<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
SECURITY GROWTH AND INCOME FUND
SECURITY EQUITY FUND PROSPECTUS
EQUITY SERIES JANUARY 31, 1998
GLOBAL SERIES
VALUE SERIES
SMALL COMPANY 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 Value Fund ("Value Fund") is to seek
long-term growth of capital by investing primarily in a diversified portfolio of
common stocks, securities convertible into common stocks, preferred stocks, and
warrants which the Investment Manager believes are undervalued.
The investment objective of Security Small Company Fund ("Small Company Fund")
is long-term growth of capital. Small Company Fund seeks this objective
primarily through investment in domestic and foreign equity securities of small
market capitalization companies (defined as companies with market
capitalizations of less than $1 billion at the time of purchase).
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, 1998, which has been
filed with the Securities and Exchange Commission. The Statement of Additional
Information, as it may be supplemented from time to time, is incorporated by
reference in this Prospectus. It is available at no charge by writing Security
Distributors, Inc., 700 Harrison, Topeka, Kansas 66636-0001, or by calling (785)
431-3127 or (800) 888-2461.
- --------------------------------------------------------------------------------
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>
SECURITY FUNDS
CONTENTS
================================================================================
Page
Transaction and Operating Expense Table.................................... 1
Financial Highlights....................................................... 2
Investment Objective and Policies of the Funds............................. 8
Growth and Income Fund................................................... 8
Equity Fund.............................................................. 10
Global Fund.............................................................. 10
Value Fund............................................................... 12
Small Company Fund....................................................... 12
Ultra Fund............................................................... 13
Investment Methods and Risk Factors........................................ 14
Management of the Funds.................................................... 21
Portfolio Management..................................................... 22
How to Purchase Shares..................................................... 22
Alternative Purchase Options............................................. 23
Class A Shares........................................................... 24
Security Equity Fund's Class A Distribution Plan......................... 24
Class B Shares........................................................... 25
Class B Distribution Plan................................................ 25
Calculation and Waiver of Contingent Deferred Sales Charges.............. 26
Arrangements with Broker-Dealers and Others.............................. 26
Purchases at Net Asset Value............................................. 27
How to Redeem Shares....................................................... 27
Telephone Redemptions ................................................... 28
Dividends and Taxes........................................................ 28
Foreign Taxes............................................................ 29
Determination of Net Asset Value........................................... 29
Trading Practices and Brokerage............................................ 30
Performance................................................................ 30
Shareholder Services....................................................... 30
Accumulation Plan........................................................ 30
Systematic Withdrawal Program............................................ 31
Exchange Privilege....................................................... 31
Retirement Plans......................................................... 32
General Information........................................................ 32
Organization............................................................. 32
Stockholder Inquiries.................................................... 32
Appendix A - Class A Shares Reduced Sales Charges.......................... 33
Rights of Accumulation................................................... 33
Statement of Intention................................................... 33
Reinstatement Privilege.................................................. 33
- --------------------------------------------------------------------------------
<PAGE>
SECURITY FUNDS
PROSPECUTS
================================================================================
TRANSACTION AND OPERATING EXPENSE TABLE
- --------------------------------------------------------------------------------
CLASS A CLASS B
SHAREHOLDER TRANSACTION EXPENSES (ALL FUNDS) SHARES SHARES(1)
- -------------------------------------------- ------- ---------
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 None(2) 5% during the
purchase price or redemption proceeds, first year,
whichever is lower) decreasing to
0% in the sixth
and following
years
<TABLE>
<CAPTION>
GROWTH AND
INCOME FUND EQUITY FUND GLOBAL FUND
----------------- ----------------- -----------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of net assets)
Management Fees (after fee waivers)(3) 1.24% 1.24% 1.03% 1.03% 2.00% 2.00%
12b-1 Fees(4) None 1.00% None 1.00% None 1.00%
Other Expenses (after expense
reimbursements)(5),(6) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
---- ---- ---- ---- ---- ----
Total Fund Operating Expenses
(after waivers and
reimbursements)(6) 1.24% 2.24% 1.03% 2.03% 2.00% 3.00%
==== ==== ==== ==== ==== ====
EXAMPLE
You would pay the following 1 Year $ 69 $ 73 $ 67 $ 71 $ 77 $ 80
expenses on a $1,000 investment 3 Years 95 100 88 94 117 123
assuming (1) 5 percent annual 5 Years 122 140 111 129 159 178
return and (2) redemption at 10 Years 198 257 176 236 277 332
the end of each time period
EXAMPLE
You would pay the following 1 Year $ 69 $ 23 $ 67 $ 21 $ 77 $ 30
expenses on a $1,000 investment, 3 Years 95 70 88 64 117 93
assuming (1) 5 percent annual 5 Years 122 120 111 109 159 158
return and (2) no redemption 10 Years 198 257 176 236 277 332
<CAPTION>
SMALL
VALUE FUND COMPANY FUND ULTRA FUND
----------------- ----------------- -----------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
------- ------- ------- ------- ------- -------
ANNUAL FUND OPERATING EXPENSES
(as a percentage of net assets)
Management Fees (after fee waivers)(3) 1.00% 1.00% 0.00% 0.00% 1.71% 1.71%
12b-1 Fees(4) None 1.00% 0.25% 1.00% None 1.00%
Other Expenses (after expense
reimursements)(5),(6) 1.00% 1.00% 1.24% 1.24% 0.00% 0.00%
---- ---- ---- ---- ---- ----
Total Fund Operating Expenses
(after waivers and
reimbursements)(6) 2.00% 3.00% 1.49% 2.24% 1.71% 2.71%
==== ==== ==== ==== ==== ====
EXAMPLE
You would pay the following 1 Year $ 77 $ 80 $ 72 $ 73 $ 74 $ 77
expenses on a $1,000 investment 3 Years 117 123 102 100 108 114
assuming (1) 5 percent annual 5 Years -- -- -- -- 145 163
return and (2) redemption at the 10 Years -- -- -- -- 247 304
end of each time period
EXAMPLE
You would pay the following 1 Year $ 77 $ 30 $ 72 $ 23 $ 74 $ 27
expenses on a $1,000 investment, 3 Years 117 93 102 70 108 84
assuming (1) 5 percent annual 5 Years -- -- -- -- 145 143
return and (2) no redemption 10 Years -- -- -- 247 304
</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," page 24.
3 The Investment Manager has agreed to waive the investment advisory fee of the
Small Company Fund for the fiscal year ending September 30, 1998; absent such
fee waiver, "Management Fees" would have been 1.00%.
4 Long-term holders of shares that are subject to an asset-based sales charge
may pay more than the equivalent of the maximum front-end sales charge
otherwise permitted by NASD Rules.
5 The amount of "Other Expenses" of Value Fund and Small Company Fund is based
on estimated amounts for the period ending September 30, 1998.
6 The Investment Manager has agreed to waive the investment advisory fee of 1%
of Small Company Fund for the fiscal year ending September 30, 1998; absent
such fee waiver, the estimated "Total Fund Operating Expenses" would have
been 2.49% for Class A shares and 3.24% for Class B shares of Small Company
Fund. The Investment Manager has voluntarily agreed to limit the total
expenses of Class A and B shares of Value Fund (excluding interest, taxes,
brokerage commissions, extraordinary expenses and 12b-1 fees) to 2% of the
average net assets of the Fund. In the absence of such limitation, the amount
of estimated "Other Expenses" would have been 1.10% for Class A shares and
Class B shares, and estimated "Total Fund Operating Expenses" would have been
2.10% for Class A shares and 3.10% for Class B shares.
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, Value, Small Company 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 21. See "How to
Purchase Shares," page 23, 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, 1997, have been audited by Ernst & Young LLP. Such information for
each of the five years in the period ended September 30, 1997, 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, 1997
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, 1992, is not covered by
the report of Ernst & Young LLP.
<TABLE>
SECURITY GROWTH AND INCOME FUND (CLASS A)
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30
---------------------------------------------------------------------------------------------------
1997(g) 1996(g) 1995(g) 1994(g) 1993 1992 1991 1990 1989(b) 1988
------- ------- ------- ------- ---- ---- ---- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value beginning of
period ..................... $ 9.05 $ 7.93 $ 6.96 $ 7.84 $ 7.13 $ 7.31 $ 7.43 $ 9.06 $ 8.43 $ 8.33
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income ........ 0.144 0.18 0.16 0.13 0.21 0.35 0.45 0.52 0.44 0.54
Net gain (loss) on securities
(realized & unrealized) .... 2.813 1.373 1.183 (0.713) 0.876 (0.016) 0.992 (0.978) 1.114 0.55
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations ................. 2.957 1.553 1.343 (0.583) 1.086 0.334 1.442 (0.458) 1.554 1.09
LESS DISTRIBUTIONS
Dividends (from net investment
income) .................... (0.155) (0.158) (0.158) (0.128) (0.218) (0.343) (0.474) (0.509) (0.537) (0.54)
Distributions (from capital
gains)...................... (0.708) (0.275) (0.215) (0.169) (0.158) (0.171) (1.088) (0.663) (0.387) (0.45)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions .......... (0.863) (0.433) (0.373) (0.297) (0.376) (0.514) (1.562) (1.172) (0.924) (0.99)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value end of period $ 11.14 $ 9.05 $ 7.93 $ 6.96 $ 7.84 $ 7.13 $ 7.31 $ 7.43 $ 9.06 $ 8.43
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total return (a) ............. 35.31% 20.31% 20.25% (7.6)% 15.6% 4.7% 22.3% (5.8)% 19.9% 13.8%
RATIOS/SUPPLEMENTAL DATA
Net assets end of period
(thousands) ................ $91,252 $73,273 $67,430 $65,328 $81,982 $75,436 $77,418 $70,588 $84,964 $81,357
Ratio of expenses to
average net assets ......... 1.24% 1.29% 1.31% 1.28% 1.26% 1.27% 1.28% 1.28% 1.10% 0.78%
Ratio of net income to
average net assets ......... 1.53% 2.09% 2.21% 1.70% 2.80% 4.79% 6.14% 6.24% 5.93% 6.22%
Portfolio turnover rate ...... 124% 69% 130% 163% 135% 74% 103% 66% 49% 47%
Average commission paid per
equity share traded (h) .... $0.0600 $0.0625 N/A N/A N/A N/A N/A N/A N/A N/A
SECURITY GROWTH AND INCOME FUND (CLASS B)
FISCAL YEAR ENDED SEPTEMBER 30
---------------------------------------
1997(g) 1996(g) 1995(g) 1994(e)
------- ------- ------- -------
PER SHARE DATA
Net asset value beginning of
period ..................... $ 8.94 $ 7.85 $ 6.90 $ 7.83
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income ........ 0.048 0.09 0.08 0.05
Net gain (loss) on securities
(realized & unrealized) .... 2.776 1.353 1.179 (0.694)
------ ------ ------ ------
Total from investment
operations ................. 2.824 1.443 1.259 (0.644)
LESS DISTRIBUTIONS
Dividends (from net investment
income) .................... (0.063) (0.078) (0.094) (0.117)
Distributions (from capital
gains) ..................... (0.708) (0.275) (0.215) (0.169)
------ ------ ------ ------
Total distributions .......... (0.771) (0.353) (0.309) (0.286)
------ ------ ------ ------
Net asset value end of period $ 10.99 $ 8.94 $ 7.85 $ 6.90
====== ====== ====== ======
Total return (a) ............. 34.01% 19.01% 19.07% (8.00)%
RATIOS/SUPPLEMENTAL DATA
Net assets end of period
(thousands) ................ $ 6,737 $ 2,247 $ 1,130 $ 668
Ratio of expenses to
average net assets ......... 2.24% 2.29% 2.31% 2.27%
Ratio of net income to
average net assets ......... 0.53% 1.09% 1.21% 1.03%
Portfolio turnover rate ...... 124% 69% 130% 178%
Average commission paid per
equity share traded (h) .... $0.0600 $0.0625 N/A N/A
</TABLE>
- --------------------------------------------------------------------------------
2
<PAGE>
SECURITY FUNDS
FINANCIAL HIGHLIGHTS (CONTINUED)
================================================================================
<TABLE>
SECURITY EQUITY FUND (CLASS A)
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30
----------------------------------------------------------------------------------------------------
1997(g) 1996(g) 1995(g) 1994(g) 1993 1992 1991 1990 1989 1988
------- ------- ------- ------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value beginning of
period ..................... $ 7.54 $ 6.55 $ 5.54 $ 6.73 $ 5.86 $ 5.82 $ 4.82 $ 6.53 $ 4.74 $ 6.95
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income ........ 0.04 0.05 0.04 0.05 0.12 0.09 0.12 0.15 0.15 0.14
Net gain (loss) on securities
(realized & unrealized) .... 2.199 1.482 1.377 0.085 1.165 0.475 1.403 (1.115) 1.758 (1.05)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations ................. 2.239 1.532 1.417 0.135 1.285 0.565 1.523 (0.965) 1.908 (0.91)
LESS DISTRIBUTIONS
Dividends (from net investment
income)..................... (0.041) (0.060) -- (0.120) (0.053) (0.132) (0.148) (0.166) (0.118) (0.11)
Distributions (from capital
gains) ..................... (0.648) (0.482) (0.407) (1.205) (0.362) (0.393) (0.375) (0.579) -- (1.19)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions .......... (0.689) (0.542) (0.407) (1.325) (0.415) (0.525) (0.523) (0.745) (0.118) (1.30)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value end of period $ 9.09 $ 7.54 $ 6.55 $ 5.54 $ 6.73 $ 5.86 $ 5.82 $ 4.82 $ 6.53 $ 4.74
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Total return (a) ............. 32.08% 24.90% 27.77% 1.95% 22.7% 10.2% 34.2% (15.9) 41.2% (10.6)%
RATIOS/SUPPLEMENTAL DATA
Net assets end of period
(thousands) ................ $757,520 $575,680 $440,339 $358,237 $375,565 $313,582 $295,030 $226,186 $283,662 $231,807
Ratio of expenses to
average net assets ......... 1.03% 1.04% 1.05% 1.06% 1.06% 1.06% 1.08% 1.08% 0.99% 0.72%
Ratio of net income to
average net assets ......... 0.46% 0.75% 0.87% 0.86% 1.95% 1.48% 2.34% 2.72% 2.62% 2.78%
Portfolio turnover rate ...... 66% 64% 95% 79% 95% 83% 61% 97% 86% 142%
Average commission paid per
equity share traded (h) .... $ 0.0600 $ 0.0609 N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
SECURITY EQUITY FUND (CLASS B)
FISCAL YEAR ENDED SEPTEMBER 30
----------------------------------------
1997(g) 1996(g) 1995(g) 1994(e)
------- ------- ------- -------
PER SHARE DATA
Net asset value beginning of
period ..................... $ 7.36 $ 6.43 $ 5.49 $ 6.81
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income (loss) . (0.04) (0.02) (0.01) 0.01
Net gain (loss) on securities
(realized & unrealized) .... 2.148 1.449 1.357 (0.005)
------- ------- ------ -------
Total from investment
operations ................. 2.108 1.429 1.347 0.005
LESS DISTRIBUTIONS
Dividends (from net investment
income) .................... -- (0.017) -- (0.12)
Distributions (from capital
gains) ..................... (0.648) (0.482) (0.407) (1.205)
------- ------- ------ -------
Total distributions .......... (0.648) (0.499) (0.407 (1.325)
------- ------- ------ -------
Net asset value end of period $ 8.82 $ 7.36 $ 6.43 $ 5.49
======= ======= ====== =======
Total return (a) ............. 30.85% 23.57% 26.69% (0.15)%
RATIOS/SUPPLEMENTAL DATA
Net assets end of period
(thousands) ................ $ 89,336 $ 38,822 $19,288 $ 7,452
Ratio of expenses to
average net assets ......... 2.03% 2.04% 2.05% 2.07%
Ratio of net loss to
average net assets ......... (0.54)% (0.13)% (0.01)% (0.01)%
Portfolio turnover rate ...... 66% 64% 95% 80%
Average commission paid per
equity share traded (h) .... $ 0.0600 $ 0.0609 N/A N/A
- --------------------------------------------------------------------------------
3
<PAGE>
SECURITY FUNDS
FINANCIAL HIGHLIGHTS (CONTINUED)
================================================================================
SECURITY GLOBAL FUND (CLASS A)
FISCAL YEAR ENDED SEPTEMBER 30
--------------------------------------
1997(g) 1996(g) 1995(g) 1994(f)
------- ------- ------- -------
PER SHARE DATA
Net asset value beginning of period ... $ 12.42 $ 10.94 $ 10.84 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .......... 0.01 0.01 (0.02) (0.03)
Net gain on securities (realized &
unrealized) ......................... 2.289 1.874 0.31 0.87
------- ------- ------- -------
Total from investment operations ...... 2.299 1.884 0.29 0.84
LESS DISTRIBUTIONS
Dividends (from net investment income) (0.376) (0.248) -- --
Distributions (from capital gains) .... (0.783) (0.156) (0.19) --
------- ------- ------- -------
Total distributions ................... (1.159) (0.404) (0.19) --
------- ------- ------- -------
Net asset value end of period ......... $ 13.56 $ 12.42 $ 10.94 $ 10.84
======= ======= ======= =======
Total return (a) ...................... 20.22% 17.73% 2.80% 8.40%
RATIOS/SUPPLEMENTAL DATA
Net assets end of period (thousands) .. $24,193 $19,644 $16,261 $20,128
Ratio of expenses to average net assets 2.00% 2.00% 2.00% 2.00%
Ratio of net income (loss) to average
net assets .......................... (0.07)% 0.07% (0.17)% (0.01)%
Portfolio turnover rate ............... 132% 142% 141% 73%
Average commission paid per equity
share traded (h) .................... $0.0141 $0.0338 N/A N/A
SECURITY GLOBAL FUND (CLASS B)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30
-----------------------------------------------------
1997(g) 1996(g) 1995(g) 1994(e)(f)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PER SHARE DATA
Net asset value beginning of period ................... $ 12.18 $ 10.74 $ 10.75 $ 9.96
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss ................................... (0.11) (0.10) (0.12) (0.12)
Net gain on securities (realized & unrealized) ........ 2.237 1.841 0.30 0.91
-------- -------- -------- --------
Total from investment operations ...................... 2.127 1.741 0.18 0.79
LESS DISTRIBUTIONS
Dividends (from net investment income) ................ (0.304) (0.145) -- --
Distributions (from capital gains) .................... (0.783) (0.156) (0.19) --
-------- -------- -------- --------
Total distributions ................................... (1.087) (0.301) (0.19) --
-------- -------- -------- --------
Net asset value end of period ......................... $ 13.22 $ 12.18 $ 10.74 $ 10.75
======== ======== ======== ========
Total return (a) ...................................... 19.01% 16.57% 1.79% 7.90%
RATIOS/SUPPLEMENTAL DATA
Net assets end of period (thousands) .................. $ 13,061 $ 7,285 $ 5,433 $ 3,960
Ratio of expenses to average net assets ............... 3.00% 3.00% 3.00% 3.00%
Ratio of net loss to average net assets ............... (0.93)% (0.93)% (1.17)% (0.01)%
Portfolio turnover rate ............................... 132% 142% 141% 73%
Average commission paid per equity
share traded (h) .................................... $ 0.0141 $ 0.0338 N/A N/A
</TABLE>
- --------------------------------------------------------------------------------
4
<PAGE>
SECURITY FUNDS
FINANCIAL HIGHLIGHTS (CONTINUED)
================================================================================
SECURITY VALUE FUND (CLASS A)
FISCAL PERIOD
ENDED SEPTEMBER 30
------------------
1997(g)(i)(j)
-----------------
PER SHARE DATA
Net asset value beginning of period ......................... $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ....................................... 0.050
Net gains on securities (realized &
unrealized) ............................................... 2.900
---------
Total from investment operations ............................ 2.950
LESS DISTRIBUTIONS
Dividends (from net investment income) ...................... --
Distributions (from capital gains) .......................... --
---------
Total distributions ......................................... --
---------
Net asset value end of period ............................... $ 12.95
=========
Total return (a) ............................................ 29.50%
RATIOS/SUPPLEMENTAL DATA
Net assets end of period (thousands) ........................ $ 4,631
Ratio of expenses to average net assets (k) ................. 1.10%
Ratio of net income to average net assets ................... 1.43%
Portfolio turnover rate ..................................... 35%
Average commission paid per
investment security equity share traded (h) ............... $ 0.0600
SECURITY VALUE FUND (CLASS B)
FISCAL PERIOD
ENDED SEPTEMBER 30
------------------
1997(g)(i)(j)
-------------
PER SHARE DATA
Net asset value beginning of period ........................... $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ......................................... 0.010
Net gain on securities (realized & unrealized) ................ 2.900
-----------
Total from investment operations .............................. 2.910
LESS DISTRIBUTIONS
Dividends (from net investment income) ........................ --
Distributions (from capital gains) ............................ --
-----------
Total distributions ........................................... --
-----------
Net asset value end of period ................................. $ 12.91
===========
Total return (a) .............................................. 29.10%
RATIOS/SUPPLEMENTAL DATA
Net assets end of period (thousands) .......................... $ 3,572
Ratio of expenses to average net assets (k) ................... 2.26%
Ratio of net income to average net assets ..................... 0.27%
Portfolio turnover rate ....................................... 35%
Average commission paid per investment security equity
share traded (h) ............................................ $ 0.0600
- --------------------------------------------------------------------------------
5
<PAGE>
SECURITY FUNDS
FINANCIAL HIGHLIGHTS (CONTINUED)
================================================================================
SECURITY ULTRA FUND (CLASS A)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30
--------------------------------------------------------------
1997(g) 1996(g) 1995(g) 1994(g) 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value beginning of period ..... $ 8.25 $ 8.20 $ 6.82 $ 8.13 $ 6.66
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ............ (0.058) (0.05) (0.02) (0.056) (0.028)
Net gain (loss) on securities (realized &
unrealized) ........................... 1.649 1.096 1.535 (0.188) 1.791
-------- -------- -------- -------- --------
Total from investment operations ........ 1.569 1.046 1.515 (0.244) 1.763
LESS DISTRIBUTIONS
Dividends (from net investment income) .. -- -- -- -- --
Distributions (from capital gains) ...... (0.579) (0.996) (0.135) (1.066) (0.293)
-------- -------- -------- --------
Total distributions ..................... (0.579) (0.996) (0.135) (1.066) (0.293)
-------- -------- --------
Net asset value end of period ........... $ 9.24 $ 8.25 $ 8.20 $ 6.82 $ 8.13
======== ======== ======== ======== ========
Total return (a) ........................ 20.57% 15.36% 22.69% (3.6)% 26.8%
RATIOS/SUPPLEMENTAL DATA
Net assets end of period (thousands) .... $ 84,504 $ 74,230 $ 66,052 $ 60,695 $ 71,056
Ratio of expenses to average net assets . 1.71% 1.31% 1.32% 1.33% 1.30%
Ratio of net income (loss) to average net
assets ................................ (1.01)% (0.61)% (0.31)% (0.80)% (0.50)%
Portfolio turnover rate ................. 68% 161% 180% 111% 101%
Average commission paid per equity share
traded (h) ............................ $ 0.0600 $ 0.0606 N/A N/A N/A
FISCAL YEAR ENDED SEPTEMBER 30
--------------------------------------------------------------
1992 1991(c)(d) 1990(c) 1989(b)(c) 1988(c)
-------- -------- -------- ---------- -------
PER SHARE DATA
Net asset value beginning of period ..... $ 6.72 $ 4.46 $ 7.89 $ 6.29 $ 5.36
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ............ (0.09) (0.03) (0.14) (0.12) (0.02)
Net gain (loss) on securities (realized &
unrealized) ........................... 0.202 2.525 (2.845) 1.72 1.135
-------- -------- -------- -------- --------
Total from investment operations ........ 0.112 2.495 (2.985) 1.60 1.115
LESS DISTRIBUTIONS
Dividends (from net investment income) .. -- -- -- -- (0.125)
Distributions (from capital gains) ...... (0.172) (0.235) (0.445) -- (0.06)
-------- -------- -------- -------- --------
Total distributions ..................... (0.172) (0.235) (0.445) -- (0.185)
-------- -------- -------- -------- --------
Net asset value end of period ........... $ 6.66 $ 6.72 $ 4.46 $ 7.89 $ 6.29
======== ======== ======== ======== ========
Total return (a) ........................ 1.5% 58.4% (39.6)% 25.4% 21.4%
RATIOS/SUPPLEMENTAL DATA
Net assets end of period (thousands) .... $ 57,128 $ 65,449 $ 31,486 $ 66,841 $ 68,700
Ratio of expenses to average net assets . 1.32% 1.61% 2.58% 3.53% 1.54%
Ratio of net income (loss) to average net
assets ................................ (0.46)% (0.51)% (1.82)% (1.66)% (0.24)%
Portfolio turnover rate ................. 142% 163% 96% 89% 120%
Average commission paid per equity share
traded (h) ............................ N/A N/A N/A N/A N/A
</TABLE>
SECURITY ULTRA FUND (CLASS B)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30
-----------------------------------------------------------
1997(g) 1996(g) 1995(g) 1994(e)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
PER SHARE DATA
Net asset value beginning of period ..... $ 8.03 $ 8.11 $ 6.81 $ 8.30
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ............ (0.15) (0.13) (0.09) (0.103)
Net gain (loss) on securities (realized &
unrealized) ........................... 1.599 1.046 1.525 (0.321)
--------- --------- --------- ---------
Total from investment operations ........ 1.449 0.916 1.435 (0.424)
LESS DISTRIBUTIONS
Dividends (from net investment income) .. -- -- -- --
Distributions (from capital gains) ...... (0.579) (0.996) (0.135) (1.066)
--------- --------- --------- ---------
Total distributions ..................... (0.579) (0.996) (0.135) (1.066)
--------- --------- --------- ---------
Net asset value end of period ........... $ 8.90 $ 8.03 $ 8.11 $ 6.81
========= ========= ========= =========
Total return (a) ........................ 19.58% 13.81% 21.53% (5.7)%
RATIOS/SUPPLEMENTAL DATA
Net assets end of period (thousands) .... $ 5,964 $ 2,698 $ 5,428 $ 1,254
Ratio of expenses to average net assets . 2.71% 2.31% 2.32% 2.36%
Ratio of net income (loss) to average net
assets ................................ (2.01)% (1.61)% (1.32)% (1.76)%
Portfolio turnover rate ................. 68% 161% 180% 110%
Average commission paid per equity share
traded (h) ............................ $ 0.0600 $ 0.0606 N/A N/A
</TABLE>
- --------------------------------------------------------------------------------
6
<PAGE>
SECURITY FUNDS
FINANCIAL HIGHLIGHTS (CONTINUED)
================================================================================
(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 1988 are for the 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) SECURITY ULTRA FUND
--------------------------------------------------------
1988 1989 1990 1991
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Debt outstanding at end of period $ -- $17,742,849 $ 8,207,425 $ --
Weighted average debt outstanding
during the period ............. 4,217,187 13,322,428 5,948,569 970,096
Weighted average month-end shares
outstanding ................... 11,834,629 9,374,183 7,713,750 8,817,652
Average debt per share .......... .36 1.42 .77 .11
Interest expense per share ...... .03 .17 .08 .01
Borrowings and related interest, if any, were immaterial in 1992, 1993, 1994, 1995, 1996 and 1997.
</TABLE>
(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, pay a "spread" or "mark-up" rather than a commission and are
therefore excluded from this calculation. Generally, non-U.S. commissions
are lower than U.S. commissions when expressed as cents per share but
higher when expressed as a percentage of transactions because of the lower
per-share prices of many non-U.S. securities. Prior to 1996, average
commission information was not required to be disclosed.
(i) Figures for the period May 1, 1997 (date of inception) to September 30,
1997. Percentage amounts have been annualized, except for total return.
(j) Security Value Fund was initially capitalized on May 1, 1997, with a net
asset value of $10 per share.
(k) Fund expenses were reduced by the Investment Manager during the period, and
expense ratios absent such reimbursement would have been 1.90% for Class A
and 2.80% for Class B.
- --------------------------------------------------------------------------------
7
<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, Global Fund, Value Fund and Small Company Fund
are series of Security Equity Fund. Each of Growth and Income Fund, Equity Fund,
Global Fund, Value Fund, Small Company 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 (for the Value
Fund and Small Company Fund, this limitation applies only with respect to 75
percent of the value of its total assets) 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; (vi) higher yielding, high risk
debt securities (commonly referred to as "junk bonds"); and (vii) zero coupon
securities. 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. 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
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
8
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
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, restricted securities, and repurchase
agreements under "Investment Methods and Risk Factors."
Growth and Income 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."
The Fund may invest in zero coupon securities which are debt securities that
pay no cash income but are sold at substantial discounts from their face value.
Certain zero coupon securities also provide for the commencement of regular
interest payments at a deferred date. See "Investment Methods and Risk Factors"
for a discussion of zero coupon securities.
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 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, 1997, the dollar weighted average of
Growth and Income Fund's holdings (excluding equities) had the following credit
quality characteristics.
- --------------------------------------------------------------------------------
9
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
PERCENT OF
INVESTMENT NET ASSETS
---------- ----------
U.S. Government Securities ................. 0%
Cash and other Assets, Less Liabilities .... 2.31%
Rated Fixed Income Securities
A ........................................ 0%
Baa/BBB .................................. 0.80%
Ba/BB .................................... 6.86%
B ........................................ 5.73%
Caa/CCC .................................. 0%
D ........................................ 0.14%
Unrated Securities Comparable in Quality to
A ........................................ 0%
Baa/BBB .................................. 0%
Ba/BB .................................... 0%
B ........................................ 0%
Caa/CCC .................................. 0%
-----
15.84%
The foregoing table is intended solely to provide disclosure about Growth and
Income Fund's asset composition during the year ended September 30, 1997. 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,
Real Estate Investment Trusts (REITs), warrants and options). The Fund may also
invest in preferred stocks, bonds and other debt obligations, which include
money market instruments of foreign and domestic companies and the U.S.
Government and foreign governments, governmental agencies and international
organizations. The Fund may purchase securities that are restricted as to
disposition under federal securities laws, provided that such securities are
eligible for resale pursuant 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 restricted 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 the
Fund's Sub-Adviser, Lexington Management Corporation ("Lexington"), 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 Lexington. The Fund
will be moved into a defensive position when, in the judgment of Lexington,
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.
- --------------------------------------------------------------------------------
10
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
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 Lexington 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 Lexington 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.
Although the Fund does not intend to invest for the purpose of seeking
short-term profits, the Fund's investments may be changed whenever Lexington
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 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. 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 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. 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
- --------------------------------------------------------------------------------
11
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
the option the right to buy, that security at a stated exercise price at any
time until a stated expiration date of the option.
VALUE FUND
The investment objective of the Value Fund is to seek long-term growth of
capital. The Value Fund will seek to achieve its objective through investment in
a diversified portfolio of securities. Under normal circumstances the Fund will
consist primarily of various types of common stock, which may include ADRs, and
securities convertible into common stocks which the Investment Manager believes
are undervalued relative to assets, earnings, growth potential or cash flows.
See the discussion of ADRs under "Investment Methods and Risk Factors." Under
normal circumstances, the Fund will invest at least 65 percent of its total
assets in the securities of companies which the Investment Manager believes are
undervalued.
The Value Fund may also invest in (i) preferred stocks; (ii) warrants; and
(iii) investment grade debt securities (or unrated securities of comparable
quality). The Value Fund may purchase securities on a "when-issued" or "delayed
delivery basis" in excess of customary settlement periods for the type of
security involved. The Fund may purchase securities which are restricted as to
disposition under the federal securities laws, provided that such securities are
eligible for resale to qualified institutional investors pursuant to Rule 144A
under the Securities Act of 1933 and subject to the Fund's policy that not more
than 15 percent of its net assets will be invested in illiquid securities. The
Value Fund reserves the right to invest its assets temporarily in cash and money
market instruments when, in the opinion of the Investment Manager, it is
advisable to do so on account of current or anticipated market conditions. The
Fund may utilize repurchase agreements on an overnight basis or bank demand
accounts, pending investment in securities or to meet potential redemptions or
expenses. See the discussion of when-issued securities, restricted securities
and repurchase agreements under "Investment Methods and Risk Factors." The Fund
may borrow as set forth in the Statement of Additional Information. However, as
an operating policy, the Fund will not purchase portfolio securities when
borrowings exceed 5 percent of total Fund assets.
SMALL COMPANY FUND
The investment objective of the Small Company Fund is to seek long-term growth
of capital. The Fund invests primarily in equity securities of small market
capitalization companies ("small company stocks"). Market capitalization means
the total market value of a company's outstanding common stock. The Fund
anticipates that under normal market conditions, the Fund will invest at least
65 percent of its assets in equity securities of domestic and foreign companies
with market capitalizations of less than $1 billion at the time of purchase. The
equity securities in which the Fund may invest include common stocks, preferred
stocks (both convertible and non-convertible), warrants and rights. It is
anticipated that the Fund will invest primarily in companies whose securities
are traded on foreign or domestic stock exchanges or in the over-the-counter
market ("OTC"). The Fund also may invest in securities of emerging growth
companies, some of which may have market capitalizations over $1 billion.
Emerging growth companies are companies which have passed their start-up phase
and which show positive earnings and prospects of achieving significant profit
and gain in a relatively short period of time. The Fund also may invest in
equity securities of issuers which are directly or indirectly engaged in the
exploration, development or distribution of hard assets. See "Investment Methods
and Risk Factors"--"Hard Asset Securities."
Under normal conditions, the Fund intends to invest primarily in small company
stocks; however, the Fund is also permitted to invest up to 35 percent of its
assets in equity securities of domestic and foreign issuers with a market
capitalization of more than $1 billion at the time of purchase, debt obligations
and domestic and foreign money market instruments, including bankers
acceptances, certificates of deposit and discount notes of U.S. Government
securities. Debt obligations in which the Fund may invest will be investment
grade debt obligations, although the Fund may invest up to 5 percent of its
assets in non-investment grade debt obligations. (See the discussion of the
risks associated with investing in non-investment grade debt securities under
"Special Risks of High Yield Investing," page 9.) In addition, for temporary or
emergency purposes, the Fund can invest up to 100 percent of total assets in
cash, cash equivalents, U.S. Government securities, commercial paper and certain
other money market instruments, as well as repurchase agreements collateralized
by these types of securities. The Fund also may invest in reverse repurchase
agreements and shares of non-affiliated investment companies. See the discussion
of such securities under "Investment Methods and Risk Factors."
The Fund may purchase an unlimited number of foreign securities, including
securities of companies in emerging markets. The Fund may invest in foreign
securities, either directly or indirectly through the use of depositary
receipts. Depositary receipts, including American Depositary Receipts ("ADRs"),
European Depository Receipts and American Depository Shares are generally issued
by banks or trust companies and evidence ownership of underlying foreign
securities. The Fund also may invest in securities of foreign investment funds
or trusts (including passive foreign investment companies). See the discussion
of foreign securities, emerging market risks, currency risk and ADRs under
"Investment Methods and Risk Factors."
The Fund may purchase and sell foreign currency on a spot basis and may engage
in forward currency contracts, currency options and futures transactions for
hedging or risk
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management purposes. See the discussion of currency risk under "Investment
Methods and Risk Factors."
At various times the Fund may invest in derivative instruments for hedging or
risk management purposes or for any other permissible purpose consistent with
the Fund's investment objective. Derivative transactions in which the Fund may
engage include the writing of covered put and call options on securities and the
purchase of put and call options thereon, the purchase of put and call options
on securities indexes and exchange-traded options on currencies and the writing
of put and call options on securities indexes. The Fund may enter into spread
transactions and swap agreements. The Fund also may buy and sell financial
futures contracts which may include interest-rate futures, futures on currency
exchanges, and stock and bond index futures contracts. The Fund may enter into
any futures contracts and related options without limit for "bona fide hedging"
purposes (as defined in the Commodity Futures Trading Commission regulations)
and for other permissible purposes, provided that aggregate initial margin and
premiums on positions engaged in for purposes other than "bona fide hedging"
will not exceed 5 percent of its net asset value, after taking into account
unrealized profits and losses on such contracts. See "Investment Methods and
Risk Factors"--"Derivative Instruments," "Futures Contracts and Related Options"
and "Futures and Options Risk" below.
The Fund may engage in short selling against the box, provided that no more
than 15 percent of the value of the Fund's net assets is in deposits on short
sales against the box at any one time. The Fund also may invest in real estate
investment trusts ("REITs") and other real estate industry companies or
companies with substantial real estate investments. See the discussion of real
estate securities under "Investment Methods and Risk Factors."
The Fund may invest in restricted securities, including Rule 144A securities
(subject to the Fund's limit of 15 percent of net assets invested in illiquid
securities), and may lend its portfolio securities to brokers, dealers and other
financial institutions needing to borrow securities to complete certain
transactions. See the discussion of restricted securities and lending of
portfolio securities under "Investment Methods and Risk Factors." The Fund also
may invest without limitation in securities purchased on a when-issued or
delayed delivery basis as discussed under "Investment Methods and Risk Factors."
While there is careful selection and constant supervision by the Fund's
Sub-Adviser, Strong Capital Management, Inc. ("Strong"), there can be no
guarantee that the Fund's objective will be achieved. Strong invests in
companies whose earnings are believed to be in a relatively strong growth trend,
and, to a lesser extent, in companies in which significant further growth is not
anticipated but which are perceived to be undervalued. In identifying companies
with favorable growth prospects, Strong considers factors such as prospects for
above-average sales and earnings growth; high return on invested capital;
overall financial strength; competitive advantages, including innovative
products and services; effective research, product development and marketing;
and stable, capable management.
Investing in securities of small-sized and emerging growth companies may
involve greater risks than investing in larger, more established issuers since
these securities may have limited marketability and, thus, they may be more
volatile than securities of larger, more established companies or the market
averages in general. Because small-sized companies normally have fewer shares
outstanding than larger companies, it may be more difficult for the Fund to buy
or sell significant numbers of such shares without an unfavorable impact on
prevailing prices. Small-sized companies may have limited product lines, markets
or financial resources and may lack management depth. In addition, small-sized
companies are typically subject to wider variations in earnings and business
prospects than are larger, more established companies. There is typically less
publicly available information concerning small-sized companies than for larger,
more established ones.
Securities of issuers in "special situations" also may be more volatile, since
the market value of these securities may decline in value if the anticipated
benefits do not materialize. Companies in "special situations" include, but are
not limited to, companies involved in an acquisition or consolidation;
reorganization; recapitalization; merger, liquidation or distribution of cash,
securities or other assets; a tender or exchange offer, a breakup or workout of
a holding company; litigation which, if resolved favorably, would improve the
value of the companies' securities; or a change in corporate control.
Although investing in securities of emerging growth companies or issuers in
"special situations" offers potential for above-average returns if the companies
are successful, the risk exists that the companies will not succeed and the
prices of the companies' shares could significantly decline in value. Therefore,
an investment in the Fund may involve a greater degree of risk than an
investment in other mutual funds that seek long-term growth of capital by
investing in better-known, larger companies.
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
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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 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.
BORROWING -- Each Fund may borrow money from banks as a temporary measure for
emergency purposes. Growth and Income and Ultra Funds may borrow up to 5 percent
of total assets, Equity and Global Funds up to 10 percent of total assets and
Value and Small Company Funds up to 33 1/3 percent of total assets. None of
Growth and Income, Ultra, Equity or Global Funds may borrow for investment
purposes. Value and Small Company Funds may borrow for investment purposes and
may borrow from sources other than banks. To the extent that a Fund purchases
securities while it has outstanding borrowings, it is using leverage, i.e. using
borrowed funds for investment. Leveraging will exaggerate the effect on net
asset value of any increase or decrease in the market value of a Fund's
portfolio. Money borrowed for leveraging will be subject to interest costs that
may or may not be recovered by appreciation in the securities purchased. A Fund
may be required to maintain minimum average balances in connection with
borrowings or to pay a commitment or other fee to maintain a line of credit.
Either of these requirements would increase the cost of borrowing over the
stated interest rate.
SHARES OF OTHER INVESTMENT COMPANIES. Small Company 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.
AMERICAN DEPOSITARY RECEIPTS (ADRs) -- Each Fund 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
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domestic investments. See "Foreign Investment Risks" below.
FOREIGN INVESTMENT RISKS -- Each Fund may invest in foreign securities either
directly or through ADRs. 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. Although the
Funds generally invest only in securities that are regularly traded on
recognized exchanges or OTC, from time to time, foreign securities may be
difficult to liquidate rapidly without adverse price effects. Certain costs
attributable to foreign investing, such as custody charges and brokerage costs,
are higher than those attributable to domestic investing. 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 savings and capital reinvestment, resource self-sufficiency
and balance of payments positions.
EMERGING MARKETS RISKS -- In addition to the risks associated with investment
in foreign securities, investment in securities of issuers in developing or
emerging markets involves special risks, including less social, political, and
economic stability; smaller securities markets and lower trading volume, which
may result in a lack of liquidity and greater price volatility; certain national
policies that may restrict a Fund's investment opportunities, including
restrictions on investment in issuers or industries deemed sensitive to national
interests, or expropriation or confiscation of assets or property, which could
result in the Fund's loss of its entire investment in that market; and less
developed legal structures governing private or foreign investment or allowing
for judicial redress for injury to private property. In addition, brokerage
commissions, custodial services, withholding taxes, and other costs relating to
investment in emerging markets generally are more expensive than in the U.S. and
certain more established foreign markets. Economies in emerging markets
generally are heavily dependent upon international trade and, accordingly, have
been and may continue to be affected adversely by trade barriers, exchange
controls, managed adjustments in relative currency values, and other
protectionist measures negotiated or imposed by the countries with which they
trade.
CURRENCY RISK -- The Global and Small Company Funds invest in securities
denominated in currencies other than the U.S. dollar and, as a result, 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 -- The Growth and Income and Small Company Funds 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.
Investors should recognize that
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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 -- Each of the Funds may
purchase securities on a when-issued or forward commitment basis. 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 (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.
ZERO COUPON SECURITIES -- The Growth and Income and Small Company Funds may
invest in certain zero coupon securities that are "stripped" U.S. Treasury notes
and bonds. These Funds also may invest in zero coupon and other deep discount
securities issued by foreign governments and domestic and foreign corporations,
including certain Brady Bonds and other foreign debt and payment-in-kind
securities. Zero coupon securities pay no interest to holders prior to maturity,
and payment-in-kind securities pay interest in the form of additional
securities. However, a portion of the original issue discount on zero coupon
securities and the "interest" on payment-in-kind securities will be included in
the investing Fund's income. Accordingly, for the Fund to qualify for tax
treatment as a regulated investment company and to avoid certain taxes (see
"Taxes" in the Statement of Additional Information), the Fund may be required to
distribute an amount that is greater than the total amount of cash it actually
receives. These distributions must be made from the Fund's cash assets or, if
necessary, from the proceeds of sales of portfolio securities. The Fund will not
be able to purchase additional income-producing securities with cash used to
make such distributions and its current income ultimately may be reduced as a
result. Zero coupon and payment-in-kind securities usually trade at a deep
discount from their face or par value and will be subject to greater
fluctuations of market value in response to changing interest rates than debt
obligations of comparable maturities that make current distributions of interest
in cash.
REAL ESTATE SECURITIES -- The Global and Small Company Funds may invest in
equity securities of real estate investment trusts ("REITs"), and the Small
Company Fund may invest in other real estate industry companies or companies
with substantial real estate investments and therefore, the Funds may be subject
to certain risks associated with direct ownership of real estate and with the
real estate industry in general. These risks include, among others: possible
declines in the value of real estate; possible lack of availability of mortgage
funds; extended vacancies of properties; risks related to general and local
economic conditions; overbuilding; increases in competition, property taxes and
operating expenses; changes in zoning laws; costs resulting from the clean-up
of, and liability to third parties for damages resulting from, environmental
problems; casualty or condemnation losses; uninsured damages from floods,
earthquakes or other natural disasters; limitations on and variations in rents;
and changes in interest rates.
REITs are pooled investment vehicles which invest primarily in income
producing real estate or real estate related loans or interests. REITs are
generally classified as equity REITs, mortgage REITs or hybrid REITs. Equity
REITs invest the majority of their assets directly in real property and derive
income primarily from the collection of rents. Equity REITs can also realize
capital gains by selling properties that have appreciated in value. Mortgage
REITs invest the majority of their assets in real estate mortgages and derive
income from the collection of interest payments. REITs are not taxed on income
distributed to shareholders provided they comply with several requirements of
the
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Internal Revenue Code, as amended (the "Code"). 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.
REPURCHASE AGREEMENTS -- Each Fund may invest in 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 the intention of each Fund, except the Small Company Fund,
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.
REVERSE REPURCHASE AGREEMENTS -- The Small Company Fund may enter into reverse
repurchase agreements with the same parties with whom it may enter into
repurchase agreements. Reverse repurchase agreements involve the sale of
securities held by the Fund pursuant to its agreement to repurchase them at a
mutually agreed upon date, price and rate of interest. At the time the Fund
enters into a reverse repurchase agreement, it will establish and maintain a
segregated account with an approved custodian containing cash or liquid
securities having a value not less than the repurchase price (including accrued
interest). The assets contained in the segregated account will be
marked-to-market daily and additional assets will be placed in such account on
any day in which the assets fall below the repurchase price (plus accrued
interest). The Fund's liquidity and ability to manage its assets might be
affected when it sets aside cash or portfolio securities to cover such
commitments. Reverse repurchase agreements involve the risk that the market
value of the securities retained in lieu of sale may decline below the price of
the securities the Fund has sold but is obligated to repurchase. Investment in
reverse repurchase agreements may result in a decrease in the Fund's net asset
value per share if interest rates rise during the term of the agreement. In the
event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Fund's
obligation to repurchase the securities, and the Fund's use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending such
decision. Reverse repurchase agreements are considered to be borrowings under
the Investment Company Act of 1940 (the "1940 Act").
LENDING PORTFOLIO SECURITIES -- From time to time, the Small Company Fund may
lend its portfolio securities to brokers, dealers and other financial
institutions needing to borrow securities to complete certain transactions. In
connection with such loans, the Fund will receive collateral consisting of cash,
U.S. Government securities or irrevocable letters of credit. Such collateral
will be maintained at all times in an amount equal to at least 100 percent of
the current market value of the loaned securities. The Fund can increase its
income through the investment of such collateral. The Fund continues to be
entitled to payments in amounts equal to the interest, dividends or other
distributions payable on the loaned security and receives interest on the amount
of the loan. Such loans will be terminable at any time upon specified notice.
The Fund might experience risk of loss if the institution with which it has
engaged in a portfolio loan transaction breaches its agreement with the Fund.
RESTRICTED SECURITIES -- The Small Company Fund may purchase securities that
are restricted as to disposition under the federal securities laws, including
restricted securities that are eligible for resale to qualified institutional
investors pursuant to Rule 144A under the Securities Act of 1933 ("Rule 144A
Securities"). The Growth and Income, Global and Value Funds may purchase Rule
144A Securities.
Restricted securities cannot be sold to the public without registration under
the Securities Act of 1933 ("1933 Act"). Unless registered for sale, restricted
securities can be sold only in privately negotiated transactions or pursuant to
an exemption from registration. Restricted securities are generally considered
illiquid and, therefore, subject to the Fund's limitation on illiquid
securities.
Non-publicly traded securities (including Rule 144A Securities) may involve a
high degree of business and financial risk which may result in substantial
losses. The securities may be less liquid than publicly traded securities.
Although these securities may be resold in privately negotiated transactions,
the prices realized from these sales could be less than those originally paid by
the Fund. In
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particular, Rule 144A Securities may be resold only to qualified institutional
buyers in accordance with Rule 144A under the Securities Act of 1933.
Unregistered securities may also be sold abroad pursuant to Regulation S under
the 1933 Act. Companies whose securities are not publicly traded are not subject
to the disclosure and other investor protection requirements that would be
applicable if their securities were publicly traded. Acting pursuant to
guidelines established by the Board of Directors of the Funds, some restricted
securities and Rule 144A Securities may be considered liquid.
In making the determination regarding the liquidity of Rule 144A Securities,
the Investment Manager (or Sub-Adviser) will consider trading markets for the
specific security taking into account the unregistered nature of a Rule 144A
security. In addition, the Investment Manager (or Sub-Adviser) 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).
CONVERTIBLE SECURITIES -- Each Fund may invest in convertible securities. A
convertible security is a fixed income security or preferred stock that may be
converted at either a stated price or stated rate into underlying shares of
common stock. Convertible securities have general characteristics similar to
both debt obligations and equity securities. Although to a lesser extent than
with debt obligations generally, the market value of convertible securities
tends to decline as interest rates increase and, conversely, tends to increase
as interest rates decline. In addition, because of the conversion feature, the
market value of convertible securities tends to vary with fluctuations in the
market value of the underlying common stock, and therefore, also will react to
variations in the general market for equity securities. A unique feature of
convertible securities is that as the market price of the underlying common
stock declines, convertible securities tend to trade increasingly on a yield
basis, and so may not experience market value declines to the same extent as the
underlying common stock. When the market price of the underlying common stock
increases, the prices of the convertible securities tend to rise as a reflection
of the value of the underlying common stock. While no securities investments are
without risk, investments in convertible securities generally entail less risk
than investments in common stock of the same issuer.
As debt obligations, convertible securities are investments that provide for a
stable stream of income with generally higher yields than common stocks. Of
course, like all debt obligations, there can be no assurance of current income
because the issuers of the convertible securities may default on their
obligations. Convertible securities, however, generally offer lower interest or
dividend yields than non-convertible securities of similar quality because of
the potential for capital appreciation. A convertible security, in addition to
providing fixed income, offers the potential for capital appreciation through
the conversion feature, which enables the holder to benefit from increases in
the market price of the underlying common stock. There can be no assurance of
capital appreciation, however, because the market value of securities will
fluctuate.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock of the
same issuer. Because of the subordination feature, however, convertible
securities typically have lower ratings than similar non-convertible securities.
WARRANTS -- 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).
DEBT SECURITIES -- Each Fund may invest in debt securities. The market value
of all debt securities is affected by changes in the prevailing interest rates.
The market value of such instruments generally reacts inversely to interest rate
changes. If the prevailing interest rates decrease, the market value of debt
obligations generally increases. If the prevailing interest rates increase, the
market value of debt obligations generally decreases. In general, the longer the
maturity of a debt obligation, the greater its sensitivity to changes in
interest rates.
Investment-grade debt obligations include (1) bonds or bank obligations rated
in one of the four highest rating categories by any nationally recognized
statistical rating organization ("NRSRO") (e.g., Moody's Investors Service, Inc.
or Standard & Poor's Ratings Group ("Standard & Poor's")); (2) U.S. government
securities (as described below); (3) commercial paper rated in one of the three
highest ratings categories of any NRSRO; (4) short-term bank obligations that
are rated in one of the three highest categories by any NRSRO, with respect to
obligations maturing in one year or less; (5) repurchase agreements involving
investment-grade debt obligations; or (6) unrated debt obligations which are
determined by the Adviser or a Sub-Adviser to be of comparable quality.
All ratings are determined at the time of investment. Any subsequent rating
downgrade of a debt obligation will be monitored by the Adviser or a Sub-Adviser
to consider what action, if any, the Fund should take consistent with its
investment objective; such event will not automatically require the sale of the
downgraded securities. Securities rated in the fourth highest category by an
NRSRO, although considered investment-grade, have speculative
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characteristics and may be subject to greater fluctuations in value than
higher-rated securities.
U.S. GOVERNMENT SECURITIES -- Each Fund may invest in U.S. Government
securities which include obligations issued or guaranteed (as to principal and
interest) by the United States Government or its agencies (such as the Small
Business Administration, the Federal Housing Administration, and Government
National Mortgage Association), or instrumentalities (such as Federal Home Loan
Banks and Federal Land Banks), and instruments fully collateralized with such
obligations such as repurchase agreements. Some U.S. Government securities, such
as Treasury bills and bonds, are supported by the full faith and credit of the
U.S. Treasury; others are supported by the right of the issuer to borrow from
the Treasury; others, such as those of the Federal National Mortgage
Association, are supported by the discretionary authority of the U.S. Government
to purchase the agency's obligations; still others, such as those of the Student
Loan Marketing Association, are supported only by the credit of the
instrumentality. Government National Mortgage Association (GNMA) certificates
are mortgage-backed securities representing part ownership of a pool of mortgage
loans on which timely payment of interest and principal is guaranteed by the
full faith and credit of the U.S. Government. Although U.S. Government
securities are guaranteed by the U.S. Government, its agencies or
instrumentalities, shares of the Funds are not so guaranteed in any way.
DERIVATIVE INSTRUMENTS -- Derivative instruments may be exchange-traded or
traded in OTC transactions between private parties. OTC transactions are subject
to the credit risk of the counterparty to the instrument and are less liquid
than exchange-traded derivatives since they often can only be closed out with
the other party to the transaction. When required by guidelines of the
Securities and Exchange Commission ("SEC"), the Fund will set aside permissible
liquid assets or securities positions that substantially correlate to the market
movements of the derivatives transactions in a segregated account to secure its
obligations under derivative transactions. Segregated assets cannot be sold or
transferred unless equivalent assets are substituted in their place or it is no
longer necessary to segregate them. As a result, there is a possibility that
segregation of a large percentage of the Fund's assets could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations. In order to maintain its required cover for a derivative
transaction, the Fund may need to sell portfolio securities at disadvantageous
prices or times since it may not be possible to liquidate a derivative position.
The successful use of derivative transactions by the Fund is dependent upon
the Investment Manager's (or Sub-Adviser's) ability to correctly anticipate
trends in the underlying asset. Hedging transactions are subject to risks; if
the Investment Manager (or Sub-Adviser) incorrectly anticipates trends in the
underlying asset, the Fund may be in a worse position than if no hedging had
occurred. In addition, there may be imperfect correlation between the Fund's
derivative transactions and the instruments being hedged.
FUTURES CONTRACTS AND RELATED Options -- Growth and Income and Ultra Funds may
buy and sell futures contracts and Small Company Fund 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. Small Company Fund may also
write call options and purchase put options on financial futures contracts as a
hedge to attempt to protect the Fund's securities from a decrease in value. When
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 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
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contract purchased or long position in an option contract, each Fund will set
aside in a segregated account cash or liquid securities in an amount equal to
the market value of such contract less the initial margin deposit.
The Staff of the 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 or liquid
securities in an amount equal to the total market value of such futures
contracts less the initial margin deposited therefor; and (iv) writes put
options on futures contracts, stock 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 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.
HARD ASSET SECURITIES -- The Small Company Fund may invest in equity
securities of issuers which are directly or indirectly engaged to a significant
extent in the exploration development or distribution of one or more of the
following: precious metals; ferrous and non-ferrous metals; gas, petroleum,
petrochemical and/or other commodities (collectively, "Hard Assets"). The
production and marketing of Hard Assets may be affected by actions and changes
in governments. In addition, Hard Asset securities may be cyclical in nature.
During periods of economic or financial instability, the securities of some Hard
Asset companies may be subject to broad price fluctuations, reflecting the
volatility of energy and basic materials prices and the possible instability of
supply of various Hard Assets. In addition, some Hard Asset companies also may
be subject to the risks generally associated with extraction of natural
resources, such as the risks of mining and oil drilling, and the risks of the
hazard associated with natural resources, such as fire, drought, increased
regulatory and environmental costs, and others. Securities of Hard Asset
companies may also experience greater price fluctuations than the relevant Hard
Asset. In periods of rising Hard Asset prices, such securities may rise at a
faster rate, and, conversely, in times of falling Hard Asset prices, such
securities may suffer a greater price decline.
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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 life insurance company with over $7.3 billion in assets under
management. 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,
1997, the aggregate assets of all of the Funds under the investment management
of the Investment Manager were approximately $4.5 billion.
The Investment Manager has engaged Lexington Management Corporation
("Lexington"), Park 80 West, Plaza Two, Saddle Brook, New Jersey 07663, to
provide certain investment advisory services to Global Fund. 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 engaged Strong Capital Management, Inc. ("Strong"),
900 Heritage Reserve, Menomonee Falls, Wisconsin 53051, to provide certain
investment advisory services to the Small Company Fund. Strong is a privately
held corporation which is controlled by Richard S. Strong. Strong was
established in 1974 and currently manages over $27 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 and Small Company Fund, the Investment Manager supervises the
management of these Funds' portfolios by the Sub-Advisers, Lexington and Strong.
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 is not aware of any state that currently
imposes limits on the level of mutual fund expenses.) The Investment Manager
will contribute such funds to the Funds or waive such portion of its
compensation as may be necessary to insure that such total annual expenses do
not exceed any such limitation.
The Investment Manager also acts as the administrative agent and transfer
agent 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.
Like other mutual funds, as well as other financial and business organizations
around the world, the Funds could be adversely affected if the computer systems
used by the Investment Manager, and other service providers, in performing their
administrative functions do not properly process and calculate date-related
information and data before, during and after January 1, 2000. Some computer
software and hardware systems currently cannot distinguish between the year 2000
and the year 1900 or some other date because of the way date fields were
encoded. This is commonly known as the "Year 2000 Problem." If not addressed,
the Year 2000 Problem could impact the management services provided to the Funds
by the Investment Manager, as well as transfer agency, accounting, custody,
distribution and other services provided to the Funds and their shareholders.
The Investment Manager has adopted a plan to be "Year 2000 Compliant" with
respect to both its internally built systems as well as systems provided by
external vendors. "Year 2000 Compliant" means that systems and programs which
require modification will have the date fields expanded to include the century
information and that for interfaces to external organizations as well as new
systems development the year portion of the date field will be expanded to four
digits using the format YYYYMMDD. The Investment Manager's overall approach to
addressing the Year 2000 issue is as follows: (1) to inventory its internal and
external hardware, software, telecommunications and data transmissions to
customers and conduct a risk assessment with respect to the impact that a
failure on any such system would have on its business operations; (2) to modify
or replace its internal systems and obtain vendor certifications of Year 2000
compliance for systems provided by vendors or replace such systems that are not
Year 2000 Compliant; and (3) to implement and test its systems for Year 2000
compliance. The Investment Manager has completed the inventory of its internal
and external systems and has made substantial progress toward completing the
modification/replacement of its internal systems as well as towards obtaining
Year 2000 Compliant certifications from its external vendors. Overall systems
testing is scheduled to commence in December 1998 and extend into the first six
months of 1999.
Although the Investment Manager has taken steps to ensure that its systems
will function properly before, during
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SECURITY FUNDS
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and after the Year 2000, its key operating systems and information sources are
provided by or through external vendors which creates uncertainty to the extent
the Investment Manager is relying on the assurance of such vendors as to whether
their systems will be Year 2000 Compliant. The costs or consequences of
incomplete or untimely resolution of the Year 2000 issue are unknown to the
Investment Manager at this time but could have a material adverse impact on the
operations of the Funds and the Investment Manager.
The Year 2000 Problem is expected to impact companies, which may include
issuers of portfolio securities held by the Funds, to varying degrees based upon
various factors, including, but not limited to, the company's industry sector
and degree of technological sophistication. The Funds and the Investment Manager
are unable to predict what impact, if any, the Year 2000 Problem will have on
issuers of the portfolio securities held by the Funds.
For the services provided to the Funds, 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, 1.50 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 1.50 percent of
the remaining average net assets of this Fund, calculated daily and payable
monthly. The Investment Manager pays Lexington an amount equal to .50 percent of
the average net assets of Global Fund, calculated on a daily basis and payable
monthly. For the investment advisory services provided to the Value Fund and
Small Company Fund, the Investment Manager receives, on an annual basis, a fee
of 1 percent of the average daily net assets of each Fund, calculated daily and
payable monthly. The Investment Manager pays Strong with respect to the Small
Company Fund, an annual fee based on the combined average net asset of the Fund
and another fund to which Strong provides advisory services. The fee is equal to
.50 percent of the combined average net assets under $150 million, .45 percent
of the combined average net assets at or above $150 million but less than $500
million, and .40 percent of the combined average net assets at or above $500
million. As compensation for providing administrative, bookkeeping, accounting
and pricing services to the Value Fund and Small Company Fund, the Investment
Manager receives on an annual basis, a fee of .09 percent of the average daily
net assets of each Fund, calculated daily and payable monthly.
For the fiscal year ended September 30, 1997, the total expenses, as a
percentage of average net assets, were 1.24 percent for Class A and 2.24 percent
for Class B shares of Growth and Income Fund; 1.03 percent for Class A and 2.03
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 1.71 percent for Class A and 2.71
percent for Class B shares of Ultra Fund. For the period May 1, 1997 (date of
inception) to September 30, 1997, the total expenses for Class A and Class B
shares of Value Fund were 1.10 percent and 2.26 percent, respectively. Expense
information for the Small Company Fund is not yet available as it did not begin
operations until October of 1997.
PORTFOLIO MANAGEMENT
The Growth and Income, Equity, Value and Ultra Funds are managed by the
Investment Manager's Equity Team with an individual portfolio manager being
responsible for the day-to-day management of each particular Fund. Michael
Petersen has had day-to-day responsibility for managing the GROWTH AND INCOME
FUND since January of 1998. Terry Milberger has had day-to-day responsibility
for managing the EQUITY FUND since 1981. Jim Schier has had day-to-day
responsibility for managing the VALUE FUND since its inception in 1997 and for
managing the ULTRA FUND since January of 1998. Global Fund is managed by an
investment management team of Lexington. Richard T. Saler and Alan Wapnick, the
lead portfolio managers, have had day-to-day responsibility for managing GLOBAL
Fund since 1994. SMALL COMPANY FUND is managed by Ronald C. Ognar of Strong. He
has had day-to-day responsibility for managing Small Company Fund since its
inception in 1997.
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 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. OGNAR, portfolio manager of Strong, is a Chartered Financial Analyst with
more than 25 years of investment experience. Mr. Ognar joined Strong in April
1993 after two years as a principal and portfolio manager with RCM Capital
Management. Prior to his position at RCM Capital Management, he was a portfolio
manager at Kemper Financial Services in Chicago. Mr. Ognar began his investment
career in 1968 at LaSalle National Bank. He is a graduate of the University of
Illinois with a bachelor's degree in accounting.
MR. PETERSEN, Senior Portfolio Manager of the Investment Manager, has 15 years
of investment experience. Prior to joining the Investment Manager in 1997, he
was
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SECURITY FUNDS
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Director of Equity Research and Fund Management at Old Kent Bank and Trust
Corporation from 1988 to 1997. Prior to 1988, he was an Investment Officer at
First Asset Management. Mr. Petersen earned a Bachelor of Science degree in
Accounting from the University of Minnesota. He is a Chartered Financial
Analyst.
MR. 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.
MR. SCHIER, Portfolio Manager of the Investment Manager, has 13 years
experience in the investment field and is a Chartered Financial Analyst. While
employed by the Investment Manager, he also served as a research analyst. Prior
to joining the Investment Manager in 1995, he was a portfolio manager for
Mitchell Capital Management from 1993 to 1995. From 1988 to 1995 he served as
Vice President and Portfolio Manager for Fourth Financial. Prior to 1988, Mr.
Schier served in various positions in the investment field for Stifel Financial,
Josepthal & Company and Mercantile Trust Company. Mr. Schier earned a bachelor
of business degree from the University of Notre Dame and an M.B.A. from
Washington University.
MR. 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.
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 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.
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CLASS A SHARES
Class A shares are offered at net asset value plus an initial sales charge as
follows:
SALES CHARGE
--------------------------------------------
PERCENTAGE PERCENTAGE OF PERCENTAGE
AMOUNT OF TRANSACTION OF OFFERING NET AMOUNT REALLOWABLE TO
AT OFFERING PRICE PRICE INVESTED 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," page 26.
The Distributor will pay a commission to dealers on Class A purchases of
$1,000,000 or more as follows: 1.00 percent on sales up to $5,000,000, plus .50
percent on sales of $5,000,000 or more up to $10,000,000 and .10 percent on any
amount of $10,000,000 or more.
The Investment Manager may, at its expense, pay a service fee to dealers who
satisfy certain criteria established by the Investment Manager from time to time
relating to the volume of their sales of Class A shares of the 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, Value, Small Company 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.
SECURITY EQUITY FUND'S CLASS A DISTRIBUTION PLAN
In addition to the sales charge deducted from Class A shares at the time of
purchase, Small Company Fund is authorized, under a Distribution Plan pursuant
to Rule 12b-1 under the Investment Company Act of 1940 (the "Class A
Distribution Plan"), to use its assets to finance certain activities relating to
the distribution of its shares to investors. This Plan permits payments to be
made by this Fund to the Distributor to finance various activities relating to
the distribution of its Class A shares to investors, including, but not limited
to, the payment of compensation (including incentive compensation to securities
dealers and other financial institutions and organizations) to obtain various
distribution-related and/or administrative services for the Fund.
Under the Class A Distribution Plan, a monthly payment is made to the
Distributor in an amount computed at an annual rate of .25 percent of the
average daily net asset value of Small Company Fund's Class A shares. The
distribution fee is charged to the Fund in proportion to the relative net assets
of its Class A shares. The distribution fees collected may be used by Small
Company Fund to finance distribution activities, for example advertisements.
The Class A Distribution Plan authorizes payment by the Class A shares of this
Fund of the cost of preparing, printing and distributing prospectuses and
Statements of Additional Information to prospective investors and of
implementing and operating the Plan.
In addition, compensation to securities dealers and others is paid from
distribution fees at an annual rate of .25 percent of the average daily net
asset value of Class A shares sold by such dealers and remaining outstanding on
the Small Company Fund's books to obtain certain administrative services for the
Small Company Fund's Class A stockholders. The services include, among other
things, processing new stockholder account applications and serving as the
primary source of information to customers in answering questions concerning the
Fund and its transactions with the Fund. The Distributor is also authorized to
engage in advertising, the preparation and distribution of sales literature and
other promotional activities on behalf of Small Company Fund. Other promotional
activities which may be financed pursuant to the Plan include (i) informational
meetings concerning the Fund for registered representatives interested in
selling shares of the Fund and (ii) bonuses or incentives offered to all or
specified dealers on the basis of sales of a specified minimum dollar amount of
Class A shares of the Fund by the registered representatives employed by such
dealer(s). The expenses associated with the foregoing activities will include
travel expenses, including lodging.
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SECURITY FUNDS
PROSPECTUS
================================================================================
From time to time, the Distributor may spend an amount on promotional activities
that exceeds the amount of distribution fees that have been collected under the
plan. In this event, the Distributor would seek reimbursement for such
expenditures from distribution fees collected in future years. Additional
information may be obtained by referring to the Fund's Statement of Additional
Information.
Small Company Fund's Class A Distribution Plan may be terminated at any time
by vote of the directors of Equity Fund, who are not interested persons of the
Fund as defined in the 1940 Act or by vote of a majority of the outstanding
Class A shares. In the event the Class A Distribution Plan is terminated by the
Fund's Class A stockholders or the 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.
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 PAYMENT WAS MADE CONTINGENT DEFERRED SALES CHARGE
------------------------------------ --------------------------------
First 5%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth and following 0%
Class B shares (except shares purchased through the reinvestment of dividends
and other distributions paid with respect to Class B shares) will automatically
convert on the eighth anniversary of the date such shares were purchased to
Class A shares which are subject to a lower distribution fee. This automatic
conversion of Class B shares will take place without imposition of a front-end
sales charge or exchange fee. (Conversion of Class B shares represented by stock
certificates will require the return of the stock certificates to the Investment
Manager.) All shares purchased through reinvestment of dividends and other
distributions paid with respect to Class B shares ("reinvestment shares") will
be considered to be held in a separate subaccount. Each time any Class B shares
(other than those held in the subaccount) convert to Class A shares, a pro rata
portion of the reinvestment shares held in the subaccount will also convert to
Class A shares. Class B shares so converted will no longer be subject to the
higher expenses borne by Class B shares. Because the net asset value per share
of the Class A shares may be higher or lower than that of the Class B shares at
the time of conversion, although the dollar value will be the same, a
shareholder may receive more or less Class A shares than the number of Class B
shares converted. Under current law, it is the Funds' opinion that such a
conversion will not constitute a taxable event under federal income tax law. In
the event that this ceases to be the case, the Board of Directors will consider
what action, if any, is appropriate and in the best interests of the Class B
stockholders.
CLASS B DISTRIBUTION PLAN
Each Fund bears some of the costs of selling its Class B shares under a
Distribution Plan adopted with respect to its Class B shares ("Class B
Distribution Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940 ("1940 Act"). This Plan provides for payments at an annual rate of 1.00
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.
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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 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 31 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 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
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SECURITY FUNDS
PROSPECTUS
================================================================================
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' 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
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SECURITY FUNDS
PROSPECTUS
================================================================================
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 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. Telephone redemptions are not accepted for IRA and
403(b)(7) accounts. A stockholder who authorizes telephone redemptions
authorizes the Investment Manager to act upon the instructions of any person
identifying themselves as the owner of the account or the owner's broker. The
Investment Manager has established procedures to confirm that instructions
communicated by telephone are genuine and may be liable for any losses due to
fraudulent or unauthorized instructions if it fails to comply with its
procedures. The Investment Manager's procedures require that any person
requesting a 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. 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.
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.
The following summarizes certain federal income tax considerations generally
affecting the Funds and their stockholders. See the Statement of Additional
Information for further details. No attempt is made to present a detailed
explanation of the tax treatment of the Funds or their stockholders, and the
discussion here and in the Statement of Additional Information is not intended
as a substitute for careful tax planning. The discussion is based upon present
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), the
regulations promulgated thereunder, and judicial and administrative ruling
authorities, all of which are subject to change, which change may be
retroactive. Prospective investors should consult their own tax advisors with
regard to the federal tax consequences of the purchase, ownership, and
disposition of Fund shares, as well as the tax consequences arising under the
laws of any state, foreign country, or other taxing jurisdiction.
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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 of net capital gain, whether
received in cash or reinvested in Fund shares, will generally be taxable to
shareholders as either "20% Gain" or "28% Gain," depending upon the Fund's
holding period for the assets sold. "20% Gains" arise from sales of assets held
by a Fund for more than 18 months and are subject to a maximum tax rate of 20%;
"28% Gains" arise from sales of assets held by a Fund for more than one year but
no more than 18 months and are subject to a maximum tax rate of 28%. Net capital
gains from assets held for one year or less will be taxed as ordinary income.
Distributions will be subject to these capital gains rates regardless of how
long a shareholder has held Fund 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. The payment of such taxes will reduce the amount
of dividends and distributions paid to the Fund's stockholders. So long as a
Fund qualifies as a regulated investment company, certain distribution
requirements are satisfied, and more than 50% of such Fund's assets at the close
of the taxable year consists of securities of foreign corporations, the Fund may
elect, subject to limitation, to pass through its foreign tax credits to its
stockholders.
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
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SECURITY FUNDS
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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, 1997, was Growth and Income Fund - 124 percent; Equity Fund - 66
percent; Global Fund - 132 percent; and Ultra Fund - 68 percent. The annualized
portfolio turnover rate for the Value Fund for the period May 1, 1997 (date of
inception) to September 30, 1997, was 35 percent. The portfolio turnover rate is
not yet available for the Small Company Fund as it did not begin operations
until October of 1997. 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 the Value Fund will generally be less than 150
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. The portfolio
turnover of Small Company Fund is not expected to exceed 200 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 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.
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.
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
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30
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
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 26. 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, for shares of the other mutual funds distributed by the
Distributor or for shares of Security Cash Fund at net asset value. The other
funds currently distributed by the Distributor include Security Asset
Allocation, Social Awareness, Corporate Bond, Limited Maturity Bond, U.S.
Government, High Yield, Emerging Markets Total Return, Global Asset Allocation,
Global High Yield and Tax-Exempt Funds. Exchanges may be made only in those
states where shares of the fund into which an exchange is to be made are
qualified for sale. 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 distributed by the Distributor or for
shares of Security Cash Fund, a money market fund that offers a single class of
shares. Any applicable contingent deferred sales charge will be imposed upon
redemption and calculated from the date of the initial purchase without regard
to the time shares were held in Security Cash Fund. 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,
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31
<PAGE>
SECURITY FUNDS
PROSPECTUS
================================================================================
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 capital stock of $.25 par value and currently issues
its shares in six series, Equity Fund, Global Fund, Asset Allocation Fund,
Social Awareness Fund, Value Fund and Small Company 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.
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32
<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.
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33
<PAGE>
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SECURITY GROWTH AND INCOME FUND
(formerly Security Investment Fund)
SECURITY EQUITY FUND
o EQUITY SERIES
o GLOBAL SERIES
o ASSET ALLOCATION SERIES
o SOCIAL AWARENESS SERIES
o VALUE SERIES
o SMALL COMPANY SERIES
SECURITY ULTRA FUND
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 31, 1998
RELATING TO THE PROSPECTUS DATED
JANUARY 31, 1998 AS IT MAY BE SUPPLEMENTED FROM TIME TO TIME
(785) 431-3127
(800) 888-2461
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INVESTMENT MANAGER CUSTODIAN
Security Management Company, LLC UMB Bank, N.A.
700 SW Harrison Street 928 Grand Avenue
Topeka, Kansas 66636-0001 Kansas City, Missouri 64106
The Chase Manhattan Bank
4 Chase MetroTech Center
Brooklyn, New York 11245
UNDERWRITER INDEPENDENT AUDITORS
Security Distributors, Inc. Ernst & Young LLP
700 SW Harrison Street One Kansas City Place
Topeka, Kansas 66636-0001 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, 1998
(RELATING TO THE PROSPECTUS DATED JANUARY 31, 1998,
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, 1998 as it may be
supplemented from time to time. A Prospectus may be obtained by writing Security
Distributors, Inc., 700 SW Harrison Street, Topeka, Kansas 66636-0001, or by
calling (785) 431-3127 or (800) 888-2461, ext. 3127.
TABLE OF CONTENTS
Page
General Information ....................................................... 1
Investment Objective and Policies of the Funds ............................ 2
Security Growth and Income Fund ......................................... 2
Security Equity Fund .................................................... 4
Equity Fund ............................................................ 4
Global Fund ............................................................ 4
Asset Allocation Fund .................................................. 6
Social Awareness Fund .................................................. 8
Value Fund ............................................................. 9
Small Company Fund ..................................................... 9
Security Ultra Fund ..................................................... 11
Investment Methods and Risk Factors ....................................... 12
Investment Policy Limitations ............................................. 29
Security Growth and Income Fund's Fundamental Policies .................. 29
Security Equity Fund's Fundamental Policies ............................. 30
Security Ultra Fund's Fundamental Policies .............................. 32
Officers and Directors .................................................... 32
Remuneration of Directors and Others ...................................... 34
How to Purchase Shares .................................................... 35
Alternative Purchase Options ............................................ 35
Class A Shares .......................................................... 36
Security Equity Fund's Class A Distribution Plan ........................ 36
Class B Shares .......................................................... 37
Class B Distribution Plan ............................................... 37
Calculation and Waiver of Contingent Deferred Sales Charges ............. 38
Arrangements With Broker-Dealers and Others ............................. 38
Purchases at Net Asset Value ............................................ 39
Accumulation Plan ......................................................... 40
Systematic Withdrawal Program ............................................. 40
Investment Management ..................................................... 40
Portfolio Management .................................................... 44
Code of Ethics .......................................................... 45
Distributor ............................................................... 45
Allocation of Portfolio Brokerage ......................................... 46
How Net Asset Value is Determined ......................................... 48
How to Redeem Shares ...................................................... 49
Telephone Redemptions ................................................... 50
How to Exchange Shares .................................................... 50
Exchange by Telephone ................................................... 51
Dividends and Taxes ....................................................... 52
Organization .............................................................. 56
Custodian, Transfer Agent and Dividend-Paying Agent ....................... 57
Independent Auditors ...................................................... 57
Performance Information ................................................... 57
Retirement Plans .......................................................... 59
Individual Retirement Accounts (IRAs)...................................... 59
Roth IRAs ................................................................. 60
SIMPLE IRAs ............................................................... 60
Pension and Profit-Sharing Plans .......................................... 60
403(b) Retirement Plans ................................................... 60
Simplified Employee Pension Plans (SEPPs) ................................. 61
Financial Statements ...................................................... 61
Appendix A ................................................................ 62
Appendix B ................................................................ 64
<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 49.)
Each of Security Growth and Income Fund ("Growth and Income Fund"), the Equity
Series ("Equity Fund"), Global Series ("Global Fund"), Asset Allocation Series
("Asset Allocation Fund"), Social Awareness Series ("Social Awareness Fund"),
Value Series ("Value Fund"), and Small Company Series ("Small Company 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 29.
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 52.)
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
35.)
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 investment advisory
services to Global Fund, Meridian Investment Management Corporation ("Meridian")
to provide quantitative investment research and investment advisory services to
the Asset Allocation Fund and Strong Capital Management, Inc. ("Strong) to
provide investment advisory services to Small Company Fund.
The Funds receive investment advisory, administrative, accounting, and
transfer agency services from the Investment Manager for a fee. The fee for each
of the Growth and Income, Equity and Ultra Funds, on an annual basis, is 2% of
the first $10 million of the average net assets, 1 1/2% of the next $20 million
of the average net assets and 1% of the remaining average net assets of the
respective Funds, determined daily and payable monthly. The fee paid by Global
Fund, on an annual basis, is 2% of the first $70 million of the average net
assets, and 1 1/2% of the remaining average net assets, determined daily and
payable monthly.
Separate fees are paid by Asset Allocation, Social Awareness, Value, and Small
Company Funds, to the Investment Manager for investment advisory, administrative
and transfer agency services. The investment advisory fee for Asset Allocation,
Social Awareness, Value, and Small Company Funds on an annual basis is equal to
1% of the average daily net assets of each Fund, calculated daily and payable
monthly. The administrative fee for Asset Allocation Fund on an annual basis is
equal to .045% of the average daily net assets of the Fund plus the greater of
.10% of its average net assets or $60,000. The administrative fee for the Social
Awareness, Value, and Small Company Funds on an annual basis is equal to .09% of
the average daily net assets of each respective Fund. The transfer agency fee
for the Asset Allocation, Social Awareness, Value, and Small Company Funds
consists of an annual maintenance fee of $8.00 per account, and a transaction
fee of $1.00 per transaction.
The Investment Manager bears all expenses of the Funds (except Asset
Allocation, Social Awareness, Value, and Small Company Funds) except for its
fees and the expenses of brokerage commissions, interest, taxes, Class B
distribution fees, and extraordinary expenses approved by the Board of Directors
of the Funds. The Asset Allocation, Social Awareness, Value, and Small Company
Funds pay all of their expenses not assumed by the
1
<PAGE>
Investment Manager or Security Distributors, Inc. (the "Distributor") as
described under "Investment Management," page 40.
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 40 for a discussion of the Investment
Manager and the Investment Management and Services Agreements.
Under a Distribution Plan adopted with respect to the Class A shares of Small
Company Fund, pursuant to Rule 12b-1 under the Investment Company Act of 1940,
the Small Company Fund is authorized to pay the Distributor an annual fee of
.25% of the average daily net assets of the Class A shares of that Fund to
finance various distribution-related activities. Under Distribution Plans
adopted with respect to the Class B shares of the Funds, pursuant to Rule 12b-1,
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 A Distribution
Plan," page 36 and "Class B Distribution Plan," page 37.)
INVESTMENT OBJECTIVE AND POLICIES OF THE FUNDS
SECURITY GROWTH AND INCOME FUND
The investment objective of Growth and Income Fund is long-term growth of
capital with a secondary emphasis on income. The value of Growth and Income
Fund's shares will fluctuate with changes in the market value of the Fund's
investments. The investment objective and policies of Growth and Income Fund may
be altered by the Board of Directors without the approval of stockholders of the
Fund. There can be no assurance that the stated investment objective will be
achieved.
The policy of Growth and Income Fund is to invest in a diversified portfolio
which will ordinarily consist principally of common stocks (which may include
ADRs), but may also include other securities when deemed advisable. Such other
securities may include (i) securities convertible into common stocks; (ii)
preferred stocks; (iii) debt securities issued by U.S. corporations; (iv)
securities issued by the U.S. Government or any of its agencies or
instrumentalities, including Treasury bills, certificates of indebtedness, notes
and bonds; (v) securities issued by foreign governments, their agencies, and
instrumentalities, and foreign corporations, provided that such securities are
denominated in U.S. dollars; (vi) higher yielding, high risk debt securities
(commonly referred to as "junk bonds"); and (vii) zero coupon securities. The
Fund may also invest in warrants. However, such investment may not exceed 5% of
its total assets valued at the lower of cost or market. Included in that amount,
but not to exceed 2% of the value of the Fund's assets may be warrants which are
not listed on the New York or American Stock Exchange. Warrants acquired by the
Fund in units or attached to securities may be deemed to be without value. In
the selection of securities for investment, the potential for appreciation and
future dividends is given more weight than current dividends.
Except when in a temporary defensive position, Growth and Income Fund will
maintain at least 25% of its assets invested in securities selected for their
capital growth potential, principally common stocks, and at least another 25% of
its total assets invested in securities which provide income.
With respect to Growth and Income Fund's investment in debt securities, there
is no percentage limitation on the amount of the Fund's assets that may be
invested in securities within any particular rating classification (see Appendix
A for a more complete description of the corporate bond ratings), and the Fund
may invest without limit in unrated securities. Growth and Income Fund may
invest in securities rated Baa by Moody's Investors Service, Inc., or BBB by
Standard & Poor's Corporation. Baa securities are considered to be "medium
grade" obligations by Moody's and BBB is the lowest classification which is
still considered an "investment grade" rating by Standard & Poor's. Bonds rated
Baa by Moody's or BBB by Standard & Poor's have speculative characteristics and
may be more susceptible than higher grade bonds to adverse economic conditions
or other adverse circumstances which may result in a weakened capacity to make
principal and interest payments. In addition, the Fund may invest in higher
yielding, longer-term debt securities in the lower rating (higher risk)
categories of the recognized rating services (commonly referred to as "junk
bonds"). These include securities rated Ba or lower by Moody's or BB or lower by
Standard & Poor's and are regarded as predominantly speculative with respect to
the ability of the issuer to meet principal and interest payments. However, the
Investment Manager will not rely
2
<PAGE>
principally on the ratings assigned by the rating services. Because Growth and
Income Fund may invest in lower rated securities and unrated securities of
comparable quality, the achievement of the Fund's investment objective may be
more dependent on the Investment Manager's own credit analysis than would be the
case if investing in higher rated securities.
As discussed above, Growth and Income Fund may invest in foreign debt
securities that are denominated in U.S. dollars. Such foreign debt securities
may include debt of foreign governments, including Brady Bonds, and debt of
foreign corporations. The Fund expects to limit its investment in foreign debt
securities, excluding 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, restricted securities, and repurchase agreements under
"Investment Methods and Risk Factors" and see the discussion of restricted
securities under the same heading in the prospectus.
The Fund may 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.
The Fund may invest in zero coupon securities which are debt securities that
pay no cash income but are sold at substantial discounts from their face value.
Certain zero coupon securities also provide for the commencement of regular
interest payments at a deferred date. See "Investment Methods and Risk Factors"
for a discussion of zero coupon securities.
Growth and Income Fund's policy is to diversify its investments among various
industries, but freedom of action is reserved (at times when deemed appropriate
for the attainment of its investment objectives) to invest up to 25% of its
assets in one industry. This is a fundamental policy of Growth and Income Fund
which cannot be changed without stockholder approval.
There is no restriction on Growth and Income Fund's portfolio turnover, but it
is the Fund's practice to invest its funds for long-term growth and secondarily
for income. The portfolio turnover rate for Class A and Class B shares of the
Fund for the fiscal years ended September 30, 1997, 1996 and 1995 was as
follows: 1997 - 124%, 1996 - 69% and 1995 - 130%. 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
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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 six series -- Equity
Series ("Equity Fund"), Global Series ("Global Fund"), Asset Allocation Series
("Asset Allocation Fund"), Social Awareness Series ("Social Awareness Fund"),
Value Series ("Value Fund") and Small Company Series ("Small Company 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 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 for Class A and Class B shares of Equity Fund for
the fiscal years ended September 30, 1997, 1996 and 1995 was as follows: 1997 -
66%, 1996 - 64% and 1995 - 95%. Portfolio turnover is the percentage of the
lower of security sales or purchases to the average portfolio value and would be
100% if all securities in the Fund were replaced within a period of one year.
It is not the policy of Equity Fund to purchase securities for trading
purposes. Nevertheless, securities may be disposed of without regard to the
length of time held if such sales are deemed advisable in order to meet the
Fund's investment objective. Equity Fund does not intend to purchase restricted
stock.
GLOBAL FUND
The investment objective of Global Fund is to seek long-term growth of capital
primarily through investment in securities of companies domiciled in foreign
countries and the United States. Global Fund will seek to achieve its objective
through investment in a diversified portfolio of securities which under normal
circumstances will consist primarily of various types of common stocks and
equivalents (the following constitute equivalents: convertible debt securities,
real estate investment trusts (REITs), warrants and options). The Fund may also
invest in preferred stocks, bonds and other debt obligations, which include
money market instruments of foreign and domestic companies and the U.S.
Government and foreign governments, governmental agencies and international
organizations. For a full description of the Fund's investment objective and
policies, see the Prospectus.
In seeking to achieve its investment objective, Global Fund may from time to
time engage in the following investment practices:
SETTLEMENT TRANSACTIONS. Global Fund may, for a fixed amount of United States
dollars, enter into a forward foreign exchange contract for the purchase or sale
of the amount of foreign currency involved in the underlying securities
transactions. In so doing, the Fund will attempt to insulate itself against
possible losses and gains resulting from a change in the relationship between
the United States dollar and the foreign currency during the
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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 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
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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 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 Class A and Class B shares of Global Fund for the
fiscal years ended September 30, 1997, 1996 and 1995 were 132%, 142% and 141%,
respectively. Portfolio turnover is the percentage of the lower of security
sales or purchases to the average portfolio value and would be 100% if all
securities in the Fund were replaced within a period of one year.
ASSET ALLOCATION FUND
The investment objective of Asset Allocation Fund is to seek high total
return, consisting of capital appreciation and current income. The Fund seeks
this objective by following an asset allocation strategy that contemplates
shifts among a wide range of investment categories and market sectors. The Fund
will invest in the following investment categories: equity securities of
domestic and foreign issuers, including common stocks, ADRs, preferred stocks,
convertible securities and warrants; debt securities of domestic and foreign
issuers, including mortgage-related and other asset-backed securities;
exchange-traded real estate investment trusts (REITs); equity securities of
companies involved in the exploration, mining, development, production and
distribution of gold ("gold stocks"); zero coupon securities and domestic money
market instruments. See "Investment Methods and Risk Factors" in the Prospectus
for a discussion of the additional risks associated with investment in foreign
securities and real estate securities, and see the discussion of the risks
associated with investment in gold stocks below.
Investment in gold stocks presents risks, because the prices of gold have
fluctuated substantially over short periods of time. Prices may be affected by
unpredictable monetary and political policies, such as currency devaluations or
revaluations, economic and social conditions within an individual country, trade
imbalances, or trade or currency restrictions between countries. The unstable
political and social conditions in South Africa and unsettled political
conditions prevailing in neighboring countries may have disruptive effects on
the market prices of securities of South African companies.
The Fund is not required to maintain a portion of its assets in each of the
permitted investment categories. The Fund, however, will maintain under normal
circumstances a minimum of 35% of its total assets in equity securities and 10%
in debt securities. The Fund will not invest more than 55% of its total assets
in money market instruments (except for temporary defensive purposes), more than
80% of its total assets in foreign securities, nor more than 20% of its total
assets in gold stocks. The Fund will not invest 25% or more of its assets in the
securities of any single country other than the United States.
The Fund's Sub-Adviser, Meridian Investment Management Corporation
("Meridian"), conducts quantitative investment research and uses the research to
strategically allocate the Fund's assets among the investment categories
identified above, primarily on the basis of a quantitative asset allocation
model. With respect to equity securities, the model analyzes a large number of
equity securities based on the following factors: current earnings, earnings
history, long-term earnings projections, current price, and risk. Meridian then
determines which sectors within an identified investment category are deemed to
be the most attractive relative to other sectors. For example, the model may
indicate that a portion of the Fund's assets should be invested in the domestic
equity category of the market and within this category that pharmaceutical
stocks represent a sector with an attractive total return potential.
Meridian identifies sectors of the domestic and international economy in which
the Fund will invest and then determines which equity securities to purchase
within the identified sectors.
With respect to the selection of debt securities for the Fund, the asset
allocation model provided by Meridian analyzes the prices of commodities and
finished goods to arrive at an interest rate projection. The Investment
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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 invest in zero coupon securities which are debt securities that
pay no cash income but are sold at substantial discounts from their face value.
Certain zero coupon securities also provide for the commencement of regular
interest payments at a deferred date. See "Investment Methods and Risk Factors"
for a discussion of zero coupon securities.
The Fund may write covered call options and purchase put options on
securities, financial indices and foreign currencies and may enter into futures
contracts. The Fund may buy and sell futures contracts (and options on such
contracts) to manage exposure to changes in securities prices and foreign
currencies and as an efficient means of adjusting overall exposure to certain
markets. It is the Fund's operating policy that initial margin deposits and
premiums on options used for non-hedging purposes will not equal more than 5% of
the Fund's net assets. The total market value of securities against which the
Fund has written call options may not exceed 25% of its total assets. The Fund
will not commit more than 5% of its total assets to premiums when purchasing put
options. Futures contracts and options may not always be successful hedges and
their prices can be highly volatile. Using futures contracts and options could
lower the Fund's total return and the potential loss from the use of futures can
exceed the Fund's initial investment in such contracts. Futures contracts and
options and the risks associated with such derivative securities are described
in further detail under "Investment Methods and Risk Factors" below.
The Fund may not purchase securities of unseasoned issuers, including their
predecessors, which have been in operation for less than three years, or equity
securities of issuers which are not readily marketable if, at the time of
investment, its aggregate investment in such securities would exceed 5% of its
total assets.
The Fund's investment in warrants may not exceed 5% of the value of the Fund's
net assets. Included in that amount, but not to exceed 2.0% of the value of the
Fund's net assets, may be warrants which are not listed on the New York or
American Stock Exchange. Warrants acquired by the Fund in units or attached to
securities are deemed to be without value. The portfolio turnover rate for Class
A and Class B shares of Asset Allocation Fund, for the fiscal years ended
September 30, 1997 and 1996 was 79% and 75% respectively. The portfolio turnover
rate for Class A and Class B shares of 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.
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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 ("OTC") market or on smaller
securities exchanges. As a result, the securities of smaller companies may have
limited marketability and may be subject to more abrupt or erratic changes in
value than securities of larger, more established companies. The Fund may also
invest in larger companies where opportunities for above-average capital
appreciation appear favorable and the Fund's social criteria are satisfied.
The Social Awareness Fund may enter into futures contracts (a type of
derivative) (or options thereon) to hedge all or a portion of its portfolio or
as an efficient means of adjusting its exposure to the stock market. The Fund
will limit its use of futures contracts so that initial margin deposits or
premiums on such contracts used for non-hedging purposes will not equal more
than 5% of the Fund's net assets. The Fund may also write call and put options
on a covered basis and purchase put and call options on securities and financial
indices. The aggregate market value of the Fund's portfolio securities covering
call or put options will not exceed 25% of the Fund's net assets. See the
discussion of options and futures contracts under "Investment Methods and Risk
Factors." Under normal circumstances, the Social Awareness Fund will invest all
of its assets in issuers that meet its social criteria as set forth below and
that offer investment potential. Because of the limitations on investment
imposed by the social criteria, the availability of investment opportunities for
the Fund may be limited as compared to those of similar funds which do not
impose such restrictions on investment.
The Social Awareness Fund will not invest in securities of companies that
engage in the production of nuclear energy, alcoholic beverages or tobacco
products.
In addition, the Fund will not invest in securities of companies that
significantly engage in: (1) the manufacture of weapon systems; (2) practices
that, on balance, have a detrimental effect on the environment; or (3) the
gambling industry. The Fund will monitor the activities identified above to
determine whether they are significant to an issuer's business. Significance may
be determined on the basis of the percentage of revenue generated by, or the
size of operations attributable to, such activities. The Fund may invest in an
issuer that engages in the activities set forth above, in a degree that is not
deemed significant by the Investment Manager. In addition, the Fund will seek
out companies that have contributed substantially to the communities in which
they operate, have a positive record on employment relations, have made
substantial progress in the promotion of women and minorities or in the
implementation of benefit policies that support working parents, or have taken
notably positive steps in addressing environmental challenges.
The Investment Manager will evaluate an issuer's activities to determine
whether it engages in any practices prohibited by the Fund's social criteria. In
addition to its own research with respect to an issuer's activities, the
Investment Manager will also rely on other organizations that publish
information for investors concerning the social policy implications of corporate
activities. The Investment Manager may rely upon information provided by
advisory firms that provide social research on U.S. corporations, such as
Kinder, Lydenberg & Domini & Co., Inc., Franklin Insight, Inc. and
Prudential-Bache Capital Funding. Investment selection on the basis of social
attributes is a relatively new practice and the sources for this type of
information are not well established. The Investment Manager will continue to
identify and monitor sources of such information to screen issuers which do not
meet the social investment restrictions of the Fund.
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If after purchase of an issuer's securities by Social Awareness Fund, it is
determined that such securities do not comply with the Fund's social criteria,
the securities will be eliminated from the Fund's portfolio within a reasonable
time. This requirement may cause the Fund to dispose of a security at a time
when it may be disadvantageous to do so. The annualized portfolio turnover rate
for Class A and Class B shares for the period November 4, 1996 (date of
inception) to September 30, 1997, was 38% for Social Awareness Fund. 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.
VALUE FUND
The investment objective of the Value Fund is to seek long-term growth of
capital. The Value Fund will seek to achieve its objective through investment in
a diversified portfolio of securities. Under normal circumstances the Fund will
consist primarily of various types of common stock, which may include ADRs, and
securities convertible into common stocks which the Investment Manager believes
are undervalued relative to assets, earnings, growth potential or cash flows.
See the discussion of ADRs under "Investment Methods and Risk Factors." Under
normal circumstances, the Fund will invest at least 65% of its total assets in
the securities of companies which the Investment Manager believes are
undervalued.
The Value Fund may also invest in (i) preferred stocks; (ii) warrants; and
(iii) investment grade debt securities (or unrated securities of comparable
quality). The Value Fund may purchase securities on a "when-issued" or "delayed
delivery basis" in excess of customary settlement periods for the type of
security involved. The Fund may purchase securities which are restricted as to
disposition under the federal securities laws, provided that such securities are
eligible for resale to qualified institutional investors pursuant to Rule 144A
under the Securities Act of 1933 and subject to the Fund's policy that not more
than 15% of its net assets will be invested in illiquid securities. The Value
Fund reserves the right to invest its assets temporarily in cash and money
market instruments when, in the opinion of the Investment Manager, it is
advisable to do so on account of current or anticipated market conditions. The
Fund may utilize repurchase agreements on an overnight basis or bank demand
accounts, pending investment in securities or to meet potential redemptions or
expenses. See the discussion of when-issued securities, restricted securities
and repurchase agreements under "Investment Methods and Risk Factors."
The annualized portfolio turnover rate for Class A and Class B shares for the
period May 1, 1997 (date of inception) to September 30, 1997, was 35% for Value
Fund. Portfolio turnover is the percentage of the lower of security sales or
purchases to the average portfolio value and would be 100% if all securities in
the Fund were replaced within a period of one year. A 100% turnover rate is
substantially greater than that of most mutual funds.
SMALL COMPANY FUND
The investment objective of the Small Company Fund is to seek long-term growth
of capital. The Fund invests primarily in equity securities of small market
capitalization companies ("small company stocks"). Market capitalization means
the total market value of a company's outstanding common stock. The Fund
anticipates that under normal market conditions, the Fund will invest at least
65% of its assets in equity securities of domestic and foreign companies with
market capitalizations of less than $1 billion at the time of purchase. The
equity securities in which the Fund may invest include common stocks, preferred
stocks (both convertible and non-convertible), warrants and rights. It is
anticipated that the Fund will invest primarily in companies whose securities
are traded on foreign or domestic stock exchanges or in the over-the-counter
market ("OTC"). The Fund also may invest in securities of emerging growth
companies, some of which may have market capitalizations over $1 billion.
Emerging growth companies are companies which have passed their start-up phase
and which show positive earnings and prospects of achieving significant profit
and gain in a relatively short period of time.
Under normal conditions, the Fund intends to invest primarily in small company
stocks; however, the Fund is also permitted to invest up to 35% of its assets in
equity securities of domestic and foreign issuers with a market capitalization
of more than $1 billion at the time of purchase, debt obligations and domestic
and foreign money market instruments, including bankers acceptances,
certificates of deposit and discount notes of U.S. Government securities. Debt
obligations in which the Fund may invest will be investment grade debt
obligations, although the Fund may invest up to 5% of its assets in
non-investment grade debt obligations. In addition, for temporary or emergency
purposes, the Fund can invest up to 100% of total assets in cash, cash
equivalents, U.S. Government securities, commercial paper and certain other
money market instruments, as well as repurchase agreements
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collateralized by these types of securities. The Fund also may invest in reverse
repurchase agreements and shares of non-affiliated investment companies. See the
discussion of such securities under "Investment Methods and Risk Factors" in the
Prospectus.
The Fund may purchase an unlimited number of foreign securities, including
securities of companies in emerging markets. The Fund may invest in foreign
securities, either directly or indirectly through the use of depositary
receipts. Depositary receipts, including American Depositary Receipts ("ADRs"),
European Depository Receipts and American Depository Shares are generally issued
by banks or trust companies and evidence ownership of underlying foreign
securities. The Fund also may invest in securities of foreign investment funds
or trusts (including passive foreign investment companies). See the discussion
of foreign securities, emerging growth stocks, currency risk and ADRs under
"Investment Methods and Risk Factors."
Some of the countries in which the Fund may invest may not permit direct
investment by outside investors. Investment in such countries may only be
permitted through foreign government-approved or government-authorized
investment vehicles, which may include other investment companies. Investing
through such vehicles may involve frequent or layered fees or expenses and may
also be subject to limitation under the Investment Company Act of 1940. See
"Investment Methods and Risk Factors" - "Shares of Other Investment Companies"
for more information.
The Fund may purchase and sell foreign currency on a spot basis and may engage
in forward currency contracts, currency options and futures transactions for
hedging or risk management purposes. See the discussion of currency risk under
"Investment Methods and Risk Factors."
At various times the Fund may invest in derivative instruments for hedging or
risk management purposes or for any other permissible purpose consistent with
the Fund's investment objective. Derivative transactions in which the Fund may
engage include the writing of covered put and call options on securities and the
purchase of put and call options thereon, the purchase of put and call options
on securities indexes and exchange-traded options on currencies and the writing
of put and call options on securities indexes. The Fund may enter into spread
transactions and swap agreements. The Fund also may buy and sell financial
futures contracts which may include interest-rate futures, futures on currency
exchanges, and stock and bond index futures contracts. The Fund may enter into
any futures contracts and related options without limit for "bona fide hedging"
purposes (as defined in the Commodity Futures Trading Commission regulations)
and for other permissible purposes, provided that aggregate initial margin and
premiums on positions engaged in for purposes other than "bona fide hedging"
will not exceed 5% of its net asset value, after taking into account unrealized
profits and losses on such contracts. See "Investment Methods and Risk Factors"
for more information on options, futures (and options thereon) and other
derivative instruments.
The Fund may acquire warrants which are securities giving the holder the
right, but not the obligation, to buy the stock of an issuer at a given price
(generally higher that the value of the stock at the time of issuance), on a
specified date, during a specified period, or perpetually. Warrants may be
acquired separately or in connection with the acquisition of securities. The
Fund may purchase warrants, valued at the lower of cost or market value, of up
to 5% of the Fund's net assets. Included in that amount, but not to exceed 2% of
the Fund's net assets, may be warrants that are not listed on any recognized
U.S. or foreign stock exchange. Warrants acquired by the Fund in units or
attached to securities are not subject to these restrictions.
The Fund may engage in short selling against the box, provided that no more
that 15% of the value of the Fund's net assets is in deposits on short sales
against the box at any one time. The Fund also may invest in real estate
investment trusts ("REITs") and other real estate industry companies or
companies with substantial real estate investments. See the discussion of real
estate securities under "Investment Methods and Risk Factors."
The Fund may invest in restricted securities, including Rule 144A securities.
See the discussion of restricted securities under "Investment Methods and Risk
Factors." The Fund also may invest without limitation in securities purchased on
a when-issued or delayed delivery basis as discussed under "Investment Methods
and Risk Factors."
While there is careful selection and constant supervision by the Fund's
Sub-Adviser, Strong Capital Management, Inc. ("Strong"), there can be no
guarantee that the Fund's objective will be achieved. Strong invests in
companies whose earnings are believed to be in a relatively strong growth trend,
and, to a lesser extent, in companies in which significant further growth is not
anticipated but which are perceived to be undervalued. In identifying companies
with favorable growth prospects, Strong considers factors such as prospects for
above-
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average sales and earnings growth; high return on invested capital; overall
financial strength; competitive advantages, including innovative products and
services; effective research, product development and marketing; and stable,
capable management.
Investing in securities of small-sized and emerging growth companies may
involve greater risks than investing in larger, more established issuers since
these securities may have limited marketability and, thus, they may be more
volatile than securities of larger, more established companies or the market
averages in general. Because small-sized companies normally have fewer shares
outstanding than larger companies, it may be more difficult for the Fund to buy
or sell significant numbers of such shares without an unfavorable impact on
prevailing prices. Small-sized companies may have limited product lines, markets
or financial resources and may lack management depth. In addition, small-sized
companies are typically subject to wider variations in earnings and business
prospects than are larger, more established companies. There is typically less
publicly available information concerning small-sized companies than for larger,
more established ones.
Securities of issuers in "special situations" also may be more volatile, since
the market value of these securities may decline in value if the anticipated
benefits do not materialize. Companies in "special situations" include, but are
not limited to, companies involved in an acquisition or consolidation;
reorganization; recapitalization; merger, liquidation or distribution of cash,
securities or other assets; a tender or exchange offer, a breakup or workout of
a holding company; litigation which, if resolved favorably, would improve the
value of the companies' securities; or a change in corporate control.
Although investing in securities of emerging growth companies or issuers in
"special situations" offers potential for above-average returns if the companies
are successful, the risk exists that the companies will not succeed and the
prices of the companies' shares could significantly decline in value. Therefore,
an investment in the Fund may involve a greater degree of risk than an
investment in other mutual funds that seek long-term growth of capital by
investing in better-known, larger companies.
SECURITY ULTRA FUND
The investment objective of Ultra Fund is to seek capital appreciation.
Investment securities will be selected on the basis of their appreciation
possibilities. Current income will not be a factor in selecting investments and
any such income should be considered incidental.
There can be no assurance that the investment objective of Ultra Fund will be
achieved. Nevertheless, Ultra Fund hopes, by careful selection of individual
securities and by supervision of the investment portfolio, to increase the value
of the Fund's shares.
Stocks considered to have growth potential will include securities of newer,
unseasoned companies and may involve greater risks than investments in companies
with demonstrated earning power. At times Ultra Fund may invest in warrants to
purchase (or securities convertible into) common stocks or in other classes of
securities which the Investment Manager believes will contribute to the
attainment of its investment objective. Securities other than common stock may
be held, but Ultra Fund will not normally invest in fixed income securities
except for defensive purposes or to employ uncommitted cash balances. Ultra Fund
expects that it may invest in certificates of deposit issued by banks or other
bank demand accounts, pending investment in other securities or to meet
potential redemptions or expenses. Ultra Fund will not concentrate its
investments in a particular industry or group of industries. As a matter of
operating policy, Ultra Fund may not invest in illiquid securities in excess of
15% of its net assets.
The Fund may enter into futures contracts to hedge all or a portion of its
portfolio, or as an efficient means of adjusting its exposure to the stock
market. The Fund will limit its use of futures contracts so that initial margin
deposits or premiums on such contracts used for non-hedging purposes will not
equal more than 5% of the Fund's net asset value. Futures contracts and the
risks associated with such instruments are described in further detail under
"Investment Methods and Risk Factors" below.
In seeking capital appreciation, Ultra Fund expects to trade to a substantial
degree in securities for the short term. That is, Ultra Fund will be engaged
essentially in trading operations based on short term market 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
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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 for Class A
and Class B shares of Ultra Fund for the fiscal years ended September 30, 1997,
1996 and 1995 was as follows: 1997 - 68%, 1996 - 161% and 1995 - 180%.
Short-term investments increase portfolio turnover and brokerage costs to
Ultra Fund and thus to its stockholders. Moreover, to the extent short-term
transactions result in the realization of net gains in securities held less than
one year, Ultra Fund's stockholders will be taxed on any such gains at ordinary
income tax rates.
Ultra Fund will not make short sales of securities unless at the time of such
sales it owns or has the right to acquire, as a result of the ownership of
convertible or exchangeable securities and without the payment of further
consideration, an equal amount of such securities, and it will retain such
securities so long as it is in a short position as to them. Should such
securities be sold short, the underlying security will be valued at the asked
price. Such short sales will be used by Ultra Fund only for the purpose of
deferring recognition of gain or loss for federal income tax purposes.
The foregoing investment objective and policies of Ultra Fund may be altered
by the Board of Directors without the approval of stockholders.
INVESTMENT METHODS AND RISK FACTORS
Some of the risk factors related to certain securities, instruments and
techniques that may be used by one or more of the Funds are described in the
"Investment Objectives and Policies" and "Investment Methods and Risk Factors"
sections of the applicable Prospectus and in this Statement of Additional
Information. The following is a description of certain additional risk factors
related to various securities, instruments and techniques. The risks so
described only apply to those Funds which may invest in such securities and
instruments or which use such techniques. Also included is a general description
of some of the investment instruments, techniques and methods which may be used
by one or more of the Funds. The methods described only apply to those Funds
which may use such methods. Although a Fund may employ the techniques,
instruments and methods described below, consistent with its investment
objective and policies and any applicable law, no Fund will be required to do
so.
SHARES OF OTHER INVESTMENT COMPANIES. Certain of the Funds 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
and Small Company Funds) 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. Although each of the Funds 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 intention of each Fund, except Small Company Fund, 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 (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. 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,
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which is generally expressed in yield terms, is fixed at the time the commitment
is made, but delivery and payment for the securities take place at a later date.
When issued securities and forward commitments may be sold prior to the
settlement date, but the Funds will enter into when issued and forward
commitments only with the intention of actually receiving or delivering the
securities, as the case may be; however, a Fund may dispose of a commitment
prior to settlement if the Investment Manager deems it appropriate to do so. No
income accrues on securities which have been purchased pursuant to a forward
commitment or on a when issued basis prior to delivery of the securities. If a
Fund disposes of the right to acquire a when issued security prior to its
acquisition or disposes of its right to deliver or receive against a forward
commitment, it may incur a gain or loss. At the time a Fund enters into a
transaction on a when issued or forward commitment basis, a segregated account
consisting of cash or liquid securities equal to the value of the when issued or
forward commitment securities will be established and maintained with its
custodian and will be marked to market daily. There is a risk that the
securities may not be delivered and that the Fund may incur a loss.
AMERICAN DEPOSITARY RECEIPTS. Each of the Funds may purchase American
Depositary Receipts ("ADRs") which are dollar-denominated receipts issued
generally by U.S. banks and which represent the deposit with the bank of a
foreign company's securities. ADRs are publicly traded on exchanges or
over-the-counter in the United States. Investors should consider carefully the
substantial risks involved in investing in securities issued by companies of
foreign nations, which are in addition to the usual risks inherent in domestic
investments. ADRs and European Depositary Receipts ("EDRs") or other securities
convertible into securities of issuers based in foreign countries are not
necessarily denominated in the same currency as the securities into which they
may be converted. General, ADRs, in registered form, are denominated in U.S.
dollars and are designed for use in the U.S. securities markets, while EDRs
(also referred to as Continental Depositary Receipts (CDRs"), in bearer form,
may be denominated in other currencies and are designed for use in European
securities markets. ADRs are receipts typically issued by a U.S. bank or trust
company evidencing ownership of the underlying securities. EDRs are European
receipts evidencing a similar arrangement. For purposes of the Fund's investment
policies, ADRs and EDRs are deemed to have the same classification as the
underlying securities they represent. Thus, an ADR or EDR representing ownership
of common stock will be treated as common stock.
Depositary receipts are issued through "sponsored" or "unsponsored"
facilities. A sponsored facility is established jointly by the issuer of the
underlying security and a depositary, whereas a depositary may establish an
unsponsored facility without participation by the issuer of the deposited
security. Holders of unsponsored depositary receipts generally bear all the cost
of such facilities and the depositary of an unsponsored facility frequently is
under no obligation to distribute shareholder communications received from the
issuer of the deposited security or to pass through voting rights to the holders
of such receipts in respect of the deposited securities.
RESTRICTED SECURITIES. Restricted securities cannot be sold to the public
without registration under the Securities Act of 1933 ("1933 Act"). Unless
registered for sale, restricted securities can be sold only in privately
negotiated transactions or pursuant to an exemption from registration.
Restricted securities are generally considered illiquid and, therefore, subject
to the Fund's limitation on illiquid securities.
Non-publicly traded securities (including Rule 144A Securities) may involve a
high degree of business and financial risk which may result in substantial
losses. The securities may be less liquid than publicly traded securities.
Although these securities may be resold in privately negotiated transactions,
the prices realized from these sales could be less than those originally paid by
the Fund. In particular, Rule 144A Securities may be resold only to qualified
institutional buyers in accordance with Rule 144A under the Securities Act of
1933. Rule 144A permits the resale to "qualified institutional buyers" of
"restricted securities" that, when issued, were not of the same class as
securities listed on a U.S. securities exchange or quoted in the National
Association of Securities Dealers Automated Quotation System (the "Rule 144A
Securities"). A "qualified institutional buyer" is defined by Rule 144A
generally as an institution, acting for its own account or for the accounts of
other qualified institutional buyers, that in the aggregate owns and invests on
a discretionary basis at least $100 million in securities of issuers not
affiliated with the institution. A dealer registered under the Securities
Exchange Act of 1934 (the "Exchange Act"), acting for its own account or the
accounts of other qualified institutional buyers, that in the aggregate owns and
invests on a discretionary basis at least $10 million in securities of issuers
not affiliated with the dealer may also qualify as a qualified institutional
buyer, as well as an Exchange Act registered dealer acting in a riskless
principal transaction on behalf of a qualified institutional buyer.
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The Funds' Board of Directors is responsible for developing and establishing
guidelines and procedures for determining the liquidity of Rule 144A Securities.
As permitted by Rule 144A, the Board of Directors has delegated this
responsibility to the Investment Manager or relevant Sub-Adviser. In making the
determination regarding the liquidity of Rule 144A Securities, the Investment
Manager or relevant Sub-Adviser will consider trading markets for the specific
security taking into account the unregistered nature of a Rule 144A security. In
addition, the Investment Manager or relevant Sub-Adviser 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 and other restricted securities could have the
effect of increasing the amount of a Fund's assets invested in illiquid
securities to the extent that qualified institutional buyers become
uninterested, for a time, in purchasing these securities.
REAL ESTATE SECURITIES. Certain of the Funds may invest in equity securities
of real estate investment trusts ("REITs") and other real estate industry
companies or companies with substantial real estate investments and therefore,
such Funds may be subject to certain risks associated with direct ownership of
real estate and with the real estate industry in general. These risks include,
among others: possible declines in the value of real estate; possible lack of
availability of mortgage funds; extended vacancies of properties; risks related
to general and local economic conditions; overbuilding; increases in
competition, property taxes and operating expenses; changes in zoning laws;
costs resulting from the clean-up of, and liability to third parties for damages
resulting from, environmental problems; casualty or condemnation losses;
uninsured damages from floods, earthquakes or other natural disasters;
limitations on and variations in rents; and changes in interest rates.
REITs are pooled investment vehicles which invest primarily in income
producing real estate or real estate related loans or interests. REITs are
generally classified as equity REITs, mortgage REITs or hybrid REITs. Equity
REITs invest the majority of their assets directly in real property and derive
income primarily from the collection of rents. Equity REITs can also realize
capital gains by selling properties that have appreciated in value. Mortgage
REITs invest the majority of their assets in real estate mortgages and derive
income from the collection of interest payments. REITs are not taxed on income
distributed to shareholders provided they comply with several requirements of
the Internal Revenue Code, as amended (the "Code"). Finally, certain REITs may
be self-liquidating in that a specific term of existence is provided for in the
trust document. Such trusts run the risk of liquidating at an economically
inopportune time.
ZERO COUPON SECURITIES. Certain of the Funds may invest in certain zero coupon
securities that are "stripped" U.S. Treasury notes and bonds. These Funds also
may invest in zero coupon and other deep discount securities issued by foreign
governments and domestic and foreign corporations, including certain Brady Bonds
and other foreign debt and payment-in-kind securities. Zero coupon securities
pay no interest to holders prior to maturity, and payment-in-kind securities pay
interest in the form of additional securities. However, a portion of the
original issue discount on zero coupon securities and the "interest" on
payment-in-kind securities will be included in the investing Fund's income.
Accordingly, for the Fund to qualify for tax treatment as a regulated investment
company and to avoid certain taxes (see "Taxes" in the Statement of Additional
Information), the Fund may be required to distribute an amount that is greater
than the total amount of cash it actually receives. These distributions must be
made from the Fund's cash assets or, if necessary, from the proceeds of sales of
portfolio securities. The Fund will not be able to purchase additional
income-producing securities with cash used to make such distributions and its
current income ultimately may be reduced as a result. Zero coupon and
payment-in-kind securities usually trade at a deep discount from their face or
par value and will be subject to greater fluctuations of market value in
response to changing interest rates than debt obligations of comparable
maturities that make current distributions of interest in cash.
FOREIGN INVESTMENT RISKS. Investment in foreign securities involves risks and
considerations not present in domestic investments. Foreign companies generally
are not subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to U.S.
companies. The securities of non-U.S. issuers generally are not registered with
the SEC, nor are the issuers thereof usually subject to the SEC's reporting
requirements. Accordingly, there may be less publicly available information
about foreign securities and issuers than is available with respect to U.S.
securities and issuers. Foreign securities markets, while growing in volume,
have for the most part substantially less volume than United States securities
markets and securities of foreign companies are generally less liquid and at
times their prices may be more volatile than
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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 and Small Company Funds 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.
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 only in collateralized Brady Bonds
denominated in U.S. dollars. U.S. dollar-denominated, collateralized Brady
Bonds, which may be fixed rate par bonds or floating rate discount bonds, are
collateralized in full as to principal by U.S. Treasury zero coupon bonds having
the same maturity as the bonds. Interest payments on such bonds generally are
collateralized by cash or securities in an amount that, in the case of fixed
rate bonds, is equal to at least one year of rolling interest payments or, in
the case of floating rate bonds, initially is equal to at least one year's
rolling interest payments based on the applicable interest rate at the time and
is adjusted at regular intervals thereafter.
EMERGING COUNTRIES. Certain Funds 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, a 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 the Fund. The
claims of property owners against those governments were never finally settled.
There can be no assurance that any property represented
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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 the Funds 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 the Funds. 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 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 the 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 or relevant Sub-Adviser will consider
such difficulties when determining the allocation of the Fund's assets.
NON-U.S. WITHHOLDING TAXES. A Fund's investment income and gains from foreign
issuers may be subject to non-U.S. withholding and other taxes, thereby reducing
the Fund's investment income and gains.
CURRENCY RISK. Because certain Funds, under normal circumstances, may invest
substantial portions of its total assets in the securities of foreign issuers
which are denominated in foreign currencies, the strength or weakness of the
U.S. dollar against such foreign currencies will account for part of the Fund's
investment performance. A decline in the value of any particular currency
against the U.S. dollar will cause a decline in the U.S. dollar value of the
Fund's holdings of securities denominated in such currency and, therefore, will
cause an
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overall decline in the Fund's net asset value and any net investment income and
capital gains to be distributed in U.S. dollars to shareholders of the Fund.
The rate of exchange between the U.S. dollar and other currencies is
determined by several factors including the supply and demand for particular
currencies, central bank efforts to support particular currencies, the movement
of interest rates, the pace of business activity in certain other countries and
the U.S., and other economic and financial conditions affecting the world
economy.
Although the Funds value assets daily in terms of U.S. dollars, the Funds do
not intend to convert holdings of foreign currencies into U.S. dollars on a
daily basis. A Fund will do so from time to time, and investors should be aware
of the costs of currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
("spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at
one rate, while offering a lesser rate of exchange should the Fund desire to
sell that currency to the dealer.
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 or
liquid securities having a value equal to the fluctuating market value of the
optioned securities or currencies. In order to comply with the requirements of
several states, the Fund will not write a covered call option if, as a result,
the aggregate market value of all Fund securities or currencies covering call or
put options exceeds 25% of the market value of the Fund's net assets. Should
these state laws change or should the Fund obtain a waiver of their application,
the Fund reserves the right to increase this percentage. In calculating the 25%
limit, the Fund will offset, against the value of assets covering written calls
and puts, the value of purchased calls and puts on identical securities or
currencies with identical maturity dates.
Fund securities or currencies on which call options may be written will be
purchased solely on the basis of investment considerations consistent with the
Fund's investment objectives. The writing of covered call options is a
conservative investment technique believed to involve relatively little risk (in
contrast to the writing of naked or uncovered options, which the Fund will not
do), but capable of enhancing the Fund's total return. When writing a covered
call option, the Fund, in return for the premium, gives up the opportunity for
profit from a price increase in the underlying security or currency above the
exercise price, but conversely, retains the risk of loss should the price of the
security or currency decline. Unlike one who owns securities or currencies not
subject to an option, the Fund has no control over when it may be required to
sell the underlying securities or currencies, since it may be assigned an
exercise notice at any time prior to the expiration of its obligations as a
writer. If a call option which the Fund has written expires, the Fund will
realize a gain in the amount of the premium; however, such gain may be offset by
a decline in the market value of the underlying security or currency during the
option period. If the call option is exercised, the Fund will realize a gain or
loss from the sale of the underlying security or currency.
Call options written by the Fund will normally have expiration dates of less
than nine months from the date written. The exercise price of the options may be
below, equal to, or above the current market values of the underlying securities
or currencies at the time the options are written. From time to time, the Fund
may purchase
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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 or liquid securities
in an amount not less than the exercise price at all times while the put option
is outstanding; (ii) sell short the security or currency underlying the put
option at the same or higher 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 or
relevant Sub-Adviser wishes to purchase the underlying security or currency for
the Fund's portfolio at a price lower than the current market price of the
security or currency. In such event the Fund would write a put option at an
exercise price which, reduced by the premium received on the option, reflects
the lower price it is willing to pay. Since the Fund would also receive interest
on debt securities or currencies maintained to cover the exercise price of the
option, this technique could be used to enhance current return during periods of
market uncertainty. The risk in such a transaction would be that the market
price of the underlying security or currency would decline below the exercise
price less the premiums received. Such a decline could be substantial and result
in a significant loss to the Fund. In addition, the Fund, because it does not
own the specific securities or currencies which it may be required to purchase
in the exercise of the put, cannot benefit from appreciation, if any, with
respect to such specific securities or currencies. In order to comply with the
requirements of several states, the Fund will not write a covered put option if,
as a result, the aggregate market value of all portfolio securities or
currencies covering put or call options exceeds 25% of the market value of the
Fund's net assets. Should these state laws change or should the Fund obtain a
waiver of their application, the Fund reserves the right to increase this
percentage. In calculating the 25% limit, the Fund will offset against the value
of assets covering written puts and calls, the value of purchased puts and calls
on identical securities or currencies.
PREMIUM 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
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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 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
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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 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
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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. 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,
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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 and bond 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 or liquid
securities known as "initial margin." The margin required for a particular
futures contract is set by the exchange on which the contract is traded, and may
be significantly modified from time to time by the exchange during the term of
the contract. Futures contracts are customarily purchased and sold on margins
that may range upward from less than 5% of the value of the contract being
traded.
Margin is the amount of funds that must be deposited by the Fund with its
custodian in a segregated account in the name of the futures commission merchant
in order to initiate futures trading and to maintain the Fund's open position in
futures contracts. A margin deposit is intended to ensure the Fund's performance
of the futures contract. The margin required for a particular futures contract
is set by the exchange on which the futures contract is traded, and may be
significantly modified from time to time by the exchange during the term of the
futures contract.
If the price of an open futures contract changes (by increase in the case of a
sale or by decrease in the case of a purchase) so that the loss on the futures
contract reaches a point at which the margin on deposit does not satisfy margin
requirements, the broker will require an increase in the margin. However, if the
value of a position increases because of favorable price changes in the futures
contract so that the margin deposit exceeds the required margin, the broker will
pay the excess to the Fund.
These subsequent payments, called "variation margin," to and from the futures
broker, are made on a daily basis as the price of the underlying assets
fluctuate making the long and short positions in the futures contract
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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, 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
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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 or liquid securities equal in value
to the current value of the underlying instrument less the margin deposit.
LIQUIDITY. The Fund may elect to close some or all of its futures positions at
any time prior to their expiration. The Fund would do so to reduce exposure
represented by long futures positions or increase exposure represented by short
futures positions. The Fund may close its positions by taking opposite positions
which would operate to terminate the Fund's position in the futures contracts.
Final determinations of variation margin would then be made, additional cash
would be required to be paid by or released to the Fund, and the Fund would
realize a loss or a gain.
Futures contracts may be closed out ONLY on the exchange or board of trade
where the contracts were initially traded. For example, stock index futures
contracts can currently be purchased or sold with respect to the S&P 500 Index
on the Chicago Mercantile Exchange, the New York Stock Exchange Composite Stock
Index on the New York Futures Exchange and the Value Line Composite Stock Index
on the Kansas City Board of Trade. Although the Fund intends to purchase or sell
futures contracts only on exchanges or boards of trade where there appears to be
an active market, there is no assurance that a liquid market on an exchange or
board of trade will exist for any particular contract at any particular time. In
such event, it might not be possible to close a futures
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contract, and in the event of adverse price movements, the Fund would continue
to be required to make daily cash payments of variation margin. However, in the
event futures contracts have been used to hedge portfolio securities, the Fund
would continue to hold securities subject to the hedge until the futures
contracts could be terminated. In such circumstances, an increase in the price
of the securities, if any, might partially or completely offset losses on the
futures contract. However, as described below, there is no guarantee that the
price of the securities will, in fact, correlate with the price movements in the
futures contract and thus provide an offset to losses on a futures contract.
HEDGING RISK. A decision of whether, when, and how to hedge involves skill and
judgment, and even a well-conceived hedge may be unsuccessful to some degree
because of unexpected market behavior or market trends. There are several risks
in connection with the use by the Fund of futures contracts as a hedging device.
One risk arises because of the imperfect correlation between movements in the
prices of the futures and movements in the prices of the underlying instruments
which are the subject of the hedge. The Investment Manager or relevant
Sub-Adviser will, however, attempt to reduce this risk by entering into futures
contracts whose movements, in its judgment, will have a significant correlation
with movements in the prices of the Fund's underlying instruments sought to be
hedged.
Successful use of futures contracts by the Fund for hedging purposes is also
subject to the Investment Manager's or relevant Sub-Adviser's ability to
correctly predict movements in the direction of the market. It is possible that,
when the Fund has sold futures to hedge its portfolio against a decline in the
market, the index, indices, or instruments underlying futures might advance and
the value of the underlying instruments held in the Fund's portfolio might
decline. If this were to occur, the Fund would lose money on the futures and
also would experience a decline in value in its underlying instruments. However,
while this might occur to a certain degree, the Investment Manager believes that
over time the value of the Fund's portfolio will tend to move in the same
direction as the market indices used to hedge the portfolio. It is also possible
that if the Fund were to hedge against the possibility of a decline in the
market (adversely affecting the underlying instruments held in its portfolio)
and prices instead increased, the Fund would lose part or all of the benefit of
increased value of those underlying instruments that it had hedged, because it
would have offsetting losses in its futures positions. In addition, in such
situations, if the Fund had insufficient cash, it might have to sell underlying
instruments to meet daily variation margin requirements. Such sales of
underlying instruments might be, but would not necessarily be, at increased
prices (which would reflect the rising market). The Fund might have to sell
underlying instruments at a time when it would be disadvantageous to do so.
In addition to the possibility that there might be an imperfect correlation,
or no correlation at all, between price movements in the futures contracts and
the portion of the portfolio being hedged, the price movements of futures
contracts might not correlate perfectly with price movements in the underlying
instruments due to certain market distortions. First, all participants in the
futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors might
close future contracts through offsetting transactions which could distort the
normal relationship between the underlying instruments and futures markets.
Second, the margin requirements in the futures market are less onerous than
margin requirements in the securities markets, and as a result the futures
market might attract more speculators than the securities markets do. Increased
participation by speculators in the futures market might also cause temporary
price distortions. Due to the possibility of price distortion in the futures
market and also because of the imperfect correlation between movements in the
underlying instruments and movements in the prices of futures contracts, even a
correct forecast of general market trends by the Investment Manager or relevant
Sub-Adviser might not result in a successful hedging transaction over a very
short time period.
CERTAIN RISKS OF OPTIONS ON FUTURES CONTRACTS. The Fund may seek to close out
an option position by writing or buying an offsetting option covering the same
index, underlying instruments, or contract and having the same exercise price
and expiration date. The ability to establish and close out positions on such
options will be subject to the maintenance of a liquid secondary market. Reasons
for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options, or underlying instruments; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange or
a clearing corporation may not at all times be adequate to handle
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current trading volume; or (vi) one or more exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that exchange (or in the class or series of options)
would cease to exist, although outstanding options on the exchange that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. There is no assurance
that higher than anticipated trading activity or other unforeseen events might
not, at times, render certain of the facilities of any of the clearing
corporations inadequate, and thereby result in the institution by an exchange of
special procedures which may interfere with the timely execution of customers'
orders.
REGULATORY LIMITATIONS. The Funds will engage in transactions in futures
contracts and options thereon only for bona fide hedging, yield enhancement and
risk management purposes, in each case in accordance with the rules and
regulations of the CFTC.
The Funds may not enter into futures contracts or options thereon if, with
respect to positions which do not qualify as bona fide hedging under applicable
CFTC rules, the sum of the amounts of initial margin deposits on the Fund's
existing futures and premiums paid for options on futures would exceed 5% of the
net asset value of the Funds after taking into account unrealized profits and
unrealized losses on any such contracts it has entered into; provided, however,
that in the case of an option that is in-the-money at the time of purchase, the
in-the-money amount may be excluded in calculating the 5% limitation.
To the extent necessary to comply with applicable regulations, in instances
involving the purchase of futures contracts or call options thereon or the
writing of put options thereon by the Fund, an amount of cash or liquid
securities, equal to the market value of the futures contracts and options
thereon (less any related margin deposits), will be identified in an account
with the Fund's custodian to cover the position, or alternative cover will be
employed.
In addition, CFTC regulations may impose limitations on the Funds' ability to
engage in certain yield enhancement and risk management strategies. If the CFTC
or other regulatory authorities adopt different (including less stringent) or
additional restrictions, the Funds would comply with such new restrictions.
FORWARD CURRENCY CONTRACTS AND RELATED OPTIONS. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the Contract.
These contracts are principally traded in the interbank market conducted
directly between currency traders (usually large, commercial banks) and their
customers. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for trades.
Depending on the investment policies and restrictions applicable to a Fund, a
Fund will generally enter into forward foreign currency exchange contracts under
two circumstances. First, when a Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to "lock in"
the U.S. dollar price of the security. By entering into a forward contract for
the purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying security transactions, the Fund will be able
to protect itself against a possible loss resulting from an adverse change in
the relationship between the U.S. dollar and the subject foreign currency during
the period between the date the security is purchased or sold and the date on
which payment is made or received.
Second, when the Investment Manager or relevant Sub-Adviser believes that the
currency of a particular foreign country may suffer or enjoy a substantial
movement against another currency, including the U.S. dollar, it may enter into
a forward contract to sell or buy the amount of the former foreign currency,
approximating the value of some or all of the Fund's portfolio securities
denominated in such foreign currency. Alternatively, where appropriate, the Fund
may hedge all or part of its foreign currency exposure through the use of a
basket of currencies or a proxy currency where such currencies or currency act
as an effective proxy for other currencies. In such a case, the Fund may enter
into a forward contract where the amount of the foreign currency to be sold
exceeds the value of the securities denominated in such currency. The use of
this basket hedging technique may be more efficient and economical than entering
into separate forward contracts for each currency held in the Fund. The precise
matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it
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matures. The projection of short-term currency market movement is extremely
difficult, and the successful execution of a short-term hedging strategy is
highly uncertain.
The Fund will also not enter into such forward contracts or maintain a net
exposure to such contracts where the consummation of the contracts would
obligate a Fund to deliver an amount of foreign currency in excess of the value
of the Fund's portfolio securities or other assets denominated in that currency.
The Funds, however, in order to avoid excess transactions and transaction costs,
may maintain a net exposure to forward contracts in excess of the value of the
Fund's portfolio securities or other assets to which the forward contracts
relate (including accrued interest to the maturity of the forward contract on
such securities) provided the excess amount is "covered" by liquid securities,
denominated in any currency, at least equal at all times to the amount of such
excess. For these purposes the securities or other assets to which the forward
contracts relate may be securities or assets denominated in a single currency,
or where proxy forwards are used, securities denominated in more than one
currency. Under normal circumstances, consideration of the prospect for currency
parities will be incorporated into the longer term investment decisions made
with regard to overall diversification strategies. However, the Investment
Manager and relevant Sub-Advisers believe that it is important to have the
flexibility to enter into such forward contracts when it determines that the
best interests of the Fund will be served.
At the maturity of a forward contract, the Fund may either sell the portfolio
security and make delivery of the foreign currency, or it may retain the
security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract obligating it to purchase, on
the same maturity date, the same amount of the foreign currency.
As indicated above, it is impossible to forecast with absolute precision the
market value of portfolio securities at the expiration of the forward contract.
Accordingly, it may be necessary for a Fund to purchase additional foreign
currency on the spot market (and bear the expense of such purchase) if the
market value of the security is less than the amount of foreign currency the
Fund is obligated to deliver and if a decision is made to sell the security and
make delivery of the foreign currency. Conversely, it may be necessary to sell
on the spot market some of the foreign currency received upon the sale of the
portfolio security if its market value exceeds the amount of foreign currency
the Fund is obligated to deliver. However, as noted, in order to avoid excessive
transactions and transaction costs, the Fund may use liquid securities,
denominated in any currency, to cover the amount by which the value of a forward
contract exceeds the value of the securities to which it relates.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If the Fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between the Fund entering into a forward contract for the sale
of a foreign currency and the date it enters into an offsetting contract for the
purchase of the foreign currency, the Fund will realize a gain to the extent the
price of the currency it has agreed to sell exceeds the price of the currency it
has agreed to purchase. Should forward prices increase, the Fund will suffer a
loss to the extent the price of the currency it has agreed to purchase exceeds
the price of the currency it has agreed to sell.
The Funds dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. However, the Funds
reserve the right to enter into forward foreign currency contracts for different
purposes and under different circumstances. Of course, the Funds are not
required to enter into forward contracts with regard to their foreign
currency-denominated securities and will not do so unless deemed appropriate by
the Investment Manager or relevant Sub-Adviser. It also should be realized that
this method of hedging against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange at a future date. Additionally, although such
contracts tend to minimize the risk of loss due to a decline in the value of the
hedged currency, at the same time, they tend to limit any potential gain which
might result from an increase in the value of that currency.
Although the Funds value their assets daily in terms of U.S. dollars, they do
not intend to convert their holdings of foreign currencies into U.S. dollars on
a daily basis. They will do so from time to time, and investors should be aware
of the costs of currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(the "spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to a Fund at one
rate, while offering a lesser rate of exchange should the Fund desire to resell
that currency to the dealer.
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PURCHASE AND SALE OF CURRENCY FUTURES CONTRACTS AND RELATED OPTIONS. As noted
above, a currency futures contract sale creates an obligation by a Fund, as
seller, to deliver the amount of currency called for in the contract at a
specified future time for a specified price. A currency futures contract
purchase creates an obligation by a Fund, as purchaser, to take delivery of an
amount of currency at a specified future time at a specified price. Although the
terms of currency futures contracts specify actual delivery or receipt, in most
instances the contracts are closed out before the settlement date without the
making or taking of delivery of the currency. Closing out of a currency futures
contract is effected by entering into an offsetting purchase or sale
transaction. Unlike a currency futures contract, which requires the parties to
buy and sell currency on a set date, an option on a currency futures contract
entitles its holder to decide on or before a future date whether to enter into
such a contract. If the holder decides not to enter into the contract, the
premium paid for the option is fixed at the point of sale.
SWAPS, CAPS, FLOORS AND COLLARS. Certain Funds may enter into interest rate,
securities index, commodity, or security and currency exchange rate swap
agreements for any lawful purpose consistent with the Fund's investment
objective, such as for the purpose of attempting to obtain or preserve a
particular desired return or spread at a lower cost to the Fund than if the Fund
had invested directly in an instrument that yielded that desired return or
spread. The Fund also may enter into swaps in order to protect against an
increase in the price of, or the currency exchange rate applicable to,
securities that the Fund anticipates purchasing at a later date. Swap agreements
are two-party contracts entered into primarily by institutional investors for
periods ranging from a few weeks to several years. In a standard "swap"
transaction, two parties agree to exchange the returns (or differentials in
rates of return) earned or realized on particular predetermined investments or
instruments. The gross returns to be exchanged or "swapped" between the parties
are calculated with respect to a "notional amount," i.e., the return on or
increase in value of a particular dollar amount invested at a particular
interest rate, in a particular foreign currency, or in a "basket" of securities
representing a particular index. Swap agreements may include interest rate caps,
under which, in return for a premium, one party agrees to make payments to the
other to the extent that interests rates exceed a specified rate, or "cap";
interest rate floors under which, in return for a premium, one party agrees to
make payments to the other to the extent that interest rates fall below a
specified level, or "floor"; and interest rate collars, under which a party
sells a cap and purchases a floor, or vice versa, in an attempt to protect
itself against interest rate movements exceeding given minimum or maximum
levels.
The "notional amount" of the swap agreement is the agreed upon basis for
calculating the obligations that the parties to a swap agreement have agreed to
exchange. Under most swap agreements entered into by the Funds, the obligations
of the parties would be exchanged on a "net basis." Consequently, the Fund's
obligation (or rights) under a swap agreement will generally be equal only to
the net amount to be paid or received under the agreement based on the relative
value of the positions held by each party to the agreement (the "net amount").
The Fund's obligation under a swap agreement will be accrued daily (offset
against amounts owed to the Fund) and any accrued but unpaid net amounts owed to
a swap counterparty will be covered by the maintenance of a segregated account
consisting of cash or liquid securities.
Whether a Fund's use of swap agreements will be successful in furthering its
investment objective will depend, in part, on the Investment Manager or relevant
Sub-Adviser's ability to predict correctly whether certain types of investments
are likely to produce greater returns than other investments. Swap agreements
may be considered to be illiquid. Moreover, the Fund bears the risk of loss of
the amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counterparty. Certain restrictions
imposed on the Fund's by the Internal Revenue Code may limit a Series' ability
to use swap agreements. The swaps market is largely unregulated.
The Funds will enter swap agreements only with counterparties that the
Investment Manager or relevant Sub-Adviser reasonably believes are capable of
performing under the swap agreements. If there is a default by the other party
to such a transaction, the Fund will have to rely on its contractual remedies
(which may be limited by bankruptcy, insolvency or similar laws) pursuant to the
agreements related to the transaction.
SPREAD TRANSACTIONS. Certain Funds may purchase covered spread options from
securities dealers. Such covered spread options are not presently
exchange-listed or exchange-traded. The purchase of a spread option gives the
Fund the right to put, or sell, a security that it owns at a fixed dollar spread
or fixed yield spread in relationship to another security that the Fund does not
own, but which is used as a benchmark. The risk to the Funds in purchasing
covered spread options is the cost of the premium paid for the spread option and
any transaction costs. In addition, there is no assurance that closing
transactions will be available. The purchase of
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spread options will be used to protect the Fund against adverse changes in
prevailing credit quality spreads, i.e., the yield spread between high quality
and lower quality securities. Such protection is only provided during the life
of the spread option.
HYBRID INSTRUMENTS. Hybrid instruments combine the elements of futures
contracts or options with those of debt, preferred equity or a depository
instrument ("Hybrid Instruments"). Often these Hybrid Instruments are indexed to
the price of a commodity or particular currency or a domestic or foreign debt or
equity securities index. Hybrid Instruments may take a variety of forms,
including, but not limited to, debt instruments with interest or principal
payments or redemption terms determined by reference to the value of a currency
or commodity at a future point in time, preferred stock with dividend rates
determined by reference to the value of a currency, or convertible securities
with the conversion terms related to a particular commodity. The risks of
investing in Hybrid Instruments reflect a combination of the risks from
investing in securities, futures and currencies, including volatility and lack
of liquidity. Reference is made to the discussion of futures and forward
contracts in this Statement of Additional Information for a discussion of these
risks. Further, the prices of the Hybrid Instrument and the related commodity or
currency may not move in the same direction or at the same time. Hybrid
Instruments may bear interest or pay preferred dividends at below market (or
even relatively nominal) rates. In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market or in a
private transaction between a Fund and the seller of the Hybrid Instrument, the
creditworthiness of the contract party to the transaction would be a risk factor
which the Fund would have to consider. Hybrid Instruments also may not be
subject to regulation of the CFTC, which generally regulates the trading of
commodity futures by U.S. persons, the SEC, which regulates the offer and sale
of securities by and to U.S. persons, or any other governmental regulatory
authority.
LENDING OF PORTFOLIO SECURITIES. For the purpose of realizing additional
income, certain of the Funds may make secured loans of Fund securities amounting
to not more than 33 1/3% of its total assets. Securities loans are made to
broker/dealers, institutional investors, or other persons pursuant to agreements
requiring that the loans be continuously secured by collateral at least equal at
all times to the value of the securities lent marked to market on a daily basis.
The collateral received will consist of cash, U.S. Government securities,
letters of credit or such other collateral as may be permitted under its
investment program. While the securities are being lent, the Fund will continue
to receive the equivalent of the interest or dividends paid by the issuer on the
securities, as well as interest on the investment of the collateral or a fee
from the borrower. The Fund has a right to call each loan and obtain the
securities on five business days' notice or, in connection with securities
trading on foreign markets, within such longer period of time which coincides
with the normal settlement period for purchases and sales of such securities in
such foreign markets. The Fund will not have the right to vote securities while
they are being lent, but it will call a loan in anticipation of any important
vote. The risks in lending portfolio securities, as with other extensions of
secured credit, consist of possible delay in receiving additional collateral or
in the recovery of the securities or possible loss of rights in the collateral
should the borrower fail financially. Loans will only be made to persons deemed
by the Investment Manager or relevant Sub-Adviser to be of good standing and
will not be made unless, in the judgment of the Investment Manager or relevant
Sub-Adviser, the consideration to be earned from such loans would justify the
risk.
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.
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3. Not to purchase securities for the purpose of exercising control over the
issuers thereof.
4. Not to act as an underwriter, either directly or indirectly.
5. Not to borrow money or securities for any purpose except to the extent that
borrowing up to 5% of the Fund's total assets is permitted for emergency
purposes, provided such borrowing is made on a temporary basis from
commercial banks and is not used for investment purposes.
6. Not to lend money or securities to any person, corporation, securities
dealer, or bank, other than the purchase of publicly distributed debt
securities which are not considered loans, or by entry into repurchase
agreements.
7. Not to buy securities on margin or effect short sales of securities.
8. Not to mortgage, pledge or hypothecate any securities or funds of the Fund
other than as might become necessary to furnish bond to governmental
agencies required for the conduct of the business of the Fund.
9. Not to purchase any security other than securities listed on a national
securities exchange registered under the Securities Exchange Act of 1934,
or actively traded over-the-counter.
10. Not to invest in companies having a record of less than three years'
continuous operation, which may include the operations of predecessor
companies.
11. Not to invest in the securities of an issuer if the officers and directors
of the Fund, Underwriter or Manager own more than 1/2 of 1% of such
securities, or if all such persons together own more than 5% of such
securities.
12. Not to invest in the securities of other investment companies except in the
open market at ordinary broker's commissions.
13. Not to allow officers or directors of the Fund, Underwriter or Manager to
purchase shares of the Fund except for investment at current net asset
value.
14. Not to own, buy or sell real estate, commodities or commodity contracts.
15. Not to invest in puts, calls, straddles, spreads or any combination
thereof.
16. Not to invest in limited partnerships or similar interests in oil, gas,
mineral leases, and other mineral exploration development programs;
provided, however, that the Fund may invest in the securities of other
corporations whose activities include such exploration and development.
Although Fundamental Policy 16 is intended to apply only to certain oil, gas
and other mineral exploration development programs and not to securities traded
on national securities exchanges, the Board of Directors reviewed and considered
in 1986 the scope of this limitation. Prior to that time, the Fund had made an
investment, which incurred a loss, in an oil and gas company which was organized
as a limited partnership with its securities traded on the New York Stock
Exchange. The directors concluded that the limitation was not intended to apply
to such investments, but in order to avoid possible future questions regarding
the permissibility of such investments, have determined that Growth and Income
Fund will not purchase limited partnership securities of any type in the future.
The Fund does not interpret Fundamental Policy 7 or 14 as prohibiting
transactions in financial futures contracts.
SECURITY EQUITY FUND'S FUNDAMENTAL POLICIES
Security Equity Fund's fundamental policy limitations, which are applicable to
each of Equity Fund, Global Fund, Asset Allocation Fund, Social Awareness Fund,
Value Fund and Small Company Fund, are:
1. Not to invest more than 5% of its total assets in the securities of any one
issuer; provided, however, that for Asset Allocation Fund, Social Awareness
Fund, Value Fund and Small Company Fund, this limitation applies only with
respect to 75% of its total assets.
2. Not to purchase more than 10% of the outstanding voting securities of any
one issuer.
3. Not to purchase securities for the purpose of exercising control over the
issuers thereof.
4. Not to underwrite securities of other issuers, provided that this policy
shall not be construed to prevent or limit in any manner the right of the
Fund to purchase securities for investment purposes.
5. With respect to Equity Fund and Global Fund, not to borrow money or
securities for any purpose except to the extent that borrowing up to 10% of
the Fund's total assets is permitted for emergency purposes on a temporary
basis from banks and will not be made for investment purposes. Asset
Allocation Fund, Social Awareness Fund, Value Fund and Small Company Fund
may borrow up to 33 1/3% of total assets and may
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borrow for emergency, temporary or investment purposes from a variety of
sources, including banks. Each of the Funds may also obtain such short-term
credits as are necessary for the clearance of portfolio transactions.
6. Not to make loans to other persons other than the purchase of publicly
distributed debt securities which are not considered loans, or by entry
into repurchase agreements; provided, however, that this investment
limitation does not apply to Asset Allocation Fund, Social Awareness Fund,
Value Fund and Small Company Fund.
7. Not to buy securities on margin or effect short sales of securities;
provided, however, that Asset Allocation Fund, Social Awareness Fund and
Value Fund may make margin deposits in connection with transactions in
options, futures, and options on futures and provided further that this
investment limitation does not apply to Small Company Fund.
8. Not to issue senior securities; provided, however, that Asset Allocation
Fund, Social Awareness Fund, Value Fund and Small Company Fund may issue
senior securities in compliance with the Investment Company Act of 1940.
9. Not to invest in the securities of other investment companies; provided,
however, that this investment limitation does not apply to Asset Allocation
Fund, Social Awareness Fund, Value Fund and Small Company Fund which may
invest in the securities of other investment companies. (Social Awareness
Fund does not presently intend to invest in the securities of other
investment companies.)
10. Not to invest in companies having a record of less than three years'
continuous operation, which may include the operations of predecessor
companies; provided, however, that this investment limitation does not
apply to Asset Allocation Fund, Social Awareness Fund, Value Fund and Small
Company 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; provided, however, that this limitation does not apply to
the Small Company Fund.
12. Not to allow officers or directors of the Fund, the Underwriter or
Investment Manager to purchase shares of the Fund except for investment at
current net asset value.
13. Not to invest 25% or more of the Fund's total assets in a particular
industry.
14. Not to own, buy or sell real estate, commodities or commodity contracts;
provided, however, that Asset Allocation Fund, Social Awareness Fund, Value
Fund and Small Company Fund may enter into forward currency contracts and
forward commitments, and transactions in futures, options, and options on
futures. (This policy shall not prevent any of the Funds from investing in
securities or other instruments backed by real estate or in securities of
companies engaged in the real estate business.)
15. Not to invest in warrants unless acquired as a unit or attached to other
securities; provided, however, that this investment limitation does not
apply to Asset Allocation Fund, Social Awareness Fund, Value Fund and Small
Company Fund.
16. Not to invest more than 10% of its total assets in restricted securities;
provided, however, that this investment limitation does not apply to Asset
Allocation Fund, Social Awareness Fund, Value Fund and Small Company Fund
which may invest in restricted securities. (Restricted securities are those
securities for which an active and substantial market does not exist at the
time of purchase or upon subsequent valuation, or for which there are legal
or contractual restrictions as to disposition.)
17. Not to invest more than 2% of its total assets in puts, calls, straddles,
spreads, or any combination thereof; provided, however, that this
investment limitation does not apply to Asset Allocation Fund, Social
Awareness Fund, Value Fund and Small Company 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 and provided
further that this investment limitation does not apply to Small Company
Fund.
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
31
<PAGE>
contracts or options on financial futures contracts; however, with respect to
Equity and Global Funds, transactions in options and options on financial
futures contracts are subject to the limits set forth in Fundamental Policy 17.
SECURITY ULTRA FUND'S FUNDAMENTAL POLICIES
Ultra Fund's fundamental policy limitations are:
1. Not to invest more than 5% of its total assets in the securities of any one
issuer (other than the United States of America).
2. Not to purchase more than 10% of the outstanding voting securities (or of
any class of outstanding securities) of any one issuer.
3. Not to purchase securities for the purpose of exercising control over the
issuers thereof.
4. Not to underwrite securities of other issuers.
5. Not to purchase restricted securities.
6. Not to pledge any portion of its assets.
7. Not to make loans to other persons other than the purchase of publicly
distributed debt securities which are not considered loans, or by entry
into repurchase agreements.
8. Not to buy securities on margin but it may obtain such short-term credits
as may be necessary for the clearance of purchases and sales of securities.
9. Not to issue senior securities, except that it may borrow money from banks
for temporary or emergency purposes in an amount up to 5% of the Fund's
total assets, provided that the Fund will not purchase portfolio securities
at any time it has outstanding borrowings.
10. Not to invest in the securities of other investment companies.
11. Not to make short sales of securities unless at the time it owns an equal
amount of such securities, or by virtue of ownership of convertible or
exchangeable securities, it has the right to obtain through the conversion
or exchange of such other securities an equal amount of securities sold
short.
12. Not to invest more than 25% of the Fund's total assets in a particular
industry.
13. Not to own, buy or sell real estate, commodities or commodity contracts.
14. Not to invest more than 5% of the value of the Fund's net assets in
warrants, valued at the lower of cost or market. Included within that
amount (but not to exceed 2% of the value of the Fund's net assets) may be
warrants which are not listed on the New York or American Stock Exchanges.
Warrants acquired by the Fund in units or attached to securities may be
deemed to be without value.
15. Not to invest more than 5% of its total assets in any issuer or issuers
having a record of less than three years continuous operation, which may
include the operations of predecessor companies.
16. Not to invest in puts, calls, straddles, spreads, or any combination
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.
- --------------------------------------------------------------------------------
NAME, ADDRESS AND POSITIONS HELD WITH PRINCIPAL OCCUPATIONS DURING PAST
THE FUNDS FIVE YEARS
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
32
<PAGE>
- --------------------------------------------------------------------------------
NAME, ADDRESS AND POSITIONS HELD WITH PRINCIPAL OCCUPATIONS DURING PAST
THE FUNDS FIVE YEARS
- --------------------------------------------------------------------------------
DONALD A. CHUBB, JR.,** Director Business broker, Griffith & Blair
2222 SW 29th Street Realtors. Prior to 1997, President,
Topeka, Kansas 66611 Neon Tube Light Company, Inc.
DONALD L. HARDESTY, Director President, Central Research
900 Bank IV Tower Corporation.
Topeka, Kansas 66603
PENNY A. LUMPKIN,** Director Vice President, Palmer News, Inc.
3616 Canterbury Town Road Prior to October 1991, Secretary and
Topeka, Kansas 66610 Director, Palmer Companies, Inc.
(Wholesale Periodicals).
MARK L. MORRIS, JR.,** Director President, Mark Morris Associates
5500 SW 7th Street (Veterinary Research and Education).
Topeka, Kansas 66606
HUGH L. THOMPSON, Director President Emeritus, Washburn
2728 Newfound Harbour Drive University. Prior to June 1997,
Merritt Island, Florida 32952 President, Washburn University.
JAMES R. SCHMANK,* Vice President and President and Managing Member
Director Representative, Security Management
Company, LLC; Senior Vice President,
Security Benefit Group, Inc. and
Security Benefit Life Insurance
Company.
MARK E. YOUNG, Vice President Vice President, Security Management
Company, LLC; Vice Company, LLC; Assistant Vice
President, Security Benefit Group,
Inc. and Security Benefit Life
Insurance Company.
JANE A. TEDDER, Vice President Vice President and Senior Economist,
(Equity Fund only) Security Management President,
Security Benefit Group, Inc. and
Security Benefit Life Insurance
Company.
TERRY A. MILBERGER, Vice President Senior Vice President and Senior
(Equity Fund only) Portfolio Manager, Security
Management Company, LLC; Senior Vice
President, Security Benefit Group,
Inc. and Security Benefit Life
Insurance Company.
MICHAEL A. PETERSEN, Vice President Vice President and Senior Portfolio
(Growth and Income Fund only) Manager, Security Management Company,
LLC; Vice President, Security Benefit
Group, Inc. and Security Benefit Life
Insurance Company. Prior to November
1997, Director of Equity Research and
Fund Management, Old Kent Bank and
Trust Corporation.
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, Treasurer Assistant Vice President and
Treasurer, 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
(Equity and Ultra Fund only) Portfolio Manager, Security
Management 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.
- --------------------------------------------------------------------------------
33
<PAGE>
- --------------------------------------------------------------------------------
NAME, ADDRESS AND POSITIONS HELD WITH PRINCIPAL OCCUPATIONS DURING PAST
THE FUNDS FIVE YEARS
- --------------------------------------------------------------------------------
THOMAS A. SWANK, Assistant Vice President Vice President and Portfolio Manager,
(Growth and Income Fund only) Security Management Company, LLC;
Vice President and Chief Investment
Officer, Security Benefit Group, Inc.
and Security Benefit Life Insurance
Company.
JIM SCHIER, Assistant Vice President Assistant Vice President and
(Equity Fund and Growth and Income Fund Portfolio Manager, Security
only) Management Company, LLC; Assistant
Vice President, Security Benefit
Group, Inc. and Security Benefit Life
Insurance Company. Prior to February
1997, Assistant Vice President and
Senior Research Analyst, Security
Management Company, LLC. Prior to
August 1995, Portfolio Manager,
Mitchell Capital Management. Prior to
March 1993, Vice President and
Portfolio Manager, Fourth Financial.
CHRISTOPHER D. SWICKARD, Assistant Assistant Secretary, Security
Secretary Management Company, LLC; Assistant
Vice President and Assistant Counsel,
Security Benefit Group, Inc. and
Security Benefit Life Insurance
Company. Prior to June 1992, student
at Washburn University School of Law.
- --------------------------------------------------------------------------------
*These directors are deemed to be "interested persons" of the Funds under the
Investment Company Act of 1940, as amended, by reason of their positions with
the Funds' Investment Manager and/or the parent of the Investment Manager.
**These directors serve on the Funds' joint audit committee, the purpose of
which is to meet with the independent auditors, to review the work of the
auditors, and to oversee the handling by Security Management Company, LLC of
the accounting functions for the Funds.
- --------------------------------------------------------------------------------
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, Messrs. Milberger and Petersen
who are also Vice Presidents of SBL Fund, Ms. Shields who is also Assistant Vice
President of SBL Fund and Messrs. Swank and Schier who are Assistant Vice
Presidents of SBL Fund. (See the table under "Investment Management," on page
40, for positions held by such persons with the Investment Manager.) Ms. Lee
holds identical offices for the Funds' distributor, Security Distributors, Inc.,
and Messrs. Cleland, Schmank and Young 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 $1,667 and a fee of $1,000
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 $1,000 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, Social
Awareness, Value and Small Company Funds, 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, Social Awareness,
Value and Small Company Funds pay their respective share of directors' fees,
audit committee fees and travel costs based on relative net assets. (See page
40, "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,
1997, 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.
34
<PAGE>
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION
--------------------------------------- TOTAL COMPENSATION
SECURITY SECURITY SECURITY ESTIMATED ANNUAL FROM THE SECURITY
GROWTH AND EQUITY ULTRA BENEFITS UPON FUND COMPLEX,
NAME OF DIRECTOR OF THE FUND INCOME FUND FUND FUND RETIREMENT INCLUDING THE FUNDS
- ------------------------------- ------------- ---------- ---------- ----------------- --------------------
<S> <C> <C> <C> <C> <C>
Willis A. Anton, Jr ........... $ 394 $ 394 $ 394 $ 0 $ 4,725
Donald A.Chubb, Jr ............ 1,585 1,651 1,583 0 19,300
John D. Cleland ............... 0 0 0 0 0
Donald L. Hardesty ............ 1,575 1,575 1,575 0 18,900
Penny A. Lumpkin .............. 1,585 1,651 1,583 0 19,300
Mark L. Morris, Jr ............ 1,585 1,651 1,583 0 19,300
Jeffrey B. Pantages ........... 0 0 0 0 0
Hugh Thompson ................. 1,575 1,575 1,575 0 18,900
</TABLE>
- --------------------------------------------------------------------------------
The Investment Manager compensates its officers and directors who may also
serve as officers or directors of the Funds. On December 31, 1997, the Funds'
officers and directors (as a group) beneficially owned less than one percent of
the total outstanding Class A shares of Growth and Income Fund, Equity Fund,
Global Fund, Asset Allocation Fund, Social Awareness Fund, Value Fund and Ultra
Fund.
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 40.) 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.
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
35
<PAGE>
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 OF PERCENTAGE
AMOUNT OF PURCHASE PERCENTAGE OF NET AMOUNT REALLOWABLE
AT OFFERING PRICE OFFERING PRICE INVESTED TO DEALERS
- --------------------------------- -------------- ------------- -----------
Less than $50,000 ............... 5.75% 6.10% 5.00%
$50,000 but less than $100,000 .. 4.75 4.99 4.00
$100, 000 but less than $250,000 3.75 3.90 3.00
$250,000 but less than $500,000 . 2.75 2.83 2.25
$500,000 but less than $1,000,000 2.00 2.04 1.75
$1,000,000 and over ............. None None (See below)
The Underwriter will pay a commission to dealers on purchases of $1,000,000 or
more as follows: 1.00% on sales up to $5,000,000, plus .50% on sales of
$5,000,000 or more up to $10,000,000, and .10% on any amount of $10,000,000 or
more.
The Investment Manager may, at its expense, pay a service fee to dealers who
satisfy certain criteria established by the Investment Manager from time to time
relating to the volume of their sales of Class A shares of the Funds and certain
other Security Funds during prior periods and certain other factors, including
providing to their clients who are stockholders of the Funds certain services,
which include assisting in maintaining records, processing purchase and
redemption requests and establishing shareholder accounts, assisting
shareholders in changing account options or enrolling in specific plans, and
providing shareholders with information regarding the Funds and related
developments. Service fees are paid quarterly and may be discontinued at any
time.
SECURITY EQUITY FUND'S CLASS A DISTRIBUTION PLAN
As discussed in the Prospectus, Small Company Fund has a Distribution Plan for
its Class A shares pursuant to Rule 12b-1 under the Investment Company Act of
1940. The Plan authorizes the Fund to pay an annual fee to the Distributor of
.25% of the average daily net asset value of the Class A shares of the Fund to
finance various activities relating to the distribution of such shares of the
Fund to investors. These expenses include, but are not limited to, the payment
of compensation (including compensation to securities dealers and other
financial institutions and organizations) to obtain various administrative
services for the Fund. These services include, among other things, processing
new shareholder account applications and serving as the primary source of
information to customers in answering questions concerning the Fund and their
transactions with the Fund. The Distributor is also authorized to engage in
advertising, the preparation and distribution of sales literature and other
promotional activities on behalf of the Fund. The Distributor is required to
report in writing to the Board of Directors of Equity Fund and the board will
review at least quarterly the amounts and purpose of any payments made under the
Plan. The Distributor is also required to furnish the board with such other
information as may reasonably be requested in order to enable the board to make
an informed determination of whether the Plan should be continued.
The Plan became effective on October 15, 1997. The Plan will continue from
year to year, provided that such continuance is approved at least annually by a
vote of a majority of the Board of Directors of the Fund, including a majority
of the independent directors cast in person at a meeting called for the purpose
of voting on such continuance. The Plan can be terminated at any time on 60
days' written notice, without penalty, if a majority of the disinterested
directors or the Class A shareholders vote to terminate the Plan. Any agreement
relating to the implementation of the Plan terminates automatically if it is
assigned. The Plan may not be amended to increase materially the amount of
payments thereunder without approval of the Class A shareholders of the Fund.
Because all amounts paid pursuant to the Distribution Plan are paid to the
Distributor, the Investment Manager and its officers, directors and employees,
including Mr. Cleland (director of the Fund), Messrs. Young, Schmank and
Swickard, Ms. Tedder, Ms. Lee and Ms. Harwood (officers of the Fund), all may be
deemed to have a direct or
36
<PAGE>
indirect financial interest in the operation of the Distribution Plan. None of
the independent directors have a direct or indirect financial interest in the
operation of the Distribution Plan.
Benefits from the Distribution Plan may accrue to the Fund and its
stockholders from the growth in assets due to sales of shares to the public
pursuant to the Distribution Agreement with the Distributor. Increases in the
Small Company Fund's net assets from sales pursuant to its Distribution Plan and
Agreement may benefit shareholders by reducing per share expenses, permitting
increased investment flexibility and diversification of Small Company Fund's
assets, and facilitating economies of scale (e.g., block purchases) in the
Fund's securities transactions.
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 CONTINGENT DEFERRED
PAYMENT WAS MADE SALES CHARGE
--------------------------------------------
First.................. 5%
Second................. 4%
Third.................. 3%
Fourth................. 3%
Fifth.................. 2%
Sixth and Following.... 0%
--------------------------------------------
Class B shares (except shares purchased through the reinvestment of dividends
and other distributions paid with respect to Class B shares) will automatically
convert, on the eighth anniversary of the date such shares were purchased, to
Class A shares which are subject to a lower distribution fee. This automatic
conversion of Class B shares will take place without imposition of a front-end
sales charge or exchange fee. (Conversion of Class B shares represented by stock
certificates will require the return of the stock certificates to the Investment
Manager.) All shares purchased through reinvestment of dividends and other
distributions paid with respect to Class B shares ("reinvestment shares") will
be considered to be held in a separate subaccount. Each time any Class B shares
(other than those held in the subaccount) convert to Class A shares, a pro rata
portion of the reinvestment shares held in the subaccount will also convert to
Class A shares. Class B shares so converted will no longer be subject to the
higher expenses borne by Class B shares. Because the net asset value per share
of the Class A shares may be higher or lower than that of the Class B shares at
the time of conversion, although the dollar value will be the same, a
shareholder may receive more or less Class A shares than the number of Class B
shares converted. Under current law, it is the Funds' opinion that such a
conversion will not constitute a taxable event under federal income tax law. In
the event that this ceases to be the case, the Board of Directors will consider
what action, if any, is appropriate and in the best interests of the Class B
stockholders.
CLASS B DISTRIBUTION PLAN
Each Fund bears some of the costs of selling its Class B shares under a
Distribution Plan adopted with respect to its Class B shares ("Class B
Distribution Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940 ("1940 Act"). This Plan provides for payments at an annual rate of 1.00% of
the average daily net asset value of Class B shares. Amounts paid by the Funds
are currently used to pay dealers and other firms that make Class B shares
available to their customers (1) a commission at the time of purchase normally
equal to 4.00% of the value of each share sold and (2) a service fee for account
maintenance and personal service to shareholders payable for the first year,
initially, and for each year thereafter, quarterly, in an amount equal to .25%
annually of the average daily net asset value of Class B shares sold by such
dealers and other firms and remaining outstanding on the books of the Funds.
37
<PAGE>
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.
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 40.)
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
38
<PAGE>
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.
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
39
<PAGE>
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.
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 38.
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
40
<PAGE>
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 life insurance company with $7.3 billion of
assets under management, is incorporated under the laws of Kansas.
The Investment Manager serves as investment adviser to Security Growth and
Income Fund, Security Equity Fund and Security Ultra Fund, respectively, under
Investment Management and Services Agreements, which were approved by the
shareholders of the Funds on March 29, 1989, December 8, 1988 and December 30,
1988, and which became effective on March 31, 1989, January 31, 1989 and
February 28, 1989. Security Equity Fund's Agreement was amended by its Board of
Directors at a regular meeting held on July 23, 1993, to provide for the
Investment Manager to serve as investment adviser to Global Fund and on April 3,
1995, July 26, 1996, February 7, 1997 and July 25, 1997, respectively, to
provide for the Investment Manager to serve as investment adviser to Asset
Allocation Fund, Social Awareness Fund, Value Fund and Small Company Fund. The
Agreements were last renewed by the Funds' Board of Directors at a regular
meeting held on December 1, 1997.
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 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 advisory services to Global Fund pursuant to a Sub-Advisory Agreement,
dated October 1, 1993. Pursuant to this agreement, Lexington furnishes
investment advisory, statistical and research facilities, supervises and
arranges for the purchase and sale of securities on behalf of Global Fund and
provides for the compilation and maintenance of records pertaining to such
investment advisory services, subject to the control and supervision of the
Funds' Board of Directors and the Investment Manager. For such services, the
Investment Manager pays Lexington an amount equal to .50% of the average net
assets of Global Fund, computed on a daily basis and payable monthly. The
Sub-Advisory Agreement may be terminated without penalty at any time by either
party on 60 days' written notice and is automatically terminated in the event of
its assignment or in the event that the Investment Advisory Contract between the
Investment Manager and the Fund is terminated, assigned or not renewed.
Lexington is a wholly-owned subsidiary of Lexington Global Asset Managers,
Inc., a Delaware corporation with offices at Park 80 West, Plaza Two, Saddle
Brook, New Jersey 07663. Descendants of Lunsford Richardson, Sr., their spouses,
trusts and other related entities have a majority voting control of the
outstanding shares of Lexington Global Asset Managers, Inc. Lexington was
established in 1938 and currently manages over $3.5 billion in assets.
The Investment Manager has entered into a sub-advisory research agreement with
Meridian Investment Management Corporation ("Meridian"), 12835 East Arapahoe
Road, Tower II, 7th Floor, Englewood, Colorado 80112. Pursuant to the agreement,
Meridian furnishes investment advisory, statistical and research facilities,
supervises and arranges for the purchase and sale of equity securities on behalf
of the Fund and provides for the compilation and maintenance of records
pertaining to such investment advisory services, subject to the control and
supervision of the Board of Directors of the Fund and the Investment Manager.
Meridian is a wholly-owned subsidiary of Meridian Management & Research
Corporation which is controlled by its two stockholders, Michael J. Hart and
Craig T. Callahan. The Investment Manager pays Meridian an annual fee equal to a
percentage of the average daily closing value of the net assets of Asset
Allocation Fund, computed on a daily basis, according to the following schedule:
- --------------------------------------------------------------------------------
AVERAGE DAILY NET ASSETS OF THE FUND ANNUAL FEE
- --------------------------------------------------------------------------------
Less than $100 million ..................................... .40%, plus
$100 million but less than $200 million .................... .35%, plus
$200 million but less than $400 million .................... .30%, plus
$400 million or more ....................................... .25%
- --------------------------------------------------------------------------------
The Investment Manager has engaged Strong Capital Management, Inc. ("Strong"),
900 Heritage Reserve, Menomonee Falls, Wisconsin 53051, to provide investment
advisory services to the Small Company Fund. For such services, the Investment
Manager pays Strong, an annual fee based on the combined average net assets of
Small Company Fund and another fund for which the Investment Manager has engaged
Strong to provide
41
<PAGE>
advisory services. The fee is equal to .50% of the combined average net assets
under $150 million, .45% of the combined average net assets at or above $150
million but less than $500 million, and .40% of the combined average net assets
at or above $500 million. 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. Strong is a privately held corporation
which is controlled by Richard S. Strong. Strong was established in 1974 and
currently manages over $27 billion in assets.
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 also agreed to arrange for others (or itself) to
provide to the Funds, except Asset Allocation, Social Awareness, Value and Small
Company Funds, all other services, including custodian and independent
accounting services, required by the Funds. The Investment Manager will, when
necessary, engage the services of third parties such as a custodian bank or
independent auditors, in accordance with applicable legal requirements,
including approval by the Funds' Board of Directors. The Investment Manager
bears the expenses of providing the services it is required to furnish under the
Agreement for each Fund, except Asset Allocation, Social Awareness, Value and
Small Company Funds. Thus, those Funds' expenses include only fees paid to the
Investment Manager as well as expenses of brokerage commissions, interest,
taxes, extraordinary expenses approved by the Board of Directors, and Class B
distribution fees.
Asset Allocation, Social Awareness, Value and Small Company 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, Social
Awareness, Value and Small Company Funds will also pay for the preparation and
distribution of the prospectus to their shareholders and all expenses in
connection with registration under the Investment Company Act of 1940 and the
registration of their capital stock under federal and state securities laws.
Asset Allocation, Social Awareness, Value and Small Company Funds will pay
nonrecurring expenses as may arise, including litigation expenses affecting
them.
The Investment Manager has agreed to reimburse the Funds or waive a portion of
its management fee for any amount by which the total annual expenses of the
Funds (including management fees, but excluding interest, taxes, brokerage
commissions, extraordinary expenses and Class B distribution fees) for any
fiscal year that exceeds the level of expenses which the Funds are permitted to
bear under the most restrictive expense limitation imposed by any state in which
shares of the Funds are then qualified for sale. (The Investment Manager is not
aware of any state that currently imposes limits on the level of mutual fund
expenses.)
As compensation for its services, the Investment Manager receives with respect
to Growth and Income, Equity and Ultra Funds, on an annual basis, 2% of the
first $10 million of the average net assets, 1 1/2% of the next $20 million of
the average net assets and 1% of the remaining average net assets of the Funds,
determined daily and payable monthly. The Investment Manager receives with
respect to the Global Fund, on an annual basis, 2% of the first $70 million of
the average net assets and 1 1/2% of the remaining average net assets,
determined daily and payable monthly.
Separate fees are paid by Asset Allocation, Social Awareness, Value and Small
Company Funds to the Investment Manager for investment advisory, administrative
and transfer agency services. With respect to Asset Allocation Fund the
Investment Manager receives, on an annual basis, an investment advisory fee
equal to 1% of the average daily net assets of the Fund, calculated daily and
payable monthly. The Investment Manager also receives, on an annual basis, an
administrative fee equal to .045% of the average daily net assets of the Asset
Allocation Fund plus the greater of .10% of its average net assets or $60,000.
With respect to the Social Awareness, Value and Small Company Funds, the
Investment Manager receives, on an annual basis, an investment advisory fee
equal to 1% of the average daily net assets of the respective Funds, calculated
daily and payable monthly. The Investment Manager has agreed to waive the
investment advisory fee of Small Company Fund for the fiscal year ending
September 30, 1998. The Investment Manager also receives, on an annual basis,
42
<PAGE>
an administrative fee equal to .09% of the average daily net assets of the
Social Awareness, Value and Small Company Funds. For transfer agency services
provided to each of the Asset Allocation, Social Awareness, Value and Small
Company 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, 1997, 1996 and 1995, the Funds
paid the following amounts to the Investment Manager for its services:
1997-$1,024,369, 1996 - $919,674 and 1995 - $839,358 for Growth and Income Fund;
1997- $7,375,751, 1996 - $5,528,818 and 1995 - $4,185,144 for Equity Fund; and
1997 - $985,285, 1996 - $862,190 and 1995 - $816,039 for Ultra Fund. Global Fund
paid the Investment Manager for its services for 1997- $642,585, 1996 -
$470,077 and 1995 - $457,489.
Asset Allocation Fund paid the Investment Manager for investment advisory,
administrative and transfer agency services for fiscal year ended September 30,
1997 - $62,322, $53,010 and $7,611 respectively, and for the fiscal year ended
September 30, 1996 - $39,560, $36,957 and $5,571, respectively and for the
period June 1, 1995 (date of inception) to September 30, 1995 - $10,134, $10,456
and $790, respectively. For the fiscal years ended September 30, 1997 and 1996
and for the period June 1, 1995 (date of inception) to September 30, 1995, the
Investment Manager waived $45,581, $24,236 and $0 respectively of the Fund's
investment advisory fee and reimbursed the Fund $0, $19,620 and $16,615
respectively of the Fund's administrative and transfer agency fees. For the
period November 4, 1996 (date of inception) to September 30, 1997, the
Investment Manager waived its entire advisory fee for the Social Awareness Fund
in the amount of $50,880. For the same period, the Social Awareness Fund paid
the Investment Manager for administrative and transfer agency services, $4,579
and $3,925, respectively. For the period May 1, 1997 (date of inception) to
September 30, 1997, the Investment Manager waived its entire advisory fee for
the Value Fund in the amount of $17,003. For the same period, the Value Fund
paid the Investment Manager for administrative and transfer agency services,
$1,530 and $1,345 respectively.
The total expenses for Growth and Income Fund, Equity Fund, Global Fund, Asset
Allocation Fund and Ultra Fund, respectively, for the fiscal year ended
September 30, 1997 were 1.24%, 1.03%, 2.00%, 1.68% and 1.71% 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, 1997 were 2.24%, 2.03%, 3.00%, 2.58% and 2.71% of the average net
assets of each Fund's Class B shares for the fiscal year. The total expenses for
Class A and Class B shares of Social Awareness Fund for the period November 4,
1996 (date of inception) to September 30, 1997, were 0.67% and 1.84%,
respectively, of the average net assets for the period. The total expenses of
the average net assets for Class A and Class B shares of Value Fund for the
period May 1, 1997 (date of inception) to September 30, 1997, were 1.10% and
2.26%, respectively. Expense information is not yet available for Small Company
Fund as it did not begin operations until October of 1997.
The Funds' Investment Management and Services Agreements are renewable
annually by the Funds' Board of Directors or by a vote of a majority of the
individual Fund's outstanding securities and, in either event, by a majority of
the board who are not parties to the Agreement or interested persons of any such
party. The Agreements provide that they may be terminated without penalty at any
time by either party on 60 days' notice and are automatically terminated in the
event of assignment.
43
<PAGE>
The following persons are affiliated with the Funds and also with the Funds'
investment adviser, Security Management Company, LLC, in these capacities:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
NAME POSITION(S) WITH THE FUNDS POSITION(S) WITH SECURITY MANAGEMENT COMPANY, LLC
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
James R. Schmank Vice President and Director President and Managing Member Representative
John D. Cleland President and Director Senior Vice President and Managing Member Representative
Jane A. Tedder Vice President (Equity Fund only) Vice President and Senior Economist
Terry A. Milberger Vice President (Equity Fund only) Senior Vice President and Senior Portfolio Manager
Michael A. Petersen Vice President Vice President and Senior Portfolio Manager
Growth and Income Fund only)
Mark E. Young Vice President Vice President
Amy J. Lee Secretary Secretary
Brenda M. Harwood Treasurer Assistant Vice President and Treasurer
Cindy L. Shields Assistant Vice President Assistant Vice President and Portfolio Manager
(Equity Fund and Ultra Fund only)
Thomas A. Swank Assistant Vice President Vice President and Portfolio Manager
(Growth and Income Fund only)
Christopher D. Swickard Assistant Secretary Assistant Secretary
James P. Schier Assistant Vice President (Equity Fund Assistant Vice President and Portfolio Manager
and Growth and Income Fund only)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
PORTFOLIO MANAGEMENT
The Growth and Income, Equity, Value and Ultra Funds are managed by the
Investment Manager's Equity Team with an individual portfolio manager being
responsible for the day-to-day management of each particular Fund. Michael
Petersen has had day-to-day responsibility for managing the GROWTH AND INCOME
FUND since January of 1998. Terry Milberger has had day-to-day responsibility
for managing the EQUITY FUND since 1981. Jim Schier has had day-to-day
responsibility for managing the VALUE FUND since its inception in 1997 and for
managing the ULTRA FUND since January of 1998. Global Fund is managed by an
investment management team of Lexington. Richard T. Saler and Alan Wapnick, the
lead portfolio managers, have had day-to-day responsibility for managing GLOBAL
FUND since 1994. SMALL COMPANY FUND is managed by Ronald C. Ognar of Strong. He
has had day-to-day responsibility for managing Small Company Fund since its
inception in 1997.
Steven M. Bowser joined the Investment Manager in 1992 and has managed the
U.S. Government Fund since 1995. Prior to joining the Investment Manager, he was
Assistant Vice President and Portfolio Manager with the Federal Home Loan Bank
of Topeka from 1989 to 1992. He was employed at the Federal Reserve Bank of
Kansas City in 1988 and began his career with the Farm Credit System from 1982
to 1987, serving as a Senior Financial Analyst and Assistant Controller. He
graduated with a Bachelor of Science Degree from Kansas State University in
1982.
Pat Boyle is a research analyst and portfolio manager of Meridian. He has four
years of investment experience and is a Chartered Financial Analyst. Mr. Boyle
graduated from the University of Denver with a B.S.B.A. degree in Finance.
David Eshnaur is Assistant Vice President and Portfolio Manager of the
Investment Manager. Mr. Eshnaur has 15 years of investment experience. Prior to
joining the Investment Manager in 1997, he worked at Waddell & Reed in the
positions of Assistant Vice President, Assistant Portfolio Manager, Senior
Analyst, Industry Analyst and Account Administrator. Mr. Eshnaur earned a
Bachelor of Arts degree in Business Administration from Coe College and an
M.B.A. degree in Finance from the University of Missouri - Kansas City.
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
44
<PAGE>
Chartered Financial Analyst. His investment philosophy is based on patience and
opportunity for the long-term investor.
Ronald C. Ognar, Portfolio Manager of Strong, is a Chartered Financial Analyst
with more than 25 years of investment experience. Mr. Ognar joined Strong in
April 1993 after two years as a principal and portfolio manager with RCM Capital
Management. Prior to his position at RCM Capital Management, he was a portfolio
manager at Kemper Financial Services in Chicago. Mr. Ognar began his investment
career in 1968 at LaSalle National Bank. He is a graduate of the University of
Illinois with a bachelor's degree in accounting.
Michael A. Petersen is Vice President and Senior Portfolio Manager of the
Investment Manager. Mr. Petersen has 15 years of investment experience. Prior to
joining the Investment Manager in 1997, he was Director of Equity Research and
Fund Management at Old Kent Bank and Trust Corporation from 1988 to 1997. Prior
to 1988, he was an Investment Officer at First Asset Management. Mr. Petersen
earned a Bachelor of Science degree in Accounting from the University of
Minnesota. He is a Chartered Financial Analyst.
James P. Schier, Assistant Vice President and Portfolio Manager of the
Investment Manager, has 13 years experience in the investment field and is a
Chartered Financial Analyst. While employed by the Investment Manager, he also
served as a research analyst. Prior to joining the Investment Manager in 1995,
he was a portfolio manager for Mitchell Capital Management from 1993 to 1995.
From 1988 to 1995 he served as Vice President and Portfolio Manager for Fourth
Financial. Prior to 1988, Mr. Schier served in various positions in the
investment field for Stifel Financial, Josepthal & Company and Mercantile Trust
Company. Mr. Schier earned a Bachelor of Business degree from the University of
Notre Dame and an M.B.A. from Washington University.
Cindy L. Shields is a Portfolio Manager of the Investment Manager. Ms. Shields
has eight years experience in the securities field and joined the Investment
Manager in 1989. She has been a portfolio manager since 1994, and prior to that
time, she served as a research analyst for the Investment Manager. Ms. Shields
graduated from Washburn University with a Bachelor of Business Administration
degree, majoring in finance and economics. She is a Chartered Financial Analyst.
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, Value Fund, Small Company Fund and
Ultra Fund
45
<PAGE>
pursuant to Distribution Agreements with the Funds. The Distributor also acts as
principal underwriter for Security Income Fund and Security Tax-Exempt Fund.
The Distributor receives a maximum commission on sales of Class A shares of
5.75% and allows a maximum discount of 5% from the offering price to authorized
dealers on the Fund shares sold. The discount is the same for all dealers, but
the Distributor at its discretion may increase the discount for specific
periods. Salespersons employed by dealers may also be licensed to sell insurance
with Security Benefit Life.
For the fiscal year ended September 30, 1997, the gross underwriting
commissions (Class A and B shares) received and the net underwriting commissions
retained by the Distributor were as follows:
- --------------------------------------------------------------------------------
GROSS UNDERWRITING NET UNDERWRITING
COMMISSIONS COMMISSIONS
- --------------------------------------------------------------------------------
Growth and Income Fund ......... $ 149,742 $ 6,497
Equity Fund .................... 2,585,332 21,344
Ultra Fund ..................... 82,428 5,388
Global Fund .................... 98,425 2,930
Asset Allocation Fund .......... 62,634 3,114
Social Awareness Fund* ......... 94,294 7,639
Value Fund** ................... 178,048 2,015
- --------------------------------------------------------------------------------
*For the period November 4, 1996 (date of inception) to September 30, 1997.
**For the period May 1, 1997 (date of inception) to September 30, 1997.
- --------------------------------------------------------------------------------
For the fiscal years ended September 30, 1996 and 1995, the Distributor
received gross underwriting commissions on the sale of Class A shares of the
Funds of: 1996 - $38,156 and 1995 - $30,840 for Growth and Income Fund; 1996 -
$869,310 and 1995 - $610,460 for Equity Fund; 1996 - $42,335 and 1995 - $86,682
for Ultra Fund; 1996 -$29,472 and 1995 - $25,278 for Global Fund. For these
years, the Distributor retained net underwriting commissions as follows: 1996 -
$7,615 and 1995 - $5,020 for Growth and Income Fund; 1996 - $107,976 and 1995 -
$96,169 for Equity Fund; 1996 - $9,163 and 1995 - $14,803 for Ultra Fund; and
1996 - $3,907 and 1995 - $4,002 for Global Fund. For the fiscal year ended
September 30, 1996, and the period June 1, 1995 through September 30, 1995, the
Distributor received gross underwriting commissions on the sale of Class A
shares of $7,393 and $819, respectively, for Asset Allocation Fund and retained
net underwriting commissions of $911 and $198, respectively. 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
46
<PAGE>
to the foregoing considerations, the execution of portfolio transactions may be
directed to brokers who furnish investment information or research services to
the Investment Manager or relevant Sub-Adviser. Such investment information and
research services include advice as to the value of securities, the advisability
of investing in, purchasing or selling securities, and the availability of
securities and purchasers or sellers of securities, and furnishing analyses and
reports concerning issues, industries, securities, economic factors and trends,
portfolio strategy and performance of accounts. Such investment information and
research services may be furnished by brokers in many ways, including: (1)
on-line data base systems, the equipment for which is provided by the broker,
that enable the Investment Manager to have real-time access to market
information, including quotations; (2) economic research services, such as
publications, chart services and advice from economists concerning macroeconomic
information; and (3) analytical investment information concerning particular
corporations. If a transaction is directed to a broker supplying such
information or services, the commission paid for such transaction may be in
excess of the commission another broker would have charged for effecting that
transaction provided that the Investment Manager or relevant Sub-Adviser shall
have determined in good faith that the commission is reasonable in relation to
the value of the investment information or the research services provided,
viewed in terms of either that particular transaction or the overall
responsibilities of the Investment Manager or relevant Sub-Adviser with respect
to all accounts as to which it exercises investment discretion. The Investment
Manager or relevant Sub-Adviser may use all, none, or some of such information
and services in providing investment advisory services to each of the mutual
funds under its management, including the Funds.
In addition, brokerage transactions may be placed with broker-dealers who sell
shares of the Funds managed by the Investment Manager and who may or may not
also provide investment information and research services. The Investment
Manager may, consistent with the NASD's Conduct Rules, 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.
47
<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
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
1997 ............. 124% $ 251,945 0 $ 26,335,380 $ 40,539
1996 ............. 69% 98,516 0 15,375,167 22,566
1995 ............. 130% 257,300 0 33,932,170 57,450
- --------------------------------------------------------------------------------------------------------------------
Security Equity Fund
Equity Series
1997 ............. 66% $1,111,928 0 $234,139,342 $301,670
1996 ............. 64% 919,879 0 181,146,205 227,747
1995 ............. 95% 1,234,947 0 168,226,033 327,825
- --------------------------------------------------------------------------------------------------------------------
Security Equity Fund
Global Series
1997 ............. 132% $ 270,065 0 $ 14,817,527 $ 39,165
1996 ............. 142% 194,768 0 11,476,297 20,493
1995 ............. 141% 193,540 0 11,472,063 32,292
- --------------------------------------------------------------------------------------------------------------------
Security Equity Fund
Asset Allocation Series
1997 ............. 79% $ 18,571 0 $ 6,075,844 $ 15,313
1996 ............. 75% 10,674 0 259,602 724
1995* ............ 129% 3,904 0 0 0
- --------------------------------------------------------------------------------------------------------------------
Security Equity Fund
Social Awareness Series
1997** ............ 38% $ 12,365 0 $ 6,419,564 $ 8,327
- --------------------------------------------------------------------------------------------------------------------
Security Equity Fund
Value Series
1997*** ........... 35% $ 15,192 0 $ 3,606,587 $ 7,392
- --------------------------------------------------------------------------------------------------------------------
Security Ultra Fund
1997 ............. 68% $ 83,841 0 $ 22,060,304 $ 41,217
1996 ............. 161% 200,614 0 45,866,810 76,520
1995 ............. 180% 277,069 0 24,047,026 42,679
- ---------------------------------------------------------------------------------------------------------------------
*Asset Allocation Fund's figures are based on the period June 1, 1995 (date of inception) to September 30, 1995.
**Social Awareness Fund's figures are based on the period November 4, 1996 (date of inception) to September 30,
1997.
***Value Fund's figures are based on the period May 1, 1997 (date of inception) to September 30, 1997. Portfolio
turnover information is not yet available for Small Company Fund.
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
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, Martin Luther King, Jr. 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
48
<PAGE>
determined as of the close of business of the Exchange on the next day on which
the Exchange is open. It is the responsibility of the dealer to promptly
transmit orders to the Funds.
In determining net asset value, securities listed or traded on a national
securities exchange are valued on the basis of the last sale price. If there are
no sales on a particular day, then the securities shall be valued at the last
bid price. All other securities for which market quotations are available are
valued on the basis of the last current bid price. If there is no bid price, or
if the bid price is deemed to be unsatisfactory by the Board of Directors or the
Funds' Investment Manager, then the securities shall be valued in good faith by
such method as the Board of Directors determines will reflect their fair market
value.
Because the expenses of distribution are borne by Class A shares through a
front-end sales charge and by Class B shares through an ongoing distribution
fee, the expenses attributable to each class of shares will differ, resulting in
different net asset values. The net asset value of Class B shares will generally
be lower than the net asset value of Class A shares as a result of the
distribution fee charged to Class B shares. It is expected, however, that the
net asset value per share will tend to converge immediately after the payment of
dividends which will differ in amount for Class A and B shares by approximately
the amount of the different distribution expenses attributable to Class A and B
shares.
HOW TO REDEEM SHARES
Stockholders may turn in their shares directly to the Investment Manager for
redemption at net asset value (which may be more or less than the investor's
cost, depending upon the market value of the portfolio securities at the time of
redemption). The redemption price in cash will be the net asset value next
determined after the time when such shares are tendered for redemption.
Shares will be redeemed on request of the stockholder in proper order to the
Investment Manager, which serves as the Funds' transfer agent. A request is made
in proper order by submitting the following items to the Investment Manager: (1)
a written request for redemption signed by all registered owners exactly as the
account is registered, including fiduciary titles, if any, and specifying the
account number and the dollar amount or number of shares to be redeemed; (2) a
guarantee of all signatures on the written request or on the share certificate
or accompanying stock power; (3) any share certificates issued for any of the
shares to be redeemed; and (4) any additional documents which may be required by
the Investment Manager for redemption by corporations or other organizations,
executors, administrators, trustees, custodians or the like. Transfers of shares
are subject to the same requirements. A signature guarantee is not required for
redemptions of $10,000 or less, requested by and payable to all stockholders of
record for an account, to be sent to the address of record. The signature
guarantee must be provided by an eligible guarantor institution, such as a bank,
broker, credit union, national securities exchange or savings association. The
Investment Manager reserves the right to reject any signature guarantee pursuant
to its written procedures which may be revised in the future. To avoid delay in
redemption or transfer, stockholders having questions should contact the
Investment Manager.
The Articles of Incorporation of Security Equity Fund provide that the Board
of Directors, without the vote or consent of the stockholders, may adopt a plan
to redeem at net asset value all shares in any stockholder account in which
there has been no investment (other than the reinvestment of income dividends or
capital gains distributions) for the last six months and in which there are
fewer than 25 shares or such fewer number of shares as may be specified by the
Board of Directors. Any plan of involuntary redemption adopted by the Board of
Directors shall provide that the plan is in the economic best interests of the
Fund or is necessary to reduce disproportionately burdensome expenses in
servicing stockholder accounts. Such plan shall further provide that prior
notice of at least six months shall be given to a stockholder before involuntary
redemption, and that the stockholder will have at least six months from the date
of the notice to avoid redemption by increasing his or her 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.
49
<PAGE>
Payment in cash of the amount due on redemption, less any applicable deferred
sales charge, for shares redeemed will be made within seven days after tender,
except that the Funds may suspend the right of redemption during any period when
trading on the New York Stock Exchange is restricted or such Exchange is closed
for other than weekends or holidays, or any emergency is deemed to exist by the
Securities and Exchange Commission. When a redemption request is received, the
redemption proceeds are deposited into a redemption account established by the
Distributor and the Distributor sends a check in the amount of redemption
proceeds to the stockholder. The Distributor earns interest on the amounts
maintained in the redemption account. Conversely, the Distributor causes
payments to be made to the Funds in the case of orders for purchase of Fund
shares before it actually receives federal funds.
The Funds have committed themselves to pay in cash all requests for
redemptions by any stockholder of record limited in amount during any 90-day
period to the lesser of $250,000 or 1% of the net asset value of the Fund at the
beginning of such period.
In addition to the foregoing redemption procedure, the Funds repurchase shares
from broker-dealers at the price determined as of the close of business on the
day such offer is confirmed. The Distributor has been authorized, as agent, to
make such repurchases for the Funds' account. Dealers may charge a commission on
the repurchase of shares.
The repurchase or redemption of shares held in a tax-qualified retirement plan
must be effected through the trustee of the plan and may result in adverse tax
consequences. (See "Retirement Plans," page 59.)
At various times the Funds may be requested to redeem shares for which they
have not yet received good payment. Accordingly, the Funds may delay the mailing
of a redemption check until such time as they have assured themselves that good
payment (e.g., cash or certified check on a U.S. bank) has been collected for
the purchase of such shares.
TELEPHONE REDEMPTIONS
A stockholder may redeem uncertificated shares in amounts up to $10,000 by
telephone request, provided the stockholder has completed the Telephone
Redemption section of the application or a Telephone Redemption form which may
be obtained from the Investment Manager. The proceeds of a telephone redemption
will be sent to the stockholder at his or her address as set forth in the
application or in a subsequent written authorization with a signature guarantee.
Once authorization has been received by the Investment Manager, a stockholder
may redeem shares by calling the Funds at (800) 888-2461, extension 3127, on
weekdays (except holidays) between the hours of 7:00 a.m. and 6:00 p.m. Central
time. Redemption requests received by telephone after the close of the New York
Stock Exchange (normally 3:00 p.m. Central time) will be treated as if received
on the next business day. Telephone redemptions are not accepted for IRA and
403(b)(7) accounts. A stockholder who authorizes telephone redemptions
authorizes the Investment Manager to act upon the instructions of any person
identifying themselves as the owner of the account or the owner's broker. The
Investment Manager has established procedures to confirm that instructions
communicated by telephone are genuine and may be liable for any losses due to
fraudulent or unauthorized instructions if it fails to comply with its
procedures. The Investment Manager's procedures require that any person
requesting a redemption by telephone provide the account registration and
number, the owner's tax identification number, and the dollar amount or number
of shares to be redeemed, and such instructions must be received on a recorded
line. Neither the Fund, the Investment Manager, nor the Distributor will be
liable for any loss, liability, cost or expense arising out of any redemption
request provided that the Investment Manager complied with its procedures. Thus,
a stockholder who authorizes telephone redemptions may bear the risk of loss
from a fraudulent or unauthorized request. The telephone redemption privilege
may be changed or discontinued at any time by the Investment Manager or the
Funds.
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," page 49.
HOW TO EXCHANGE SHARES
Pursuant to arrangements with the Distributor and with Security Cash Fund,
stockholders of the Funds may exchange their shares for shares of another of the
Funds, for shares of the other mutual funds distributed by the Distributor or
for shares of Security Cash Fund at net asset value. The other mutual funds
currently distributed by the Distributor currently include Security Corporate
Bond, Limited Maturity Bond, U.S. Government, High Yield,
50
<PAGE>
Emerging Markets Total Return, Global Asset Allocation, Global High Yield and
Tax-Exempt Funds. Exchanges may be made only in those states where shares of the
fund into which an exchange is to be made are qualified for sale.
Class A and Class B shares of the Funds may be exchanged for Class A and Class
B shares, respectively, of another Fund distributed by the Distributor or for
shares of Security Cash Fund, a money market fund that offers a single class of
shares. Any applicable contingent deferred sales charge will be imposed upon
redemption and calculated from the date of the initial purchase without regard
to the time shares were held in Security Cash Fund. Such transactions generally
have the same tax consequences as ordinary sales and purchases. No service fee
is presently imposed on such an exchange. They are not tax-free exchanges.
Exchanges are made promptly upon receipt of a properly completed Exchange
Authorization form and (if issued) share certificates in good order for
transfer. If the stockholder is a corporation, partnership, agent, fiduciary or
surviving joint owner, additional documentation of a customary nature, such as a
stock power and guaranteed signature, will be required. (See "How to Redeem
Shares," page 49.)
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.
51
<PAGE>
DIVIDENDS AND TAXES
It is each Fund's policy to pay dividends from net investment income as from
time to time declared by the Board of Directors, and to distribute realized
capital gains (if any) in excess of any capital losses and capital loss
carryovers, at least once a year. Because Class A shares of the Funds bear most
of the costs of distribution of such shares through payment of a front-end sales
charge, while Class B shares of the Funds bear such costs through a higher
distribution fee, expenses attributable to Class B shares, generally, will be
higher and as a result, income distributions paid by the Funds with respect to
Class B shares generally will be lower than those paid with respect to Class A
shares. Because the value of a share is based directly on the amount of the net
assets rather than on the principle of supply and demand, any distribution of
capital gains or payment of an income dividend will result in a decrease in the
value of a share equal to the amount paid. All such dividends and distributions
are automatically reinvested on the payable date in shares of the Funds at net
asset value as of the record date (reduced by an amount equal to the amount of
the dividend or distribution), unless the Investment Manager is previously
notified in writing by the stockholder that such dividends or distributions are
to be received in cash. A stockholder may request that such dividends or
distributions be directly deposited to the stockholder's bank account. A
stockholder who elected not to reinvest dividends or distributions paid with
respect to Class A shares may, at any time within 30 days after the payment
date, reinvest a dividend check without imposition of a sales charge.
The following summarizes certain federal income tax considerations generally
affecting the Funds and their stockholders. No attempt is made to present a
detailed explanation of the tax treatment of the Funds or their stockholders,
and the discussion here is not intended as a substitute for careful tax
planning. The discussion is based upon present provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the regulations promulgated
thereunder, and judicial and administrative ruling authorities, all of which are
subject to change, which change may be retroactive. Prospective investors should
consult their own tax advisors with regard to the federal tax consequences of
the purchase, ownership, and disposition of Fund shares, as well as the tax
consequences arising under the laws of any state, foreign country, or other
taxing jurisdiction.
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.
Distributions of net capital gain, whether received in cash or reinvested in
Fund shares, will generally be taxable to shareholders as either "20% Gain" or
"28% Gain", depending upon the Fund's holding period for the assets sold. "20%
Gains" arise from sales of assets held by a Fund for more than 18 months and are
subject to a maximum tax rate of 20%; "28% Gains" arise from sales of assets
held by a Fund for more than one year but no more than 18 months and are subject
to a maximum tax rate of 28%. Net capital gains from assets held for one year or
less will be taxed as ordinary income. Distributions will be subject to these
capital gains rates regardless of how long a shareholder has held Fund shares.
Advice as to the tax status of each year's dividends and distributions will be
mailed annually. At September 30, 1997, Social Awareness Fund had accumulated
net realized losses on sales of investments of $204,858.
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
52
<PAGE>
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) 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 (iii) distribute at least 90% of the sum of its investment
company taxable income (which includes, among other items, dividends, interest,
and net short-term capital gains in excess of any net long-term capital losses)
and its net tax-exempt interest each taxable year. The Treasury Department is
authorized to promulgate regulations under which foreign currency gains would
constitute qualifying income for purposes of the Qualifying Income Test only if
such gains are directly related to investing in securities (or options and
futures with respect to securities). To date, no such regulations have been
issued.
Certain requirements relating to the qualification of a Fund as a regulated
investment company may limit the extent to which a Fund will be able to engage
in certain investment practices, including transactions in futures contracts and
other types of derivative securities transactions. In addition, if a Fund were
unable to dispose of portfolio securities due to settlement problems relating to
foreign investments or due to the holding of illiquid securities, the Fund's
ability to qualify as a regulated investment company might be affected.
A Fund qualifying as a regulated investment company generally will not be
subject to U.S. federal income tax on its investment company taxable income and
net capital gains (any net long-term capital gains in excess of the net
short-term capital losses), if any, that it distributes to shareholders. Each
Fund intends to distribute to its shareholders, at least annually, substantially
all of its investment company taxable income and any net capital gains.
Generally, regulated investment companies, like the Fund, must distribute
amounts on a timely basis in accordance with a calendar year distribution
requirement in order to avoid a nondeductible 4% excise tax. Generally, to avoid
the tax, a regulated investment company must distribute during each calendar
year, (i) at least 98% of its ordinary income (not taking into account any
capital gains or losses) for the calendar year, (ii) at least 98% of its capital
gains in excess of its capital losses (adjusted for certain ordinary losses) for
the 12-month period ending on October 31 of the calendar year, and (iii) all
ordinary income and capital gains for previous years that were not distributed
during such years. To avoid application of the excise tax, each Fund intends to
make its distributions in accordance with the calendar year distribution
requirement. A distribution is treated as paid on December 31 of the calendar
year if it is declared by a Series in October, November or December of that year
to shareholders of record on a date in such a month and paid by the Fund during
January of the following calendar year. Such distributions are taxable to
shareholders in the calendar year in which the distributions are declared,
rather than the calendar year in which the distributions are received.
If, as a result of exchange controls or other foreign laws or restrictions
regarding repatriation of capital, a Fund were unable to distribute an amount
equal to substantially all of its investment company taxable income (as
determined for U.S. tax purposes) within applicable time periods, the Fund would
not qualify for the favorable federal income tax treatment afforded regulated
investment companies, or, even if it did so qualify, it might become liable for
federal taxes on undistributed income. In addition, the ability of a Fund to
obtain timely and accurate information relating to its investments is a
significant factor in complying with the requirements applicable to regulated
investment companies in making tax-related computations. Thus, if a Fund were
unable to obtain accurate information on a timely basis, it might be unable to
qualify as a regulated investment company, or its tax computations might be
subject to revisions (which could result in the imposition of taxes, interest
and penalties).
Generally, gain or loss realized upon the sale or redemption of shares
(including the exchange of shares for shares of another fund) will be capital
gain or loss if the shares are capital assets in the shareholder's hands, and
will be taxable to stockholders as "20% Gains" if the shares had been held for
more than 18 months or as "28% Gains" if the shares had been held for more than
one year but no more than 18 months. 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
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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 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.
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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 Funds intend to account for such
transactions in a manner deemed by them to be appropriate, but the Internal
Revenue Service might not necessarily accept such treatment. If it did not, the
status of a Fund as a regulated investment company might be affected.
The requirements applicable to a Fund's qualification as a regulated
investment company may limit the extent to which a Fund will be able to engage
in transactions in options, futures contracts, forward contracts, swap
agreements and other financial contracts.
MARKET DISCOUNT. If a Fund purchases a debt security at a price lower than the
stated redemption price of such debt security, the excess of the stated
redemption price over the purchase amount is "market discount". If the amount of
market discount is more than a DE MINIMIS amount, a portion of such market
discount must be included as ordinary income (not capital gain) by the Fund in
each taxable year in which the Fund owns an interest in such debt security and
receives a principal payment on it. In particular, the Fund will be required to
allocate that principal payment first to a portion of the market discount on the
debt security that has accrued but has not previously been includable in income.
In general, the amount of market discount that must be included for each period
is equal to the lesser of (i) the amount of market discount accruing during such
period (plus any accrued market discount for prior periods not previously taken
into account) or (ii) the amount of the principal payment with respect to such
period. Generally, market discount accrues on a daily basis for each day the
debt security is held by a Fund at a constant rate over the time remaining to
the debt security's maturity or, at the election of the Fund, at a constant
yield to maturity which takes into account the semi-annual compounding of
interest, Gain realized on the disposition of a market discount obligation must
be recognized as ordinary interest income (not capital gain) to the extent of
the "accrued market discount."
ORIGINAL ISSUE DISCOUNT. Certain debt securities acquired by the Funds may be
treated as debt securities that were originally issued at a discount. Very
generally, original issue discount is defined as the difference between the
price at which a security was issued and its stated redemption price at
maturity. Although no cash income on account of such discount is actually
received by a Fund, original issue discount that accrues on a debt security in a
given year generally is treated for federal income tax purposes as interest and,
therefore, such income would be subject to the distribution requirements
applicable to regulated investment companies.
Some debt securities may be purchased by the Funds at a discount that exceeds
the original issue discount on such debt securities, if any. This additional
discount represents market discount for federal income tax purposes (see above).
CONSTRUCTIVE SALES. Recently enacted rules may affect timing and character of
gain if a Fund engages in transactions that reduce or eliminate its risk of loss
with respect to appreciated financial positions. If the Fund enters into certain
transactions in property while holding substantially identical property, the
Fund would be treated as if it had sold and immediately repurchased the property
and would be taxed on any gain (but not loss) from the
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constructive sale. The character of gain from a constructive sale would depend
upon the Fund's holding period in the property. Loss from a constructive sale
would be recognized when the property was subsequently disposed of, and its
character would depend on the Fund's holding period and the application of
various loss deferral provisions of the Code.
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.
The payment of such taxes will reduce the amount of dividends and
distributions paid to the Fund's stockholders. So long as a Fund qualifies as a
regulated investment company, certain distribution requirements are satisfied,
and more than 50% of such Fund's assets at the close of the taxable year
consists of securities of foreign corporations, the Fund may elect, subject to
limitation, to pass though its foreign tax credits to its stockholders.
FOREIGN CURRENCY TRANSACTIONS. Under the Code, gains or losses attributable to
fluctuations in exchange rates which occur between the time a Fund accrues
income or other receivables or accrues expenses or other liabilities denominated
in a foreign currency and the time that a Fund actually collects such
receivables or pays such liabilities, generally are treated as ordinary income
or ordinary loss. Similarly, on disposition of debt securities denominated in a
foreign currency and on disposition of certain futures contracts, forward
contracts and options, gains or losses attributable to fluctuations in the value
of foreign currency between the date of acquisition of the security or contract
and the date of disposition also are treated as ordinary gain or loss. These
gains or losses, referred to under the Code as "Section 988" gains or losses,
may increase or decrease the amount of a Fund's investment company taxable
income to be distributed to its shareholders as ordinary income.
OTHER TAXES. The foregoing discussion is general in nature and is not intended
to provide an exhaustive presentation of the tax consequences of investing in a
Fund. Distributions may also be subject to additional state, local and foreign
taxes, depending on each shareholder's particular situation. Depending upon the
nature and extent of a Fund's contacts with a state or local jurisdiction, the
Fund may be subject to the tax laws of such jurisdiction if it is regarded under
applicable law as doing business in, or as having income derived from, the
jurisdiction. Shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in a Fund.
ORGANIZATION
The Articles of Incorporation of each Fund provide for the issuance of an
indefinite number of shares of common stock in one or more classes or series.
Security Equity Fund has authorized capital stock of $.25 par value and
currently issues its shares in six series, Equity Fund, Global Fund, Asset
Allocation Fund, Social Awareness Fund, Value Fund and Small Company 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 50, but will have no other preference, conversion,
exchange or preemptive rights. Shares are transferable, redeemable and
assignable and have cumulative voting privileges for the election of directors.
On certain matters, such as the election of directors, all shares of the
Series of Security Equity Fund, Equity Fund, Global Fund, Asset Allocation Fund,
Social Awareness Fund, Value Fund and Small Company 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.
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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.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND-PAYING AGENT
UMB Bank, N.A., 928 Grand Avenue, Kansas City, Missouri, acts as the custodian
for the portfolio securities of Growth and Income Fund, Equity Fund, Social
Awareness Fund, Value Fund, Small Company 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, 1997, respectively, the
average annual total return of Class A shares of Growth and Income Fund was
27.55%, 14.54% and 9.89%. For the 1-year period ended September 30, 1997, the
average annual total return of Class B shares of Growth and Income Fund was
29.01%. For the period October 19, 1993 (date of inception) to September 30,
1997, the average annual total return for Class B shares of Growth and Income
Fund was 14.67%.
For the 1-, 5- and 10-year periods ended September 30, 1997, respectively, the
average annual total return of Class A shares of Equity Fund was 24.48%, 19.97%
and 14.59%. For the 1-year period ended September 30, 1997, the average annual
total return of Class B shares of Equity Fund was 25.85%. For the period October
19, 1993 (date of inception) to September 30, 1997, the average annual total
return for Class B shares of Equity Fund was 19.41%.
For the 1-year period ended September 30, 1997, the average annual total
return of Class A shares of Global Fund was 13.29%. For the period October 5,
1993 (date of inception) to September 30, 1997, the average annual total return
of Class A shares of Global Fund was 10.42%. For the 1-year period ended
September 30, 1997, the average annual total return of Class B shares of Global
Fund was 14.01%. For the period October 19, 1993 (date of inception) to
September 30, 1997, the average annual total return of Class B shares of Global
Fund was 10.70%.
For the 1-, 5- and 10-year periods ended September 30, 1997, respectively, the
average annual total return of Class A shares of Ultra Fund was 13.68%, 13.59%
and 6.27%. For the 1-year period ended September 30, 1997, the average annual
total return of Class B shares of Ultra Fund was 14.58%. For the period October
19, 1993 (date of inception) to September 30, 1997, the average annual total
return for Class B shares of Ultra Fund was 11.36%.
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For the 1-year period ended September 30, 1997 the average annual total return
of Class A and Class B shares of Asset Allocation Fund was 12.16% and 12.95%,
respectively. For the period June 1, 1995 (date of inception) through September
30, 1997, the average annual total return of Class A and Class B shares of Asset
Allocation Fund was 11.92% and 12.25%, respectively.
For the period November 4, 1997 (date of inception) to September 30, 1997, the
average annual total return of Class A and Class B shares of Social Awareness
Fund was 13.00% and 13.73%, respectively.
For the period May 1, 1997 (date of inception) to September 30, 1997, the
average annual total return of Class A and Class B shares of Value Fund was
22.05% and 24.10%, respectively.
Quotations of aggregate total return will be calculated for any specified
period pursuant to the following formula:
ERV - P
------- = T
P
(where P = a hypothetical initial payment of $1,000, T = the total return, and
ERV = the ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the period). All total return figures will assume that all
dividends and distributions are reinvested when paid. The Funds may, from time
to time, include quotations of aggregate total return that do not reflect
deduction of the sales load. The sales load, if reflected, would reduce the
total return.
The aggregate total return on an investment made in Class A shares of Growth
and Income Fund, Equity Fund and Ultra Fund calculated as described above for
the period from September 30, 1987 through September 30, 1997 was 156.73%,
290.24% and 83.73%, respectively. Aggregate total return on an investment made
in Class A shares of Global Fund calculated as described above for the period
October 1, 1993 through September 30, 1997 was 48.66%. Aggregate total return on
an investment made in Class B shares of Growth and Income, Equity, Global and
Ultra Funds calculated as described above for the period October 19, 1993
through September 30, 1997 was 52.95%, 101.53%, 49.42% and 52.95%, respectively.
Aggregate total return made on an investment made in Class A and Class B shares
of Asset Allocation Fund calculated as described above for the period June 1,
1995 through September 30, 1997 was 30.06% and 30.96%, respectively. Aggregate
total return on an investment made in Class A and Class B shares of Social
Awareness Fund calculated as described above for the period November 4, 1996
(date of inception) to September 30, 1997 was 13.00% and 13.70%, respectively.
Aggregate total return on an investment made in Class A and Class B shares of
Value Fund calculated as described above for the period May 1, 1997 (date of
inception) to September 30, 1997, was 22.05% and 24.10%, respectively. These
figures reflect deduction of the maximum sales load. Performance information is
not yet available for Small Cap Fund as it did not begin operations until
October of 1997.
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. 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,
but are not limited to, 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.
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RETIREMENT PLANS
The Funds offer tax-qualified retirement plans for individuals (Individual
Retirement Accounts, known as IRAs), several prototype retirement plans for the
self-employed (Keogh plans), pension and profit-sharing plans for corporations,
and custodial account plans for employees of public school systems and
organizations meeting the requirements of Section 501(c)(3) of the Internal
Revenue Code. Actual documents and detailed materials about the plans will be
provided upon request to the Distributor.
Purchases of the Funds' shares under any of these plans are made at the public
offering price next determined after contributions are received by the
Distributor. The Funds' shares owned under any of the plans have full dividend,
voting and redemption privileges. Depending on the terms of the particular plan,
retirement benefits may be paid in a lump sum or in installment payments over a
specified period. There are possible penalties for premature distributions from
such plans.
Security Management Company, LLC is available to act as custodian for the
plans on a fee basis. For IRAs, SIMPLE IRAs, Roth IRAs, Section 403(b)
Retirement Plans, and Simplified Employee Pension Plans (SEPPs), service fees
for such custodial services currently are: (1) $10 for annual maintenance of the
account and (2) benefit distribution fee of $5 per distribution. Service fees
for other types of plans will vary. These fees will be deducted from the plan
assets. Optional supplemental services are available from Security Benefit Life
Insurance Company for additional charges.
Retirement investment programs involve commitments covering future years. It
is important that the investment objectives and structure of the Funds be
considered by the investors for such plans. A brief description of the available
tax-qualified retirement plans is provided below. However the tax rules
applicable to such qualified plans vary according to the type of plan and the
terms and conditions of the plan itself. Therefore, no attempt is made to
provide more than general information about the various types of qualified
plans.
Investors are urged to consult their own attorneys or tax advisers when
considering the establishment and maintenance of any such plans.
INDIVIDUAL RETIREMENT ACCOUNTS (IRAS)
Individual Retirement Account Custodial Agreements are available to provide
investment in shares of the Funds or in other Funds in the Security Group. An
individual may initiate an IRA through the Underwriter by executing the
custodial agreement and making a minimum initial investment of at least $100. A
$10 annual fee is charged for maintaining the account.
An individual may make a contribution to a traditional IRA each year of up to
the lesser of $2,000 or 100% of earned income under current tax law. The IRAs
described in this paragraph are called "traditional IRAs" to distinguish them
from the new "Roth IRAs" which became available in 1998. Roth IRAs are described
below. Spousal IRAs allow an individual and his or her spouse to contribute up
to $2,000 to their respective IRAs so long as a joint tax return is filed and
joint income is $4,000 or more. The maximum amount the higher compensated spouse
may contribute for the year is the lesser of $2,000 or 100% of that spouse's
compensation. The maximum the lower compensated spouse may contribute is the
lesser of (i) $2,000 or (ii) 100% of that spouse's compensation plus the amount
by which the higher compensated spouse's compensation exceeds the amount the
higher compensated spouse contributes to his or her IRA.
Generally if a taxpayer is not covered by an employer-sponsored retirement
plan, the amount the taxpayer may deduct for federal income tax purposes in a
year for contributions to an IRA is the lesser of $2,000 or the taxpayer's
compensation for the year. If the taxpayer is covered by an employer-sponsored
retirement plan, the amount of IRA contributions the taxpayer may deduct in a
year may be reduced or eliminated based on the taxpayer's adjusted gross income
for the year. The adjusted gross income level at which a single taxpayer's
deduction for 1997 is affected, $25,000, will increase annually to $50,000 in
the year 2005. The adjusted gross income level at which the deduction for 1997
for a married taxpayer (who does not file a separate return) is affected,
$40,000, will increase annually to $80,000 in the year 2007. If the taxpayer is
married, files a separate tax return, and is covered by a qualified retirement
plan, the taxpayer may not make a deductible contribution to an IRA if the
taxpayer's income exceeds $10,000. If the taxpayer is not covered by an
employer-sponsored retirement plan, but the taxpayer's spouse is, the amount the
taxpayer may deduct for IRA contributions will be phased out if the taxpayer's
adjusted gross income is between $150,000 and $160,000.
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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 a traditional 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.
ROTH IRAS
Section 408A of the Code permits eligible individuals to establish a Roth IRA,
a new type of IRA which becomes available in 1998. Contributions to a Roth IRA
are not deductible, but withdrawals that meet certain requirements are not
subject to federal income tax. In general, Roth IRAs are subject to certain
required distribution requirements. Unlike a traditional IRA, Roth IRAs are not
subject to minimum required distribution rules during the owner's lifetime.
Generally, however, the amount in a remaining Roth IRA must be distributed by
the end of the fifth year after the death of the owner.
Beginning in 1998 the owner of a traditional IRA may convert the traditional
IRA into a Roth IRA under certain circumstances. The conversion of a traditional
IRA to a Roth IRA will subject the amount of the converted traditional IRA to
federal income tax. If a traditional IRA is converted to a Roth IRA, the taxable
amount of the owner's traditional IRA will be considered taxable income for
federal income tax purposes for the year of conversion. Generally, all amounts
in a traditional IRA are taxable except for the owner's prior non-deductible
contributions to the traditional IRA.
SIMPLE IRAS
The Small Business Job Protection Act of 1996 created a new retirement plan,
the Savings Incentive Match Plan for Employees of Small Employers (SIMPLE Plans)
for tax years beginning in 1997. SIMPLE Plan participants must establish a
SIMPLE IRA into which plan contributions will be deposited.
The Investment Manager makes available SIMPLE IRAs to provide investment in
shares of the Funds. Contributions to a SIMPLE IRA may be either salary deferral
contributions or employer contributions. Contributions must be made in cash and
cannot exceed the maximum amount allowed under the Internal Revenue Code. On a
pre-tax basis, up to $6,000 of compensation (through salary deferrals) may be
contributed to a SIMPLE IRA. In addition, employers are required to make either
(1) a dollar-for-dollar matching contribution or (2) a nonelective contribution
to each participant's account each year. In general, matching contributions must
equal up to 3% of compensation, but under certain circumstances, employers may
make lower matching contributions. Instead of the match, employers may make a
nonelective contribution equal to 2% of compensation (compensation for purposes
of any nonelective contribution is limited to $160,000, as indexed).
Distributions from a SIMPLE IRA are (1) taxed as ordinary income; (2)
includable in gross income; and (3) subject to applicable state tax laws.
Distributions prior to age 59 1/2 may be subject to a 10% penalty tax which
increases to 25% for distributions made before a participant has participated in
the SIMPLE Plan for at least two years. An annual fee of $10 is charged for
maintaining the SIMPLE IRA.
PENSION AND PROFIT-SHARING PLANS
Prototype corporate pension or profit-sharing plans meeting the requirements
of Internal Revenue Code Section 401(a) are available. Information concerning
these plans may be obtained from the Distributor.
403(B) RETIREMENT PLANS
Employees of public school systems and tax-exempt organizations meeting the
requirements of Internal Revenue Code Section 501(c)(3) may purchase shares of
the Funds or of the other Funds in the Security Group under a Section 403(b)
Plan. Section 403(b) Plans are subject to numerous restrictions on the amount
that may be contributed, the persons who are eligible to participate and on the
time when distributions may commence.
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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 (except Small Company Fund),
which are contained in the Funds' September 30, 1997 Annual Report are
incorporated herein by reference. Copies of the Annual Report are provided to
every person requesting a Statement of Additional Information.
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APPENDIX A
DESCRIPTION OF CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
STANDARD & POOR'S CORPORATION
AAA - Bonds rated AAA have the highest rating assigned by Standard & Poor's to
a debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA - Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
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A - Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominately speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C - The rating C is reserved for income bonds on which no interest is being
paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
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APPENDIX B
REDUCED SALES CHARGES
CLASS A SHARES
Initial sales charges may be reduced or eliminated for persons or
organizations purchasing Class A shares of the Funds alone or in combination
with Class A shares of certain other Security Funds.
For purposes of qualifying for reduced sales charges on purchases made
pursuant to Rights of Accumulation or a Statement of Intention (also referred to
as a "Letter of Intent"), the term "Purchaser" includes the following persons:
an individual, his or her spouse and children under the age 21; a trustee or
other fiduciary of a single trust estate or single fiduciary account established
for their benefit; an organization exempt from federal income tax under Section
501(c)(3) or (13) of the Internal Revenue Code; or a pension, profit-sharing or
other employee benefit plan whether or not qualified under Section 401 of the
Internal Revenue Code.
RIGHTS OF ACCUMULATION
A Purchaser may combine all previous purchases with his or her contemplated
current purchases of Class A Shares of a Fund, for the purpose of determining
the sales charge applicable to the current purchase. For example, an investor
who already owns Class A shares of a Fund either worth $30,000 at the applicable
current offering price or purchased for $30,000 and who invests an additional
$25,000, is entitled to a reduced front-end sales charge of 4.75% on the latter
purchase. The Underwriter must be notified when a sale takes place which would
qualify for the reduced charge on the basis of previous purchases subject to
confirmation of the investor's holding through the Fund's records. Rights of
accumulation apply also to purchases representing a combination of the Class A
shares of the Funds, Security Income Fund or Security Tax-Exempt Fund in those
states where shares of the Fund being purchased are qualified for sale.
STATEMENT OF INTENTION
A Purchaser may sign a Statement of Intention, which may be signed within 90
days after the first purchase to be included thereunder, in the form provided by
the Underwriter covering purchases of Class A shares of the Funds, Security
Income Fund or Security Tax-Exempt Fund to be made within a period of 13 months
(or a 36-month period for purchases of $1 million or more) and thereby become
eligible for the reduced front-end sales charge applicable to the actual amount
purchased under the Statement. Five percent of the amount specified in the
Statement of Intention will be held in escrow shares until the Statement is
completed or terminated. The shares so held may be redeemed by the Funds if the
investor is required to pay additional sales charges which may be due if the
amount of purchases made by the Purchaser during the period the Statement is
effective is less than the total specified in the Statement of Intention.
A Statement of Intention may be revised during the 13-month period (or a
36-month period for purchases of $1 million or more). Additional Class A shares
received from reinvestment of income dividends and capital gains distributions
are included in the total amount used to determine reduced sales charges. The
Statement is not a binding obligation upon the investor to purchase or any Fund
to sell the full indicated amount. A Statement of Intention form may be obtained
from the Funds. An investor considering signing such an agreement should read
the Statement of Intention carefully.
REINSTATEMENT PRIVILEGE
Stockholders who redeem their Class A shares of the Funds have a one-time
privilege (1) to reinstate their accounts by purchasing shares without a sales
charge up to the dollar amount of the redemption proceeds, or (2) to the extent
the redeemed shares would have been eligible for the exchange privilege, to
purchase Class A shares of another of the Funds, Security Income Fund and
Security Tax-Exempt Fund, without a sales charge up to the dollar amount of the
redemption proceeds. Written notice and a check in the amount of the
reinvestment from eligible stockholders wishing to exercise this reinstatement
privilege must be received by a fund within 30
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days after the redemption request was received (or such longer period as may be
permitted by rules and regulations promulgated under the Investment Company Act
of 1940). The reinstatement or exchange will be made at the net asset value next
determined after the reinvestment is received by the Fund. Stockholders making
use of the reinstatement privilege should note that any gains realized upon the
redemption will be taxable while any losses may be deferred under the "wash
sale" provision of the Internal Revenue Code.
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