurance covering Security Management Company, LLC, its
subsidiaries, including Security Distributors, Inc., and all of the
registered investment companies advised by Security Management Company,
LLC, insures the Registrant's directors and officers and others against
liability arising by reason of an alleged breach of duty caused by any
negligent act, error or accidental omission in the scope of their
duties.
Item Thirty of Registrant's Bylaws, dated February 3, 1995, provides,
in relevant part as follows:
"Each person who is or was a Director or officer of the Corporation or
is or was serving at the request of the Corporation as a Director or
officer of another corporation (including the heirs, executors,
administrators and estate of such person) shall be indemnified by the
Corporation as of right to the full extent permitted or authorized by
the laws of the State of Kansas, as now in effect and is hereafter
amended, against any liability, judgment, fine, amount paid in
settlement, cost and expense (including attorneys' fees) asserted or
threatened against and incurred by such person in his/her capacity as
or arising out of his/her status as a Director or officer of the
Corporation or, if serving at the request of the Corporation, as a
Director or officer of another corporation. The indemnification
provided by this bylaw provision shall not be exclusive of any other
rights to which those indemnified may be entitled under the Articles of
Incorporation, under any other bylaw or under any agreement, vote of
stockholders or disinterested directors or otherwise, and shall not
limit in any way any right which the Corporation may have to make
different or further indemnification with respect to the same or
different persons or classes of persons.
<PAGE>
No person shall be liable to the Corporation for any loss, damage,
liability or expense suffered by it on account of any action taken or
omitted to be taken by him/her as a Director or officer of the
Corporation or of any other corporation which he/she serves as a
Director or officer at the request of the Corporation, if such person
(a) exercised the same degree of care and skill as a prudent man would
have exercised under the circumstances in the conduct of his/her own
affairs, or (b) took or omitted to take such action in reliance upon
advice of counsel for the Corporation, or for such other corporation,
or upon statement made or information furnished by Directors, officers,
employees or agents of the Corporation, or of such other corporation,
which he/she had no reasonable grounds to disbelieve.
In the event any provision of this section 30 shall be in violation of
the Investment Company Act of 1940, as amended, or of the rules and
regulations promulgated thereunder, such provisions shall be void to
the extent of such violations".
Article Sixteenth of Registrant's Articles of Incorporation, as amended
January 22, 1988, provides as follows:
"A director shall not be personally liable to the corporation or to its
stockholders for monetary damages for breach of fiduciary duty as a
director, provided that this sentence shall not eliminate nor limit the
liability of a director:
A. for any breach of his or her duty of loyalty to the corporation or
to its stockholders;
B. for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
C. for an unlawful dividend, stock purchase or redemption under the
provisions of Kansas Statutes Annotated (K.S.A.) 17-6424 and
amendments thereto; or
D. for any transaction from which the director derived an improper
personal benefit."
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid
by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
<PAGE>
ITEM 28. BUSINESS OR OTHER CONNECTIONS OF INVESTMENT ADVISER
Security Management Company, LLC also acts as investment manager to
SBL Fund, Security Cash Fund, Security Income Fund, Security Growth
and Income Fund, Security Tax-Exempt Fund, and Security Ultra Fund.
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
----------------------------------------------------------------------
James R. Schmank President (Interim), Treasurer,
Chief Fiscal Officer and
Managing Member Representative
Security Management Company, LLC
Vice President and Director
Security Distributors, Inc.
Vice President and Interim
Chief Investment Officer
Security Benefit Group, Inc.
Security Benefit Life Insurance Company
Vice President and Treasurer
Security Growth and Income Fund, Security
Income Fund, Security Cash Fund, Security
Tax-Exempt Fund, Security Ultra Fund,
Security Equity Fund, SBL Fund
Jeffrey B. Pantages President, Chief Investment Officer and Director
Security Management Company (until June 1996)
Director
Security Cash Fund, Security Income Fund,
Security Tax-Exempt Fund, SBL Fund,
Security Growth and Income Fund,
Security Equity Fund, Security Ultra Fund
Senior Vice President and
Chief Investment Officer
Security Benefit Life Insurance Company,
Security Benefit Group, Inc.
Director
Mulvane Art Center
Mulvane Art Museum
Washburn University
17th & Jewell
Topeka, Kansas
United Way of Greater Topeka
P.O. Box 4188
Topeka, Kansas
<PAGE>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
----------------------------------------------------------------------
John D. Cleland Senior Vice President and Managing
Member Representative
Security Management Company, LLC
President and Director
Security Cash Fund, Security Income Fund,
Security Tax-Exempt Fund, SBL Fund,
Security Growth and Income Fund,
Security Equity Fund, Security Ultra Fund
Senior Vice President
Security Benefit Life Insurance Company
Security Benefit Group, Inc.
Vice President and Director
Security Distributors, Inc.
Trustee and Treasurer
Mount Hope Cemetery Corporation
4700 SW 17th
Topeka, Kansas
Trustee and Investment Committee Chairman
Topeka Community Foundation
5100 SW 10th
Topeka, Kansas
James W. Lammers Senior Vice President and Director
Security Management Company, LLC
Security Distributors, Inc.
Director (until November 1996)
Security Management Company
Donald E. Caum Director (until November 1996)
Security Management Company
Senior Vice President
Security Benefit Life Insurance Company
Security Benefit Group
Director
YMCA Metro, Topeka, Kansas
Executive Director
Jayhawk Area Council Boy Scouts of America,
Topeka, Kansas
Metropolitan Ballet, Topeka, Kansas
James L. Woods Senior Vice President
Security Management Company, LLC
Security Benefit Life Insurance Company
Security Benefit Group, Inc.
<PAGE>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
----------------------------------------------------------------------
Mark E. Young Vice President
Security Growth and Income Fund,
Security Income Fund,
Security Cash Fund, Security Tax-Exempt Fund,
Security Ultra Fund, Security Equity Fund,
SBL Fund, Security Management Company, LLC
Security Distributors, Inc.
Assistant Vice President
Security Benefit Life Insurance Company
First Security Benefit Life Insurance
and Annuity Company of New York
Security Benefit Group, Inc.
Trustee
Topeka Zoological Foundation, Topeka, Kansas
Terry A. Milberger Senior Portfolio Manager and Vice President
Security Management Company, LLC
Vice President
Security Equity Fund, SBL Fund
Jane A. Tedder Vice President and Senior Portfolio Manager
Security Management Company, LLC
Vice President
Security Income Fund, SBL Fund,
Security Equity Fund
Gregory A. Hamilton Second Vice President
Security Management Company, LLC
Assistant Vice President
Security Income Fund, SBL Fund,
Security Equity Fund,
Security Tax-Exempt Fund
Director
Downtown Topeka, Inc., Topeka, Kansas
Trustee
Kansas State University Foundation,
Manhattan, Kansas
<PAGE>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
----------------------------------------------------------------------
Amy J. Lee Vice President and Associate General Counsel
Security Benefit Life Insurance Company,
Security Benefit Group, Inc.
Secretary
Security Management Company, LLC,
Security Distributors, Inc.,
Security Cash Fund,
Security Equity Fund,
Security Tax-Exempt Fund,
Security Ultra Fund, SBL Fund,
Security Growth and Income Fund,
Security Income Fund
Director
Everywoman's Resource Center
1002 SW Garfield Avenue
Topeka, Kansas
Brenda M. Harwood Assistant Vice President, Assistant Treasurer and
Assistant Secretary
Security Management Company, LLC
Assistant Treasurer and Assistant Secretary
Security Equity Fund, Security Ultra Fund,
Security Growth and Income Fund,
Security Income Fund, Security Cash Fund,
SBL Fund, Security Tax-Exempt Fund
Treasurer
Security Distributors, Inc.
Steven M. Bowser Assistant Vice President and Portfolio Manager
Security Management Company, LLC
Assistant Vice President
Security Benefit Life Insurance Company,
Security Benefit Group, Inc.
Thomas A. Swank Second Vice President and Portfolio Manager
Security Management Company, LLC
Second Vice President
Security Benefit Life Insurance Company,
Security Benefit Group, Inc.
<PAGE>
Business* and Other Connections of the Executive
Name Officers and Directors of Registrant's Adviser
----------------------------------------------------------------------
Barbara J. Davison Assistant Vice President and Portfolio Manager
Security Management Company, LLC
Assistant Vice President
Security Benefit Life Insurance Company,
Security Benefit Group, Inc.
Vice-Chairman
Topeka Chapter American Red Cross
Topeka, Kansas
Cindy L. Shields Assistant Vice President and Portfolio Manager
Security Management Company, LLC
Assistant Vice President
Security Ultra Fund, SBL Fund
Larry L. Valencia Assistant Vice President
and Senior Research Analyst
Security Management Company, LLC
James P. Schier Assistant Vice President
and Senior Research Analyst
Security Management Company, LLC
Martha L. Sutherland Second Vice President
Security Management Company, LLC
Vice President
Security Benefit Life Insurance Company
Security Benefit Group, Inc.
*Located at 700 Harrison, Topeka, Kansas 66636-0001.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Security Equity Fund
Security Growth and Income Fund
Security Income Fund
Security Tax-Exempt Fund
Variflex Variable Annuity Account
Varilife Variable Annuity Account
Parkstone Variable Annuity
Security Varilife Separate Account
Variflex LS Variable Annuity Account
T. Rowe Price Variable Annuity Account
T. Rowe Price Variable Annuity Account of First Security Benefit
Life Insurance and Annuity Company of New York
<PAGE>
(b)
(1) (2) (3)
NAME AND PRINCIPAL POSITION AND OFFICES POSITION AND OFFICES
BUSINESS ADDRESS* WITH UNDERWRITER WITH REGISTRANT
- --------------------------------------------------------------------------------
Richard K Ryan President and Director None
John D. Cleland Vice President and Director President and Director
James W. Lammers National Sales Manager, None
Senior Vice President
and Director
James R. Schmank Vice President Vice President
and Director and Treasurer
Louis R. Jicha Vice President and Director None
Mark E. Young Vice President Vice President
Amy J. Lee Secretary Secretary
Brenda M. Harwood Treasurer Assistant Secretary and
Assistant Treasurer
Daniel J. McNichol Vice President None
Steven S. Doerrer Regional Vice President None
Steven D. Eklund Regional Vice President None
Carla D. Griffin Regional Vice President None
Anthony L. Hammock Regional Vice President None
Douglas J. Ikenberry Regional Vice President None
Robert L. Kirchner Regional Vice President None
Daniel R. Murphy Regional Vice President None
Kent N. Spillman Regional Vice President None
Ronald V. Vermillion Regional Vice President None
Jennifer A. Zaat Regional Vice President None
Marek E. Lakotko Regional Vice President None
*700 Harrison, Topeka, Kansas 66636-0001
(c) Not Applicable.
<PAGE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
Certain accounts, books and other documents required to be maintained
by Section 31(a) of the 1940 Act and the rules promulgated thereunder
are maintained by Security Management Company, LLC, 700 Harrison,
Topeka, Kansas 66636-0001. Records relating to the duties of the
Registrant's custodian are maintained by UMB Bank, N.A., 928 Grand
Avenue, Kansas City, Missouri 64106.
ITEM 31. MANAGEMENT SERVICES.
Not applicable.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) Not applicable.
(c) Upon the inclusion of Item 5A's required performance information
in the Registrant's annual report, the Registrant hereby
undertakes to furnish each person, to whom a prospectus is
delivered, a copy of the Registrant's latest report to
shareholders upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Topeka, and State of Kansas on the 21st day of
January, 1997.
SECURITY ULTRA FUND
(The Registrant)
By: JOHN D. CLELAND, President
-----------------------------------
John D. Cleland, President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the date indicated:
Date: January 21, 1997
-----------------------------------
WILLIS A. ANTON, JR. Director
- ---------------------------
Willis A. Anton, Jr.
DONALD A. CHUBB, JR. Director
- ---------------------------
Donald A. Chubb, Jr.
JOHN D. CLELAND President and Director
- ---------------------------
John D. Cleland
DONALD L. HARDESTY Director
- ---------------------------
Donald L. Hardesty
PENNY A. LUMPKIN Director
- ---------------------------
Penny A. Lumpkin
MARK L. MORRIS, JR. Director
- ---------------------------
Mark L. Morris, Jr.
JEFFREY B. PANTAGES Director
- ---------------------------
Jeffrey B. Pantages
HAROLD G. WORSWICK Director
- ---------------------------
Harold G. Worswick
<PAGE>
EXHIBIT INDEX
(1) None
(2) None
(3) None
(4) None
(5) Investment Management and Services Agreement
(6) None
(7) None
(8) Custodian Agreement - UMB Bank
(9) None
(10) None
(11) Consent of Independent Auditors
(12) None
(13) None
(14) None
(15) None
(16) Schedule of Computation of Performance
(17) Financial Data Schedules
(18) None
<PAGE>
INVESTMENT MANAGEMENT AND SERVICES AGREEMENT
This Agreement, made and entered into this 30th day of December, 1988, by
and between SECURITY ULTRA FUND, a Kansas corporation (hereinafter referred to
as the "Fund"), and SECURITY MANAGEMENT COMPANY, a Kansas corporation
(hereinafter referred to as "SMC").
WITNESSETH:
WHEREAS, the Fund is engaged in business as an open-end management
investment company registered under the Investment Company Act of 1940 ("1940
Act"); and
WHERE, SMC is willing to provide investment research and advice, general
administrative, fund accounting, transfer agency, and dividend disbursing
services to the Fund on the terms and conditions hereinafter set forth and to
arrange for the provision of all other services (except for those services
specifically excluded in this Agreement) required by the Fund, including
custodial, legal, auditing and printing;
NOW THEREFORE, in consideration of the premises and mutual agreements made
herein, the parties agree as follows:
1. EMPLOYMENT OF SMC. The Fund hereby employs SMC to (a) act as investment
adviser to the Fund with respect to the investment of its assets and to
supervise and arrange the purchase of securities for the Fund and the sale
of securities held in the portfolio of the Fund, subject always to the
supervision of the Board of Directors of the Fund (or a duly appointed
committee thereof), during the period and upon and subject to the terms and
conditions described herein; (b) to provide the Fund with general
administrative, fund accounting, transfer agency, and dividend disbursing
services described and set forth in Schedule A attached hereto and made a
part of this Agreement by reference; and (c) to arrange for, monitor, and
bear the expense of, the provision to the Fund of all other services
required by the Fund, including but not limited to services of independent
accountants, legal counsel, custodial services and printing. SMC may, in
accordance with all applicable legal requirements, engage the services of
other persons or entities, regardless of any affiliation with SMC, to
provide services to the Fund under this Agreement. SMC agrees to maintain
sufficient trained personnel and equipment and supplies to perform its
responsibilities under this Agreement and in conformity with the current
Prospectus of the Fund and such other reasonable standards of performance
as the Fund may from time to time specify and shall use reasonable care in
selecting and monitoring the performance of third parties, who perform
services for the Fund. SMC shall not guarantee the performance of such
persons.
SMC hereby accepts such employment and agrees to perform the services
required by this Agreement for the compensation herein provided.
<PAGE>
2. ALLOCATION OF EXPENSES AND CHARGES.
(A) EXPENSES OF SMC. SMC shall pay all expenses in connection with the
performance of its services under this Agreement, including all fees
and charges of third parties providing services to the Fund, whether
or not such expenses are billed to SMC or the Fund, except as
otherwise provided herein.
(B) EXPENSES OF THE FUND. Anything in this Agreement to the contrary
notwithstanding, the Fund shall pay, or reimburse SMC for the payment
of, the following described expenses of the Fund whether or not billed
to the Fund, SMC or any related entity;
(i) brokerage fees and commissions;
(ii) taxes;
(iii) interest expenses; and
(iv) any extraordinary expenses approved by the Board
of Directors of the Fund.
3. COMPENSATION OF SMC.
(a) In consideration of the services to be rendered by SMC pursuant to
this Agreement, the Fund shall pay SMC an annual fee equal to 2% of
the first $10 million of the average net assets of the Fund, and 1
1/2% of the next $20 million of the average net assets, and 1% of the
remaining average net assets of the Fund for any fiscal year,
determined and payable monthly. If this Agreement shall be effective
for only a portion of a year in which a fee is owed, then SMC's
compensation for the year shall be prorated for that portion. For
purposes of this Section 3, the value of the net assets of the Fund
shall be computed in the same manner as the value of such net assets
is computed in connection with the determination of the net asset
value of the shares of the Fund as described in the Fund's Prospectus
and Statement of Additional Information.
(b) For each of the Fund's full fiscal years during which this Agreement
remains in force, SMC agrees that if the total annual expenses of the
Fund, exclusive of those expenses listed in paragraph 2(b) of this
Agreement, but inclusive of SMC's compensation, exceed any expense
limitation imposed by state securities law or regulation in any state
in which shares of the Fund are then qualified for sale, as such
regulations may be amended from time to time, SMC will contribute to
the Fund such funds or waive that portion of its fee on a monthly
basis as may be necessary to insure that its total expenses will not
exceed any state limitation. If this paragraph of the Agreement shall
be effective for only a portion of one of the Fund's fiscal years,
then the maximum annual expenses shall be prorated for such portion.
4. INVESTMENT ADVISORY DUTIES.
(A) INVESTMENT ADVICE. SMC shall regularly provide the Fund with
investment research, advice and supervision, continuously furnish an
investment program, recommend which securities shall be purchased and
sold and what portion of the assets of the Fund shall be held
uninvested and arrange for the purchase of securities
<PAGE>
and other investments for the Fund and the sale of securities and
other investments held in the portfolio of the Fund. All investment
advice furnished by SMC to the Fund under this paragraph 4 shall at
all times conform to any requirements imposed by the provisions of the
Fund's Articles of Incorporation and Bylaws, the 1940 Act, the
Investment Advisors Act of 1940 and the rules and regulations
promulgated thereunder, and other applicable provisions of law, and
the terms of the registration statements of the Fund under the
Securities Act of 1933 ("1933 Act") and/or the 1940 Act, as may be
applicable at the time, all as from time to time amended. SMC shall
advise and assist the officers or other agents of the Fund in taking
such steps as are necessary or appropriate to carry out the decisions
of the Board of Directors of the Fund (and any duly appointed
committee thereof) with regard to the foregoing matters and the
general account of the Fund's business.
(B) PORTFOLIO TRANSACTIONS AND BROKERAGE.
(i) Transactions in portfolio securities shall be effected by SMC,
through brokers or otherwise, in the manner permitted in this
paragraph 4 and in such manner as SMC shall deem to be in the
best interests of the Fund after consideration is given to all
relevant factors.
(ii) In reaching a judgment relative to the qualification of a
broker to obtain the best execution of a particular
transaction, SMC may take into account all relevant factors and
circumstances, including the size of any contemporaneous market
in such securities; the importance to the Fund of speed and
efficiency of execution; whether the particular transaction is
part of a larger intended change of portfolio position in the
same securities; the execution capabilities required by the
circumstances of the particular transaction; the capital
required by the transaction; the overall capital strength of
the broker; the broker's apparent knowledge of or familiarity
with sources from or to whom such securities may be purchased
or sold; as well as the efficiency, reliability and
confidentiality with which the broker has handled the execution
of prior similar transactions.
(iii) Subject to any statements concerning the allocation of
brokerage contained in the Fund's Prospectus or Statement of
Additional Information, SMC is authorized to direct the
execution of portfolio transactions for the Fund to brokers who
furnish investment information or research service to the SMC.
Such allocations shall be in such amounts and proportions as
SMC may determine. If the transaction is directed to a broker
providing brokerage and research services to SMC, the
commission paid for such transaction may be in excess of the
commission another broker would have charged for effecting that
transaction, if SMC shall have determined in good faith that
the commission is reasonable in relation to the value of the
brokerage and research services provided, viewed in terms of
either that particular transaction or the overall
responsibilities of SMC with respect to all accounts as to
which it now or hereafter exercises investment discretion. For
purposes of the immediately preceding sentence, "providing
brokerage and research services" shall have the
<PAGE>
meaning generally given such terms or similar terms under
Section 28(e)(3) of the Securities Exchange Act of 1934, as
amended.
(iv) In the selection of a broker for the execution of any
transaction not subject to fixed commission rates, SMC shall
have no duty or obligation to seek advance competitive bidding
for the most favorable negotiated commission rate to be
applicable to such transaction, or to select any broker solely
on the basis of its purported or "posted" commission rates.
(v) In connection with transactions on markets other than national
or regional securities exchanges, the Fund will deal directly
with the selling principal or market maker without incurring
charges for the services of a broker on its behalf unless, in
the best judgment of SMC, better price or execution can be
obtained by utilizing the services of a broker.
(C) SMC NOT TO RECEIVE COMMISSIONS. In connection with the purchase or
sale of portfolio securities for the account of the Fund, neither SMC
nor any officer or director of SMC shall act as principal or receive
any compensation from the Fund other than its compensation as provided
for in Section 3 above. If SMC, or any "affiliated person" (as defined
in the 1940 Act) receives any cash, credits, commissions or tender
fees from any person in connection with transactions in portfolio
securities of the Fund (including but not limited to the tender or
delivery of any securities held in such portfolio), SMC shall
immediately pay such amount to the Fund in cash or as a credit against
any then earned but unpaid management fees due by the Fund to SMC.
(D) LIMITATION OF LIABILITY OF SMC WITH RESPECT TO RENDERING INVESTMENT
ADVISORY SERVICES. So long as SMC shall give the Fund the benefit of
its best judgment and effort in rendering investment advisory services
hereunder, SMC shall not be liable for any errors of judgment or
mistake of law, or for any loss sustained by reason of the adoption of
any investment policy or the purchase, sale or retention of any
security on its recommendation, whether or not such recommendation
shall have been based upon its own investigation and research or upon
investigation and research made by any other individual, firm or
corporation, if such recommendation shall have been made and such
other individual, firm or corporation shall have been selected with
due care and in good faith. Nothing herein contained shall, however,
be construed to protect SMC against any liability to the Fund or its
shareholders by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of its
reckless disregard of its obligations and duties under this paragraph
4. As used in this paragraph 4, "SMC" shall include directors,
officers and employees of SMC, as well as that corporation itself.
5. ADMINISTRATIVE AND TRANSFER AGENCY SERVICES.
(A) RESPONSIBILITIES OF SMC. SMC will provide the Fund with general
administrative, fund accounting, transfer agency, and dividend
disbursing services described and set
<PAGE>
forth in Schedule A attached hereto and made a part of this Agreement
by reference. SMC agrees to maintain sufficient trained personnel and
equipment and supplies to perform such services in conformity with the
current Prospectus of the Fund and such other reasonable standards of
performance as the Fund may from time to time specify, and otherwise
perform such services in an accurate, timely, and efficient manner.
(B) INSURANCE. The Fund and SMC agree to procure and maintain, separately
or as joint insureds with themselves, their directors, employees,
agents and others, and other investment companies for which SMC acts
as investment adviser and transfer agent, a policy or policies of
insurance against loss arising from breaches of trust, errors and
omissions, and a fidelity bond meeting the requirements of the 1940
Act, in the amounts and with such deductibles as may be agreed upon
from time to time. SMC shall be solely responsible for the payment of
premiums due for such policies.
(C) REGISTRATION AND COMPLIANCE.
(i) SMC represents that as of the date of this Agreement it is
registered as a transfer agent with the Securities and Exchange
Commission ("SEC") pursuant to Subsection 17A of the Securities
and Exchange Act of 1934 and the rules and regulations
thereunder, and agrees to maintain said registration and comply
with all of the requirements of said Act, rules and regulations
so long as this Agreement remains in force.
(ii) The Fund represents that it is a diversified management
investment company registered with the SEC in accordance
with the 1940 Act and the rules and regulations
thereunder, and authorized to sell its shares pursuant to
said Act, the 1933 Act and the rules and regulations
thereunder.
(D) LIABILITY AND INDEMNIFICATION WITH RESPECT TO RENDERING ADMINISTRATIVE
AND TRANSFER AGENCY SERVICES. SMC shall be liable for any actual
losses, claims, damages or expenses (including any reasonable counsel
fees and expenses) resulting from SMC's bad faith, willful
misfeasance, reckless disregard of its obligations and duties,
negligence or failure to properly perform any of its responsibilities
or duties under this Paragraph 5. SMC shall not be liable and shall be
indemnified and held harmless by the Fund, for any claim, demand or
action brought against it arising out of, or in connection with:
(i) The bad faith, willful misfeasance, reckless disregard of its
duties or negligence by the Board of Directors of the Fund, or
SMC's acting upon any instructions properly executed and
authorized by the Board of Directors of the Fund;
(ii) SMC acting in reliance upon advice given by independent counsel
retained by the Board of Directors of the Fund.
<PAGE>
In the event that SMC requests the Fund to indemnify or hold it
harmless hereunder, SMC shall use its best efforts to inform the Fund
of the relevant facts concerning the matter in question. SMC shall use
reasonable care to identify and promptly notify the Fund concerning
any matter which presents, or appears likely to present, a claim for
indemnification against the Fund.
The Fund shall have the election of defending SMC against any claim
which may be the subject of indemnification hereunder. In the event
the Fund so elects, it will so notify SMC and thereupon the Fund shall
take over defenses of the claim, and if so requested by the Fund, SMC
shall incur no further legal or other claims related thereto for which
it would be entitled to indemnity hereunder provided, however, that
nothing herein contained shall prevent SMC from retaining, at its own
expense, counsel to defend any claim. Except with the Fund's prior
consent, SMC shall in no event confess any claim or make any
compromise in any matter in which the Fund will be asked to indemnify
or hold SMC harmless hereunder.
PUNITIVE DAMAGES. SMC shall not be liable to the Fund, or any
third party, for punitive, exemplary, indirect, special or
consequential damages (even if SMC has been advised of the
possibility of such damage) arising from its obligations and
the services provided under this paragraph 5, including but not
limited to loss of profits, loss of use of the shareholder
accounting system, cost of capital and expenses of substitute
facilities, programs or services.
FORCE MAJEURE. Anything in this paragraph 5 to the contrary
notwithstanding, SMC shall not be liable for delays or errors
occurring by reason of circumstances beyond its control,
including but not limited to acts of civil or military
authority, national emergencies, work stoppages, fire, flood,
catastrophe, earthquake, acts of God, insurrection, war, riot,
failure of communication or interruption.
(E) DELEGATION OF DUTIES. SMC may, at its discretion, delegate, assign, or
subcontract any of the duties, responsibilities and services governed
by this paragraph 5, to its parent company, Security Benefit Group,
Inc. or any of its affiliates, whether or not by formal written
agreement. SMC shall, however, retain ultimate responsibility to the
Fund, and shall implement such reasonable procedures as may be
necessary, for assuring that any duties, responsibilities or services
so assigned, subcontracted or delegated are performed in conformity
with the terms and conditions of this Agreement.
6. OTHER ACTIVITIES NOT RESTRICTED. Nothing in this Agreement shall prevent
SMC or any officer thereof from acting as investment adviser, administrator
or transfer agent for any other person, firm or corporation, nor shall it
in any way limit or restrict SMC or any of its directors, officers,
stockholders or employees from buying, selling, or trading any securities
for its own accounts or for the accounts of others for whom it may be
acting; provided, however, that SMC expressly represents that it will
undertake no activities
<PAGE>
which, in its judgment, will conflict with the performance of its
obligations to the Fund under this Agreement. The Fund acknowledges that
SMC acts as investment adviser, administrator and transfer agent to other
investment companies, and it expressly consents to SMC acting as such;
provided, however, that if in the opinion of SMC, particular securities are
consistent with the investment objectives of, and desirable purchases or
sales for the portfolios of one or more of such other investment companies
or series of such companies at approximately the same time, such purchases
or sales will be made on a proportionate basis if feasible, and if not
feasible, then on a rotating or other equitable basis.
7. AMENDMENT. This Agreement and the schedules forming a part hereof may be
amended at any time, without shareholder approval to the extent permitted
by applicable law, by a writing signed by each of the parties hereto. Any
change in the Fund's registration statements or other documents of
compliance or in the forms relating to any plan, program or service offered
by its current Prospectus which would require a change in SMC's obligations
hereunder shall be subject to SMC's approval, which shall not be
unreasonably withheld.
8. DURATION AND TERMINATION OF AGREEMENT. This Agreement shall become
effective on February 28, 1989, provided that on December 30, 1988, it is
approved by a majority of the holders of the outstanding voting securities
of the Fund. This Agreement shall continue in effect until February 1,
1990, and for successive 12-month periods thereafter, unless terminated,
provided that each such continuance is specifically approved at least
annually by (a) the vote of the majority of the entire Board of Directors
of the Fund, and the vote of the majority of those directors who are not
parties to this Agreement or interested persons (as such terms are defined
in the 1940 Act) of any such party cast in person at a meeting called for
the purpose of voting on such approval, or (b) by the vote of a majority of
the outstanding voting securities of the Fund (as defined in the 1940 Act).
Upon this Agreement becoming effective, any previous Agreement between the
Fund and SMC providing for investment advisory, administrative or transfer
agency services shall concurrently terminate, except that such termination
shall not affect any fees accrued and guarantees of expenses with respect
to any period prior to termination.
This Agreement may be terminated at any time without payment of any
penalty, by the Fund upon the vote of a majority of the Fund's Board of
Directors or, by a majority of the outstanding voting securities of the
Fund, or by SMC, in each case on sixty (60) days' written notice to the
other party. This Agreement shall automatically terminate in the event of
its assignment (as such term is defined in the 1940 Act).
9. SEVERABILITY. If any clause or provision of this Agreement is determined to
be illegal, invalid or unenforceable under present or future laws effective
during the term hereof, then such clause or provision shall be considered
severed herefrom and the remainder of this Agreement shall continue in full
force and effect.
<PAGE>
10. APPLICABLE LAW. This Agreement shall be subject to and construed in
accordance with the laws of the State of Kansas.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective officers thereto duly authorized on the day,
month and year first above written.
SECURITY ULTRA FUND
By MICHAEL J. PROVINES
---------------------------------------
Michael J. Provines
President
(Corporate Seal)
ATTEST:
AMY J. LEE
- -----------------------
Secretary
SECURITY MANAGEMENT COMPANY
By MICHAEL J. PROVINES
---------------------------------------
Michael J. Provines
President
(Corporate Seal)
ATTEST:
AMY J. LEE
- -----------------------
Secretary
<PAGE>
SCHEDULE A
INVESTMENT ADVISORY, ADMINISTRATIVE SERVICES
AND TRANSFER AGENCY AGREEMENT
SCHEDULE OF ADMINISTRATIVE AND FUND ACCOUNTING FACILITIES AND SERVICES
Security Management Company agrees to provide the Fund the following
administrative facilities and services:
1. FUND AND PORTFOLIO ACCOUNTING
a. Maintenance of Fund General Ledger and Journal.
b. Preparing and recording disbursements for direct Fund expenses.
c. Preparing daily money transfers.
d. Reconciliation of all Fund bank and custodian accounts.
e. Assisting Fund independent auditors as appropriate.
f. Prepare daily projection of available cash balances.
g. Record trading activity for purposes of determining net asset values
and daily dividend.
h. Prepare daily portfolio evaluation report to value portfolio
securities and determine daily accrued income.
i. Determine the daily net asset value per share.
j. Determine the daily, monthly, quarterly, semiannual or annual dividend
per share.
k. Prepare monthly, quarterly, semiannual and annual financial
statements.
l. Provide financial information for reports to the Securities and
Exchange Commission in compliance with the provisions of the
Investment Company Act of 1940 and the Securities Act of 1933, the
Internal Revenue Service and any other regulatory agencies as
required.
m. Provide financial, yield, net asset value, etc. information to NASD
and other survey and statistical agencies as instructed by the Fund.
n. Reports to the Audit Committee of the Board of Directors, if
applicable.
2. LEGAL
a. Provide registration and other administrative services necessary to
qualify the shares of the Fund for sale in those jurisdictions
determined from time to time by the Fund's Board of Directors
(commonly known as "Blue Sky Registration").
b. Provide registration with and reports to the Securities and Exchange
Commission in compliance with the provisions of the Investment Company
Act of 1940 and the Securities Act of 1933.
c. Prepare and review Fund Prospectus and Statement of Additional
Information.
<PAGE>
d. Prepare proxy statements and oversee proxy tabulation for annual
meetings.
e. Prepare Board materials and maintain minutes of the Board meetings.
f. Draft, review and maintain contractual agreements between Fund and
Investment Adviser, Custodian, Distributor and Transfer Agent.
g. Oversee printing of proxy statements, financial reports to
shareholders, prospectuses and Statements of Additional Information.
h. Provide legal advice and oversight regarding shareholder transactions,
administrative services, compliance with contractual agreements and
the provisions of the 1940 and 1933 Acts.
SCHEDULE OF SHARE TRANSFER AND DIVIDEND DISBURSING SERVICES
Security Management Company agrees to provide the Fund the following
transfer agency and dividend disbursing services:
1. Maintenance of shareholder accounts, including processing of new accounts.
2. Posting address changes and other file maintenance for shareholder
accounts.
3. Posting all transactions to the shareholder file, including:
a. Direct purchases
b. Wire order purchases
c. Direct redemptions
d. Wire order redemptions
e. Draft redemptions
f. Direct exchanges
g. Transfers
h. Certificate issuances
i. Certificate deposits
<PAGE>
4. Monitor fiduciary processing, insuring accuracy and deduction of fees.
5. Prepare daily reconciliations of shareholder processing to money movement
instructions.
6. Handle bounced check collections. Immediately liquidate shares purchased
and return to the shareholder the check and confirmation of the
transaction.
7. Issuing all checks and stopping and replacing lost checks.
8. Draft clearing services.
a. Maintenance of signature cards and appropriate corporate resolutions
b. Comparison of the signature on the check to the signatures on the
signature card for the purpose of paying the face amount of the check
only
c. Receiving checks presented for payment and liquidating shares after
verifying account balance
d. Ordering checks in quantity specified by the Fund for the shareholder
9. Mailing confirmations, checks and/or certificates resulting from
transaction requests to shareholders.
10. Performing all of the Fund's other mailings, including:
a. Dividend and capital gain distributions
b. Semiannual and annual reports
c. 1099/year-end shareholder reporting
d. Systematic withdrawal plan payments
e. Daily confirmations
11. Answering all service related telephone inquiries from shareholders and
others, including:
a. General and policy inquiries (research and resolve problems)
b. Fund yield inquiries
c. Taking shareholder processing requests and account maintenance changes
by telephone as described above
<PAGE>
d. Submit pending requests to correspondence
e. Monitor on-line statistical performance of unit
f. Develop reports on telephone activity
12. Respond to written inquiries (research and resolve problems), including:
a. Initiate shareholder account reconciliation proceeding when
appropriate
b. Notify shareholder of bounced investment checks
c. Respond to financial institutions regarding verification of deposit
d. Initiate proceedings regarding lost certificates
e. Respond to complaints and log activities
f. Correspondence control
13. Maintaining and retrieving all required past history for shareholders and
provide research capabilities as follows:
a. Daily monitoring of all processing activity to verify back-up
documentation
b. Provide exception reports
c. Microfilming
d. Storage, retrieval and archive
14. Prepare materials for annual meetings.
a. Address and mail annual proxy and related material
b. Prepare and submit to Fund an affidavit of mailing
c. Furnish certified list of shareholders (hard copy or microfilm) and
inspectors of elections
15. Report and remit as necessary for state escheat requirements.
Approved: Fund M. J. PROVINES SMC M. J. PROVINES
--------------------- ------------------------
<PAGE>
AMENDMENT TO INVESTMENT MANAGEMENT AND SERVICES AGREEMENT
WHEREAS, Security Ultra Fund (the "Fund") and Security Management Company
("SMC") are parties to an Investment Management and Services Agreement dated
December 30, 1988 (the "Agreement"), under which SMC agrees to provide
investment research and advice, general administrative, fund accounting,
transfer agency and dividend disbursing services to the Fund in return for the
compensation specified in the Agreement;
WHEREAS, effective October 19, 1993, the Fund will offer its shares in two
classes, Class A shares which are currently being offered, and a new class,
Class B shares;
WHEREAS, the Fund has adopted a Distribution Plan with respect to its Class B
shares and, as a result, such shares are subject to distribution fees to which
Class A shares are not subject;
WHEREAS, the distribution fees associated with Class B shares require the
amendment of the Agreement relative to that class of shares;
WHEREAS, on October 1, 1993, the initial Class B shareholder of the Fund
approved such amendment to this Agreement;
WHEREAS, the changes to the Agreement which are contemplated by this Amendment
do not affect the interests of Class A shareholders of the Fund;
NOW, THEREFORE, the Fund and SMC hereby amend the Investment Management and
Services Agreement, dated December 8, 1988, effective October 1, 1993, as
follows:
A. SMC agrees to provide investment research and advice, general
administrative, fund accounting, transfer agency and dividend disbursing
services to the Fund pursuant to the terms and conditions set forth in the
Agreement, as amended in section B below.
B. Paragraph 2(b) of the Agreement shall be deleted in its entirety and the
following paragraph inserted in lieu thereof:
(b) EXPENSES OF THE FUND. Anything in this Agreement to the contrary
notwithstanding, the Fund shall pay, or reimburse SMC for the payment
of, the following described expenses of the Fund whether or not billed
to the Fund, SMC or any related entity;
(i) brokerage fees and commissions;
(ii) taxes;
(iii) interest expenses;
(iv) any extraordinary expenses approved by the Board of Directors
of the Fund; and
(v) distribution fees paid under the Fund's Class B
Distribution Plan.
<PAGE>
C. Paragraph 3(b) shall be deleted in its entirety and the following paragraph
inserted in lieu thereof:
(b) For each of the Fund's fiscal years this Agreement remains in force,
SMC agrees that if total annual expenses of the Fund, exclusive of
interest and taxes, extraordinary expenses (such as litigation) and
distribution fees paid under the Fund's Class B Distribution Plan, but
inclusive of SMC's compensation, exceed any expense limitation imposed
by state securities law or regulation in any state in which shares of
the Fund are then qualified for sale, as such regulations may be
amended from time to time, SMC will contribute to the Fund such funds
or waive such portion of its fee, adjusted monthly, as may be
requisite to insure that such annual expenses will not exceed any such
limitation. If this Agreement shall be effective for only a portion of
any fiscal year, then the maximum annual expenses shall be prorated
for such portion. Brokerage fees and commissions incurred in
connection with the purchase or sale of any securities by the Fund
shall not be deemed to be expenses within the meaning of this
paragraph (b).
IN WITNESS WHEREOF, the parties hereto have made this Amendment to the
Investment Management and Services Agreement this 1st day of October 1993.
SECURITY ULTRA FUND
By: MICHAEL J. PROVINES
-------------------------------
ATTEST:
AMY J. LEE
- ------------------------------
Amy J. Lee, Secretary
SECURITY MANAGEMENT COMPANY
By: MICHAEL J. PROVINES
-------------------------------
ATTEST:
AMY J. LEE
- ------------------------------
Amy J. Lee, Secretary
<PAGE>
AMENDMENT TO
INVESTMENT MANAGEMENT AND SERVICES AGREEMENT
WHEREAS, Security Ultra Fund (the "Fund") and Security Management Company (
"SMC") are parties to an Investment Management and Services Agreement, dated
December 30, 1988, as amended (the "Agreement"), under which SMC agrees to
provide investment research and advice, general administrative, fund accounting,
transfer agency and dividend disbursing services to the Fund in return for the
compensation specified in the Agreement;
WHEREAS, on October 31, 1996, the operations of SMC, a Kansas corporation, will
be transferred to Security Management Company, LLC ("SMC, LLC"), a Kansas
limited liability company; and
WHEREAS, SMC, LLC desires to assume all rights, duties and obligations of SMC
under the Agreement.
NOW THEREFORE, in consideration of the premises and mutual agreements made
herein, the parties hereto agree as follows:
1. The Agreement is hereby amended to substitute SMC, LLC for SMC, with the
same effect as though SMC, LLC were the originally named management
company, effective November 1, 1996;
2. SMC, LLC agrees to assume the rights, duties and obligations of SMC
pursuant to the terms of the Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to
Investment Management and Services Agreement this 1st day of November, 1996.
SECURITY ULTRA FUND SECURITY MANAGEMENT COMPANY, LLC
By: JOHN D. CLELAND By: JAMES R. SCHMANK
-------------------------------- ---------------------------------
John D. Cleland, President James R. Schmank, President
ATTEST: ATTEST:
AMY J. LEE AMY J. LEE
- ------------------------ ------------------------------
Amy J. Lee, Secretary Amy J. Lee, Secretary
<PAGE>
CUSTODY AGREEMENT
DATED JANUARY 1, 1995
BETWEEN
UMB BANK, N.A.
AND
SECURITY MANAGEMENT COMPANY
FAMILY OF FUNDS
<PAGE>
TABLE OF CONTENTS
SECTION PAGE
1. APPOINTMENT OF CUSTODIAN 1
2. DEFINITIONS 1
(a) Securities 1
(b) Assets 1
(c) Instructions and Special Instructions 1
3. DELIVERY OF CORPORATE DOCUMENTS 2
4. POWERS AND DUTIES OF CUSTODIAN AND DOMESTIC SUBCUSTODIAN 3
(a) Safekeeping 3
(b) Manner of Holding Securities 4
(c) Free Delivery of Assets 6
(d) Exchange of Securities 6
(e) Purchases of Assets 6
(f) Sales of Assets 7
(g) Options 8
(h) Futures Contracts 8
(i) Segregated Accounts 9
(j) Depository Receipts 9
(k) Corporate Actions, Put Bonds, Called Bonds, Etc. 10
(l) Interest Bearing Deposits 10
(m) Foreign Exchange Transactions Other than as Principal 11
(n) Pledges or Loans of Securities 11
(o) Stock Dividends, Rights, Etc. 12
(p) Routine Dealings 12
(q) Collections 12
(r) Bank Accounts 13
(s) Dividends, Distributions and Redemptions 13
(t) Proceeds from Shares Sold 13
(u) Proxies and Notices; Compliance with the Shareholders
Communication Act of 1985 14
(v) Books and Records 14
(w) Opinion of Fund's Independent Certified Public Accountants 14
(x) Reports by Independent Certified Public Accountants 14
(y) Bills and Other Disbursements 15
<PAGE>
5. SUBCUSTODIANS 15
(a) Domestic Subcustodians 15
(b) Foreign Subcustodians 15
(c) Interim Subcustodians 16
(d) Special Subcustodians 17
(e) Termination of a Subcustodian 17
(f) Certification Regarding Foreign Subcustodians 17
6. STANDARD OF CARE 17
(a) General Standard of Care 17
(b) Actions Prohibited by Applicable Law, Events Beyond Custodian's
Control, Armed Conflict, Sovereign Risk, Etc. 18
(c) Liability for Past Records 18
(d) Advice of Counsel 18
(e) Advice of the Fund and Others 19
(f) Instructions Appearing to be Genuine 19
(g) Exceptions from Liability 19
7. LIABILITY OF THE CUSTODIAN FOR ACTIONS OF OTHERS 20
(a) Domestic Subcustodians 20
(b) Liability for Acts and Omissions of Foreign Subcustodians 20
(c) Securities Systems, Interim Subcustodians, Special
Subcustodians, Securities Depositories and Clearing Agencies 20
(d) Defaults or Insolvencies of Brokers, Banks, Etc. 20
(e) Reimbursement of Expenses 20
8. INDEMNIFICATION 21
(a) Indemnification by Fund 21
(b) Indemnification by Custodian 21
9. ADVANCES 21
10. LIENS 22
11. COMPENSATION 22
12. POWERS OF ATTORNEY 22
13. TERMINATION AND ASSIGNMENT 23
14. ADDITIONAL FUNDS 23
15. NOTICES 23
16. MISCELLANEOUS 24
<PAGE>
CUSTODY AGREEMENT
This agreement made as of this 1st day of January, 1995, between UMB Bank, n.a.,
a national banking association with its principal place of business located at
Kansas City, Missouri (hereinafter "Custodian"), and each of the Funds which
have executed the signature page hereof together with such additional Funds
which shall be made parties to this Agreement by the execution of a separate
signature page hereto (individually, a "Fund" and collectively, the "Funds").
WITNESSETH:
WHEREAS, each Fund is registered as an open-end management investment company
under the Investment Company Act of 1940, as amended; and
WHEREAS, each Fund desires to appoint Custodian as its custodian for the custody
of Assets (as hereinafter defined) owned by such Fund which Assets are to be
held in such accounts as such Fund may establish from time to time; and
WHEREAS, Custodian is willing to accept such appointment on the terms and
conditions hereof.
NOW, THEREFORE, in consideration of the mutual promises contained herein, the
parties hereto, intending to be legally bound, mutually covenant and agree as
follows:
1. APPOINTMENT OF CUSTODIAN.
Each Fund hereby constitutes and appoints the Custodian as custodian of
Assets belonging to each such Fund which have been or may be from time to
time deposited with the Custodian. Custodian accepts such appointment as a
custodian and agrees to perform the duties and responsibilities of
Custodian as set forth herein on the conditions set forth herein.
2. DEFINITIONS.
For purposes of this Agreement, the following terms shall have the meanings
so indicated:
(a) "Security" or "Securities" shall mean stocks, bonds, bills, rights,
script, warrants, interim certificates and all negotiable or
nonnegotiable paper commonly known as Securities and other
instruments or obligations.
(b) "Assets" shall mean Securities, monies and other property held by
the Custodian for the benefit of a Fund.
(c)(1) "Instructions", as used herein, shall mean: (i) a tested telex, a
written (including, without limitation, facsimile transmission)
request, direction, instruction or
1
<PAGE>
certification signed or initialed by or on behalf of a Fund by an
Authorized Person; (ii) a telephonic or other oral communication
from a person the Custodian reasonably believes to be an Authorized
Person; or (iii) a communication effected directly between an
electro-mechanical or electronic device or system (including,
without limitation, computers) on behalf of a Fund. Instructions in
the form of oral communications shall be confirmed by the
appropriate Fund by tested telex or in writing in the manner set
forth in clause (i) above, but the lack of such confirmation shall
in no way affect any action taken by the Custodian in reliance upon
such oral Instructions prior to the Custodian's receipt of such
confirmation. Each Fund authorizes the Custodian to record any and
all telephonic or other oral Instructions communicated to the
Custodian.
(c)(2) "Special Instructions", as used herein, shall mean Instructions
countersigned or confirmed in writing by the Treasurer or any
Assistant Treasurer of a Fund or any other person designated by the
Treasurer of such Fund in writing, which countersignature or
confirmation shall be included on the same instrument containing
the Instructions or on a separate instrument relating thereto.
(c)(3) Instructions and Special Instructions shall be delivered to the
Custodian at the address and/or telephone, facsimile transmission
or telex number agreed upon from time to time by the Custodian and
each Fund.
(c)(4) Where appropriate, Instructions and Special Instructions shall be
continuing instructions.
3. DELIVERY OF CORPORATE DOCUMENTS.
Each of the parties to this Agreement represents that its execution does
not violate any of the provisions of its respective charter, articles of
incorporation, articles of association or bylaws and all required corporate
action to authorize the execution and delivery of this Agreement has been
taken.
Each Fund has furnished the Custodian with copies, properly certified or
authenticated, with all amendments or supplements thereto, of the following
documents:
(a) Certificate of Incorporation (or equivalent document) of the Fund
as in effect on the date hereof;
(b) By-Laws of the Fund as in effect on the date hereof;
(c) Resolutions of the Board of Directors of the Fund appointing the
Custodian and approving the form of this Agreement; and
(d) The Fund's current prospectus and statements of additional
information.
2
<PAGE>
Each Fund shall promptly furnish the Custodian with copies of any updates,
amendments or supplements to the foregoing documents.
In addition, each Fund has delivered or will promptly deliver to the
Custodian, copies of the Resolution(s) of its Board of Directors or
Trustees and all amendments or supplements thereto, properly certified or
authenticated, designating certain officers or employees of each such Fund
who will have continuing authority to certify to the Custodian: (a) the
names, titles, signatures and scope of authority of all persons authorized
to give Instructions or any other notice, request, direction, instruction,
certificate or instrument on behalf of each Fund, and (b) the names, titles
and signatures of those persons authorized to countersign or confirm
Special Instructions on behalf of each Fund (in both cases collectively,
the "Authorized Persons" and individually, an "Authorized Person"). Such
Resolutions and certificates may be accepted and relied upon by the
Custodian as conclusive evidence of the facts set forth therein and shall
be considered to be in full force and effect until delivery to the
Custodian of a similar Resolution or certificate to the contrary. Upon
delivery of a certificate which deletes or does not include the name(s) of
a person previously authorized to give Instructions or to countersign or
confirm Special Instructions, such persons shall no longer be considered an
Authorized Person authorized to give Instructions or to countersign or
confirm Special Instructions. Unless the certificate specifically requires
that the approval of anyone else will first have been obtained, the
Custodian will be under no obligation to inquire into the right of the
person giving such Instructions or Special Instructions to do so.
Notwithstanding any of the foregoing, no Instructions or Special
Instructions received by the Custodian from a Fund will be deemed to
authorize or permit any director, trustee, officer, employee, or agent of
such Fund to withdraw any of the Assets of such Fund upon the mere receipt
of such authorization, Special Instructions or Instructions from such
director, trustee, officer, employee or agent.
4. POWERS AND DUTIES OF CUSTODIAN AND DOMESTIC SUBCUSTODIAN.
Except for Assets held by any Subcustodian appointed pursuant to Sections
5(b), (c), or (d) of this Agreement, the Custodian shall have and perform
the powers and duties hereinafter set forth in this Section 4. For purposes
of this Section 4 all references to powers and duties of the "Custodian"
shall also refer to any Domestic Subcustodian appointed pursuant to Section
5(a).
(a) SAFEKEEPING.
The Custodian will keep safely the Assets of each Fund which are
delivered to it from time to time. The Custodian shall not be
responsible for any property of a Fund held or received by such
Fund and not delivered to the Custodian.
3
<PAGE>
(b) MANNER OF HOLDING SECURITIES.
(1) The Custodian shall at all times hold Securities of each Fund
either: (i) by physical possession of the share certificates
or other instruments representing such Securities in
registered or bearer form; or (ii) in book-entry form by a
Securities System (as hereinafter defined) in accordance with
the provisions of sub-paragraph (3) below.
(2) The Custodian may hold registrable portfolio Securities which
have been delivered to it in physical form, by registering the
same in the name of the appropriate Fund or its nominee, or in
the name of the Custodian or its nominee, for whose actions
such Fund and Custodian, respectively, shall be fully
responsible. Upon the receipt of Instructions, the Custodian
shall hold such Securities in street certificate form, so
called, with or without any indication of fiduciary capacity.
However, unless it receives Instructions to the contrary, the
Custodian will register all such portfolio Securities in the
name of the Custodian's authorized nominee. All such
Securities shall be held in an account of the Custodian
containing only assets of the appropriate Fund or only assets
held by the Custodian as a fiduciary, provided that the
records of the Custodian shall indicate at all times the Fund
or other customer for which such Securities are held in such
accounts and the respective interests therein.
(3) The Custodian may deposit and/or maintain domestic Securities
owned by a Fund in, and each Fund hereby approves use of: (a)
The Depository Trust Company; (b) The Participants Trust
Company; and (c) any book-entry system as provided in (i)
Subpart 0 of Treasury Circular No. 300, 31 CFR 306.115, (ii)
Subpart B of Treasury Circular Public Debt Series No. 27-76,
31 CFR 350.2, or (iii) the book-entry regulations of federal
agencies substantially in the form of 31 CFR 306.115. Upon the
receipt of Special Instructions, the Custodian may deposit
and/or maintain domestic Securities owned by a Fund in any
other domestic clearing agency registered with the Securities
and Exchange Commission ("SEC") under Section 17A of the
Securities Exchange Act of 1934 (or as may otherwise be
authorized by the SEC to serve in the capacity of depository
or clearing agent for the Securities or other assets of
investment companies) which acts as a Securities depository.
Each of the foregoing shall be referred to in this Agreement
as a "Securities System", and all such Securities Systems
shall be listed on the attached Appendix A. Use of a
Securities System shall be in accordance with applicable
Federal Reserve Board and SEC rules and regulations, if any,
and subject to the following provisions:
(i) The Custodian may deposit the Securities directly or
through one or more agents or Subcustodians which are
also qualified to act as custodians for investment
companies.
4
<PAGE>
(ii) The Custodian shall deposit and/or maintain the
Securities in a Securities System, provided that such
Securities are represented in an account ("Account") of
the Custodian in the Securities System that includes
only assets held by the Custodian as a fiduciary,
custodian or otherwise for customers.
(iii) The books and records of the Custodian shall at all
times identify those Securities belonging to any one or
more Funds which are maintained in a Securities System.
(iv) The Custodian shall pay for Securities purchased for
the account of a Fund only upon (a) receipt of advice
from the Securities System that such Securities have
been transferred to the Account of the Custodian in
accordance with the rules of the Securities System, and
(b) the making of an entry on the records of the
Custodian to reflect such payment and transfer for the
account of such Fund. The Custodian shall transfer
Securities sold for the account of a Fund only upon (a)
receipt of advice from the Securities System that
payment for such Securities has been transferred to the
Account of the Custodian in accordance with the rules
of the Securities System, and (b) the making of an
entry on the records of the Custodian to reflect such
transfer and payment for the account of such Fund.
Copies of all advices from the Securities System
relating to transfers of Securities for the account of
a Fund shall be maintained for such Fund by the
Custodian. The Custodian shall deliver to a Fund on the
next succeeding business day daily transaction reports
which shall include each day's transactions in the
Securities System for the account of such Fund. Such
transaction reports shall be delivered to such Fund or
any agent designated by such Fund pursuant to
Instructions, by computer or in such other manner as
such Fund and Custodian may agree.
(v) The Custodian shall, if requested by a Fund pursuant to
Instructions, provide such Fund with reports obtained
by the Custodian or any Subcustodian with respect to a
Securities System's accounting system, internal
accounting control and procedures for safeguarding
Securities deposited in the Securities System.
(vi) Upon receipt of Special Instructions, the Custodian
shall terminate the use of any Securities System on
behalf of a Fund as promptly as practicable and shall
take all actions reasonably practicable to safeguard
the Securities of such Fund maintained with such
Securities System.
5
<PAGE>
(c) FREE DELIVERY OF ASSETS.
Notwithstanding any other provision of this Agreement and except as
provided in Section 3 hereof, the Custodian, upon receipt of
Special Instructions, will undertake to make free delivery of
Assets, provided such Assets are on hand and available, in
connection with a Fund's transactions and to transfer such Assets
to such broker, dealer, Subcustodian, bank, agent, Securities
System or otherwise as specified in such Special Instructions.
(d) EXCHANGE OF SECURITIES.
Upon receipt of Instructions, the Custodian will exchange portfolio
Securities held by it for a Fund for other Securities or cash paid
in connection with any reorganization, recapitalization, merger,
consolidation, or conversion of convertible Securities, and will
deposit any such Securities in accordance with the terms of any
reorganization or protective plan.
Without Instructions, the Custodian is authorized to exchange
Securities held by it in temporary form for Securities in
definitive form, to surrender Securities for transfer into a name
or nominee name as permitted in Section 4(b)(2), to effect an
exchange of shares in a stock split or when the par value of the
stock is changed, to sell any fractional shares, and, upon
receiving payment therefor, to surrender bonds or other Securities
held by it at maturity or call.
(e) PURCHASE OF ASSETS.
(1) SECURITIES PURCHASES. In accordance with Instructions, the
Custodian shall, with respect to a purchase of Securities, pay
for such Securities out of monies held for a Fund's account
for which the purchase was made, but only insofar as monies
are available therein for such purpose, and receive the
portfolio Securities so purchased. Unless the Custodian has
received Special Instructions to the contrary, such payment
will be made only upon receipt of Securities by the Custodian,
a clearing corporation of a national Securities exchange of
which the Custodian is a member, or a Securities System in
accordance with the provisions of Section 4(b)(3) hereof.
Notwithstanding the foregoing, upon receipt of Instructions:
(i) in connection with a repurchase agreement, the Custodian
may release funds to a Securities System prior to the receipt
of advice from the Securities System that the Securities
underlying such repurchase agreement have been transferred by
book-entry into the Account maintained with such Securities
System by the Custodian, provided that the Custodian's
instructions to the Securities System require that the
Securities System may make payment of such funds to the other
party to the repurchase agreement only upon transfer by
book-entry of the Securities underlying the repurchase
agreement into such Account; (ii) in the case of Interest
Bearing Deposits, currency deposits, and
6
<PAGE>
other deposits, foreign exchange transactions, futures
contracts or options, pursuant to Sections 4(g), 4(h), 4(1),
and 4(m) hereof, the Custodian may make payment therefor
before receipt of an advice of transaction; and (iii) in the
case of Securities as to which payment for the Security and
receipt of the instrument evidencing the Security are under
generally accepted trade practice or the terms of the
instrument representing the Security expected to take place in
different locations or through separate parties, such as
commercial paper which is indexed to foreign currency exchange
rates, derivatives and similar Securities, the Custodian may
make payment for such Securities prior to delivery thereof in
accordance with such generally accepted trade practice or the
terms of the instrument representing such Security.
(2) OTHER ASSETS PURCHASED. Upon receipt of Instructions and
except as otherwise provided herein, the Custodian shall pay
for and receive other Assets for the account of a Fund as
provided in Instructions.
(f) SALES OF ASSETS.
(1) SECURITIES SOLD. In accordance with Instructions, the
Custodian will, with respect to a sale, deliver or cause to be
delivered the Securities thus designated as sold to the broker
or other person specified in the Instructions relating to such
sale. Unless the Custodian has received Special Instructions
to the contrary, such delivery shall be made only upon receipt
of payment therefor in the form of: (a) cash, certified check,
bank cashier's check, bank credit, or bank wire transfer; (b)
credit to the account of the Custodian with a clearing
corporation of a national Securities exchange of which the
Custodian is a member; or (c) credit to the Account of the
Custodian with a Securities System, in accordance with the
provisions of Section 4(b)(3) hereof. Notwithstanding the
foregoing, Securities held in physical form may be delivered
and paid for in accordance with "street delivery custom" to a
broker or its clearing agent, against delivery to the
Custodian of a receipt for such Securities, provided that the
Custodian shall have taken reasonable steps to ensure prompt
collection of the payment for, or return of, such Securities
by the broker or its clearing agent, and provided further that
the Custodian shall not be responsible for the selection of or
the failure or inability to perform of such broker or its
clearing agent or for any related loss arising from delivery
or custody of such Securities prior to receiving payment
therefor.
(2) OTHER ASSETS SOLD. Upon receipt of Instructions and except as
otherwise provided herein, the Custodian shall receive payment
for and deliver other Assets for the account of a Fund as
provided in Instructions.
7
<PAGE>
(g) OPTIONS.
(1) Upon receipt of Instructions relating to the purchase of an
option or sale of a covered call option, the Custodian shall:
(a) receive and retain confirmations or other documents, if
any, evidencing the purchase or writing of the option by a
Fund; (b) if the transaction involves the sale of a covered
call option, deposit and maintain in a segregated account the
Securities (either physically or by book-entry in a Securities
System) subject to the covered call option written on behalf
of such Fund; and (c) pay, release and/or transfer such
Securities, cash or other Assets in accordance with any
notices or other communications evidencing the expiration,
termination or exercise of such options which are furnished to
the Custodian by the Options Clearing Corporation (the "OCC"),
the securities or options exchanges on which such options were
traded, or such other organization as may be responsible for
handling such option transactions.
(2) Upon receipt of Instructions relating to the sale of a naked
option (including stock index and commodity options), the
Custodian, the appropriate Fund and the broker-dealer shall
enter into an agreement to comply with the rules of the OCC or
of any registered national securities exchange or similar
organizations(s). Pursuant to that agreement and such Fund's
Instructions, the Custodian shall: (a) receive and retain
confirmations or other documents, if any, evidencing the
writing of the option; (b) deposit and maintain in a
segregated account, Securities (either physically or by
book-entry in a Securities System), cash and/or other Assets;
and (c) pay, release and/or transfer such Securities, cash or
other Assets in accordance with any such agreement and with
any notices or other communications evidencing the expiration,
termination or exercise of such option which are furnished to
the Custodian by the OCC, the securities or options exchanges
on which such options were traded, or such other organization
as may be responsible for handling such option transactions.
The appropriate Fund and the broker-dealer shall be
responsible for determining the quality and quantity of assets
held in any segregated account established in compliance with
applicable margin maintenance requirements and the performance
of other terms of any option contract.
(h) FUTURES CONTRACTS.
Upon receipt of Instructions, the Custodian shall enter into a
futures margin procedural agreement among the appropriate Fund, the
Custodian and the designated futures commission merchant (a
"Procedural Agreement"). Under the Procedural Agreement the
Custodian shall: (a) receive and retain confirmations, if any,
evidencing the purchase or sale of a futures contract or an option
on a futures contract by such Fund; (b) deposit and maintain in a
segregated account cash, Securities and/or other Assets designated
as initial, maintenance or variation
8
<PAGE>
"margin" deposits intended to secure such Fund's performance of its
obligations under any futures contracts purchased or sold, or any
options on futures contracts written by such Fund, in accordance
with the provisions of any Procedural Agreement designed to comply
with the provisions of the Commodity Futures Trading Commission
and/or any commodity exchange or contract market (such as the
Chicago Board of Trade), or any similar organization(s), regarding
such margin deposits; and (c) release Assets from and/or transfer
Assets into such margin accounts only in accordance with any such
Procedural Agreements. The appropriate Fund and such futures
commission merchant shall be responsible for determining the type
and amount of Assets held in the segregated account or paid to the
broker-dealer in compliance with applicable margin maintenance
requirements and the performance of any futures contract or option
on a futures contract in accordance with its terms.
(i) SEGREGATED ACCOUNTS.
Upon receipt of Instructions, the Custodian shall establish and
maintain on its books a segregated account or accounts for and on
behalf of a Fund, into which account or accounts may be transferred
Assets of such Fund, including Securities maintained by the
Custodian in a Securities System pursuant to Paragraph (b)(3) of
this Section 4, said account or accounts to be maintained (i) for
the purposes set forth in Sections 4(g), 4(h) and 4(n) and (ii) for
the purpose of compliance by such Fund with the procedures required
by the SEC Investment Company Act Release Number 10666 or any
subsequent release or releases relating to the maintenance of
segregated accounts by registered investment companies, or (iii)
for such other purposes as may be set forth, from time to time, in
Special Instructions. The Custodian shall not be responsible for
the determination of the type or amount of Assets to be held in any
segregated account referred to in this paragraph, or for compliance
by the Fund with required procedures noted in (ii) above.
(j) DEPOSITORY RECEIPTS.
Upon receipt of Instructions, the Custodian shall surrender or
cause to be surrendered Securities to the depositary used for such
Securities by an issuer of American Depositary Receipts or
International Depositary Receipts (hereinafter referred to,
collectively, as "ADRs"), against a written receipt therefor
adequately describing such Securities and written evidence
satisfactory to the organization surrendering the same that the
depositary has acknowledged receipt of instructions to issue ADRs
with respect to such Securities in the name of the Custodian or a
nominee of the Custodian, for delivery in accordance with such
instructions.
Upon receipt of Instructions, the Custodian shall surrender or
cause to be surrendered ADRs to the issuer thereof, against a
written receipt therefor adequately describing the ADRs surrendered
and written evidence satisfactory to the organization surrendering
the same that the issuer of the ADRs has
9
<PAGE>
acknowledged receipt of instructions to cause its depository to
deliver the Securities underlying such ADRs in accordance with such
instructions.
(k) CORPORATE ACTIONS, PUT BONDS, CALLED BONDS, ETC.
Upon receipt of Instructions, the Custodian shall: (a) deliver
warrants, puts, calls, rights or similar Securities to the issuer
or trustee thereof (or to the agent of such issuer or trustee) for
the purpose of exercise or sale, provided that the new Securities,
cash or other Assets, if any, acquired as a result of such actions
are to be delivered to the Custodian; and (b) deposit Securities
upon invitations for tenders thereof, provided that the
consideration for such Securities is to be paid or delivered to the
Custodian, or the tendered Securities are to be returned to the
Custodian.
Notwithstanding any provision of this Agreement to the contrary,
the Custodian shall take all necessary action, unless otherwise
directed to the contrary in Instructions, to comply with the terms
of all mandatory or compulsory exchanges, calls, tenders,
redemptions, or similar rights of security ownership, and shall
notify the appropriate Fund of such action in writing by facsimile
transmission or in such other manner as such Fund and Custodian may
agree in writing.
The Fund agrees that if it gives an Instruction for the performance
of an act on the last permissible date of a period established by
any optional offer or on the last permissible date for the
performance of such act, the Fund shall hold the Bank harmless from
any adverse consequences in connection with acting upon or failing
to act upon such Instructions.
(l) INTEREST BEARING DEPOSITS.
Upon receipt of Instructions directing the Custodian to purchase
interest bearing fixed term and call deposits (hereinafter referred
to, collectively, as "Interest Bearing Deposits") for the account
of a Fund, the Custodian shall purchase such Interest Bearing
Deposits in the name of such Fund with such banks or trust
companies, including the Custodian, any Subcustodian or any
subsidiary or affiliate of the Custodian (hereinafter referred to
as "Banking Institutions"), and in such amounts as such Fund may
direct pursuant to Instructions. Such Interest Bearing Deposits may
be denominated in U.S. dollars or other currencies, as such Fund
may determine and direct pursuant to Instructions. The
responsibilities of the Custodian to a Fund for Interest Bearing
Deposits issued by the Custodian shall be that of a U.S. bank for a
similar deposit. With respect to Interest Bearing Deposits other
than those issued by the Custodian, (a) the Custodian shall be
responsible for the collection of income and the transmission of
cash to and from such accounts; and (b) the Custodian shall have no
duty with respect to the selection of the Banking Institution or
for the failure of such Banking Institution to pay upon demand.
10
<PAGE>
(m) FOREIGN EXCHANGE TRANSACTIONS OTHER THAN AS PRINCIPAL.
(1) Upon receipt of Instructions, the Custodian shall settle
foreign exchange contracts or options to purchase and sell
foreign currencies for spot and future delivery on behalf of
and for the account of a Fund with such currency brokers or
Banking Institutions as such Fund may determine and direct
pursuant to Instructions. Each Fund accepts full
responsibility for its use of third party foreign exchange
brokers and for execution of said foreign exchange contracts
and understands that the Fund shall be responsible for any and
all costs and interest charges which may be incurred as a
result of the failure or delay of its third party broker to
deliver foreign exchange. The Custodian shall have no
responsibility with respect to the selection of the currency
brokers or Banking Institutions with which a Fund deals or, so
long as the Custodian acts in accordance with Instructions,
for the failure of such brokers or Banking Institutions to
comply with the terms of any contract or option.
(2) Notwithstanding anything to the contrary contained herein,
upon receipt of Instructions the Custodian may, in connection
with a foreign exchange contract, make free outgoing payments
of cash in the form of U.S. Dollars or foreign currency prior
to receipt of confirmation of such foreign exchange contract
or confirmation that the countervalue currency completing such
contract has been delivered or received.
(n) PLEDGES OR LOANS OF SECURITIES.
(1) Upon receipt of Instructions from a Fund, the Custodian will
release or cause to be released Securities held in custody to
the pledgees designated in such Instructions by way of pledge
or hypothecation to secure loans incurred by such Fund with
various lenders including but not limited to UMB Bank, n.a.;
provided, however, that the Securities shall be released only
upon payment to the Custodian of the monies borrowed, except
that in cases where additional collateral is required to
secure existing borrowings, further Securities may be released
or delivered, or caused to be released or delivered for that
purpose upon receipt of Instructions. Upon receipt of
Instructions, the Custodian will pay, but only from funds
available for such purpose, any such loan upon re-delivery to
it of the Securities pledged or hypothecated therefor and upon
surrender of the note or notes evidencing such loan. In lieu
of delivering collateral to a pledgee, the Custodian, on the
receipt of Instructions, shall transfer the pledged Securities
to a segregated account for the benefit of the pledgee.
11
<PAGE>
(2) Upon receipt of Special Instructions, and execution of a
separate Securities Lending Agreement, the Custodian will
release Securities held in custody to the borrower designated
in such Instructions and may, except as otherwise provided
below, deliver such Securities prior to the receipt of
collateral, if any, for such borrowing, provided that, in case
of loans of Securities held by a Securities System that are
secured by cash collateral, the Custodian's instructions to
the Securities System shall require that the Securities System
deliver the Securities of the appropriate Fund to the borrower
thereof only upon receipt of the collateral for such
borrowing. The Custodian shall have no responsibility or
liability for any loss arising from the delivery of Securities
prior to the receipt of collateral. Upon receipt of
Instructions and the loaned Securities, the Custodian will
release the collateral to the borrower.
(o) STOCK DIVIDENDS, RIGHTS, ETC.
The Custodian shall receive and collect all stock dividends,
rights, and other items of like nature and, upon receipt of
Instructions, take action with respect to the same as directed in
such Instructions.
(p) ROUTINE DEALINGS.
The Custodian will, in general, attend to all routine and
mechanical matters in accordance with industry standards in
connection with the sale, exchange, substitution, purchase,
transfer, or other dealings with Securities or other property of
each Fund except as may be otherwise provided in this Agreement or
directed from time to time by Instructions from any particular
Fund. The Custodian may also make payments to itself or others from
the Assets for disbursements and out-of-pocket expenses incidental
to handling Securities or other similar items relating to its
duties under this Agreement, provided that all such payments shall
be accounted for to the appropriate Fund.
(q) COLLECTIONS.
The Custodian shall (a) collect amounts due and payable to each
Fund with respect to portfolio Securities and other Assets; (b)
promptly credit to the account of each Fund all income and other
payments relating to portfolio Securities and other Assets held by
the Custodian hereunder upon Custodian's receipt of such income or
payments or as otherwise agreed in writing by the Custodian and any
particular Fund; (c) promptly endorse and deliver any instruments
required to effect such collection; and (d) promptly execute
ownership and other certificates and affidavits for all federal,
state, local and foreign tax purposes in connection with receipt of
income or other payments with respect to portfolio Securities and
other Assets, or in connection with the transfer of such Securities
or other Assets; provided, however, that with respect to portfolio
Securities registered in so-called street name, or physical
Securities with variable interest rates, the Custodian shall use
its
12
<PAGE>
best efforts to collect amounts due and payable to any such Fund.
The Custodian shall notify a Fund in writing by facsimile
transmission or in such other manner as such Fund and Custodian may
agree in writing if any amount payable with respect to portfolio
Securities or other Assets is not received by the Custodian when
due. The Custodian shall not be responsible for the collection of
amounts due and payable with respect to portfolio Securities or
other Assets that are in default.
(r) BANK ACCOUNTS.
Upon Instructions, the Custodian shall open and operate a bank
account or accounts on the books of the Custodian; provided that
such bank account(s) shall be in the name of the Custodian or a
nominee thereof, for the account of one or more Funds, and shall be
subject only to draft or order of the Custodian. The
responsibilities of the Custodian to any one or more such Funds for
deposits accepted on the Custodian's books shall be that of a U.S.
bank for a similar deposit.
(s) DIVIDENDS, DISTRIBUTIONS AND REDEMPTIONS.
To enable each Fund to pay dividends or other distributions to
shareholders of each such Fund and to make payment to shareholders
who have requested repurchase or redemption of their shares of each
such Fund (collectively, the "Shares"), the Custodian shall release
cash or Securities insofar as available. In the case of cash, the
Custodian shall, upon the receipt of Instructions, transfer such
funds by check or wire transfer to any account at any bank or trust
company designated by each such Fund in such Instructions. In the
case of Securities, the Custodian shall, upon the receipt of
Special Instructions, make such transfer to any entity or account
designated by each such Fund in such Special Instructions.
(t) PROCEEDS FROM SHARES SOLD.
The Custodian shall receive funds representing cash payments
received for shares issued or sold from time to time by each Fund,
and shall credit such funds to the account of the appropriate Fund.
The Custodian shall notify the appropriate Fund of Custodian's
receipt of cash in payment for shares issued by such Fund by
facsimile transmission or in such other manner as such Fund and the
Custodian shall agree. Upon receipt of Instructions, the Custodian
shall: (a) deliver all federal funds received by the Custodian in
payment for shares as may be set forth in such Instructions and at
a time agreed upon between the Custodian and such Fund; and (b)
make federal funds available to a Fund as of specified times agreed
upon from time to time by such Fund and the Custodian, in the
amount of checks received in payment for shares which are deposited
to the accounts of such Fund.
13
<PAGE>
(u) PROXIES AND NOTICES; COMPLIANCE WITH THE SHAREHOLDERS COMMUNICATION
ACT OF 1985.
The Custodian shall deliver or cause to be delivered to the
appropriate Fund all forms of proxies, all notices of meetings, and
any other notices or announcements affecting or relating to
Securities owned by such Fund that are received by the Custodian,
any Subcustodian, or any nominee of either of them, and, upon
receipt of Instructions, the Custodian shall execute and deliver,
or cause such Subcustodian or nominee to execute and deliver, such
proxies or other authorizations as may be required. Except as
directed pursuant to Instructions, neither the Custodian nor any
Subcustodian or nominee shall vote upon any such Securities, or
execute any proxy to vote thereon, or give any consent or take any
other action with respect thereto.
The Custodian will not release the identity of any Fund to an
issuer which requests such information pursuant to the Shareholder
Communications Act of 1985 for the specific purpose of direct
communications between such issuer and any such Fund unless a
particular Fund directs the Custodian otherwise in writing.
(v) BOOKS AND RECORDS.
The Custodian shall maintain such records relating to its
activities under this Agreement as are required to be maintained by
Rule 31a-1 under the Investment Company Act of 1940 ("the 1940
Act") and to preserve them for the periods prescribed in Rule 31a-2
under the 1940 Act. These records shall be open for inspection by
duly authorized officers, employees or agents (including
independent public accountants) of the appropriate Fund during
normal business hours of the Custodian.
The Custodian shall provide accountings relating to its activities
under this Agreement as shall be agreed upon by each Fund and the
Custodian.
(w) OPINION OF FUND'S INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.
The Custodian shall take all reasonable action as each Fund may
request to obtain from year to year favorable opinions from each
such Fund's independent certified public accountants with respect
to the Custodian's activities hereunder and in connection with the
preparation of each such Fund's periodic reports to the SEC and
with respect to any other requirements of the SEC.
(x) REPORTS BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.
At the request of a Fund, the Custodian shall deliver to such Fund
a written report prepared by the Custodian's independent certified
public accountants with respect to the services provided by the
Custodian under this Agreement, including, without
14
<PAGE>
limitation, the Custodian's accounting system, internal accounting
control and procedures for safeguarding cash, Securities and other
Assets, including cash, Securities and other Assets deposited
and/or maintained in a Securities System or with a Subcustodian.
Such report shall be of sufficient scope and in sufficient detail
as may reasonably be required by such Fund and as may reasonably be
obtained by the Custodian.
(y) BILLS AND OTHER DISBURSEMENTS.
Upon receipt of Instructions, the Custodian shall pay, or cause to
be paid, all bills, statements, or other obligations of a Fund.
5. SUBCUSTODIANS.
From time to time, in accordance with the relevant provisions of this
Agreement, the Custodian may appoint one or more Domestic Subcustodians,
Foreign Subcustodians, Special Subcustodians, or Interim Subcustodians (as
each are hereinafter defined) to act on behalf of any one or more Funds. A
Domestic Subcustodian, in accordance with the provisions of this Agreement,
may also appoint a Foreign Subcustodian, Special Subcustodian, or Interim
Subcustodian to act on behalf of any one or more Funds. For purposes of
this Agreement, all Domestic Subcustodians, Foreign Subcustodians, Special
Subcustodians and Interim Subcustodians shall be referred to collectively
as "Subcustodians".
(a) DOMESTIC SUBCUSTODIANS.
The Custodian may, at any time and from time to time, appoint any
bank as defined in Section 2(a)(5) of the 1940 Act or any trust
company or other entity, any of which meet the requirements of a
custodian under Section 17(f) of the 1940 Act and the rules and
regulations thereunder, to act for the Custodian on behalf of any
one or more Funds as a subcustodian for purposes of holding Assets
of such Fund(s) and performing other functions of the Custodian
within the United States (a "Domestic Subcustodian"). Each Fund
shall approve in writing the appointment of the proposed Domestic
Subcustodian; and the Custodian's appointment of any such Domestic
Subcustodian shall not be effective without such prior written
approval of the Fund(s). Each such duly approved Domestic
Subcustodian shall be listed on Appendix A attached hereto, as it
may be amended, from time to time.
(b) FOREIGN SUBCUSTODIANS.
The Custodian may at any time appoint, or cause a Domestic
Subcustodian to appoint, any bank, trust company or other entity
meeting the requirements of an "eligible foreign custodian" under
Section 17(f) of the 1940 Act and the rules and regulations
thereunder to act for the Custodian on behalf of any one or more
Funds as a subcustodian or sub-subcustodian (if appointed by a
Domestic Subcustodian)
15
<PAGE>
for purposes of holding Assets of the Fund(s) and performing other
functions of the Custodian in countries other than the United
States of America (hereinafter referred to as a "Foreign
Subcustodian" in the context of either a subcustodian or a
sub-subcustodian); provided that the Custodian shall have obtained
written confirmation from each Fund of the approval of the Board of
Directors or other governing body of each such Fund (which approval
may be withheld in the sole discretion of such Board of Directors
or other governing body or entity) with respect to (i) the identity
of any proposed Foreign Subcustodian (including branch
designation), (ii) the country or countries in which, and the
securities depositories or clearing agencies (hereinafter
"Securities Depositories and Clearing Agencies"), if any, through
which, the Custodian or any proposed Foreign Subcustodian is
authorized to hold Securities and other Assets of each such Fund,
and (iii) the form and terms of the subcustodian agreement to be
entered into with such proposed Foreign Subcustodian. Each such
duly approved Foreign Subcustodian and the countries where and the
Securities Depositories and Clearing Agencies through which they
may hold Securities and other Assets of the Fund(s) shall be listed
on Appendix A attached hereto, as it may be amended, from time to
time. Each Fund shall be responsible for informing the Custodian
sufficiently in advance of a proposed investment which is to be
held in a country in which no Foreign Subcustodian is authorized to
act, in order that there shall be sufficient time for the
Custodian, or any Domestic Subcustodian, to effect the appropriate
arrangements with a proposed Foreign Subcustodian, including
obtaining approval as provided in this Section 5(b). In connection
with the appointment of any Foreign Subcustodian, the Custodian
shall, or shall cause the Domestic Subcustodian to, enter into a
subcustodian agreement with the Foreign Subcustodian in form and
substance approved by each such Fund. The Custodian shall not
consent to the amendment of, and shall cause any Domestic
Subcustodian not to consent to the amendment of, any agreement
entered into with a Foreign Subcustodian, which materially affects
any Fund's rights under such agreement, except upon prior written
approval of such Fund pursuant to Special Instructions.
(c) INTERIM SUBCUSTODIANS.
Notwithstanding the foregoing, in the event that a Fund shall
invest in an Asset to be held in a country in which no Foreign
Subcustodian is authorized to act, the Custodian shall notify such
Fund in writing by facsimile transmission or in such other manner
as such Fund and the Custodian shall agree in writing of the
unavailability of an approved Foreign Subcustodian in such country;
and upon the receipt of Special Instructions from such Fund, the
Custodian shall, or shall cause its Domestic Subcustodian to,
appoint or approve an entity (referred to herein as an "Interim
Subcustodian") designated in such Special Instructions to hold such
Security or other Asset.
16
<PAGE>
(d) SPECIAL SUBCUSTODIANS.
Upon receipt of Special Instructions, the Custodian shall on behalf
of a Fund, appoint one or more banks, trust companies or other
entities designated in such Special Instructions to act for the
Custodian on behalf of such Fund as a subcustodian for purposes of:
(i) effecting third-party repurchase transactions with banks,
brokers, dealers or other entities through the use of a common
custodian or subcustodian; (ii) providing depository and clearing
agency services with respect to certain variable rate demand note
Securities, (iii) providing depository and clearing agency services
with respect to dollar denominated Securities, and (iv) effecting
any other transactions designated by such Fund in such Special
Instructions. Each such designated subcustodian (hereinafter
referred to as a "Special Subcustodian") shall be listed on
Appendix A attached hereto, as it may be amended from time to time.
In connection with the appointment of any Special Subcustodian, the
Custodian shall enter into a subcustodian agreement with the
Special Subcustodian in form and substance approved by the
appropriate Fund in Special Instructions. The Custodian shall not
amend any subcustodian agreement entered into with a Special
Subcustodian, or waive any rights under such agreement, except upon
prior approval pursuant to Special Instructions.
(e) TERMINATION OF A SUBCUSTODIAN.
The Custodian may, at any time in its discretion upon notification
to the appropriate Fund(s), terminate any Subcustodian of such
Fund(s) in accordance with the termination provisions under the
applicable subcustodian agreement, and upon the receipt of Special
Instructions, the Custodian will terminate any Subcustodian in
accordance with the termination provisions under the applicable
subcustodian agreement.
(f) CERTIFICATION REGARDING FOREIGN SUBCUSTODIANS.
Upon request of a Fund, the Custodian shall deliver to such Fund a
certificate stating: (i) the identity of each Foreign Subcustodian
then acting on behalf of the Custodian; (ii) the countries in which
and the Securities Depositories and Clearing Agencies through which
each such Foreign Subcustodian is then holding cash, Securities and
other Assets of such Fund; and (iii) such other information as may
be requested by such Fund, and as the Custodian shall be reasonably
able to obtain, to evidence compliance with rules and regulations
under the 1940 Act.
6. STANDARD OF CARE.
(a) GENERAL STANDARD OF CARE.
The Custodian shall be liable to a Fund for all losses, damages and
reasonable costs and expenses suffered or incurred by such Fund
resulting from the gross
17
<PAGE>
negligence or willful misfeasance of the Custodian; provided,
however, in no event shall the Custodian be liable for special,
indirect or consequential damages arising under or in connection
with this Agreement.
(b) ACTIONS PROHIBITED BY APPLICABLE LAW, EVENTS BEYOND CUSTODIAN'S
CONTROL, SOVEREIGN RISK, ETC.
In no event shall the Custodian or any Domestic Subcustodian incur
liability hereunder if the Custodian or any Subcustodian or
Securities System, or any subcustodian, Securities System,
Securities Depository or Clearing Agency utilized by the Custodian
or any such Subcustodian, or any nominee of the Custodian or any
Subcustodian (individually, a "Person") is prevented, forbidden or
delayed from performing, or omits to perform, any act or thing
which this Agreement provides shall be performed or omitted to be
performed, by reason of: (i) any provision of any present or future
law or regulation or order of the United States of America, or any
state thereof, or of any foreign country, or political subdivision
thereof or of any court of competent jurisdiction (and neither the
Custodian nor any other Person shall be obligated to take any
action contrary thereto); or (ii) any event beyond the control of
the Custodian or other Person such as armed conflict, riots,
strikes, lockouts, labor disputes, equipment or transmission
failures, natural disasters, or failure of the mails,
transportation, communications or power supply; or (iii) any
"Sovereign Risk." A "Sovereign Risk" shall mean nationalization,
expropriation, devaluation, revaluation, confiscation, seizure,
cancellation, destruction or similar action by any governmental
authority, de facto or de jure; or enactment, promulgation,
imposition or enforcement by any such governmental authority of
currency restrictions, exchange controls, taxes, levies or other
charges affecting a Fund's Assets; or acts of armed conflict,
terrorism, insurrection or revolution; or any other act or event
beyond the Custodian's or such other Person's control.
(c) LIABILITY FOR PAST RECORDS.
Neither the Custodian nor any Domestic Subcustodian shall have any
liability in respect of any loss, damage or expense suffered by a
Fund, insofar as such loss, damage or expense arises from the
performance of the Custodian or any Domestic Subcustodian in
reliance upon records that were maintained for such Fund by
entities other than the Custodian or any Domestic Subcustodian
prior to the Custodian's employment hereunder.
(d) ADVICE OF COUNSEL.
The Custodian and all Domestic Subcustodians shall be entitled to
receive and act upon advice of counsel of its own choosing on all
matters. The Custodian and all Domestic Subcustodians shall be
without liability for any actions taken or omitted in good faith
pursuant to the advice of counsel.
18
<PAGE>
(e) ADVICE OF THE FUND AND OTHERS.
The Custodian and any Domestic Subcustodian may rely upon the
advice of any Fund and upon statements of such Fund's accountants
and other persons believed by it in good faith to be expert in
matters upon which they are consulted, and neither the Custodian
nor any Domestic Subcustodian shall be liable for any actions taken
or omitted, in good faith, pursuant to such advice or statements.
(f) INSTRUCTIONS APPEARING TO BE GENUINE.
The Custodian and all Domestic Subcustodians shall be fully
protected and indemnified in acting as a custodian hereunder upon
any Resolutions of the Board of Directors or Trustees,
Instructions, Special Instructions, advice, notice, request,
consent, certificate, instrument or paper appearing to it to be
genuine and to have been properly executed and shall, unless
otherwise specifically provided herein, be entitled to receive as
conclusive proof of any fact or matter required to be ascertained
from any Fund hereunder a certificate signed by any officer of such
Fund authorized to countersign or confirm Special Instructions.
(g) EXCEPTIONS FROM LIABILITY.
Without limiting the generality of any other provisions hereof,
neither the Custodian nor any Domestic Subcustodian shall be under
any duty or obligation to inquire into, nor be liable for:
(i) the validity of the issue of any Securities purchased by or
for any Fund, the legality of the purchase thereof or
evidence of ownership required to be received by any such
Fund, or the propriety of the decision to purchase or amount
paid therefor;
(ii) the legality of the sale of any Securities by or for any
Fund, or the propriety of the amount for which the same were
sold; or
(iii) any other expenditures, encumbrances of Securities,
borrowings or similar actions with respect to any Fund's
Assets;
and may, until notified to the contrary, presume that all
Instructions or Special Instructions received by it are not in
conflict with or in any way contrary to any provisions of any such
Fund's Declaration of Trust, Partnership Agreement, Articles of
Incorporation or By-Laws or votes or proceedings of the
shareholders, trustees, partners or directors of any such Fund, or
any such Fund's currently effective Registration Statement on file
with the SEC.
19
<PAGE>
7. LIABILITY OF THE CUSTODIAN FOR ACTIONS OF OTHERS.
(a) DOMESTIC SUBCUSTODIANS
The Custodian shall be liable for the acts or omissions of any
Domestic Subcustodian to the same extent as if such actions or
omissions were performed by the Custodian itself.
(b) LIABILITY FOR ACTS AND OMISSIONS OF FOREIGN SUBCUSTODIANS.
The Custodian shall be liable to a Fund for any loss or damage to
such Fund caused by or resulting from the acts or omissions of any
Foreign Subcustodian to the extent that, under the terms set forth
in the subcustodian agreement between the Custodian or a Domestic
Subcustodian and such Foreign Subcustodian, the Foreign
Subcustodian has failed to perform in accordance with the standard
of conduct imposed under such subcustodian agreement and the
Custodian or Domestic Subcustodian recovers from the Foreign
Subcustodian under the applicable subcustodian agreement.
(c) SECURITIES SYSTEMS, INTERIM SUBCUSTODIANS, SPECIAL SUBCUSTODIANS,
SECURITIES DEPOSITORIES AND CLEARING AGENCIES.
The Custodian shall not be liable to any Fund for any loss, damage
or expense suffered or incurred by such Fund resulting from or
occasioned by the actions or omissions of a Securities System,
Interim Subcustodian, Special Subcustodian, or Securities
Depository and Clearing Agency unless such loss, damage or expense
is caused by, or results from, the gross negligence or willful
misfeasance of the Custodian.
(d) DEFAULTS OR INSOLVENCIES OF BROKERS, BANKS, ETC.
The Custodian shall not be liable for any loss, damage or expense
suffered or incurred by any Fund resulting from or occasioned by
the actions, omissions, neglects, defaults or insolvency of any
broker, bank, trust company or any other person with whom the
Custodian may deal (other than any of such entities acting as a
Subcustodian, Securities System or Securities Depository and
Clearing Agency, for whose actions the liability of the Custodian
is set out elsewhere in this Agreement) unless such loss, damage or
expense is caused by, or results from, the gross negligence or
willful misfeasance of the Custodian.
(e) REIMBURSEMENT OF EXPENSES.
Each Fund agrees to reimburse the Custodian for all out-of-pocket
expenses incurred by the Custodian in connection with this
Agreement, but excluding salaries and usual overhead expenses.
20
<PAGE>
8. INDEMNIFICATION.
(a) INDEMNIFICATION BY FUND.
Subject to the limitations set forth in this Agreement, each Fund
agrees to indemnify and hold harmless the Custodian and its
nominees from all losses, damages and expenses (including
attorneys' fees) suffered or incurred by the Custodian or its
nominee caused by or arising from actions taken by the Custodian,
its employees or agents in the performance of its duties and
obligations under this Agreement, including, but not limited to,
any indemnification obligations undertaken by the Custodian under
any relevant subcustodian agreement; provided, however, that such
indemnity shall not apply to the extent the Custodian is liable
under Sections 6 or 7 hereof.
If any Fund requires the Custodian to take any action with respect
to Securities, which action involves the payment of money or which
may, in the opinion of the Custodian, result in the Custodian or
its nominee assigned to such Fund being liable for the payment of
money or incurring liability of some other form, such Fund, as a
prerequisite to requiring the Custodian to take such action, shall
provide indemnity to the Custodian in an amount and form
satisfactory to it.
(b) INDEMNIFICATION BY CUSTODIAN.
Subject to the limitations set forth in this Agreement and in
addition to the obligations provided in Sections 6 and 7, the
Custodian agrees to indemnify and hold harmless each Fund from all
losses, damages and expenses suffered or incurred by each such Fund
caused by the gross negligence or willful misfeasance of the
Custodian.
9. ADVANCES.
In the event that, pursuant to Instructions, the Custodian or any
Subcustodian, Securities System, or Securities Depository or Clearing
Agency acting either directly or indirectly under agreement with the
Custodian (each of which for purposes of this Section 9 shall be referred
to as "Custodian"), makes any payment or transfer of funds on behalf of any
Fund as to which there would be, at the close of business on the date of
such payment or transfer, insufficient funds held by the Custodian on
behalf of any such Fund, the Custodian may, in its discretion without
further Instructions, provide an advance ("Advance") to any such Fund in an
amount sufficient to allow the completion of the transaction by reason of
which such payment or transfer of funds is to be made. In addition, in the
event the Custodian is directed by Instructions to make any payment or
transfer of funds on behalf of any Fund as to which it is subsequently
determined that such Fund has overdrawn its cash account with the Custodian
as of the close of business on the date of such payment or transfer, said
overdraft shall constitute an Advance. Any
21
<PAGE>
Advance shall be payable by the Fund on behalf of which the Advance was
made on demand by Custodian, unless otherwise agreed by such Fund and the
Custodian, and shall accrue interest from the date of the Advance to the
date of payment by such Fund to the Custodian at a rate agreed upon in
writing from time to time by the Custodian and such Fund. It is understood
that any transaction in respect of which the Custodian shall have made an
Advance, including but not limited to a foreign exchange contract or
transaction in respect of which the Custodian is not acting as a principal,
is for the account of and at the risk of the Fund on behalf of which the
Advance was made, and not, by reason of such Advance, deemed to be a
transaction undertaken by the Custodian for its own account and risk. The
Custodian and each of the Funds which are parties to this Agreement
acknowledge that the purpose of Advances is to finance temporarily the
purchase or sale of Securities for prompt delivery in accordance with the
settlement terms of such transactions or to meet emergency expenses not
reasonably foreseeable by a Fund. The Custodian shall promptly notify the
appropriate Fund of any Advance. Such notification shall be sent by
facsimile transmission or in such other manner as such Fund and the
Custodian may agree.
10. LIENS.
The Bank shall have a lien on the Property in the Custody Account to secure
payment of fees and expenses for the services rendered under this
Agreement. If the Bank advances cash or securities to the Fund for any
purpose or in the event that the Bank or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities
in connection with the performance of its duties hereunder, except such as
may arise from its or its nominee's negligent action, negligent failure to
act or willful misconduct, any Property at any time held for the Custody
Account shall be security therefor and the Fund hereby grants a security
interest therein to the Bank. The Fund shall promptly reimburse the Bank
for any such advance of cash or securities or any such taxes, charges,
expenses, assessments, claims or liabilities upon request for payment, but
should the Fund fail to so reimburse the Bank, the Bank shall be entitled
to dispose of such Property to the extent necessary to obtain
reimbursement. The Bank shall be entitled to debit any account of the Fund
with the Bank including, without limitation, the Custody Account, in
connection with any such advance and any interest on such advance as the
Bank deems reasonable.
11. COMPENSATION.
Each Fund will pay to the Custodian such compensation as is agreed to in
writing by the Custodian and each such Fund from time to time. Such
compensation, together with all amounts for which the Custodian is to be
reimbursed in accordance with Section 7(e), shall be billed to each such
Fund and paid in cash to the Custodian.
12. POWERS OF ATTORNEY.
Upon request, each Fund shall deliver to the Custodian such proxies, powers
of attorney or other instruments as may be reasonable and necessary or
desirable in connection with
22
<PAGE>
the performance by the Custodian or any Subcustodian of their respective
obligations under this Agreement or any applicable subcustodian agreement.
13. TERMINATION AND ASSIGNMENT.
Any Fund or the Custodian may terminate this Agreement by notice in
writing, delivered or mailed, postage prepaid (certified mail, return
receipt requested) to the other not less than 90 days prior to the date
upon which such termination shall take effect. Upon termination of this
Agreement, the appropriate Fund shall pay to the Custodian such fees as may
be due the Custodian hereunder as well as its reimbursable disbursements,
costs and expenses paid or incurred. Upon termination of this Agreement,
the Custodian shall deliver, at the terminating party's expense, all Assets
held by it hereunder to the appropriate Fund or as otherwise designated by
such Fund by Special Instructions. Upon such delivery, the Custodian shall
have no further obligations or liabilities under this Agreement except as
to the final resolution of matters relating to activity occurring prior to
the effective date of termination.
This Agreement may not be assigned by the Custodian or any Fund without the
respective consent of the other, duly authorized by a resolution by its
Board of Directors or Trustees.
14. ADDITIONAL FUNDS.
An additional Fund or Funds may become a party to this Agreement after the
date hereof by an instrument in writing to such effect signed by such Fund
or Funds and the Custodian. If this Agreement is terminated as to one or
more of the Funds (but less than all of the Funds) or if an additional Fund
or Funds shall become a party to this Agreement, there shall be delivered
to each party an Appendix B or an amended Appendix B, signed by each of the
additional Funds (if any) and each of the remaining Funds as well as the
Custodian, deleting or adding such Fund or Funds, as the case may be. The
termination of this Agreement as to less than all of the Funds shall not
affect the obligations of the Custodian and the remaining Funds hereunder
as set forth on the signature page hereto and in Appendix B as revised from
time to time.
15. NOTICES.
As to each Fund, notices, requests, instructions and other writings
delivered to THE SECURITY BENEFIT GROUP OF COMPANIES, 700 HARRISON, TOPEKA,
KS 66636-0001, postage prepaid, or to such other address as any particular
Fund may have designated to the Custodian in writing, shall be deemed to
have been properly delivered or given to a Fund.
Notices, requests, instructions and other writings delivered to the
Securities Administration Department of the Custodian at its office at 928
Grand Avenue, Kansas City, Missouri, or mailed postage prepaid, to the
Custodian's Securities Administration Department, Post Office Box 226,
Kansas City, Missouri 64141, or to such other addresses as the Custodian
may have designated to each Fund in writing, shall be deemed
23
<PAGE>
to have been properly delivered or given to the Custodian hereunder;
provided, however, that procedures for the delivery of Instructions and
Special Instructions shall be governed by Section 2(c) hereof..
16. MISCELLANEOUS.
(a) This Agreement is executed and delivered in the State of Missouri
and shall be governed by the laws of such state.
(b) All of the terms and provisions of this Agreement shall be binding
upon, and inure to the benefit of, and be enforceable by the
respective successors and assigns of the parties hereto.
(c) No provisions of this Agreement may be amended, modified or waived,
in any manner except in writing, properly executed by both parties
hereto; provided, however, Appendix A may be amended from time to
time as Domestic Subcustodians, Foreign Subcustodians, Special
Subcustodians, and Securities Depositories and Clearing Agencies
are approved or terminated according to the terms of this
Agreement.
(d) The captions in this Agreement are included for convenience of
reference only, and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
(e) This Agreement shall be effective as of the date of execution
hereof.
(f) This Agreement may be executed simultaneously in two or more
counterparts, each of which will be deemed an original, but all of
which together will constitute one and the same instrument.
(g) The following terms are defined terms within the meaning of this
Agreement, and the definitions thereof are found in the following
sections of the Agreement:
24
<PAGE>
TERM SECTION
Account 4(b)(3)(ii)
ADR'S 4(j)
Advance 9
Assets 2
Authorized Person 3
Banking Institution 4(l)
Domestic Subcustodian 5(a)
Foreign Subcustodian 5(b)
Instruction 2
Interim Subcustodian 5(c)
Interest Bearing Deposit 4(l)
Liability 10
OCC 4(g)(2)
Person 6(b)
Procedural Agreement 4(h)
SEC 4(b)(3)
Securities 2
Securities Depositories and Clearing Agencies 5(b)
Securities System 4(b)(3)
Shares 4(s)
Sovereign Risk 6(b)
Special Instruction 2
Special Subcustodian 5(c)
Subcustodian 5
1940 Act 4(v)
(h) If any part, term or provision of this Agreement is held to be
illegal, in conflict with any law or otherwise invalid by any court
of competent jurisdiction, the remaining portion or portions shall
be considered severable and shall not be affected, and the rights
and obligations of the parties shall be construed and enforced as
if this Agreement did not contain the particular part, term or
provision held to be illegal or invalid.
(i) This Agreement constitutes the entire understanding and agreement
of the parties hereto with respect to the subject matter hereof,
and accordingly supersedes, as of the effective date of this
Agreement, any custodian agreement heretofore in effect between the
Fund and the Custodian.
25
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Custody Agreement to be
executed by their respective duly authorized officers.
ATTEST: Security Ultra Fund
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: Security Equity Fund
Equity Series
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: Security Growth and Income Fund
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: Security Income Fund
Corporate Bond Series
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: Security Income Series
Limited Maturity Bond Series
AMY J. LEE By: JOHN D. CLELAND
Title: President
26
<PAGE>
ATTEST: Security Income Fund
U. S. Government Series
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: Security Tax-Exempt Fund
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: Security Cash Fund
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: SBL Fund
Series A, B, C, E, S and J
AMY J. LEE By: JOHN D. CLELAND
Title: President
ATTEST: UMB BANK, N.A.
R. WILLIAM BLOOM By: DAVID SWAN
Title: Senior Vice President
Date: 1/11/95
27
<PAGE>
APPENDIX A
CUSTODY AGREEMENT
DOMESTIC SUBCUSTODIANS:
United Missouri Trust Company of New York
SECURITIES SYSTEMS:
Federal Book Entry
Depository Trust Company
Participant's Trust Company
SPECIAL SUBCUSTODIANS:
Bank of New York
SECURITIES DEPOSITORIES
COUNTRIES FOREIGN SUBCUSTODIANS CLEARING AGENCIES
Euroclear
Security Income Fund
Security Ultra Fund Limited Maturity Bond Series
By: JOHN D. CLELAND By: JOHN D. CLELAND
Title: President Title: President
Security Equity Fund Security Income Fund
Equity Series U. S. Government Series
By: JOHN D. CLELAND By: JOHN D. CLELAND
Title: President Title: President
Security Growth and Income Fund SBL Fund
By: JOHN D. CLELAND By: JOHN D. CLELAND
Title: President Title: President
Security Income Fund
Corporate Bond Series UMB BANK, N.A.
By: JOHN D. CLELAND By: DAVID SWAN
Title: President Title: Senior Vice President
Date: 1/11/95
28
<PAGE>
AMENDMENT TO CUSTODY AGREEMENT
The following open-end management investment companies ("Funds") are hereby made
parties to the Custody Agreement dated January 1, 1995, with UMB Bank, n.a.
("Custodian"), and agree to be bound by all the terms and conditions contained
in said Agreement:
List of Funds
Security Income Fund, High Yield Series
SBL Fund, Series P
ATTEST: Security Income Fund
High Yield Series
AMY J. LEE
- ----------------------------------- By: JOHN D. CLELAND
-----------------------------------
Title: President
ATTEST: SBL Fund
Series P
AMY J. LEE
- ----------------------------------- By: JOHN D. CLELAND
-----------------------------------
Title: President
ATTEST: UMB BANK, N.A.
R.WM. BLOOM By: DAVID SWAN
- ----------------------------------- -----------------------------------
Title: Senior Vice President
Date: April 29, 1996
<PAGE>
AMENDMENT TO APPENDIX A
CUSTODY AGREEMENT
DOMESTIC SUBCUSTODIANS:
United Missouri Trust Company of New York
SECURITIES SYSTEMS:
Federal Book Entry
Depository Trust Company
Participant's Trust Company
SPECIAL SUBCUSTODIANS:
Bank of New York
SECURITIES DEPOSITORIES
COUNTRIES FOREIGN SUBCUSTODIANS CLEARING AGENCIES
Euroclear
Security Income Fund
High Yield Series
By: JAMES R. SCHMANK
-----------------------------------
Title: Vice President & Treasurer
SBL Fund
Series B
Series E
Series P
By: JAMES R. SCHMANK
-----------------------------------
Title: Vice President & Treasurer
UMB BANK, N.A.
By: RALPH SANTORO
-----------------------------------
Title: Vice President
Date: August 15, 1996
<PAGE>
AMENDMENT TO CUSTODY AGREEMENT
The following open-end management investment company ("Fund") is hereby made a
party to the Custody Agreement dated January 1, 1995, with UMB Bank, n.a.
("Custodian"), and agrees to be bound by all the terms and conditions contained
in said Agreement:
Security Equity Fund
Social Awareness Series
ATTEST: Security Equity Fund
Social Awareness Series
CHRIS SWICKARD
- -----------------------------------
By: JAMES R. SCHMANK
-----------------------------------
Title: Vice President and Treasurer
ATTEST: UMB BANK, N.A.
WILLIAM BLOEMKER By: RALPH SANTORO
- ----------------------------------- -----------------------------------
Title: Vice President
Date: August 15, 1996
<PAGE>
UMB Financial Corporation
CUSTODY FEE SCHEDULE
Security Management Group of Mutual Funds
- --------------------------------------------------------------------------------
NET ASSET VALUE CHARGES
A fee to be computed as of month-end and payable on the last day of each
month of the portfolios' fiscal year, at the annual rate of:
0.275 basis points on the combined net assets of all portfolios, subject to
a $100.00 per month minimum per portfolio.
PORTFOLIO TRANSACTION CHARGES
DTC Book-Entry Transactions* $5.00
PTC Book-Entry Transactions* 11.50
Federal Book-Entry Transactions* 7.50
Physical Transactions* 18.00
Third Party (Bank Book-Entry) Transactions 15.00
Principal and Interest Paydowns 3.00
Options/Futures 25.00
Corporate Actions/Calls/Reorgs 30.00
*A TRANSACTION INCLUDES BUYS, SELLS, MATURITIES, AND FREE SECURITY MOVEMENTS.
OUT OF POCKET EXPENSES
Including, but not limited to, security transfer fees, certificate fees,
shipping/courier fees or charges, FDIC insurance premiums, and remote
system access charges.
UMB Bank, N.A. agrees that the foregoing fees and charges will be in effect for
a period of three years beginning December 1, 1996, unless otherwise agreed by
the parties.
IN WITNESS WHEREOF, the parties hereto have executed this amendment to the
Custody Agreement dated January 1, 1995, this 26th day of November, 1996.
ATTEST: Security Ultra Fund
AMY J. LEE By: JOHN D. CLELAND
- -------------------------------- --------------------------------
Name: John D. Cleland
Title: President
ATTEST: Security Equity Fund
Equity Series
Social Awareness Series
AMY J. LEE By: JOHN D. CLELAND
- -------------------------------- --------------------------------
Name: John D. Cleland
Title: President
<PAGE>
ATTEST: Security Growth and Income Fund
AMY J. LEE By: JOHN D. CLELAND
- -------------------------------- --------------------------------
Name: John D. Cleland
Title: President
ATTEST: Security Income Fund
Corporate Bond Series
Limited Maturity Bond Series
U.S. Government Bond Series
High Yield Series
AMY J. LEE By: JOHN D. CLELAND
- -------------------------------- --------------------------------
Name: John D. Cleland
Title: President
ATTEST: Security Tax-Exempt Fund
AMY J. LEE By: JOHN D. CLELAND
- -------------------------------- --------------------------------
Name: John D. Cleland
Title: President
ATTEST: Security Cash Fund
AMY J. LEE By: JOHN D. CLELAND
- -------------------------------- --------------------------------
Name: John D. Cleland
Title: President
ATTEST: SBL Fund
Series A, B, C, E, S, J and P
AMY J. LEE By: JOHN D. CLELAND
- -------------------------------- --------------------------------
Name: John D. Cleland
Title: President
ATTEST: UMB Bank, N.A.
R. W. BLOOM By: PATRICIA A. PETERSON
- -------------------------------- --------------------------------
Name: Patricia A. Peterson
Title: Senior Vice President
<PAGE>
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Financial
Highlights" and "Independent Auditors" in the Registration Statement (Form N-1A)
and related prospectus of Security Ultra Fund and to the incorporation by
reference of our report dated November 1, 1996, with respect to the financial
statements of Security Ultra Fund included in its Annual Report to Shareholders
for the year ended September 30, 1996.
ERNST & YOUNG LLP
Ernst & Young LLP
Kansas City, Missouri
January 28, 1997
<PAGE>
Item 24.b. Exhibit (16)
SECURITY ULTRA FUND
A SHARES
Total Return from September 30, 1986, to September 30, 1996. Assuming Initial
Investment of $1,000 at offering price at the beginning of period $1,000/9.50
= 105.2632 shares.
Ending value of initial investment at September 30, 1996, NAV price = 105.2632
shares x 8.25 = $868.42.
Ending value of shares received from reinvestment of all dividends at NAV =
126.5734 shares x 8.25 = $1,044.23.
Total ending redeemable value: 868.42
+ 1,044.23
----------
1,912.65
Total Return: 1,912.65 - 1,000 = 912.65
912.65 / 1,000 = 91.27%
-----------------------------------------------
Calendar 1996 % change from previous year
= value at end of year............... 1,153.59
less value at beginning.............. 1,000.00
--------
153.59
Change 153.59
-------
Beginning Value 1,000.00 = +15.36%
<PAGE>
Item 24.b. Exhibit (16)
SECURITY ULTRA FUND
B SHARES
Total Return from October 19, 1993, to September 30, 1996. Assuming Initial
Investment of $1,000 at offering price at the beginning of period $1,000/8.30
= 120.4819 shares.
Ending value of initial investment at September 30, 1996, NAV price = 120.4819
shares x 8.03 = $967.47.
Ending value of shares received from reinvestment of all dividends at NAV =
41.9349 shares x 8.03 = $336.74.
Contingent deferred sales charge = $1,000 x .03 = $30.00.
Total ending redeemable value: 967.47
336.74
+ (30.00)
--------
1,274.21
Total Return: 1,274.21 - 1,000 = 274.21
274.21 / 1,000 = 27.42%
-----------------------------------------------
Calendar 1996 % change
= value at end of year............... 1,138
less value at beginning.............. 1,000
-----
138
Change 138
-----
Beginning Value 1,000 = 13.8%
<PAGE>
Item 24.b. Exhibit (16)
AVERAGE ANNUAL TOTAL RETURN
FOR SECURITY ULTRA FUND
Total Return of Security Ultra Fund as of September 30, 1996, (according to the
Form N-1A calculation).
A SHARES
1. Average total return for 1 year = 8.73%
=====
1000 (1+T)1 = 1,087.29
(1+T)1 = 1.08729
1+T = 1.08729
T = .08729
2. Average total return for 5 years = 10.61%
======
1000 (1+T)5 = 1,655.63
(1+T)5 = 1.65563
((1+T)5) 1/5 = 1.65563 1/5
1+T = 1.1061
T = .1061
3. Average total return for 10 years = 6.70%
=====
1000 (1+T)10 = 1,912.65
(1+T)10 = 1.91265
((1+T)10)1/10 = 1.91265 1/10
1+T = 1.0670
T = .0670
B SHARES
1. Average total return for 1 year with CDSC = 8.81%
=====
1000 (1+T)1 = 1,088.12
(1+T)1 = 1.08812
1+T = 1.08812
T = .08812
2. Average annual return since inception with CDSC = 8.56%
=====
1000 (1+T) 2 19/20 = 1,274.21
((1+T) 2 19/20)20/79 = 1.27421 20/59
1+T = 1.0856
T = .0856
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000088676
<NAME> SECURITY ULTRA FUND
<SERIES>
<NUMBER> 001
<NAME> CLASS A
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 54,337
<INVESTMENTS-AT-VALUE> 71,456
<RECEIVABLES> 152
<ASSETS-OTHER> 5,576
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 77,184
<PAYABLE-FOR-SECURITIES> 138
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 118
<TOTAL-LIABILITIES> 256
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 55,075
<SHARES-COMMON-STOCK> 8,995
<SHARES-COMMON-PRIOR> 8,054
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 4,735
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 17,119
<NET-ASSETS> 76,928
<DIVIDEND-INCOME> 260
<INTEREST-INCOME> 199
<OTHER-INCOME> 0
<EXPENSES-NET> 899
<NET-INVESTMENT-INCOME> (440)
<REALIZED-GAINS-CURRENT> 7,865
<APPREC-INCREASE-CURRENT> 2,292
<NET-CHANGE-FROM-OPS> 9,717
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 7,109
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,632
<NUMBER-OF-SHARES-REDEEMED> 3,688
<SHARES-REINVESTED> 997
<NET-CHANGE-IN-ASSETS> 8,178
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 4,919
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 862
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 899
<AVERAGE-NET-ASSETS> 65,929
<PER-SHARE-NAV-BEGIN> 8.20
<PER-SHARE-NII> (.05)
<PER-SHARE-GAIN-APPREC> 1.096
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (.996)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.25
<EXPENSE-RATIO> 1.31
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000088676
<NAME> SECURITY ULTRA FUND
<SERIES>
<NUMBER> 002
<NAME> CLASS B
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 54,337
<INVESTMENTS-AT-VALUE> 71,456
<RECEIVABLES> 152
<ASSETS-OTHER> 5,576
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 77,184
<PAYABLE-FOR-SECURITIES> 138
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 118
<TOTAL-LIABILITIES> 256
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 55,074
<SHARES-COMMON-STOCK> 336
<SHARES-COMMON-PRIOR> 669
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 4,735
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 17,119
<NET-ASSETS> 76,928
<DIVIDEND-INCOME> 260
<INTEREST-INCOME> 199
<OTHER-INCOME> 0
<EXPENSES-NET> 899
<NET-INVESTMENT-INCOME> (440)
<REALIZED-GAINS-CURRENT> 7,865
<APPREC-INCREASE-CURRENT> 2,292
<NET-CHANGE-FROM-OPS> 9,717
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 501
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 413
<NUMBER-OF-SHARES-REDEEMED> 821
<SHARES-REINVESTED> 75
<NET-CHANGE-IN-ASSETS> (2,730)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 4,919
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 862
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 899
<AVERAGE-NET-ASSETS> 65,929
<PER-SHARE-NAV-BEGIN> 8.11
<PER-SHARE-NII> (.13)
<PER-SHARE-GAIN-APPREC> 1.046
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> .996
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.03
<EXPENSE-RATIO> 2.31
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>