Capital Preservation Definitive
SECURITY FUNDS
PROSPECTUS
FEBRUARY 1, 2001
o Security Capital Preservation Fund
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The Securities and Exchange Commission has not approved or
disapproved these securities or passed upon the adequacy of this
prospectus. Any representation to the contrary is a criminal offense.
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[SDI LOGO]
SECURITY DISTRIBUTORS, INC.
A Member of The Security Benefit
Group of Companies
TABLE OF CONTENTS
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OVERVIEW OF THE SECURITY CAPITAL PRESERVATION FUND
GOAL ....................................................................... 2
CORE STRATEGY............................................................... 2
INVESTMENT POLICIES AND STRATEGIES.......................................... 2
PRINCIPAL RISKS OF INVESTING IN THE FUND.................................... 2
WHO SHOULD CONSIDER INVESTING IN THE FUND................................... 2
PAST PERFORMANCE............................................................ 2
FEES AND EXPENSES OF THE FUND............................................... 4
A DETAILED LOOK AT THE SECURITY CAPITAL PRESERVATION FUND
OBJECTIVE................................................................... 5
STRATEGY.................................................................... 5
PRINCIPAL INVESTMENTS....................................................... 5
Fixed Income Securities................................................. 5
Wrapper Agreements...................................................... 6
Short-Term Investments.................................................. 6
Derivative Instruments.................................................. 6
Other Investments....................................................... 7
INVESTMENT PROCESS.......................................................... 7
RISKS ...................................................................... 7
Primary Risks........................................................... 7
Secondary Risk.......................................................... 9
MANAGEMENT OF THE FUND...................................................... 9
Board of Directors...................................................... 9
Investment Adviser...................................................... 9
Other Services.......................................................... 10
Portfolio Managers...................................................... 10
CALCULATING THE FUND'S SHARE PRICE.......................................... 10
ORGANIZATIONAL STRUCTURE.................................................... 11
BUYING SHARES............................................................... 11
Class A Shares.......................................................... 11
Class A Distribution Plan............................................... 11
Class B Shares.......................................................... 12
Class B Distribution Plan............................................... 12
Class C Shares.......................................................... 12
Class C Distribution Plan............................................... 12
Class S Shares.......................................................... 12
Class S Distribution Plan............................................... 13
Waiver of Deferred Sales Charge......................................... 13
Confirmations and Statements............................................ 13
SELLING SHARES.............................................................. 13
Interest Rate Trigger................................................... 14
Qualified TSA Redemptions............................................... 15
Qualified IRA Redemptions............................................... 15
Qualified Plan Redemptions.............................................. 15
Payment of Redemption Proceeds.......................................... 16
DIVIDENDS AND DISTRIBUTIONS................................................. 16
TAX CONSIDERATIONS.......................................................... 16
SHAREHOLDER SERVICES........................................................ 16
Accumulation Plan....................................................... 16
Systematic Withdrawal Program........................................... 17
Exchange Privilege...................................................... 17
Retirement Plans........................................................ 18
GENERAL INFORMATION......................................................... 18
Shareholder Inquiries................................................... 18
FINANCIAL HIGHLIGHTS........................................................ 18
APPENDIX A - REDUCED SALES CHARGES.......................................... 21
Class A Shares.......................................................... 21
Rights of Accumulation.................................................. 21
Statement of Intention.................................................. 21
Reinstatement Privilege................................................. 21
Purchases at Net Asset Value............................................ 21
OVERVIEW OF THE SECURITY CAPITAL PRESERVATION FUND
GOAL
The Fund seeks a high level of current income while seeking to maintain a stable
value per share.
CORE STRATEGY
The Fund invests primarily in fixed income securities. The Fund also enters into
contracts with financial institutions that are designed to stabilize the Fund's
share value.
INVESTMENT POLICIES AND STRATEGIES
The Fund invests all of its assets in a master portfolio with the same
investment goal as the Fund. The Fund, through the master portfolio, seeks to
achieve its goal by investing in fixed income securities of varying maturities,
money market instruments and futures and options (including futures and options
traded on foreign exchanges, such as bonds and equity indices of foreign
countries). The Fund attempts to maintain a stable share value by entering into
contracts, called Wrapper Agreements, with financial institutions, such as
insurance companies or banks.
PRINCIPAL RISKS OF INVESTING IN THE FUND
Although the Fund seeks to preserve a stable share value, there are risks
associated with fixed income investing. For example, the value of fixed income
securities could fluctuate or fall if:
o There is a sharp rise in interest rates.
o An issuer's creditworthiness declines.
o Changes in interest rates or economic downturns have a negative effect on
issuers in the financial services industry.
The Fund attempts to offset these risks by purchasing Wrapper Agreements. The
use of Wrapper Agreements has its own risks, including:
o The possibility of default by a financial institution providing a Wrapper
Agreement ("Wrapper Provider").
o The inability of the Fund to obtain Wrapper Agreements covering the Fund's
assets.
The Fund is also subject to the risk that the Portfolio's Investment Adviser
incorrectly judges the potential risks and rewards of derivative investing.
WHO SHOULD CONSIDER INVESTING IN THE FUND
You should consider investing in the Fund if you are looking for an investment
that seeks to earn current income higher than money market mutual funds over
most time periods and to preserve the value of your investment. In addition, the
Fund is offered as an alternative to short-term bond funds and as a comparable
investment to stable value or guaranteed investment contract options offered in
employee benefit plans.
The Fund offers shares only to retirement accounts such as tax-sheltered annuity
custodial accounts (TSAs), individual retirement accounts (IRAs) and to
employees investing through participant-directed employee benefit plans. IRAs
include traditional IRAs, Roth IRAs, education IRAs, simplified employee pension
IRAs (SEP IRAs), savings incentive match plans for employees (SIMPLE IRAs), and
Keogh plans.
You should not consider investing in the Fund if you seek capital growth.
Although it provides a convenient means of diversifying short-term investments,
the Fund by itself does not constitute a balanced investment program.
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An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
Although the Fund seeks to preserve a stable share value, it is possible to lose
money by investing in the Fund.
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PAST PERFORMANCE
The chart and table below provide some indication of the risks of investing in
the Fund by showing changes in the Funds' Class A share performance from year to
year and by showing how the Fund's average annual returns have compared to those
of a broad measure of market performance. As with all mutual funds, past
performance is not a prediction of future results.
The bar chart does not reflect the sales charges applicable to Class A shares
which, if reflected, would lower the returns shown. Average annual total returns
for the Fund's Class A shares include deduction of the 3.5% front-end sales
charge, for Class B shares include the appropriate deferred sales charge, which
is 5% in the first year declining to 0% in the sixth and later years, and for
Class C shares include the deferred sales charge of 1% in the first year. Fee
waivers and/or reimbursements reduced Fund expenses and in the absence of such
waivers and/or reimbursements the performance quoted would be reduced.
Performance information does not include deduction of the 2% redemption fee
which may apply to certain redemptions. Performance information for Class S
shares is not included as that share class was not available until February 1,
2001.
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SECURITY CAPITAL PRESERVATION FUND - CLASS A
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[BAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
2000
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6.60%
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HIGHEST AND LOWEST RETURNS
(QUARTERLY 2000)
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QUARTER ENDING
Highest 1.69% June 30, 2000
Lowest 1.56% December 31, 2000
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AVERAGE ANNUAL TOTAL RETURNS
(THROUGH DECEMBER 31, 2000)
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PAST LIFE OF FUND
1 YEAR (SINCE 5/3/99)
Class A 2.94% 4.08%
Class B 1.12% 3.46%
Class C 5.38% 6.04%
Lehman Brothers 1-3 Year
Government/Credit Index 8.08% 5.59%(1)
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1 Index performance information is only available to
the Fund at the beginning of each month. The Lehman
Brothers 1-3 Year Government/Credit Index is for the
period May 1, 1999 to December 31, 2000.
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FEES AND EXPENSES OF THE FUND
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND HOLD
SHARES OF THE FUND.
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SHAREHOLDER FEES (fees paid directly from your investment)
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CLASS A CLASS B CLASS C CLASS S
SHARES(1) SHARES(2) SHARES(3) SHARES
Maximum Sales Charge Imposed
on Purchases (as a percentage 3.5% None None None
of offering price)
Maximum Sales Charge Imposed
on Reinvested Dividends None None None None
Maximum Deferred Sales Charge 5% during the 6% during the
(as a percentage of original first year, first year,
purchase price or redemption None decreasing to 1% decreasing to
proceeds, whichever is lower) 0% in the sixth 0% in the
and following eighth and
years following years
Maximum Redemption Fee(4) 2% 2% 2% 2%
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1 Purchases of Class A shares in amounts of $1,000,000 or more are not subject to an
initial sales load; however, a deferred sales charge of 1% is imposed in the event of
redemption within one year of purchase.
2 Class B shares convert tax-free to Class A shares automatically after eight years.
3 A deferred sales charge of 1% is imposed in the event of redemption within one year of
purchase.
4 The redemption fee payable to the master portfolio is designed primarily to offset
those expenses which may be incurred by the master portfolio in connection with
certain shareholder redemptions. Proceeds from the redemption fee will be used by the
master portfolio to offset the actual portfolio and administrative costs associated
with such redemptions, including custodian, transfer agent, settlement, and account
processing costs, as well as the adverse impact of such redemptions on the premiums
paid for Wrapper Agreements and the yield on Wrapper Agreements. The redemption fee
may also have the effect of discouraging redemptions by shareholders attempting to
take advantage of short-term interest rate movements. The redemption fee does not
apply to Qualified TSA, Qualified IRA or Qualified Plan Redemptions. The amount of,
and method of applying, the Redemption Fee, including the operation of the Interest
Rate Trigger, may be changed in the future. Shares currently offered in this
prospectus would be subject to the new combination of Redemption Fee and Interest Rate
Trigger.
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ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)
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MANAGEMENT DISTRIBUTION OTHER TOTAL ANNUAL FUND
FEES(1) (12B-1) FEES EXPENSES(2) OPERATING EXPENSES(4,5)
Class A 0.70% 0.25% 0.69% 1.64%
Class B 0.70% 0.75% 0.69% 2.14%
Class C 0.70% 0.50% 0.69% 1.89%
Class S 0.70% 1.00% 0.69%(3) 2.39%
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1 The Fund does not directly pay a management fee. However, the underlying
master portfolio in which the Fund invests, the PreservationPlus Income
Portfolio (the "Portfolio"), does pay a management fee to its investment
adviser, Bankers Trust Company.
2 "Other Expenses" include the annual premium paid for Wrapper Agreements.
3 "Other Expenses" for Class S shares are based on estimates for the current
fiscal year.
4 Information on the annual Fund operating expenses reflects the expenses of
both the Fund and the Portfolio.
5 Security Management Company, LLC ("SMC"), the Fund's Administrator, has
agreed that if the total annual expenses of the Fund, exclusive of interest,
taxes, extraordinary expenses, brokerage fees and commissions, and Rule 12b-1
fees, but inclusive of its own fee, exceeds 1.50%, SMC will contribute to the
Fund an amount and/or waive its fee as may be necessary to insure that the
total annual expenses do not exceed such amount.
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EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time periods
indicated. The Example also assumes that your investment has a 5% return each
year and that the Fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
You would pay the following expenses if you redeemed your shares at the end of
each period.
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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Class A $510 $ 849 $1,211 $2,226
Class B 717 970 1,349 2,346
Class C 292 593 1,021 2,212
Class S 842 1,245 1,575 2,731
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You would pay the following expenses if you redeemed your shares at the end of
each period and were assessed the 2% Redemption Fee.
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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Class A $ 710 $1,049 $1,411 $2,426
Class B 917 1,170 1,549 2,546
Class C 492 793 1,221 2,412
Class S 1,042 1,445 1,775 2,931
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You would pay the following expenses if you did not redeem your shares.
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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Class A $510 $849 $1,211 $2,226
Class B 217 670 1,149 2,346
Class C 192 593 1,021 2,212
Class S 242 745 1,275 2,731
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A DETAILED LOOK AT THE SECURITY CAPITAL PRESERVATION FUND
OBJECTIVE
The Security Capital Preservation Fund seeks a high level of current income
while seeking to maintain a stable value per share.
While priority is given to earning income and maintaining the value of the
Fund's principal, all fixed income securities, including U.S. government
obligations, can decrease in value when, for example, interest rates change or
an issuer's creditworthiness changes. THE FUND'S OBJECTIVE IS NOT A FUNDAMENTAL
POLICY AND MAY BE CHANGED BY THE FUND'S BOARD OF DIRECTORS.
STRATEGY
As noted previously, the Fund seeks its objective by investing its assets in the
PreservationPlus Income Portfolio. Accordingly, references to the Fund investing
in particular types of securities or asset classes are actually references to
what is done by the underlying Portfolio.
The Fund seeks current income that is higher than that of money market funds by
investing in fixed income securities with varying maturities and maintaining an
average portfolio DURATION of 2.5 to 4.5 years. In addition, the Fund enters
into Wrapper Agreements designed to stabilize the Fund's share value. Wrapper
Agreements are provided by financial institutions, such as insurance companies
and banks. In an attempt to enhance return, the Fund also employs a global asset
allocation strategy, which evaluates the equity, bond, cash and currency
opportunities across domestic and international markets.
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DURATION measures the sensitivity of bond prices to changes in interest rates.
The longer the duration of a bond, the longer it will take to repay the
principal and interest obligations and the more sensitive it is to changes in
interest rates. Investors in longer-duration bonds face more risk as interest
rates rise--but also are more likely to receive more income from their
investment to compensate for the risk.
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PRINCIPAL INVESTMENTS
FIXED INCOME SECURITIES -- The Fund invests at least 65% of its total assets in
fixed income securities rated, at the time of purchase, within the top four
long-term rating categories by a nationally recognized statistical rating
organization (or, if unrated, are determined to be of similar quality by the
Portfolio's Investment Adviser). However, the Fund may invest up to 10% of its
assets in high yield debt securities (also known as junk bonds) rated in the
fifth and sixth long-term rating categories by a nationally recognized
statistical rating organization (or, if unrated, are determined to be of similar
quality by the Portfolio's Investment Adviser).
Fixed income securities in which the Fund may invest include the following:
o U.S. government securities that are issued or guaranteed by the U.S.
Treasury, or by agencies or instrumentalities of the U.S. Government.
o U.S. dollar-denominated securities issued by domestic or foreign
corporations, foreign governments or supranational entities.
o U.S. dollar-denominated asset-backed securities issued by domestic or foreign
entities.
o Mortgage pass-through securities issued by governmental and non-governmental
issuers.
o Collateralized mortgage obligations and real estate mortgage investment
conduits.
o Obligations issued or guaranteed, or backed by securities issued or
guaranteed, by the U.S. government, or any of its agencies or
instrumentalities, including CATS, TIGRs, TRs and zero coupon securities,
which are securities consisting of either the principal component or the
interest component of a U.S. Treasury bond.
The following policies are employed to attempt to reduce the risks involved in
investing in fixed income securities:
o Assets are allocated among a diversified group of issuers.
o Investments are primarily made in fixed income securities that are rated, at
the time of purchase, within the top four rating categories as rated by
Moody's Investors Service, Inc., Standard & Poor's Ratings Services or Duff &
Phelps Credit Rating Co., another nationally recognized statistical rating
organization, or, if unrated, determined by the Portfolio's investment
adviser to be of comparable quality.
o Average portfolio duration of 2.5 to 4.5 years is targeted by investing in
fixed income securities with short- to intermediate term MATURITIES.
Generally, rates of short-term investments fluctuate less than longer-term
investments.
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MATURITY measures the time remaining until an issuer must repay a bond's
principal in full.
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WRAPPER AGREEMENTS -- The Fund enters into Wrapper Agreements with insurance
companies, banks and other financial institutions. Unlike traditional fixed
income portfolios, the Fund's purchases of Wrapper Agreements should offset
substantially the price fluctuations typically associated with fixed income
securities. In using Wrapper Agreements, the Fund seeks to eliminate the effect
of any gains or losses on the value per share of the Fund. Normally, these
agreements require the Wrapper Provider to maintain the BOOK VALUE of a portion
of the Fund's assets (Covered Assets) if certain events occur. More than one
Wrapper Provider provides coverage with respect to the same securities and, when
applicable, pays based on the pro rata portion of the Fund's assets that it
covers.
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BOOK VALUE of the Covered Assets is their purchase price, plus interest (as
specified in the Wrapper Agreements), less an adjustment to reflect any
defaulted securities.
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In general, if the Fund sells securities to meet shareholder redemptions and the
market value (plus accrued interest) of those securities is less than their book
value, the Wrapper Provider must pay the difference to the Fund. On the other
hand, if the Fund sells securities and the market value (plus accrued interest)
is more than the book value, the Fund must pay the difference to the Wrapper
Provider. The timing of payments between the Fund and the Wrapper Provider vary.
The Crediting Rate:
o Is the actual interest earned on the Covered Assets based on the formula
stated in the Wrapper Agreements and is generally adjusted monthly for price
movements in the Covered Assets and amounts payable to or receivable from the
Wrapper Provider; and
o Is a significant component of the Fund's yield.
The following policies are employed to attempt to reduce the risks involved in
using Wrapper Agreements:
o Wrapper Agreements are purchased from multiple issuers, each of which has
received a HIGH QUALITY RATING from Moody's or Standard & Poor's.
o The financial well being of the issuers of the securities in which the Fund
invests and the Wrapper Providers providing Wrapper Agreements to the Fund
are monitored on a continuous basis.
Generally, unless the Wrapper Agreement requires the sale of a security that has
been downgraded below a specified rating, the Fund is not required to dispose of
any security or Wrapper Agreement whose issuer's rating has been downgraded.
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A HIGH QUALITY RATING means a security is rated in the top two long-term ratings
categories by a nationally recognized statistical rating organization.
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SHORT-TERM INVESTMENTS -- The Fund will also invest in short-term investments,
including money market mutual funds, to meet shareholder withdrawals and other
liquidity needs. These short-term investments, such as commercial paper and
certificates of deposit, will be rated, at the time of purchase, in one of the
top two short-term rating categories by a nationally recognized statistical
rating organization, or if unrated, are determined to be of similar quality by
the Portfolio's Investment Adviser.
DERIVATIVE INSTRUMENTS -- The Fund may invest in various instruments commonly
known as "derivatives" to increase its exposure to certain groups of securities.
The derivatives that the Fund may use include FUTURES CONTRACTS, OPTIONS ON
FUTURES CONTRACTS AND FORWARD CONTRACTS. The Fund may use derivatives to keep
cash on hand to meet shareholder redemptions, as a hedging strategy to maintain
a specific portfolio duration, or to protect against market risk. When employing
the global asset allocation strategy, the Fund may use derivatives for
leveraging, which is a way to attempt to enhance returns. We will only use these
securities if we believe that their return potential more than compensates for
the extra risks associated with using them.
OTHER INVESTMENTS -- The Fund may also invest in and utilize the following
investments and investment techniques and practices: Rule 144A securities,
when-issued and delayed delivery securities, repurchase agreements, reverse
repurchase agreements, to be announced securities ("TBA securities") and dollar
rolls.
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FUTURES CONTRACTS, OPTIONS ON FUTURES CONTRACTS AND FORWARD CONTRACTS are
commonly used for traditional hedging purposes to attempt to protect an investor
from the risks of changing interest rates, securities prices or currency
exchange rates and for cash management purposes as a low cost method of gaining
exposure to a particular securities market without investing directly in those
securities.
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INVESTMENT PROCESS
The Fund's investment strategy emphasizes a diversified exposure to higher
yielding mortgage, corporate and asset-backed sectors of the investment grade
fixed income markets. These "spread" sectors have historically offered higher
returns than U.S. government securities. The investment process focuses on a
top-down approach, first focused on the sector allocations, then using relative
value analysis to select the best securities within each sector. To select
securities, the Portfolio's investment adviser analyzes such factors as credit
quality, interest rate sensitivity and spread relationships between individual
bonds.
The Fund also purchases Wrapper Agreements, which seek to offset price
fluctuations of the fixed income securities and, as a result, provide a stable
value per share for the Fund. A primary emphasis is placed on assessing the
credit quality of financial institutions that may provide a Wrapper Agreement to
the Fund. The Portfolio's Investment Adviser performs proprietary credit
analysis on a large universe of issuers and actively manages the negotiation and
maintenance of Wrapper Agreements.
The global asset allocation strategy attempts to enhance long-term returns and
manage risk by responding effectively to changes in global markets using
instruments including, but not limited to, futures, options and currency
forwards. This strategy employs a multi-factor global asset allocation model
that evaluates equity, bond, cash and currency opportunities across domestic and
international markets.
In implementing the global asset allocation strategy, the Fund invests in
options and futures based on any type of security or index including options and
futures traded on foreign exchanges, such as bonds and equity indices of foreign
countries. Some options and futures strategies, including selling futures,
buying puts and writing calls, hedge the Fund's investments against price
fluctuations. Other strategies, including buying futures, writing puts and
buying calls, tend to increase and will broaden the Fund's market exposure.
Options and futures may be combined with each other, or with forward contracts,
in order to adjust the risk and return characteristics of an overall strategy.
The Fund may also enter into forward currency exchange contracts (agreements to
exchange one currency for another at a future date), may buy and sell options
and futures contracts relating to foreign currencies and may purchase securities
indexed to foreign currencies. Currency management strategies allow shifts of
investment exposure from one currency to another to attempt to profit from
anticipated declines in the value of a foreign currency relative to the U.S.
dollar.
Successful implementation of the global asset allocation strategy depends on the
Portfolio's Investment Adviser's judgment as to the potential risks and rewards
of implementing the different types of strategies.
TEMPORARY DEFENSIVE POSITION. From time to time a temporary defensive position
may be adopted in response to extraordinary adverse political, economic or
market events. Up to 100% of the Fund's assets could be placed in short-term
obligations within one of the top two investment ratings. These short-term
obligations may not be covered by a Wrapper Agreement. To the extent such a
position is adopted, the Fund may not meet its goal of a high level of current
income or a stable net asset value.
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PORTFOLIO TURNOVER rate measures the frequency that the Portfolio sells and
replaces the securities it holds within a given period. Historically, this Fund
has had a high portfolio turnover rate. High turnover can increase the Fund's
transaction costs, thereby lowering its returns.
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RISKS
Set forth below are some of the prominent risks associated with fixed income
investing, the use of Wrapper Agreements, and the risks of investing in general.
Although an attempt is made to assess the likelihood that these risks may
actually occur and to limit them, there can be no guarantee that it will
succeed.
PRIMARY RISKS --
INTEREST RATE RISK. All debt securities face the risk that the securities will
decline in value because of changes in interest rates. Generally, investments
subject to interest rate risk will decrease in value when interest rates rise
and increase when interest rates fall. If interest rates are falling, the Fund's
income may decline because of the investment or reinvestment of assets in fixed
income securities.
CREDIT RISK. An investor purchasing a fixed income security faces the risk that
the value of the security may decline because the creditworthiness of the issuer
may decline or the issuer may fail to make timely payment of interest or
principal.
WRAPPER AGREEMENT RISK. Although the Fund uses Wrapper Agreements to attempt to
maintain a stable value per share, there are risks associated with the Wrapper
Agreements, including:
o A Wrapper Provider could default, which could cause the Fund's share value to
fluctuate or fall and could result in losses for Plan participants who sell
their shares.
o The Wrapper Agreements may require the Fund to maintain a certain percentage
of its assets in short-term investments. This could result in a lower return
than if the Fund invested those assets in longer-term securities. The Fund
may elect not to cover a fixed income security with a remaining maturity of
60 days or less, cash or short-term investments with Wrapper Agreements.
o The Wrapper Agreements generally do not protect the Fund from loss caused by
a fixed income security issuer's default on principal or interest payments.
o The Fund may not be able to obtain Wrapper Agreements to cover all of its
assets.
o If a Wrapper Provider is unable to make timely payments, the Portfolio's
Board may determine the fair value of that Wrapper Agreement to be less than
the difference between the book value and the market value, which could cause
the Fund's net asset value to fluctuate.
o Compared to investing in a traditional fixed income fund, the Fund trades the
potential for capital appreciation and some yield for protection from a
decline in the value of its holdings caused by changes in interest rates.
MARKET RISK. Although individual securities may outperform their market, the
entire market may decline as a result of rising interest rates, regulatory
developments or deteriorating economic conditions.
SECURITY SELECTION RISK. While the Fund invests in short- to intermediate-term
securities, which by nature are relatively stable investments, the risk remains
that the securities selected will not perform as expected. This could cause the
Fund's returns to lag behind those of money market funds.
LIQUIDITY RISK. Liquidity risk is the risk that a security cannot be sold
quickly at a price that reflects the estimate of its value. Because there is no
active trading market for Wrapper Agreements, the Fund's investments in the
Wrapper Agreements are considered illiquid. In an effort to minimize this risk,
the Fund limits its investments in illiquid securities, including Wrapper
Agreements, to 15% of net assets.
PRICING RISK. The securities in the Portfolio are valued at their stated market
value if price quotations are available and, if not, by the method that most
accurately reflects their current worth in the judgment of the Portfolio's Board
of Trustees.
If Wrapper Agreements are not in place, this procedure implies an unavoidable
risk, the risk that the prices used are higher or lower than the prices that the
securities might actually command if they were sold. If the securities are
valued too highly, you may end up paying too much for Fund shares when you buy.
If the price of the securities are undervalued, you may not receive the full
market value for your Fund shares when you sell.
According to the procedures adopted by the Portfolio's Board of Trustees, the
fair value of the Wrapper Agreements generally will equal the difference between
the book value and the market value (plus accrued interest) of the Fund's
assets. In determining fair value, the Board will consider the creditworthiness
and ability of a Wrapper Provider to pay amounts due under the Wrapper
Agreements. If the Portfolio's Board of Trustees determines that a Wrapper
Agreement should not be valued this way, the net asset value of the Fund could
fluctuate.
DERIVATIVE RISK. Derivatives are more volatile and less liquid than traditional
fixed income securities. Risks associated with derivatives include:
o the derivative may not fully offset the underlying positions;
o the derivatives used for risk management may not have the intended effects
and may result in losses or missed opportunities; and
o the possibility the Fund cannot sell the derivative because of an illiquid
secondary market.
The use of derivatives for leveraging purposes tends to magnify the effect of an
instrument's price changes as market conditions change.
If the Fund invests in futures contracts and options on futures contracts for
non-hedging purposes, the margin and premiums required to make those investments
will not exceed 5% of the Fund's net asset value after taking into account
unrealized profits and losses on the contracts. Futures contracts and options on
futures contracts used for non-hedging purposes involve greater risks than other
investments.
FOREIGN INVESTING RISK. The Fund faces the risks detailed below in the portion
of its investments it devotes to foreign securities.
o POLITICAL RISK. Profound social changes and business practices that depart
from developed-market norms have hindered the growth of capital markets in
developing nations in the past. High levels of debt have tended to make them
overly reliant on foreign capital investment and vulnerable to capital
flight. Governments have limited foreign investors' access to capital markets
and restricted the flow of profits overseas. They have resorted to high
taxes, expropriation and nationalization. All these threats remain a part of
emerging-market investing in particular today.
o INFORMATION RISK. Foreign accounting, auditing, and financial reporting and
disclosure standards tend to be less stringent than those in the United
States. And the risks of investors acting on incomplete or inaccurate
information are correspondingly greater. Compounding the problem, local
investment research often lacks the sophistication to spot potential
pitfalls.
CURRENCY RISK. The Fund invests in foreign securities denominated in foreign
currencies. This creates the possibility that changes in foreign exchange rates
will affect the value of foreign securities and, thus, the U.S. dollar amount of
income or gain received on these securities. The Portfolio's Investment Adviser
seeks to minimize this risk by actively managing the currency exposure of the
Fund. There is no guarantee that these currency management activities will work
and they could cause losses to the Fund.
SECONDARY RISK --
LOWER RATED SECURITIES. The Fund may invest in debt securities rated in the
fifth and sixth long-term ratings categories. The market for lower-rated debt
securities may be thinner and less active than that for higher rated debt
securities, which can adversely affect the prices at which the lower-rated
securities are sold. If market quotations are not available, lower-rated debt
securities will be valued in accordance with procedures established by the
Portfolio's Board of Trustees. Judgment plays a greater role in valuing high
yield corporate debt securities than is the case for securities for which more
external sources for quotations and last sale information is available. Adverse
publicity and changing investor perception may affect the availability of
outside pricing services to value lower-rated debt securities and the Fund's
ability to dispose of these securities. Since the risk of default is higher for
lower-rated securities, the Investment Adviser's research and credit analysis
are an especially important part of managing securities of this type.
In considering investments for the Fund, the Portfolio's Investment Adviser
attempts to identify those issuers of high yielding debt securities whose
financial conditions are adequate to meet future obligations, have improved or
are expected to improve in the future. The Investment Adviser's analysis focuses
on relative values based on such factors as interest on dividend coverage, asset
coverage, earnings prospects and the experience and managerial strength of the
issuer.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS -- The Fund's shareholders, voting in proportion to the
number of shares each owns, elect a Board of Directors, and the Directors
supervise all of the Fund's activities on their behalf.
INVESTMENT ADVISER -- Under the supervision of the Board of Trustees of the
Portfolio, Bankers Trust Company (Bankers Trust) with headquarters at 130
Liberty Street, New York, New York 10006, acts as the Portfolio's Investment
Adviser. As Investment Adviser, Bankers Trust makes the Portfolio's investment
decisions and assumes responsibility for the securities the Portfolio owns. It
buys and sells securities for the Portfolio and conducts the research that leads
to the purchase and sale decisions. Bankers Trust received a fee of 0.70% of the
Portfolio's average daily net assets for its services in the last fiscal year.
The fee received by Banker's Trust in the last fiscal year reflected certain fee
waivers that were in place. Those fee waivers have since been discontinued.
As of September 30, 2000, Bankers Trust had total assets under management of
approximately $223 billion. Bankers Trust is dedicated to servicing the needs of
corporations, governments, financial institutions, and private clients and has
invested retirement assets on behalf of the nation's largest corporations and
institutions for more than 50 years. The scope of the firm's capability is
broad: it is a leader in both the active and passive quantitative investment
disciplines and maintains a major presence in stock and bond markets worldwide.
As of September 30, 2000, Bankers Trust managed approximately $15 billion in
stable value assets.
At a Special Meeting of Shareholders held in 1999, shareholders of the Portfolio
approved a new investment advisory agreement with Deutsche Asset Management,
Inc. (formerly Morgan Grenfell, Inc.). The new investment advisory agreement
with Deutsche Asset Management, Inc. may be implemented within two years of the
date of the Special Meeting upon approval of a majority of the members of the
Board of Trustees of the Portfolio who are not "interested persons", generally
referred to as Independent Trustees. Shareholders of the Portfolio also approved
a new sub-investment advisory agreement among the Trust, Deutsche Asset
Management, Inc. and Bankers Trust under which Bankers Trust may perform certain
of Deutsche Asset Management, Inc.'s responsibilities, at Deutsche Asset
Management, Inc.'s expense, upon approval of the Independent Trustees, within
two years of the date of the Special Meeting. Under the new investment advisory
agreement and new sub-advisory agreement, the compensation paid and the services
provided would be the same as those under the existing advisory agreement with
Bankers Trust.
Deutsche Asset Management, Inc. is located at 885 Third Avenue, New York, New
York 10022. The firm provides a full range of investment advisory services to
institutional clients. It serves as investment adviser to 11 other investment
companies and as sub-adviser to five other investment companies.
OTHER SERVICES -- The Fund's administrator, Security Management Company, LLC
("SMC" or the "Administrator") provides administrative services, fund accounting
and transfer agency services to the Fund. Bankers Trust provides administrative
services--such as portfolio accounting, legal services and other services--for
the Portfolio.
Pursuant to a separate Management Services Agreement, SMC also performs certain
other services on behalf of the Fund. Under this Agreement, SMC provides, among
other things, feeder fund management and administrative services to the Fund
which include:
o monitoring the performance of the Portfolio;
o coordinating the Fund's relationship with the Portfolio;
o communicating with the Fund's Board of Directors and shareholders regarding
the Portfolio's performance and the Fund's two tier structure, and in
general;
o assisting the Board of Directors of the Fund in all aspects of the
administration and operation of the Fund.
For these services, the Fund pays SMC a fee at the annual rate of .20% of its
average daily net assets, calculated daily and payable monthly.
For providing certain shareholder services to the shareholders of the Fund, SMC
receives from Bankers Trust a fee which is equal on an annual basis to .20% of
the aggregate net assets of the Fund invested in the Portfolio. The fee is not
an expense of the Fund or the Portfolio.
PORTFOLIO MANAGERS --
ERIC KIRSCH, Portfolio Manager of Bankers Trust Company, has managed the Fixed
Income Securities of the Portfolio since its inception in May 1999. Mr. Kirsch
joined Bankers Trust in 1980. He is a Chartered Financial Analyst with ten years
of investment experience.
LOUIS R. D'ARIENZO, Portfolio Manager of Bankers Trust Company, has managed the
Fixed Income Securities of the Portfolio since its inception in May 1999. Mr.
D'Arienzo joined Bankers Trust in 1981 and has 17 years investment experience.
JOHN D. AXTELL, JR., Portfolio Manager of Bankers Trust Company, is responsible
for the portfolio management and trading activities relating to Stable Value
Investments for client portfolios. Mr. Axtell joined Bankers Trust in 1990.
CALCULATING THE FUND'S SHARE PRICE
The Fund's share price is calculated daily (also known as the "net asset value"
or "NAV") in accordance with the standard formula for valuing mutual fund shares
at the close of regular trading on the New York Stock Exchange every day the
Exchange is open for business. The formula calls for deducting all of a Fund's
liabilities from the total value of its assets--the market value of the
securities it holds, plus its cash reserves--and dividing the result by the
number of shares outstanding. (Note that prices for securities that trade on
foreign exchanges can change significantly on days when the New York Stock
Exchange is closed and you cannot buy or sell Fund shares. Price changes in the
securities the Fund owns may ultimately affect the price of Fund shares the next
time the NAV is calculated.)
The securities in the Portfolio are valued at their stated market value if price
quotations are available and, if not, by the method that most accurately
reflects their current worth in the judgment of the Portfolio's Board of
Trustees.
According to the procedures adopted by the Board of Trustees of the Portfolio,
the fair value of the Wrapper Agreements generally will equal the difference
between the book value and the market value (plus accrued interest) of the
Portfolio's assets. In determining fair value, the Board will consider the
creditworthiness and ability of a Wrapper Provider to pay amounts due under the
Wrapper Agreements.
--------------------------------------------------------------------------------
The Exchange is open every week, Monday through Friday, except when the
following holidays are celebrated: New Year's Day, Martin Luther King, Jr. Day
(the third Monday in January), Presidents' Day (the third Monday in February),
Good Friday, Memorial Day (the last Monday in May), Independence Day, Labor Day
(the first Monday in September), Thanksgiving Day (the fourth Thursday in
November) and Christmas Day.
--------------------------------------------------------------------------------
ORGANIZATIONAL STRUCTURE
Although the Fund has not currently retained the services of an investment
adviser or sub-advisor, it may do so in the future. Accordingly, SMC and the
Fund have received from the Securities and Exchange Commission an exemptive
order for a multi-manager structure that allows SMC to hire, replace or
terminate sub-advisors without the approval of shareholders. The order also
allows SMC to revise a sub-advisory agreement with the approval of Fund
Directors, but without shareholder approval. If a new sub-advisor is hired,
shareholders will receive information about the new sub-advisor within 90 days
of the change. The order allows the Fund to operate more efficiently and with
greater flexibility. Should the Fund use the service of a sub-advisor in the
future, SMC would anticipate providing the following oversight and evaluation
services to the Fund:
o performing initial due diligence on prospective sub-advisors for the Fund
o monitoring the performance of the sub-advisor(s)
o communicating performance expectations to the sub-advisor(s)
o ultimately recommending to the Board of Directors whether a sub-advisor's
contract should be renewed, modified or terminated.
SMC does not expect it would recommend frequent changes of sub-advisors.
The Fund is a "feeder fund" that invests all of its assets in a "master
portfolio," the PreservationPlus Income Portfolio. The Fund and the master
portfolio have the same investment objective. The master portfolio is advised by
Bankers Trust.
The master portfolio may accept investments from other feeder funds. The feeders
bear the master portfolio's expenses in proportion to their assets. Each feeder
can set its own transaction minimums, fund-specific expenses, and other
conditions. This arrangement allows the Fund's Directors to withdraw the Fund's
assets from the master portfolio if they believe doing so is in the
shareholders' best interests. If the Directors withdraw the Fund's assets, they
would then consider whether the Fund should hire its own investment adviser,
invest in a different master portfolio or take other action.
BUYING SHARES
Shares of the Fund are available through broker/dealers, banks, and other
financial intermediaries that have an agreement with the Fund's Distributor,
Security Distributors, Inc. A broker/dealer may impose a transaction charge on
the purchase of Fund shares. Fund shares purchased directly from the Fund do not
contain a transaction charge but may contain a front-end sales charge as noted
under "Class A shares".
There are four different ways to buy shares of the Fund--Class A shares, Class B
shares, Class C shares or Class S shares. The different classes of a Fund differ
primarily with respect to the sales charges and Rule 12b-1 distribution fees to
which they are subject. The minimum initial investment is $100. Subsequent
investments must be $100 (or $20 under an Accumulation Plan). The Fund reserves
the right to reject any order to purchase shares.
CLASS A SHARES -- Class A shares are subject to a sales charge at the time of
purchase. An order for Class A shares will be priced at the Fund's net asset
value per share (NAV), plus the sales charge, set forth in the following table.
The NAV, plus the sales charge is the "offering price." The Fund's NAV is
generally calculated as of the close of trading on every day the New York Stock
Exchange is open. An order for Class A shares is priced at the NAV next
calculated after the order is accepted by the Fund, plus the sales charge.
--------------------------------------------------------------------------------
SALES CHARGE
--------------------------------------------
APPLICABLE PERCENTAGE OF PERCENTAGE
AMOUNT OF PURCHASE PERCENTAGE OF NET AMOUNT REALLOWABLE
AT OFFERING PRICE OFFERING PRICE INVESTED TO DEALERS
--------------------------------------------------------------------------------
Less than $100,000 3.5% 3.63% 3.0%
$100,000 but less than $500,000 2.5% 2.56% 2.0%
$500,000 but less than $1,000,000 1.5% 1.52% 1.0%
$1,000,000 and over None None (See below)
--------------------------------------------------------------------------------
Please see Appendix A for options that are available for reducing the sales
charge applicable to purchases of Class A shares.
CLASS A DISTRIBUTION PLAN -- The Fund has adopted a Class A Distribution Plan
that allows the Fund to pay distribution fees to the Fund's Distributor. The
Distributor uses the fees to finance activities related to the sale of Class A
shares and services to shareholders. The distribution fee is equal to 0.25% of
the average daily net assets of the Fund's Class A shares. Because the
distribution fees are paid out of the Fund's assets on an ongoing basis, over
time these fees will increase the cost of a shareholder's investment and may
cost an investor more than paying other types of sales charges.
CLASS B SHARES -- Class B shares are not subject to a sales charge at the time
of purchase. An order for Class B shares will be priced at the Fund's NAV next
calculated after the order is accepted by the Fund. The Fund's NAV is generally
calculated as of the close of trading on every day the New York Stock Exchange
is open.
Class B shares are subject to a deferred sales charge if redeemed within 5 years
from the date of purchase. The deferred sales charge is a percentage of the NAV
of the shares at the time they are redeemed or the original purchase price,
whichever is less. Shares that are not subject to the deferred sales charge are
redeemed first. Then, shares held the longest will be the first to be redeemed.
The amount of the deferred sales charge is based upon the number of years since
the shares were purchased, as follows:
--------------------------------
NUMBER OF YEARS DEFERRED
SINCE PURCHASE SALES CHARGE
--------------------------------
1 5%
2 4%
3 3%
4 3%
5 2%
6 and more 0%
--------------------------------
The Distributor will waive the deferred sales charge under certain
circumstances. See "Waiver of the Deferred Sales Charge," page 13.
CLASS B DISTRIBUTION PLAN -- The Fund has adopted a Class B Distribution Plan
that allows the Fund to pay distribution fees to the Distributor. The
Distributor uses the fees to finance activities related to the sale of Class B
shares and services to shareholders. The distribution fee is equal to .75% of
the average daily net assets of the Fund's Class B shares. Because the
distribution fees are paid out of the Fund's assets on an ongoing basis, over
time these fees will increase the cost of a shareholder's investment and may
cost an investor more than paying other types of sales charges.
Class B shares automatically convert to Class A shares on the eighth anniversary
of purchase. This is advantageous to such shareholders because Class A shares
are subject to a lower distribution fee than Class B shares. A pro rata amount
of Class B shares purchased through the reinvestment of dividends or other
distributions is also converted to Class A shares each time that shares
purchased directly are converted.
CLASS C SHARES -- Class C shares are not subject to a sales charge at the time
of purchase. An order for Class C shares will be priced at the Fund's NAV next
calculated after the order is accepted by the Fund. The Fund's NAV is generally
calculated as of the close of trading on every day the New York Stock Exchange
is open.
Class C shares are subject to a deferred sales charge of 1.00% if redeemed
within one year from the date of purchase. The deferred sales charge is a
percentage of the NAV of the shares at the time they are redeemed or the
original purchase price, whichever is less. Shares that are not subject to the
deferred sales charge are redeemed first. Then, shares held the longest will be
the first to be redeemed. The Distributor will waive the deferred sales charge
under certain circumstances. See "Waiver of the Deferred Sales Charge," page 13.
CLASS C DISTRIBUTION PLAN -- The Fund has adopted a Class C Distribution Plan
that allows the Fund to pay distribution fees to the Distributor. The
Distributor uses the fees to finance activities related to the sale of Class C
shares and services to shareholders. The distribution fee is equal to .50% of
the average daily net assets of the Fund's Class C shares. Because the
distribution fees are paid out of the Fund's assets on an ongoing basis, over
time these fees will increase the cost of a shareholder's investment and may
cost an investor more than paying other types of sales charges.
CLASS S SHARES -- Class S shares are not subject to a sales charge at the time
of purchase. An order for Class S shares will be priced at the Fund's NAV next
calculated after the order is accepted by the Fund. The Fund's NAV is generally
calculated as of the close of trading on every day the New York Stock Exchange
is open.
Class S shares are subject to a deferred sales charge if redeemed within 7 years
from the date of purchase. The deferred sales charge is a percentage of the NAV
of the shares at the time they are redeemed or the original purchase price,
whichever is less. Shares that are not subject to the deferred sales charge are
redeemed first. Then, shares held the longest will be the first to be redeemed.
The amount of the deferred sales charge is based upon the number of years since
the shares were purchased, as follows:
--------------------------------
NUMBER OF YEARS DEFERRED
SINCE PURCHASE SALES CHARGE
--------------------------------
1 6%
2 6%
3 5%
4 4%
5 3%
6 2%
7 1%
8 and more 0%
--------------------------------
The Distributor will waive the deferred sales charge under certain
circumstances. See "Waiver of the Deferred Sales Charge," page 13. Investors for
whom Class S shares may be appropriate include (1) persons working with a
registered investment adviser, financial planner or other financial intermediary
where financial planning, asset allocation or other services are provided at a
reduced fee, or for no additional fee; (2) qualified retirement plans where the
selling dealer is absorbing certain plan expenses and (3) investors with unique
service needs. In each of the foregoing cases, with the purchase of Class S
shares the investor is receiving services at reduced or no additional cost, in
addition to Fund shares. The Fund does not monitor or make any representation as
to the quality or value of any of the foregoing services.
CLASS S DISTRIBUTION PLAN -- The Fund has adopted a Class S Distribution Plan
that allows the Fund to pay distribution fees to the Distributor. The
Distributor uses the fees to finance activities related to the sale of Class S
shares and services to shareholders. The distribution fee is equal to 1.00% of
the average daily net assets of the Fund's Class S shares. Because the
distribution fees are paid out of the Fund's assets on an ongoing basis, over
time these fees will increase the cost of a shareholder's investment and may
cost an investor more than paying other types of sales charges.
WAIVER OF DEFERRED SALES CHARGE -- The Distributor will waive the deferred sales
charge under the following circumstances:
o Upon the death of the shareholder if shares are redeemed within one year of
the shareholder's death
o Upon the disability of the shareholder prior to age 65 if shares are redeemed
within one year of the shareholder becoming disabled and the shareholder was
not disabled when the shares were purchased
o In connection with required minimum distributions from a retirement plan
qualified under Section 401(a), 401(k), 403(b) or 408 of the Internal Revenue
Code
o In connection with distributions from retirement plans qualified under
Section 401(a) or 401(k) of the Internal Revenue Code for:
- returns of excess contributions to the plan
- retirement of a participant in the plan
- a loan from the plan (loan repayments are treated as new sales for
purposes of the deferred sales charge)
o Upon the financial hardship (as defined in regulations under the Code) of a
participant in a plan
o Upon termination of employment of a participant in a plan
o Upon any other permissible withdrawal under the terms of the plan
CONFIRMATIONS AND STATEMENTS -- The Fund will send you a confirmation statement
after every transaction that affects your account balance or registration.
However, certain automatic transactions may be confirmed on a quarterly basis
including systematic withdrawals, automatic purchases and reinvested dividends.
Each shareholder will receive a quarterly statement setting forth a summary of
the transactions that occurred during the preceding quarter.
SELLING SHARES
Selling your shares of a Fund is called a "redemption," because the Fund buys
back its shares. A shareholder may sell shares at any time. Shares will be
redeemed at the NAV next determined after the order is accepted by the Fund's
transfer agent, less any applicable (i) deferred sales charge and (ii)
redemption fee. A Fund's NAV is generally calculated as of the close of trading
on every day the New York Stock Exchange is open. Any share certificates
representing Fund shares being sold must be returned with a request to sell the
shares. The value of your shares at the time of redemption may be more or less
than their original cost. The Fund reserves the right to honor any request for
redemption by making payment in whole or in part in securities selected in the
sole discretion of the Fund. The redemption-in-kind will not include wrapper
agreements.
When redeeming recently purchased shares, if the Fund has not collected payment
for the shares, it may delay sending the proceeds until it has collected
payment, which may take up to 15 days.
When the Interest Rate Trigger is active, redemptions that are not Qualified TSA
Redemptions, Qualified IRA Redemptions or Qualified Plan Redemptions, as
described in the following sections, will be subject to a 2% redemption fee. It
is therefore important to consult with your professional tax advisor regarding
the terms, conditions and tax consequences of such withdrawals.
To sell your shares, send a letter of instruction that includes:
o The name and signature of the account owner(s)
o The name of the Fund
o The reason you are selling your shares
o The dollar amount or number of shares to sell
o Where to send the proceeds
o A signature guarantee if
- The check will be mailed to a payee or address different than that of the
account owner, or
- The sale of shares is more than $10,000.
--------------------------------------------------------------------------------
A SIGNATURE GUARANTEE helps protect against fraud. Banks, brokers, credit
unions, national securities exchanges and savings associations provide signature
guarantees. A notary public is not an eligible signature guarantor. For joint
accounts, both signatures must be guaranteed.
--------------------------------------------------------------------------------
Mail your request to:
Security Management Company, LLC
P.O. Box 750525
Topeka, KS 66675-9135
Signature requirements vary based on the type of account you have:
o INDIVIDUAL OR JOINT TENANTS: Written instructions must be signed by an
individual shareholder, or in the case of joint accounts, all of the
shareholders, exactly as the name(s) appears on the account.
o UGMA OR UTMA: Written instructions must be signed by the custodian as it
appears on the account.
o SOLE PROPRIETOR OR GENERAL PARTNER: Written instructions must be signed by an
authorized individual as it appears on the account.
o CORPORATION OR ASSOCIATION: Written instructions must be signed by the
person(s) authorized to act on the account. A certified resolution dated
within six months of the date of receipt, authorizing the signer to act, must
accompany the request if not on file with the Fund.
o TRUST: Written instructions must be signed by the trustee(s). If the name of
the current trustee(s) does not appear on the account, a certified
certificate of incumbency dated within 60 days must also be submitted.
o RETIREMENT: Written instructions must be signed by the account owner.
INTEREST RATE TRIGGER -- Qualified TSA Redemptions, Qualified IRA Redemptions
and Qualified Plan Redemptions are not subject to the redemption fee at any
time. All other redemptions are subject to the redemption fee, in the amount of
2%, on the proceeds of such redemptions of shares by shareholders on any day
that the "Interest Rate Trigger" (as described below) is "active," and not
subject to those charges on days that the Interest Rate Trigger is "inactive."
The Interest Rate Trigger is active on any day when, as of the preceding day,
the "Reference Index Yield" exceeds the sum of the "Annual Effective Yield" of
the PreservationPlus Income Portfolio ("Portfolio") plus 1.55%. The Reference
Index Yield on any determination date is the previous day's closing "Yield to
Worst" on the Lehman Brothers Intermediate Treasury Bond Index(R). The "Annual
Effective Yield" generally represents one day's investment income expressed as
an annualized yield and compounded annually. The status of the Interest Rate
Trigger will either be "active" or "inactive" on any day, and shall be
determined on every day that an NAV is calculated for the Fund. Once the
Interest Rate Trigger is active, it remains active every day until the Reference
Index Yield is less than the sum of the Annual Effective Yield of the Portfolio
plus 1.30%, at which time the Interest Rate Trigger becomes inactive on the
following day and remains inactive every day thereafter until it becomes active
again. An example of when and how the redemption fee will apply to the
redemption of shares follows.
--------------------------------------------------------------------------------
The Annual Effective Yield of the Portfolio shall be expressed as a percentage
and calculated on each business day as follows based on the dividend declared
for the previous day:
(previous day's dividend factor)
1 + (------------------------------)^365 - 1
( NAV per share )
Please note that the Annual Effective Yield of the Fund will be lower than the
annual effective yield of the Portfolio because the Portfolio's expenses are
lower than the Fund's.
--------------------------------------------------------------------------------
A shareholder is considering submitting a request for a redemption of Class A
shares other than a Qualified TSA Redemption, Qualified IRA Redemption or
Qualified Plan Redemption to the Fund on March 2 in the amount of $5,000. Assume
that the Reference Index Yield is 8.65% as of the close of business on March 1
and the Annual Effective Yield of the Portfolio is 6.20% as of that date. The
Annual Effective Yield of the Portfolio plus 1.55% equals 7.75%. Since this is
less than the Reference Index Yield of 8.65%, the Interest Rate Trigger is
active. Thus, the net redemption proceeds to the Shareholder will be $4,900. The
redemption fee will continue to apply to all redemptions which are not Qualified
TSA Redemptions, Qualified IRA Redemptions or Qualified Plan Redemptions until
the day after the Reference Index Yield is less than the sum of the Annual
Effective Yield of the Portfolio plus 1.30%. (Please note that this example does
not take into consideration an individual Shareholder's tax issues or
consequences including without limitation any withholding taxes that may apply.)
The amount of, and method of applying, the Redemption Fee, including the
operation of the Interest Rate Trigger, may be changed in the future. Shares
currently offered in this prospectus would be subject to the new combination of
Redemption Fee and Interest Rate Trigger.
Shareholders can obtain information regarding when the Interest Rate Trigger is
active, as well as the Annual Effective Yield of the Portfolio and the Reference
Index Yield by calling 1-800-888-2461.
QUALIFIED TSA REDEMPTIONS -- A redemption of Fund shares can be made at any time
without the assessment of a redemption fee if the redemption is a "Qualified TSA
Redemption." In general, amounts distributed to a taxpayer from a TSA account
prior to the date on which the taxpayer reaches age 59 1/2 are includible in the
taxpayer's gross income and, unless the distribution meets the requirements of a
specific exception under the tax code, are also subject to an early withdrawal
penalty tax. A "Qualified TSA Redemption" is:
o a redemption made by an owner of a TSA account that is not subject to the
early withdrawal penalty tax, provided however, that a rollover from a TSA
account to an IRA account, or a direct trustee-to-trustee transfer of a TSA
account is not a Qualified TSA Redemption unless the owner of the TSA account
or IRA account continues the investment of the transferred amount in the
Fund;
o a transfer to another investment option that is not a competing fund* in your
TSA account if:
- your TSA account does not allow transfers to competing funds or
- your TSA account requires transfers between the Fund and a non-competing
fund to remain in the non-competing fund for a period of at least three
months before being transferred to a competing fund.
*Competing funds are any fixed income investment options with a targeted average
duration of three years or less, or any investment option that seeks to
maintain a stable value per unit or share, including money market funds.
All other redemptions of shares will be subject to the 2% redemption fee, if the
Interest Rate Trigger is active. Specifically, if your account allows transfers
to competing funds or if they do not require transfers between the Fund and a
non-competing fund to remain in the non-competing fund for a period of at least
three months before transfer to a competing fund, all transfers will be subject
to a redemption fee.
Owners of TSA accounts requesting a redemption of Fund shares will be required
to provide a written statement as to whether the proceeds of the redemption will
be subject to the early withdrawal penalty tax and to identify the specific
exception upon which he or she intends to rely. The information relating to the
early withdrawal penalty tax will form the basis for determining whether a
redemption is a Qualified TSA Redemption. The Fund or the Fund's Administrator
may require additional evidence, such as the opinion of a certified public
accountant or tax attorney, that any particular redemption will not be subject
to early withdrawal penalty tax. With respect to a transfer, the owner may be
required to provide evidence that the transfer is not to a competing fund.
QUALIFIED IRA REDEMPTIONS -- A redemption of Fund shares can be made at any time
without the assessment of a redemption fee if the redemption is a "Qualified IRA
Redemption." In general, amounts distributed to a taxpayer from an IRA account
prior to the date on which the taxpayer reaches age 59 1/2 are includible in the
taxpayer's gross income and, unless the distribution meets the requirements of a
specific exception under the tax code, are also subject to an early withdrawal
penalty tax. A "Qualified IRA Redemption" is a redemption made by an owner of an
IRA account that is not subject to the early withdrawal penalty tax, provided
however, that an IRA rollover, or a direct trustee-to-trustee transfer of an IRA
is not a Qualified IRA Redemption unless the owner of the IRA account continues
the investment of the transferred amount in the Fund.
Owners of IRA accounts requesting a redemption of Fund shares will be required
to provide a written statement as to whether the proceeds of the redemption will
be subject to the early withdrawal penalty tax and to identify the specific
exception upon which he or she intends to rely. This information will form the
basis for determining whether a redemption is a Qualified IRA Redemption. The
Fund or the Fund's Administrator may require additional evidence, such as the
opinion of a certified public accountant or tax attorney, that any particular
redemption will not be subject to early withdrawal penalty tax.
QUALIFIED PLAN REDEMPTIONS -- Your plan administrator should be contacted for
information on how to redeem shares. There will be no redemption fee assessed
for qualified plan redemptions, which are:
o Redemptions resulting from the plan participant's death, disability,
retirement or termination of employment;
o Redemptions to fund loans to, or "in service" withdrawals by, a plan
participant; and
o Transfers to other plan investment options that are not competing funds* if:
- your plan does not allow transfers to competing funds or
- your plan requires transfers between the Fund and a non-competing fund to
remain in the non-competing fund for a period of at least three months
before transfer to a competing fund.
*Competing funds are any fixed income investment options with a targeted average
duration of three years or less, or any investment option that seeks to
maintain a stable value per unit or share, including money market funds.
All other redemptions of shares will be subject to the 2% redemption fee, if the
Interest Rate Trigger is active. Specifically, if your plan allows transfers to
competing funds or if they do not require transfers between the Fund and a
non-competing fund to remain in the non-competing fund for a period of at least
three months before transfer to a competing fund, all transfers will be subject
to a redemption fee.
The Fund reserves the right to require written verification of whether a
redemption request is for a Qualified Plan Redemption in accordance with plan
provisions and to establish the authenticity of this information before
processing a redemption request.
PAYMENT OF REDEMPTION PROCEEDS -- Payments may be made by check.
The Fund 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.
BY CHECK. Redemption proceeds will be sent to the shareholder(s) of record at
the address on our records generally within seven days after receipt of a valid
redemption request. For a charge of $15 deducted from redemption proceeds, the
Administrator will provide a certified or cashier's check, or send the
redemption proceeds by express mail, upon the shareholder's request.
DIVIDENDS AND DISTRIBUTIONS
The Fund declares dividends from its net income daily and pays the dividends on
a monthly basis.
The Fund reserves the right to include in the daily dividend any short-term
capital gains on securities that it sells. Also, the Fund will normally declare
and pay annually any long-term capital gains as well as any short-term capital
gains that it did not distribute during the year.
On occasion, the dividends the Fund distributes may differ from the income the
Fund earns. When the Fund's income exceeds the amount distributed to
shareholders, the Fund may make an additional distribution. When an additional
distribution is necessary, the Board of Directors may declare a REVERSE STOCK
SPLIT to occur at the same time the additional distribution is made. Making the
additional distribution simultaneously with the reverse stock split will
minimize fluctuations in the net asset value of the Fund's shares.
All dividends and capital gains, if any, will automatically be reinvested unless
you notify the Fund otherwise.
--------------------------------------------------------------------------------
A REVERSE STOCK SPLIT reduces the number of total shares the Fund has
outstanding. The market value of the shares will be the same after the stock
split as before the split, but each share will be worth more.
--------------------------------------------------------------------------------
TAX CONSIDERATIONS
The Fund does not ordinarily pay income taxes. You and other shareholders pay
taxes on the income or capital gains from the Fund's holdings.
For TSA owners, IRA owners and Plan participants utilizing the Fund as an
investment option under their Plan, dividend and capital gain distributions from
the Fund generally will not be subject to current taxation, but will accumulate
on a tax-deferred basis.
Because each participant's tax circumstances are unique and because the tax laws
governing Plans are complex and subject to change, it is recommended that you
consult your Plan administrator, your plan's Summary Plan Description, and/or
your tax advisor about the tax consequences of your participation in your Plan
and of any Plan contributions or withdrawals.
SHAREHOLDER SERVICES
ACCUMULATION PLAN -- An investor may choose to invest in the Fund through a
voluntary Accumulation Plan. This allows for an initial investment of $100
minimum and subsequent investments of $20 minimum at any time. An Accumulation
Plan involves no obligation to make periodic investments, and is terminable at
will.
Payments are made by sending a check to the Distributor who (acting as an agent
for the dealer) will purchase whole and fractional shares of the Fund as of the
close of business on such day as the payment is received. The investor will
receive a confirmation and statement after each investment.
Investors may also choose to use "Secur-O-Matic" (automatic bank draft) to make
Fund purchases. There is no additional charge for choosing to use Secur-O-Matic.
Withdrawals from your bank account may occur up to 3 business days before the
date scheduled to purchase Fund shares. An application for Secur-O-Matic may be
obtained from the Fund.
SYSTEMATIC WITHDRAWAL PROGRAM -- Shareholders who wish to receive regular
monthly, quarterly, semiannual, or annual payments of $25 or more may establish
a Systematic Withdrawal Program. A shareholder 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 aggregate net asset value of $5,000 or more are deposited with
the Administrator, which will act as agent for the shareholder under the
Program. Shares are liquidated at net asset value less any applicable Redemption
Fee. The Program may be terminated on written notice, or it will terminate
automatically if all shares are liquidated or redeemed from the account.
A shareholder may establish a Systematic Withdrawal Program with respect to
Class B, Class C and Class S 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, Class C or Class S 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 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, Class C or Class S shares
requested while Free Systematic Withdrawals are being made will be calculated as
described under "Waiver of Deferred Sales Charge," page 13. A Systematic
Withdrawal form may be obtained from the Fund.
EXCHANGE PRIVILEGE -- Shareholders who own shares of the Fund may exchange those
shares for shares of the Diversified Income or High Yield series of Security
Income Fund or for shares of other mutual funds distributed by the Distributor
(the "Security Funds"). Shareholders, except those who have purchased through
the following custodial accounts of the Administrator, 403(b)(7) accounts, SEPP
accounts and SIMPLE Plans, may also exchange their shares for shares of Security
Cash Fund. 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, Class B, Class C and Class S
shares of the Fund may be exchanged for Class A, Class B and, if applicable,
Class C and Class S shares, respectively, of another Security Fund. A Redemption
Fee may be assessed on an exchange from the Fund to another Security Fund if the
Interest Rate Trigger is active. Any applicable contingent deferred sales charge
will be calculated from the date of the initial purchase.
Exchanges of Class A shares from the Fund are made at net asset value without a
front-end sales charge if (1) the shares have been owned for at least 90
consecutive days prior to the exchange, (2) the shares were acquired pursuant to
a prior exchange from a Security Fund which assessed a sales charge on the
original purchase, or (3) the shares were acquired as a result of the
reinvestment of dividends or capital gains distributions. Exchanges of Class A
shares from the Fund, other than those described above, are made at net asset
value plus the sales charge described in the prospectus of the other Security
Fund being acquired, less the sales charge paid on the shares of the Fund at the
time of original purchase.
Shareholders should contact the Fund before requesting an exchange in order to
ascertain whether any sales charges are applicable to the shares to be
exchanged. In effecting the exchanges of Fund shares, the Administrator will
first cause to be exchanged those shares which would not be subject to any sales
charges. The terms of an employee-sponsored retirement plan may affect a
shareholder's right to exchange shares as described above. Contact your plan
sponsor or administrator to determine if all of the exchange options discussed
above are available under your plan.
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. This privilege may be changed or discontinued at any time at the
discretion of the management of the Fund upon 60 days' notice to shareholders. A
current prospectus of the Security Fund into which an exchange is made will be
given to each shareholder exercising this privilege.
DOLLAR COST AVERAGING. Only for shareholders of a TSA account sponsored by the
Administrator and opened on or after June 5, 2000, a special exchange privilege
is available. This privilege allows such shareholders to make periodic exchanges
of shares from the Fund (held in non-certificate form) to one or more of the
funds available under the exchange privilege as described above. Such periodic
exchanges in which securities are purchased at regular intervals are known as
"dollar cost averaging." With dollar cost averaging, the cost of the securities
gets averaged over time and possibly over various market cycles. Dollar cost
averaging does not guarantee profits, nor does it assure that you will not have
losses.
You may obtain a dollar cost averaging request form from the Administrator. You
must designate on the form whether amounts are to be exchanged on the basis of a
specific dollar amount or a specific number of shares. The Administrator will
exchange shares as requested on the first business day of the month. The
Administrator will make exchanges until your account value in the Fund is
depleted or until you instruct the Administrator to terminate dollar cost
averaging. You may instruct the Administrator to terminate dollar cost averaging
at any time by written request.
ASSET REBALANCING. Only for shareholders of a TSA account sponsored by the
Administrator and opened on or after June 5, 2000, a special exchange privilege
is available that allows shareholders to automatically exchange shares of the
funds on a quarterly basis to maintain a particular percentage allocation among
the funds. The available funds are those discussed above under the exchange
privilege and shares of such funds must be held in non-certificate form. Your
account value allocated to a fund will grow or decline in value at different
rates during the selected period, and asset rebalancing will automatically
reallocate your account value in the funds to the allocation you select on a
quarterly basis.
You may obtain an asset rebalancing request form from the Administrator. You
must designate on the form the applicable funds and the percentage of account
value to be maintained in each fund. Thereafter, the Administrator will exchange
shares of the funds to maintain that allocation on the first business day of
each calendar quarter. You may instruct the Administrator to terminate asset
rebalancing at any time by written request.
RETIREMENT PLANS -- The Fund has available tax-qualified retirement plans for
individuals, prototype plans for the self-employed, pension and profit sharing
plans for corporations and custodial accounts for employees of public school
systems and organizations meeting the requirements of Section 501(c)(3) of the
Internal Revenue Code. Further information concerning these plans is contained
in the Fund's Statement of Additional Information.
GENERAL INFORMATION
SHAREHOLDER INQUIRIES -- Shareholders who have questions concerning their
account or wish to obtain additional information, may call the Fund (see back
cover for address and telephone numbers), or contact their securities dealer.
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for its Class A shares, Class B shares and Class C shares
during the period since commencement of the Fund or share class. Financial
performance for Class S shares is not reported since these shares will not be
available until February 1, 2001. Certain information reflects financial results
for a single Fund share. The total returns in the table represent the rate that
an investor would have earned (or lost) on an investment in the Fund assuming
reinvestment of all dividends and distributions. This information has been
audited by Ernst & Young LLP, whose report, along with the Fund's financial
statements, is included in the annual report which is available upon request.
--------------------------------------------------------------------------------
SECURITY CAPITAL PRESERVATION FUND (CLASS A)
--------------------------------------------------------------------------------
FISCAL YEAR ENDED
SEPTEMBER 30
--------------------
2000 1999(a)
---- -------
PER SHARE DATA
Net asset value beginning of period...................... $10.00 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................................... 0.65 0.22
DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income.................................... (0.65) (0.22)
----- -----
Net asset value end of period............................ $10.00 $10.00
===== =====
Total investment return(b)............................... 6.65% 2.24%
RATIOS/SUPPLEMENTAL DATA
Net assets end of period (thousands)..................... $198,235 $25,261
Ratio of net investment income to average net assets..... 6.51% 6.16%
Ratio of expenses to average net assets(c)............... 1.00% 1.26%
Ratio of expenses to average net assets
before waivers (c)..................................... 1.64% 2.18%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITY CAPITAL PRESERVATION FUND (CLASS B)
--------------------------------------------------------------------------------
FISCAL YEAR ENDED
SEPTEMBER 30
--------------------
2000 1999(a)
---- -------
PER SHARE DATA
Net asset value beginning of period...................... $10.00 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................................... 0.60 0.20
DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income.................................... (0.60) (0.20)
----- -----
Net asset value end of period............................ $10.00 $10.00
===== =====
Total investment return(b)............................... 6.12% 2.03%
RATIOS/SUPPLEMENTAL DATA
Net assets end of period (thousands)..................... $790 $324
Ratio of net investment income to average net assets..... 6.01% 5.27%
Ratio of expenses to average net assets(c)............... 1.50% 1.89%
Ratio of expenses to average net assets
before waivers (c)..................................... 2.14% 2.81%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITY CAPITAL PRESERVATION FUND (CLASS C)
--------------------------------------------------------------------------------
FISCAL YEAR ENDED
SEPTEMBER 30
--------------------
2000 1999(a)
---- -------
PER SHARE DATA
Net asset value beginning of period...................... $10.00 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................................... 0.62 0.21
DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income.................................... (0.62) (0.21)
----- -----
Net asset value end of period............................ $10.00 $10.00
===== =====
Total investment return(b)............................... 6.39% 2.12%
RATIOS/SUPPLEMENTAL DATA
Net assets end of period (thousands)..................... $1,697 $194
Ratio of net investment income to average net assets..... 6.26% 5.51%
Ratio of expenses to average net assets(c)............... 1.25% 1.64%
Ratio of expenses to average net assets
before waivers (c).................................... 1.89% 2.56%
--------------------------------------------------------------------------------
(a) Security Capital Preservation Fund Class A, B and C shares were initially
capitalized on May 3, 1999, with a net asset value of $10 per share.
Amounts presented are for the period May 3, 1999 through September 30,
1999. Percentage amounts, except for total return, have been annualized.
(b) Total return information does not reflect deduction of any sales charges
imposed at the time of purchase for Class A shares or upon redemption for
Class B and C shares. Total returns for the Fund assume that an investor
did not pay a redemption fee at the end of the periods shown.
(c) Ratio expenses to average net assets include expenses of the
PreservationPlus Income Portfolio.
APPENDIX A
================================================================================
REDUCED SALES CHARGES
CLASS A SHARES -- Initial sales charges may be reduced or eliminated for persons
or organizations purchasing Class A shares of the Fund alone or in combination
with Class A shares of other Security Funds.
For purposes of qualifying for reduced sales charges on purchases made pursuant
to Rights of Accumulation or a Statement of Intention, the term "Purchaser"
includes the following persons: an individual, his or her spouse and children
under the age of 21; a trustee or other fiduciary of a single trust estate or
single fiduciary account established for their benefit; an organization exempt
from federal income tax under Section 501(c)(3) or (13) of the Internal Revenue
Code; or a pension, profit-sharing or other employee benefit plan whether or not
qualified under Section 401 of the Internal Revenue Code.
RIGHTS OF ACCUMULATION -- To reduce sales charges on purchases of Class A shares
of the Fund, a Purchaser may combine all previous purchases of the Fund with a
contemplated current purchase and receive the reduced applicable front-end sales
charge. The Distributor must be notified when a sale takes place which might
qualify for the reduced charge on the basis of previous purchases.
Rights of accumulation also apply to purchases representing a combination of the
Class A shares of the Fund, and other Security Funds, except Security Cash Fund,
in those states where shares of the fund being purchased are qualified for sale.
STATEMENT OF INTENTION -- A Purchaser may choose to sign a Statement of
Intention within 90 days after the first purchase to be included thereunder,
which will cover future purchases of Class A shares of the Fund, and other
Security Funds, except Security Cash Fund. The amount of these future purchases
shall be specified and must be made within a 13-month period (or 36-month period
for purchases of $1 million or more) to become eligible for the reduced
front-end sales charge applicable to the actual amount purchased under the
Statement. Shares equal to five percent (5%) of the amount specified in the
Statement of Intention will be held in escrow until the statement is completed
or terminated. These shares may be redeemed by the Fund if the Purchaser is
required to pay additional sales charges.
A Statement of Intention may be revised during the 13-month (or, if applicable,
36-month) period. Additional Class A shares received from reinvestment of income
dividends and capital gains distributions are included in the total amount used
to determine reduced sales charges. A Statement of Intention may be obtained
from the Fund.
REINSTATEMENT PRIVILEGE -- Shareholders who redeem their Class A shares of the
Fund have a one-time privilege (1) to reinstate their accounts by purchasing
Class A shares without a sales charge up to the dollar amount of the redemption
proceeds; or (2) to the extent the redeemed shares would have been eligible for
the exchange privilege, to purchase Class A shares of another of the Security
Funds, without a sales charge up to the dollar amount of the redemption
proceeds. To exercise this privilege, a shareholder must provide written notice
and a check in the amount of the reinvestment within thirty days after the
redemption request; the reinstatement will be made at the net asset value per
share on the date received by the Fund or the Security Funds, as appropriate.
PURCHASES AT NET ASSET VALUE -- Class A shares of the Fund may be purchased at
net asset value by (1) directors, officers and employees of the Fund, the Fund's
Administrator 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 Fund may also be purchased at net asset value when the
purchase is made on the recommendation of (i) a registered investment adviser,
trustee or financial intermediary who has authority to make investment decisions
on behalf of the investor; or (ii) a certified financial planner or registered
broker-dealer who either charges periodic fees to its customers for financial
planning, investment advisory or asset management services, or provides such
services in connection with the establishment of an investment account for which
a comprehensive "wrap fee" is imposed. The Distributor must be notified when a
purchase is made that qualifies under this provision.
FOR MORE INFORMATION
--------------------------------------------------------------------------------
BY TELEPHONE-- Call 1-800-888-2461.
BY MAIL-- Write to:
Security Management Company, LLC
700 SW Harrison
Topeka, KS 66636-0001
ON THE INTERNET -- Reports and other information about the Fund can be viewed
online or downloaded from:
SEC: On the EDGAR Database at http://www.sec.gov
SMC, LLC: http://www.securitybenefit.com
Additional information about the Fund (including the Statement of Additional
Information) can be reviewed and copied at the Securities and Exchange
Commission's Public Reference Room in Washington, DC. Information about the
operation of the Public Reference Room may be obtained by calling the Commission
at 1-202-942-8090. Copies may be obtained, upon payment of a duplicating fee, by
electronic request at the following e-mail address: publicinfo@sec.gov or by
writing the Public Reference Section of the Commission, Washington, DC
20549-0102.
--------------------------------------------------------------------------------
ANNUAL/SEMI-ANNUAL REPORT -- Additional information about the Fund's investments
is available in the Fund's annual and semi-annual reports to shareholders. In
the Fund's annual report, you will find a discussion of the market conditions
and investment strategies that significantly affected the Fund's performance
during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION -- The Fund's Statement of Additional
Information and the Fund's annual or semi-annual report are available, without
charge upon request by calling the Funds' toll-free telephone number
1-800-888-2461, extension 3127. Shareholder inquiries should be addressed to
SMC, LLC, 700 SW Harrison Street, Topeka, Kansas 66636-0001, or by calling the
Fund's toll-free telephone number listed above. The Fund's Statement of
Additional Information is incorporated into this prospectus by reference.
The Fund's Investment Company Act file number is listed below:
Security Income Fund............. 811-2120
www.securitybenefit.com
[SDI LOGO]
SECURITY DISTRIBUTORS, INC.
A Member of The Security Benefit
Group of Companies
700 SW Harrison St., Topeka, Kansas 66636-0001
--------------------------------------------------------------------------------
SECURITY INCOME FUND
o CAPITAL PRESERVATION SERIES
Member of The Security Benefit Group of Companies
700 SW Harrison, Topeka, Kansas 66636-0001
(785) 431-3127
(800) 888-2461
This Statement of Additional Information is not a Prospectus. It should be read
in conjunction with the Prospectus dated February 1, 2001, as it may be
supplemented from time to time. A Prospectus may be obtained by writing Security
Distributors, Inc., 700 SW Harrison, Topeka, Kansas 66636-0001, or by calling
(785) 431-3127 or (800) 888-2461, ext. 3127. The Funds' September 30, 2000
Annual Report is incorporated herein by reference.
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 1, 2001
RELATING TO THE PROSPECTUS DATED FEBRUARY 1, 2001,
AS IT MAY BE SUPPLEMENTED FROM TIME TO TIME
--------------------------------------------------------------------------------
FUND ADMINISTRATOR
Security Management Company, LLC
700 SW Harrison Street
Topeka, Kansas 66636-0001
DISTRIBUTOR
Security Distributors, Inc.
700 SW Harrison Street
Topeka, Kansas 66636-0001
CUSTODIAN
UMB Bank, N.A.
928 Grand Avenue
Kansas City, Missouri 64106
INDEPENDENT AUDITORS
Ernst & Young LLP
Two Commerce Square
2001 Market Street
Philadelphia, Pennsylvania 19103
TABLE OF CONTENTS
--------------------------------------------------------------------------------
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS........................... 4
Investment Objective..................................................... 4
Investment Policies...................................................... 4
SHORT-TERM INSTRUMENTS................................................. 4
CERTIFICATES OF DEPOSIT AND BANKERS' ACCEPTANCES....................... 5
COMMERCIAL PAPER....................................................... 5
U.S. DOLLAR-DENOMINATED FIXED INCOME SECURITIES........................ 5
U.S. DOLLAR-DENOMINATED FOREIGN SECURITIES............................. 5
U.S. DOLLAR-DENOMINATED SOVEREIGN AND
SUPRANATIONAL FIXED INCOME SECURITIES................................ 5
MORTGAGE-AND ASSET-BACKED SECURITIES................................... 5
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS")........................... 6
ZERO-COUPON SECURITIES................................................. 7
WRAPPER AGREEMENTS..................................................... 7
RISKS OF WRAPPER AGREEMENTS............................................ 8
ILLIQUID SECURITIES.................................................... 9
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES............................ 10
U.S. GOVERNMENT OBLIGATIONS............................................ 10
LOWER-RATED DEBT SECURITIES ("JUNK BONDS")............................. 10
HEDGING STRATEGIES..................................................... 11
FUTURES CONTRACTS AND OPTIONS AND FUTURES CONTRACTS - GENERAL.......... 11
FUTURES CONTRACTS...................................................... 11
OPTIONS ON FUTURES CONTRACTS........................................... 12
OPTIONS ON SECURITIES.................................................. 13
GLOBAL ASSET ALLOCATION STRATEGY ("GAA STRATEGY")...................... 14
REPURCHASE AGREEMENTS.................................................. 16
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS......................... 16
BORROWING.............................................................. 16
ASSET COVERAGE......................................................... 16
Rating Services.......................................................... 16
Investment Restrictions.................................................. 16
FUNDAMENTAL RESTRICTIONS............................................... 17
NON-FUNDAMENTAL RESTRICTIONS........................................... 17
Portfolio Transactions and Brokerage Commissions......................... 18
PERFORMANCE INFORMATION.................................................... 19
Standard Performance Information......................................... 19
YIELD.................................................................. 19
TOTAL RETURN........................................................... 19
PERFORMANCE RESULTS.................................................... 20
Comparison of Fund Performance........................................... 20
Economic and Market Information.......................................... 20
VALUATION OF ASSETS; REDEMPTIONS IN KIND................................... 20
Overview of TSA Accounts................................................. 22
OVERVIEW OF THE TYPES OF INDIVIDUAL RETIREMENT ACCOUNTS.................... 22
Types of Individual Retirement Accounts.................................. 22
TRADITIONAL IRAS....................................................... 22
ROTH IRAS.............................................................. 23
SIMPLE IRAS............................................................ 23
KEOGH PLANS............................................................ 23
EDUCATION IRAS......................................................... 23
OWNERSHIP OF SHARES THROUGH PLANS.......................................... 24
QUALIFIED REDEMPTIONS...................................................... 24
Traditional IRAs, SEP-IRAs and SIMPLE IRAs............................... 25
Roth IRAs................................................................ 26
Keogh Plans.............................................................. 26
Education IRAs........................................................... 26
HOW TO PURCHASE SHARES..................................................... 27
Alternative Purchase Options............................................. 27
CLASS A SHARES - FRONT-END LOAD OPTION................................. 27
CLASS B SHARES - BACK-END LOAD OPTION.................................. 27
CLASS C SHARES - LEVEL LOAD OPTION..................................... 27
Class A Shares........................................................... 27
Class A Distribution Plan................................................ 27
Class B Shares........................................................... 28
Class B Distribution Plan................................................ 29
Class C Shares........................................................... 29
Class C Distribution Plan................................................ 29
Class S Shares........................................................... 29
Class S Distribution Plan................................................ 30
Calculation and Waiver of Contingent Deferred Sales Charges.............. 30
Arrangements with Broker-Dealers and Others.............................. 31
Purchases at Net Asset Value............................................. 31
MANAGEMENT OF THE FUND AND TRUST........................................... 32
Directors and Officers of Security Income Fund........................... 32
Trustees of BT Investment Portfolios..................................... 33
Officers of BT Investment Portfolios..................................... 34
Security Income Fund Director Compensation Table......................... 35
BT Investment Portfolio Trustee Compensation Table....................... 35
Investment Adviser....................................................... 36
Administrator............................................................ 36
Custodian and Transfer Agent............................................. 37
Banking Regulatory Matters............................................... 37
Independent Auditors..................................................... 37
ORGANIZATION OF SECURITY INCOME FUND....................................... 37
ORGANIZATION OF THE PORTFOLIO TRUST........................................ 38
TAXATION................................................................... 39
Taxation of the Fund..................................................... 39
Taxation of the Portfolio................................................ 39
Other Taxation........................................................... 40
Foreign Withholding Taxes................................................ 40
FINANCIAL STATEMENTS....................................................... 40
APPENDIX A................................................................. 41
Description of Moody's Corporate Bond Ratings............................ 41
Description of S&P's Corporate Bond Ratings.............................. 41
Duff & Phelps' Long-Term Debt Ratings.................................... 42
Description of Moody's Short-Term Ratings................................ 42
Description of S&P Short-Term Issuer Credit Ratings...................... 43
Description of Duff & Phelps' Commercial Paper Ratings................... 43
Description of Moody's Insurance Financial Strength Ratings.............. 43
Description of S&P Claims Paying Ability Rating Definitions.............. 44
Duff & Phelps' Claims Paying Ability Ratings............................. 44
APPENDIX B................................................................. 45
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
Security Capital Preservation Fund (the "Fund") is a separate series of Security
Income Fund, an open-end, management investment company (mutual fund) of the
series type, offering shares of the Fund ("Shares") as described herein.
As described in the Fund's Prospectus, the Fund seeks to achieve its
investment objective by investing all its net investable assets (the "Assets")
in PreservationPlus Income Portfolio (the "Portfolio"), a diversified open-end
management investment company having the same investment objective as the Fund.
The Portfolio is a separate subtrust of BT Investment Portfolios, a New York
master trust fund (the "Portfolio Trust").
Because the investment characteristics of the Fund correspond directly to
those of the Portfolio (in which the Fund invests all of its assets), the
following is a discussion of the various investments of and techniques employed
by the Portfolio. The Fund has been established to serve as an alternative
investment to short-term bond funds and money market funds. In addition, since
to date, there has been no comparable investment substitute for those
individuals who are "rolling" assets over from the stable value or guaranteed
investment contract ("GIC") option of their employee benefit plans (such as
401(k) plans), the Fund is designed to be that comparable alternative.
Shares of the Fund are sold by Security Distributors, Inc., the Fund's
distributor (the "Distributor"), solely to tax-sheltered annuity custodial
accounts as defined in Section 403(b)(7) of the Internal Revenue Code of 1986,
as amended (the "Code"), individual retirement accounts as defined in Section
408 of the Code including "SIMPLE IRAs" and "SEP IRAs", Roth IRAs as defined in
Section 408A of the Code, education individual retirement accounts as defined in
Section 530 of the Code and "Keogh Plans" (sometimes collectively referred to
herein as "IRAs"), and to employees investing through participant-directed
employee benefit plans (each a "Plan" and together "Plans"). Shares are offered
to Plans either directly, or through vehicles such as bank collective funds or
insurance company separate accounts consisting solely of such Plans. Shares are
also available to employee benefit plans which invest in the Fund through an
omnibus account or similar arrangement.
The Fund's Prospectus (the "Prospectus") is dated February 1, 2001. The
Prospectus provides the basic information investors should know before investing
and may be obtained without charge by calling the Distributor at 1-800-888-2461
extension 3127. This Statement of Additional Information ("SAI"), which is not a
prospectus, is intended to provide additional information regarding the
activities and operations of the Fund and the Portfolio and should be read in
conjunction with the Prospectus. This SAI is not an offer by the Fund to an
investor that has not received a Prospectus. Capitalized terms not otherwise
defined in this SAI have the meanings ascribed to them in the Prospectus.
INVESTMENT OBJECTIVE -- The investment objective of the Fund is a high level of
current income while seeking to maintain a stable net asset value per Share.
There can, of course, be no assurance that the Fund will achieve its investment
objective.
INVESTMENT POLICIES --The Fund seeks to achieve its investment objective by
investing all of its Assets in the Portfolio. The Fund's investment in the
Portfolio may be withdrawn at any time if the Board of Directors of Security
Income Fund determines that it is in the best interests of the Fund to do so.
The Portfolio's investment objective is a high level of current income while
seeking to maintain a stable net asset value per Share. The Portfolio expects to
invest primarily in fixed income securities ("Fixed Income Securities") of
varying maturities rated, at the time of purchase, in one of the top four
long-term rating categories by Standard & Poor's Ratings Services ("S&P"),
Moody's Investors Service, Inc. ("Moody's"), or Duff & Phelps Credit Rating Co.,
or comparably rated by another nationally recognized statistical rating
organization ("NRSRO"), or, if not rated by a NRSRO, of comparable quality as
determined by Bankers Trust in its sole discretion.
In addition, the Portfolio will enter into contracts ("Wrapper Agreements")
with insurance companies, banks or other financial institutions ("Wrapper
Providers") that are rated, at the time of purchase, in one of the top two
long-term rating categories by Moody's or S&P. There is no active trading market
for Wrapper Agreements, and none is expected to develop; therefore, they will be
considered illiquid. At the time of purchase, the value of all of the Wrapper
Agreements and any other illiquid securities will not exceed 15% of the
Portfolio's net assets.
The following is a discussion of the various investments of and techniques
employed by the Portfolio.
SHORT-TERM INSTRUMENTS. The Portfolio's assets may be invested in high
quality short-term investments with remaining maturities of 397 days or less to
maintain the Liquidity Reserve (as defined below), to meet anticipated
redemptions and expenses for day-to-day operating purposes and when, in the
opinion of Bankers Trust Company, the Portfolio's investment adviser (the
"Adviser" or "Bankers Trust"), it is advisable to adopt a temporary defensive
position because of unusual and adverse conditions affecting the respective
markets. The Portfolio may hold short-term investments consisting of foreign and
domestic (i) short-term obligations of sovereign governments, their agencies,
instrumentalities, authorities or political subdivisions; (ii) other short-term
debt securities rated in one of the top two short-term rating categories by an
NRSRO or, if unrated, of comparable quality in the opinion of the Adviser; (iii)
commercial paper; (iv) bank obligations, including negotiable certificates of
deposit, time deposits and bankers' acceptances; and (v) repurchase agreements.
At the time the Portfolio invests in commercial paper, bank obligations or
repurchase agreements, the issuer or the issuer's parent must have an
outstanding long-term debt rating of A or higher by Standard & Poor's Ratings
Group ("S&P") or A-2 or higher by Moody's Investors Service, Inc. ("Moody's") or
outstanding commercial paper or bank obligations rated A-1 by S&P or Prime-1 by
Moody's; or, if no such ratings are available, the instrument must be of
comparable quality in the opinion of the Adviser.
CERTIFICATES OF DEPOSIT AND BANKERS' ACCEPTANCES. Certificates of deposit are
receipts issued by a depository institution in exchange for the deposit of
funds. The issuer agrees to pay the amount deposited plus interest to the bearer
of the receipt on the date specified on the certificate. The certificate usually
can be traded in the secondary market prior to maturity. Bankers' acceptances
typically arise from short-term credit arrangements designed to enable
businesses to obtain funds to finance commercial transactions. Generally, an
acceptance is a time draft drawn on a bank by an exporter or an importer to
obtain a stated amount of funds to pay for specific merchandise. The draft is
then "accepted" by a bank that, in effect, unconditionally guarantees to pay the
face value of the instrument on its maturity date. The acceptance may then be
held by the accepting bank as an earning asset or it may be sold in the
secondary market at the going rate of discount for a specific maturity. Although
maturities for acceptances can be as long as 270 days, most acceptances have
maturities of six months or less.
COMMERCIAL PAPER. Commercial paper consists of short-term (usually from one
to 270 days) unsecured promissory notes issued by corporations in order to
finance their current operations. A variable amount master demand note (which is
a type of commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts.
For a description of commercial paper ratings, see the Appendix.
U.S. DOLLAR-DENOMINATED FIXED INCOME SECURITIES. Bonds and other debt
instruments are used by issuers to borrow money from investors. The issuer pays
the investor a fixed or variable rate of interest and must repay the amount
borrowed at maturity. Some debt securities, such as zero coupon bonds, do not
pay current interest but are purchased at a discount from their face values.
Debt securities, loans and other direct debt have varying degrees of quality and
varying levels of sensitivity to changes in interest rates. Longer-term bonds
are generally more sensitive to interest rate changes than short-term bonds.
U.S. DOLLAR-DENOMINATED FOREIGN SECURITIES. The Portfolio may invest a
portion of its assets in the dollar-denominated debt securities of foreign
companies. Investing in the securities of foreign companies involves more risks
than investing in securities of U.S. companies. Their value is subject to
economic and political developments in the countries where the companies operate
and to changes in foreign currency values. Values may also be affected by
foreign tax laws, changes in foreign economic or monetary policies, exchange
control regulations and regulations involving prohibitions on the repatriation
of foreign currencies.
In general, less information may be available about foreign companies than
about U.S. companies, and foreign companies are generally not subject to the
same accounting, auditing and financial reporting standards as are U.S.
companies. Foreign securities markets may be less liquid and subject to less
regulation than the U.S. securities markets. The costs of investing outside the
United States frequently are higher than those in the United States. These costs
include relatively higher brokerage commissions and foreign custody expenses.
U.S. DOLLAR-DENOMINATED SOVEREIGN AND SUPRANATIONAL FIXED INCOME SECURITIES.
Debt instruments issued or guaranteed by foreign governments, agencies and
supranational organizations ("sovereign debt obligations"), especially sovereign
debt obligations of developing countries, may involve a high degree of risk. The
issuer of the obligation or the governmental authorities that control the
repayment of the debt may be unable or unwilling to repay principal and interest
when due and may require renegotiation or rescheduling of debt payments. In
addition, prospects for repayment of principal and interest may depend on
political as well as economic factors.
MORTGAGE- AND ASSET-BACKED SECURITIES. The Portfolio may purchase
mortgage-backed securities issued by the U.S. government, its agencies or
instrumentalities and non-governmental entities such as banks, mortgage lenders
or other financial institutions. Mortgage-backed securities include mortgage
pass-through securities, mortgage-backed bonds and mortgage pay-through
securities. A mortgage pass-through security is a pro rata interest in a pool of
mortgages where the cash flow generated from the mortgage collateral is passed
through to the security holder. A mortgage-backed bond is a general obligation
of the issuer, payable out of the issuer's general funds and additionally
secured by a first lien on a pool of mortgages. Mortgage pay-through securities
exhibit characteristics of both pass-through and mortgage-backed bonds. The
mortgage pass-through securities issued by non-governmental entities such as
banks, mortgage lenders or other financial institutions in which the Portfolio
may invest include private label mortgage pass-through securities and whole
loans. Mortgage-backed securities also include other debt obligations secured by
mortgages on commercial real estate or residential properties. Other types of
mortgage-backed securities will likely be developed in the future, and the
Portfolio may invest in them if Bankers Trust determines they are consistent
with the Portfolio's investment objective and policies.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are mortgage-backed bonds
that separate mortgage pools into different classes, called tranches. Tranches
pay different rates of interest and can mature in a few months, or in as long as
20 years. Issued by the Federal Home Loan Mortgage Corporation (Freddie Mac) and
private issuers, CMOs are usually backed by government-guaranteed or other top
grade mortgages and have AAA ratings. In return for a lower yield, CMOs provide
investors with increased security throughout the life of their investment
compared to purchasing a whole mortgage-backed security. Even so, if mortgage
rates drop sharply, causing a flood of refinancings, prepayment rates will soar
and CMO tranches will be repaid before their expected maturity.
REMICs are pass-through vehicles created under the tax reform act of 1986 to
issue multiclass mortgage-backed securities. REMICs may be organized as
corporations, partnerships or trusts. Interests in REMICs may be senior or
junior, regular (debt instruments) or residual (equity interests). CMOs normally
have AAA bond ratings, whereas REMICs represent a range of risk levels.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities. However, the underlying assets are not first lien
mortgage loans or interests therein but include assets such as motor vehicle
installment sale contracts, other installment sale contracts, home equity loans,
leases of various types of real and personal property, and receivables from
revolving credit (credit card) agreements. Such assets are securitized through
the use of trusts or special purpose corporations. Payments or distributions of
principal and interest on asset-backed securities may be guaranteed up to
certain amounts and for a certain time period by a letter of credit or a pool
insurance policy issued by a financial institution unaffiliated with the issuer,
or other credit enhancements may be present.
The yield characteristics of the mortgage- and asset-backed securities in
which the Portfolio may invest differ from those of traditional debt securities.
Among the major differences are that interest and principal payments are made
more frequently on mortgage- and asset-backed securities (usually monthly) and
that principal may be prepaid at any time because the underlying mortgage loans
or other assets generally may be prepaid at any time. As a result, if the
Portfolio purchases these securities at a premium, a prepayment rate that is
faster than expected will reduce their yield, while a prepayment rate that is
slower than expected will have the opposite effect of increasing yield.
Conversely, if the Portfolio purchases these securities at a discount, faster
than expected prepayments will increase, while slower than expected prepayments
will reduce, their yield. Amounts available for reinvestment by the Portfolio
are likely to be greater during a period of declining interest rates and, as a
result, are likely to be reinvested at lower interest rates than during a period
of rising interest rates.
Unlike ordinary Fixed Income Securities, which generally pay a fixed rate of
interest and return principal upon maturity, mortgage-backed securities repay
both interest income and principal as part of their periodic payments. Because
the mortgages underlying mortgage-backed certificates can be prepaid at any time
by homeowners or corporate borrowers, mortgage-backed securities give rise to
certain unique "pre-payment" risks. Prepayment risk or call risk is the
likelihood that, during periods of falling interest rates, securities with high
stated interest rates will be prepaid (or "called") prior to maturity, requiring
the Portfolio to invest the proceeds at generally lower interest rates.
In general, the prepayment rate for mortgage-backed securities decreases as
interest rates rise and increases as interest rates fall. However, rising
interest rates will tend to decrease the value of these securities. In addition,
an increase in interest rates may affect the volatility of these securities by
effectively changing a security that was considered a short-term security at the
time of purchase into a long-term security. Long-term securities generally
fluctuate more widely in response to changes in interest rates than short- or
intermediate-term securities.
The market for privately issued mortgage- and asset-backed securities is
smaller and less liquid than the market for U.S. government mortgage-backed
securities. CMO classes may be specially structured in a manner that provides
any of a wide variety of investment characteristics, such as yield, effective
maturity and interest rate sensitivity. As market conditions change, however,
and particularly during periods of rapid or unanticipated changes in market
interest rates, the attractiveness of the CMO classes and the ability of the
structure to provide the anticipated investment characteristics may be
significantly reduced. These changes can result in volatility in the market
value, and in some instances reduced liquidity, of the CMO class.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of the same type of security interest in the related collateral. Credit card
receivables are generally unsecured, and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to avoid payment of certain amounts owed on the
credit cards, thereby reducing the balance due. There is the risk in connection
with automobile receivables that recoveries on repossessed collateral may not,
in some cases, be available to support payments on those securities.
ZERO-COUPON SECURITIES. The Portfolio may invest in certain zero coupon
securities that are "stripped" U.S. Treasury notes and bonds. Zero Coupon
Securities including CATS, TIGRs and TRs, are the separate income or principal
components of a debt instrument. Zero coupon securities usually trade at a
substantial discount from their face or par value. Zero coupon securities are
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. Zero coupon securities involve risks that are
similar to those of other debt securities, although they may be more volatile,
and the value of certain zero coupon securities moves in the same direction as
interest rates. Zero coupon bonds do not make regular interest payments.
WRAPPER AGREEMENTS. Wrapper Agreements are structured with a number of
different features. Wrapper Agreements purchased by the Portfolio are of three
basic types: (1) non-participating, (2) participating and (3) "hybrid." In
addition, the Wrapper Agreements will either be of fixed-maturity or open-end
maturity ("evergreen"). The Portfolio enters into particular types of Wrapper
Agreements depending upon their respective cost to the Portfolio and the Wrapper
Provider's creditworthiness, as well as upon other factors. Under most
circumstances, it is anticipated that the Portfolio will enter into
participating Wrapper Agreements of open-end maturity and hybrid Wrapper
Agreements.
Under a NON-PARTICIPATING WRAPPER AGREEMENT, the Wrapper Provider becomes
obligated to make a payment to the Portfolio whenever the Portfolio sells
Covered Assets at a price below Book Value to meet withdrawals of a type covered
by the Wrapper Agreement (a "Benefit Event"). Conversely, the Portfolio becomes
obligated to make a payment to the Wrapper Provider whenever the Portfolio sells
Covered Assets at a price above their Book Value in response to a Benefit Event.
In neither case is the Crediting Rate adjusted at the time of the Benefit Event.
Accordingly, under this type of Wrapper Agreement, while the Portfolio is
protected against decreases in the market value of the Covered Assets below Book
Value, it does not realize increases in the market value of the Covered Assets
above Book Value; those increases are realized by the Wrapper Providers.
Under a PARTICIPATING WRAPPER AGREEMENT, the obligation of the Wrapper
Provider or the Portfolio to make payments to each other typically does not
arise until all of the Covered Assets have been liquidated. Instead of payments
being made on the occurrence of each Benefit Event, these obligations are a
factor in the periodic adjustment of the Crediting Rate.
Under a HYBRID WRAPPER AGREEMENT, the obligation of the Wrapper Provider or
the Portfolio to make payments does not arise until withdrawals exceed a
specified percentage of the Covered Assets, after which time payment covering
the difference between market value and Book Value will occur.
A FIXED-MATURITY WRAPPER AGREEMENT terminates at a specified date, at which
time settlement of any difference between Book Value and market value of the
Covered Assets occurs. A fixed-maturity Wrapper Agreement tends to ensure that
the Covered Assets provide a relatively fixed rate of return over a specified
period of time through bond immunization, which targets the duration of the
Covered Assets to the remaining life of the Wrapper Agreement.
An EVERGREEN WRAPPER AGREEMENT has no fixed maturity date on which payment
must be made, and the rate of return on the Covered Assets accordingly tends to
vary. Unlike the rate of return under a fixed-maturity Wrapper Agreement, the
rate of return on assets covered by an evergreen Wrapper Agreement tends to more
closely track prevailing market interest rates and thus tends to rise when
interest rates rise and fall when interest rates fall. An evergreen Wrapper
Agreement may be converted into a fixed-maturity Wrapper Agreement that will
mature in the number of years equal to the duration of the Covered Assets.
Wrapper Providers are banks, insurance companies and other financial
institutions. The number of Wrapper Providers has been increasing in recent
years. As of December 2000, there were approximately 15 Wrapper Providers rated
in one of the top two long-term rating categories by Moody's, S&P or another
NRSRO. The cost of Wrapper Agreements is typically 0.10% to 0.25% per dollar of
Covered Assets per annum.
In the event of the default of a Wrapper Provider, the Portfolio could
potentially lose the Book Value protections provided by the Wrapper Agreements
with that Wrapper Provider. However, the impact of such a default on the
Portfolio as a whole may be minimal or non-existent if the market value of the
Covered Assets thereunder is greater than their Book Value at the time of the
default, because the Wrapper Provider would have no obligation to make payments
to the Portfolio under those circumstances. In addition, the Portfolio may be
able to obtain another Wrapper Agreement from another Wrapper Provider to
provide Book Value protections with respect to those Covered Assets. The cost of
the replacement Wrapper Agreement might be higher than the initial Wrapper
Agreement due to market conditions or if the market value (plus accrued interest
on the underlying securities) of those Covered Assets is less than their Book
Value at the time of entering into the replacement agreement. Such cost would
also be in addition to any premiums previously paid to the defaulting Wrapper
Provider. If the Portfolio were unable to obtain a replacement Wrapper
Agreement, participants redeeming Shares might experience losses if the market
value of the Portfolio's assets no longer covered by the Wrapper Agreement is
below Book Value. The combination of the default of a Wrapper Provider and an
inability to obtain a replacement agreement could render the Portfolio and the
Fund unable to achieve their investment objective of seeking to maintain a
stable value per Share.
With respect to payments made under the Wrapper Agreements between the
Portfolio and the Wrapper Provider, some Wrapper Agreements provide that
payments may be due upon disposition of the Covered Assets, while others provide
for payment only upon the total liquidation of the Covered Assets or upon
termination of the Wrapper Agreement. In none of these cases, however, would the
terms of the Wrapper Agreements specify which Portfolio Securities are to be
disposed of or liquidated. Moreover, because it is anticipated that each Wrapper
Agreement will cover all Covered Assets up to a specified dollar amount, if more
than one Wrapper Provider becomes obligated to pay to the Portfolio the
difference between Book Value and market value (plus accrued interest on the
underlying securities), each Wrapper Provider will pay a pro-rata amount in
proportion to the maximum dollar amount of coverage provided. Thus, the
Portfolio will not have the option of choosing which Wrapper Agreement to draw
upon in any such payment situation. Under the terms of most Wrapper Agreements,
the Wrapper Provider will have the right to terminate the Wrapper Agreement in
the event that material changes are made to the Portfolio's investment
objectives or limitations or to the nature of the Portfolio's operations. In
such event, the Portfolio may be obligated to pay the Wrapper Provider
termination fees equal in amount to the premiums that would have been due had
the Wrapper Agreement continued through the predetermined period. The Portfolio
will have the right to terminate a Wrapper Agreement for any reason. Such right,
however, may also be subject to the payment of termination fees. In the event of
termination of a Wrapper Agreement or conversion of an evergreen Wrapper
Agreement to a fixed maturity, some Wrapper Agreements may require that the
duration of some portion of the Fund's portfolio securities be reduced to
correspond to the fixed maturity or termination date and that such securities
maintain a higher credit rating than is normally required, either of which
requirements might adversely affect the return of the Portfolio and the Fund.
RISKS OF WRAPPER AGREEMENTS. Each Wrapper Agreement obligates the Wrapper
Provider to maintain the "Book Value" of a portion of the Portfolio's assets
("Covered Assets") up to a specified maximum dollar amount, upon the occurrence
of certain specified events. The Book Value of the Covered Assets is their
purchase price (i) plus interest on the Covered Assets at a rate specified in
the Wrapper Agreement ("Crediting Rate"), and (ii) less an adjustment to reflect
any defaulted securities. The Crediting Rate used in computing Book Value is
calculated by a formula specified in the Wrapper Agreement and is adjusted
periodically. In the case of Wrapper Agreements purchased by the Portfolio, the
Crediting Rate is the actual interest earned on the Covered Assets, or an
index-based approximation thereof, plus or minus an adjustment for an amount
receivable from or payable to the Wrapper Provider based on fluctuations in the
market value of the Covered Assets. As a result, while the Crediting Rate will
generally reflect movements in the market rates of interest, it may at any time
be more or less than these rates or the actual interest income earned on the
Covered Assets. The Crediting Rate may also be impacted by defaulted securities
and by increases and decreases of the amount of Covered Assets as a result of
contributions and withdrawals tied to the sale and redemption of Shares.
Furthermore, the premiums due Wrapper Providers in connection with the
Portfolio's investments in Wrapper Agreements are offset against interest earned
and thus reduce the Crediting Rate. These premiums are generally paid quarterly.
In no event will the Crediting Rate fall below zero percent under the Wrapper
Agreements entered into by the Portfolio.
Under the terms of a typical Wrapper Agreement, if the market value (plus
accrued interest on the underlying securities) of the Covered Assets is less
than their Book Value at the time the Covered Assets are liquidated in order to
provide proceeds for withdrawals of Portfolio interests resulting from
redemptions of Shares by Plan participants, the Wrapper Provider becomes
obligated to pay to the Portfolio the difference. Conversely, the Portfolio
becomes obligated to make a payment to the Wrapper Provider if it is necessary
for the Portfolio to liquidate Covered Assets at a price above their Book Value
in order to make withdrawal payments. (Withdrawals generally will arise when the
Fund must pay shareholders who redeem their Shares.) Because it is anticipated
that each Wrapper Agreement will cover all Covered Assets up to a specified
dollar amount, if more than one Wrapper Provider becomes obligated to pay to the
Portfolio the difference between Book Value and market value (plus accrued
interest on the underlying securities), each Wrapper Provider will be obligated
to pay a pro-rata amount in proportion to the maximum dollar amount of coverage
provided. Thus, the Portfolio will not have the option of choosing which Wrapper
Agreement to draw upon in any such payment situation.
The terms of the Wrapper Agreements vary concerning when these payments must
actually be made between the Portfolio and the Wrapper Provider. In some cases,
payments may be due upon disposition of the Covered Assets; other Wrapper
Agreements provide for settlement only upon termination of the Wrapper Agreement
or total liquidation of the Covered Assets.
The Fund expects that the use of Wrapper Agreements by the Portfolio will
under most circumstances permit the Fund to maintain a constant NAV per Share
and to pay dividends that will generally reflect over time both the interest
income of, and market gains and losses on, the Covered Assets held by the
Portfolio less the expenses of the Fund and the Portfolio. However, there can be
no guarantee that the Fund will maintain a constant NAV per Share or that any
Fund shareholder or Plan participant will realize the same investment return as
might be realized by investing directly in the Portfolio assets other than the
Wrapper Agreements. For example, a default by the issuer of a Portfolio Security
or a Wrapper Provider on its obligations might result in a decrease in the value
of the Portfolio assets and, consequently, the Shares. The Wrapper Agreements
generally do not protect the Portfolio from loss if an issuer of Portfolio
Securities defaults on payments of interest or principal. Additionally, a Fund
shareholder may realize more or less than the actual investment return on the
Portfolio Securities depending upon the timing of the shareholder's purchases
and redemption of Shares, as well as those of other shareholders. Furthermore,
there can be no assurance that the Portfolio will be able at all times to obtain
Wrapper Agreements. Although it is the current intention of the Portfolio to
obtain such agreements covering all of its assets (with the exceptions noted),
the Portfolio may elect not to cover some or all of its assets with Wrapper
Agreements should Wrapper Agreements become unavailable or should other
conditions such as cost, in Bankers Trust's sole discretion, render their
purchase inadvisable.
If, in the event of a default of a Wrapper Provider, the Portfolio were
unable to obtain a replacement Wrapper Agreement, participants redeeming Shares
might experience losses if the market value of the Portfolio's assets no longer
covered by the Wrapper Agreement is below Book Value. The combination of the
default of a Wrapper Provider and an inability to obtain a replacement agreement
could render the Portfolio and the Fund unable to achieve their investment
objective of maintaining a stable NAV per Share. If the Board of Trustees of the
Portfolio Trust (the "Portfolio Trust Board") determines that a Wrapper Provider
is unable to make payments when due, that Board may assign a fair value to the
Wrapper Agreement that is less than the difference between the Book Value and
the market value (plus accrued interest on the underlying securities) of the
applicable Covered Assets and the Portfolio might be unable to maintain NAV
stability.
Some Wrapper Agreements require that the Portfolio maintain a specified
percentage of its total assets in short-term investments ("Liquidity Reserve").
These short-term investments must be used for the payment of withdrawals from
the Portfolio and Portfolio expenses. To the extent the Liquidity Reserve falls
below the specified percentage of total assets, the Portfolio is obligated to
direct all net cash flow to the replenishment of the Liquidity Reserve. The
obligation to maintain a Liquidity Reserve may result in a lower return for the
Portfolio and the Fund than if these funds were invested in longer-term Fixed
Income Securities. The Liquidity Reserve required by all Wrapper Agreements is
not expected to exceed 20% of the Portfolio's total assets.
Wrapper Agreements also require that the Covered Assets have a specified
duration or maturity, consist of specified types of securities or be of a
specified investment quality. The Portfolio will purchase Wrapper Agreements
whose criteria in this regard are consistent with the Portfolio's (and the
Fund's) investment objective and policies as described in this Prospectus.
Wrapper Agreements may also require the disposition of securities whose ratings
are downgraded below a certain level. This may limit the Portfolio's ability to
hold such downgraded securities. For a description of Wrapper Provider ratings,
see the Appendix.
ILLIQUID SECURITIES. Mutual funds do not typically hold a significant amount
of illiquid securities because of the potential for delays on resale and
uncertainty in valuation. Limitations on resale may have an adverse effect on
the marketability of portfolio securities, and a mutual fund might be unable to
dispose of illiquid securities promptly or at reasonable prices and might
thereby experience difficulty satisfying redemptions within seven days. A mutual
fund might also have to register restricted securities in order to dispose of
them, resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the 1933 Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Rule 144A Securities are securities
that are not registered for sale under the federal securities laws but can be
resold to institutions pursuant to Rule 144A under the Securities Act of 1933.
Institutional investors depend on an efficient institutional market in which the
unregistered security can be readily resold or on an issuer's ability to honor a
demand for repayment. The fact that there are contractual or legal restrictions
on resale of such investments to the general public or to certain institutions
may not be indicative of their liquidity.
The Securities and Exchange Commission (the "SEC") has adopted Rule 144A
under the 1933 Act, which allows a broader institutional trading market for
securities otherwise subject to restriction on their resale to the general
public. Rule 144A establishes a "safe harbor" from the registration requirements
of the 1933 Act for resales of certain securities to qualified institutional
buyers. The Adviser anticipates that the market for certain restricted
securities such as institutional commercial paper will expand further as a
result of this rule and the development of automated systems for the trading,
clearance and settlement of unregistered securities of domestic and foreign
issuers, such as the PORTAL System sponsored by the National Association of
Securities Dealers, Inc.
The Adviser will monitor the liquidity of Rule 144A securities held by the
Portfolio under the supervision of the Portfolio Trust Board. In reaching
liquidity decisions, the Adviser will consider, among other things, the
following factors: (1) the frequency of trades and quotes for the security; (2)
the number of dealers and other potential purchasers or sellers of the security;
(3) dealer undertakings to make a market in the security; and (4) the nature of
the security and of the marketplace trades (e.g., the time needed to dispose of
the security, the method of soliciting offers and the mechanics of the
transfer).
Provided that a dealer or institutional trading market in such securities
exists, these restricted securities are treated as exempt from the Portfolio's
15% limit on illiquid securities. Under the supervision of the Portfolio Trust
Board, Bankers Trust determines the liquidity of restricted securities; and
through reports from Bankers Trust, the Portfolio Trust Board monitors trading
activity in restricted securities. If institutional trading in restricted
securities were to decline, the liquidity of the Portfolio could be adversely
affected.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. Delivery of and payment
for these securities can take place a month or more after the date of the
purchase commitment. The purchase price and the interest rate payable, if any,
on the securities are fixed on the purchase commitment date or at the time the
settlement date is fixed. The value of such securities is subject to market
fluctuation, and no interest accrues to the Portfolio until settlement takes
place. At the time the Portfolio makes the commitment to purchase securities on
a when-issued or delayed delivery basis, it will record the transaction, reflect
the value each day of such securities in determining its NAV and, if applicable,
calculate the maturity for the purposes of average maturity from that date. At
the time of settlement, a when-issued security may be valued at less than the
purchase price. To facilitate such acquisitions, the Portfolio will maintain
with its custodian (Bankers Trust) a segregated account with liquid assets,
consisting of cash, U.S. government securities or other appropriate securities,
in an amount at least equal to such commitments. On delivery dates for such
transactions, the Portfolio will meet its obligations from maturities or sales
of the securities held in the segregated account and/or from cash flow. If the
Portfolio chooses to dispose of the right to acquire a when-issued security
prior to its acquisition, it could, as with the disposition of any other
portfolio obligation, realize a gain or loss due to market fluctuation. It is
the current policy of the Portfolio not to enter into when-issued commitments
exceeding in the aggregate 15% of the market value of its total assets, less
liabilities other than the obligations created by when-issued commitments.
U.S. GOVERNMENT OBLIGATIONS. The Portfolio may invest in obligations issued
or guaranteed by U.S. government agencies or instrumentalities. U.S. government
securities are high-quality debt securities issued or guaranteed by the U.S.
Treasury or by an agency or instrumentality of the U.S. government. These
obligations may or may not be backed by the "full faith and credit" of the
United States. In the case of securities not backed by the full faith and credit
of the United States, the Portfolio must look principally to the federal agency
issuing or guaranteeing the obligation for ultimate repayment and may not be
able to assert a claim against the United States itself in the event the agency
or instrumentality does not meet its commitments. Securities in which the
Portfolio may invest that are not backed by the full faith and credit of the
United States include obligations of the Tennessee Valley Authority, the Federal
Home Loan Mortgage Corporation and the U.S. Postal Service, each of which has
the right to borrow from the U.S. Treasury to meet its obligations, and
obligations of the Federal Farm Credit System and the Federal Home Loan Banks,
both of whose obligations may be satisfied only by the individual credit of the
issuing agency. Securities that are backed by the full faith and credit of the
United States include obligations of the Government National Mortgage
Association (the "GNMA"), the Farmers Home Administration and the Export-Import
Bank.
LOWER-RATED DEBT SECURITIES ("JUNK BONDS"). The Portfolio may invest in debt
securities rated in the fifth and sixth long-term rating categories by S&P,
Moody's and Duff & Phelps Credit Rating Company, or comparably rated by another
NRSRO, or if not rated by a NRSRO, of comparable quality as determined by
Bankers Trust in its sole discretion. While the market for high yield corporate
debt securities has been in existence for many years and has weathered previous
economic downturns, the 1980's brought a dramatic increase in the use of such
securities to fund highly leveraged corporate acquisitions and restructuring.
Past experience may not provide an accurate indication of future performance of
the high yield bond market, especially during periods of economic recession. In
fact, from 1989 to 1991, the percentage of lower-rated debt securities that
defaulted rose significantly above prior levels.
The market for lower-rated debt securities may be thinner and less active
than that for higher rated debt securities, which can adversely affect the
prices at which the former are sold. If market quotations are not available,
lower-rated debt securities will be valued in accordance with procedures
established by the Board of Trustees, including the use of outside pricing
services. Judgment plays a greater role in valuing high yield corporate debt
securities than is the case for securities for which more external sources for
quotations and last sale information is available. Adverse publicity and
changing investor perception may affect the availability of outside pricing
services to value lower-rated debt securities and the Portfolio's ability to
dispose of these securities.
Since the risk of default is higher for lower-rated debt securities, Bankers
Trust's research and credit analysis are an especially important part of
managing securities of this type held by the Portfolio. In considering
investments for the Portfolio, Bankers Trust will attempt to identify those
issuers of high yielding debt securities whose financial conditions are adequate
to meet future obligations, have improved or are expected to improve in the
future. Bankers Trust's analysis focuses on relative values based on such
factors as interest on dividend coverage, asset coverage, earnings prospects and
the experience and managerial strength of the issuer.
The Portfolio may choose, at its expense or in conjunction with others, to
pursue litigation or otherwise exercise its rights as a security holder to seek
to protect the interest of security holders if it determines this to be in the
interest of the Portfolio.
HEDGING STRATEGIES. The Portfolio may use certain strategies designed to
adjust the overall risk of its investment portfolio. These "hedging" strategies
involve derivative contracts, including U.S. Treasury and Eurodollar futures
contracts and exchange-traded put and call options on such futures contracts.
New financial products and risk management techniques continue to be developed
and may be used if consistent with the Portfolio's investment objective and
policies. Among other purposes, these hedging strategies may be used to
effectively maintain a desired portfolio duration or to protect against market
risk should the Portfolio change its investments among different types of Fixed
Income Securities. In this respect, these hedging strategies are designed for
different purposes than the investments in Wrapper Agreements.
The Portfolio might not use any hedging strategies, and there can be no
assurance that any strategy used will succeed. If the Adviser is incorrect in
its judgment on market values, interest rates or other economic factors in using
a hedging strategy, the Portfolio may have lower net income and a net loss on
the investment. Each of these strategies involves certain risks, which include:
o the fact that the skills needed to use hedging instruments are different from
those needed to select securities for the Portfolio;
o the possibility of imperfect correlation, or even no correlation, between the
price movements of hedging instruments and price movements of the securities
or currencies being hedged;
o possible constraints placed on the Portfolio's ability to purchase or sell
portfolio investments at advantageous times due to the need for the Portfolio
to maintain "cover" or to segregate securities; and
o the possibility that the Portfolio will be unable to close out or liquidate
its hedged position.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS -- GENERAL. The successful
use of these instruments draws upon the Adviser's skill and experience with
respect to such instruments and usually depends on its ability to forecast
interest rate movements correctly. If interest rates move in an unexpected
manner, the Portfolio may not achieve the anticipated benefits of futures
contracts or options thereon or may realize losses and thus will be in a worse
position than if such strategies had not been used. In addition, the correlation
between movements in the price of futures contracts or options thereon and
movements in the price of the securities hedged or used for cover will not be
perfect and could produce unanticipated losses.
FUTURES CONTRACTS. The Portfolio may enter into contracts for the purchase or
sale for future delivery of fixed-income securities or contracts based on
financial indices, including any index of U.S. government securities, foreign
government securities or corporate debt securities. U.S. futures contracts have
been designed by exchanges that have been designated "contracts markets" by the
Commodity Futures Trading Commission ("CFTC") and must be executed through a
futures commission merchant, or brokerage firm, that is a member of the relevant
contract market. Futures contracts trade on a number of exchange markets, and,
through their clearing corporations, the exchanges guarantee performance of the
contracts as between the clearing members of the exchange. The Portfolio may
enter into futures contracts based on debt securities that are backed by the
full faith and credit of the U.S. government, such as long-term U.S. Treasury
bonds, U.S. Treasury notes, GNMA modified pass-through mortgage-backed
securities and three-month U.S. Treasury bills. The Portfolio may also enter
into futures contracts that are based on bonds issued by entities other than the
U.S. government.
At the same time a futures contract is purchased or sold, the Portfolio must
allocate cash or securities as a deposit payment. Daily thereafter, the futures
contract is valued and "variation margin" may be required (that is, the
Portfolio may have to provide or may receive cash that reflects any decline or
increase in the contract's value).
At the time of delivery of securities pursuant to a futures contract,
adjustments are made to recognize differences in value arising from the delivery
of securities with a different interest rate from that specified in the
contract. In some (but not many) cases, securities called for by a futures
contract may not have been issued when the contract was written.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is fulfilled
before the termination date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled through a
clearinghouse associated with the exchange on which the contracts are traded,
the Portfolio will incur brokerage fees when it purchases or sells futures
contracts.
The purpose of the Portfolio's acquisition or sale of a futures contract is
to attempt to protect the Portfolio from fluctuations in interest rates without
actually buying or selling fixed-income securities. For example, if interest
rates were expected to increase (which thus would cause the prices of debt
securities to decline), the Portfolio might enter into futures contracts for the
sale of debt securities. Such a sale would have much the same effect as selling
an equivalent value of the debt securities owned by the Portfolio. If interest
rates did increase, the value of the debt securities held by the Portfolio would
decline, but the value of the futures contracts to the Portfolio would increase
at approximately the same rate, thereby keeping the Portfolio's NAV from
declining as much as it otherwise would have. The Portfolio could accomplish
similar results by selling debt securities and investing in bonds with short
maturities when interest rates are expected to increase. However, since the
futures market is more liquid than the cash market, the use of futures contracts
as an investment technique allows the Portfolio to maintain a defensive position
without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline (thus
increasing the value of debt securities), futures contracts for the acquisition
of debt securities may be purchased to attempt to hedge against anticipated
purchases of debt securities at higher prices. Since the fluctuations in the
value of futures contracts should be similar to those of the underlying debt
securities, the Portfolio could take advantage of the anticipated rise in the
value of debt securities without actually buying them until the market had
stabilized. At that time, the futures contracts could be liquidated and the
Portfolio could then buy debt securities on the cash market. To the extent the
Portfolio enters into futures contracts for this purpose, the assets in the
segregated asset account maintained to cover the Portfolio's obligations with
respect to such futures contracts will consist of cash, cash equivalents or high
quality liquid debt securities from its portfolio in an amount equal to the
difference between the fluctuating market value of such futures contracts and
the aggregate value of the initial and variation margin payments made by the
Portfolio with respect to such futures contracts.
The ordinary spreads between prices in the cash and futures market, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial and variation
margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions that could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by Bankers Trust may still not
result in a successful transaction.
In addition, futures contracts entail risks. Although the Adviser believes
that use of such contracts will benefit the Portfolio, if its investment
judgment about the general direction of interest rates is incorrect, the
Portfolio's overall performance would be poorer than if it had not entered into
any such contract. For example, if the Portfolio has hedged against the
possibility of an increase in interest rates that would adversely affect the
price of debt securities held in its portfolio and interest rates decrease
instead, the Portfolio will lose part or all of the benefit of the increased
value of its debt securities that it has hedged because it will have offsetting
losses in its futures positions. In addition, in such situations, if the
Portfolio has insufficient cash, it may have to sell debt securities from its
portfolio to meet daily variation margin requirements. Such sales of securities
may be, but will not necessarily be, at increased prices that reflect the rising
market. The Portfolio may have to sell securities at a time when it may be
disadvantageous to do so.
OPTIONS ON FUTURES CONTRACTS. The Portfolio may purchase and write (sell)
options on futures contracts for hedging purposes. The purchase of a call option
on a futures contract is similar in some respects to the purchase of a call
option on an individual security. Depending on the pricing of the option
compared to either the price of the futures contract upon which it is based or
the price of the underlying debt securities, it may or may not be less risky
than ownership of the futures contract or underlying debt securities. As with
the purchase of futures contracts, when the Portfolio is not fully invested it
may purchase a call option on a futures contract to hedge against a market
advance due to declining interest rates.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the security that is deliverable upon exercise
of the futures contract. If the futures price at expiration of the option is
below the price specified in the option ("exercise price"), the Portfolio will
retain the full amount of the net premium (the premium received for writing the
option less any commission), which will provide a partial hedge against any
decline that may have occurred in its portfolio holdings. The writing of a put
option on a futures contract constitutes a partial hedge against increasing
prices of the security that is deliverable upon exercise of the futures
contract. If the futures price at expiration of the option is higher than the
exercise price, the Portfolio will retain the full amount of the option net
premium, which will provide a partial hedge against any increase in the price of
securities that the Portfolio intends to purchase. If a put or call option the
Portfolio has written is exercised, the Portfolio may incur a loss that will be
reduced by the amount of the net premium it receives. Depending on the degree of
correlation between changes in the value of its portfolio securities and changes
in the value of its futures positions, such losses from existing options on
futures may to some extent be reduced or increased by changes in the value of
portfolio securities.
The purchase of a put option on a futures contract is similar in some
respects to the purchase of put options on portfolio securities. For example,
the Portfolio may purchase a put option on a futures contract to hedge its
portfolio against the risk of rising interest rates. The amount of risk the
Portfolio assumes when it purchases an option on a futures contract is the
premium paid for the option plus related transaction costs. In addition to the
correlation risks discussed above, the purchase of an option also entails the
risk that changes in the value of the underlying futures contract will not be
fully reflected in the value of the option purchased.
The Portfolio Trust Board has adopted a restriction that the Portfolio will
not enter into any futures contract or option on a futures contract if
immediately thereafter the amount of margin deposits on all the futures
contracts held by the Portfolio and premiums paid on outstanding options on its
futures contracts (other than those entered into for BONA FIDE hedging purposes)
would exceed 5% of the market value of the Portfolio's total assets.
OPTIONS ON SECURITIES. The Portfolio may write (sell) covered call and put
options on its portfolio securities ("covered options") to a limited extent in
an attempt to increase income. However, the Portfolio may forgo the benefits of
appreciation on securities sold or may pay more than the market price on
securities acquired pursuant to call and put options it writes. A call option
written by a Portfolio is "covered" if the Portfolio owns the underlying
security covered by the call or has an absolute and immediate right to acquire
that security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if the Portfolio holds a call option on the same security and in the
same principal amount as the written call option where the exercise price of the
call option so held (a) is equal to or less than the exercise price of the
written call option or (b) is greater than the exercise price of the written
call option if the difference is maintained by the Portfolio in cash, U.S.
government securities and other high quality liquid securities in a segregated
account with its custodian.
When the Portfolio writes a covered call option, it gives the purchaser of
the option the right to buy the underlying security at the exercise price by
exercising the option at any time during the option period. If the option
expires unexercised, the Portfolio will realize income in an amount equal to the
premium received for writing the option. If the option is exercised, a decision
over which the Portfolio has no control, the Portfolio must sell the underlying
security to the option holder at the exercise price. By writing a covered call
option, the Portfolio forgoes, in exchange for the net premium, the opportunity
to profit during the option period from an increase in the market value of the
underlying security above the exercise price.
When the Portfolio writes a covered put option, it gives the purchaser of the
option the right to sell the underlying security to the Portfolio at the
exercise price at any time during the option period. If the option expires
unexercised, the Portfolio will realize income in the amount of the net premium
received for writing the option. If the put option is exercised, a decision over
which the Portfolio has no control, the Portfolio must purchase the underlying
security from the option holder at the exercise price. By writing a covered put
option, the Portfolio, in exchange for the net premium, accepts the risk of a
decline in the market value of the underlying security below the exercise price.
The Portfolio will only write put options involving securities for which a
determination is made at the time the option is written that the Portfolio
wishes to acquire the securities at the exercise price.
The Portfolio may terminate its obligation as the writer of a call or put
option by purchasing an option with the same exercise price and expiration date
as the option previously written. This transaction is called a "closing purchase
transaction." The Portfolio will realize a profit or loss on a closing purchase
transaction if the amount paid to purchase the option is less or more, as the
case may be, than the amount received from the sale thereof. To close out a
position as a purchaser of an option, the Portfolio may enter into a "closing
sale transaction," which involves liquidating the Portfolio's position by
selling the option previously purchased. Where the Portfolio cannot effect a
closing purchase transaction, it may be forced to incur brokerage commissions or
dealer spreads in selling securities it receives or it may be forced to hold
underlying securities until an option is exercised or expires.
When the Portfolio writes an option, an amount equal to the net premium
received is included in the liability section of its Statement of Assets and
Liabilities as a deferred credit. The amount of the deferred credit will be
subsequently marked to market to reflect the current market value of the option.
The current market value of a traded option is the last sale price or, in the
absence of a sale, the mean between the closing bid and asked prices. If an
option expires or if the Portfolio enters into a closing purchase transaction,
the Portfolio will realize a gain (or loss if the cost of the closing purchase
transaction exceeds the net premium received when the option was sold), and the
deferred credit related to such option will be eliminated. If a call option is
exercised, the Portfolio will realize a gain or loss from the sale of the
underlying security and the proceeds of the sale will be increased by the
premium originally received. The writing of covered call options may be deemed
to involve the pledge of the securities against which the option is being
written. Securities against which call options are written will be segregated on
the books of the custodian for the Portfolio.
The Portfolio may purchase call and put options on any securities in which it
may invest. The Portfolio would normally purchase a call option in anticipation
of an increase in the market value of such securities. The purchase of a call
option would entitle the Portfolio, in exchange for the premium paid, to
purchase a security at a specified price during the option period. The Portfolio
would ordinarily have a gain if the value of the securities increased above the
exercise price sufficiently to cover the premium and would have a loss if the
value of the securities remained at or below the exercise price during the
option period.
The Portfolio would normally purchase put options in anticipation of a
decline in the market value of securities in its portfolio ("protective puts")
or securities of the type in which it is permitted to invest. The purchase of a
put option would entitle the Portfolio, in exchange for the premium paid, to
sell a security, which may or may not be held in the Portfolio's holdings, at a
specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the market value of the
Portfolio's holdings. Put options also may be purchased by the Portfolio for the
purpose of benefiting from a decline in the price of securities that the
Portfolio does not own. The Portfolio would ordinarily recognize a gain if the
value of the securities decreased below the exercise price sufficiently to cover
the premium and would recognize a loss if the value of the securities remained
at or above the exercise price. Gains and losses on the purchase of protective
put options would tend to be offset by countervailing changes in the value of
underlying portfolio securities.
The Portfolio has adopted certain non-fundamental policies concerning option
transactions that are discussed below.
The hours of trading for options on securities may not conform to the hours
during which the underlying securities are traded if the option markets close
before the markets for the underlying securities, significant price and rate
movements can take place in the underlying securities markets that will not be
reflected in the option markets. It is impossible to predict the volume of
trading that may exist in such options, and there can be no assurance that
viable exchange markets will develop or continue.
The Portfolio may engage in over-the-counter options transactions with
broker-dealers who make markets in these options. At present, approximately ten
broker-dealers, including several of the largest primary dealers in U.S.
government securities, make these markets. The ability to terminate
over-the-counter option positions is more limited than with exchange-traded
option positions because the predominant market is the issuing broker rather
than an exchange and may involve the risk that broker-dealers participating in
such transactions will not fulfill their obligations. To reduce this risk, the
Portfolio will purchase such options only from broker-dealers who are primary
U.S. government securities dealers recognized by the Federal Reserve Bank of New
York and who agree to (and are expected to be capable of) entering into closing
transactions, although there can be no guarantee that any such option will be
liquidated at a favorable price prior to expiration. Bankers Trust will monitor
the creditworthiness of dealers with whom the Portfolio enters into such options
transactions under the general supervision of the Portfolio Board.
GLOBAL ASSET ALLOCATION STRATEGY ("GAA STRATEGY"). In connection with the GAA
Strategy and in addition to the securities described above, the Portfolio may
invest in indexed securities, futures contracts on securities indices,
securities representing securities of foreign issuers (e.g. ADRs, GDRs and
EDRs), options on stocks, options on futures contracts, foreign currency
exchange transactions and options on foreign currencies. These are discussed
below, to the extent not already described above.
INDEXED SECURITIES. The indexed securities in which the Portfolio may invest
include debt securities whose value at maturity is determined by reference to
the relative prices of various currencies or to the price of a stock index. The
value of such securities depends on the price of foreign currencies, securities
indices or other financial values or statistics. These securities may be
positively or negatively indexed; that is, their value may increase or decrease
if the underlying instrument appreciates.
FUTURES CONTRACTS ON SECURITIES INDICES. Futures contracts on securities
indices provide for the making and acceptance of a cash settlement based upon
changes in the value of an index of securities, and will be entered into by the
Portfolio to hedge against anticipated future change in general market prices
which otherwise might either adversely affect the value of securities held by
the Portfolio or adversely affect the prices of securities which are intended to
be purchased at a later date for the Portfolio, or as an efficient means of
managing allocations between asset classes. A futures contract may also be
entered into to close out or offset an existing futures position. The risks
attendant to futures contracts on securities indices are similar to those of
futures contracts, discussed above.
SECURITIES REPRESENTING SECURITIES OF FOREIGN ISSUERS. The Portfolio's
investments in the securities of foreign issuers may be made directly or in the
form of American Depositary Receipts ("ADRs"), Global Depositary Receipts
("GDRs"), European Depositary Receipts ("EDRs") or other similar securities
representing securities of foreign issuers. These securities may not necessarily
be denominated in the same currency as the securities they represent, and while
designed for use as alternatives to the purchase of the underlying securities in
their national markets and currencies, are subject to the same risks as the
foreign securities to which they relate.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. The Portfolio from time to time may
enter into foreign currency exchange transactions to convert to and from
different foreign currencies and to convert foreign currencies to and from the
U.S. dollar, either on a spot (i.e., cash) basis at the spot rate prevailing in
the foreign currency exchange market, or through forward contracts to purchase
or sell foreign currencies. A forward foreign currency exchange contract
obligates the Portfolio 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.
Forward foreign currency exchange contracts establish an exchange rate at a
future date. These contracts are transferable in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A forward foreign currency exchange contract generally has no deposit
requirement and is traded at a net price without commission. Neither spot
transactions nor forward foreign currency exchange contracts eliminate
fluctuations in the prices of the Portfolio's securities or in foreign exchange
rates, or prevent loss if the prices of these securities should decline.
The Portfolio may enter into foreign currency hedging transactions in an
attempt to protect against changes in foreign currency exchange rates between
the trade and settlement dates of specific securities transactions or changes in
foreign currency exchange rates that would adversely affect a portfolio position
or an anticipated investment position. Since consideration of the prospect for
currency parities will be incorporated into Bankers Trust's long term investment
decisions, the Portfolio will not routinely enter into foreign currency hedging
transactions with respect to security transactions; however, Bankers Trust
believes that it is important to have the flexibility to enter into foreign
currency hedging transactions when it determines that the transactions would be
in the Portfolio's best interest. Although these transactions 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 that might be realized should
the value of the hedged currency increase. The precise matching of the forward
contract amounts and the value of the securities involved will not generally be
possible because the future value of such securities in foreign currencies will
change as a consequence of market movements in the value of such securities
between the date the forward contract is entered into and the date it matures.
The projection of currency market movements is extremely difficult, and the
successful execution of a hedging strategy is highly uncertain.
OPTIONS ON FOREIGN CURRENCIES. The Portfolio may write covered put and call
options and purchase put and call options on foreign currencies for the purpose
of protecting against declines in the dollar value of portfolio securities and
against increases in the dollar cost of securities to be acquired. The Portfolio
may use options on currency to cross hedge, which involves writing or purchasing
options on one currency to hedge against changes in exchange rates for a
different, but related currency. As with other types of options, however, the
writing of an option on foreign currency will constitute only a partial hedge up
to the amount of the premium received, and the Portfolio could be required to
purchase or sell foreign currencies at disadvantageous exchange rates, thereby
incurring losses. The purchase of an option on foreign currency may be used to
hedge against fluctuations in exchange rates although, in the event of exchange
rate movements adverse to the Portfolio's position, it may forfeit the entire
amount of the premium plus related transaction costs. In addition, the Portfolio
may purchase call options on currency when the Adviser anticipates that the
currency will appreciate in value.
There is no assurance that a liquid secondary market on an options exchange
will exist for any particular option, or at any particular time. If the
Portfolio is unable to effect a closing purchase transaction with respect to
covered options it has written, the Portfolio will not be able to sell the
underlying currency or dispose of assets held in a segregated account until the
options expire or are exercised. Similarly, if the Portfolio is unable to effect
a closing sale transaction with respect to options it has purchased, it would
have to exercise the options in order to realize any profit and will incur
transaction costs upon the purchase or sale of underlying currency. The
Portfolio pays brokerage commissions or spreads in connection with its options
transactions.
As in the case of forward contracts, certain options on foreign currencies
are traded over the counter and involve liquidity and credit risks which may not
be present in the case of exchange traded currency options. The Portfolio's
ability to terminate over-the-counter ("OTC") options will be more limited than
with exchange traded options. It is also possible that broker dealers
participating in OTC options transactions will not fulfill their obligations.
Until such time as the staff of the SEC changes its position, the Portfolio will
treat purchased OTC options and assets used to cover written OTC options as
illiquid securities. With respect to options written with primary dealers in
U.S. Government securities pursuant to an agreement requiring a closing purchase
transaction at a formula price, the amount of illiquid securities may be
calculated with reference to the repurchase formula.
REPURCHASE AGREEMENTS. In a repurchase agreement, the Portfolio buys a
security at one price and simultaneously agrees to sell it back to the seller on
a specific date and at a higher price reflecting a market rate of interest
unrelated to the coupon rate or maturity of the underlying security. Delays or
losses could result if the other party to the agreement defaults or becomes
insolvent.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. In a reverse repurchase
agreement, the Portfolio temporarily transfers possession of a portfolio
instrument to another party in return for cash. This could increase the risk of
fluctuation in the Fund's yield or in the market value of its interest in the
Portfolio. In a dollar roll, the Portfolio sells mortgage-backed or other
securities for delivery in the current month and simultaneously contracts to
purchase substantially similar securities on a specified future date. Reverse
repurchase agreements and dollar rolls are forms of borrowing and will be
counted towards the Portfolio's borrowing restrictions. Wrapper Agreements would
cover the cash proceeds of such transactions but not the portfolio instruments
transferred to another party until possession of such instruments is returned to
the Portfolio.
BORROWING. The Portfolio will not borrow money (including through reverse
repurchase agreements or dollar roll transactions) for any purpose in excess of
5% of its total assets, except that it may borrow for temporary or emergency
purposes up to 1/3 of its total assets. Under the 1940 Act, the Portfolio is
required to maintain continuous asset coverage of 300% with respect to such
borrowings and to sell (within three days) sufficient portfolio holdings to
restore such coverage if it should decline to less than 300% due to market
fluctuations or otherwise, even if such liquidation of the Portfolio's holdings
may be disadvantageous from an investment standpoint.
Leveraging by means of borrowing may exaggerate the effect of any increase or
decrease in the value of the Portfolio's securities and the Fund's NAV per
Share, and money borrowed by the Portfolio will be subject to interest and other
costs (which may include commitment fees and/or the cost of maintaining minimum
average balances) that may exceed the income received from the securities
purchased with the borrowed funds. It is not the intention of Bankers Trust to
use leverage as a normal practice in the investment of the Portfolio's assets.
There can be no assurance that the use of these portfolio strategies will be
successful.
ASSET COVERAGE. To assure that the Portfolio's use of futures contracts and
related options, as well as when-issued and delayed-delivery securities, are not
used to achieve investment leverage, the Portfolio will cover such transactions,
as required under applicable interpretations of the SEC, either by owning the
underlying securities or by segregating or earmarking liquid securities with the
Portfolio's custodian (Bankers Trust) in an amount at all times equal to or
exceeding the Portfolio's commitment with respect to these instruments or
contracts. The Portfolio will also cover its use of Wrapper Agreements to the
extent required to avoid the creation of a "senior security" (as defined in the
1940 Act) in connection with its use of such agreements.
RATING SERVICES -- The ratings of rating services represent their opinions as to
the quality of the securities that they undertake to rate. It should be
emphasized, however, that ratings are relative and subjective and are not
absolute standards of quality. Although these ratings are an initial criterion
for selection of portfolio investments, the Adviser also makes its own
evaluation of these securities, subject to review by the Portfolio Trust Board.
After purchase by the Portfolio, an obligation may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Portfolio.
Neither event would require the Portfolio to eliminate the obligation from its
portfolio, but the Adviser will consider such an event in its determination of
whether the Portfolio should continue to hold the obligation. A description of
the ratings referred to herein and in the Prospectus is set forth in the
Appendix.
INVESTMENT RESTRICTIONS -- The following investment restrictions are
"fundamental policies" of the Fund and the Portfolio and may not be changed
without the approval of a "majority of the outstanding voting securities" of the
Fund or the Portfolio, as the case may be. The phrase "Majority of the
outstanding voting securities" under the 1940 Act, and as used in this SAI and
the Prospectus, means, with respect to the Fund (or the Portfolio), the lesser
of (1) 67% or more of the outstanding voting securities of the Fund (or of the
total beneficial interests of the Portfolio) present at a meeting, if the
holders of more than 50% of the outstanding voting securities of the Fund (or of
the total beneficial interests of the Portfolio) are present or represented by
proxy or (2) more than 50% of the outstanding voting securities of the Fund (or
of the total beneficial interests of the Portfolio). Whenever the Fund is
requested to vote on a fundamental policy of the Portfolio, the Fund will hold a
meeting of its shareholders and will cast its vote as instructed by them. Fund
shareholders who do not vote will not affect the Fund's votes at the Portfolio
meeting. The Fund's votes representing Fund shareholders not voting will be
voted by the Directors of Security Income Fund in the same proportion as the
Fund shareholders who do, in fact, vote.
None of the fundamental and non-fundamental policies described below shall
prevent the Fund from investing all of its assets in an open-end investment
company with substantially the same investment objective. Because the Fund and
the Portfolio have the same fundamental policies and the Fund invests all of its
Assets in the Portfolio, the following discussion (though speaking only of the
Portfolio) applies to the Fund as well.
FUNDAMENTAL RESTRICTIONS. As a matter of fundamental policy, the Portfolio
may not:
1. Borrow money (including through reverse repurchase or dollar roll
transactions) in excess of 5% of the Portfolio's total assets (taken at
cost), except that the Portfolio may borrow for temporary or emergency
purposes up to 1/3 of its net assets. The Portfolio may pledge, mortgage or
hypothecate not more than 1/3 of such assets to secure such borrowings
provided that collateral arrangements with respect to options and futures,
including deposits of initial and variation margin, are not considered a
pledge of assets for purposes of this restriction and except that assets may
be pledged to secure letters of credit solely for the purpose of
participating in a captive insurance company sponsored by the Investment
Company Institute;
2. Underwrite securities issued by other persons except insofar as the
Portfolio may be deemed an underwriter under the 1933 Act in selling a
portfolio security;
3. Make loans to other persons except (a) through the lending of the
Portfolio's portfolio securities and provided that any such loans not exceed
30% of its total assets (taken at market value); (b) through the use of
repurchase agreements or the purchase of short-term obligations; or (c) by
purchasing a portion of an issue of debt securities of types distributed
publicly or privately;
4. Purchase or sell real estate (including limited partnership interests but
excluding securities secured by real estate or interests therein), interests
in oil, gas or mineral leases, commodities or commodity contracts (except
futures and option contracts) in the ordinary course of business (except
that the Portfolio may hold and sell, for its portfolio, real estate
acquired as a result of the Portfolio's ownership of securities);
5. Concentrate its investments in any particular industry (excluding U.S.
government securities), but if it is deemed appropriate for the achievement
of the Portfolio's investment objective, up to 25% of its total assets may
be invested in any one industry;
6. Issue any senior security (as that term is defined in the 1940 Act) if such
issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder, provided that collateral arrangements
with respect to options and futures contracts, including deposits of initial
and variation margin, are not considered to be the issuance of a senior
security for purposes of this restriction;
7. Purchase, with respect to 75% of the Portfolio's total assets, securities of
any issuer if such purchase at the time thereof would cause the Portfolio to
hold more than 10% of any class of securities of such issuer, for which
purposes all indebtedness of an issuer shall be deemed a single class and
all preferred stock of an issuer shall be deemed a single class, except that
options or futures contracts shall not be subject to this restriction; and
8. Invest, with respect to 75% of the Portfolio's total assets, more than 5% of
its total assets in the securities (excluding U.S. government securities) of
any one issuer.
NON-FUNDAMENTAL RESTRICTIONS. In order to comply with certain statutes and
policies and for other reasons, the Portfolio will not, as a matter of operating
policy (these restrictions may be changed without shareholder approval):
(i) purchase any security or evidence of interest therein on margin, except
that short-term credit necessary for the clearance of purchases and sales
of securities may be obtained and deposits of initial and variation
margin may be made in connection with the purchase, ownership, holding or
sale of futures contracts;
(ii) sell securities it does not own (short sales). (This restriction does not
preclude short sales "against the box" (that is, sales of securities (a)
the Portfolio contemporaneously owns or (b) where the Portfolio has the
right to obtain securities equivalent in kind and amount to those sold).
The Portfolio has no current intention to engage in short selling);
(iii) purchase securities issued by any investment company except to the extent
permitted by the 1940 Act (including any exemptions or exclusions
therefrom), except that this limitation does not apply to securities
received or acquired as dividends, through offers of exchange, or as a
result of reorganization, consolidation or merger; and
(iv) invest more than 15% of the Portfolio's net assets (taken at the greater
of cost or market value) in securities that are illiquid or not readily
marketable (excluding Rule 144A securities deemed by the Portfolio Board
to be liquid).
An investment restriction will not be considered violated if that restriction
is complied with at the time the relevant action is taken, notwithstanding a
later change in the market value of an investment, in net or total assets or in
the change of securities rating of the investment or any other later change.
The Portfolio will comply with the permitted investments and investment
limitations in the securities laws and regulations of all states in which the
Fund, or any other registered investment company investing in the Portfolio, is
registered.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS -- The Adviser is responsible
for decisions to buy and sell securities, futures contracts and options thereon
for the Portfolio, the selection of brokers, dealers and futures commission
merchants to effect transactions and the negotiation of brokerage commissions,
if any. Broker-dealers may receive brokerage commissions on portfolio
transactions, including options, futures contracts and options on futures
transactions and the purchase and sale of underlying securities upon the
exercise of options. Orders may be directed to any broker-dealer or futures
commission merchant, including, to the extent and in the manner permitted by
applicable law, the Adviser or its subsidiaries or affiliates. Purchases and
sales of certain portfolio securities on behalf of the Portfolio are frequently
placed by the Adviser with the issuer or a primary or secondary market-maker for
these securities on a net basis, without any brokerage commission being paid by
the Portfolio. Trading does, however, involve transaction costs. Transactions
with dealers serving as market-makers reflect the spread between the bid and
asked prices. Transaction costs may also include fees paid to third parties for
information as to potential purchasers or sellers of securities. Purchases of
underwritten issues may be made that will include an underwriting fee paid to
the underwriter.
The Adviser seeks to evaluate the overall reasonableness of the brokerage
commissions paid (to the extent applicable) in placing orders for the purchase
and sale of securities for the Portfolio taking into account such factors as
price, commission (negotiable in the case of national securities exchange
transactions), if any, size of order, difficulty of execution and skill required
of the executing broker-dealer through familiarity with commissions charged on
comparable transactions, as well as by comparing commissions paid by the
Portfolio to reported commissions paid by others. The Adviser reviews on a
routine basis commission rates, execution and settlement services performed,
making internal and external comparisons.
For the period December 23, 1998 through September 30, 1999, the Portfolio
paid brokerage commissions in the amount of $180 and for the period October 1,
1999 through September 30, 2000, the Portfolio paid brokerage commissions in the
amount of $0.
The Adviser is authorized, consistent with Section 28(e) of the Securities
Exchange Act of 1934, as amended, when placing portfolio transactions for the
Portfolio with a broker to pay a brokerage commission (to the extent applicable)
in excess of that which another broker might have charged for effecting the same
transaction on account of the receipt of research, market or statistical
information. The term "research, market or statistical information" includes (a)
advice as to (i) the value of securities, (ii) the advisability of investing in,
purchasing or selling securities, and (iii) the availability of securities or
purchasers or sellers of securities and (b) furnishing analyses and reports
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts. Higher commissions may be
paid to firms that provide research services to the extent permitted by law. The
Adviser may use this research information in managing the Portfolio's assets, as
well as the assets of other clients.
Consistent with the policy stated above, the Conduct Rules of the National
Association of Securities Dealers, Inc. and such other policies as the Portfolio
Trust Board may determine, the Adviser may consider sales of shares of the Fund
and of other investment company clients of the Adviser as a factor in the
selection of broker-dealers to execute portfolio transactions. The Adviser will
make such allocations if commissions are comparable to those charged by
nonaffiliated, qualified broker-dealers for similar services.
Except for implementing the policies stated above, there is no intention to
place portfolio transactions with particular brokers or dealers or groups
thereof. In effecting transactions in over-the-counter securities, orders are
placed with the principal market-makers for the security being traded unless,
after exercising care, it appears that more favorable results are available
otherwise.
Although certain research, market or statistical information from brokers and
dealers can be useful to the Portfolio and to the Adviser, it is the opinion of
the Portfolio's management that such information is only supplementary to the
Adviser's own research effort, since the information must still be analyzed,
weighed and reviewed by the Adviser's staff. Such information may be useful to
the Adviser in providing services to clients other than the Portfolio, and not
all such information is used by the Adviser in connection with the Portfolio.
Conversely, such information provided to the Adviser by brokers and dealers
through whom other clients of the Adviser effect securities transactions may be
useful to the Adviser in providing services to the Portfolio.
In certain instances there may be securities that are suitable for the
Portfolio, as well as for one or more of the Adviser's other clients. Investment
decisions for the Portfolio and for the Adviser's other clients are made with a
view to achieving their respective investment objectives. It may develop that a
particular security is bought or sold for only one client even though it might
be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more clients are
selling that same security. Some simultaneous transactions are inevitable when
several clients receive investment advice from the same investment adviser,
particularly when the same security is suitable for the investment objectives of
more than one client. When two or more clients are simultaneously engaged in the
purchase or sale of the same security, the securities are allocated between
(among) clients in a manner believed to be equitable to each. It is recognized
that in some cases this system could have a detrimental effect on the price or
volume of the security as far as the Portfolio is concerned. However, it is
believed that the ability of the Portfolio to participate in volume transactions
will produce better executions for the Portfolio.
PERFORMANCE INFORMATION
STANDARD PERFORMANCE INFORMATION -- From time to time, quotations of the Fund's
performance may be included in advertisements, sales literature or shareholder
reports. These performance figures are calculated in the following manner:
YIELD. Yield refers to the income generated by an investment over a given
period of time, expressed as an annual percentage rate. Yields are calculated
according to a standard that is required for all stock and bond mutual funds.
Because this differs from other accounting methods, the quoted yield may not
equal the income actually paid to shareholders.
Per SEC regulations, the yield of the Fund (the "SEC yield") shall be
calculated on any determination date as follows:
2[((a - b)(c * d) + 1)^6 - 1] where
a = current income measured over a 30-day period.
b = Expenses accrued during the same 30-day period.
c = Average daily number of shares outstanding during the same 30-day period.
d = Maximum offering price per share on the last day of the period.
The SEC yield for the Fund for the 30 days ended September 30, 2000 was as
follows: Class A - 6.34%, Class B - 6.08%, Class C - 6.32%.
The "annual effective yield" of the fund is intended to represent one day's
investment income expressed as an annualized yield and compounded annually. It
shall be expressed as a percentage and calculated on each business day as
follows based on the dividend declared for the previous day.
(previous day's dividend factor)
1 + (------------------------------)^365 - 1
( NAV per share )
Example: If on March 1, the Fund's dividend factor is 0.00174163 and the
Fund's NAV per share is $10, then the Fund's annual effective yield for March 2
equals 6.56%.
The annual effective yield of the Fund on September 30, 2000 was as follows:
Class A - 6.69%, Class B - 6.16%, Class C - 6.42%.
The annual effective yield of the Portfolio is used in determining when the
interest rate trigger is active.
Performance information or advertisements may include comparisons of the
Fund's investment results to various unmanaged indices or results of other
mutual funds or investment or savings vehicles. From time to time, the Fund's
ranking may be quoted from various sources, such as Lipper Analytical Services,
Inc., Value Line, Inc. and Morningstar, Inc.
Unlike some bank deposits or other investments that pay a fixed yield for a
stated period of time, the total return of the Shares will vary depending upon
interest rates, the current market value of the securities held by the Portfolio
and the Wrapper Agreements and changes in the expenses of the Shares and the
Portfolio. In addition, during certain periods for which total return may be
provided, the Fund's administrator, Security Management Company, LLC may have
voluntarily agreed to waive portions of its fees, or to reimburse certain
operating expenses of the Fund , on a month-to-month basis. Bankers Trust may
have agreed to do the same thing with respect to the Portfolio. Such waivers
will have the effect of increasing the Fund's net income (and therefore its
yield and total return) during the period such waivers are in effect.
TOTAL RETURN. Total return is the change in value of an investment in the
shares over a given period, assuming reinvestment of any dividends and capital
gain distributions. A cumulative total return reflects actual performance over a
stated period of time. An average annual total return is a hypothetical rate of
return that, if achieved annually, would have produced the same cumulative total
return if performance had been constant over the entire period. Average annual
total return calculations smooth out variations in performance; they are not the
same as actual year-by-year results. Average annual total returns covering
periods of less than one year assume that performance will remain constant for
the rest of the year.
The Fund's average annual total return is calculated for certain periods by
determining the average annual compounded rates of return over those periods
that would cause an investment of $1,000 (made at the maximum public offering
price with all distributions reinvested) to reach the value of that investment
at the end of the periods. The Fund may also calculate total return figures that
represent aggregate performance over a period or year-by-year performance. The
Fund's average annual total returns for the periods ended September 30, 2000,
including deduction of the applicable sales charge, were as follows:
--------------------------------------
SINCE INCEPTION
1 YEAR (MAY 3, 1999)
--------------------------------------
Class A 2.94% 3.68%
Class B 1.12% 3.00%
Class C 5.39% 6.04%
--------------------------------------
PERFORMANCE RESULTS. Any performance information provided for the Fund should
not be considered as representative of its performance in the future, because
the NAV and public offering price of Shares will vary based not only on the
type, quality and maturities of the securities held by the Portfolio but also on
changes in the current value of such securities and on changes in the expenses
of the Fund and the Portfolio. Total return reflects the performance of both
principal and income.
Unless noted otherwise, the Fund's total return and average annual total
return will reflect deduction of the maximum initial sales load in the case of
Class A shares or the applicable deferred sales charge in the case of Class B
and Class C shares. From time to time the Fund may include performance
information in advertisements and sales literature without deduction of the
sales charge, which, if deducted, would reduce the performance data quoted.
COMPARISON OF FUND PERFORMANCE -- Comparison of the quoted non-standardized
performance of various investments is valid only if performance is calculated in
the same manner. Since there are different methods of calculating performance,
investors should consider the effect of the methods used to calculate
performance when comparing performance of the Fund with performance quoted with
respect to other investment companies or types of investments.
In connection with communicating its performance to current or prospective
shareholders, the Fund also may compare these figures to the performance of
other mutual funds tracked by mutual fund rating services or to unmanaged
indices that may assume reinvestment of dividends but generally do not reflect
deductions for administrative and management costs. Evaluations of the Fund's
performance made by independent sources may also be used in advertisements
concerning the Fund. Sources for the Fund's performance information could
include the following: ASIAN WALL STREET JOURNAL, BARRON'S, BUSINESS WEEK,
CHANGING TIMES, THE KIPLINGER MAGAZINE, CONSUMER DIGEST, FINANCIAL TIMES,
FINANCIAL WORLD, FORBES, FORTUNE, GLOBAL INVESTOR, INVESTOR'S DAILY, LIPPER
ANALYTICAL SERVICES, INC.'S MUTUAL FUND PERFORMANCE ANALYSIS, MONEY, MORNINGSTAR
INC., NEW YORK TIMES, PERSONAL INVESTING NEWS, PERSONAL INVESTOR, SUCCESS, U.S.
NEWS AND WORLD REPORT, VALUELINE, WALL STREET JOURNAL, WEISENBERGER INVESTMENT
COMPANIES SERVICES, WORKING WOMEN and WORTH.
ECONOMIC AND MARKET INFORMATION -- Advertising and sales literature of the Fund
may include discussions of economic, financial and political developments and
their effect on the securities market. Such discussions may take the form of
commentary on these developments by Fund portfolio managers and their views and
analysis on how such developments could affect the Fund. In addition,
advertising and sales literature may quote statistics and give general
information about the mutual fund industry, including the growth of the
industry, from sources such as the Investment Company Institute ("ICI"). For
example, according to the ICI, thirty-seven percent of American households are
pursuing their financial goals through mutual funds. These investors, as well as
businesses and institutions, have entrusted over $3.5 trillion to the more than
6,000 funds available.
VALUATION OF ASSETS; REDEMPTIONS IN KIND
Debt securities (other than short-term debt obligations maturing in 60 days or
less), including listed securities and securities for which price quotations are
available, will normally be valued on the basis of market valuations furnished
by a pricing service. Such market valuations may represent the last quoted price
on the securities' major trading exchange or quotes received from dealers or
market makers in the relevant securities or may be determined through the use of
matrix pricing. In matrix pricing, pricing services may use various pricing
models, involving comparable securities, historic relative price movements,
economic factors and dealer quotations. Over-the-counter securities will
normally be valued at the bid price. Short-term debt obligations and money
market securities maturing in 60 days or less are valued at amortized cost.
Securities for which market quotations are not readily available are valued
by Bankers Trust pursuant to procedures adopted by the Portfolio's Trust Board.
The NAV per Share is calculated once on each Valuation Day as of the
Valuation Time, which is currently 3:00 p.m., Central time, or if the NYSE
closes early, at the time of such early closing. The NAV per Share is computed
by dividing the value of the Fund's assets (I.E., the value of its investment in
the Portfolio and other assets, if any), less all liabilities, by the total
number of its Shares outstanding. The Portfolio's securities and other assets
are valued primarily on the basis of market quotations or, if quotations are not
readily available, by a method that the Portfolio Trust Board believes
accurately reflects fair value.
Pursuant to procedures adopted by the Portfolio Trust Board, the Wrapper
Value generally will be equal to the difference between the Book Value and the
market value (plus accrued interest on the underlying securities) of the
applicable Covered Assets. If the market value (plus accrued interest on the
underlying securities) of the Covered Assets is greater than their Book Value,
the Wrapper Value will be reflected as a liability of the Portfolio in the
amount of the difference, I.E., a negative value, reflecting the potential
liability of the Portfolio to the Wrapper Provider. If the market value (plus
accrued interest on the underlying securities) of the Covered Assets is less
than their Book Value, the Wrapper Value will be reflected as an asset of the
Portfolio in the amount of the difference, I.E., a positive value, reflecting
the potential liability of the Wrapper Provider to the Portfolio. In performing
its fair value determination, the Portfolio Trust Board expects to consider the
creditworthiness and ability of a Wrapper Provider to pay amounts due under the
Wrapper Agreement. If the Portfolio Trust Board determine that a Wrapper
Provider is unable to make such payments, that Board may assign a fair value to
the Wrapper Agreement that is less than the difference between the Book Value
and the market value (plus accrued interest on the underlying securities) of the
applicable Covered Assets and the Portfolio might be unable to maintain NAV
stability.
The problems inherent in making a good faith determination of value are
recognized in the codification effected by SEC Financial Reporting Release No. 1
(formerly Accounting Series Release No. 113) ("FRR 1"), which concludes that
there is "no automatic formula" for calculating the value of restricted
securities. It recommends that the best method simply is to consider all
relevant factors before making any calculation. According to FRR 1, such factors
would include consideration of the--
type of security involved, financial statements, cost at date of purchase,
size of holding, discount from market value of unrestricted securities of
the same class at the time of purchase, special reports prepared by
analysts, information as to any transactions or offers with respect to the
security, existence of merger proposals or tender offers affecting the
security, price and extent of public trading in similar securities of the
issuer or comparable companies, and other relevant matters.
The Adviser will value securities purchased by the Portfolio that are
restricted as to resale or for which current market quotations are not readily
available, including Wrapper Agreements, based upon all relevant factors as
outlined in FRR 1.
The Fund and the Portfolio each reserves the right, if conditions exist that
make cash payments undesirable, or for other reasons, to honor any request for
redemption or withdrawal, respectively, by making payment wholly or partly in
Portfolio Securities, as the same may be chosen by the Adviser in its sole
discretion (a "redemption in kind"). Such securities shall not include Wrapper
Agreements, and shall be valued as they are for purposes of computing the Fund's
or the Portfolio's NAV, as the case may be. If payment is made to a Fund
shareholder in securities, the shareholder may incur transaction expenses in
converting those securities into cash.
The Portfolio has agreed to make a redemption in kind to the Fund whenever
the Fund wishes to make a redemption in kind to a shareholder thereof, and
therefore Fund shareholders that receive redemptions in kind will receive
Portfolio Securities of the Portfolio and in no case will they receive a
security issued by the Portfolio. The Portfolio has advised Security Income Fund
that the Portfolio will not redeem in kind except in circumstances in which the
Fund is permitted to redeem in kind or unless requested by the Fund.
Each investor in the Portfolio, including the Fund, may add to or reduce its
investment in the Portfolio on each business day the Portfolio determines its
NAV. At the close of business on each such day, the value of each investor's
beneficial interest in the Portfolio will be determined by multiplying the NAV
of the Portfolio by the percentage effective for that day that represents that
investor's share of the aggregate beneficial interests in the Portfolio. Any
additions or withdrawals that are to be effected as of the close of business on
that day will then be effected. The investor's percentage of the aggregate
beneficial interests in the Portfolio will then be recomputed as the percentage
equal to a fraction (a) the numerator of which is the value of the investor's
investment in the Portfolio as of the close of business on that day plus or
minus, as the case may be, the amount of net additions to or withdrawals from
the investor's investment in the Portfolio effected as of the close of business
on that day, and (b) the denominator of which is the aggregate NAV of the
Portfolio as of the close of business on that day plus or minus, as the case may
be, the amount of net additions to or withdrawals from the aggregate investments
in the Portfolio by all investors therein. The percentage so determined will
then be applied to determine the value of the investor's interest in the
Portfolio as the close of business on the following business day.
The Fund and the Portfolio each reserves the right to redeem all of its
shares, if their respective Boards vote to liquidate the Fund and/or Portfolio
as applicable.
OVERVIEW OF TSA ACCOUNTS -- In general, Section 403(b)(7) of the Internal
Revenue Code of 1986, as amended (the "Code") permits public school employees
and employees of certain types of charitable, educational and scientific
organizations specified in Section 501(c)(3) of the Code to purchase shares of a
mutual fund through a custodial account, and, subject to certain limitations, to
exclude the amount of purchase payments from gross income for tax purposes.
Shares of the Fund may be purchased in connection with a TSA custodial account.
TSA Accounts may provide significant tax savings to individuals, but are
governed by a complex set of tax rules under the Code and the regulations
promulgated by the Department of the Treasury thereunder.
If you already have a Security Funds TSA custodial account, you may be able
to invest in the Fund. If you do not presently have a Security Funds TSA
custodial account and you meet the requirements of the applicable tax rules, you
may be able to create a Security Funds TSA custodial account (or a TSA custodial
account from another provider that makes shares of the Fund available to its
customers) and invest in shares of the Fund through that TSA. Class A shares may
not be available to TSA custodial accounts opened on or after June 5, 2000. The
minimum initial or subsequent investment in a Security Funds TSA custodial
account is $50. An annual administration fee of $25 is required for each
Security Funds TSA custodial account with a balance less than $25,000 and a $5
withdrawal fee will be charged when any Security Funds TSA custodial account is
closed.
You may request loans from your Security Funds TSA custodial account, subject
to limitations on the number and amount of loans. An administration fee of $125
will be charged at the time of application for a loan and a $50 loan maintenance
fee will be deducted each year from the account balance. Loan repayments will be
treated as purchases for the purpose of determining any applicable deferred
sales charge. See "How to Purchase Shares," page 27, for a discussion of the
application of deferred sales charges to Class B and Class C shares. Loans may
not be available from certain accounts, including those opened prior to June 5,
2000. Please contact Security Management Company, LLC concerning loan
availability.
TSA OWNERS AND OTHER PROSPECTIVE INVESTORS SHOULD CONSULT WITH THEIR
PROFESSIONAL TAX AND FINANCIAL ADVISERS BEFORE ESTABLISHING A TSA OR OTHERWISE
INVESTING IN SHARES.
OVERVIEW OF THE TYPES OF INDIVIDUAL RETIREMENT ACCOUNTS
In general, an IRA is a trust or custodial account established in the United
States for the exclusive benefit of an individual or his or her
beneficiaries.(Keogh plans are established by self-employed persons, including
partnerships, and also cover eligible non-owner employees.) Most IRAs are
designed principally as retirement savings vehicles. Education IRAs are designed
to provide a tax-favored means of saving for a child's educational expenses.
IRAs may provide significant tax savings to individuals, but are governed by a
complex set of tax rules set out under the Internal Revenue Code of 1986, as
amended (the "Code"),and the regulations promulgated by the Department of the
Treasury thereunder. If you already have an IRA, your IRA may be able to invest
in the Fund. If you do not presently have an IRA and you meet the requirements
of the applicable tax rules, you may be able to create an IRA and invest in
Shares of the Fund through that IRA. Included below is a general discussion of
some IRA features. However, IRA Owners and other prospective investors should
consult with their professional tax and financial advisers before establishing
an IRA or investing in Shares.
TYPES OF INDIVIDUAL RETIREMENT ACCOUNTS--
TRADITIONAL IRAS. If you are under age 70 1/2, and you (or if you file a
joint return, your spouse) have taxable compensation, you may set up a
Traditional IRA and make annual IRA contributions of up to $2,000, or 100% of
your taxable compensation, whichever is less. Taxable income includes wages,
salaries, and other amounts reported in box 1 of Form W-2, as well as earnings
from self-employment. If you file a joint return and your taxable compensation
is less than that of your spouse, you may make annual contributions to a
Traditional IRA equal to the lesser of $2,000, or the sum of (i) your taxable
compensation and (ii) the taxable compensation of your spouse, reduced by the
amount of his or her IRA deduction for the year. Amounts contributed to a
Traditional IRA generally are deductible for federal income tax purposes.
However, if you were covered by an employer retirement plan, the amount of your
contribution to a Traditional IRA that you may deduct will be reduced or
eliminated if your modified adjusted gross income exceeds certain amounts
(currently $50,000 for a married couple filing a joint return and $30,000 for a
single taxpayer). If your spouse is covered by an employer retirement plan but
you are not, you may be able to deduct your contributions to a Traditional IRA;
however, the deduction will be reduced or eliminated if your adjusted gross
income on a joint return exceeds $150,000. Even if your ability to deduct
contributions to a Traditional IRA is limited, you may still make contributions
up to the limits described above. In general, you may also make a contribution
to a Traditional IRA by "rolling over" all or a portion of a distribution you
receive from a qualified retirement plan (such as a pension or profit-sharing
plan or a 401(k) plan) or another Traditional IRA. Amounts distributed from a
Traditional IRA and eligible rollover distributions from qualified retirement
plans will not be includible in income if they are contributed to a Traditional
IRA in a rollover transaction which meets certain conditions; however, a federal
withholding tax may be imposed on such distributions. Consult your professional
tax adviser for complete details on Traditional IRAs.
ROTH IRAS. Regardless of your age, you may be able to establish a Roth IRA.
Contributions to Roth IRAs are not deductible for federal income tax purposes.
However, if all of the applicable requirements are met, earnings in the account
accumulate tax free, and all withdrawals are also tax free. Generally, you may
contribute up to $2,000 annually to a Roth IRA; however, your ability to
contribute to a Roth IRA will be reduced or eliminated if your adjusted gross
income exceeds certain amounts (currently $150,000 for a married couple filing a
joint return and $95,000 for a single taxpayer). In addition, if you make
contributions to both a Traditional IRA and a Roth IRA, your contribution limit
for the Roth IRA will be reduced by the amount of the contribution you make to
the Traditional IRA. If certain requirements are met, and (i) your modified
adjusted gross income is not more than $100,00, and (ii) you are not married and
filing a separate tax return, you can roll over amounts from a Traditional IRA
to a Roth IRA. The amount rolled over generally will be included in your taxable
income; however, if you roll over from a Traditional IRA to a Roth IRA before
2000, you may elect to have the taxable amount included in your income ratably
over a four-year period. You may also roll over amounts from one Roth IRA to
another Roth IRA. Consult your professional tax adviser for complete details on
Roth IRAs. SEP-IRAs are IRAs that are created in connection with a simplified
employee pension ("SEP") established and maintained by a self-employed
individual, a partnership or a corporation. SEP-IRAs must be created for each
qualifying employee of the employer that establishes a SEP. In general, a
qualifying employee is an employee who has: (i) reached the age of 21; and (ii)
worked for the employer at least three out of the past five years. Each SEP-IRA
is owned by the employee for whom it is created; assets of a SEP are not pooled
together. SEPs must provide for discretionary employer contributions. In other
words, employers are not required to make contributions to SEP-IRAs each year,
but if they do make contributions for any year, the contributions must be based
on a specific allocation formula set forth in the SEP, and must not discriminate
in favor of highly compensated employees. Contributions to SEP-IRAs generally
are deductible by the employer, subject to certain limitations. Contributions to
SEP-IRAs of self-employed individuals are subject to certain additional
limitations. SEP-IRAs generally are subject to the same distribution and
rollover rules that apply to Traditional IRAs.
SIMPLE IRAS. In general, a SIMPLE plan may be established by any employer,
including a sole proprietorship, partnership or corporation, with 100 or fewer
employees, and must be the only retirement plan maintained by the employer.
Under a SIMPLE plan using SIMPLE IRAs, a SIMPLE IRA is created for each eligible
employee which, in general, includes all employees who received at least $5,000
in compensation during any two years preceding the year for which eligibility is
being determined (i.e., the current year) and is reasonably expected to earn at
least $5,000 during the current year. As with SEP-IRAs, SIMPLE IRAs are
individual accounts owned by each eligible employee. Under a SIMPLE IRA plan,
eligible employees can elect to contribute a portion of their salary to their
SIMPLE IRA. (These contributions are referred to as "elective deferrals.")
Elective deferrals are based on a stated percentage of the employee's
compensation, and are limited to $6,000 per year (indexed for inflation).
Elective deferrals are included in employees' gross income only for Social
Security and Medicare tax purposes (i.e., they are not included in wages for
federal income tax purposes).In addition to elective deferrals by employees,
under a SIMPLE IRA plan, employers must make either: (i) matching contributions
equal to each employee' selective deferral, up to a maximum of 3% of the
employee's compensation, or (ii) nonelective contributions of 2% of compensation
for each eligible employee(subject to certain limits). Employer contributions to
SIMPLE IRAs are excluded from employees' gross income and are deductible by the
employer. SIMPLE IRAs generally are subject to the same distribution and
rollover rules that apply to Traditional IRAs. However, a rollover from a SIMPLE
IRA to a Traditional IRA can be made tax free only after the employee has
participated in the SIMPLE IRA plan for at least two years.
KEOGH PLANS. Keogh plans are qualified retirement plans established by sole
proprietors or partnerships. As with other qualified retirement plans, in
general, contributions to Keogh plans are deductible, and neither such
contributions nor the investment earnings thereon are subject to tax until they
are distributed by the plan. A number of different types of plans may qualify as
Keogh plans. In certain circumstances, Keogh plans may provide greater tax
advantages than other types of retirement plans. However, Keogh plans must
satisfy a number of complex rules, including minimum participation requirements,
under which certain employees must be covered by the plan, and in some cases,
minimum funding requirements. Professional assistance generally is required to
establish and maintain a Keogh plan.
EDUCATION IRAS. An education IRA is a trust or custodial account created for
the purpose of paying the qualified higher education expenses of a designated
beneficiary, i.e., a child under the age of 18 at the time of the contributions.
In general, qualified higher education expenses include expenses for tuition,
fees, books, supplies and equipment required for the designated beneficiary of
the Education IRA to attend an eligible educational institution, which includes
essentially all accredited post-secondary educational institutions. Any
individual may make contributions to an education IRA so long as his or her
modified adjusted gross income is less than $110,000 ($160,000 for married
taxpayers filing jointly).The maximum total contributions that may be made to
education IRAs for each child is $500 per year. Generally, amounts may be rolled
over from an Education IRA to another education IRA established for the same
beneficiary or for certain members of the beneficiary's family. Beneficiaries
may make tax free withdrawals from education IRAs to pay qualified higher
education expenses. Other withdrawals generally will be subject to tax. Consult
your professional tax adviser for complete details on Education IRAs.
OWNERSHIP OF SHARES THROUGH PLANS
Fund Shares owned by Plan Participants through Plans are held either directly by
the respective Plan, or beneficially through vehicles such as bank collective
funds or insurance company separate accounts consisting solely of such Plans
(collectively, "Plan Pools"), which will in turn offer the Fund as an investment
option to their participants. Investments in the Fund may by themselves
represent an investment option for a Plan or may be combined with other
investments as part of a pooled investment option for the Plan. In the latter
case, the Fund may require Plans to provide information regarding the withdrawal
order and other characteristics of any pooled investment option in which the
Shares are included prior to a Plan's initial investment in the Fund.
Thereafter, the Fund will require the Plan to provide information regarding any
changes to the withdrawal order and other characteristics of the pooled
investment option before such changes are implemented. The Fund in its sole
discretion may decline to sell Shares to Plans if the governing withdrawal order
or other characteristics of any pooled investment option in which the Shares are
included is determined at any time to be disadvantageous to the Fund. Plan
Participants should contact their Plan administrator or the organization that
provides recordkeeping services if they have questions concerning their account.
Plan administrators and fiduciaries should call 1-800-888-2461 for information
regarding a Plan's account with the Fund.
QUALIFIED REDEMPTIONS
At any time, a redemption of Fund Shares can be effected without assessment of
the Redemption Fee as described in the Prospectus, if such redemption is a
"Qualified Plan Redemption," a "Qualified TSA Redemption" or a "Qualified IRA
Redemption." "Qualified Plan Redemptions" are redemptions resulting from a Plan
Participant's death, disability, retirement or termination of employment or to
make loans to, or "in service" withdrawals by, a Plan Participant. A "Qualified
TSA Redemption" is:
o a redemption made by an owner of a TSA account to effect a distribution from
his or her account that is not subject to the 10% penalty tax imposed by
section 72(t), other than a rollover from a TSA account to an IRA or other
TSA account and, direct trustee-to-trustee transfers, unless the owner
continues the investment of the transferred amount in the Fund;
o a transfer to another investment option that is not a competing fund* in your
TSA account if:
>> your TSA account does not allow transfers to competing funds or
>> your TSA account requires transfers between the Fund and a non-competing
fund to remain in the non-competing fund for a period of at least three
months before being transferred to a competing fund.
*Competing funds are any fixed income investment options with a targeted average
duration of three years or less, or any investment option that seeks to
maintain a stable value per unit or share, including money market funds.
In general, section 72(t) of the Code imposes a 10% penalty tax on any
distribution received by a taxpayer who owns a TSA account prior to the date on
which the taxpayer reaches age 59 1/2, unless the distribution meets the
requirements of a specific exception to the penalty tax. In general, rollovers
from a TSA account to an IRA, from one TSA account to another and direct
trustee-to-trustee transfers from one TSA account to another TSA account are not
subject to tax. TSA account owners requesting a redemption of Fund Shares will
be required to provide a written statement as to whether the proceeds of the
redemption will be subject to a penalty tax and, if not, to identify the
specific exception upon which the owner intends to rely. The information
provided by the owner will be reflected on the Form 1099-R issued to the owner
and filed with the Internal Revenue Service in connection with the redemption as
well as forming the basis for redemption as a Qualified TSA Redemption. The Fund
may require additional evidence, such as the opinion of a certified public
accountant or tax attorney, that any particular redemption will not be subject
to any penalty tax. TSA ACCOUNT OWNERS SHOULD CONSULT THEIR TAX ADVISERS
REGARDING THE TAX CONSEQUENCES OF ANY REDEMPTION. TSA Account owners may be
required to provide evidence that a requested transfer of funds within his or
her custodial account is not a transfer to a competing fund.
Some of the exceptions to the 10% penalty taxes are described below. This
description is intended to provide only a brief summary of the principal
exceptions to the additional tax imposed on early withdrawals under the current
provisions of the Code, which may change from time to time. The Fund intends to
conform the definition of Qualified TSA Redemptions to changes in applicable tax
laws; however, the Fund reserves the right to continue to define Qualified TSA
Redemptions by reference to Code provisions now in effect or otherwise to define
such phrase independently of future Code provisions.
In general, the early withdrawal penalty tax imposed by the Code will not
apply to the following types of distributions from a TSA account:
1. Distributions made on or after the date on which the TSA account owner
attains age 59 1/2;
2. Distributions made to a beneficiary (or to the estate of the TSA account
owner) on or after the death of the TSA account owner;
3. Distributions attributable to the TSA account owner being disabled;
4. Distributions made to the TSA account owner after separation from service
after age 55;
5. Distributions to an alternate payee (e.g. a former spouse) pursuant to a
qualified domestic relations order;
6. Distributions that are part of a series of substantially equal periodic
payments made at least annually for the life (or life expectancy) of the TSA
account owner, or the joint lives (or life expectancies) of the TSA account
owner and his or her designated beneficiary, after the TSA account owner
separates from service;
7. Distributions made to a TSA account owner for medical care, but not in
excess of the amount allowable as a medical expense deduction by the TSA
account owner on his or her tax return for the year;
8. Distributions timely made to correct an excess contribution; and
9. Distributions timely made to reduce an excess elective deferral.
A "Qualified IRA Redemption" is a redemption made by an IRA Owner to effect a
distribution from his or her IRA account that is not subject to the 10% penalty
tax imposed by section 72(t) or 530(d), as applicable, other than IRA rollovers,
direct trustee-to-trustee transfers and conversions of Traditional IRAs to Roth
IRAs, unless the IRA Owner continues the investment of the transferred amount in
the Fund. In general, section 72(t) of the Code imposes a 10% penalty tax on any
distribution received by a taxpayer from a Traditional IRA, SEP-IRA or SIMPLE
IRA prior to the date on which the taxpayer reaches age 59 1/2, unless the
distribution meets the requirements of a specific exception to the penalty tax.
Similar penalties apply to early withdrawals from Roth IRAs and Keogh Plans.
Section 530(d) as currently written, imposes a separate 10% penalty tax on
distributions from an education IRA not used to pay qualified higher education
expenses. In general, rollovers from one IRA to another and direct
trustee-to-trustee transfers from an IRA to another IRA (or in some cases to
other types of qualified plans) are not subject to tax. In addition, conversions
of Traditional IRAs to Roth IRAs are subject to income tax but are not subject
to the early withdrawal penalty tax. IRA Owners requesting a redemption of Fund
Shares will be required to provide a written statement as to whether the
proceeds of the redemption will be subject to a penalty tax and, if not, to
identify the specific exception upon which the IRA Owner intends to rely. The
information provided by the IRA Owner will be reflected on the Form 1099-R
issued to the IRA Owner and filed with the Internal Revenue Service in
connection with the redemption as well as forming the basis for redemption as a
Qualified IRA Redemption. The Fund may require additional evidence, such as the
opinion of a certified public accountant or tax attorney, that any particular
redemption will not be subject to any penalty tax. IRA OWNERS SHOULD CONSULT
THEIR TAX ADVISERS REGARDING THE TAX CONSEQUENCES OF ANY REDEMPTION.
Some of the exceptions to the 10% penalty taxes are described below. This
description is intended to provide only a brief summary of the principal
exceptions to the additional tax imposed on early withdrawals under the current
provisions of the Code, which may change from time to time. The Fund intends to
conform the definition of Qualified IRA Redemptions to changes in applicable tax
laws; however, the Fund reserves the right to continue to define Qualified IRA
Redemptions by reference to Code provisions now in effect or otherwise to define
such phrase independently of future Code provisions.
TRADITIONAL IRAS, SEP-IRAS AND SIMPLE IRAS -- In general, the 10% penalty tax
imposed by section 72(t) of the Code will not apply to the following types of
distributions from a Traditional IRA, SEP-IRA or SIMPLE IRA:
1. Distributions made on or after the date on which the IRA Owner attains age
59 1/2;
2. Distributions made to a beneficiary (or to the estate of the IRA Owner) on
or after the death of the IRA Owner;
3. Distributions attributable to the IRA Owner's being disabled within the
meaning of section 72(m)(7) of the Code;
4. Distributions made to the IRA Owner to the extent such distributions do not
exceed the amount of unreimbursed medical expenses allowed as a deduction
under section 213 of the Code;
5. Distributions to unemployed individuals to the extent such distributions do
not exceed the amount paid for medical insurance as described in section
213(d)(1)(D) of the Code for the IRA Owner, and his or her spouse and
dependents;
6. Distributions to an IRA Owner to the extent such distributions do not exceed
the qualified higher education expenses, as defined in section 72(t)(7), for
the IRA Owner;
7. Distributions to an IRA Owner that are used to acquire a first home, and
that meet the definition of "qualified first-time homebuyer distributions"
under section 72(t)(8) of the Code; and
8. Distributions that are part of a series of substantially equal periodic
payments made at least annually for the life (or life expectancy) of the IRA
Owner, or the joint lives (or life expectancies) of the IRA Owner and his or
her designated beneficiary.
ROTH IRAS -- With respect to a Roth IRA, all "qualified distributions" are
excluded from gross income and, therefore, from the 10% penalty tax imposed by
section 72(t). In general, qualified distributions from a Roth IRA include:
1. Distributions made on or after the date on which the IRA Owner attains age
59 1/2;
2. Distributions made to a beneficiary (or to the estate of the IRA Owner) on
or after the death of the IRA Owner;
3. Distributions attributable to the IRA Owner's being disabled within the
meaning of section 72(m)(7) of the Code; and
4. Distributions to an IRA Owner that are used to acquire a first home, and
that meet the definition of "qualified first-time homebuyer distributions"
under section 72(t)(8) of the Code.
However, a distribution will not be a qualified distribution, even if it
otherwise meets the definition, if it is made within the 5-year period beginning
with the first taxable year for which the IRA Owner made a contribution to the
Roth IRA (or such person's spouse made a contribution to a Roth IRA established
for the IRA Owner). Special rules apply with respect to certain types of
rollovers.
To the extent a distribution from a Roth IRA is not a qualified distribution,
either because it does not meet the definition of a qualified distribution in
the first instance, or because it is made within the five-year period described
in section 408A(d)(2)(B), the portion of the distribution that represents
earnings will be subject to tax in accordance with section 72 of the Code,
including the 10% penalty tax imposed under section 72(t). The same exceptions
to the penalty tax that apply to Traditional IRAs will apply to nonqualified
distributions from Roth IRAs.
In the event of a nonqualified distribution from a Roth IRA, only the
earnings in the account are subject to tax; contributions may be recovered
tax-free (since no deduction is permitted for such contributions). Section
408A(d) provides that distributions from Roth IRAs are considered to come first
from contributions, to the extent that distributions do not exceed the total
amount of contributions.
KEOGH PLANS -- In general, the 10% penalty tax imposed by section 72(t) of the
Code will not apply to the following types of distributions from a Traditional
IRA:
1. Distributions made on or after the date on which the IRA Owner attains age
59 1/2;
2. Distributions made to a beneficiary (or to the estate of the IRA Owner) on
or after the death of the IRA Owner;
3. Distributions attributable to the IRA Owner's being disabled within the
meaning of section 72(m)(7) of the Code;
4. Distributions made to the IRA Owner after separation from service after age
55;
5. Distributions to unemployed individuals to the extent such distributions do
not exceed the amount of unreimbursed medical expenses allowed as a
deduction under section 213 of the Code;
6. Distributions to an alternate payee (e.g., a former spouse) pursuant to a
qualified domestic relations order; and
7. Distributions that are part of a series of substantially equal periodic
payments made at least annually for the life (or life expectancy) of the IRA
Owner, or the joint lives (or life expectancies) of the IRA Owner and his or
her designated beneficiary.
EDUCATION IRAS -- Distributions from an education IRA are included in income
unless the qualified higher education expenses of the designated beneficiary are
equal to or greater than the amount of such distributions. In addition, certain
special rules are provided that permit certain rollovers or changes in
beneficiaries. Any distribution that is subject to tax under section 530 is also
subject to the 10% penalty tax imposed by section 530(d)(4). Thus, in general,
any distribution from an education IRA that exceeds the amount of qualified
higher education expenses of the designated beneficiary will be subject to the
10% penalty tax.
HOW TO PURCHASE SHARES
Investors may purchase shares of the Fund 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 Fund available to
their customers. (Banks and other financial institutions that make shares of the
Fund 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. An application may be obtained from
the Fund Administrator.
As a convenience to investors and to save operating expenses, the Fund does
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 Fund will be confirmed at an
offering price equal to the net asset value per share next determined after
receipt of the order in proper form by 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 Fund reserves the right to withdraw all or any part of the offering made
by this prospectus and to reject purchase orders.
ALTERNATIVE PURCHASE OPTIONS -- The Fund offers four 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 of 1% 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.
CLASS C SHARES - LEVEL LOAD OPTION. Class C shares are sold without a sales
charge at the time of purchase, but are subject to a contingent deferred sales
charge if they are redeemed within one year of the date of purchase.
CLASS S SHARES - FLEXIBLE LOAD OPTION. Class S 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 seven years of the date of purchase. Class S shares
do not convert to another class of shares after a specified number of years.
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, Class C or Class S shares, in which case 100% of the purchase
price is invested immediately, depending on the amount of the purchase and the
intended length of investment.
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 $100,000.................. 3.50% 3.63% 3.00%
$100,000 but less than $500,000..... 2.50 2.56 2.00
$500,000 but less than $1,000,000... 1.50 1.52 1.00
$1,000,000 and over................. None None (See below)
--------------------------------------------------------------------------------
The Distributor will pay a commission to dealers on purchases of $1,000,000
or more as follows: .50% on sales up to $5,000,000, plus .25% on sales of
$5,000,000 or more up to $10,000,000, and .10% on any amount of $10,000,000 or
more.
CLASS A DISTRIBUTION PLAN -- As discussed in the prospectus, the 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 Security Income 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 February 10, 1999. 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 Fund Administrator and its officers, directors and employees,
including Messrs. Cleland and Schmank (directors of the Fund), Messrs. Swank,
Swickard, Bowser, Ms. Harwood and Ms. Lee (officers of the Fund), all may be
deemed to have a direct or 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
net assets of the Fund from sales pursuant to its Distribution Plan and
Agreement may benefit shareholders by reducing per share expenses, permitting
increased investment flexibility and diversification of such 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 Fund may impose a deferred
sales charge on shares redeemed within five years of the date of purchase. No
deferred sales charge is imposed on amounts redeemed thereafter. If imposed, the
deferred sales charge is deducted from the redemption proceeds otherwise payable
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 transfer
agent.) All shares purchased through reinvestment of dividends and other
distributions paid with respect to Class B shares ("reinvestment shares") will
be considered to be held in a separate subaccount. Each time any Class B shares
(other than those held in the subaccount) convert to Class A shares, a pro rata
portion of the reinvestment shares held in the subaccount will also convert to
Class A shares. Class B shares so converted will no longer be subject to the
higher expenses borne by Class B shares. Because the net asset value per share
of the Class A shares may be higher or lower than that of the Class B shares at
the time of conversion, although the dollar value will be the same, a
shareholder may receive more or less Class A shares than the number of Class B
shares converted. Under current law, it is the Fund's opinion that such a
conversion will not constitute a taxable event under federal income tax law. In
the event that this ceases to be the case, the Board of Directors will consider
what action, if any, is appropriate and in the best interests of the Class B
stockholders.
CLASS B DISTRIBUTION PLAN -- The Fund bears some of the costs of selling its
Class B shares under a Distribution Plan adopted with respect to its Class B
shares ("Class B Distribution Plan") pursuant to Rule 12b-1 under the Investment
Company Act of 1940 ("1940 Act"). This Plan provides for payments at an annual
rate of .75% of the average daily net asset value of Class B shares. Amounts
paid by the Fund are currently used to pay dealers and other firms that make
Class B shares available to their customers (1) a commission at the time of
purchase normally equal to 2.75% 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 Fund.
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 Fund. 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 Fund would be within permitted limits.
The Fund's Class B Distribution Plan may be terminated at any time by vote of
its directors who are not interested persons of the Fund as defined in the 1940
Act or by vote of a majority of the outstanding Class B shares. In the event the
Class B Distribution Plan is terminated by the Class B stockholders or the
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 Fund makes no payments in connection with the sales of its
shares other than the distribution fee paid to the Distributor.
CLASS C SHARES -- Class C shares of the Fund are offered at net asset value,
without an initial sales charge. With certain exceptions, the Fund may impose a
deferred sales charge on shares redeemed within one year 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.
CLASS C DISTRIBUTION PLAN -- The Fund bears some of the costs of selling its
Class C shares under a Distribution Plan adopted with respect to its Class C
shares ("Class C 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 .50% of the average daily net asset value of Class C shares. Amounts
paid by the Fund are currently used to pay dealers and other firms that make
Class C shares available to their customers (1) a commission at the time of
purchase normally equal to .25% of the value of each share sold, and for each
year thereafter, quarterly, in an amount equal to .25% annually of the average
daily net asset value of Class C shares sold by such dealers and other firms and
remaining outstanding on the books of the Fund and (2) a service fee 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 C shares
sold by such dealers and other firms and remaining outstanding on the books of
the Fund.
Rules of the NASD limit the aggregate amount that a Fund may pay annually in
distribution costs for the sale of its Class C shares to 6.25% of gross sales of
Class C 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 C 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 C Distribution Plan which exceed current
annual payments permitted to be received by the Distributor from the Fund. The
Distributor intends to seek full payment of such charges from the Fund (together
with annual interest thereon at the prime rate plus 1%) at such time in the
future as, and to the extent that, payment thereof by the Fund would be within
permitted limits.
The Fund's Class C 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 C shares. In the event the
Class C Distribution Plan is terminated by the Class C stockholders or the
Fund's Board of Directors, the payments made to the Distributor pursuant to the
Plan up to that time would be retained by the Distributor. Any expenses incurred
by the Distributor in excess of those payments would be absorbed by the
Distributor. The Fund makes no payments in connection with the sales of their
shares other than the distribution fee paid to the Distributor.
CLASS S SHARES -- Class S shares are offered at net asset value, without an
initial sales charge. With certain exceptions, the Fund may impose a deferred
sales charge on shares redeemed within seven 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 6%
Second 6%
Third 5%
Fourth 4%
Fifth 3%
Sixth 2%
Seventh 1%
Eighth and Following 0%
---------------------------------------------
CLASS S DISTRIBUTION PLAN -- The Fund bears some of the costs of selling its
Class S shares under a Distribution Plan adopted with respect to its Class S
shares ("Class S 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 S shares. Amounts
paid by the Funds are currently used to pay dealers and other firms that make
Class S 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, (2) a service
fee for account maintenance and personal service to shareholders payable
calendar quarterly beginning in the second year in an amount equal to .25%
annually of the average daily net asset value of Class S shares sold by such
dealers remaining outstanding on the books of the Funds, and (3) a trail
commission payable calendar quarterly beginning in the seventh year, and for
each year thereafter, in an amount equal to .75% annually of the average daily
net asset value of Class S shares sold by such dealers remaining outstanding on
the books of the Funds.
Rules of the NASD limit the aggregate amount that a Fund may pay annually in
distribution costs for the sale of its Class S shares to 6.25% of gross sales of
Class S 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 S 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 S Distribution Plan which exceed current
annual payments permitted to be received by the Distributor from the Fund. The
Distributor intends to seek full payment of such charges from the Fund (together
with annual interest thereon at the prime rate plus 1%) at such time in the
future as, and to the extent that, payment thereof by the Fund would be within
permitted limits.
The Fund's Class S 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 S shares. In the event the
Class S Distribution Plan is terminated by the Class S 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 Fund makes no payments in connection with the sales of its
Class S 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), Class B shares, Class C and Class S 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) or Class C shares held for more than one year or Class B shares held for
more than five years or Class S shares held more than seven 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.
ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS -- To the extent permitted by
applicable law, the Fund's Administrator or Distributor, from time to time, will
pay a bonus, to certain dealers whose representatives have sold or are expected
to sell significant amounts of the Fund and/or certain other funds managed by
the Fund Administrator. 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, Class C or
Class S shares, an amount which exceeds the maximum commission. The Distributor,
or the Fund Administrator, 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 Fund Administrator. In addition, the Fund Administrator or Distributor may
sponsor training or education meetings at various locations. In connection with
such meetings it is expected that the Fund Administrator or Distributor would
pay the travel, lodging and other expenses of representatives of the dealers in
attendance. Certain of the foregoing arrangements may be financed by payments to
the Distributor under a Rule 12b-1 Distribution Plan. These arrangements will
not change the price an investor will pay for shares or the amount that the Fund
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 NASD.
A dealer to whom substantially the entire sales charge of Class A shares is
reallowed may be deemed to be an "underwriter" under federal securities laws.
The Distributor also may pay banks and other financial services firms that
facilitate transactions in shares of the Fund for their clients a transaction
fee up to the level of the payments made allowable to dealers for the sale of
such shares as described above.
PURCHASES AT NET ASSET VALUE -- Class A shares of the Fund may be purchased at
net asset value by (1) directors, officers and employees of the Fund, the Fund's
Administrator 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 Fund may also be purchased at net asset value when the
purchase is made on the recommendation of (i) a registered investment adviser,
trustee or financial intermediary who has authority to make investment decisions
on behalf of the investor; or (ii) a certified financial planner or registered
broker-dealer who either charges periodic fees to its customers for financial
planning, investment advisory or asset management services, or provides such
services in connection with the establishment of an investment account for which
a comprehensive "wrap fee" is imposed. The Distributor must be notified when a
purchase is made that qualifies under this provision.
PURCHASES FOR EMPLOYER-SPONSORED RETIREMENT PLANS -- Security Financial
Resources, Inc., an affiliated company of the Distributor, offers plan
recordkeeping services on a fee basis to employer-sponsored retirement plans.
Employer-sponsored retirement plans that have entered into an agreement to
receive such services from Security Financial Resources, Inc. may purchase Class
A shares of Capital Preservation Fund at net asset value under certain
circumstances. Such plans would first purchase Class C shares of the Fund for an
initial period of time that would vary with the size of the plan, amount of
assets flowing into the plan and level of service provided by the dealer. After
that initial period of time has elapsed, the plan would exchange at net asset
value existing Class C shares for Class A shares of Capital Preservation Fund,
and new purchases under the plans would be made in Class A shares at net asset
value.
The schedule below sets forth the amount of time that retirement plan assets
would remain invested in Class C shares before they would be eligible for
exchange to Class A shares of Capital Preservation Fund. The schedule below also
sets forth the commissions paid to dealers in connection with sales of Fund
shares with respect to such retirement plans, which commissions replace those
normally paid in connection with sales of Class C shares.
--------------------------------------------------------------------------------
NUMBER OF YEARS COMMISSION BY YEAR OF PURCHASE*
INVESTED IN -------------------------------
ELIGIBLE PLANS CLASS C SHARES 1 2 3 4 5+
--------------------------------------------------------------------------------
Less than $1.5 mil. in
assets or $400,000 in flow 8 years 5% 4% 3% 2% 1%
--------------------------------------------------------------------------------
Less than $1.5 mil. in
assets or $400,000 in flow 8 years 6% 4% 2% 1% 1%
--------------------------------------------------------------------------------
Less than $5 mil. In
assets or $1 mil. in flow 6 years 4% 3% 2% 1% 1%
--------------------------------------------------------------------------------
Less than $5 mil. In
assets or $1 mil. in flow 5 years 3% 2% 1% 1% 1%
--------------------------------------------------------------------------------
Less than $10 mil. In
assets or $2 mil. in flow 3 years 2% 1% 1% 1% 1%
--------------------------------------------------------------------------------
Less than $10 mil. In
assets or $2 mil. in flow 0 years** 1%+ 1% 1% 1% 1%
--------------------------------------------------------------------------------
*The commission is a percentage of the amount invested. The year of purchase is
measured from the date of the plan's initial investment in the Fund.
Notwithstanding the foregoing schedule, if 50% or more of the plan assets
allocated to the Fund is redeemed within the four-year period beginning on the
date of the plan's initial investment in the Fund, the commission will
immediately drop to 1% for all subsequent purchases.
**Amounts will be invested in Class A shares at net asset value.
+Certain dealers may receive 1.25% in year 1.
--------------------------------------------------------------------------------
The Distributor may also enter into arrangements with dealers whereby it
agrees to "annualize" the first-year commission expected to be paid on the
purchase of Fund shares by retirement plans receiving plan recordkeeping
services from Security Financial Resources, Inc. Such arrangements will
typically provide for an up-front payment by the Distributor to the dealer of a
specified percentage of the first-year's expected commissions attributable to a
particular retirement plan.
In some circumstances, a retirement plan that was not previously receiving
plan recordkeeping services from Security Financial Resources, Inc. may transfer
its assets in an arrangement where it does receive such services. In such
circumstances, the Distributor may pay the dealer a commission on the
transferred assets that is different from the commission otherwise set forth in
the table above, but typically not in excess of 1.25% of the transferred amount.
In addition to the commissions set forth above, dealers will receive a
service fee payable beginning in the 13th month following the plan's initial
investment. The Distributor pays service fees quarterly, in an amount equal to
0.25% annually of the average daily net asset value of Class C shares sold by
dealers in connection with such employer-sponsored retirement plans and
remaining outstanding on the books of Capital Preservation Fund.
MANAGEMENT OF THE FUND AND TRUST
The Board of Directors of Security Income Fund and the Board of Trustees of the
Portfolio Trust (collectively, the Directors) are each composed of persons
experienced in financial matters who meet throughout the year to oversee the
activities of the Fund or the Portfolio, respectively. In addition, the
Directors review contractual arrangements with companies that provide services
to the Fund/Portfolio and review the Fund's performance.
The Directors and officers of the Security Income Fund and the Portfolio
Trust, their birth dates, and their principal occupations during the past five
years are set forth below. Their titles may have varied during that period.
Unless otherwise indicated, the address of each officer and director of Security
Income Fund is 700 Harrison Street, Topeka, Kansas 66636-0001 and the address of
each officer of the Portfolio Trust is One South Street, Baltimore, Maryland
21202.
DIRECTORS AND OFFICERS OF SECURITY INCOME FUND --
------------------------------------------------------------------------------------------
POSITION(S)
HELD WITH PRINCIPAL OCCUPATION(S)
NAME, ADDRESS, AND AGE FUND DURING PAST 5 YEARS
------------------------------------------------------------------------------------------
John D. Cleland,* 64 Chairman of Senior Vice President and Managing
(Birth date: May 1, 1936) the Board Member Representative, Security
and Management Company, LLC; Senior Vice
Director President, Security Benefit Group, Inc.
and Security Benefit Life Insurance
Company
------------------------------------------------------------------------------------------
Donald A. Chubb, Jr.,** 54 Director Business broker, Griffith & Blair
(Birth date: December 14, 1946) Realtors. Prior to 1997, President,
2222 SW 29th Street Neon Tube Light Company, Inc.
Topeka, Kansas 66611
------------------------------------------------------------------------------------------
Penny A. Lumpkin,** 61 Director Owner, Vivian's Gift Shop (Corporate
(Birth date: August 20, 1939) Retail); Vice President, Palmer
3616 Canterbury Town Road Companies, Inc. (Small Business and
Topeka, Kansas 66610 Shopping Center Development) and
Bellairre Shopping Center LLC (Managing
and Leasing); Partner, Goodwin
Enterprises (Retail). Prior to 1999,
Vice President and Treasurer, Palmer
News, Inc.; Vice President, M/S News,
Inc. and Secretary, Kansas City
Periodicals.
------------------------------------------------------------------------------------------
Mark L. Morris, Jr.,** 66 Director Independent Investor, Morris Co.
(Birth date: February 3, 1934) (Personal Investments); Former General
5500 SW 7th Street Partner, Mark Morris Associates
Topeka, Kansas 66606 (Veterinary Research and Education)
------------------------------------------------------------------------------------------
Maynard Oliverius, 57 Director President and Chief Executive Officer,
(Birth date: December 18, 1943) Stormont-Vail HealthCare
1500 SW 10th Avenue
Topeka, Kansas 66604
------------------------------------------------------------------------------------------
James R. Schmank,* 47 President President and Managing Member
(Birth date: February 21, 1953) and Representative, Security Management
Director Company, LLC; Senior Vice President,
Security Benefit Group, Inc. and
Security Benefit Life Insurance Company
------------------------------------------------------------------------------------------
Amy J. Lee, 39 Secretary Secretary, Security Management Company,
(Birth date: June 5, 1961) LLC; Vice President, Associate General
Counsel and Assistant Secretary,
Security Benefit Group, Inc. and
Security Benefit Life Insurance Company
------------------------------------------------------------------------------------------
Brenda M. Harwood, 37 Treasurer Assistant Vice President and Treasurer,
(Birth date: November 3, 1963) Security Management Company, LLC;
Assistant Vice President, Security
Benefit Group, Inc. and Security Benefit
Life Insurance Company
------------------------------------------------------------------------------------------
Steven M. Bowser, 40 Vice Vice President and Portfolio Manager,
(Birth date: February 11, 1960) President Security Management Company, LLC; Vice
President, Security Benefit Group, Inc.
and Security Benefit Life Insurance
Company
------------------------------------------------------------------------------------------
Thomas A. Swank, 41 Vice Senior Vice President and Director of
(Birth date: January 10, 1960) President Fixed Income, Security Management
Company, LLC; Senior Vice President and
Chief Investment Officer, Security
Benefit Group, Inc. and Security Benefit
Life Insurance Company
------------------------------------------------------------------------------------------
Christopher D. Swickard, 35 Assistant Assistant Secretary, Security Management
(Birth date: October 9, 1965) Secretary Company, LLC; Assistant Vice President
and Assistant Counsel, Security Benefit
Group, Inc. and Security Benefit Life
Insurance Company
------------------------------------------------------------------------------------------
*These directors are deemed to be "interested persons" of the Fund.
**These directors serve on the Fund's audit committee, the purpose of which (among other
things) is to meet with independent auditors, to review the work of the auditors, and to
oversee the handling by Security Management Company, LLC of the accounting function for
the Fund.
------------------------------------------------------------------------------------------
The officers of Security Income Fund hold identical offices with each of the
other mutual funds in the Security Funds Family, except Messrs. Bowser and Swank
who hold the same office only with respect to SBL Fund. The directors of
Security Income Fund also serve as directors of each of the other Security
Funds. Ms. Lee is also Secretary of the Distributor, Messrs. Cleland and Schmank
are directors and Vice Presidents of the Distributor and Ms. Harwood is a
director and Treasurer of the Distributor.
TRUSTEES OF BT INVESTMENT PORTFOLIOS --
------------------------------------------------------------------------------------------
POSITION(S)
HELD WITH THE PRINCIPAL OCCUPATION(S)
NAME, ADDRESS, AND AGE PORTFOLIO TRUST DURING PAST 5 YEARS
------------------------------------------------------------------------------------------
Charles P. Biggar, 70 Trustee Trustee of each of the other
(Birth date: October 13, 1930) investment companies in the Fund
12 Hitching Post Lane Complex(1); Retired; former Vice
Chappaqua, New York 10514 President, International Business
Machines ("IBM") and President,
National Services and the Field
Engineering Divisions of IBM
------------------------------------------------------------------------------------------
S. Leland Dill, 70 Trustee Trustee of each of the other
(Birth date: March 28, 1930) investment companies in the Fund
5070 North Ocean Drive Complex; Retired; Director, Coutts
Singer Island, Florida 33404 (U.S.A.) International; Trustee,
Phoenix-Zweig Trust(2) and Phoenix-
Euclid Market Neutral Fund(2);
former Partner, KPMG Peat Marwick;
Director, Vintners International
Company Inc.; Director, Coutts Trust
Holdings Ltd., Director, Coutts
Group; General Partner, Pemco(2)
------------------------------------------------------------------------------------------
Martin J. Gruber, 63 Trustee Trustee of each of the other
(Birth date: July 15, 1937) investment companies in the Fund
229 South Irving Street Complex; Nomura Professor of
Ridgewood, New Jersey 07450 Finance, Leonard N. Stern School of
Business, New York University (since
1964); Trustee, TIAA(2); Trustee, SG
Cowen Mutual Funds(2); Trustee,
Japan Equity Fund(2); Trustee,
Taiwan Equity Fund(2)
------------------------------------------------------------------------------------------
Richard Hale,* 55 Trustee and Trustee of each of the other
(Birth date: July 17, 1945) President investment companies in the Fund
205 Woodbrook Lane Complex; Managing Director, Deutsche
Baltimore, Maryland 21212 Asset Management; Director, Flag
Investors Funds(2) and ISI Family of
Funds(2); President, Morgan Grenfell
Investment Trust(2); Managing
Director, DB Alex. Brown LLC;
Director and President, Investment
Company Capital Corp.
------------------------------------------------------------------------------------------
Richard J. Herring, 54 Trustee Trustee of each of the other
(Birth date: February 18, 1946) investment companies in the Fund
325 South Roberts Road Complex; Jacob Safra Professor of
Bryn Mawr, Pennsylvania 19010 International Banking, Professor of
Finance and Vice Dean, The Wharton
School, University of Pennsylvania
(since 1972)
------------------------------------------------------------------------------------------
Bruce E. Langton, 69 Trustee Trustee of each of the other
(Birth date: May 10, 1931) investment companies in the Fund
99 Jordan Lane Complex; Retired; Trustee, Allmerica
Stamford, Connecticut 06903 Financial Mutual Funds (1992-
present); Member, Pension and Thrift
Plans and Investment Committee,
Unilever U.S. Corporation (1989 to
present)(3); Director, TWA Pilots
Directed Account Plan and 401(k)
Plan (1988 to present)(2)
------------------------------------------------------------------------------------------
Philip Saunders, Jr., 65 Trustee Trustee of each of the other
(Birth date: October 11, 1935) investment companies in the Fund
445 Glen Road Complex; Principal, Philip Saunders
Weston, Massachusetts 02193 Associates (Economic and Financial
Analysis); former Director,
Financial Industry Consulting, Wolf
& Company; President, John Hancock
Home Mortgage Corporation; Senior
Vice President of Treasury and
Financial Services, John Hancock
Mutual Life Insurance Company, Inc.
------------------------------------------------------------------------------------------
Harry Van Benschoten, 72 Trustee Trustee of each of the other
(Birth date: February 18, 1928) investment companies in the Fund
6581 Ridgewood Drive Complex; Retired; Director, Canada
Naples, Florida 34108 Life Insurance Corporation of New
York
------------------------------------------------------------------------------------------
* "Interested Person" within the meaning of Section 2(a)(19) of the Act. Mr. Hale is a
Managing Director of Deutsche Asset Management, the U.S. asset management unit of
Deutsche Bank and its affiliates.
1 The "Fund Complex" consists of BT Investment Funds, BT Institutional Funds, BT Pyramid
Mutual Funds, BT Advisor Funds, Cash Management Portfolio, Intermediate Tax Free
Portfolio, Tax Free Money Portfolio, NY Tax Free Money Portfolio, Treasury Money
Portfolio, International Equity Portfolio, Equity 500 Index Portfolio, Capital
Appreciation Portfolio, Asset Management Portfolio and BT Investment Portfolios.
2 An investment company registered under the Investment Company Act of 1940, as amended
(the "Act").
3 A publicly held company with securities registered pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended.
------------------------------------------------------------------------------------------
The Board has an Audit Committee that meets with the Portfolio Trust's
independent auditors to review the financial statements of the Portfolio Trust,
the adequacy of internal controls and the accounting procedures and policies of
the Portfolio Trust. Each member of the Board except Mr. Hale also is a member
of the Audit Committee.
OFFICERS OF BT INVESTMENT PORTFOLIOS--
Unless otherwise specified, each officer listed below holds the same position
with BT Investment Portfolios.
------------------------------------------------------------------------------------------
POSITION(S)
HELD WITH THE PRINCIPAL OCCUPATION(S)
NAME, ADDRESS, AND AGE PORTFOLIO TRUST DURING PAST 5 YEARS
------------------------------------------------------------------------------------------
Daniel O. Hirsch, 46 Secretary Director, Deutsche Asset Management
(Birth date: March 27, 1954) Americas since 1999; Director, DB Alex.
One South Street Brown LLC and Investment Company
Baltimore, Maryland 21202 Capital Corp. since July 1998;
Assistant General Counsel, Office of
the General Counsel, United States
Securities and Exchange Commission from
1993 to 1998
------------------------------------------------------------------------------------------
Richard Hale,* 55 President and Trustee of each of the other investment
(Birth date: July 17, 1945) Chief Executive companies in the Fund Complex; Managing
205 Woodbrook Lane Officer Director, Deutsche Asset Management;
Baltimore, Maryland 21202 Director, Flag Investors Funds(1) and
ISI Family of Funds(1); President,
Morgan Grenfell Investment Trust(1);
Managing Director, DB Alex. Brown LLC;
Director and President, Investment
Company Capital Corp.
------------------------------------------------------------------------------------------
Charles A. Rizzo, 43 Treasurer Director, Deutsche Asset Management;
(Birth date: August 5, 1957) Vice President and Department Head,
One South Street DB Alex. Brown LLC from 1998 to 1999;
Baltimore, Maryland 21202 Formerly, Senior Manager,
PricewaterhouseCoopers LLP from 1993 to
1998
------------------------------------------------------------------------------------------
1 An investment company registered under the Investment Company Act of 1940, as amended
(the "Act").
------------------------------------------------------------------------------------------
Messrs. Hale, Hirsch and Rizzo also hold similar positions for other
investment companies for which ICC Distributors, or an affiliate serves as the
principal underwriter.
No person who is an officer or director of Bankers Trust is an officer or
Trustee of the Portfolio Trust. No director, officer or employee of ICC
Distributors, Inc. or any of its affiliates will receive any compensation from
the Portfolio Trust for serving as an officer or Trustee of the Portfolio Trust.
SECURITY INCOME FUND DIRECTOR COMPENSATION TABLE--
--------------------------------------------------------------------------------
AGGREGATE COMPENSATION TOTAL COMPENSATION FROM
NAME FROM SECURITY INCOME FUND SECURITY FUND COMPLEX
--------------------------------------------------------------------------------
Donald A. Chubb, Jr. $2,917 $35,000
John D. Cleland N/A N/A
Penny A. Lumpkin 2,917 35,000
Mark L. Morris, Jr. 2,917 35,000
Maynard Oliverius 2,833 34,000
James R. Schmank N/A N/A
--------------------------------------------------------------------------------
As of December 18, 2000 the officers and directors of Security Income Fund as
a group beneficially owned less than 1% of the total outstanding voting shares
of the Fund.
PORTFOLIO TRUSTEE COMPENSATION TABLE --
--------------------------------------------------------------------------------
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM FROM FUND COMPLEX
NAME OF PERSON, POSITION PORTFOLIO TRUST(1) PAID TO TRUSTEES(2)
--------------------------------------------------------------------------------
Charles P. Biggar, $850 $42,500
Trustee of Portfolio Trust
--------------------------------------------------------------------------------
S. Leland Dill, $841 $42,500
Trustee of Portfolio Trust
--------------------------------------------------------------------------------
Philip Saunders, Jr., $841 $42,500
Trustee of Portfolio Trust
--------------------------------------------------------------------------------
Martin J. Gruber, $850 $42,500
Trustee of Portfolio Trust
--------------------------------------------------------------------------------
Richard J. Herring, $827 $41,250
Trustee of Portfolio Trust
--------------------------------------------------------------------------------
Bruce E. Langton, $841 $42,500
Trustee of Portfolio Trust
--------------------------------------------------------------------------------
Harry Van Benschoten, $815 $41,250
Trustee of Portfolio Trust
--------------------------------------------------------------------------------
1 Information is provided for the Portfolio Trust's fiscal year ended September
30, 2000.
2 Aggregated information is furnished for the BT Family of Funds which consists
of the following: BT Investment Funds, BT Institutional Funds, BT Pyramid
Mutual Funds, BT Advisor Funds, BT Investment Portfolios, Cash Management
Portfolio, Treasury Money Portfolio, Tax Free Money Portfolio, NY Tax Free
Money Portfolio, International Equity Portfolio, Short Intermediate U.S.
Government Securities Portfolio, Intermediate Tax Free Portfolio, Asset
Management Portfolio, Equity 500 Index Portfolio, and Capital Appreciation
Portfolio. The compensation is provided for the fiscal year ended September
30, 2000.
--------------------------------------------------------------------------------
As of January 9, 2001, the Trustees and Officers of the Trust owned in the
aggregate less than 1% of the shares of the Trust (all series taken together).
As of December 18, 2000, Security Benefit Life Insurance Company ("SBL"), 700
SW Harrison Street, Topeka, Kansas, 66636-0001, owned, of record and
beneficially, 10.68% of the voting securities of Capital Preservation Fund
(10.7% of the total outstanding Class A shares, 21.0% of the total outstanding
Class B shares, and 6.4% of the total outstanding Class C shares). SBL is a
stock life insurance company and is incorporated under the laws of Kansas. SBL
is ultimately controlled by Security Benefit Mutual Holding Company, 700 SW
Harrison Street, Topeka, Kansas, 66636-0001, a mutual holding company organized
under the laws of Kansas.
As of December 18, 2000, the following entities owned, of record and
beneficially unless otherwise indicated, 5% or more of a class of a Fund's
outstanding securities:
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NAME OF STOCKHOLDER CLASS OWNED PERCENTAGE OWNED
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SBL Class A 10.7%
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Nancy L. Staresinic Class B 5.7%
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SBL Class B 21.0%
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Louis F. McCarthy Class B 5.2%
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First National Bank of Onaga, Class B 27.1%
FBO Raymond Johnson
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SBL Class C 6.4%
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Wisconsin Muffler PSP Class C 6.3%
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Judith M. Benham Class C 6.3%
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Linda M. Pennacchio Class C 6.1%
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Industrial Parts Service Class C 29.1%
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INVESTMENT ADVISER -- Bankers Trust is the Portfolio's investment adviser.
Bankers Trust is an indirect wholly owned subsidiary of Deutsche Bank. Deutsche
Bank is a banking company with limited liability organized under the laws of the
Federal Republic of Germany. Deutsche Bank is the parent company of a group
consisting of banks, capital markets companies, fund management companies,
mortgage banks, a property finance company, installment financing and leasing
companies, insurance companies, research and consultancy companies and other
domestic and foreign companies.
Bankers Trust may have deposit, loan and other commercial banking
relationships with the issuers of obligations which may be purchased on behalf
of the Portfolio, including outstanding loans to such issuers which could be
repaid in whole or in part with the proceeds of securities so purchased. Such
affiliates deal, trade and invest for their own accounts in such obligations and
are among the leading dealers of various types of such obligations. Bankers
Trust has informed the Portfolio that, in making its investment decisions, it
does not obtain or use material inside information in its possession or in the
possession of any of its affiliates. In making investment recommendations for
the Portfolio, Bankers Trust will not inquire or take into consideration whether
an issuer of securities proposed for purchase or sale by the Portfolio is a
customer of Bankers Trust, its parent or its subsidiaries or affiliates and, in
dealing with its customers, Bankers Trust, its parent, subsidiaries and
affiliates will not inquire or take into consideration whether securities of
such customers are held by any fund managed by Bankers Trust or any such
affiliate.
For the fiscal years ended September 30, 2000 and September 30, 1999, Bankers
Trust earned $721,834 and $64,673, respectively, for compensation of investment
advisory services provided to the Portfolio. For the same periods, Bankers Trust
reimbursed $687,148 and $42,363, respectively, to the Portfolio to cover
expenses.
ADMINISTRATOR -- Pursuant to an Administrative Services and Transfer Agency
Agreement with Security Income Fund, dated April 1, 1987 as amended April 30,
1999, Security Management Company, LLC ("SMC") acts as the administrative agent
for the Fund and as such performs administrative functions and the bookkeeping,
accounting and pricing function for the Fund. For these services SMC receives,
on an annual basis .09% of the average net assets of the fund, calculated daily
and payable monthly. Under this Agreement SMC also performs the transfer agency
function for the Fund. As such, SMC performs all shareholder servicing
functions, mailing shareholder communications and acting as dividend disbursing
agent. For the transfer agency services, SMC receives an annual maintenance fee
of $8 per account, a fee of $1 per shareholder transaction, and a fee of $1 per
dividend transaction. Under a sub-administration agreement between SMC and
Bankers Trust, Bankers Trust has agreed to provide certain fund accounting
services to the fund, including calculation of the Fund's daily NAV. For these
services, SMC pays Bankers Trust a fee of $14,000 per year.
Under an administration and services agreements, Bankers Trust is obligated
on a continuous basis to provide such administrative services as the Board of
Trustees of the Trust and the Portfolio reasonably deem necessary for the proper
administration of the Trust and the Portfolio. Bankers Trust will generally
assist in all aspects of the Fund's and Portfolio's operations; supply and
maintain office facilities (which may be in Bankers Trust's own offices),
statistical and research data, data processing services, clerical, accounting,
bookkeeping and record keeping services (including without limitation the
maintenance of such books and records as are required under the 1940 Act and the
rules thereunder, except as maintained by other agents), executive and
administrative services, and stationary and office supplies; prepare reports to
shareholders or investors; prepare and file tax returns; supply financial
information and supporting data for reports to and filings with the SEC and
various state Blue Sky authorities; supply supporting documentation for meetings
of the Board of Trustees; provide monitoring reports and assistance regarding
compliance with Declarations of Trust, by-laws, investment objectives and
policies and with Federal and state securities laws; arrange for appropriate
insurance coverage; calculate net asset values, net income and realized capital
gains or losses; and negotiate arrangements with, and supervise and coordinate
the activities of, agents and others to supply services.
For the fiscal years ended September 30, 2000 and September 30, 1999, Bankers
Trust earned $55,317 and $4,620, respectively, as compensation for
administrative and other services provided to the Portfolio.
Pursuant to a separate Management Services Agreement, SMC also performs
certain other services on behalf of the Fund. Under this Agreement, SMC provides
feeder fund management and administrative services to the Fund which include
monitoring the performance of the Portfolio, coordinating the Fund's
relationship with the Portfolio, communicating with the Fund's Board of
Directors and shareholders regarding the Portfolio's performance and the Fund's
two tier structure, and in general, assisting the Board of Directors of the Fund
in all aspects of the administration and operation of the Fund. For these
services, the Fund pays SMC a fee at the annual rate of .20% of its average
daily net assets, calculated daily and payable monthly.
During the fiscal years ended September 30, 2000 and September 30, 1999, the
Fund paid the following amounts to the Administrator for its services.
-------------------------------------------------------------------------
2000 1999
-------------------------------------------------------------------------
Administrative service fees paid to Administrator $98,982 $7,181
Transfer Agency service fees paid to Administrator 14,543 464
Reimbursement of expenses by Administrator --- ---
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For the fiscal year ended September 30, 2000, the Fund paid the Administrator
$219,961 for its services under the Management Services Agreement.
CUSTODIAN AND TRANSFER AGENT -- Bankers Trust, 130 Liberty Street (One Bankers
Trust Plaza), New York, New York 10006, serves as Custodian for the Portfolio
pursuant to the administration and services agreements. As Custodian, it holds
the Portfolio's assets. Bankers Trust also serves as transfer agent of the
Portfolio pursuant to the administration and services agreement. Bankers Trust
may be reimbursed by the Portfolio for its out-of-pocket expenses. Bankers Trust
will comply with the self-custodian provisions of Rule 17f-2 under the 1940 Act.
UMB Bank, N.A. 928 Grand Avenue, Kansas City, Missouri 64106 serves as Custodian
for the Fund and as such, holds all the Fund's assets.
BANKING REGULATORY MATTERS -- Bankers Trust has been advised by its counsel that
in its opinion Bankers Trust may perform the services for the Portfolio
contemplated by the Advisory Agreement and other activities for the Portfolio
described in the Prospectus and this SAI without violation of the Glass-Steagall
Act or other applicable banking laws or regulations. However, counsel has
pointed out that future changes in either Federal or state statutes and
regulations concerning the permissible activities of banks or trust companies,
as well as future judicial or administrative decisions or interpretations of
present and future statutes and regulations, might prevent Bankers Trust from
continuing to perform those services for the Portfolio. State laws on this issue
may differ from the interpretations of relevant Federal law and banks and
financial institutions may be required to register as dealers pursuant to state
securities law. If the circumstances described above should change, the Boards
of Directors would review the relationships with Bankers Trust and consider
taking all actions necessary in the circumstances.
INDEPENDENT AUDITORS -- Ernst & Young LLP, Two Commerce Square, 2001 Market
Street, Philadelphia, Pennsylvania, 19103, acts as independent auditors of
Security Income Fund and the Portfolio.
ORGANIZATION OF SECURITY INCOME FUND
Security Income Fund was organized as a Kansas corporation on April 20, 1965 and
is registered with the Securities and Exchange Commission as an investment
company. Such registration does not involve supervision by the Securities and
Exchange Commission of the management or policies of the Fund.
The Articles of Incorporation of Security Income Fund provides for the
issuance of shares of common stock in one or more classes or series.
Security Income Fund has authorized the issuance of an indefinite number of
shares of capital stock of $1.00 par value and currently issues its shares in
five series, Corporate Bond Fund, Limited Maturity Bond Fund, U.S. Government
Fund, High Yield Fund and Capital Preservation Fund. The shares of each Series
of Security Income 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.
Each Series of Security Income Fund currently issues two classes of shares
except Capital Preservation Fund which issues three classes of shares. Each
class of shares participates 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 of
each Series of Security income Fund will be fully paid and nonassessable. Shares
may be exchanged as described under "Exchange Privilege," in the prospecting 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 Income Fund vote together with each share having one vote.
Under certain circumstances, the shareholders of one series of Security Income
Fund could control the outcome of these votes. 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.
Security Income Fund does not generally hold annual meetings of shareholders
and will do so only when required by law. Shareholders may remove directors from
office by vote cast in person or by proxy at a meeting of shareholders. Such a
meeting will be called at the written request of 10% of Security Income Fund's
outstanding shares.
ORGANIZATION OF THE PORTFOLIO TRUST
The Portfolio Trust was organized as a trust under the laws of the State of
New York on March 27, 1993. Under the Declaration of Trust, the Trustees are
authorized to issue beneficial interests in separate series (each, a "Portfolio"
and, collectively, the "Portfolios"). No Portfolio has any preference over any
other Portfolio. Investors in the Portfolios are entitled to participate pro
rata in distributions of taxable income, loss, gain and credit of the
Portfolios. Upon liquidation or dissolution of a Portfolio, investors are
entitled to share pro rata in the net assets of the Portfolio available for
distribution to investors. Investments in the Portfolios have no preference,
preemptive, conversion or similar rights and are fully paid and nonassessable,
except as set forth below. Investments in the Portfolios may not be transferred.
Certificates representing an investor's beneficial interest in the Portfolio
Trust are issued only upon the written request of an investor.
Each investor in a Portfolio is entitled to a vote in proportion to the
amount of its investment. The Portfolios will all vote together in certain
circumstances (e.g., election of the Portfolio Trust's Trustees, as required by
the 1940 Act and the rules thereunder). One or more Portfolio of the Portfolio
Trust could control the outcome of these votes. Investors do not have cumulative
voting rights, and investors holding more than 50% of the aggregate beneficial
interests in the Portfolio Trust, or in a Portfolio as the case may be, may
control the outcome of votes and in such event the other investors in the
Portfolios would not be able to elect any Trustee. The Portfolio Trust is not
required and has no current intention to hold annual meetings of investors, but
the Portfolio Trust will hold special meetings of investors when in the judgment
of the Portfolio Trust's Trustees it is necessary or desirable to submit matters
for an investor vote. No material amendment may be made to the Portfolio Trust's
Declaration of Trust without the affirmative majority vote of investors (with
the vote of each being in proportion to the amount of its investment).
The Portfolio Trust, with respect to each Portfolio, may enter into a merger
or consolidation, or sell all or substantially all of its assets, if approved by
the vote of two-thirds of the Portfolio's investors (with the vote of each being
in proportion to its percentage of the beneficial interests in the Portfolios),
except that if the Trustees of the Portfolio Trust recommend such sale of
assets, the approval by vote of a majority of the investors (with the vote of
each being in proportion to its percentage of the beneficial interests of the
Portfolios) will be sufficient. A Portfolio may also be terminated (i) upon
liquidation and distribution of its assets, if approved by the vote of
two-thirds of its investors (with the vote of each being in proportion to the
amount of its investment), or (ii) by the Trustees of the Portfolio Trust by
written notice to its investors.
Investors in the Portfolios of the Portfolio Trust will be held personally
liable for its obligations and liabilities, subject, however, to indemnification
by the Portfolio Trust in the event that there is imposed upon an investor a
greater portion of the liabilities and obligations than its proportionate
beneficial interest. The Declaration of Trust also provides that the Portfolio
Trust shall maintain appropriate insurance (for example, fidelity bonding and
errors and omissions insurance) for the protection of the Portfolio Trust, its
investors, Trustees, officers, employees and agents covering possible tort and
other liabilities. Thus, the risk of an investor incurring financial loss on
account of investor liability is limited to circumstances in which both
inadequate insurance existed and the Portfolio Trust itself was unable to meet
its obligations with respect to any Portfolio thereof.
The Declaration of Trust further provides that obligations of each Portfolio
of the Portfolio Trust are not binding upon the Trustees individually but only
upon the property of the Portfolio of the Portfolio Trust, and that the Trustees
will not be liable for any action or failure to act, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office. The Portfolio Trust reserves the right to create and issue a number of
series, in which case investments in each series would participate equally in
the earnings and assets of the particular series. Investors in each series would
be entitled to vote separately to approve advisory agreements or changes in
investment policy, but investors of all series may vote together in the election
or selection of Trustees and principal underwriters. Upon liquidation or
dissolution of any series of the Portfolio Trust, the investors in that series
would be entitled to share pro rata in the net assets of that series available
for distribution to investors.
TAXATION
TAXATION OF THE FUND -- The Fund intends to qualify annually to be treated as a
regulated investment company under the Code. To qualify for that treatment, the
Fund must, among other things, (a) derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities loans
and gains from the sale or other disposition of securities or foreign
currencies, or other income (including gains from options, futures or forward
contracts) derived with respect to its business of investing in securities or
those currencies (the "Income Requirement"), (b) diversify its holdings so that,
at the end of each quarter of its taxable year, (i) at least 50% of the value of
its assets is represented by cash and cash items (including receivables), U.S.
government securities, securities of other regulated investment companies and
other securities, with such other securities of any one issuer limited to an
amount not greater than 5% of the value of the Fund's total assets and not
greater than 10% of the issuer's outstanding voting securities and (ii) 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), and (c) distribute for each taxable year at
least 90% of its investment company taxable income (generally consisting of
interest, dividends and the excess of net short-term capital gain over net
long-term capital loss).
The Fund will be subject to a nondeductible 4% federal excise tax to the
extent it fails to distribute by the end of any calendar year substantially all
of its ordinary income for that year and capital gain net income for the
one-year period ending on October 31 of that year, plus any undistributed amount
from the prior year.
The Fund, as an investor in the Portfolio, will be deemed to own a
proportionate share of the Portfolio's assets, and to earn a proportionate share
of the Portfolio's income, for purposes of determining whether the Fund
satisfies all the requirements described above to qualify as a regulated
investment company. See the next section for a discussion of the tax
consequences to the Fund of hedging transactions engaged in by the Portfolio.
TAXATION OF THE PORTFOLIO -- The Portfolio will be treated as a separate
partnership for federal income tax purposes and will not be a "publicly traded
partnership." As a result, the Portfolio will not be subject to federal income
tax. Instead, the Fund and other investors in the Portfolio will be required to
take into account, in computing their federal income tax liability, their
respective shares of the Portfolio's income, gains, losses, deductions and
credits, without regard to whether they have received any cash distributions
from the Portfolio. The Portfolio also will not be subject to state income or
franchise tax.
Because, as noted above, the Fund will be deemed to own a proportionate share
of the Portfolio's assets, and to earn a proportionate share of the Portfolio's
income, for purposes of determining whether the Fund satisfies the requirements
to qualify as a regulated investment company, the Portfolio intends to conduct
its operations so that the Fund will be able to satisfy all those requirements.
Distributions received by the Fund from the Portfolio (whether pursuant to a
partial or complete withdrawal or otherwise) generally will not result in the
Fund's recognizing any gain or loss for federal income tax purposes, except that
(a) gain will be recognized to the extent any cash that is distributed exceeds
the Fund's basis for its interest in the Portfolio prior to the distribution,
(b) income or gain will be realized if the distribution is in liquidation of the
Fund's entire interest in the Portfolio and includes a disproportionate share of
any unrealized receivables held by the Portfolio, and (c) gain or loss will be
recognized if a liquidation distribution consists solely of cash and/or
unrealized receivables. The Fund's basis for its interest in the Portfolio
generally will equal the amount of cash and the basis of any property the Fund
invests in the Portfolio, increased by the Fund's share of the Portfolio's net
income and gains and decreased by (i) the amount of any cash and the basis of
any property distributed from the Portfolio to the Fund and (ii) the Fund's
share of the Portfolio's losses, if any.
The Portfolio's use of hedging strategies, such as writing (selling) and
purchasing options and futures contracts, involves complex rules that will
determine for income tax purposes the amount, character and timing of
recognition of the gains and losses it realizes in connection therewith. Gains
from options and futures contracts derived by the Portfolio with respect to its
business of investing in securities will qualify as permissible income for the
Fund under the Income Requirement.
Certain futures and foreign currency contracts in which the Portfolio may
invest may be subject to section 1256 of the Code ("section 1256 contracts").
Any section 1256 contracts held by the Portfolio at the end of each taxable
year, other than contracts subject to a "mixed straddle" election made by the
Portfolio, must be "marked-to-market" (that is, treated as having been sold at
that time for their fair market value) for federal income tax purposes, with the
result that unrealized gains or losses will be treated as though they were
realized. Sixty percent of any net gain or loss recognized on these deemed
sales, and 60% of any net realized gain or loss from any actual sales of section
1256 contracts, will be treated as long-term capital gain or loss, and the
balance will be treated as short-term capital gain or loss. Section 1256
contracts also may be marked-to-market for purposes of the 4% excise tax
mentioned previously.
Code section 1092 (dealing with straddles) also may affect the taxation of
options and futures contracts in which the Portfolio may invest. Section 1092
defines a "straddle" as offsetting positions with respect to personal property;
for these purposes, options and futures contracts are personal property. Under
that section, any loss from the disposition of a position in a straddle
generally may be deducted only to the extent the loss exceeds the unrealized
gain on the offsetting position(s) of the straddle; in addition, these rules may
apply to postpone the recognition of loss that otherwise would be recognized
under the mark-to-market rules discussed above. The regulations under section
1092 also provide certain "wash sale" rules, which apply to transactions where a
position is sold at a loss and a new offsetting position is acquired within a
prescribed period, and "short sale" rules applicable to straddles. If the
Portfolio makes certain elections, the amount, character and timing of
recognition of gains and losses from the affected straddle positions would be
determined under rules that vary according to the elections made. Because only a
few of the regulations implementing the straddle rules have been promulgated,
the tax consequences to the Portfolio of straddle transactions are not entirely
clear.
If the Portfolio has an "appreciated financial position"--generally, an
interest (including an interest through an option, futures or forward contract,
or short sale) with respect to any debt instrument (other than "straight debt")
or partnership interest the fair market value of which exceeds its adjusted
basis--and enters into a "constructive sale" of the same or substantially
similar property, the Portfolio will be treated as having made an actual sale
thereof, with the result that gain will be recognized at that time. A
constructive sale generally consists of a short sale, an offsetting notional
principal contract, or a futures or forward contract entered into by the
Portfolio or a related person with respect to the same or substantially similar
property. In addition, if the appreciated financial position is itself a short
sale or such a contract, acquisition of the underlying property or substantially
similar property will be deemed a constructive sale. The foregoing will not
apply, however, to any transaction during any taxable year that otherwise would
be treated as a constructive sale if the transaction is closed within 30 days
after the end of that year and the Portfolio holds the appreciated financial
position unhedged for 60 days after that closing (I.E., at no time during that
60-day period is the Portfolio's risk of loss regarding that position reduced by
reason of certain specified transactions with respect to substantially similar
or related property, such as having an option to sell, being contractually
obligated to sell, making a short sale or granting an option to buy
substantially identical stock or securities).
OTHER TAXATION --The investment by the Fund in the Portfolio should not cause
the Fund to be liable for any income or franchise tax in the State of New York.
The Portfolio is organized as a New York trust. The Portfolio is not subject
to any income or franchise tax in the State of New York or the State of Kansas.
If the Fund fails to qualify as a RIC for any taxable year, all of its
taxable income will be subject to tax at regular corporate income tax rates
without any deduction for distributions to shareholders and such distributions
generally will be taxable to shareholders as ordinary dividends to the extent of
the Fund's current and accumulated earnings and profits. In this event,
distributions generally will be eligible for the dividends-received deduction
for corporate shareholders.
FOREIGN WITHHOLDING TAXES -- Income received and gains realized by the Portfolio
from sources within foreign countries may be subject to withholding and other
taxes imposed by those countries that would reduce the yield and/or total return
on its securities. Tax conventions between certain countries and the United
States may reduce or eliminate these foreign taxes, however, and many foreign
countries do not impose taxes on capital gains in respect of investments by
foreign investors.
FINANCIAL STATEMENTS
The financial statements for the Fund and the Portfolio for the fiscal year
ended September 30, 2000, are incorporated herein by reference to the Annual
Report to shareholders for the Fund and Portfolio dated September 30, 2000.
Copies of the Fund's and the Portfolio's Annual Report are provided to every
person requesting the Statement of Additional Information.
APPENDIX A
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DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
Aaa -- Bonds 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 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 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 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 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 rated B generally lack characteristics of a 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 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 rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked short-comings.
C -- Bonds rated C are the lowest-rated class of bonds and issued so rated can
be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through B in its corporate bond system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
DESCRIPTION OF S&P'S CORPORATE BOND RATINGS
AAA -- Debt rated AAA has the highest rating assigned by Standard & Poor's to a
debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher-rated issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to weakened capacity to pay interest and repay principal for debt
in this category than in higher-rated categories.
BB -- Debt rate BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
B -- Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB- rating.
CCC -- Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal.
CC -- Debt rated CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C -- The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed but debt service
payments are continued.
CI -- The rating CI is reserved for income bonds on which no interest is being
paid.
D -- Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating will also be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
DUFF & PHELPS' LONG-TERM DEBT RATINGS
AAA -- Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA- -- High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
A+, A, A- -- Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB+, BBB, BBB- -- Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB- -- Below investment grade but deemed likely to meet obligation when
due. Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B+, B, B- -- Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or into
a higher or lower rating grade.
CCC -- Well below investment-grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD -- Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP -- Preferred stock with dividend arrearages.
DESCRIPTION OF MOODY'S SHORT-TERM DEBT RATINGS
Issuers rated PRIME-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: leasing
market positions in well-established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; well-established access to
a range of financial markets and assured sources of alternate liquidity.
Issuers rated PRIME-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated PRIME-3 (or related supporting institutions) have an acceptable
capacity for repayment of short-term promissory obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
DESCRIPTION OF S&P SHORT-TERM ISSUER CREDIT RATINGS
A-1 -- An obligor rated `A-1' has STRONG capacity to meet its financial
commitments. It is rated in the highest category by Standard & Poor's. Within
this category, certain obligors are designated with a plus sign (+). This
indicates that the obligor's capacity to meet its financial commitments is
EXTREMELY STRONG.
A-2 -- An obligor rated `A-2' has SATISFACTORY capacity to meet its financial
commitments. However, it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligors in the highest
rating category.
A-3 -- An obligor rated `A-3' has ADEQUATE capacity to meet its financial
obligations. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitments.
DESCRIPTION OF DUFF & PHELPS' COMMERCIAL PAPER RATINGS
D-1+ -- Highest certainty of timely payment. Short term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk free U.S. Treasury short term
obligations.
D-1 -- Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
D-1- -- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
D-2 -- Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
D-3 -- Satisfactory liquidity and other protection factors qualify issues as to
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
DESCRIPTION OF MOODY'S INSURANCE FINANCIAL STRENGTH RATINGS
Aaa -- Insurance companies rated Aaa offer exceptional financial security. While
the financial strength of these companies is likely to change, such changes as
can be visualized are most unlikely to impair their fundamentally strong
position.
Aa -- Insurance companies rated Aa offer excellent financial security. Together
with the Aaa group they constitute what are generally known as high grade
companies. They are rated lower than Aaa companies because long-term risks
appear somewhat larger.
A -- Insurance companies rated A offer good financial security. However,
elements may be present which suggest a susceptibility to impairment sometime in
the future.
Baa -- Insurance companies rated Baa offer adequate financial security. However,
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time.
Ba -- Insurance companies rated Ba offer questionable financial security. Often
the ability of these companies to meet policyholder obligations maybe very
moderate and thereby not well safeguarded in the future.
B -- Insurance companies rated B offer poor financial security. Assurance of
punctual payment of policyholder obligations over any long period of time is
small.
Caa -- Insurance companies rated Caa offer very poor financial security. They
may be in default on their policyholder obligations or there may be present
elements of danger with respect to punctual payment of policyholder obligations
and claims.
Ca -- Insurance companies rated Ca offer extremely poor financial security. Such
companies are often in default on their policyholder obligations or have other
marked shortcomings.
C -- Insurance companies rated C are the lowest rated class of insurance company
and can be regarded as having extremely poor prospects of ever offering
financial security.
Numeric modifiers: Numeric modifiers are used to refer to the ranking within
the group--one being the highest and three being the lowest. However, the
financial strength of companies within a generic rating symbol (Aa, for example)
is broadly the same.
DESCRIPTION OF S&P CLAIMS PAYING ABILITY RATING DEFINITIONS
SECURE RANGE -- AAA to BBB
"AAA" -- Superior financial security on an absolute and relative basis. Capacity
to meet policyholder obligations is overwhelming under a variety of economic and
underwriting conditions.
"AA" -- Excellent financial security. Capacity to meet policyholder obligations
is strong under a variety of economic and underwriting conditions.
"A" -- Good financial security, but capacity to meet policyholder obligations is
somewhat susceptible to adverse economic and underwriting conditions.
"BBB" -- Adequate financial security, but capacity to meet policyholder
obligations is susceptible to adverse economic and underwriting conditions.
VULNERABLE RANGE -- BB to CCC
"BB" -- Financial security may be adequate, but capacity to meet policyholder
obligations, particularly with respect to long-term or "long-tail" policies, is
vulnerable to adverse economic and underwriting conditions.
"B" -- Vulnerable financial security. Currently able to meet policyholder
obligations, but capacity to meet policyholder obligations is particularly
vulnerable to adverse economic and underwriting conditions.
"CCC" -- Extremely vulnerable financial security. Continued capacity to meet
policyholder obligations is highly questionable unless favorable economic and
underwriting conditions prevail.
"R" -- Regulatory action. As of the date indicated, the insurer is under
supervision of insurance regulators following rehabilitation, receivership,
liquidation, or any other action that reflects regulatory concern about the
insurer's financial condition. Information on this status is provided by the
National Association of Insurance Commissioners and other regulatory bodies.
Although believed to be accurate, this information is not guaranteed. The "R"
rating does not apply to insurers subject only to nonfinancial actions such as
market conduct violations.
Plus (+) or minus (-) Ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
DUFF & PHELPS' CLAIMS PAYING ABILITY RATINGS
AAA -- Highest claims paying ability. Risk factors are negligible.
AA+, AA, AA- -- Very high claims paying ability. Protection factors are strong.
Risk is modest, but may vary slightly over time due to economic and/or
underwriting conditions.
A+, A, A- -- High claims paying ability. Protection factors are average and
there is an expectation of variability in risk over time due to economic and/or
underwriting conditions.
BBB+, BBB, BBB- -- Adequate claims paying ability. Protection factors are
adequate. There is considerable variability in risk over time due to economic
and/or underwriting conditions.
BB+, BB, BB- -- Uncertain claims paying ability and less than investment grade
quality. However, the company is deemed likely to meet these obligations when
due. Protection factors will vary widely with changes in economic and/or
underwriting conditions.
B+, B, B- -- Possessing risk that policyholder and contractholder obligations
will not be paid when due. Protection factors will vary widely with changes in
economic and underwriting conditions or company fortunes.
CCC -- There is substantial risk that policyholder and contractholder
obligations will not be paid when due. Company has been or is likely to be
placed under state insurance department supervision.
DD -- Company is under an order of liquidation.
APPENDIX B
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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
$90,000 at the applicable current offering price or purchased for $90,000 and
who invests an additional $25,000, is entitled to a reduced front-end sales
charge of 2.5% 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 Fund, together with other Class A
shares of the Security Funds other than Cash Fund.
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 Fund, together with other Class A shares of the Security Funds other than
Cash 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 Fund 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 Fund. 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
Fund 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 Security
Funds, 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 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.