N-CSR 1 c10193anvcsr.txt CERTIFIED SHAREHOLDER REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-01136 SECURITY EQUITY FUND (Exact name of registrant as specified in charter) ONE SECURITY BENEFIT PLACE, TOPEKA, KANSAS 66636-0001 (Address of principal executive offices) (Zip code) MICHAEL G. ODLUM, PRESIDENT SECURITY EQUITY FUND ONE SECURITY BENEFIT PLACE TOPEKA, KANSAS 66636-0001 (Name and address of agent for service) Registrant's telephone number, including area code: (785) 438-3000 Date of fiscal year end: September 30 Date of reporting period: September 30, 2006 Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles. A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. Section 3507. ITEM 1. REPORTS TO STOCKHOLDERS. (GRAPHIC) (SECURITY FUNDS(SM) LOGO) ANNUAL REPORT SEPTEMBER 30, 2006 - SECURITY EQUITY FUND - ALPHA OPPORTUNITY SERIES - EQUITY SERIES - GLOBAL SERIES - MID CAP VALUE SERIES - SELECT 25 SERIES - SMALL CAP GROWTH SERIES - SECURITY LARGE CAP VALUE FUND - SECURITY MID CAP GROWTH FUND (SECURITY BENEFIT(SM) LOGO) Security Distributors, Inc. SECURITY EQUITY FUND SECURITY LARGE CAP VALUE FUND SECURITY MID CAP GROWTH FUND SEPTEMBER 30, 2006 ANNUAL REPORT TABLE OF CONTENTS Security Equity Fund Alpha Opportunity Series............................................... 2 Equity Series.......................................................... 14 Global Series.......................................................... 25 Mid Cap Value Series................................................... 36 Select 25 Series....................................................... 48 Small Cap Growth Series................................................ 58 Security Large Cap Value Fund............................................. 70 Security Mid Cap Growth Fund.............................................. 81 Notes to Financial Statements............................................. 91 Report of Independent Registered Public Accounting Firm................... 101 Special Shareholders' Meeting............................................. 102 Directors and Officers.................................................... 103
1 SECURITY EQUITY FUND Managers' Commentary ALPHA OPPORTUNITY SERIES November 15, 2006 (unaudited) Advised by: (SECURITY BENEFIT(SM) LOGO) and (MAINSTREAM LOGO) Security Management Company, LLC Subadviser, Mainstream Investment Advisers (PHOTO OF BILL JENKINS) (PHOTO OF MARK LAMB) Bill Jenkins Mark Lamb Co-Portfolio Manager Co-Portfolio Manager TO OUR SHAREHOLDERS: A strong first half of 2006 offset by a weak third quarter resulted in the Security Equity Fund Alpha Opportunity Series returning 7.39%(1) for the 12-month period ended September 30, 2006, lagging the 10.79% return for the S&P 500 Index. Although we are disappointed that the Series' return trailed its S&P 500 benchmark, we believe our investment approach delivers significant long-term value. This has been demonstrated by the Series' cumulative total return of 49.77% since its July 7, 2003 inception, which exceeded the S&P 500 Total Return by 8.77%. As long-term investors, we understand that there will be short-term variances in performance. 2006 was a volatile year that saw our portfolio's performance vary greatly. In the first half of the year, performance was positively influenced by our weightings in the basic materials, energy, industrial and transportation sectors. Unfortunately, their strong momentum reversed in the second half of the year, with all three recording negative returns in the final six months. For much of the trailing 12-month period, the portfolio construction had been composed primarily of long positions with moderate levels of cash and short equity positions. With the S&P 500 up almost 11% for the 12 months, the cash and short equity positions detracted from returns, particularly in the last half of the year. Despite this near-term adverse experience, our underlying investment theme remains essentially the same - we believe that global demand for infrastructure-related products will continue to be strong. Long term, we see demand growth for energy as unrelenting globally because excess supplies of oil are marginal. In the near term, energy prices should firm with recently announced OPEC production cuts and a lack of selling pressure from investment managers heavily leveraged to energy. Basic material stocks also suffered as investors feared slowing global economic growth. In this sector, growth near the double digits in developing economies should continue to fuel demand for materials and the industrial products to convert them into infrastructure projects. We increased our short positions late in the year. This was in response to strength in the defensive sectors of the market which we viewed as vulnerable given their recent strength. Regional bank stocks within the finance sector seem particularly vulnerable, and we have concentrated our short positions in that industry. The elevated valuation of these stocks, coupled with their poor fundamental outlook, makes them particularly vulnerable as we enter the first earnings season of the new fiscal year. Looking forward, we are optimistic about the outlook for stocks and our theme sectors of energy, materials, industrials and transportation. We believe that these sectors have been set up to produce a strong start in this new fiscal year. However, should the market dictate that we consider a different scenario, be assured we will alter course accordingly. Finally, we remain resolutely focused on creating long-term economic value for our clients. Though this year was disappointing, we view the weakness as a temporary interruption in a positive multi-year trend for stocks in general and our strategy in particular. Sincerely, Bill Jenkins, Co-Portfolio Manager Mark Lamb, Co-Portfolio Manager (1) Performance figures are based on Class A shares and do not reflect deduction of the sales charges or taxes that a shareholder would pay on distributions or the redemption of shares. Fee waivers and/or reimbursements reduce Fund expenses and in the absence of such waivers, the performance quoted would be reduced. 2 SECURITY EQUITY FUND Performance Summary ALPHA OPPORTUNITY SERIES September 30, 2006 (unaudited) PERFORMANCE SECURITY ALPHA OPPORTUNITY SERIES VS. S&P 500 INDEX (PERFORMANCE GRAPH) ALPHA OPPORTUNITY SERIES 7/7/03 9,425.00 9/30/03 9,632.35 12/31/03 11,152.80 3/31/04 11,381.22 6/30/04 11,609.63 9/30/04 11,708.95 12/31/04 12,528.47 3/31/05 12,485.97 6/30/05 12,358.45 9/30/05 13,144.80 12/31/05 13,423.47 3/31/06 14,727.73 6/30/06 14,358.38 9/30/06 14,116.00
S&P 500 INDEX INCEPTION 7/01/03 10,000.00 09/30/03 10,264.66 12/31/03 11,515.49 03/31/04 11,710.84 06/30/04 11,912.75 09/30/04 11,689.41 12/31/04 12,768.79 03/31/05 12,493.71 06/30/05 12,663.78 09/30/05 13,120.77 12/31/05 13,393.36 03/31/06 13,956.34 06/30/06 13,755.26 09/30/06 14,535.53
$10,000 SINCE INCEPTION This chart assumes a $10,000 investment in Class A shares of Alpha Opportunity Series on July 7, 2003 (date of inception), reflects deduction of the 5.75% sales load and assumes all dividends reinvested. The chart does not reflect the deduction of taxes that a shareholder would pay on distributions or the redemption of fund shares. The S&P 500 Index is a capitalization weighted index composed of 500 selected common stocks that represent the broad domestic economy and is a widely recognized unmanaged index of market performance. AVERAGE ANNUAL RETURNS
PERIODS ENDED 9-30-06 1 YEAR SINCE INCEPTION --------------------- ------ --------------- A Shares 7.39% 13.31% (7-07-03) A Shares with sales charge 1.25% 11.25% (7-07-03) B Shares 6.56% 12.45% (7-07-03) B Shares with CDSC 1.66% 11.73% (7-07-03) C Shares 6.56% 12.45% (7-07-03) C Shares with CDSC 5.58% 12.45% (7-07-03)
The performance data above represents past performance that is not predictive of future results. The investment return and principal value of an investment in the Series will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The figures above do not reflect deduction of the maximum front-end sales charge of 5.75% for Class A shares or the contingent deferred sales charge of 5% for Class B shares and 1% for Class C shares, as applicable, except where noted. The figures do not reflect the deduction of taxes that a shareholder would pay on distributions or redemption of shares. Such figures would be lower if the maximum sales charge and any applicable taxes were deducted. Fee waivers and/or reimbursements reduced expenses of the Series and in the absence of such waiver, the performance quoted would be reduced. PORTFOLIO COMPOSITION BY SECTOR AS OF 9-30-06* Consumer Discretionary (0.36%) Consumer Staples 2.80 Energy 6.85 Financials (8.56) Health Care (0.90) Industrials 22.68 Information Technology 7.84 Materials 13.22 Telecommunication Services 2.14 Utilities 0.04 Exchange Traded Funds (0.62) U.S. Government Sponsored Agencies 40.51 Asset Backed Securities 0.02 Cash & other assets, less liabilities 14.34 ------ Total net assets 100.00% ======
* Securities sold short are netted with long positions in common stocks in the appropriate sectors. 3 See accompanying notes. SECURITY EQUITY FUND Performance Summary ALPHA OPPORTUNITY SERIES September 30, 2006 (unaudited) PERFORMANCE INFORMATION ABOUT YOUR SERIES EXPENSES CALCULATING YOUR ONGOING SERIES EXPENSES EXAMPLE As a shareholder of the Series, you incur two types of costs: (1) transaction costs, which may include sales charges (loads) on purchase payments; contingent deferred sales charges on redemptions; and redemption fees, if any; and (2) ongoing costs, including management fees; distribution and/or service fees (12b-1); and other Series expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Series and to compare these costs with ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period, April 1, 2006 - September 30, 2006. ACTUAL EXPENSES The first line for each class of shares in the table provides information about actual account values and actual expenses. You may use the information in this table, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the table under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line for each class of shares in the table provides information about hypothetical account values and hypothetical expenses based on the Series actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Series actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Series and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other mutual funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads) on purchase payments, contingent deferred sales charges on redemptions, and redemption fees, if any. Therefore, the second line for each class of shares is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. SERIES EXPENSES
BEGINNING ENDING EXPENSES ACCOUNT ACCOUNT PAID VALUE VALUE DURING 04-01-06 09-30-06(1) PERIOD(2) --------- ----------- --------- Alpha Opportunity Series - Class A Actual $1,000.00 $ 958.50 $14.83 Hypothetical 1,000.00 1,009.93 15.22 Alpha Opportunity Series - Class B Actual 1,000.00 954.30 18.47 Hypothetical 1,000.00 1,006.17 18.96 Alpha Opportunity Series - Class C Actual 1,000.00 954.30 18.47 Hypothetical 1,000.00 1,006.17 18.96
(1) The actual ending account value is based on the actual total return of the Series for the period from April 1, 2006 to September 30, 2006 after actual expenses and will differ from the hypothetical ending account value which is based on the Series expense ratio and a hypothetical annual return of 5% before expenses. The actual cumulative return at net asset value for the period from April 1, 2006 to September 30, 2006 was (4.15%), (4.57%) and (4.57%), for Class A, B and C shares, respectively. (2) Expenses are equal to the Series annualized expense ratio (3.02%, 3.77% and 3.77% for Class A, B and C shares, respectively), net of any applicable fee waivers or earnings credits, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 4 Schedule of Investments Security Equity Fund - Alpha Opportunity Series September 30, 2006
SHARES VALUE ------ ----------- COMMON STOCK - 58.3% AEROSPACE & DEFENSE - 0.3% Northrop Grumman Corporation 700 $ 47,649 Raytheon Company 700 33,607 ----------- 81,256 ----------- AGRICULTURAL PRODUCTS - 2.2% Archer-Daniels-Midland Company 6,200 234,856 Bunge, Ltd. 3,900 226,005 Cresud S.A. ADR 16,500 224,400 ----------- 685,261 ----------- AIRLINES - 2.0% Alaska Air Group, Inc. * 4,900 186,396 Republic Airways Holdings, Inc. * 10,244 158,987 Southwest Airlines Company 17,400 289,884 ----------- 635,267 ----------- ALUMINUM - 0.4% Alcan, Inc. 3,500 139,545 ----------- AUTO PARTS & EQUIPMENT - 0.3% Sauer-Danfoss, Inc. 3,700 88,726 ----------- BROADCASTING & CABLE TV -0.3% DIRECTV Group, Inc. * 3,400 66,912 Shaw Communications, Inc. (CI.B) 800 24,016 ----------- 90,928 ----------- COAL & CONSUMABLE FUELS - 0.7% Cameco Corporation 6,100 223,077 ----------- COMMODITY CHEMICALS - 0.3% Lyondell Chemical Company 2,300 58,351 Nova Chemicals Corporation 1,000 30,710 ----------- 89,061 ----------- COMMUNICATIONS EQUIPMENT - 3.0% Black Box Corporation 600 23,352 CommScope, Inc. * (1) 27,200 893,792 ----------- 917,144 ----------- COMPUTER HARDWARE - 0.1% Sun Microsystems, Inc. * 6,700 33,299 ----------- CONSTRUCTION & ENGINEERING - 5.2% Chicago Bridge & Iron Company N.V. 6,200 149,172 EMCOR Group, Inc. * 4,500 246,780 Infrasource Services, Inc. * 6,200 108,810 Insituform Technologies, Inc. * 12,700 308,356 Michael Baker Corporation * 5,000 101,800 Quanta Services, Inc. * 8,400 141,624 Washington Group International, Inc. 9,300 547,398 ----------- 1,603,940 ----------- CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS - 2.6% AGCO Corporation * 9,600 243,360 Bucyrus International, Inc. 3,500 148,470
SHARES VALUE ------ ----------- COMMON STOCK (CONTINUED) CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS (CONTINUED) Cummins, Inc. 800 $ 95,384 Lindsay Manufacturing Company 5,300 152,375 Manitowoc Company, Inc. 3,700 165,723 ----------- 805,312 ----------- DISTILLERS & VINTNERS - 0.0% MGP Ingredients, Inc. 600 12,762 ----------- DIVERSIFIED METALS & MINING - 5.4% Anglo American pic ADR 6,100 128,710 BHP Billiton, Ltd. ADR 1,300 49,244 Brush Engineered Materials, Inc. * 10,900 271,083 Eurozinc Mining Corporation * 4,900 12,054 Freeport-McMoRan Copper & Gold, Inc. (CI.B) 6,000 319,560 Peru Copper, Inc. * 37,900 153,116 Phelps Dodge Corporation 3,000 254,100 Rio Tinto plc ADR 1,200 227,556 Southern Copper Corporation 700 64,750 Teck Cominco, Ltd. (CI.B) 1,200 74,988 Titanium Metals Corporation * 4,200 106,176 ----------- 1,661,337 ----------- ELECTRICAL COMPONENTS & EQUIPMENT - 4.7% American Superconductor Corporation * 15,500 143,530 Emerson Electric Company (1) 7,200 603,792 General Cable Corporation * 12,200 466,162 Lamson & Sessions Company * 4,200 100,044 Regal-Beloit Corporation 3,300 143,550 ----------- 1,457,078 ----------- ELECTRONIC EQUIPMENT MANUFACTURERS - 0.7% Littelfuse, Inc. * 5,900 204,730 ----------- ELECTRONIC MANUFACTURING SERVICES - 0.4% Benchmark Electronics, Inc. * 4,700 126,336 ----------- ENVIRONMENTAL & FACILITIES SERVICES - 1.1% Layne Christensen Company * 11,400 325,698 ----------- EXCHANGE TRADED FUNDS - 1.6% Euro Currency Trust 1,300 165,217 iShares MSCI Australia Index Fund 5,300 112,307 PowerShares DB Commodity Index Tracking Fund * 4,000 95,600 Streettracks Gold Trust * 2,200 130,768 ----------- 503,892 ----------- FERTILIZERS & AGRICULTURAL CHEMICALS - 1.7% CF Industries Holdings, Inc. 4,200 71,694
The accompanying notes are an integral part of the financial statements. 5 Schedule of Investments Security Equity Fund - Alpha Opportunity Series September 30, 2006 - continued
SHARES VALUE ------ ----------- COMMON STOCK (CONTINUED) FERTILIZERS & AGRICULTURAL CHEMICALS (CONTINUED) Monsanto Company 400 $ 18,804 Mosaic Company * 24,500 414,050 Terra Industries, Inc. * 4,100 31,611 ----------- 536,159 ----------- FOOD RETAIL - 0.6% Safeway, Inc. 6,400 194,240 ----------- HEAVY ELECTRICAL EQUIPMENT - 1.7% ABB, Ltd. ADR 40,300 531,154 ----------- INDEPENDENT POWER PRODUCERS & ENERGY TRADERS - 0.0% Dynegy, Inc. * 2,100 11,634 ----------- INDUSTRIAL CONGLOMERATES - 2.0% McDermott International, Inc. * (1) 15,150 633,270 ----------- INDUSTRIAL GASES - 0.7% Air Products & Chemicals, Inc. 3,300 219,021 ----------- INDUSTRIAL MACHINERY - 2.0% Dynamic Materials Corporation 1,000 32,420 Timken Company 8,300 247,174 Valmont Industries, Inc. 6,800 355,300 ----------- 634,894 ----------- INTEGRATED TELECOMMUNICATION SERVICES - 0.2% XO Holdings, Inc. * 11,600 56,608 ----------- INTERNET SOFTWARE & SERVICES - 0.8% Valueclick, Inc. * 12,600 233,604 ----------- MARINE - 1.5% American Commercial Lines, Inc. * 7,900 469,655 ----------- OIL & GAS EQUIPMENT & SERVICES - 2.6% Cameron International Corporation * (1) 11,800 570,058 Input/Output, Inc. * 5,100 50,643 National Oilwell Varco, Inc. * 3,000 175,650 ----------- 796,351 ----------- OIL & GAS EXPLORATION & PRODUCTION - 3.6% Devon Energy Corporation (1) 13,700 865,155 Kodiak Oil & Gas Corporation * 6,400 22,336 McMoRan Exploration Company * 12,300 218,202 ----------- 1,105,693 ----------- PAPER PACKAGING - 1.3% Packaging Corporation of America 5,000 116,000 Sonoco Products Company 8,300 279,212 ----------- 395,212 ----------- PAPER PRODUCTS - 1.5% Aracruz Celulose S.A. ADR 1,300 64,701
SHARES VALUE ------ ----------- COMMON STOCK (CONTINUED) PAPER PRODUCTS (CONTINUED) Votorantim Celulose e Papel S.A. ADR 23,800 $ 403,172 ----------- 467,873 ----------- PRECIOUS METALS & MINERALS - 0.2% Silver Standard Resources, Inc. * 2,300 50,784 ----------- SEMICONDUCTORS - 0.3% Anadigics, Inc. * 14,300 102,388 ----------- SPECIALTY CHEMICALS - 0.4% A. Schulman, Inc. 2,100 49,371 Nalco Holding Company * 3,900 72,228 ----------- 121,599 ----------- STEEL - 1.1% AK Steel Holding Corporation * 12,400 150,536 Highveld Steel and Vanadium Corporation, Ltd. ADR 3,100 25,947 Mittal Steel Company N.V. 1,300 45,162 NN, Inc. 4,880 57,730 Steel Technologies, Inc. 3,500 68,705 ----------- 348,080 ----------- TECHNOLOGY DISTRIBUTORS - 2.8% Anixter International, Inc. (1) 15,600 880,932 ----------- WIRELESS TELECOMMUNICATION SERVICES -2.0% Crown Castle International Corporation * 8,300 292,492 SBA Communications Corporation * 12,900 313.857 ----------- 606,349 ----------- TOTAL COMMON STOCK (Cost $18,418,842) $18,080,149 -----------
PRINCIPAL AMOUNT VALUE ---------- ----------- U.S. GOVERNMENT SPONSORED AGENCY BONDS & NOTES - 40.5% Federal Farm Credit Discount Note 5.07% - 2006 (1) $1,250,000 1,238,404 Federal Home Loan Bank 5.125% - 2006 (2) 825,000 823,003 5.142% - 2006 (1) 425,000 421,416 5.15% - 2006 (1) 550,000 545,517 5.21% - 2006 (1) 600,000 596,880 Federal Home Loan Mortgage Corporation 5.13% - 2006 (2) 1,175,000 1,166,742 5.141% - 2006 (1) 550,000 549,921 5.23% - 2006 (1) 950,000 948,932 Federal National Mortgage Association 5.10% - 2006 (1) 600,000 599,235 5.14% - 2006 (2) 800,000 795,053
The accompanying notes are an integral part of the financial statements. 6 Schedule of Investments Security Equity Fund - Alpha Opportunity Series September 30, 2006 - continued
PRINCIPAL AMOUNT VALUE ---------- ----------- U.S. GOVERNMENT SPONSORED AGENCY BONDS & NOTES (CONTINUED) Federal National Mortgage Association (continued) 5.143% - 2006 (1) $1,000,000 $ 989,880 5.18% - 2006 (1) 275,000 275,000 5.22% - 2006 (1) 400,000 398,313 5.23% - 2006 (2) 1,400,000 1,395,474 5.252% - 2006 (1) 1,000,000 997,751 5.29% - 2006 (1) 825,000 824,768 ----------- TOTAL U.S. GOVERNMENT SPONSORED AGENCY BONDS & NOTES (Cost $12,563,806) $12,566,289 ----------- ASSET BACKED SECURITIES - 0.0% OTHER - 0.0% Credit-Based Asset Servicing and Securitization LLC 2005-CB2, 5.43%, 2036 (1)(3) 6,276 6,276 ----------- TOTAL ASSET BACKED SECURITIES (Cost $6,276) $ 6,276 ----------- TOTAL INVESTMENTS (SECURITY EQUITY FUND - ALPHA OPPORTUNITY SERIES) (COST $30,988,924) - 98.8% $30,652,714 OTHER ASSETS IN EXCESS OF LIABILITIES - 1.2% 364,100 ----------- TOTAL NET ASSETS - 100.0% $31,016,814 ===========
SCHEDULE OF SECURITIES SOLD SHORT SEPTEMBER 30,2006 SECURITY EQUITY FUND - ALPHA OPPORTUNITY SERIES
SHARES VALUE ------ ----------- COMMON STOCK SOLD SHORT - (13.4%) APPAREL RETAIL - (0.2%) HOT Topic, Inc. * (5,000) $ (55,700) ----------- APPAREL, ACCESSORIES & LUXURY GOODS - (0.1%) Quiksilver, Inc. * (3,000) (36,450) ----------- COMMERCIAL PRINTING - (0.2%) John H. Harland Company (1,500) (54,675) ----------- CONSUMER FINANCE - (0.2%) Advanta Corporation (1,400) (47,558) ----------- DATA PROCESSING & OUTSOURCED SERVICES - (0.1%) BISYS Group, Inc. * (2,000) (21,720) ----------- DIVERSIFIED BANKS - (0.3%) Kookmin Bank ADR (1,300) (101,439) ----------- EXCHANGE TRADED FUNDS - (2.2%) Consumer Discretionary Select (500) (17,475)
SHARES VALUE ------ ----------- COMMON STOCK SOLD SHORT (CONTINUED) EXCHANGE TRADED FUNDS (CONTINUED) Financial Select Sector SPDR Fund (2,000) $ (69,320) Health Care Select Sector SPDR (2,500) (83,000) iShares Lehman 20+ Year Treasury (4,100) (366,540) iShares Lehman U.S. Treasury Inflation Protected Securities (900) (91,035) Semiconductor HOLDRs Trust (2,000) (68,580) ----------- (695,950) ----------- HEALTH CARE EQUIPMENT - (0.4%) Hospira, Inc. * (3,000) (114,810) Medtronic, Inc. (500) (23,220) ----------- (138,030) ----------- INDUSTRIAL CONGLOMERATES - (0.3%) Textron, Inc. (1,000) (87,500) ----------- INVESTMENT BANKING & BROKERAGE - (0.8%) Lehman Brothers Holdings, Inc. (2,000) (147,720) Stifel Financial Corporation * (3,300) (104,742) ----------- (252,462) ----------- MORTGAGE REIT'S - (0.2%) New Century Financial Corporation (1,500) (58,965) ----------- MOVIES & ENTERTAINMENT - (0.4%) Time Warner, Inc. (7,400) (134,902) ----------- PACKAGED FOODS & MEATS - (0.1%) WM Wrigley Jr Company (500) (23,030) ----------- PHARMACEUTICALS - (0.5%) King Pharmaceuticals, Inc. * (2,200) (37,466) Teva Pharmaceutical Industries, (3,000) (102,270) ----------- (139,736) ----------- REGIONAL BANKS - (5.5%) Bank of Hawaii Corporation (8,000) (385,280) Cathay General Bancorp (3,600) (129,960) Central Pacific Financial (1,000) (36,580) Commerce Bancorp, Inc. (7,000) (256,970) Fifth Third Bancorp (2,000) (76,160) First Horizon National Corporation (2,000) (76,020) Irwin Financial Corporation * (7,000) (136,920) National City Corporation (4,500) (164,700) PNC Financial Services Group, Inc. (1,000) (72,440) TCF Financial Corporation (2,300) (60,467) Zions Bancorporation (4,000) (319,240) ----------- (1,714,737) ----------- SEMICONDUCTORS - (0.2%) Altera Corporation * (2,500) (45,950) ----------- SPECIALIZED CONSUMER SERVICES - (0.2%) H&R Block, Inc. (3,000) (65,220) -----------
The accompanying notes are an integral part of the financial statements. 7 Schedule of Investments Security Equity Fund - Alpha Opportunity Series September 30, 2006 - continued
SHARES VALUE ------ ----------- COMMON STOCK SOLD SHORT (CONTINUED) THRIFTS & MORTGAGES FINANCE - (1.5%) Accredited Home Lenders Holding (2,000) $ (71,880) BankAtlantic Bancorp, Inc. (4,000) (56,880) Countrywide Financial Corporation (3,500) (122,640) Sovereign Bancorp, Inc. (500) (10,755) Washington Mutual, Inc. (5,000) (217,350) ----------- (479,505) ----------- TOTAL COMMON STOCK (Proceeds $4,059,520) $(4,153,529) ----------- TOTAL SECURITIES SOLD SHORT (SECURITY EQUITY FUND - ALPHA OPPORTUNITY SERIES) (PROCEEDS $4,059,520) $(4,153,529) ===========
Footnotes Percentages are stated as a percent of net assets. For federal income tax purposes the identified cost of investments owned at 9/30/2006 was $31,154,326. * - Non-income producing security (1) - Security is segregated as collateral for open futures contracts. (2) - Security is segregated as collateral for short positions. (3) - Variable rate security. Rate indicated is rate effective at September 30, 2006. Glossary: ADR - American Depositary Receipt plc - Public Limited Company See notes to financial statements. The accompanying notes are an integral part of the financial statements. 8 SECURITY EQUITY FUND ALPHA OPPORTUNITY SERIES Statement of Assets and Liabilities September 30, 2006 ASSETS: Investments, at value(1) ......................................... $30,652,714 Cash ............................................................. 4,406,732 Receivables: Fund shares sold .............................................. 25,016 Securities sold ............................................... 2,829,646 Dividends ..................................................... 8,508 Prepaid expenses ................................................. 13,425 ----------- Total assets ..................................................... 37,936,041 ----------- LIABILITIES: Common stock sold short, at value(2) ............................. 4,153,529 Payable for: Securities purchased .......................................... 2,601,359 Security Management Company ................................... 6,154 Fund shares redeemed .......................................... 37,377 Variation margin in futures ................................... 18,050 Dividends on common stock sold short .......................... 6,027 Management fees ............................................... 52,698 Custodian fees ................................................ 5,000 Transfer agent and administration fees ........................ 7,199 Professional fees ............................................. 16,410 12b-1 distribution plan fees .................................. 12,774 Directors' fees ............................................... 150 Other ......................................................... 2,500 ----------- Total liabilities ................................................ 6,919,227 ----------- NET ASSETS ....................................................... $31,016,814 =========== NET ASSETS CONSIST OF: Paid in capital .................................................. $29,274,655 Accumulated undistributed net investment loss .................... (103) Accumulated undistributed net realized gain on sale of investments, securities sold short and futures ................ 1,988,878 Net unrealized depreciation in value of investments, securities sold short and futures ........................................ (246,616) ----------- Net assets ....................................................... $31,016,814 =========== CLASS A: Capital shares outstanding (unlimited number of shares authorized) ....................... 1,684,625 Net assets ....................................................... $20,594,420 Net asset value and redemption price per share ................... $ 12.23 =========== Maximum offering price per share (net asset value divided by 94.25%) ........................... $ 12.98 =========== CLASS B: Capital shares outstanding (unlimited number of shares authorized) ....................... 407,218 Net assets ....................................................... $ 4,846,328 Net asset value, offering and redemption price per share (excluding any applicable contingent deferred sales charge) ... $ 11.90 =========== CLASS C: Capital shares outstanding (unlimited number of shares authorized) ....................... 468,481 Net assets ....................................................... $ 5,576,066 Net asset value, offering and redemption price per share (excluding any applicable contingent deferred sales charge) ... $ 11.90 =========== (1)Investments, at cost .......................................... $30,988,925 (2)Common stock sold short, at proceeds .......................... 4,059,520
Statement of Operations For the Year Ended September 30, 2006 INVESTMENT INCOME: Dividends ..................................................... $ 193,465 Interest ...................................................... 513,871 ---------- Total investment income ....................................... 707,336 ---------- EXPENSES: Management fees ............................................... 613,927 Custodian fees ................................................ 39,243 Transfer agent/maintenance fees ............................... 28,768 Administration fees ........................................... 45,721 Directors' fees ............................................... 746 Professional fees ............................................. 36,078 Reports to shareholders ....................................... 8,628 Registration fees ............................................. 30,739 Other expenses ................................................ 2,278 Dividends on securities sold short ............................ 18,602 12b-1 distribution plan fees - Class A ........................ 44,067 12b-1 distribution plan fees - Class B ........................ 45,372 12b-1 distribution plan fees - Class C ........................ 57,997 ---------- Total expenses ................................................ 972,166 Less: Reimbursement of expenses - Class A ........................ (17,045) Reimbursement of expenses - Class B ........................ (4,738) Reimbursement of expenses - Class C ........................ (6,514) Earnings credits ........................................... (24,088) ---------- Net expenses .................................................. 919,781 ---------- Net investment loss ........................................... (212,445) ---------- NET REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) during the period on: Investments ................................................... 1,904,920 Securities sold short ......................................... (102,361) Futures ....................................................... 487,716 ---------- Net realized gain ............................................. 2,290,275 ---------- Net unrealized appreciation (depreciation) during the period on: Investments ................................................... (547,156) Securities sold short ......................................... (94,009) Futures ....................................................... 126,874 ---------- Net unrealized depreciation ................................... (514,291) ---------- Net gain ...................................................... 1,775,984 ---------- Net increase in net assets resulting from operations .......... $1,563,539 ==========
9 See accompanying notes. SECURITY EQUITY FUND Statement of Changes in Net Assets ALPHA OPPORTUNITY SERIES
YEAR ENDED YEAR ENDED SEPTEMBER 30, 2006 SEPTEMBER 30, 2005 ------------------ ------------------ INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS: Net investment loss ............................. $ (212,445) $ (252,493) Net realized gain during the period on investments, futures and securities sold short ................................... 2,290,275 2,310,074 Net unrealized appreciation (depreciation) during the period on investments, futures and securities sold short ........................ (514,291) 144,528 ----------- ----------- Net increase in net assets resulting from operations ................................... 1,563,539 2,202,109 ----------- ----------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net realized gain Class A ...................................... (1,193,077) (604,730) Class B ...................................... (346,675) (202,618) Class C ...................................... (438,798) (478,033) ----------- ----------- Total distributions to shareholders ............. (1,978,550) (1,285,381) ----------- ----------- CAPITAL SHARE TRANSACTIONS: Proceeds from sale of shares Class A ...................................... 7,974,133 11,459,073 Class B ...................................... 988,390 1,533,972 Class C ...................................... 1,340,669 4,544,101 Distributions reinvested Class A ...................................... 1,170,685 591,209 Class B ...................................... 343,297 202,336 Class C ...................................... 380,745 269,335 Cost of shares redeemed Class A ...................................... (2,922,942) (4,559,666) Class B ...................................... (512,280) (107,116) Class C ...................................... (3,871,410) (332,772) ----------- ----------- Net increase from capital share transactions .... 4,891,287 13,600,472 ----------- ----------- Net increase in net assets ...................... 4,476,276 14,517,200 ----------- ----------- NET ASSETS: Beginning of period ............................. 26,540,538 12,023,338 ----------- ----------- End of period ................................... $31,016,814 $26,540,538 =========== =========== Accumulated undistributed net investment loss at end of period ................................ $ (103) $ -- =========== =========== CAPITAL SHARE ACTIVITY: Shares sold Class A ...................................... 641,932 970,012 Class B ...................................... 81,728 130,674 Class C ...................................... 110,434 378,831 Shares reinvested Class A ...................................... 99,888 50,401 Class B ...................................... 29,904 17,458 Class C ...................................... 33,166 23,238 Shares redeemed Class A ...................................... (239,609) (393,904) Class B ...................................... (42,378) (9,111) Class C ...................................... (318,091) (28,119)
10 See accompanying notes. SECURITY EQUITY FUND Financial Highlights ALPHA OPPORTUNITY SERIES Selected data for each share of capital stock outstanding throughout each period
YEAR ENDED SEPTEMBER 30, -------------------------------------------- CLASS A 2006 2005 2004 2003(e) ------- ------- ------- ------ ------------ PER SHARE DATA Net asset value, beginning of period $ 12.37 $ 11.79 $10.21 $10.00 ------- ------- ------ ------ Income (loss) from investment operations: Net investment loss(c) (0.06) (0.10) (0.16) (0.03) Net gain on securities (realized and unrealized) 0.93 1.50 2.33 0.24 ------- ------- ------ ------ Total from investment operations 0.87 1.40 2.17 0.21 ------- ------- ------ ------ Less distributions: Distributions from realized gains (1.01) (0.82) (0.59) -- ------- ------- ------ ------ Total distributions (1.01) (0.82) (0.59) -- ------- ------- ------ ------ Net asset value, end of period $ 12.23 $ 12.37 $11.79 $10.21 ======= ======= ====== ====== TOTAL RETURN(a) 7.39% 12.26% 21.68% 2.10% ------- ------- ------ ------ RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $20,595 $14,622 $6,556 $2,935 ------- ------- ------ ------ Ratios to average net assets: Net investment loss (0.50%) (0.83%) (1.48%) (1.35%) Total expenses(b) 3.20% 2.94% 3.57% 3.25% Net expenses(d) 3.01% 2.86% 2.78% 2.75% Expenses prior to custodian earnings credits and net of expense waivers 3.10% 2.86% 2.79% 2.75% Net expenses prior to performance fee adjustment(f) 2.82% 2.78% 2.78% 2.75% ------- ------- ------ ------ Portfolio turnover rate 1,302% 1,502% 1,175% 867%
YEAR ENDED SEPTEMBER 30, ------------------------------------------- CLASS B 2006 2005 2004 2003(e) ------- ------ ------ ------ ------------- PER SHARE DATA Net asset value, beginning of period $12.15 $11.68 $10.20 $10.00 ------ ------ ------ ------ Income (loss) from investment operations: Net investment loss(c) (0.15) (0.18) (0.25) (0.05) Net gain on securities (realized and unrealized) 0.91 1.47 2.32 0.25 ------ ------ ------ ------ Total from investment operations 0.76 1.29 2.07 0.20 ------ ------ ------ ------ Less distributions: Distributions from realized gains (1.01) (0.82) (0.59) -- ------ ------ ------ ------ Total distributions (1.01) (0.82) (0.59) -- ------ ------ ------ ------ Net asset value, end of period $11.90 $12.15 $11.68 $10.20 ====== ====== ====== ====== TOTAL RETURN(a) 6.56% 11.39% 20.68% 2.00% ------ ------ ------ ------ RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $4,846 $4,106 $2,324 $1,731 ------ ------ ------ ------ Ratios to average net assets: Net investment loss (1.24%) (1.60%) (2.25%) (2.11%) Total expenses(b) 3.95% 3.69% 4.29% 4.01% Net expenses(d) 3.76% 3.61% 3.53% 3.50% Expenses prior to custodian earnings credits and net of expense waivers 3.85% 3.61% 3.53% 3.50% Net expenses prior to performance fee adjustment(f) 3.57% 3.53% 3.53% 3.50% ------ ------ ------ ------ Portfolio turnover rate 1,302% 1,502% 1,175% 867%
11 See accompanying notes. SECURITY EQUITY FUND Financial Highlights ALPHA OPPORTUNITY SERIES Selected data for each share of capital stock outstanding throughout each period
YEAR ENDED SEPTEMBER 30, ------------------------------------------- CLASS C 2006 2005 2004 2003(e) ------- ------ ------ ------ ------------- PER SHARE DATA Net asset value, beginning of period $12.15 $11.68 $10.20 $10.00 ------ ------ ------ ------ Income (loss) from investment operations: Net investment loss(c) (0.15) (0.18) (0.25) (0.05) Net gain on securities (realized and unrealized) 0.91 1.47 2.32 0.25 ------ ------ ------ ------ Total from investment operations 0.76 1.29 2.07 0.20 ------ ------ ------ ------ Less distributions: Distributions from realized gains (1.01) (0.82) (0.59) -- ------ ------ ------ ------ Total distributions (1.01) (0.82) (0.59) -- ------ ------ ------ ------ Net asset value, end of period $11.90 $12.15 $11.68 $10.20 ====== ====== ====== ====== TOTAL RETURN(a) 6.56% 11.39% 20.68% 2.00% ------ ------ ------ ------ RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $5,576 $7,813 $3,143 $1,723 ------ ------ ------ ------ Ratios to average net assets: Net investment loss (1.18%) (1.58%) (2.24%) (2.11%) Total expenses(b) 3.95% 3.68% 4.30% 4.01% Net expenses(d) 3.75% 3.61% 3.53% 3.50% Expenses prior to custodian earnings credits and net of expense waivers 3.83% 3.61% 3.53% 3.50% Net expenses prior to performance fee adjustment(f) 3.57% 3.53% 3.53% 3.50% ------ ------ ------ ------ Portfolio turnover rate 1,302% 1,502% 1,175% 867%
(a) Total return information does not reflect deduction of any sales charges imposed at the time of purchase for Class A shares or upon redemption for Class B and C shares. (b) Total expense information reflects expense ratios absent fund expense reductions by the Investment Manager and custodian earnings credits. (c) Net investment loss was computed using average shares outstanding throughout the period. (d) Net expense information reflects the expense ratios after voluntary expense waivers, reimbursements and custodian earnings credits, as applicable. (e) Security Alpha Opportunity Series was initially capitalized on July 7, 2003 with a net asset value of $10 per share. Percentage amounts for the period, except total return, have been annualized. (f) Net expenses prior to performance fee adjustment reflect ratios after voluntary expense waivers, reimbursements, custodian earnings credits, and before performance fee adjustments, as applicable. 12 See accompanying notes. This page left blank intentionally. 13 SECURITY EQUITY FUND Manager's Commentary EQUITY SERIES November 15, 2006 (unaudited) (SECURITY BENEFIT(SM) LOGO) Security Management Company, LLC Adviser, Security Management Company, LLC (PHOTO OF MARK MITCHELL) Mark Mitchell Senior Portfolio Manager TO OUR SHAREHOLDERS: Security Equity Fund Equity Series returned 7.88%(1) in the period, lagging the benchmark S&P 500 Index's return of 10.79% and the Series' peer group median return of 9.13%. Over the past few years, higher beta, smaller capitalization companies have helped drive equity market higher. In such environment, we tend to under perform. We still believe the market is not yet recognizing the potential in several high quality large capitalization companies. We believe that our approach will deliver good performance over a long-term investment horizon. Our investment philosophy is centered around three key tenants: first, we believe good investments are purchased at less than their intrinsic value, second, a long-term approach and patience are critical to successful investing, and last, we concentrate our investments in companies that have the greatest return potential. Our process is a bottom-up, research-driven investment process that attempts to identify companies that have a competitive advantage or have the ability to become more competitive in the future. We focus on owning these companies for three to five years or longer, which we believe differentiates us from a majority of our peers and ultimately allows us to make better investment decisions. We buy these companies when their current price trades below their intrinsic value. We closely monitor each company's progress. We will sell a company if the valuation no longer makes sense, if we've made a mistake and our investment thesis is no longer valid, or if we have a more attractive investment alternative. For this Series, we apply this philosophy to a broad range of both growth and value names. FINANCIAL, MATERIALS, AND INDUSTRIAL STOCKS TOP PERFORMERS The Series' financial holdings were up 34% compared to 20% for the index with our position in First Marblehead Corporation up over 200%. Ill-placed, short-term concerns over the company's competitive position offered us an excellent opportunity to take a position in this leading student lending company. First Marblehead Corporation maintains its competitive advantage with its loan underwriting capability, superior economics, and value-added services. The materials sector was up 35%. This was driven by Praxair, Inc., up 25% and Alcoa, Inc., up 34%. Both companies benefited from continued strong global demand for commodity-related products. Several companies in the industrial sector performed well including FedEx Corporation, up 25%, and General Dynamics Corporation, up 21%. FedEx Corporation continued to show operational improvements and experienced solid demand as a result of global economic growth. General Dynamics Corporation experienced strong results in its defense-related and corporate aircraft segments. ENERGY AND TELECOM DISAPPOINTING The Series was negatively impacted by the energy sector, which was down more than 9% overall. This was driven in part by Evergreen Energy, Inc., down more than 19% (previously known as KFx) and Halliburton Company, down 16%. Evergreen Energy was hurt by concerns over the viability of the initial production results of its proprietary clean coal technology. Halliburton was impacted more generally by the recent exodus from oil-services-related names as a result of a weakening energy commodity market. The telecom sector in the benchmark was up more than 25%, while our sector return was down 18%. Not owning AT&T, up 43%, and Bell South, up 69%, negatively impacted the Series. We've avoided these names because we believe it's very difficult to determine which, if any, company will be able to create a lasting competitive advantage that allows it to generate acceptable returns on the significant capital expenditures required to build out its services offerings. Our position in Sprint Nextel Corporation, down 17%, hurt the Series' performance. Concerns over the integration of Nextel and lack of improvement in its core legacy operations attributed to the weakness. We still believe in management's ability to show steady improvement as demonstrated by the spin-off of its slower-growing wire line business. 14 SECURITY EQUITY FUND Manager's Commentary EQUITY SERIES November 15, 2006 (unaudited) 2007 MARKET OUTLOOK The current low return investment environment has continued to make available ample liquidity in the U.S. equity market. Falling energy prices have helped increase consumer confidence and provide support to corporate profit margins through lower raw material input prices. Additionally, businesses continue to have very healthy balance sheets to help drive future growth initiatives. As we noted in last year's shareholder letter, we've been concerned about a slowdown in U.S. consumer spending for some time. This concern has yet to materialize, but we still think it will happen. Lower energy prices will help; however, higher interest rates and a housing market slowdown provide likely headwinds. The Federal Reserve is walking a fine line between managing inflation risks while supporting economic growth. We're unsure, like most investors, what the Fed's next move will be. This uncertainty will weigh on the market until it's resolved. We believe that investing is a long-term pursuit that requires patience and a consistent approach. Dollar cost averaging is a sound way to build long-term value. We recognize there are many investment fund alternatives available today and thank you for your business and the confidence you place in us. Sincerely, Mark Mitchell Senior Portfolio Manager (1) Performance figures are based on Class A shares and do not reflect deduction of the sales charges or taxes that a shareholder would pay on distributions or the redemption of shares. 15 SECURITY EQUITY FUND Performance Summary EQUITY SERIES September 30, 2006 (unaudited) PERFORMANCE SECURITY EQUITY SERIES VS. S&P 500 INDEX (PERFORMANCE GRAPH) Equity Series 9/30/96 9,425.00 12/31/96 9,859.94 3/31/97 9,928.41 6/30/97 11,612.81 9/30/97 12,448.17 12/31/97 12,778.33 3/31/98 14,603.80 6/30/98 15,056.40 9/30/98 13,366.70 12/31/98 16,160.49 3/31/99 16,322.42 6/30/99 17,229.23 9/30/99 16,128.11 12/31/99 17,936.00 3/31/00 18,120.39 6/30/00 17,600.75 9/30/00 17,198.45 12/31/00 15,689.54 3/31/01 13,713.67 6/30/01 14,633.13 9/30/01 12,442.08 12/31/01 13,831.05 3/31/02 13,752.80 6/30/02 11,737.81 9/30/02 9,957.57 12/31/02 10,564.03 3/31/03 10,270.58 6/30/03 11,542.18 9/30/03 11,698.68 12/31/03 12,775.01 3/31/04 12,912.17 6/30/04 13,088.51 9/30/04 12,735.83 12/31/04 13,717.46 3/31/05 13,277.67 6/30/05 13,382.38 9/30/05 13,780.29 12/31/05 14,237.23 3/31/06 14,758.10 6/30/06 14,454.26 9/30/06 14,866.62
S&P 500 INDEX 09/30/96 10,000.00 12/31/96 10,834.02 03/31/97 11,124.13 06/30/97 13,066.42 09/30/97 14,046.29 12/31/97 14,450.11 03/31/98 16,465.91 06/30/98 17,009.80 09/30/98 15,317.18 12/31/98 18,577.97 03/31/99 19,506.31 06/30/99 20,880.99 09/30/99 19,576.84 12/31/99 22,489.58 03/31/00 23,006.47 06/30/00 22,396.39 09/30/00 22,179.76 12/31/00 20,445.88 03/31/01 18,022.90 06/30/01 19,078.27 09/30/01 16,279.61 12/31/01 18,020.24 03/31/02 18,069.22 06/30/02 15,648.99 09/30/02 12,946.29 12/31/02 14,039.68 03/31/03 13,597.51 06/30/03 15,690.58 09/30/03 16,105.85 12/31/03 18,068.47 03/31/04 18,374.99 06/30/04 18,691.81 09/30/04 18,341.37 12/31/04 20,034.97 03/31/05 19,603.36 06/30/05 19,870.22 09/30/05 20,587.26 12/31/05 21,014.96 03/31/06 21,898.31 06/30/06 21,582.80 09/30/06 22,807.09
$10,000 OVER TEN YEARS This chart assumes a $10,000 investment in Class A shares of Equity Series on September 30, 1996, reflects deduction of the 5.75% sales load and assumes all dividends reinvested. The chart does not reflect the deduction of taxes that a shareholder would pay on distributions or the redemption of fund shares. The S&P 500 Index is a capitalization weighted index composed of 500 selected common stocks that represent the broad domestic economy and is a widely recognized unmanaged index of market performance. AVERAGE ANNUAL RETURNS
SINCE PERIODS ENDED 9-30-06 1 YEAR 5 YEARS 10 YEARS INCEPTION --------------------- ------ ------- -------- --------- A Shares 7.88% 3.62% 4.70% -- A Shares with sales charge 1.70% 2.40% 4.08% -- B Shares 7.16% 2.81% 3.93% -- B Shares with CDSC 2.16% 2.45% 3.93% -- C Shares 7.10% 2.82% N/A (2.13%) (1-29-99) C Shares with CDSC 6.10% 2.82% N/A (2.13%) (1-29-99)
The performance data above represents past performance that is not predictive of future results. The investment return and principal value of an investment in the Series will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The figures above do not reflect deduction of the maximum front-end sales charge of 5.75% for Class A shares or the contingent deferred sales charge of 5% for Class B shares and 1% for Class C shares, as applicable, except where noted. The figures do not reflect the deduction of taxes that a shareholder would pay on distributions or redemption of shares. Such figures would be lower if the maximum sales charge and any applicable taxes were deducted. PORTFOLIO COMPOSITION BY SECTOR AS OF 9-30-06 Consumer Discretionary 9.66% Consumer Staples 10.78 Energy 11.82 Financials 19.86 Health Care 17.54 Industrials 15.36 Information Technology 9.31 Materials 2.33 Telecommunication Services 1.69 Commercial Paper 1.63 Repurchase Agreement 0.05 Liabilities in excess of other assets (0.03) ------ Total net assets 100.00% ======
16 See accompanying notes. SECURITY EQUITY FUND Performance Summary EQUITY SERIES September 30, 2006 (unaudited) PERFORMANCE INFORMATION ABOUT YOUR SERIES EXPENSES CALCULATING YOUR ONGOING SERIES EXPENSES EXAMPLE As a shareholder of the Series, you incur two types of costs: (1) transaction costs, which may include sales charges (loads) on purchase payments; contingent deferred sales charges on redemptions; and redemption fees, if any; and (2) ongoing costs, including management fees; distribution and/or service fees (12b-1); and other Series expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Series and to compare these costs with ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period, April 1, 2006 - September 30, 2006. ACTUAL EXPENSES The first line for each class of shares in the table provides information about actual account values and actual expenses. You may use the information in this table, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the table under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line for each class of shares in the table provides information about hypothetical account values and hypothetical expenses based on the Series actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Series actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Series and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other mutual funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads) on purchase payments, contingent deferred sales charges on redemptions, and redemption fees, if any. Therefore, the second line for each class of shares is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. SERIES EXPENSES
ENDING BEGINNING ACCOUNT EXPENSES ACCOUNT VALUE VALUE PAID DURING 04-01-06 09-30-06(1) PERIOD(2) ------------- ----------- ----------- Equity Series - Class A Actual $1,000.00 $1,007.40 $ 6.79 Hypothetical 1,000.00 1,018.30 6.83 Equity Series - Class B Actual 1,000.00 1,005.00 10.56 Hypothetical 1,000.00 1,014.54 10.61 Equity Series - Class C Actual 1,000.00 1,004.70 10.55 Hypothetical 1,000.00 1,014.54 10.61
(1) The actual ending account value is based on the actual total return of the Series for the period from April 1, 2006 to September 30, 2006 after actual expenses and will differ from the hypothetical ending account value which is based on the Series expense ratio and a hypothetical annual return of 5% before expenses. The actual cumulative return at net asset value for the period from April 1, 2006 to September 30, 2006 was 0.74%, 0.50% and 0.47%, for Class A, B and C shares, respectively. (2) Expenses are equal to the Series annualized expense ratio (1.35%, 2.10% and 2.10% for Class A, B and C shares, respectively) multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 17 Schedule of Investments Security Equity Fund - Equity Series September 30, 2006
SHARES VALUE --------- ------------ COMMON STOCK - 98.3% AEROSPACE & DEFENSE - 3.9% General Dynamics Corporation 173,800 $ 12,456,246 L-3 Communications Holdings, Inc. 42,000 3,289,860 ------------ 15,746,106 ------------ AIR FREIGHT & LOGISTICS - 2.9% FedEx Corporation 107,700 11,704,836 ------------ BIOTECHNOLOGY - 3.5% Amgen, Inc. * 195,200 13,962,656 ------------ BROADCASTING & CABLE TV - 2.3% CBS Corporation (CI.B) 158,100 4,453,677 Univision Communications, Inc. * 142,200 4,883,148 ------------ 9,336,825 ------------ COAL & CONSUMABLE FUELS - 2.2% Evergreen Energy, Inc. * 857,800 9,015,478 ------------ COMMUNICATIONS EQUIPMENT - 1.7% ADC Telecommunications, Inc. * 447,757 6,716,355 ------------ CONSTRUCTION & ENGINEERING - 1.7% Shaw Group, Inc. * 293,300 6,933,612 ------------ CONSUMER FINANCE - 7.3% American Express Company 193,850 10,871,108 First Marblehead Corporation (1) 267,100 18,499,346 ------------ 29,370,454 ------------ DATA PROCESSING & OUTSOURCED SERVICES - 2.2% First Data Corporation 208,100 8,740,200 ------------ DRUG RETAIL - 3.1% CVS Corporation 393,200 12,629,584 ------------ HEALTH CARE EQUIPMENT - 4.1% Zimmer Holdings, Inc. * 247,000 16,672,500 ------------ HEALTH CARE SERVICES - 2.0% Medco Health Solutions, Inc. * 133,650 8,033,701 ------------ HOME IMPROVEMENT RETAIL - 2.4% Home Depot, Inc. 273,100 9,905,337 ------------ HOTELS, RESORTS & CRUISE LINES - 2.5% Carnival Corporation 216,500 10,181,995 ------------ HYPERMARKETS & SUPER CENTERS - 5.7% Costco Wholesale Corporation 226,300 11,242,584 Wal-Mart Stores, Inc. 240,200 11,846,664 ------------ 23,089,248 ------------ INDUSTRIAL CONGLOMERATES - 6.9% General Electric Company (1) 474,400 16,746,320 Tyco International, Ltd. 394,300 11,036,457 ------------ 27,782,777 ------------ INDUSTRIAL GASES - 2.3% Praxair, Inc. 160,000 9,465,600 ------------
SHARES VALUE --------- ------------ COMMON STOCK (CONTINUED) INTEGRATED OIL & GAS - 6.1% 128,500 $ 8,334,510 Chevron Corporation ConocoPhillips 8,500 506,005 Exxon Mobil Corporation 229,700 15,412,870 Sasol, Ltd. ADR 15,600 513,084 ------------ 24,766,469 ------------ IT CONSULTING & OTHER SERVICES - 2.1% Unisys Corporation * 1,488,000 8,422,080 ------------ MANAGED HEALTH CARE - 5.0% UnitedHealth Group, Inc. 162,000 7,970,400 WellPoint, Inc. * 156,700 12,073,735 ------------ 20,044,135 ------------ MOVIES & ENTERTAINMENT - 2.4% Time Warner, Inc. 528,000 9,625,440 ------------ MULTI-LINE INSURANCE - 4.6% American International Group, Inc. 282,500 18,718,450 ------------ OIL & GAS DRILLING - 0.7% Transocean, Inc. * (1) 36,200 2,650,926 ------------ OIL & GAS EQUIPMENT & SERVICES - 2.8% BJ Services Company 125,500 3,781,315 Halliburton Company 267,000 7,596,150 ------------ 11,377,465 ------------ OTHER DIVERSIFIED FINANCIAL SERVICES - 4.7% Citigroup, Inc. 244,600 12,149,282 JPMorgan Chase & Company 150,600 7,072,176 ------------ 19,221,458 ------------ PACKAGED FOODS & MEATS - 1.9% Tyson Foods, Inc. (1) 496,900 7,890,772 ------------ PHARMACEUTICALS - 3.0% Johnson & Johnson 189,000 12,273,660 ------------ PROPERTY & CASUALTY INSURANCE - 3.2% Berkshire Hathaway, Inc. * 136 13,028,800 ------------ SYSTEMS SOFTWARE - 3.4% Microsoft Corporation 505,300 13,809,849 ------------ WIRELESS TELECOMMUNICATION SERVICES - 1.7% Sprint Nextel Corporation 399,700 6,854,855 ------------ TOTAL COMMON STOCK (Cost $324,176,610) $397,971,623 ------------
The accompanying notes are an integral part of the financial statements. 18 Schedule of Investments Security Equity Fund - Equity Series September 30, 2006 - continued
PRINCIPAL AMOUNT VALUE --------- ------------ ASSET BACKED COMMERCIAL PAPER - 0.9% MISC. RECEIVABLES - 0.3% Fairway Finance Corporation 5.257%, 10/5/2006 1,100,000 $ 1,099,355 ------------ TRADE RECEIVABLES - 0.6% Old Line Funding LLC 5.25%, 10/3/2006 1,280,000 1,279,627 Sheffield Receivables Corporation 5.26%, 10/4/2006 1,300,000 1,299,430 ------------ 2,579,057 ------------ TOTAL ASSET BACKED COMMERCIAL PAPER (Cost $3,678,412) $ 3,678,412 ------------ COMMERCIAL PAPER - 0.7% BANKING - 0.4% UBS Finance (DE) LLC 5.25%, 10/2/2006 1,600,000 1,599,767 ------------ METALS & MINING - 0.3% Alcoa, Inc. 5.34%, 10/6/2006 1,300,000 1,299,036 ------------ TOTAL COMMERCIAL PAPER (Cost $2,898,803) $ 2,898,803 ------------ REPURCHASE AGREEMENT - 0.1% United Missouri Bank, 4.88%, dated 09-29-06, matures 10-02-06; repurchase amount of $226,092 (Collateralized by FHLB, 2.625%, 05-15-07 with a value of $232,665) $ 226,000 $ 226,000 ------------ TOTAL REPURCHASE AGREEMENT (Cost $226,000) $ 226,000 ------------ TOTAL INVESTMENTS (SECURITY EQUITY FUND - EQUITY SERIES) (COST $330,979,825) - 100.0% $404,774,838 LIABILITIES IN EXCESS OF OTHER ASSETS - 0.0% (132,986) ------------ TOTAL NET ASSETS - 100.0% $404,641,852 ============
Footnotes Percentages are stated as a percent of net assets. For federal income tax purposes the identified cost of investments owned at 9/30/2006 was $330,979,825. * - Non-income producing security (1) - Security is segregated as collateral for open written options contracts. Glossary: ADR - American Depositary Receipt See notes to financial statements. The accompanying notes are an integral part of the financial statements. 19 SECURITY EQUITY FUND EQUITY SERIES Statement of Assets and Liabilities September 30, 2006 ASSETS: Investments, at value(1) ........................................ $404,774,838 Receivables: Securities sold .............................................. 815,646 Fund shares sold ............................................. 307,413 Dividends .................................................... 178,674 Prepaid expenses ................................................ 24,086 ------------ Total assets .................................................... 406,100,657 ------------ LIABILITIES: Cash overdraft .................................................. 33 Payable for: Securities purchased ......................................... 67,557 Fund shares redeemed ......................................... 260,747 Written options, at value (premiums received, $463,009) ...... 627,810 Management fees .............................................. 246,802 Transfer agent and administration fees ....................... 67,729 Professional fees ............................................ 51,100 12b-1 distribution plan fees ................................. 102,777 Directors' fees .............................................. 3,000 Other ........................................................ 31,250 ------------ Total liabilities ............................................... 1,458,805 ------------ NET ASSETS ...................................................... $404,641,852 ============ NET ASSETS CONSIST OF: Paid in capital ................................................. $298,037,716 Accumulated undistributed net realized gain on sale of investments and options written .............................. 32,973,924 Net unrealized appreciation in value of investments and options written ...................................................... 73,630,212 ------------ Net assets ...................................................... $404,641,852 ============ CLASS A: Capital shares outstanding (unlimited number of shares authorized) ........................................ 54,136,170 Net assets ...................................................... $371,006,110 Net asset value and redemption price per share .................. $ 6.85 ============ Maximum offering price per share (net asset value divided by 94.25%) ...................................................... $ 7.27 ============ CLASS B: Capital shares outstanding (unlimited number of shares authorized) .................................................. 4,610,711 Net assets ...................................................... $ 27,841,473 Net asset value, offering and redemption price per share (excluding any applicable contingent deferred sales charge) .. $ 6.04 ============ CLASS C: Capital shares outstanding (unlimited number of shares authorized) .................................................. 906,930 Net assets ...................................................... $ 5,794,269 Net asset value, offering and redemption price per share (excluding any applicable contingent deferred sales charge) .. $ 6.39 ============ (1)Investments, at cost ......................................... $330,979,825
Statement of Operations For the Year Ended September 30, 2006 INVESTMENT INCOME: Dividends .................................................... $ 4,840,662 Interest ..................................................... 266,261 ------------ Total investment income ...................................... 5,106,923 ------------ EXPENSES: Management fees .............................................. 3,046,388 Custodian fees ............................................... 24,962 Transfer agent/maintenance fees .............................. 704,156 Administration fees .......................................... 383,797 Directors' fees .............................................. 10,933 Professional fees ............................................ 66,197 Reports to shareholders ...................................... 106,122 Registration fees ............................................ 41,180 Other expenses ............................................... 26,125 12b-1 distribution plan fees - Class A ....................... 913,140 12b-1 distribution plan fees - Class B ....................... 350,900 12b-1 distribution plan fees - Class C ....................... 58,394 ------------ Total expenses ............................................... 5,732,294 ------------ Net investment loss .......................................... (625,371) ------------ NET REALIZED AND UNREALIZED GAIN: Net realized gain during the period on: Investments .................................................. 40,438,617 Options written .............................................. 1,141,486 ------------ Net realized gain ............................................ 41,580,103 ------------ Net unrealized appreciation (depreciation) during the period on: Investments .................................................. (9,013,023) Options written .............................................. (200,603) ------------ Net unrealized depreciation .................................. (9,213,626) ------------ Net realized and unrealized gain ............................. 32,366,477 ------------ Net increase in net assets resulting from operations ......... $ 31,741,106 ============
20 See accompanying notes. SECURITY EQUITY FUND Statement of Changes in Net Assets EQUITY SERIES
YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, 2006 2005 ------------- ------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS: Net investment income (loss).......................... $ (625,371) $ 2,106,508 Net realized gain during the period on investments and options written.................................... 41,580,103 5,986,078 Net unrealized appreciation (depreciation) during the period on investments and options written.......... (9,213,626) 26,726,517 ------------ ------------ Net increase in net assets resulting from operations.. 31,741,106 34,819,103 ------------ ------------ DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income Class A............................................ (2,147,421) -- Class B............................................ -- -- Class C............................................ -- -- Net realized gain Class A............................................ (11,068,277) (26,380,459) Class B............................................ (1,320 160) (3,538,521) Class C............................................ (182,232) (441,254) ------------ ------------ Total distributions to shareholders................... (14,718,090) (30,360,234) ------------ ------------ CAPITAL SHARE TRANSACTIONS: Proceeds from sale of shares Class A............................................ 52,710,115 27,211,499 Class B............................................ 7,159,305 7,524,651 Class C............................................ 1,001,095 1,434,117 Distributions reinvested Class A............................................ 12,004,929 24,060,300 Class B............................................ 1,296,700 3,490,102 Class C............................................ 180,424 436,627 Cost of shares redeemed Class A............................................ (84 851 352) (71,972,519) Class B............................................ (21 542 434) (20,528,055) Class C............................................ (1,287,944) (2,480,994) ------------ ------------ Net decrease from capital share transactions.......... (33,329,162) (30,824,272) ------------ ------------ Net decrease in net assets............................ (16,306,146) (26,365,403) ------------ ------------ NET ASSETS: Beginning of period................................... 420,947,998 447,313,401 ------------ ------------ End of period......................................... $404,641,852 $420,947,998 ============ ============ Accumulated undistributed net investment income at end of period...................................... $ -- $ 2,106,508 ============ ============ CAPITAL SHARE ACTIVITY: Shares sold Class A............................................ 8,042,578 4,214,004 Class B............................................ 1,205,513 1,306,540 Class C............................................ 160,281 233,732 Shares reinvested Class A............................................ 1,816,177 3,673,328 Class B............................................ 221,280 597,620 Class C............................................ 29,101 70,881 Shares redeemed Class A............................................ (12,720,895) (11,058,402) Class B............................................ (3,666,875) (3,529,552) Class C............................................ (208,581) (406,368)
21 See accompanying notes. SECURITY EQUITY FUND Financial Highlights EQUITY SERIES Selected data for each share of capital stock outstanding throughout each period
YEAR ENDED SEPTEMBER 30, ------------------------------------------------------ CLASS A 2006 2005 2004 2003 2002(c, e) ------- -------- -------- -------- -------- ---------- PER SHARE DATA Net asset value, beginning of period $ 6.58 $ 6.50 $ 5.98 $ 5.09 $ 6.36 -------- -------- -------- -------- -------- Income (loss) from investment operations: Net investment income (loss)(b) (0.01) 0.04 0.01 0.01 0.01 Net gain (loss) on securities (realized and unrealized) 0.52 0.49 0.52 0.88 (1.28) -------- -------- -------- -------- -------- Total from investment operations 0.51 0.53 0.53 0.89 (1.27) -------- -------- -------- -------- -------- Less distributions: Dividends from net investment income (0.04) -- (0.01) -- -- Distributions from realized gains (0.20) (0.45) -- -- -- -------- -------- -------- -------- -------- Total distributions (0.24) (0.45) (0.01) -- -- -------- -------- -------- -------- -------- Net asset value, end of period $ 6.85 $ 6.58 $ 6.50 $ 5.98 $ 5.09 ======== ======== ======== ======== ======== TOTAL RETURN(a) 7.88% 8.20% 8.87% 17.49% (19.97%) -------- -------- -------- -------- -------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $371,006 $375,280 $391,384 $430,161 $412,791 -------- -------- -------- -------- -------- Ratios to average net assets: Net investment income (loss) (0.08%) 0.57% 0.08% 0.23% 0.13% Total expenses 1.34% 1.30% 1.28% 1.25% 1.11% -------- -------- -------- -------- -------- Portfolio turnover rate 34% 32% 28% 54% 30%
YEAR ENDED SEPTEMBER 30, ------------------------------------------------------ CLASS B 2006 2005 2004 2003 2002(c, e) ------- -------- -------- -------- -------- ---------- PER SHARE DATA Net asset value, beginning of period $ 5.83 $ 5.83 $ 5.41 $ 4.64 $ 5.86 ------- ------- ------- ------- ------- Income (loss) from investment operations: Net investment loss(b) (0.05) (0.01) (0.04) (0.03) (0.05) Net gain (loss) on securities (realized and unrealized) 0.46 0.44 0.48 0.80 (1.17) ------- ------- ------- ------- ------- Total from investment operations 0.41 0.43 0.44 0.77 (1.22) ------- ------- ------- ------- ------- Less distributions: Distributions from realized gains (0.20) (0.45) -- -- -- ------- ------- ------- ------- ------- Total distributions (0.20) (0.45) -- -- -- ------- ------- ------- ------- ------- Net asset value, end of period $ 6.04 $ 5.83 $ 5.85 $ 5.41 $ 4.64 ======= ======= ======= ======= ======= TOTAL RETURN(a) 7.16% 7.35% 8.13% 16.59% (20.82%) ------- ------- ------- ------- ------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $27,842 $39,962 $49,600 $61,733 $66,267 ------- ------- ------- ------- ------- Ratios to average net assets: Net investment loss (0.83%) (0.16%) (0.67%) (0.52%) (0.78%) Total expenses 2.09% 2.05% 2.03% 2.00% 2.02% ------- ------- ------- ------- ------- Portfolio turnover rate 34% 32% 28% 54% 30%
22 See accompanying notes. SECURITY EQUITY FUND Financial Highlights EQUITY SERIES Selected data for each share of capital stock outstanding throughout each period
YEAR ENDED SEPTEMBER 30, --------------------------------------------------------- CLASS C 2006 2005 2004 2003 2002(c, d, e) ------- -------- -------- -------- -------- ------------- PER SHARE DATA Net asset value, beginning of period $ 6.16 $ 6.16 $ 5.69 $ 4.88 $ 6.16 ------ ------ ------ ------ ------- Income (loss) from investment operations: Net investment loss(b) (0.05) (0.01) (0.04) (0.03) (0.05) Net gain (loss) on securities (realized and unrealized) 0.48 0.46 0.51 0.84 (1.23) ------ ------ ------ ------ ------- Total from investment operations 0.43 0.45 0.47 0.81 (1.28) ------ ------ ------ ------ ------- Less distributions: Distributions from realized gains (0.20) (0.45) -- -- -- ------ ------ ------ ------ ------- Total distributions (0.20) (0.45) -- -- -- ------ ------ ------ ------ ------- Net asset value, end of period $ 6.39 $ 6.16 $ 6.16 $ 5.69 $ 4.88 ====== ====== ====== ====== ======= TOTAL RETURN(a) 7.10% 7.32% 8.26% 16.60% (20.78%) ------ ------ ------ ------ ------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $5,794 $5,706 $6,329 $6,651 $ 4,979 ------ ------ ------ ------ ------- Ratios to average net assets: Net investment loss (0.83%) (0.18%) (0.67%) (0.52%) (0.76%) Total expenses 2.09% 2.05% 2.03% 2.00% 2.02% ------ ------ ------ ------ ------- Portfolio turnover rate 34% 32% 28% 54% 30%
(a) Total return information does not reflect deduction of any sales charges imposed at the time of purchase for Class A shares or upon redemption for Class B and C shares. (b) Net investment income (loss) was computed using average shares outstanding throughout the period. (c) The financial highlights for the Equity Series exclude the historical financial highlights of the Total Return Series Class A, B and C shares. The assets of the Total Return Series were acquired by the Equity Series on August 27, 2002. (d) The financial highlights for Class C shares exclude the historical financial highlights of Class S shares. Class S shares were exchanged for Class C shares on June 3, 2002. (e) Effective May 1, 2002 the fee structure for Equity Series changed. Per share information reflects this change. 23 See accompanying notes. This page left blank intentionally. 24 SECURITY EQUITY FUND Manager's Commentary GLOBAL SERIES November 15, 2006 (unaudited) (OPPENHEIMERFUNDS(R) LOGO) Subadviser, OppenheimerFunds, Inc. (PHOTO OF RAJEEV BHAMAN) Rajeev Bhaman Portfolio Manager TO OUR SHAREHOLDERS: The Global Series of the Security Equity Fund under performed its benchmark, the Morgan Stanley Capital International (MSCI) World Index, over the 12-month period ending September 30, 2006. Class A shares of the Series returned 12.48%(1), versus the benchmark's return of 14.18%. Although we are not pleased with the Series' performance during the reporting period, we remain committed to our investment horizon of three to five years. The past year has been characterized by significant increases in commodity prices, including oil, and monetary tightening worldwide, primarily in the United States, Europe, and Japan. These two phenomena are related, as inflationary concerns from higher oil prices have driven global tightening. Furthermore, there has been concern regarding the decline of U.S. housing prices. Although this has not been the most benign environment for stocks, markets have continued to rally as valuations remained attractive. Among thematic disappointments for the year was the heightened focus on options expensing, particularly for technology companies, and the concerns about lawsuits and damages resulting thereof. This cast a pall on technology shares, which underperformed notwithstanding their excellent long-term growth characteristics. There was also a market slowdown in the take up of implantable cardiac defibrillators and growth rate of knee and hip replacements, hurting some of the Series holdings. We remain confident that the long-term opportunity set for all of the segments that faced setbacks in the past year remain excellent and that our original thesis will come to pass. As to the Series' successes, investments in software companies Intuit, Inc. and Adobe Systems, Inc. continue to pay off. Both companies continue to innovate with new products, satisfying existing customers and achieving broader appeal. Investments in television companies, including ZEE Telefilms Ltd. in India and Grupo Televisa SA in Mexico, contributed positively to the Series' performance as they retained high respective market shares and a growing audience for their programming worldwide. We are also finding strong opportunities across a variety of areas, particularly in technology. We continue to favor a number of our existing holdings, such as Juniper Networks, Inc., as the opportunity for communication network build-outs remains robust. Additionally, we are finding attractive opportunities in the areas of analog and mixed signal semiconductors. Companies such as Maxim Integrated Products, Inc. and Linear Technology Corporation continue to see a high margin of profitable growth and are now available at a fraction of their valuations of only a few years ago. Leading companies in the programmable logic devices arena such as Altera Corporation and Xilinx, Inc., we believe, also provide significant investment upside. The Series has also invested significantly in great companies such as Carnival Corporation, which runs the Carnival Cruise Lines, and the car manufacturer Bayerische Motoren Werke AG (BMW), which both have wonderful franchises and are available at bargain prices. Automatic Data Processing, Inc., the leading payroll processor in the world, is another investment for which we have great enthusiasm. Its business opportunities expand as more companies look to outsourcing their non-core activities to high-quality, lower-cost providers. As global growth continues to advance nicely and interest rates remain relatively low, we remain optimistic about markets generally. As such, we expect to continue to see good opportunities for investment. We remain focused on our long-term investment philosophy and our mantra of looking for "good companies in good businesses at good prices." Sincerely, Rajeev Bhaman, Portfolio Manager (1) Performance figures are based on Class A shares and do not reflect deduction of the sales charges or taxes that a shareholder would pay on distributions or redemptions of shares. Investment in international securities entail greater risks than investment in domestic securities. 25 SECURITY EQUITY FUND Performance Summary GLOBAL SERIES September 30, 2006 (unaudited) PERFORMANCE SECURITY GLOBAL SERIES VS. MORGAN STANLEY CAPITAL INTERNATIONAL WORLD INDEX (PERFORMANCE GRAPH) GLOBAL SERIES 09/30/96 9,425.00 12/31/96 9,709.63 03/31/97 9,943.60 06/30/97 10,946.31 09/30/97 11,330.69 12/31/97 10,380.48 03/31/98 11,968.95 06/30/98 11,710.36 09/30/98 10,371.24 12/31/98 12,373.75 03/31/99 12,602.90 06/30/99 13,718.73 09/30/99 13,937.91 12/31/99 19,157.60 03/31/00 21,722.09 06/30/00 20,928.84 09/30/00 20,494.18 12/31/00 19,743.19 03/31/01 16,907.37 06/30/01 18,103.52 09/30/01 14,837.63 12/31/01 17,135.85 03/31/02 17,377.77 06/30/02 15,738.10 09/30/02 12,754.45 12/31/02 12,996.37 03/31/03 11,907.74 06/30/03 14,380.67 09/30/03 15,697.78 12/31/03 18,399.20 03/31/04 19,151.83 06/30/04 18,909.91 09/30/04 18,721.76 12/31/04 21,705.41 03/31/05 20,939.34 06/30/05 21,544.13 09/30/05 23,479.47 12/31/05 24,541.23 03/31/06 26,274.97 06/30/06 25,334.18 09/30/06 26,409.37
MSCI WORLD INDEX 9/30/96 10,000.00 12/31/96 10,469.97 3/31/97 10,511.55 6/30/97 12,105.92 9/30/97 12,464.66 12/31/97 12,169.53 3/31/98 13,924.88 6/30/98 14,220.29 9/30/98 12,527.96 12/31/98 15,186.70 3/31/99 15,741.08 6/30/99 16,506.74 9/30/99 16,274.79 12/31/99 19,035.23 3/31/00 19,242.03 6/30/00 18,572.82 9/30/00 17,653.15 12/31/00 16,573.91 3/31/01 14,456.22 6/30/01 14,857.82 9/30/01 12,732.31 12/31/01 13,835.63 3/31/02 13,894.43 6/30/02 12,644.22 9/30/02 10,329.79 12/31/02 11,129.55 3/31/03 10,579.16 6/30/03 12,403.38 9/30/03 13,015.07 12/31/03 14,871.13 3/31/04 15,260.00 6/30/04 15,392.25 9/30/04 15,238.65 12/31/04 17,059.31 3/31/05 16,872.05 6/30/05 16,942.43 9/30/05 18,124.52 12/31/05 18,696.97 3/31/06 19,950.20 6/30/06 20,080.61 9/30/06 20,999.83
$10,000 OVER TEN YEARS This chart assumes a $10,000 investment in Class A shares of Global Series on September 30, 1996, reflects deduction of the 5.75% sales load and assumes all dividends reinvested. The chart does not reflect the deduction of taxes that a shareholder would pay on distributions or the redemption of fund shares. The MSCI World Index is an unmanaged capitalization-weighted index that is designed to measure global developed market equity performance. PORTFOLIO COMPOSITION BY SECTOR AS OF 9-30-06 Consumer Discretionary 13.91% Consumer Staples 11.15 Energy 5.19 Financials 15.85 Health Care 12.71 Industrials 9.88 Information Technology 18.27 Materials 1.19 Telecommunication Services 10.59 Utilities 0.63 Cash & other assets, less liabilities 0.63 ------ Total net assets 100.00% ======
AVERAGE ANNUAL RETURNS
SINCE PERIODS ENDED 9-30-06 1YEAR 5 YEARS 10 YEARS INCEPTION --------------------- ----- ------- -------- --------- A Shares 12.48% 12.22% 10.84% -- A Shares with sales charge 5.99% 10.91% 10.19% -- B Shares 12.72% 11.85% 10.29% -- B Shares with CDSC 7.72% 11.59% 10.29% -- C Shares 11.60% 11.37% N/A 9.21% (1-29-99) C Shares with CDSC 10.60% 11.37% N/A 9.21% (1-29-99)
The performance data above represents past performance that is not predictive of future results. The investment return and principal value of an investment in the Series will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The figures above do not reflect deduction of the maximum front-end sales charge of 5.75% for Class A shares or the contingent deferred sales charge of 5% for Class B shares and 1% for Class C shares, as applicable, except where noted. The figures do not reflect the deduction of taxes that a shareholder would pay on distributions or redemption of shares. Such figures would be lower if the maximum sales charge and any applicable taxes were deducted. Fee waivers and/or reimbursements reduced expenses of the Series and in the absence of such waiver, the performance quoted would be reduced. 26 See accompanying notes. SECURITY EQUITY FUND Performance Summary GLOBAL SERIES September 30, 2006 (unaudited) PERFORMANCE INFORMATION ABOUT YOUR SERIES EXPENSES CALCULATING YOUR ONGOING SERIES EXPENSES EXAMPLE As a shareholder of the Series, you incur two types of costs: (1) transaction costs, which may include sales charges (loads) on purchase payments; contingent deferred sales charges on redemptions; and redemption fees, if any; and (2) ongoing costs, including management fees; distribution and/or service fees (12b-1); and other Series expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Series and to compare these costs with ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period, April 1, 2006 - September 30, 2006. ACTUAL EXPENSES The first line for each class of shares in the table provides information about actual account values and actual expenses. You may use the information in this table, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the table under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line for each class of shares in the table provides information about hypothetical account values and hypothetical expenses based on the Series actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Series actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Series and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other mutual funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads) on purchase payments, contingent deferred sales charges on redemptions, and redemption fees, if any. Therefore, the second line for each class of shares is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. SERIES EXPENSES
BEGINNING ENDING ACCOUNT ACCOUNT EXPENSES VALUE VALUE PAID DURING 04-01-06 09-30-06(1) PERIOD(2) --------- ----------- ----------- Global Series - Class A Actual $1,000.00 $1,005.10 $ 8.95 Hypothetical 1,000.00 1,016.74 9.00 Global Series - Class B Actual 1,000.00 1,006.10 7.69 Hypothetical 1,000.00 1,017.40 7.74 Global Series - Class C Actual 1,000.00 1,001.10 12.69 Hypothetical 1,000.00 1,012.38 12.76
(1) The actual ending account value is based on the actual total return of the Series for the period from April 1, 2006 to September 30, 2006 after actual expenses and will differ from the hypothetical ending account value which is based on the Series expense ratio and a hypothetical annual return of 5% before expenses. The actual cumulative return at net asset value for the period from April 1, 2006 to September 30, 2006 was 0.51%, 0.61% and 0.11%, for Class A, B and C shares, respectively. (2) Expenses are equal to the Series annualized expense ratio (1.78%, 1.53% and 2.53% for Class A, B and C shares, respectively), net of any applicable fee waivers, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 27 Schedule of Investments Security Equity Fund - Global Series September 30, 2006
SHARES VALUE --------- ------------ COMMON STOCK - 98.8% AUSTRALIA - 0.3% Macquarie Airports 176,302 $ 403,389 ------------ BERMUDA - 0.3% Everest Re Group, Ltd. 4,900 477,897 ------------ BRAZIL - 1.5% Companhia de Bebidas das Americas ADR 21,557 978,257 Empresa Brasileira de Aeronautica S.A. ADR 36,768 1,443,879 ------------ 2,422,136 ------------ CANADA - 1.7% Husky Energy, Inc. 27,880 1,794,976 Manulife Financial Corporation 25,646 826,032 ------------ 2,621,008 ------------ CAYMAN ISLANDS - 1.1% ACE, Ltd. 17,740 970,910 XL Capital, Ltd. 11,800 810,660 ------------ 1,781,570 ------------ DENMARK - 0.3% Novo-Nordisk A/S (CI.B) 6,400 475,687 ------------ FINLAND - 0.7% Fortum Oyj 37,100 988,361 Neste Oil Oyj 5,225 151,851 ------------ 1,140,212 ------------ FRANCE - 5.6% Arkema * 5,959 281,157 LVMH Moet Hennessy Louis Vuitton S.A 18,520 1,908,007 NicOxSA * 7,490 98,297 Sanofi-Aventis 28,235 2,513,278 Societe Generale 10,880 1,731,364 Technip S.A. 26,740 1,519,669 Total S.A. 10,200 669,308 ------------ 8,721,080 ------------ GERMANY - 4.4% Allianz AG 10,469 1,811,715 Bayerische Motoren Werke (BMW) AG * 28,073 1,503,587 SAPAG 8,783 1,741,788 Siemens AG 21,478 1,873,691 ------------ 6,930,781 ------------ HONG KONG - 0.4% Hutchison Whampoa, Ltd. 63,082 557,080 ------------ INDIA - 3.1% Hindustan Lever, Ltd. 180,100 1,011,184 ICICI Bank, Ltd. ADR (1) 14,650 449,901 Infosys Technologies, Ltd. 49,374 1,993,965 ZEE Telefilms, Ltd. * 198,900 1,328,881 ------------ 4,783,931 ------------
SHARES VALUE --------- ------------ COMMON STOCK (CONTINUED) IRELAND - 0.0% Anglo Irish Bank Corporation plc 203 $ 3,336 ------------ ITALY - 0.5% Bulgari SpA 59,100 752,379 ------------ JAPAN - 10.5% Canon, Inc. 12,150 633,600 Chugai Pharmaceutical Company, Ltd. 29,200 627,877 Credit Saison Company, Ltd. (1) 18,500 779,936 Fanuc, Ltd. 4,800 374,654 Hoya Corporation 25,700 968,169 KDDI Corporation 266 1,657,363 Keyence Corporation 3,200 736,847 Kyocera Corporation 7,500 641,905 Murata Manufacturing Company, Ltd. 21,700 1,506,370 Nidec Corporation 6,300 475,200 Nintendo Company, Ltd. 4,200 865,422 Resona Holdings, Inc. 238 713,244 Shionogi & Company, Ltd. 59,000 1,083,852 Shiseido Company, Ltd. 27,000 539,429 Sony Corporation 43,600 1,764,301 Square Enix Company, Ltd. 24,700 599,073 Sumitomo Mitsui Financial Group, Inc. 34 356,910 Takeda Pharmaceutical Company, Ltd. 12,800 798,612 Toyota Motor Corporation 25,700 1,396,775 ------------ 16,519,539 ------------ MEXICO - 2.1% Fomento Economico Mexicano, S.A. de C.V. * 110,200 1,070,054 Grupo Modelo, S.A. de C.V. (CI.C) 152,300 664,824 Grupo Televisa S.A. ADR 74,456 1,582,934 ------------ 3,317,812 ------------ NETHERLANDS - 2.2% European Aeronautic Defence and Space Company N.V. 55,090 1,584,278 Koninklijke (Royal) Philips Electronics N.V. 52,700 1,848,994 ------------ 3,433,272 ------------ NORWAY - 0.3% Tandberg ASA 49,000 523,297 ------------ REPUBLIC OF KOREA - 2.0% Hyundai Heavy Industries Company, Ltd. 4,054 561,241 Samsung Electronics Company, Ltd.* 1,711 1,200,638 SK Telecom Company, Ltd. ADR 60,460 1,428,670 ------------ 3,190,549 ------------
The accompanying notes are an integral part of the financial statements. 28 Schedule of Investments Security Equity Fund - Global Series September 30, 2006 - continued
SHARES VALUE --------- ------------ COMMON STOCK (CONTINUED) SINGAPORE - 0.2% Singapore Press Holdings, Ltd. 137,848 $ 355,860 ------------ SPAIN - 0.9% Industria de Diseno Textil S.A 29,600 1,379,694 ------------ SWEDEN - 5.7% Hennes & Mauritz AB (CI.B) 65,700 2,747,885 Investor AB (CI.B) (1) 42,428 882,928 Telefonaktiebolaget LM Ericsson (CI.B) 1,512,600 5,242,766 ------------ 8,873,579 ------------ SWITZERLAND - 3.3% Credit Suisse Group 33,155 1,918,398 Novartis AG 15,430 900,824 Roche Holding AG 11,914 2,059,986 Syngenta AG 2,156 325,193 ------------ 5,204,401 ------------ TAIWAN, PROVINCE OF CHINA - 1.4% Benq Corporation 407,000 239,122 MediaTek, Inc. 106,700 1,012,047 Taiwan Semiconductor Manufacturing Company, Ltd. ADR 99,636 956,506 ------------ 2,207,675 ------------ UNITED KINGDOM - 12.5% 3i Group plc (1) 36,195 634,251 BP plc ADR 19,567 1,283,204 Burberry Group plc 59,591 575,104 Cadbury Schweppes plc 155,624 1,656,318 Diageo plc 48,672 859,722 GUS plc 26,420 477,801 HSBC Holdings plc 91,545 1,669,753 Pearson plc 48,130 685,254 Prudential plc 115,159 1,430,460 Reckitt Benckiser plc 57,844 2,397,578 Royal Bank of Scotland Group plc 70,279 2,420,918 Smith & Nephew plc 85,582 787,085 Tesco plc 175,289 1,182,212 Vodafone Group plc 1,359,243 3,117,238 WPP Group plc 41,910 519,412 ------------ 19,696,310 ------------ UNITED STATES - 37.8% 3M Company 20,600 1,533,052 Adobe Systems, Inc. * 52,500 1,966,125 Advanced Micro Devices, Inc. * 91,700 2,278,745 Affymetrix, Inc. * 14,800 319,088 Altera Corporation * 53,200 977,816 Amgen, Inc. * 17,000 1,216,010 Atherogenics, Inc. * 24,700 325,299 Automatic Data Processing, Inc. 39,900 1,888,866 Avis Budget Group, Inc. 6,060 110,837
SHARES VALUE --------- ------------ COMMON STOCK (CONTINUED) UNITED STATES (CONTINUED) Avon Products, Inc. 23,000 $ 705,180 Berkshire Hathaway, Inc. (CI.B) * 280 888,720 Biomet, Inc. 25,400 817,626 Boeing Company 12,800 1,009,280 Boston Scientific Corporation * 64,079 947,729 Carnival Corporation 44,100 2,074,023 Chevron Corporation 15,866 1,029,069 Cisco Systems, Inc. * 28,300 650,900 Coach, Inc. * 22,600 777,440 Conor Medsystems, Inc. * 9,300 219,201 Corning, Inc. * 77,900 1,901,539 Cree, Inc. * 26,300 528,893 eBay, Inc. * 81,700 2,317,012 Emerson Electric Company 12,100 1,014,706 Express Scripts, Inc. * 8,300 626,567 Genentech, Inc. * 8,500 702,950 Getty Images, Inc. * 10,500 521,640 Gilead Sciences, Inc. * 19,500 1,339,650 GlobalSantaFe Corporation 25,100 1,254,749 International Game Technology 29,100 1,207,650 International Rectifier Corporation * 16,200 564,408 Intuit, Inc. * 43,000 1,379,870 Johnson & Johnson 6,500 422,110 JPMorgan Chase & Company 26,769 1,257,072 Juniper Networks, Inc. * 81,800 1,413,504 Linear Technology Corporation 14,100 438,792 Lockheed Martin Corporation 10,300 886,418 Maxim Integrated Products, Inc. 37,600 1,055,432 Medtronic, Inc. 11,700 543,348 Microsoft Corporation 102,500 2,801,325 Morgan Stanley 27,000 1,968,570 Nektar Therapeutics * (2) 10,308 148,538 Northern Trust Corporation 26,700 1,560,081 Northrop Grumman Corporation 11,400 775,998 Novell, Inc. * 83,800 512,856 Nuvelo, Inc. * 8,800 160,512 Qualcomm, Inc. 19,040 692,104 Quest Diagnostics, Inc. 13,200 807,312 Raytheon Company 18,900 907,389 Realogy Corporation * 16,100 365,148 Sirius Satellite Radio, Inc. * 320,900 1,254,719 Starbucks Corporation * 18,200 619,710 Theravance, Inc. * 12,500 338,000 Tiffany & Company 34,700 1,152,040 Transocean, Inc. * 23,300 1,706,259 Wal-Mart Stores, Inc. 33,200 1,637,424 Walt Disney Company 34,300 1,060,213 Wyeth 14,100 716,844 Xilinx, Inc. 35,600 781,420
The accompanying notes are an integral part of the financial statements. 29 Schedule of Investments Security Equity Fund - Global Series September 30, 2006 - continued
SHARES VALUE --------- ------------ COMMON STOCK (CONTINUED) UNITED STATES (CONTINUED) Yahoo!, Inc. * 11,400 $ 288,192 ------------ 59,365,970 ------------ TOTAL COMMON STOCK (Cost $118,164,866) $155,138,444 ------------ PREFERRED STOCK - 0.6% GERMANY - 0.6% Porsche AG 880 911,455 ------------ TOTAL PREFERRED STOCK (Cost $388,526) $ 911,455 ------------ TOTAL INVESTMENTS (SECURITY EQUITY FUND - GLOBAL SERIES) (COST $118,553,392) - 99.4% $156,049,899 OTHER ASSETS IN EXCESS OF LIABILITIES - 0.6 981.628 ------------ TOTAL NET ASSETS - 100.0% $157,031,527 ============
INVESTMENT CONCENTRATION At September 30, 2006, the investment diversification of the fund was as follows:
% OF INDUSTRY NET ASSETS VALUE -------- ---------- ------------ Communications Equipment 6.5% $ 10,424,110 Pharmaceuticals 6.4 9,924,369 Semiconductors 6.2 9,794,697 Diversified Banks 4.2 6,632,182 Aerospace & Defense 4.2 6,607,242 Wireless Telecommunication Services 4.0 6,203,271 Application Software 3.3 5,087,783 Integrated Oil & Gas 3.0 4,776,557 Electronic Equipment Manufacturers 2.8 4,328,491 Broadcasting & Cable TV 2.7 4,166,535 Apparel Retail 2.6 4,127,579 Apparel, Accessories & Luxury Goods 2.6 4,012,930 Industrial Conglomerates 2.6 3,963,823 Biotechnology 2.5 3,855,419 Automobile Manufacturers 2.5 3,811,817 Consumer Electronics 2.3 3,613,294 Household Products 2.1 3,408,762 Health Care Equipment 2.0 3,314,989 Systems Software 2.1 3,314,181 Other Diversified Financial Services 2.1 3,225,642 Oil & Gas Drilling 1.9 2,961,008 Property & Casualty Insurance 1.7 2,670,290 Internet Software & Services 1.7 2,605,204 Life & Health Insurance 1.4 2,256,492 Asset Management & Custody Banks 1.4 2,194,332 Hotels, Resorts & Cruise Lines 1.3 2,074,023 IT Consulting & Other Services 1.3 1,993,965 Diversified Capital Markets 1.2 1,918,398 Data Processing & Outsourced Services 1.2 1,888,866 Multi-Line Insurance 1.1 1,811,715 Packaged Foods & Meats 1.1 1,656,318 Brewers 1.1 1,643,081 Hypermarkets & Super Centers 1.0 1,637,424 Publishing 0.9 1,562,754 Oil & Gas Equipment & Services 1.0 1,519,669 Home Entertainment Software 0.9 1,464,495 Health Care Services 0.9 1,433,879 Personal Products 0.8 1,244,608 Casinos & Gaming 0.8 1,207,650 Food Retail 0.8 1,182,212 Specialty Stores 0.7 1,152,040 Soft Drinks 0.7 1,070,054 Movies & Entertainment 0.7 1,060,213 Electrical Components & Equipment 0.6 1,014,706 Electric Utilities 0.6 988,361 Multi-Sector Holdings 0.6 882,928 Distillers & Vintners 0.5 859,722 Consumer Finance 0.5 779,937 Regional Banks 0.5 713,244 Office Electronics 0.4 633,600 Restaurants 0.4 619,710 Construction & Farm Machinery & Heavy Trucks 0.3 561,241 Advertising 0.3 519,412 Reinsurance 0.3 477,897 Catalog Retail 0.3 477,801 Life Sciences Tools & Services 0.3 467,626 Airport Services 0.3 403,389 Industrial Machinery 0.2 374,654 Real Estate Management & Development 0.2 365,148 Fertilizers & Agricultural Chemicals 0.2 325,193 Commodity Chemicals 0.2 281,157 Computer Storage & Peripherals 0.2 239,122 Oil & Gas Refining & Marketing 0.1 151,851 Diversified Commercial & Professional Services 0.1 110,837 ---- ------------ TOTAL INVESTMENTS 99.4 156,049,899 OTHER ASSETS AND LIABILITIES, NET 0.6 981,628 ---- ------------ NET ASSETS 100% $157,031,527 ==== ============
Footnotes Percentages are stated as a percent of net assets. For federal income tax purposes the identified cost of investments owned at 9/30/2006 was $119,986,913. * - Non-income producing security (1) - PFIC (Passive Foreign Investment Company) The accompanying notes are an integral part of the financial statements. 30 Schedule of Investments Security Equity Fund - Global Series September 30, 2006 - continued (2) - Security is restricted. See Notes to Financials. Glossary: ADR - American Depositary Receipt plc - Public Limited Company See notes to financial statements. The accompanying notes are an integral part of the financial statements. 31 SECURITY EQUITY FUND GLOBAL SERIES Statement of Assets and Liabilities September 30, 2006 ASSETS: Investments, at value(1) ........................................ $156,049,899 Cash ............................................................ 764,183 Cash denominated in a foreign currency, at value(2) ............. 306,252 Receivables: Fund shares sold ............................................. 108,187 Dividends .................................................... 195,352 Foreign taxes recoverable ....................................... 32,451 Prepaid expenses ................................................ 20,224 ------------ TOTAL ASSETS .................................................... 157,476,548 ------------ LIABILITIES: Payable for: Fund shares redeemed ......................................... 182,918 Management fees .............................................. 127,201 Custodian fees ............................................... 29,490 Transfer agent and administration fees ....................... 38,781 Professional fees ............................................ 25,042 12b-1 distribution plan fees ................................. 32,489 Directors' fees .............................................. 600 Other ........................................................ 8,500 ------------ Total liabilities ............................................... 445,021 ------------ NET ASSETS ...................................................... $157,031,527 ============ NET ASSETS CONSIST OF: Paid in capital ................................................. $104,007,591 Accumulated undistributed net investment loss ................... (4,979,244) Accumulated undistributed net realized gain on sale of investments, foreign currency transactions and options purchased .................................................... 20,507,729 Net unrealized appreciation in value of investments and translation of assets and liabilities in foreign currency .... 37,495,451 ------------ Net assets ...................................................... $157,031,527 ============ CLASS A: Capital shares outstanding (unlimited number of shares authorized) .................................................. 6,064,999 Net assets ...................................................... $119,176,458 Net asset value per share ....................................... $ 19.65 ============ Maximum offering price per share (net asset value divided by 94.25%) ................................................... $ 20.85 ============ CLASS B: Capital shares outstanding (unlimited number of shares authorized) .................................................. 1,512,854 Net assets ...................................................... $ 27,493,865 Net asset value, offering and redemption price per share (excluding any applicable contingent deferred sales charge) .. $ 18.17 ============ CLASS C: Capital shares outstanding (unlimited number of shares authorized) .................................................. 563,899 Net assets ...................................................... $ 10,361,204 Net asset value, offering and redemption price per share (excluding any applicable contingent deferred sales charge) .. $ 18.37 ============ (1) Investments, at cost ....................................... $118,553,392 (2) Cash denominated in a foreign currency, at cost ............ 306,421
Statement of Operations For the Year Ended September 30, 2006 INVESTMENT INCOME: Dividends (net of foreign withholding tax $203,986) .......... $ 2,412,341 Interest ..................................................... 72,495 ------------ Total investment income ...................................... 2,484,836 ------------ EXPENSES: Management fees .............................................. 1,566,845 Custodian fees ............................................... 121,874 Transfer agent/maintenance fees .............................. 279,480 Administration fees .......................................... 246,343 Directors' fees .............................................. 3,815 Professional fees ............................................ 40,701 Reports to shareholders ...................................... 41,614 Registration fees ............................................ 41,250 Other expenses ............................................... 9,931 12b-1 distribution plan fees - Class A ....................... 294,608 12b-1 distribution plan fees - Class C ....................... 96,425 ------------ Total expenses ............................................... 2,742,886 Less: Earnings credits ....................................... (3,648) ------------ Net expenses ................................................. 2,739,238 ------------ Net investment loss .......................................... (254,402) ------------ NET REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) during the period on: Investments .................................................. 26,109,943 Foreign currency transactions ................................ (4,364,134) Options purchased ............................................ 2,910 ------------ Net realized gain ............................................ 21,748,719 ------------ Net unrealized depreciation during the period on: Investments .................................................. (2,328,820) Translation of assets and liabilities in foreign currencies .. (2,285) ------------ Net unrealized depreciation .................................. (2,331,105) ------------ Net gain ..................................................... 19,417,614 ------------ Net increase in net assets resulting from operations ......... $ 19,163,212 ============
32 See accompanying notes. SECURITY EQUITY FUND Statement of Changes in Net Assets GLOBAL SERIES
YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, 2006 2005 ------------- ------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS: Net investment loss ............................................................. $ (254,402) $ (466,732) Net realized gain during the period on investments, options purchased and foreign currency transactions ........................................................ 21,748,719 13,103,309 Net unrealized appreciation (depreciation) during the period on investments and translation of assets and liabilities in foreign currencies .................. (2,331,105) 20,726,759 ------------ ------------ Net increase in net assets resulting from operations ............................ 19,163,212 33,363,336 ------------ ------------ CAPITAL SHARE TRANSACTIONS: Proceeds from sale of shares Class A ...................................................................... 38,473,976 31,692,774 Class B ...................................................................... 4,863,534 3,283,116 Class C ...................................................................... 2,579,360 1,610,608 Cost of shares redeemed Class A ...................................................................... (62,028,224) (27,395,260) Class B ...................................................................... (9,756,709) (8,996,589) Class C ...................................................................... (2,073,631) (2,115,442) ------------ ------------ Net decrease from capital share transactions .................................... (27,941,694) (1,920,793) ------------ ------------ Net increase (decrease) in net assets ........................................... (8,778,482) 31,442,543 ------------ ------------ NET ASSETS: Beginning of period ............................................................. 165,810,009 134,367,466 ------------ ------------ End of period ................................................................... $157,031,527 $165,810,009 ============ ============ Accumulated undistributed net investment loss at end of period .................. $ (4,979,244) $ (772,826) ============ ============ CAPITAL SHARE ACTIVITY: Shares sold Class A ...................................................................... 2,071,616 2,004,496 Class B ...................................................................... 283,447 225,028 Class C ...................................................................... 146,502 107,909 Shares redeemed Class A ...................................................................... (3,331,473) (1,748,721) Class B ...................................................................... (569,781) (618,877) Class C ...................................................................... (119,789) (142,443)
33 See accompanying notes. SECURITY EQUITY FUND Financial Highlights GLOBAL SERIES Selected data for each share of capital stock outstanding throughout each period
YEAR ENDED SEPTEMBER 30, -------------------------------------------------------- CLASS A 2006 2005 2004(h) 2003 2002(e, g) ------- -------- -------- ------- ------- ---------- PER SHARE DATA Net asset value, beginning of period $ 17.47 $ 13.93 $ 11.68 $ 9.49 $ 11.04 -------- -------- ------- ------- ------- Income (loss) from investment operations: Net investment loss(c) (0.03) (0.02) (0.03) (0.03) (0.05) Net gain (loss) on securities (realized and unrealized) 2.21 3.56 2.28 2.22 (1.50) -------- -------- ------- ------- ------- Total from investment operations 2.18 3.54 2.25 2.19 (1.55) -------- -------- ------- ------- ------- Net asset value, end of period $ 19.65 $ 17.47 $ 13.93 $ 11.68 $ 9.49 ======== ======== ======= ======= ======= TOTAL RETURN(a) 12.48% 25.41% 19.26% 23.08% (14.04%) -------- -------- ------- ------- ------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $119,176 $127,970 $98,450 $42,711 $50,893 -------- -------- ------- ------- ------- Ratios to average net assets: Net investment loss (0.17%) (0.14%) (0.20%) (0.26%) (0.46%) Total expenses(b) 1.75% 1.73% 1.79% 2.00% 1.85% Net expenses(d) 1.75% 1.73% 1.79% 2.00% 1.85% Expenses prior to custodian earnings credits and net of expense waivers 1.75% 1.73% 1.79% 2.00% 1.85% -------- -------- ------- ------- ------- Portfolio turnover rate 28% 31% 25% 62% 36%
YEAR ENDED SEPTEMBER 30, ----------------------------------------------------- CLASS B 2006(i) 2005(i) 2004(h) 2003 2002(e, g) ------- ------- ------- ------- ------- ---------- PER SHARE DATA Net asset value, beginning of period $ 16.12 $ 12.93 $ 10.93 $ 8.89 $ 10.38 ------- ------- ------- ------- ------- Income (loss) from investment operations: Net investment income (loss)(c) 0.02 (0.12) (0.13) (0.04) (0.10) Net gain (loss) on securities (realized and unrealized) 2.03 3.31 2.13 2.08 (1.39) ------- ------- ------- ------- ------- Total from investment operations 2.05 3.19 2.00 2.04 (1.49) ------- ------- ------- ------- ------- Net asset value, end of period $ 18.17 $ 16.12 $ 12.93 $ 10.93 $ 8.89 ======= ======= ======= ======= ======= TOTAL RETURN(a) 12.72% 24.67% 18.30% 22.95% (14.35%) ------- ------- ------- ------- ------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $27,494 $28,999 $28,360 $16,461 $19,021 ------- ------- ------- ------- ------- Ratios to average net assets: Net investment income (loss) 0.11% (0.80%) (1.00%) (0.42%) (0.89%) Total expenses(b) 1.50% 2.38% 2.54% 2.18% 2.28% Net expenses(d) 1.50% 2.38% 2.54% 2.18% 2.28% Expenses prior to custodian earnings credits and net of expense waivers 1.50% 2.38% 2.54% 2.18% 2.28% ------- ------- ------- ------- ------- Portfolio turnover rate 28% 31% 25% 62% 36%
34 See accompanying notes. SECURITY EQUITY FUND Financial Highlights GLOBAL SERIES Selected data for each share of capital stock outstanding throughout each period
YEAR ENDED SEPTEMBER 30, ------------------------------------------------------ CLASS C 2006 2005 2004(h) 2003 2002(e, f, g) ------- ------- ------ ------- ------ ------------- PER SHARE DATA Net asset value, beginning of period $ 16.46 $13.22 $11.17 $ 9.14 $ 10.72 ------- ------ ------ ------ ------- Income (loss) from investment operations: Net investment loss(c) (0.15) (0.13) (0.13) (0.09) (0.15) Net gain (loss) on securities (realized and unrealized) 2.06 3.37 2.18 2.12 (1.43) ------- ------ ------ ------ ------- Total from investment operations 1.91 3.24 2.05 2.03 (1.58) ------- ------ ------ ------ ------- Net asset value, end of period $ 18.37 $16.46 $13.22 $11.17 $ 9.14 ======= ====== ====== ====== ======= TOTAL RETURN(a) 11.60% 24.51% 18.35% 22.21% (14.74%) ------- ------ ------ ------ ------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $10,361 $8,841 $7,557 $5,326 $ 4,076 ------- ------ ------ ------ ------- Ratios to average net assets: Net investment loss (0.87%) (0.90%) (1.02%) (0.96%) (1.33%) Total expenses(b) 2.51% 2.48% 2.54% 2.77% 2.74% Net expenses(d) 2.50% 2.48% 2.54% 2.77% 2.74% Expenses prior to custodian earnings credits and net of expense waivers 2.51% 2.48% 2.54% 2.77% 2.74% ------- ------ ------ ------ ------- Portfolio turnover rate 28% 31% 25% 62% 36%
(a) Total return information does not reflect deduction of any sales charges imposed at the time of purchase for Class A shares or upon redemption for Class B and C shares. (b) Total expense information reflects expense ratios absent fund expense reductions by the Investment Manager. (c) Net investment income (loss) was computed using average shares outstanding throughout the period. (d) Net expense information reflects the expense ratios after voluntary expense waivers, reimbursements and custodian earnings credits, as applicable. (e) As required, effective October 1, 2001, the Funds adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premiums on fixed income securities. The effect of this change for the period ended September 30, 2002, was to increase net investment income per share by less than 1/2 of a cent, decrease net realized and unrealized gains and losses per share by less than 1/2 of a cent and increase the ratio of net investment income to average net assets from 0.06% to 0.07%. Per share, ratios and supplemental data for periods prior to October 1, 2001 have not been restated to reflect this change in presentation. (f) The financial highlights for Class C shares exclude the historical financial highlights of Class S shares. Class S shares were exchanged for Class C shares on June 3, 2002. (g) Effective May 1, 2002 the fee structure for Global Series changed. Per share information reflects this change. (h) The financial highlights for the Global Series exclude the historical financial highlights of the International Series Class A, B and C shares. The assets of the International Series were acquired by the Global Series on October 3, 2003. (i) Effective August 25, 2005, Class B shares ceased charging 12b-1 fees in accordance with NASD sales cap regulations. Per share information reflects this change. This fee may be reinstated at any time. 35 See accompanying notes. SECURITY EQUITY FUND Manager's Commentary MID CAP VALUE SERIES November 15, 2006 (unaudited) (SECURITY BENEFIT(SM) LOGO) Security Management Company, LLC Adviser, Security Management Company, LLC (PHOTO OF JAMES P. SCHIER) James P. Schier Senior Portfolio Manager TO OUR SHAREHOLDERS: For the year ending September 30 2006, the Security Equity Fund Mid Cap Value Series gained 11.44%(1). This exceeded the 11.13% return of the Series' benchmark, the Russell 2500 Value Index, and the 8.98% median return of the peer group. Our approach with the Mid Cap Senior Value Series is to seek appreciable securities of companies that are able to grow and/or reinvest in increasingly profitable ventures and hold them over three to five years to capture the better part of the improvements in profitability. We are focused on investing in securities when we find opportunities, with our individual position sizes reflecting the magnitude and the confidence in the opportunity. For this Series, we target securities generally priced at or below a market multiple that are able to increase their return on capital over time. STAPLES, INDUSTRIALS AND FINANCIALS WERE POSITIVE CONTRIBUTORS Grain processors Archer Daniels Midland Corporation and Corn Products International, Inc., gained 56% and 63% respectively, with a favorable commodity environment. Archer Daniels Midland Corporation benefited from the ethanol expansion and Corn Products International, Inc., benefited from a change in import tariffs on the high fructose corn syrup market. Playtex Products, Inc., gained 31% as the company's new management team introduced new product initiatives. The position in Archer Daniels Midland has been sold in favor of more compelling alternatives. Stock selection and a larger-than-benchmark allocation in the industrials sector were positive contributors. With 25% of assets in this sector, the Series' holdings in industrials gained 23%, versus 16% for the index. McDermott International, Inc., gained 71% as the company's marine construction and industrial services businesses enjoyed significant end-market demand. Hughes Supply advanced 43% as it agreed to a buy-out offer from Home Depot. Orbital Sciences Corporation gained 48% on the successful testing of its missile defense system. Positive stock selection in financials benefited the Series as stocks in this sector gained 22% versus 15% for the benchmark. First Marblehead Corporation and W.R. Berkley Corporation gained 176% and 35%, respectively, on continued solid business operating results. ENERGY, FINANCIALS, AND CONSUMER DISCRETIONARY DISAPPOINT The Series' energy weighting and selection negatively impacted performance during the year. The Series averaged a 16% weighting in this sector with holdings declining 13% in aggregate. Exposure to Evergreen Energy, Inc., and Arch Coal, Inc., coal companies, proved inopportune as they declined 38% and 13%, respectively. A temporary inventory build-up drove coal commodity prices lower. We believe coal continues to represent the best energy value in the market due to its low dollar cost per BTU. The Series' conviction in these two stocks remains high as we view the correction as being temporary. An underweight position in the financial sector hurt the Series. Given the valuation and a very lackluster credit outlook, the Series was underweight in the sector. The benchmark holds a 33% weighting in financials. If the sector has a significant price correction, we may become more aggressive in the sector. Stock selection in consumer discretionary stocks was also a negative for the year. Poor sales results at retailers Bombay Company, Inc., and Tuesday Morning Corporation hampered results. Merchandise changes at both of these companies were expected to reinvigorate store productivity. The turnarounds have proven to be far more elusive than originally anticipated and the Series has exited these names. OUTLOOK FOR 2007 We continue to be surprised by the strength of the market and maintain our cautious stance for the U.S. equity market. Despite the higher levels of short-term interest rates, high energy costs ($70 oil), and an increasingly unpredictable geopolitical environment, the broad market averages have advanced again in 2006. If anything, we are more cautious now than last year at this time. 36 SECURITY EQUITY FUND Manager's Commentary MID CAP VALUE SERIES November 15, 2006 (unaudited) We continue to find the most opportunities in the energy and industrial sectors. With large existing exposure in these areas, we are not likely not to go beyond today's significant levels. Over the past six months, the Series has increased its commitments to the utility and consumer staple sectors. On behalf of Security Management Company, I would like to thank you for trusting your funds with us. We are excited to see what opportunities present themselves in the future. As always, we continue to do our best to seek the potential available in small and mid capitalization companies. Sincerely, James P. Schier Senior Portfolio Manager (1) Performance figures are based on Class A shares and do not reflect deduction of the sales charges or taxes that a shareholder would pay on distributions or the redemption of shares. 37 SECURITY EQUITY FUND Performance Summary MID CAP VALUE SERIES September 30, 2006 (unaudited) PERFORMANCE SECURITY MID CAP VALUE SERIES VS. RUSSELL 2500 VALUE INDEX (PERFORMANCE GRAPH) MID CAP VALUE SERIES 05/01/97 9,425.00 06/30/97 10,386.35 09/30/97 12,205.38 12/31/97 12,202.14 03/31/98 13,982.63 06/30/98 13,914.89 09/30/98 11,679.61 12/31/98 14,172.02 03/31/99 13,968.04 06/30/99 16,872.38 09/30/99 16,124.44 12/31/99 17,264.05 03/31/00 19,149.61 06/30/00 18,997.55 09/30/00 21,035.18 12/31/00 21,872.54 03/31/01 22,618.32 06/30/01 24,688.70 09/30/01 20,080.44 12/31/01 24,341.98 03/31/02 26,771.65 06/30/02 24,635.80 09/30/02 19,098.39 12/31/02 20,725.71 03/31/03 20,228.48 06/30/03 25,731.98 09/30/03 27,664.42 12/31/03 31,467.96 03/31/04 33,864.00 06/30/04 34,753.95 09/30/04 34,742.54 12/31/04 39,907.19 03/31/05 39,821.68 06/30/05 40,921.05 09/30/05 44,390.18 12/31/05 46,184.87 03/31/06 51,316.52 06/30/06 50,450.47 09/30/06 49,468.09
RUSSELL 2500 VALUE INDEX INCEPTION 5/01/97 10,000.00 06/30/97 11,200.83 09/30/97 12,594.49 12/31/97 12,952.70 03/31/98 14,188.46 06/30/98 13,681.09 09/30/98 11,427.77 12/31/98 12,705.04 03/31/99 11,687.40 06/30/99 13,558.89 09/30/99 12,386.34 12/31/99 12,892.04 03/31/00 13,494.60 06/30/00 13,413.75 09/30/00 14,336.43 12/31/00 15,571.76 03/31/01 15,264.14 06/30/01 16,787.57 09/30/01 14,698.15 12/31/01 17,088.66 03/31/02 18,542.23 06/30/02 17,895.20 09/30/02 14,608.72 12/31/02 15,401.82 03/31/03 14,666.86 06/30/03 17,788.08 09/30/03 19,169.13 12/31/03 22,319.49 03/31/04 23,698.49 06/30/04 23,817.52 09/30/04 23,877.08 12/31/04 27,134.02 03/31/05 26,556.13 06/30/05 27,969.20 09/30/05 28,963.85 12/31/05 29,232.64 03/31/06 32,291.66 06/30/06 31,477.47 09/30/06 32,190.62
$10,000 SINCE INCEPTION This chart assumes a $10,000 investment in Class A shares of Mid Cap Value Series on May 1, 1997 (date of inception), reflects deduction of the 5.75% sales load and assumes all dividends reinvested. The chart does not reflect the deduction of taxes that a shareholder would pay on distributions or the redemption of fund shares. The Russell 2500 Value Index is an unmanaged index that measures the performance of securities of small-to-mid cap U.S. companies with greater-than-average value orientation. AVERAGE ANNUAL RETURNS
PERIODS ENDED 9-30-06 1 YEAR 5 YEARS SINCE INCEPTION --------------------- ------ ------- ---------------- A Shares 11.44% 19.76% 19.16% (5-1-97) A Shares with sales charge 5.02% 18.35% 18.42% (5-1-97) B Shares 10.60% 18.80% 18.24% (5-1-97) B Shares with CDSC 5.60% 18.60% 18.24% (5-1-97) C Shares 10.62% 18.82% 16.74% (1-29-99) C Shares with CDSC 9.62% 18.82% 16.74% (1-29-99)
The performance data above represents past performance that is not predictive of future results. The investment return and principal value of an investment in the Series will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The figures above do not reflect deduction of the maximum front-end sales charge of 5.75% for Class A shares or the contingent deferred sales charge of 5% for Class B shares and 1% for Class C shares, as applicable, except where noted. The figures do not reflect the deduction of taxes that a shareholder would pay on distributions or redemption of shares. Such figures would be lower if the maximum sales charge and any applicable taxes were deducted. PORTFOLIO COMPOSITION BY SECTOR AS OF 9-30-06 Consumer Discretionary 4.76% Consumer Staples 8.34 Energy 17.42 Financials 14.36 Health Care 3.01 Industrials 19.32 Information Technology 14.40 Materials 2.96 Utilities 6.98 Exchange Traded Funds 3.35 Commercial Paper 1.86 Asset Backed Commercial Paper 4.72 Warrants 0.25 Repurchase Agreement 0.03 Liabilities in excess of other assets (1.76) ------ Total net assets 100.00% ======
38 See accompanying notes. SECURITY EQUITY FUND Performance Summary MID CAP VALUE SERIES September 30, 2006 (unaudited) PERFORMANCE INFORMATION ABOUT YOUR SERIES EXPENSES CALCULATING YOUR ONGOING SERIES EXPENSES EXAMPLE As a shareholder of the Series, you incur two types of costs: (1) transaction costs, which may include sales charges (loads) on purchase payments; contingent deferred sales charges on redemptions; and redemption fees, if any; and (2) ongoing costs, including management fees; distribution and/or service fees (12b-1); and other Series expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Series and to compare these costs with ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period, April 1, 2006 - September 30, 2006. ACTUAL EXPENSES The first line for each class of shares in the table provides information about actual account values and actual expenses. You may use the information in this table, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the table under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line for each class of shares in the table provides information about hypothetical account values and hypothetical expenses based on the Series actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Series actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Series and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other mutual funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads) on purchase payments, contingent deferred sales charges on redemptions, and redemption fees, if any. Therefore, the second line for each class of shares is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. SERIES EXPENSES
BEGINNING ENDING EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING 04-01-06 09-30-06(1) PERIOD(2) ------------- ------------- ------------- Mid Cap Value Series - Class A Actual $1,000.00 $ 964.00 $ 6.70 Hypothetical 1,000.00 1,018.25 6.88 Mid Cap Value Series - Class B Actual 1,000.00 960.20 10.37 Hypothetical 1,000.00 1,014.49 10.66 Mid Cap Value Series - Class C Actual 1,000.00 960.20 10.37 Hypothetical 1,000.00 1,014.49 10.66
(1) The actual ending account value is based on the actual total return of the Series for the period from April 1, 2006 to September 30, 2006 after actual expenses and will differ from the hypothetical ending account value which is based on the Series expense ratio and a hypothetical annual return of 5% before expenses. The actual cumulative return at net asset value for the period from April 1, 2006 to September 30, 2006 was (3.60%), (3.98%) and (3.98%), for Class A, B and C shares, respectively. (2) Expenses are equal to the Series annualized expense ratio (1.36%, 2.11% and 2.11% for Class A, B and C shares, respectively) multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 39 Schedule of Investments Security Equity Fund - Mid Cap Value Series September 30, 2006
SHARES VALUE --------- ------------ COMMON STOCK - 94.5% AEROSPACE & DEFENSE - 1.7% Orbital Sciences Corporation * 762,000 $ 14,302,740 ------------ AGRICULTURAL PRODUCTS - 1.3% Corn Products International, Inc. 330,000 10,738,200 ------------ APPLICATION SOFTWARE - 1.7% EPIQ Systems, Inc. * 645,000 9,487,950 PLATO Learning, Inc. * (1) 820,000 5,223,400 ------------ 14,711,350 ------------ AUTO PARTS & EQUIPMENT - 0.4% HydroGen Corporation * (1)(2) 732,850 3,664,250 ------------ BUILDING PRODUCTS - 0.5% Quixote Corporation (1) 239,650 4,270,563 ------------ COAL & CONSUMABLE FUELS - 6.3% Arch Coal, Inc. (3) 620,000 17,924,200 Consol Energy, Inc. 163,000 5,171,990 Evergreen Energy, Inc. * 1,953,800 20,534,438 USEC, Inc. 1,084,000 10,449,760 ------------ 54,080,388 ------------ COMMUNICATIONS EQUIPMENT - 3.0% Dycom Industries, Inc. * 235,000 5,052,500 EFJ, Inc. * 9,900 73,458 Mastec, Inc. * 1,100,000 12,177,000 MRV Communications, Inc. * 1,500,000 4,140,000 Oplink Communications, Inc. * 228,571 4,566,849 ------------ 26,009,807 ------------ COMPUTER & ELECTRONICS RETAIL - 1.2% RadioShack Corporation 530,000 10,229,000 ------------ CONSTRUCTION & ENGINEERING - 7.6% Granite Construction, Inc. (3) 84,900 4,529,415 Insituform Technologies, Inc. * 270,400 6,565,312 Quanta Services, Inc. * 1,225,000 20,653,500 Shaw Group, Inc. * 1,406,700 33,254,388 ------------ 65,002,615 ------------ CONSUMER FINANCE - 2.4% First Marblehead Corporation (3) 293,600 20,334,736 ------------ DATA PROCESSING & OUTSOURCED SERVICES - 4.0% Affiliated Computer Services, Inc. * 245,000 12,705,700 Computer Sciences Corporation * 440,000 21,612,800 ------------ 34,318,500 ------------ DIVERSIFIED COMMERCIAL & PROFESSIONAL SERVICES - 2.6% FTI Consulting, Inc. * 466,000 11,677,960 PHH Corporation * 380,000 10,412,000 ------------ 22,089,960 ------------ ELECTRIC UTILITIES - 6.6% Empire District Electric Company 265,800 5,948,604
SHARES VALUE --------- ------------ COMMON STOCK (CONTINUED) ELECTRIC UTILITIES (CONTINUED) Great Plains Energy, Inc. (3) 1,420,650 $ 44,068,563 Northeast Utilities 250,300 5,824,481 Westar Energy, Inc. 25,900 608,909 ------------ 56,450,557 ------------ ELECTRICAL COMPONENTS & EQUIPMENT - 1.9% Powell Industries, Inc. * (1) 117,300 2,595,849 Power-One, Inc. * 1,904,000 13,784,960 ------------ 16,380,809 ------------ ELECTRONIC MANUFACTURING SERVICES - 3.1% Maxwell Technologies, Inc. * 601,000 12,224,340 Merix Corporation * (2) 1,476,000 14,184,360 ------------ 26,408,700 ------------ EXCHANGE TRADED FUNDS - 3.3% iShares Russell 2000 Value Index Fund 202,000 14,887,400 iShares S&P MidCap 400 185,000 13,673,350 ------------ 28,560,750 ------------ GAS UTILITIES - 0.4% Southern Union Company 130,000 3,433,300 ------------ GENERAL MERCHANDISE STORES - 1.0% Tuesday Morning Corporation 630,000 8,744,400 ------------ HEALTH CARE EQUIPMENT - 0.4% HealthTronics, Inc. * 510,000 3,146,700 ------------ HEALTH CARE FACILITIES - 2.4% Community Health Systems, Inc. * 185,000 6,909,750 Triad Hospitals, Inc. * 310,000 13,649,300 ------------ 20,559,050 ------------ HOMEFURNISHING RETAIL - 0.0% Bombay Company, Inc. * 119,200 163,304 ------------ INDUSTRIAL CONGLOMERATES - 3.8% McDermott International, Inc. * 781,700 32,675,060 ------------ INSURANCE BROKERS - 0.3% Hub International, Ltd. 96,000 2,776,320 ------------ INTEGRATED OIL & GAS - 1.6% Murphy Oil Corporation 279,000 13,266,450 ------------ LIFE & HEALTH INSURANCE - 0.8% KMG America Corporation * (1) 905,400 6,654,690 ------------ MORTGAGE REIT'S - 3.4% HomeBanc Corporation 650,000 3,997,500 MortgageIT Holdings, Inc. 960,700 13,526,656 Opteum, Inc. (1)(2) 1,474,400 11,868,920 ------------ 29,393,076 ------------
The accompanying notes are an integral part of the financial statements. 40 Schedule of Investments Security Equity Fund - Mid Cap Value Series September 30, 2006 - continued
SHARES VALUE --------- ------------ COMMON STOCK (CONTINUED) MULTI - LINE INSURANCE - 1.4% American Financial Group, Inc. 255,000 $ 11,967,150 ------------ OIL & GAS DRILLING - 2.0% Helmerich & Payne, Inc. 740,000 17,042,200 ------------ OIL & GAS EQUIPMENT & SERVICES - 1.2% Key Energy Services, Inc. * 780,000 10,608,000 ------------ OIL & GAS EXPLORATION & PRODUCTION - 1.5% Gulfport Energy Corporation * 260,000 3,013,400 Newfield Exploration Company * 260,000 10,020,400 ------------ 13,033,800 ------------ OIL & GAS REFINING & MARKETING - 0.6% Nova Oil, Inc. * (1) 1,354,900 4,742,150 ------------ OIL & GAS STORAGE & TRANSPORTATION - 4.3% Double Hull Tankers, Inc. 522,900 7,189,875 Williams Companies, Inc. 1,234,000 29,455,580 ------------ 36,645,455 ------------ PACKAGED FOODS & MEATS - 4.8% Hormel Foods Corporation 350,000 12,593,000 JM Smucker Company 260,000 12,467,000 Tyson Foods, Inc. (3) 1,000,000 15,880,000 ------------ 40,940,000 ------------ PAPER PACKAGING - 2.6% Bemis Company, Inc. 350,000 11,501,000 Sonoco Products Company 330,700 11,124,748 ------------ 22,625,748 ------------ PERSONAL PRODUCTS - 2.3% Alberto-Culver Company * 87,000 4,401,330 Playtex Products, Inc. * 1,150,000 15,410,000 ------------ 19,811,330 ------------ PROPERTY & CASUALTY INSURANCE - 4.4% Alleghany Corporation * 27,643 7,989,103 First American Corporation 262,500 11,114,250 North Pointe Holdings Corporation * (1)(2) 470,000 4,352,200 United America Indemnity, Ltd. * 130,000 2,921,100 W.R. Berkley Corporation (3) 322,500 11,413,275 ------------ 37,789,928 ------------ REGIONAL BANKS - 1.7% Mercantile Bankshares Corporation 148,000 5,367,960 Wilmington Trust Corporation 105,400 4,695,570 Zions Bancorporation 53,000 4,229,930 ------------ 14,293,460 ------------ SEMICONDUCTOR EQUIPMENT - 0.9% Ultratech, Inc. * 603,800 8,042,616 ------------
SHARES VALUE --------- ------------ COMMON STOCK (CONTINUED) SEMICONDUCTORS - 1.6% Applied Micro Circuits Corporation * 850,000 $ 2,456,500 IXYS Corporation * 880,000 7,383,200 STATS ChipPAC, Ltd. ADR * 700,000 4,207,000 ------------ 14,046,700 ------------ SPECIALIZED CONSUMER SERVICES - 0.7% Regis Corporation 163,900 5,875,815 ------------ SPECIALTY CHEMICALS - 0.2% Material Sciences Corporation * 85,700 853,572 Minerals Technologies, Inc. 23,000 1,228,200 ------------ 2,081,772 ------------ TIRES & RUBBER - 1.4% Bandag, Inc. 296,000 12,147,840 ------------ TRADING COMPANIES & DISTRIBUTORS - 1.2% United Rentals, Inc. * 450,000 10,462,500 ------------ TOTAL COMMON STOCK (Cost $653,562,578) $810,521,739 ------------ PREFERRED STOCK - 0.1% DIVERSIFIED METALS & MINING - 0.1% Arch Coal, Inc. 4,600 646,875 ------------ ENVIRONMENTAL & FACILITIES SERVICES - 0.0% ThermoEnergy Corporation PIPE * (1)(2)(4)(5)(6) 1,745,000 472,721 ------------ TOTAL PREFERRED STOCK (Cost $1,876,500) $ 1,119,596 ------------ WARRANTS - 0.3% WARRANTS - 0.3% Lime Energy Company $1.00, 3/19/2009 (4) 29,517 28,592 Nova Oil, Inc. $2.57, 7/5/2011 (1)(4) 677,450 1,965,760 ThermoEnergy Corporation $0.75, 7/14/2008 (1)(2)(4)(6) 1,745,000 160,889 ------------ 2,155,241 ------------ TOTAL WARRANTS (Cost $1,561,837) $ 2,155,241 ------------
PRINCIPAL AMOUNT VALUE ---------- ------------ CONVERTIBLE BOND - 0.3% PHARMACEUTICALS - 0.3% Ligand Pharmaceuticals, Inc. 6.00%, 2007 $1,250,000 2,017,187 ------------ TOTAL CONVERTIBLE BOND (Cost $1,250,000) $ 2,017,187 ------------
The accompanying notes are an integral part of the financial statements. 41 Schedule of Investments Security Equity Fund - Mid Cap Value Series September 30, 2006 - continued
PRINCIPAL AMOUNT VALUE ---------- ------------ ASSET BACKED COMMERCIAL PAPER - 4.7% DIVERSIFIED - 0.8% Amsterdam Funding Corporation 5.26%, 10/5/2006 1,000,000 $ 999,416 5.26%, 10/6/2006 2,000,000 1,998,539 5.26%, 10/11/2006 1,500,000 1,497,808 5.24%, 10/30/2006 1,000,000 995,779 Govco, Inc. 5.36%, 10/18/2006 1,000,000 997,521 ------------ 6,489,063 ------------ MISC. RECEIVABLES - 2.6% Fairway Finance Corporation 5.255%, 10/3/2006 1,000,000 999,708 5.255%, 10/10/2006 1,000,000 998,686 5.255%, 10/13/2006 2,500,000 2,495,621 5.255%, 10/19/2006 1,000,000 997,373 5.255%, 10/24/2006 2,000,000 1,993,285 5.255%, 10/30/2006 1,000,000 995,767 Falcon Asset Securitization Corporation 5.25%, 10/12/2006 1,000,000 998,396 5.26%, 10/17/2006 2,000,000 1,995,325 5.25%, 10/20/2006 1,000,000 997,229 5.27%, 10/31/2006 1,600,000 1,592,973 5.25%, 11/7/2006 2,000,000 1,989,208 Jupiter Securitization Corporation 5.25%, 10/3/2006 1,000,000 999,708 5.30%, 10/4/2006 2,000,000 1,999,125 5.265%, 11/7/2006 1,000,000 994,589 5.26%, 11/10/2006 1,200,000 1,192,987 5.26%, 11/14/2006 1,200,000 1,192,285 ------------ 22,432,265 ------------ SECURITIES - 0.1% Perry Global Funding LLC 5.265%, 11/6/2006 1,000,000 994,735 ------------ TRADE RECEIVABLES - 1.2% Eureka Securitization 5.25%, 10/16/2006 2,000,000 1,995,625 Old Line Funding LLC 5.25%, 10/12/2006 1,400,000 1,397,754 5.26%, 10/20/2006 1,156,000 1,152,791 5.26%, 10/26/2006 1,000,000 996,347 5.26%, 11/3/2006 1,000,000 995,169 Sheffield Receivables Corporation 5.26%, 10/2/2006 2,000,000 1,999,708 5.26%, 10/18/2006 2,000,000 1.995.032 ------------ 10,532,426 ------------ TOTAL ASSET BACKED COMMERCIAL PAPER (Cost $40,448,489) $ 40,448,489 ------------
PRINCIPAL AMOUNT VALUE ---------- ------------ COMMERCIAL PAPER - 1.9% AUTOMOTIVE - 0.7% American Honda Finance 5.25%, 10/3/2006 1,000,000 $ 999,708 5.224%, 10/23/2006 2,600,000 2,591,700 5.23%, 10/25/2006 1,000,000 996,513 5.23%, 11/6/2006 1,022,000 1,016,655 ------------ 5,604,576 ------------ BANKING - 0.9% UBS Finance (DE) LLC 5.255%, 10/4/2006 1,000,000 999,562 5.25%, 10/5/2006 1,000,000 999,417 5.25%, 10/10/2006 1,000,000 998,688 5.25%, 10/24/2006 1,000,000 996,639 5.25%, 10/26/2006 1,300,000 1,295,260 5.25%, 10/27/2006 1,000,000 996,208 5.255%, 10/31/2006 1,000,000 995,621 ------------ 7,281,395 ------------ BROKERAGE - 0.1% Merrill Lynch & Company, Inc. 5.23%, 11/20/2006 1,100,000 1,092,010 ------------ NON U.S. BANKING - 0.2% Danske Corporation 5.30%, 10/19/2006 1,000,000 997,370 Societe Generale 5.25%, 10/11/2006 1,000,000 998.542 ------------ 1,995,912 ------------ TOTAL COMMERCIAL PAPER (Cost $15,973,893) $ 15,973,893 ------------ REPURCHASE AGREEMENT - 0.0% United Missouri Bank, 4.88%, dated 09-29-06, matures 10-02-06; repurchase amount of $248,101 (Collateralized by FHLB, 2.625%, 05-15-07 with a value of $257,416) $ 248,000 $ 248,000 ------------ TOTAL REPURCHASE AGREEMENT (Cost $248,000) $ 248,000 ------------ TOTAL INVESTMENTS (SECURITY EQUITY FUND - MID CAP VALUE SERIES) (COST $714,921,297) - 101.8% $872,484,145 LIABILITIES IN EXCESS OF OTHER ASSETS - (1.8)% (l5.046.999) ------------ TOTAL NET ASSETS - 100.0% $857,437,146 ============
Footnotes Percentages are stated as a percent of net assets. For federal income tax purposes the identified cost of investments owned at 9/30/2006 was $714,921,297. The accompanying notes are an integral part of the financial statements. 42 Schedule of Investments Security Equity Fund - Mid Cap Value Series September 30, 2006 - continued * - Non-income producing security (1) - Security is illiquid. See Notes to Financials. (2) - Investment in an affiliated issuer. See Notes to Financials. (3) - Security is segregated as collateral for open written options contracts. (4) - Security is fair valued by the Board of Directors. See Note 8 in Notes to Financials. (5) - PIPE (Private Investment in Public Equity) - Stock issued by a company in the secondary market as a means of raising capital more quickly and less expensively than through registration on a secondary public offering. (6) - Security is restricted. See Notes to Financials. Glossary: ADR - American Depositary Receipt See notes to financial statements. The accompanying notes are an integral part of the financial statements. 43 SECURITY EQUITY FUND MID CAP VALUE SERIES Statement of Assets and Liabilities September 30, 2006 ASSETS: Investments in unaffiliated issues, at value(1) ................. $837,780,805 Investments in affiliated issues, at value(1) ................... 34,703,340 Cash ............................................................ 7,128 Receivables: Securities sold .............................................. 134,506 Fund shares sold ............................................. 4,978,713 Interest ..................................................... 28,125 Dividends .................................................... 690,633 Prepaid expenses ................................................ 41,825 ------------ Total assets .................................................... 878,365,075 ------------ LIABILITIES: Payable for: Securities purchased ......................................... 16,019,256 Fund shares redeemed ......................................... 1,767,802 Written options, at value (premiums received $1,248,555) ..... 2,001,610 Management fees .............................................. 565,598 Custodian fees ............................................... 8,911 Transfer agent and administration fees ....................... 140,487 Professional fees ............................................ 45,150 12b-1 distribution plan fees ................................. 335,615 Directors' fees .............................................. 3,500 Other ........................................................ 40,000 ------------ Total liabilities ............................................... 20,927,929 ------------ NET ASSETS ...................................................... $857,437,146 ============ NET ASSETS CONSIST OF: Paid in capital ................................................. $655,149,203 Accumulated undistributed net realized gain on sale of investments and options written .............................. 45,478,151 Net unrealized appreciation in value of investments and options written .............................................. 156,809,792 ------------ Net assets ...................................................... $857,437,146 ============ CLASS A: Capital shares outstanding (unlimited number of shares authorized) .................................................. 15,576,345 Net assets ...................................................... $596,074,265 Net asset value per share ....................................... $ 38.27 ============ Maximum offering price per share (net asset value divided by 94.25%) ........................................... $ 40.60 ============ CLASS B: Capital shares outstanding (unlimited number of shares authorized) .................................................. 3,130,023 Net assets ...................................................... $108,784,259 Net asset value, offering and redemption price per share (excluding any applicable contingent deferred sales charge) ...................................................... $ 34.76 ============ CLASS C: Capital shares outstanding (unlimited number of shares authorized) .................................................. 4,306,171 Net assets ...................................................... $152,578,622 Net asset value, offering and redemption price per share (excluding any applicable contingent deferred sales charge) ...................................................... $ 35.43 ============ (1) Investments, at cost ........................................ $714,921,297
Statement of Operations For the Year Ended September 30, 2006 INVESTMENT INCOME: Dividends from securities of unaffiliated issuers ............ $ 8,095,025 Dividends from securities of affiliated issuers .............. 590,220 Interest ..................................................... 1,704,232 ------------ Total investment income ...................................... 10,389,477 ------------ EXPENSES: Management fees .............................................. 5,850,448 Custodian fees ............................................... 49,015 Transfer agent/maintenance fees .............................. 908,493 Administration fees .......................................... 676,986 Directors' fees .............................................. 18,661 Professional fees ............................................ 105,246 Reports to shareholders ...................................... 192,443 Registration fees ............................................ 81,351 Other expenses ............................................... 29,373 12b-1 distribution plan fees - Class A ....................... 1,199,972 12b-1 distribution plan fees - Class B ....................... 1,068,092 12b-1 distribution plan fees - Class C ....................... 1,265,949 ------------ Total expenses ............................................... 11,446,029 Less: Earnings credits ....................................... (50) ------------ Net expenses ................................................. 11,445,979 ------------ Net investment loss .......................................... (1,056,502) ------------ NET REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain during the period on: Investment transactions of unaffiliated issuers .............. 49,823,966 Investment transactions of affiliated issuers ................ 29,316 Options written .............................................. 3,988,614 ------------ Net realized gain ............................................ 53,841,896 ------------ Net unrealized appreciation (depreciation) during the period on: Investments .................................................. 9,839,394 Options written .............................................. (866,604) ------------ Net unrealized appreciation .................................. 8,972,790 ------------ Net gain ..................................................... 62,814,686 ------------ Net increase in net assets resulting from operations ......... $ 61,758,184 ============
44 See accompanying notes. SECURITY EQUITY FUND Statement of Changes in Net Assets MID CAP VALUE SERIES
YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, 2006 2005 ------------- ------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS: Net investment loss ............................................................... $ (1,056,502) $ (1,019,140) Net realized gain during the period on investments and options written ............ 53,841,896 27,789,769 Net unrealized appreciation during the period on investments and options written .. 8,972,790 81,570,182 ------------- ------------ Net increase in net assets resulting from operations .............................. 61,758,184 108,340,811 ------------- ------------ DISTRIBUTIONS TO SHAREHOLDERS FROM: Net realized gain Class A ........................................................................ (21,770,226) (17,531,136) Class B ........................................................................ (5,997,235) (6,133,150) Class C ........................................................................ (6,154,241) (4,546,382) ------------- ------------ Total distributions to shareholders ............................................... (33,921,702) (28,210,668) ------------- ------------ CAPITAL SHARE TRANSACTIONS: Proceeds from sale of shares Class A ........................................................................ 336,551,934 161,215,930 Class B ........................................................................ 24,068,613 17,972,042 Class C ........................................................................ 66,012,687 36,990,088 Distributions reinvested Class A ........................................................................ 20,081,172 16,302,449 Class B ........................................................................ 5,715,437 5,863,417 Class C ........................................................................ 5,766,876 4,260,542 Cost of shares redeemed Class A ........................................................................ (153,088,973) (73,348,101) Class B ........................................................................ (22,952,102) (15,202,832) Class C ........................................................................ (17,136,873) (14,043,393) ------------- ------------ Net increase from capital share transactions ...................................... 265,018,771 140,010,142 ------------- ------------ Net increase in net assets ........................................................ 292,855,253 220,140,285 ------------- ------------ NET ASSETS: Beginning of period ............................................................... 564,581,893 344,441,608 ------------- ------------ End of period ..................................................................... $ 857,437,146 $564,581,893 ============= ============ Accumulated undistributed net investment income at end of period .................. $ -- $ -- ============= ============ CAPITAL SHARE ACTIVITY: Shares sold Class A ........................................................................ 8,840,332 4,912,125 Class B ........................................................................ 695,272 597,004 Class C ........................................................................ 1,858,360 1,196,717 Shares reinvested Class A ........................................................................ 565,349 505,033 Class B ........................................................................ 176,130 196,298 Class C ........................................................................ 174,331 140,103 Shares redeemed Class A ........................................................................ (4,094,527) (2,235,399) Class B ........................................................................ (663,202) (503,071) Class C ........................................................................ (485,231) (454,764)
45 See accompanying notes. SECURITY EQUITY FUND Financial Highlights MID CAP VALUE SERIES Selected data for each share of capital stock outstanding throughout each period
YEAR ENDED SEPTEMBER 30, ----------------------------------------------------- CLASS A 2006 2005 2004 2003 2002 ------- -------- -------- -------- -------- ------- PER SHARE DATA Net asset value, beginning of period $ 36.34 $ 30.45 $ 24.48 $ 16.90 $ 18.04 -------- -------- -------- -------- ------- Income (loss) from investment operations: Net investment income (loss)(b) 0.04 0.01 (0.09) (0.07) (0.04) Net gain (loss) on securities (realized and unrealized) 3.96 8.16 6.32 7.65 (0.78) -------- -------- -------- -------- ------- Total from investment operations 4.00 8.17 6.23 7.58 (0.82) -------- -------- -------- -------- ------- Less distributions: Distributions from realized gains (2.07) (2.28) (0.26) -- (0.21) Return of capital -- -- -- -- (0.11) -------- -------- -------- -------- ------- Total distributions (2.07) (2.28) (0.26) -- (0.32) -------- -------- -------- -------- ------- Net asset value, end of period $ 38.27 $ 36.34 $ 30.45 $ 24.48 $ 16.90 ======== ======== ======== ======== ======= TOTAL RETURN(a) 11.44% 27.77% 25.59% 44.85% (4.89%) -------- -------- -------- -------- ------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $596,074 $373,031 $215,659 $113,822 $68,544 -------- -------- -------- -------- ------- Ratios to average net assets: Net investment income (loss) 0.10% 0.04% (0.31%) (0.33%) (0.20%) Total expenses(d) 1.36% 1.41% 1.48% 1.65% 1.45% Net expenses(e) 1.36% 1.41% 1.48% 1.65% 1.45% -------- -------- -------- -------- ------- Portfolio turnover rate 33% 19% 45% 52% 51%
YEAR ENDED SEPTEMBER 30, ---------------------------------------------------- CLASS B 2006 2005 2004 2003 2002 ------- -------- ------- ------- ------- ------- PER SHARE DATA Net asset value, beginning of period $ 33.43 $ 28.37 $ 22.99 $ 15.99 $ 17.26 -------- ------- ------- ------- ------- Income (loss) from investment operations: Net investment loss(b) (0.23) (0.22) (0.28) (0.22) (0.21) Net gain (loss) on securities (realized and unrealized) 3.63 7.56 5.92 7.20 (0.74) -------- ------- ------- ------- ------- Total from investment operations 3.40 7.34 5.64 7.00 (0.95) -------- ------- ------- ------- ------- Less distributions: Distributions from realized gains (2.07) (2.28) (0.26) -- (0.21) Return of capital -- -- -- -- (0.11) -------- ------- ------- ------- ------- Total distributions (2.07) (2.28) (0.26) -- (0.32) -------- ------- ------- ------- ------- Net asset value, end of period $ 34.76 $ 33.43 $ 28.37 $ 22.99 $ 15.99 ======== ======= ======= ======= ======= TOTAL RETURN(a) 10.60% 26.83% 24.67% 43.78% (5.88%) -------- ------- ------- ------- ------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $108,784 $97,664 $74,650 $53,947 $37,136 -------- ------- ------- ------- ------- Ratios to average net assets: Net investment loss (0.68%) (0.72%) (1.07%) (1.08%) (1.09%) Total expenses(d) 2.11% 2.16% 2.23% 2.40% 2.34% Net expenses(e) 2.11% 2.16% 2.23% 2.40% 2.34% -------- ------- ------- ------- ------- Portfolio turnover rate 33% 19% 45% 52% 51%
46 See accompanying notes. SECURITY EQUITY FUND Financial Highlights MID CAP VALUE SERIES Selected data for each share of capital stock outstanding throughout each period
YEAR ENDED SEPTEMBER 30, ---------------------------------------------------- CLASS C 2006 2005 2004 2003 2002(c) ------- -------- ------- ------- ------- ------- PER SHARE DATA Net asset value, beginning of period $ 34.03 $ 28.85 $ 23.37 $ 16.26 $ 17.53 -------- ------- ------- ------- ------- Income (loss) from investment operations: Net investment loss(b) (0.22) (0.21) (0.29) (0.21) (0.21) Net gain (loss) on securities (realized and unrealized) 3.69 7.67 6.03 7.32 (0.74) -------- ------- ------- ------- ------- Total from investment operations 3.47 7.46 5.74 7.11 (0.95) -------- ------- ------- ------- ------- Less distributions: Distributions from realized gains (2.07) (2.28) (0.26) -- (0.21) Return of capital -- -- -- -- (0.11) -------- ------- ------- ------- ------- Total distributions (2.07) (2.28) (0.26) -- (0.32) -------- ------- ------- ------- ------- Net asset value, end of period $ 35.43 $ 34.03 $ 28.85 $ 23.37 $ 16.26 ======== ======= ======= ======= ======= TOTAL RETURN(a) 10.62% 26.80% 24.70% 43.73% (5.79%) -------- ------- ------- ------- ------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $152,579 $93,887 $54,133 $32,999 $18,785 -------- ------- ------- ------- ------- Ratios to average net assets: Net investment loss (0.65%) (0.71%) (1.06%) (1.08%) (1.06%) Total expenses(d) 2.11% 2.16% 2.23% 2.40% 2.35% Net expenses(e) 2.11% 2.16% 2.23% 2.40% 2.35% -------- ------- ------- ------- ------- Portfolio turnover rate 33% 19% 45% 52% 51%
(a) Total return information does not reflect deduction of any sales charges imposed at the time of purchase for Class A shares or upon redemption for Class B and C shares. (b) Net investment income (loss) was computed using average shares outstanding throughout the period. (c) The financial highlights for Class C shares exclude the historical financial highlights of Class S shares. Class S shares were exchanged for Class C shares on June 3, 2002. (d) Total expense information reflects expense ratios absent fund expense reductions by the Investment Manager. (e) Net expense information reflects the expense ratios after voluntary expense waivers, reimbursements and custodian earnings credits, as applicable. 47 See accompanying notes. SECURITY EQUITY FUND Manager's Commentary SELECT 25 SERIES November 15, 2006 (unaudited) (SECURITY BENEFIT(SM) LOGO) Security Management Company, LLC Adviser, Security Management Company, LLC (PHOTO OF MARK MITCHELL) Mark Mitchell Senior Portfolio Manager TO OUR SHAREHOLDERS: Security Equity Fund Select 25 Series returned 5.34%(1) in the period, lagging the benchmark Russell 1000 Growth Index's return of 6.04%, but out performing the Series' peer group median return of 3.72%. Individual stock selection drove our results in fiscal 2006. While being disappointed that our results were below the benchmark, we believe that our approach delivers performance over the long-term. Our investment philosophy is centered on three key tenants: first, we believe good investments are purchased at less than their intrinsic value, second, a long-term approach and patience are critical to successful investing, and last, we concentrate our investments in companies that have the greatest return potential. Our process is a bottom-up, research-driven investment process that attempts to identify companies that have a competitive advantage or have the ability to become more competitive in the future. We focus on owning these companies for three to five years or longer, which we believe differentiates us from a majority of our peers and ultimately allows us to make better investment decisions. We buy these companies when their current price trades below their intrinsic value. We closely monitor each company's progress. We will sell a company if the valuation no longer makes sense, if we've made a mistake and our investment thesis is no longer valid, or if we have a more attractive investment alternative. For this Series, we apply this philosophy to a broad range of growth names. We ultimately structure the portfolio with 25-30 names. This philosophy is applied to a broad range of growth names. FINANCIALS AND HEALTH CARE STOCKS TOP PERFORMERS The Series' financial holdings were up 63% compared to 17% for the index with our position in First Marblehead Corporation up over 200%. III-placed, short-term concerns over the company's competitive position offered us an excellent opportunity to take a position in this leading student lending company. First Marblehead maintains its competitive advantage with its loan underwriting capability, superior economics, and value-added services. Health care, as a sector overall, was up only 5%; however, good stock selection added value to the Series. Zimmer Holdings, Inc., was up over 15%. Zimmer is a leading orthopedic manufacturer that has experienced a sharp decline in price due to a deceleration in its long-term growth prospects. Having owned the company previously, we had a very good understanding of the fundamentals for both Zimmer and the orthopedic industry. We were comfortable with the new lower-growth outlook and thus viewed the market's reaction as overly punitive. We were able to buy a great company at a reasonable valuation with the stock having recovered more than 33% since our purchase. Covance, Inc., was up 35%. The company provides value-added services to pharmaceutical companies and related industries. Capacity additions coupled with end-market demand, we believe, have positioned Covance for continued profitable growth. ENERGY AND INDUSTRIAL SECTORS DISAPPOINT The energy sector was down more than 18% compared to a down of 6% for the benchmark. Evergreen Energy, Inc., down 39% (previously known as KFx) and BJ Services Company, down 15%, both contributed negatively to the Series. Evergreen Energy was hurt by concerns over the viability of the initial production results of its proprietary clean coal technology. BJ Services was impacted more generally by the recent exodus from oil-services-related names as a result of a weakening energy commodity market. Holdings in the industrial sector performed poorly in the reporting period. We were positioned to take advantage of several unique opportunities in companies that benefit broadly from strong global economic growth. Concerns regarding a slowdown in the United States have impacted the group. We still like the fundamentals of the companies we own, including FedEx Corporation, W.W. Grainger, Inc., L-3 Communications, Holdings, Inc., and Shaw Group. 48 SECURITY EQUITY FUND Manager's Commentary SELECT 25 SERIES November 15, 2006 (unaudited) 2007 MARKET OUTLOOK The current low-return investment environment has continued to make available ample liquidity in the U.S. equity market. Falling energy prices have helped increase consumer confidence and provide support to corporate profit margins through lower raw material input prices. Additionally, businesses continue to have very healthy balance sheets to help drive future growth initiatives. As we noted in last year's shareholder letter, we've been concerned about a slowdown in U.S. consumer spending for some time. This concern has yet to materialize, but we still think it will happen. Lower energy prices will help; however, higher interest rates and a housing market slowdown provide likely headwinds. The Federal Reserve is walking a fine line between managing inflation risks while supporting economic growth. We're unsure, like most investors, what the Fed's next move will be. This uncertainty will weigh on the market until it's resolved. We believe that investing is a long-term pursuit that requires patience and a consistent approach. Dollar cost averaging is a sound way to build long-term value. We recognize there are many investment fund alternatives available today and thank you for your business and the confidence you place in us. Sincerely, Mark Mitchell Senior Portfolio Manager (1) Performance figures are based on Class A shares and do not reflect deductions of the sales charges or taxes that a shareholder would pay on distributions or the redemption of shares. 49 SECURITY EQUITY FUND Performance Summary SELECT 25 SERIES September 30, 2006 (unaudited) PERFORMANCE SECURITY SELECT 25 SERIES VS. RUSSELL 1000 GROWTH INDEX (PERFORMANCE GRAPH) Select 25 Series 01/29/99 9,425.00 03/31/99 9,802.00 06/30/99 9,915.10 09/30/99 9,924.53 12/31/99 11,734.13 03/31/00 11,573.90 06/30/00 11,064.95 09/30/00 10,687.95 12/31/00 9,660.63 03/31/01 8,228.03 06/30/01 8,793.53 09/30/01 7,144.15 12/31/01 8,605.03 03/31/02 8,539.05 06/30/02 7,002.78 09/30/02 6,145.10 12/31/02 6,343.03 03/31/03 6,173.38 06/30/03 6,776.58 09/30/03 6,851.98 12/31/03 7,417.48 03/31/04 7,719.08 06/30/04 7,775.63 09/30/04 7,360.93 12/31/04 8,228.03 03/31/05 7,954.70 06/30/05 8,048.95 09/30/05 8,821.80 12/31/05 9,189.38 03/31/06 9,641.78 06/30/06 9,236.50 09/30/06 9,293.05
RUSSELL 1000 GROWTH INDEX INCEPTION 1/29/99 10,000.00 03/31/99 10,045.92 06/30/99 10,432.68 09/30/99 10,049.99 12/31/99 12,577.25 03/31/00 13,473.82 06/30/00 13,109.39 09/30/00 12,403.67 12/31/00 9,756.78 03/31/01 7,717.61 06/30/01 8,367.35 09/30/01 6,743.24 12/31/01 7,764.53 03/31/02 7,563.52 06/30/02 6,151.25 09/30/02 5,225.76 12/31/02 5,599.12 03/31/03 5,539.08 06/30/03 6,331.43 09/30/03 6,579.50 12/31/03 7,265.20 03/31/04 7,322.08 06/30/04 7,463.91 09/30/04 7,074.26 12/31/04 7,723.10 03/31/05 7,407.74 06/30/05 7,590.52 09/30/05 7,895.14 12/31/05 8,130.26 03/31/06 8,382.36 06/30/06 8,055.32 09/30/06 8,372.92
$10,000 SINCE INCEPTION This chart assumes a $10,000 investment in Class A shares of Select 25 Series on January 29, 1999 (date of inception), reflects deduction of the 5.75% sales load and assumes all dividends are reinvested. The chart does not reflect the deduction of taxes that a shareholder would pay on distributions or the redemption of fund shares. The Russell 1000 Growth Index is an unmanaged capitalization-weighted index which includes stocks incorporated in the United States and its territories and measures the performance of the Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. AVERAGE ANNUAL RETURNS
PERIODS ENDED 9-30-06 1 Year 5 Years Since Inception --------------------- ------ ------- --------------- A Shares 5.34% 5.40% (0.18%)(1-29-99) A Shares with sales charge (0.70%) 4.17% (0.95%)(1-29-99) B Shares 4.60% 4.63% (0.90%)(1-29-99) B Shares with CDSC (0.40%) 4.30% (0.90%)(1-29-99) C Shares 4.70% 4.61% (0.86%)(1-29-99) C Shares with CDSC 3.70% 4.61% (0.86%)(1-29-99)
The performance data above represents past performance that is not predictive of future results. The investment return and principal value of an investment in the Series will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The figures above do not reflect deduction of the maximum front-end sales charge of 5.75% for Class A shares or the contingent deferred sales charge of 5% for Class B shares and 1% for Class C shares, as applicable, except where noted. The figures do not reflect the deduction of taxes that a shareholder would pay on distributions or redemption of shares. Such figures would be lower if the maximum sales charge and any applicable taxes were deducted. PORTFOLIO COMPOSITION BY SECTOR AS OF 9-30-06 Consumer Discretionary 13.00% Consumer Staples 4.93 Energy 12.74 Financials 15.10 Health Care 18.95 Industrials 15.32 Information Technology 8.87 Materials 3.13 Exchange Traded Funds 4.04 Asset Backed Commercial Paper 1.70 Commercial Paper 3.57 Liabilities in excess of other assets (1.35) ------ Total net assets 100.00% ======
50 See accompanying notes. SECURITY EQUITY FUND Performance Summary SELECT 25 SERIES September 30, 2006 (unaudited) PERFORMANCE INFORMATION ABOUT YOUR SERIES EXPENSES CALCULATING YOUR ONGOING SERIES EXPENSES EXAMPLE As a shareholder of the Series, you incur two types of costs: (1) transaction costs, which may include sales charges (loads) on purchase payments; contingent deferred sales charges on redemptions; and redemption fees, if any; and (2) ongoing costs, including management fees; distribution and/or service fees (12b-1); and other Series expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Series and to compare these costs with ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period, April 1, 2006 - September 30, 2006. ACTUAL EXPENSES The first line for each class of shares in the table provides information about actual account values and actual expenses. You may use the information in this table, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the table under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line for each class of shares in the table provides information about hypothetical account values and hypothetical expenses based on the Series actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Series actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Series and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other mutual funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads) on purchase payments, contingent deferred sales charges on redemptions, and redemption fees, if any. Therefore, the second line for each class of shares is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. SERIES EXPENSES
BEGINNING ENDING ACCOUNT VALUE ACCOUNT VALUE EXPENSES PAID 04-01-06 09-30-06(1) DURING PERIOD(2) ------------- ------------- ---------------- Select 25 Series - Class A Actual $1,000.00 $ 963.80 $ 8.52 Hypothetical 1,000.00 1,016.39 8.74 Select 25 Series - Class B Actual 1,000.00 959.90 12.23 Hypothetical 1,000.00 1,012.58 12.56 Select 25 Series - Class C Actual 1,000.00 960.00 12.23 Hypothetical 1,000.00 1,012.58 12.56
(1) The actual ending account value is based on the actual total return of the Series for the period from April 1, 2006 to September 30, 2006 after actual expenses and will differ from the hypothetical ending account value which is based on the Series expense ratio and a hypothetical annual return of 5% before expenses. The actual cumulative return at net asset value for the period from April 1, 2006 to September 30, 2006 was (3.62%), (4.01%) and (4.00%), for Class A, B and C shares, respectively. (2) Expenses are equal to the Series annualized expense ratio (1.73%, 2.49% and 2.49% for Class A, B and C shares, respectively) multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 51 Schedule of Investments Security Equity Fund - Select 25 Series September 30, 2006
SHARES VALUE --------- ----------- COMMON STOCK - 96.1% AEROSPACE & DEFENSE - 2.5% L-3 Communications Holdings, Inc. 18,813 $ 1,473,622 ----------- AIR FREIGHT & LOGISTICS - 5.3% FedEx Corporation 28,943 3,145,525 ----------- BIOTECHNOLOGY -5.5% Amgen, Inc. * 45,442 3,250,466 ----------- BROADCASTING & CABLE TV - 3.5% CBS Corporation (CI.B) 25,626 721,884 Univision Communications, Inc. * 39,043 1,340,737 ----------- 2,062,621 ----------- COAL & CONSUMABLE FUELS - 3.0% Evergreen Energy, Inc. * 168,100 1,766,731 ----------- COMMUNICATIONS EQUIPMENT - 6.0% ADC Telecommunications, Inc. * 110,374 1,655,612 Cisco Systems, Inc. * 81,373 1,871,579 ----------- 3,527,191 ----------- CONSTRUCTION & ENGINEERING - 3.5% Shaw Group, Inc. * 88,254 2,086,325 ----------- CONSUMER FINANCE - 6.4% First Marblehead Corporation (1) 54,742 3,791,431 ----------- DATA PROCESSING & OUTSOURCED SERVICES - 2.9% First Data Corporation 40,346 1,694,532 ----------- ELECTRIC UTILITIES - 0.0% Progress Energy, Inc. - Contingent Value Obligation* 400 124 ----------- EXCHANGE TRADED FUNDS - 4.1% iShares Russell 1000 Growth Index Fund 33,886 1,767,494 iShares S&P 500 Growth Index Fund 10,000 617,600 ----------- 2,385,094 ----------- HEALTH CARE EQUIPMENT - 5.1% Zimmer Holdings, Inc. * 44,200 2,983,500 ----------- HOME IMPROVEMENT RETAIL - 4.5% Home Depot, Inc. 73,272 2,657,575 ----------- HOTELS, RESORTS & CRUISE LINES - 3.5% Carnival Corporation 43,633 2,052,060 ----------- HYPERMARKETS & SUPER CENTERS - 3.0% Wal-Mart Stores, Inc. 35,696 1,760,527 ----------- INDUSTRIAL GASES - 3.2% Praxair, Inc. 31,301 1,851,767 ----------- LIFE SCIENCES TOOLS & SERVICES - 3.7% Covance, Inc. * 32,592 2,163,457 -----------
SHARES VALUE --------- ----------- COMMON STOCK (CONTINUED) MOVIES & ENTERTAINMENT - 1.5% Viacom, Inc. (CI.B) * 23,953 $ 890,573 ----------- MULTI-LINE INSURANCE - 5.7% American International Group, Inc. 50,634 3,355,009 ----------- OIL & GAS EQUIPMENT & SERVICES - 4.1% BJ Services Company (1) 80,877 2,436,824 ----------- OIL & GAS STORAGE & TRANSPORTATION - 5.6% Williams Companies, Inc. 138,259 3,300,242 ----------- OTHER DIVERSIFIED FINANCIAL SERVICES - 3.0% Citigroup, Inc. 35,323 1,754,493 ----------- PHARMACEUTICALS - 4.7% Johnson & Johnson 42,617 2,767,548 ----------- SOFT DRINKS - 1.9% PepsiCo, Inc. 17,495 1,141,724 ----------- TRADING COMPANIES & DISTRIBUTORS - 3.9% W.W. Grainger, Inc. 34,653 2,322,444 ----------- TOTAL COMMON STOCK (Cost $48,544,104) $56,621,405 -----------
PRINCIPAL AMOUNT VALUE --------- ----------- ASSET BACKED COMMERCIAL PAPER - 1.7% MISC. RECEIVABLES - 1.7% Fairway Finance Corporation 5.26%, 10/2/2006 1,000,000 999,854 ----------- TOTAL ASSET BACKED COMMERCIAL PAPER (Cost $999,854) $ 999,854 ----------- COMMERCIAL PAPER - 3.5% BROKERAGE - 1.7% Morgan Stanley 5.32%, 10/4/2006 1,000,000 999,557 ----------- FINANCIAL - OTHER - 1.8% Countrywide Financial Corporation 5.28%, 10/3/2006 1,100,000 1,099,677 ----------- TOTAL COMMERCIAL PAPER (Cost $2,099,234) $ 2,099,234 ----------- TOTAL INVESTMENTS (SECURITY EQUITY FUND - SELECT 25 SERIES) (COST $51,643,192) - 101.3% $59,720,493 LIABILITIES IN EXCESS OF OTHER ASSETS - (1.3)% (792,000) ----------- TOTAL NET ASSETS - 100.0% $58,928,493 ===========
The accompanying notes are an integral part of the financial statements. 52 Schedule of Investments Security Equity Fund - Select 25 Series September 30, 2006 - continued Footnotes Percentages are stated as a percent of net assets. For federal income tax purposes the identified cost of investments owned at 9/30/2006 was $51,742,644. * - Non-income producing security (1) - Security is segregated as collateral for open written options contracts. See notes to financial statements. The accompanying notes are an integral part of the financial statements. 53 SECURITY EQUITY FUND SELECT 25 SERIES Statement of Assets and Liabilities September 30, 2006 ASSETS: Investments, at value(1)......................................... $ 59,720,493 Cash............................................................. 46,971 Receivables: Fund shares sold.............................................. 51,470 Securities sold............................................... 182,817 Dividends..................................................... 18,860 Prepaid expenses................................................. 11,193 ------------ Total assets..................................................... 60,031,804 ------------ LIABILITIES: Payable for: Securities purchased.......................................... 618,975 Fund shares redeemed.......................................... 283,950 Written options, at value (premiums received, $41,934)........ 70,560 Management fees............................................... 36,086 Custodian fees................................................ 2,138 Transfer agent and administration fees........................ 16,417 Professional fees............................................. 21,810 12b-1 distribution plan fees.................................. 29,740 Directors' fees............................................... 240 Other......................................................... 23,395 ------------ Total liabilities................................................ 1,103,311 ------------ NET ASSETS....................................................... $ 58,928,493 ============ NET ASSETS CONSIST OF: Paid in capital.................................................. $ 68,281,796 Accumulated undistributed net realized loss on sale of investments and options written............................... (17,401,978) Net unrealized appreciation in value of investments and options written....................................................... 8,048,675 ------------ Net assets....................................................... $ 58,928,493 ============ CLASS A: Capital shares outstanding (unlimited number of shares authorized)....................... 3,050,606 Net assets....................................................... $ 30,078,337 Net asset value per share........................................ $ 9.86 ============ Maximum offering price per share (net asset value divided by 94.25%)........................... $ 10.46 ============ CLASS B: Capital shares outstanding (unlimited number of shares authorized)....................... 1,722,942 Net assets ...................................................... $ 16,073,157 Net asset value, offering and redemption price per share (excluding any applicable contingent deferred sales charge)... $ 9.33 ============ CLASS C: Capital shares outstanding (unlimited number of shares authorized)....................... 1,365,273 Net assets....................................................... $ 12,776,999 Net asset value, offering and redemption price per share (excluding any applicable contingent deferred sales charge)... $ 9.36 ============ (1)Investments, at cost.......................................... $ 51,643,192
Statement of Operations For the Year Ended September 30, 2006 INVESTMENT INCOME: Dividends..................................................... $ 331,894 Interest...................................................... 40,756 ------------ Total investment income....................................... 372,650 ------------ EXPENSES: Management fees............................................... 258,700 Custodian fees................................................ 5,142 Transfer agent/maintenance fees............................... 174,868 Administration fees........................................... 34,756 Directors' fees............................................... 894 Professional fees............................................. 10,795 Reports to shareholders....................................... 8,690 Registration fees............................................. 30,400 Other expenses................................................ 2,454 12b-1 distribution plan fees - Class A........................ 40,862 12b-1 distribution plan fees - Class B........................ 106,552 12b-1 distribution plan fees - Class C........................ 74,932 ------------ Total expenses................................................ 749,045 ------------ Net investment loss........................................... (376,395) ------------ NET REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain during the period on: Investments................................................... 964,666 Options written............................................... 56,940 ------------ Net realized gain............................................. 1,021,606 ------------ Net unrealized appreciation (depreciation) during the period on: Investments................................................... 3,350,791 Options written............................................... (28,626) ------------ Net unrealized appreciation................................... 3,322,165 ------------ Net gain...................................................... 4,343,771 ------------ Net increase in net assets resulting from operations.......... $ 3,967,376 ============
54 See accompanying notes. SECURITY EQUITY FUND Statement of Changes in Net Assets SELECT 25 SERIES
YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, 2006 2005 ------------- ------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS: Net investment loss ................................... $ (376,395) $ (265,585) Net realized gain during the period on investments and options written ................................ 1,021,606 544,010 Net unrealized appreciation during the period on investments ........................................ 3,322,165 3,480,799 ----------- ----------- Net increase in net assets resulting from operations .. 3,967,376 3,759,224 ----------- ----------- CAPITAL SHARE TRANSACTIONS: Proceeds from sale of shares Class A ............................................ 7,864,377 1,492,556 Class B ............................................ 4,340,849 666,322 Class C ............................................ 2,041,112 610,317 Issuance of shares in connection with the acquisition of Enhanced Index Series, Large Cap Growth Series & Social Awareness Series (Note 12) Class A ............................................ 15,062,441 -- Class B ............................................ 9,166,885 -- Class C ............................................ 8,374,157 -- Cost of shares redeemed Class A ............................................ (6,429,656) (3,447,276) Class B ............................................ (4,179,088) (2,219,476) Class C ............................................ (2,220,890) (2,348,235) ----------- ----------- Net increase (decrease) from capital share transactions ....................................... 34,020,187 (5,245,792) ----------- ----------- Net increase (decrease) in net assets ................. 37,987,563 (1,486,568) ----------- ----------- NET ASSETS: Beginning of period ................................... 20,940,930 22,427,498 ----------- ----------- End of period ......................................... $58,928,493 $20,940,930 =========== =========== Accumulated undistributed net investment income at end of period ...................................... $ -- $ -- =========== =========== CAPITAL SHARE ACTIVITY: Shares sold Class A ............................................ 806,448 174,623 Class B ............................................ 468,049 82,316 Class C ............................................ 220,684 73,575 Issuance of shares in connection with the acquisition of Enhanced Index Series, Large Cap Growth Series & Social Awareness Series (Note 12) Class A ............................................ 1,968,338 -- Class B ............................................ 929,480 -- Class C ............................................ 826,684 -- Shares redeemed Class A ............................................ (676,660) (403,526) Class B ............................................ (459,639) (274,915) Class C ............................................ (244,326) (291,186)
55 See accompanying notes. SECURITY EQUITY FUND Financial Highlights SELECT 25 SERIES Selected data for each share of capital stock outstanding throughout each period
YEAR ENDED SEPTEMBER 30, ------------------------------------------------- CLASS A 2006(d) 2005 2004 2003 2002 ------- ------- ------ ------ ------- ------- PER SHARE DATA Net asset value, beginning of period $ 9.36 $ 7.81 $ 7.27 $ 6.52 $ 7.58 ------- ------ ------ ------- ------- Income (loss) from investment operations: Net investment loss(b) (0.06) (0.07) (0.06) (0.05) (0.07) Net gain (loss) on securities (realized and unrealized) 0.56 1.62 0.60 0.80 (0.99) ------- ------ ------ ------- ------- Total from investment operations 0.50 1.55 0.54 0.75 (1.06) ------- ------ ------ ------- ------- Net asset value, end of period $ 9.86 $ 9.36 $ 7.81 $ 7.27 $ 6.52 ======= ====== ====== ======= ======= TOTAL RETURN(a) 5.34% 19.85% 7.43% 11.50% (13.98%) ------- ------ ------ ------- ------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $30,078 $8,912 $9,228 $10,396 $11,933 ------- ------ ------ ------- ------- Ratios to average net assets: Net investment loss (0.68%) (0.79%) (0.75%) (0.70%) (0.81%) Total expenses 1.76% 1.67% 1.56% 1.63% 1.46% ------- ------ ------ ------- ------- Portfolio turnover rate 39% 13% 44% 54% 33%
YEAR ENDED SEPTEMBER 30, ------------------------------------------------ CLASS B 2006(d) 2005 2004 2003 2002 ------- ------- ------ ------ ------ ------- PER SHARE DATA Net asset value, beginning of period $ 8.92 $ 7.50 $ 7.04 $ 6.36 $ 7.44 ------- ------ ------ ------- ------- Income (loss) from investment operations: Net investment loss(b) (0.13) (0.13) (0.11) (0.10) (0.13) Net gain (loss) on securities (realized and unrealized) 0.54 1.55 0.57 0.78 (0.95) ------- ------ ------ ------ ------- Total from investment operations 0.41 1.42 0.46 0.68 (1.08) ------- ------ ------ ------ ------- Net asset value, end of period $ 9.33 $ 8.92 $ 7.50 $ 7.04 $ 6.36 ======= ====== ====== ====== ======= TOTAL RETURN(a) 4.60% 18.93% 6.53% 10.69% (14.52%) ------- ------ ------ ------- ------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $16,073 $7,000 $7,333 $8,203 $ 8,566 ------- ------ ------ ------- ------- Ratios to average net assets: Net investment loss (1.46%) (1.54%) (1.50%) (1.45%) (1.56%) Total expenses 2.53% 2.42% 2.31% 2.38% 2.21% ------- ------ ------ ------- ------- Portfolio turnover rate 39% 13% 44% 54% 33%
56 See accompanying notes. SECURITY EQUITY FUND Financial Highlights SELECT 25 SERIES Selected data for each share of capital stock outstanding throughout each period
YEAR ENDED SEPTEMBER 30, ------------------------------------------------ CLASS C 2006(d) 2005 2004 2003 2002(c) ------- ------- ------ ------ ------ ------- PER SHARE DATA Net asset value, beginning of period $ 8.94 $ 7.52 $ 7.06 $ 6.38 $ 7.47 ------- ------ ------ ------- ------- Income (loss) from investment operations: Net investment loss(b) (0.13) (0.13) (0.11) (0.10) (0.13) Net gain (loss) on securities (realized and unrealized) 0.55 1.55 0.57 0.78 (0.96) ------- ------ ------ ------ ------- Total from investment operations 0.42 1.42 0.46 0.68 (1.09) ------- ------ ------ ------ ------- Net asset value, end of period $ 9.36 $ 8.94 $ 7.52 $ 7.06 $ 6.38 ======= ====== ====== ====== ======= TOTAL RETURN(a) 4.70% 18.88% 6.52% 10.66% (14.59%) ------- ------ ------ ------- ------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $12,777 $5,029 $5,866 $6,225 $ 3,954 ------- ------ ------ ------- ------- Ratios to average net assets: Net investment loss (1.44%) (1.54%) (1.50%) (1.44%) (1.56%) Total expenses 2.52% 2.42% 2.31% 2.37% 2.21% ------- ------ ------ ------- ------- Portfolio turnover rate 39% 13% 44% 54% 33%
(a) Total return information does not reflect deduction of any sales charges imposed at the time of purchase for Class A shares or upon redemption for Class B and C. (b) Net investment income (loss) was computed using average shares outstanding throughout the period. (c) The financial highlights for Class C shares exclude the historical financial highlights of Class S shares. Class S shares were exchanged for Class C shares on June 3, 2002. (d) The financial highlights for the Select 25 Series exclude the historical financial highlights of the Enhanced Index Series, Class A, B and C shares, the Large Cap Growth Series, Class A, B and C shares and the Social Awareness Series Class A, B and C shares. A total of $29,412,366 was excluded from purchases in the portfolio turnover calculation. This was the cost of the securities Select 25 received as a result of the merger. The assets of the Enhanced Index, Large Cap Growth and Social Awareness Series' were acquired by the Select 25 Series on June 16, 2006. 57 See accompanying notes. SECURITY EQUITY FUND Manager's Commentary SMALL CAP GROWTH SERIES November 15, 2006 (unaudited) (RS INVESTMENTS LOGO) Subadviser, RS Investments (PHOTO OF BILL WOLFENDEN) Bill Wolfenden Portfolio Manager TO OUR SHAREHOLDERS: The Small Cap Growth Series of the Security Equity Fund was down 0.82%(1) for the fiscal year ending September 30, 2006, lagging the benchmark, which rose 5.88% in the same period. The fourth quarter of 2005, and in particular the first quarter of 2006, were positive for stocks, with investors focused on continued strong corporate earnings growth and the possibility of a pause in oil prices and interest rates. Uncertainty surrounding inflation, the new Federal Reserve Board chairman's stewardship of the economy, and continuing increases in interest rates and oil prices, however, led to a drubbing of stocks in the second quarter. The portfolio lagged the index during the strong first-quarter rally but gained ground as the market sold off for much of the second quarter. Unfortunately, these relative gains evaporated over the last several trading days of the second quarter. The macroeconomic picture was muddied during the third quarter by the start of a global economic slowdown. The slowing economy seemed to offset the positive effects of a pause by the Federal Reserve Board in its 18-month march toward higher short-term interest rates. While longer-term investors like us look forward to a "Goldilocks" scenario of slightly slower growth and a soft landing in 2007 with the tailwinds of lower interest rates and lower commodity prices, the market drifted aimlessly for much of the third quarter of 2006, searching for direction. Without clear leadership, more defensive groups, such as health care and financials, were sources of positive contribution to our performance and the benchmark's. Much of our underperformance during the year came from sub-par stock selection in energy and technology. The second-quarter earnings period in July and early August was challenging for our companies despite many earnings reports that were generally strong and on track with our expectations. The market did not always agree, however, and sometimes voted differently. Many companies' reports were "not good enough," and shares were often mispriced to the downside. We took advantage of the volatility, adding to a number of core holdings, and have already seen the fruits of those efforts. Nutri/System, Inc., is a leading provider of subscription weight-loss programs. In the recent quarter, the company announced increasing subscriptions, revenues, and earnings per share (EPS). Investors focused on a slight up tick in customer acquisition costs, however, and the stock declined more than 25% in a three-day period. We met with company management, came away reassured about the acquisition cost issue, and used the price decline as an opportunity to purchase more stock. The stock is up more than 40% from its second-quarter low and was a solid contributor to returns during the quarter. This kind of volatility is not unusual in the small cap universe, and we think that this kind of research advantage, creating portfolio management conviction, serves investors over time. We increased our weighting in financial services in the spring of 2006 as we saw the prospects of a pause in the Fed's short-term interest rate hikes. Our overweighting in financials, which represented an average of 17% of the portfolio in the most recent quarter, is spread broadly across a range of growth businesses. Longtime holding Private Bancorp, Inc., continued its good performance as it executed on growing its regional footprint for the high-net-worth market. We own a number of companies that are benefiting from the increase in derivatives and options trading. International Securities Exchange Holdings, Inc., the largest equity options exchange, is among the leading options exchanges in the world. The company is benefiting from significantly increased derivatives trading volume and a general up tick in overall market volatility. This is an exciting emerging growth company, but it is also a high-beta stock that we monitor closely. Investment Technology Group, Inc., (ITG) is a newer position that detracted from returns during the recent quarter. A leader in institutional trading analytics and execution, ITG is solidly positioned to benefit from the unbundling of trade execution and research, electronic trading, and algorithmic trading. Trading volumes at ITG continue to increase, measured quarter-by-quarter and year-over-year. The stock declined during the third quarter as investors worried about competitive threats. We think ITG can meet those challenges and continue to build market share-and the stock is cheap, trading at less than 18 times our 2007 EPS estimate. 58 SECURITY EQUITY FUND Manager's Commentary SMALL CAP GROWTH SERIES November 15, 2006 (unaudited) Poor stock selection in technology hurt our performance during the year. Despite a concerted effort midyear to be underweighted in technology due to the upcoming slower seasonal period, we were plagued by poor stock selection. Digitas, Inc., a leader in providing Web-based marketing services to large Fortune 1000 companies, was an example of overstaying our welcome in a long-term core holding. This segment is growing rapidly as blue-chip companies like General Motors and American Express move more advertising dollars out of traditional media and onto the Web. We have owned the stock since early 2003, and it has contributed significantly to returns since then. In the recent quarter, Digitas announced some execution stumbles and the loss of several major clients, and the stock dipped significantly. Despite our past success with Digitas, we are not convinced of its ability to resolve its issues and we have exited the stock. Openwave Systems, Inc., was another large loser in the tech sector. Openwave suffered the double whammy of an earnings disappointment combined with being embroiled in the options backdating scandal. We quickly cut our losses in the name but suffered a precipitous decline in the shares before exiting. In health care our stock-picking ability helped add to performance. Winners such as PolyMedica Corporation, a provider of healthcare products and services to patients suffering from chronic diseases; AMN Healthcare Services, Inc., which engages in the recruitment and placement of physicians, nurses, and allied health professionals; and Vital Signs, Inc., a manufacturer of disposable medical products for use in anesthesia, critical care, and respiratory procedures, made significant contributions. We were unfortunately underweighted for the quarter, at approximately 18% vs. 19%, and that cost us some relative performance. We aim to increase our health care weighting as we gear the portfolio for a potential slowdown in economic activity in 2007. As we have consistently said, our goal is to find exciting, fast-growing health care names that have sustainable recurring business models and that will perform well throughout the economic cycle. Overall we are disappointed with the relative underperformance during the year. As you know, we have a three to five-year time horizon with our investments, and we are very optimistic about the portfolio's prospects. Given our focus on strong, fast-growing companies that we believe will achieve superior results regardless of the economic cycle, we are eager to enter 2007 with a clearer look at the extent of the economic slowdown. We think that with the Fed's rate-tightening cycle nearing an end, lower inflation expectations, and commodity price easing, the environment in the fourth quarter and 2007 bodes well for small cap growth stocks. As a fellow investor in the strategy, I appreciate your patience this year and your continued support. Sincerely, Bill Wolfenden Portfolio Manager (1) Performance figures are based on Class A shares and do not reflect deduction of the sales charges or taxes that a shareholder would pay on distributions or the redemption of shares. 59 SECURITY EQUITY FUND Performance Summary SMALL CAP GROWTH SERIES September 30, 2006 (unaudited) PERFORMANCE SECURITY SMALL CAP GROWTH SERIES VS. RUSSELL 2000 GROWTH INDEX (PERFORMANCE GRAPH) Small Cap Growth Series 10/15/97 9,425.00 12/31/97 9,063.00 03/31/98 10,128.68 06/30/98 9,921.20 09/30/98 8,204.80 12/31/98 10,006.08 03/31/99 10,015.51 06/30/99 10,571.93 09/30/99 12,241.18 12/31/99 18,728.25 03/31/00 23,780.52 06/30/00 20,741.41 09/30/00 21,370.53 12/31/00 16,926.48 03/31/01 12,356.86 06/30/01 13,572.63 09/30/01 10,271.18 12/31/01 12,042.43 03/31/02 11,665.12 06/30/02 10,428.39 09/30/02 8,258.87 12/31/02 8,751.46 03/31/03 8,248.39 06/30/03 10,522.72 09/30/03 12,189.16 12/31/03 13,572.63 03/31/04 14,453.02 06/30/04 14,222.44 09/30/04 13,740.32 12/31/04 15,763.12 03/31/05 14,756.96 06/30/05 15,658.31 09/30/05 16,517.73 12/31/05 16,821.68 03/31/06 18,551.01 06/30/06 16,999.85 09/30/06 16,381.48
Russell 2000 Growth Index INCEPTION 10/15/97 10,000.00 12/31/97 9,180.81 03/31/98 10,271.66 06/30/98 9,680.76 09/30/98 7,516.68 12/31/98 9,294.11 03/31/99 9,137.79 06/30/99 10,485.49 09/30/99 9,970.23 12/31/99 13,299.60 03/31/00 14,534.92 06/30/00 13,462.59 09/30/00 12,927.63 12/31/00 10,315.79 03/31/01 8,747.02 06/30/01 10,319.67 09/30/01 7,421.14 12/31/01 9,363.46 03/31/02 9,179.82 06/30/02 7,739.04 09/30/02 6,073.63 12/31/02 6,529.39 03/31/03 6,275.55 06/30/03 7,790.90 09/30/03 8,606.49 12/31/03 9,698.35 03/31/04 10,240.11 06/30/04 10,249.93 09/30/04 9,633.73 12/31/04 11,085.85 03/31/05 10,329.58 06/30/05 10,688.99 09/30/05 11,363.97 12/31/05 11,545.56 03/31/06 13,204.61 06/30/06 12,246.75 09/30/06 12,032.62
$10,000 SINCE INCEPTION This chart assumes a $10,000 investment in Class A shares of Small Cap Growth Series on October 15, 1997 (date of inception), reflects deduction of the 5.75% sales load and assumes all dividends reinvested. The chart does not reflect the deduction of taxes that a shareholder would pay on distributions or the redemption of fund shares. The Russell 2000 Growth Index measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values. PORTFOLIO COMPOSITION BY SECTOR AS OF 9-30-06 Consumer Discretionary 14.02% Consumer Staples 3.51 Energy 5.80 Financials 14.05 Health Care 20.68 Industrials 14.89 Information Technology 17.40 Telecommunication Services 0.74 Repurchase Agreement 12.18 Liabilities in excess of other assets (3.27) ------ Total net assets 100.00% ======
AVERAGE ANNUAL RETURNS
PERIODS ENDED 9-30-06 1 YEAR 5 YEARS SINCE INCEPTION --------------------- ------ ------- --------------- A Shares (0.82%) 9.79% 6.37% (10-15-97) A Shares with sales charge (6.52%) 8.49% 5.67% (10-15-97) B Shares (1.51%) 8.94% 5.50% (10-15-97) B Shares with CDSC (6.43%) 8.66% 5.50% (10-15-97) C Shares (1.61%) 8.97% 5.07% (1-29-99) C Shares with CDSC (2.60%) 8.97% 5.07% (1-29-99)
The performance data above represents past performance that is not predictive of future results. The investment return and principal value of an investment in the Series will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The figures above do not reflect deduction of the maximum front-end sales charge of 5.75% for Class A shares or the contingent deferred sales charge of 5% for Class B shares and 1% for Class C shares, as applicable, except where noted. The figures do not reflect the deduction of taxes that a shareholder would pay on distributions or redemption of shares. Such figures would be lower if the maximum sales charge and any applicable taxes were deducted. Fee waivers reduced expenses of the Series and in the absence of such waiver, the performance quoted would be reduced. 60 See accompanying notes. SECURITY EQUITY FUND Performance Summary SMALL CAP GROWTH SERIES September 30, 2006 (unaudited) PERFORMANCE INFORMATION ABOUT YOUR SERIES EXPENSES CALCULATING YOUR ONGOING SERIES EXPENSES EXAMPLE As a shareholder of the Series, you incur two types of costs: (1) transaction costs, which may include sales charges (loads) on purchase payments; contingent deferred sales charges on redemptions; and redemption fees, if any; and (2) ongoing costs, including management fees; distribution and/or service fees (12b-1); and other Series expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Series and to compare these costs with ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period, April 1, 2006 - September 30, 2006. ACTUAL EXPENSES The first line for each class of shares in the table provides information about actual account values and actual expenses. You may use the information in this table, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the table under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line for each class of shares in the table provides information about hypothetical account values and hypothetical expenses based on the Series actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Series actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Series and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other mutual funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads) on purchase payments, contingent deferred sales charges on redemptions, and redemption fees, if any. Therefore, the second line for each class of shares is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. SERIES EXPENSES
BEGINNING ENDING EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING 04-01-06 09-30-06(1) PERIOD(2) ------------- ------------- ------------- Small Cap Growth Series - Class A Actual $1,000.00 $ 883.10 $ 9.44 Hypothetical 1,000.00 1,015.04 10.10 Small Cap Growth Series - Class B Actual 1,000.00 880.00 13.20 Hypothetical 1,000.00 1,011.03 14.12 Small Cap Growth Series - Class C Actual 1,000.00 879.30 13.14 Hypothetical 1,000.00 1,011.08 14.07
(1) The actual ending account value is based on the actual total return of the Series for the period from April 1, 2006 to September 30, 2006 after actual expenses and will differ from the hypothetical ending account value which is based on the Series expense ratio and a hypothetical annual return of 5% before expenses. The actual cumulative return at net asset value for the period from April 1, 2006 to September 30, 2006 was (11.69%), (12.00%) and (12.07%), for Class A, B and C shares, respectively. (2) Expenses are equal to the Series annualized expense ratio (2.00%, 2.80% and 2.79% for Class A, B and C shares, respectively), net of any applicable fee waivers or earnings credits, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 61 Schedule of Investments Security Equity Fund - Small Cap Growth Series September 30, 2006
SHARES VALUE ---------- ----------- COMMON STOCK-91.1% AEROSPACE & DEFENSE -1.8% BE Aerospace, Inc. * 25,700 $ 542,013 Heico Corporation 14,080 482,944 ----------- 1,024,957 ----------- ALTERNATIVE CARRIERS - 0.7% Time Warner Telecom, Inc. * 21,680 412,137 ----------- APPAREL RETAIL - 2.9% Cache, Inc. * 54,370 972,679 Jos A. Bank Clothiers, Inc. * 21,826 653,907 ----------- 1,626,586 ----------- APPAREL, ACCESSORIES & LUXURY GOODS -1.3% Carter's, Inc. * 27,210 718,072 ----------- APPLICATION SOFTWARE -1.7% Advent Software, Inc. * 8,000 289,680 Concur Technologies, Inc. * 45,840 666,972 ----------- 956,652 ----------- BIOTECHNOLOGY -1.0% Solexa, Inc. * 61,227 540,022 ----------- CASINOS & GAMING -3.4% Century Casinos, Inc. * 73,020 725,819 Scientific Games Corporation * 36,740 1,168,332 ----------- 1,894,151 ----------- COMMUNICATIONS EQUIPMENT -1.0% CommScope, Inc. * 17,680 580,965 ----------- CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS -0.9% American Railcar Industries, Inc. 18,000 523,980 ----------- DISTRIBUTORS -0.2% Keystone Automotive Industries, Inc.* 2,800 106,456 ----------- DIVERSIFIED COMMERCIAL & PROFESSIONAL SERVICES -1.7% FirstService Corporation * 38,710 922,072 ----------- ELECTRICAL COMPONENTS & EQUIPMENT -0.9% Regal-Beloit Corporation 11,830 514,605 ----------- ELECTRONIC EQUIPMENT MANUFACTURERS -1.1% Optimal Group, Inc. * 53,310 626,926 ----------- ENVIRONMENTAL & FACILITIES SERVICES -3.1% Rollins, Inc. 40,620 857,488 Team, Inc. * 33,550 840,763 ----------- 1,698,251 -----------
SHARES VALUE ---------- ----------- COMMON STOCK (CONTINUED) FOOTWEAR -1.6% Iconix Brand Group, Inc. * 54,280 $ 873,908 ----------- HEALTH CARE DISTRIBUTORS -1.0% MWI Veterinary Supply, Inc. * 17,090 573,028 ----------- HEALTH CARE EQUIPMENT -10.7% American Medical Systems Holdings, Inc. * 49,610 914,312 Angiodynamics, Inc. * 30,930 640,560 Arthrocare Corporation* 8,930 418,460 Kyphon, Inc. * 16,430 614,811 NuVasive, Inc. * 32,030 644,123 Orthovita, Inc. * 124,580 434,784 Resmed, Inc. * 16,610 668,553 Spectranetics Corporation* 79,510 930,267 Vital Signs, Inc. 12,359 699,643 ----------- 5,965,513 ----------- HEALTH CARE FACILITIES - 2.4% Five Star Quality Care, Inc. * 91,810 987,875 NovaMed, Inc. * 42,360 333,797 ----------- 1,321,672 ----------- HEALTH CARE SERVICES - 2.2% AMN Healthcare Services, Inc. * 26,990 641,013 Health Extras, Inc. * 20,240 572,994 ----------- 1,214,007 ----------- HEALTH CARE SUPPLIES - 2.9% Immucor, Inc. * 15,380 344,666 Lifecell Corporation * 13,390 431,426 PolyMedica Corporation 20,102 860,566 ----------- 1,636,658 ----------- HOME ENTERTAINMENT SOFTWARE -1.2% THE9, LTD. ADR* 31,240 668,536 ----------- HOTELS, RESORTS & CRUISE LINES - 0.6% Ctrip.com International, Ltd. ADR 6,960 312,852 ----------- HOUSEHOLD PRODUCTS -1.6% Central Garden and Pet Company * 18,860 910,184 ----------- HUMAN RESOURCE & EMPLOYMENT SERVICES -1.4% Barrett Business Services* 36,440 782,367 ----------- INDUSTRIAL MACHINERY - 2.7% Dynamic Materials Corporation 11,250 364,725 Flow International Corporation * 56,400 731,508 Gardner Denver, Inc. * 12,250 405,230 ----------- 1,501,463 ----------- INTERNET RETAIL -1.9% Nutri/System, Inc. * 16,440 1,024,048 Shutterfly, Inc. * 3,600 55,980 ----------- 1,080,028 -----------
The accompanying notes are an integral part of the financial statements. 62 Schedule of Investments Security Equity Fund - Small Cap Growth Series September 30, 2006 - continued
SHARES VALUE ---------- ----------- COMMON STOCK (CONTINUED) INTERNET SOFTWARE & SERVICES - 7.7% Equinix, Inc. * 12,075 $ 725,707 j2 Global Communications, Inc. * 28,780 781,953 Marchex, Inc. (CI.B) * 31,860 488,732 Omniture, Inc. * 60,580 477,976 Online Resources Corporation * 80,790 989,678 RADVision, Ltd. * 50,370 831,105 ----------- 4,295,151 ----------- INVESTMENT BANKING & BROKERAGE - 4.6% GFI Group, Inc. * 6,300 348,327 Greenhill& Company, Inc. 5,890 394,748 Investment Technology Group, Inc.* 18,910 846,222 optionsXpress Holdings, Inc. 20,020 558,158 TradeStation Group, Inc. * 27,550 415,178 ----------- 2,562,633 ----------- LEISURE FACILITIES - 0.7% Life Time Fitness, Inc. * 8,800 407,352 ----------- MANAGED HEALTH CARE - 0.5% Healthspring, Inc. * 13,850 266,612 ----------- MARINE -0.9% American Commercial Lines, Inc. * 8,000 475,600 ----------- MORTGAGE REIT'S -1.5% KKR Financial Corporation 33,490 821,845 ----------- OIL & GAS EQUIPMENT & SERVICES - 5.8% Allis-Chalmers Energy, Inc. * 19,810 290,018 Lufkin Industries, Inc. 7,140 377,849 Maverick Tube Corporation * 15,010 973,098 Oil States International, Inc. * 23,040 633,600 Superior Energy Services, Inc. * 25,200 661,752 W-H Energy Services, Inc. * 7,010 290,705 ----------- 3,227,022 ----------- PACKAGED FOODS & MEATS -1.1% SunOpta, Inc. * 59,280 626,590 ----------- PERSONAL PRODUCTS - 0.1% Bare Escentuals, Inc. * 1,260 34,209 ----------- PROPERTY & CASUALTY INSURANCE - 2.7% Amerisafe, Inc. * 74,720 732,256 Navigators Group, Inc. * 15,590 748,476 ----------- 1,480,732 ----------- REGIONAL BANKS - 2.9% Boston Private Financial Holdings, Inc. 15,070 420,152 PrivateBancorp, Inc. 11,960 546,811 Virginia Commerce Bancorp, Inc. * 28,049 622,688 ----------- 1,589,651 -----------
SHARES VALUE ---------- ----------- COMMON STOCK (CONTINUED) SEMICONDUCTOR EQUIPMENT -0.7% Cymer, Inc. * 9,210 $ 404,411 ----------- SEMICONDUCTORS -3.9% Atheros Communications, Inc. * 27,950 506,734 Silicon Motion Technology Corporation ADR * 25,000 415,750 SRS Labs, Inc. * 105,217 652,345 Volterra Semiconductor Corporation * 35,670 579,637 ----------- 2,154,466 ----------- SOFT DRINKS - 0.7% Hansen Natural Corporation * 11,770 382,290 ----------- SPECIALIZED CONSUMER SERVICES -1.4% Steiner Leisure, Ltd. * 18,530 779,186 ----------- SPECIALIZED FINANCE - 2.5% International Securities Exchange Holdings, Inc. 10,420 488,594 Portfolio Recovery Associates, Inc.* 19,940 874,768 ----------- 1,363,362 ----------- TRUCKING -1.5% Old Dominion Freight Line, Inc. * 12,780 383,783 Vitran Corporation, Inc. * 25,440 470,640 ----------- 854,423 ----------- TOTAL COMMON STOCK (Cost $45,186,540) $50,711,583 -----------
PRINCIPAL AMOUNT VALUE ---------- ----------- REPURCHASE AGREEMENT -12.2% United Missouri Bank, 4.88%, dated 09-29-06, matures 10-02-06; repurchase amount of $6,785,758 (Collateralized by FHLB, 2.875%, 02-15-07, GNMA #781522, 5.00%, 11-15-17, and GNMA #603544, 5.00%, 03-15-18 with a combined value of $6,918,660) $6,783,000 $ 6,783,000 ----------- TOTAL REPURCHASE AGREEMENT (Cost $6,783,000) $ 6,783,000 ----------- TOTAL INVESTMENTS (SECURITY EQUITY FUND - SMALL CAP GROWTH SERIES) (COST $51,969,540) - 103.3% $57,494,583 LIABILITIES IN EXCESS OF OTHER ASSETS - (3.3)% (1,820,047) ----------- TOTAL NET ASSETS -100.0% $55,674,536 ===========
The accompanying notes are an integral part of the financial statements. 63 Schedule of Investments Security Equity Fund - Small Cap Growth Series September 30, 2006 - continued Footnotes Percentages are stated as a percent of net assets. For federal income tax purposes the identified cost of investments owned at 9/30/2006 was $52,200,887. * - Non-income producing security Glossary: ADR - American Depositary Receipt GNMA - Government National Mortgage Association See notes to financial statements. The accompanying notes are an integral part of the financial statements. 64 SECURITY EQUITY FUND SMALL CAP GROWTH SERIES Statement of Assets and Liabilities September 30, 2006 ASSETS: Investments, at value(1) ......................................... $50,711,583 Repurchase agreement, at value(1) ................................ 6,783,000 Cash ............................................................. 55,054 Receivables: Fund shares sold .............................................. 32,536 Securities sold ............................................... 307,558 Dividends ..................................................... 1,656 Prepaid expenses ................................................. 9,915 ----------- Total assets ..................................................... 57,901,302 ----------- LIABILITIES: Payable for: Securities purchased .......................................... 2,101,025 Fund shares redeemed .......................................... 33,078 Management fees ............................................... 44,943 Custodian fees ................................................ 3,116 Transfer agent and administration fees ........................ 14,533 Professional fees ............................................. 11,280 12b-1 distribution plan fees .................................. 17,341 Directors' fees ............................................... 250 Other ......................................................... 1,200 ----------- Total liabilities ................................................ 2,226,766 ----------- NET ASSETS ....................................................... $55,674,536 =========== NET ASSETS CONSIST OF: Paid in capital .................................................. $52,441,215 Accumulated undistributed net realized loss on sale of investments ........................................ (2,291,722) Net unrealized appreciation in value of investments .............. 5,525,043 ----------- Net assets ....................................................... $55,674,536 =========== CLASS A: Capital shares outstanding (unlimited number of shares authorized) ............................................ 2,908,223 Net assets ....................................................... $45,450,952 Net asset value per share ........................................ $ 15.63 =========== Maximum offering price per share (net asset value divided by 94.25%) ........................... $ 16.58 =========== CLASS B: Capital shares outstanding (unlimited number of shares authorized) ............................................ 411,678 Net assets ....................................................... $ 5,919,204 Net asset value, offering and redemption price per share (excluding any applicable contingent deferred sales charge) ... $ 14.38 =========== CLASS C: Capital shares outstanding (unlimited number of shares authorized) ............................................ 293,934 Net assets ....................................................... $ 4,304,380 Net asset value, offering and redemption price per share (excluding any applicable contingent deferred sales charge) ... $ 14.64 =========== (1)Investments, at cost .......................................... $51,969,540
Statement of Operations For the Year Ended September 30, 2006 INVESTMENT INCOME: Dividends ..................................................... $ 97,311 Interest ...................................................... 125,980 ----------- Total investment income ....................................... 223,291 ----------- EXPENSES Management fees ............................................... 420,178 Custodian fees ................................................ 21,923 Transfer agent/maintenance fees ............................... 200,822 Administration fees ........................................... 41,859 Directors' fees .............................................. 1,101 Professional fees ............................................ 13,658 Reports to shareholders ....................................... 9,632 Registration fees ............................................. 33,144 Other expenses ................................................ 3,202 12b-1 distribution plan fees - Class A ........................ 73,049 12b-1 distribution plan fees - Class B ........................ 82,939 12b-1 distribution plan fees - Class C ...................... 45,044 ----------- Total expenses ................................................ 946,551 Less: Earnings credits ........................................ (568) ----------- Net expenses .................................................. 945,983 ----------- Net investment loss ........................................... (722,692) ----------- NET REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain during the period on: Investments ................................................... 1,764,643 ----------- Net realized gain ............................................. 1,764,643 ----------- Net unrealized depreciation during the period on: Investments ................................................... (1,130,941) ----------- Net unrealized depreciation ................................... (1,130,941) ----------- Net realized and unrealized gain .............................. 633,702 ----------- Net decrease in net assets resulting from operations ................................. $ (88,990) ===========
65 See accompanying notes. SECURITY EQUITY FUND Statement of Changes in Net Assets SMALL CAP GROWTH SERIES
YEAR ENDED YEAR ENDED SEPTEMBER SEPTEMBER 30, 2006 30, 2005 ------------ ------------ INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS: Net investment loss ........................... $ (722,692) $ (703,494) Net realized gain during the period on investments ................................ 1,764,643 4,851,401 Net unrealized appreciation during the period on investments ............................. (1,130,941) 1,920,648 ------------ ------------ Net increase in net assets resulting from operations ................................. (88,990) 6,068,555 ------------ ------------ CAPITAL SHARE TRANSACTIONS: Proceeds from sale of shares Class A .................................... 34,591,629 8,144,188 Class B .................................... 2,145,297 1,848,399 Class C .................................... 1,341,687 1,278,043 Cost of shares redeemed Class A .................................... (11,879,893) (10,786,990) Class B .................................... (4,367,496) (4,281,215) Class C .................................... (1,407,378) (1,752,947) ------------ ------------ Net increase (decrease) from capital share transactions ............................... 20,423,846 (5,550,522) ------------ ------------ Net increase in net assets .................... 20,334,856 518,033 ------------ ------------ NET ASSETS: Beginning of period ........................... 35,339,680 34,821,647 ------------ ------------ End of period ................................. $ 55,674,536 $ 35,339,680 ============ ============ Accumulated undistributed net investment income at end of period ........................... $ -- $ -- ============ ============ CAPITAL SHARE ACTIVITY: Shares sold Class A .................................... 2,223,136 560,063 Class B .................................... 141,177 138,265 Class C .................................... 87,821 91,558 Shares redeemed Class A .................................... (751,218) (759,381) Class B .................................... (296,698) (324,239) Class C .................................... (90,959) (128,106)
66 See accompanying notes. SECURITY EQUITY FUND Financial Highlights SMALL CAP GROWTH SERIES Selected data for each share of capital stock outstanding throughout each period
YEAR ENDED SEPTEMBER 30, --------------------------------------------------- CLASS A 2006 2005 2004 2003 2002(f) ------- ------- ------- ------- ------- ------- PER SHARE DATA Net asset value, beginning of period $ 15.76 $ 13.11 $ 11.63 $ 7.88 $ 9.80 ------- ------- ------- ------- ------- Income (loss) from investment operations: Net investment loss(c) (0.23) (0.24) (0.25) (0.18) (0.20) Net gain (loss) on securities (realized and unrealized) 0.10 2.89 1.73 3.93 (1.72) ------- ------- ------- ------- ------- Total from investment operations (0.13) 2.65 1.48 3.75 (1.92) ------- ------- ------- ------- ------- Net asset value, end of period $ 15.63 $ 15.76 $ 13.11 $ 11.63 $ 7.88 ======= ======= ======= ======= ======= TOTAL RETURN(a) (0.82%) 20.21% 12.73% 47.59% (19.59%) ------- ------- ------- ------- ------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $45,451 $22,637 $21,443 $14,406 $ 8,350 ------- ------- ------- ------- ------- Ratios to average net assets: Net investment loss (1.46%) (1.67%) (1.95%) (2.01%) (1.93%) Total expenses(b) 2.01% 2.10% 2.09% 2.51% 2.14% Net expenses(d) 2.01% 2.10% 2.09% 2.25% 2.14% Expenses prior to custodian earnings credits and net of expense waivers 2.01% 2.10% 2.09% 2.25% 2.14% ------- ------- ------- ------- ------- Portfolio turnover rate 136% 134% 157% 206% 302%
YEAR ENDED SEPTEMBER 30, ----------------------------------------------- CLASS B 2006 2005 2004 2003 2002(f) ------- ------ ------ ------ ------ ------- PER SHARE DATA Net asset value, beginning of period $14.60 $12.24 $10.94 $ 7.47 $ 9.37 ------ ------ ------ ------ ------- Income (loss) from investment operations: Net investment loss(c) (0.36) (0.33) (0.33) (0.24) (0.26) Net gain (loss) on securities (realized and unrealized) 0.14 2.69 1.63 3.71 (1.64) ------ ------ ------ ------ ------- Total from investment operations (0.22) 2.36 1.30 3.47 (1.90) ------ ------ ------ ------ ------- Net asset value, end of period $14.38 $14.60 $12.24 $10.94 $ 7.47 ====== ====== ====== ====== ======= TOTAL RETURN(a) (1.51%) 19.28% 11.88% 46.45% (20.28%) ------ ------ ------ ------ ------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $5,919 $8,283 $9,218 $6,838 $ 4,292 ------ ------ ------ ------ ------- Ratios to average net assets: Net investment loss (2.31%) (2.41%) (2.69%) (2.76%) (2.69%) Total expenses(b) 2.79% 2.85% 2.84% 3.23% 2.90% Net expenses(d) 2.79% 2.85% 2.83% 3.00% 2.90% Expenses prior to custodian earnings credits and net of expense waivers 2.79% 2.85% 2.84% 3.00% 2.90% ------ ------ ------ ------ ------- Portfolio turnover rate 136% 134% 157% 206% 302%
67 See accompanying notes. SECURITY EQUITY FUND Financial Highlights SMALL CAP GROWTH SERIES Selected data for each share of capital stock outstanding throughout each period
YEAR ENDED SEPTEMBER 30, -------------------------------------------------- CLASS C 2006 2005 2004 2003 2002(e, f) ------- ------ ------ ------ ------ ---------- PER SHARE DATA Net asset value, beginning of period $14.88 $12.47 $11.15 $ 7.61 $ 9.53 ------ ------ ------ ------ ------- Income (loss) from investment operations: Net investment loss(c) (0.35) (0.33) (0.33) (0.24) (0.26) Net gain (loss) on securities (realized and unrealized) 0.11 2.74 1.65 3.78 (1.66) ------ ------ ------ ------ ------- Total from investment operations (0.24) 2.41 1.32 3.54 (1.92) ------ ------ ------ ------ ------- Net asset value, end of period $14.64 $14.88 $12.47 $11.15 $ 7.61 ====== ====== ====== ====== ======= TOTAL RETURN(a) (1.61%) 19.33% 11.84% 46.52% (20.15%) ------ ------ ------ ------ ------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $4,304 $4,420 $4,160 $3,533 $ 2,164 ------ ------ ------ ------ ------- Ratios to average net assets: Net investment loss (2.29%) (2.42%) (2.69%) (2.76%) (2.69%) Total expenses(b) 2.79% 2.85% 2.83% 3.23% 2.91% Net expenses(d) 2.79% 2.85% 2.82% 3.00% 2.91% Expenses prior to custodian earnings credits and net of expense waivers 2.79% 2.85% 2.83% 3.00% 2.91% ------ ------ ------ ------ ------- Portfolio turnover rate 136% 134% 157% 206% 302%
(a) Total return information does not reflect deduction of any sales charges imposed at the time of purchase for Class A shares or upon redemption for Class B and C shares. (b) Total expense information reflects expense ratios absent fund expense reductions by the Investment Manager. (c) Net investment loss was computed using average shares outstanding throughout the period. (d) Net expense information reflects expense ratios after voluntary expense waivers and custodian earnings credits, as applicable. (e) The financial highlights for Class C shares exclude the historical financial highlights of Class S shares. Class S shares were exchanged for Class C shares on June 3, 2002. (f) RS Investments, Inc. became the sub-adviser of Small Cap Growth Series effective September 3, 2002. Prior to September 3, 2002, Security Management Company, LLC paid Strong Capital Management, Inc. for sub-advisory services. 68 See accompanying notes. This page left blank intentionally. 69 SECURITY Manager's Commentary LARGE CAP VALUE FUND November 15, 2006 (unaudited) (SECURITY BENEFIT(SM) LOGO) Security Management Company, LLC Adviser, Security Management Company, LLC (PHOTO OF MARK MITCHELL) Mark Mitchell Senior Portfolio Manager TO OUR SHAREHOLDERS: Security Large Cap Value Fund returned 13.45%(1) in the period, lagging the benchmark Russell 1000 Value Index's return of 14.62%, but out performing the Fund's peer group median return of 12.49%. Good individual stock selection was offset slightly by our sector weights in fiscal 2006. While being disappointed that our results were below the benchmark, we believe that our approach delivers performance over the long-term. Our investment philosophy is centered around three key tenants: first, we believe good investments are purchased at less than their intrinsic value, second, a long-term approach and patience are critical to successful investing, and last, we concentrate our investments in companies that have the greatest return potential. Our process is a bottom-up, research-driven investment process that attempts to identify companies that have the ability to become more competitive in the future. We focus on owning these companies for three to five years or longer, which we believe differentiates us from a majority of our peers and ultimately allows us to make better investment decisions. We buy these companies when their current prices trade below their intrinsic value. We closely monitor each company's progress. We will sell a company if the valuation no longer makes sense, if we've made a mistake and our investment thesis is no longer valid, or if we have a more attractive investment alternative. For this Fund, we apply this philosophy to a broad range of value names. FINANCIALS AND INDUSTRIAL STOCKS TOP PERFORMERS The Fund's financial holdings were up 41% compared to 20% for the index with our position in First Marblehead Corporation up over 200%. III-placed, short-term concerns over the company's competitive position offered us an excellent opportunity to take a position in this leading student lending company. First Marblehead maintains its competitive advantage with its loan underwriting capability, superior economics, and value-added services. The Fund continues to be underweight in financials. The valuations of financial-related companies do not reflect our expectation for a negative impact from declining credit trends. Holdings in the industrial sector were up 25%. McDermott International, Inc., appreciated 71%, driven by strong demand for its energy infrastructure construction- related services. Hughes Supply was up 40% as it agreed to be acquired by Home Depot. Hughes' strong position in the professional contractor market fits well into Home Depot's expansion plans in that segment. ENERGY DISAPPOINTING Energy stocks provided negative returns and the Fund's slight overweighting proved to be a significant headwind. Following a period of being a strong leader, the sector experienced a significant pullback after oil prices had a period of unprecedented and sustained appreciation. Halliburton Company and Sasol, Ltd., ADR were down 16% and 13%, respectively. Halliburton's price was impacted as investors became concerned about a weakening energy commodity market. Sasol was weaker due to country-specific tax issues related to its core gas-to-liquids business. 2007 MARKET OUTLOOK The current low-return investment environment has continued to make available ample liquidity in the U.S. equity market. Falling energy prices have helped increase consumer confidence and provide support to corporate profit margins through lower raw material input prices. Additionally, businesses continue to have very healthy balance sheets to help drive future growth initiatives. As we noted in last year's shareholder letter, we've been concerned about a slowdown in U.S. consumer spending for some time. This concern has yet to materialize, but we still think it will happen. Lower energy prices will help; however, higher interest rates and a housing market slowdown provide likely headwinds. The Federal Reserve is walking a fine line between managing inflation risks while supporting economic growth. We're unsure, like most investors, what the Fed's next move will be. This uncertainty will weigh on the market until it's resolved. 70 SECURITY Manager's Commentary LARGE CAP VALUE FUND November 15, 2006 (unaudited) We believe that investing is a long-term pursuit that requires patience and a consistent approach. Dollar cost averaging is a sound way to build long-term value. We recognize there are many investment fund alternatives available today and thank you for your business and the confidence you place in us. Sincerely, Mark Mitchell Senior Portfolio Manager (1) Performance figures are based on Class A shares and do not reflect deduction of the sales charges or taxes that a shareholder would pay on distributions or the redemption of shares. 71 SECURITY Performance Summary LARGE CAP VALUE FUND September 30, 2006 (unaudited) PERFORMANCE SECURITY LARGE CAP VALUE FUND VS. RUSSELL 1000 VALUE INDEX (PERFORMANCE GRAPH) Large Cap Value Fund 09/30/96 9,425.00 12/31/96 9,721.68 03/31/97 9,697.53 06/30/97 11,041.10 09/30/97 12,752.51 12/31/97 12,802.09 03/31/98 13,842.50 06/30/98 13,388.78 09/30/98 11,738.96 12/31/98 12,762.42 03/31/99 12,762.42 06/30/99 14,596.10 09/30/99 13,147.49 12/31/99 13,082.66 03/31/00 12,304.16 06/30/00 11,639.58 09/30/00 12,190.23 12/31/00 12,134.94 03/31/01 11,311.91 06/30/01 11,771.28 09/30/01 10,278.34 12/31/01 11,457.13 03/31/02 11,322.56 06/30/02 10,092.27 09/30/02 8,169.93 12/31/02 8,688.96 03/31/03 8,246.83 06/30/03 9,477.12 09/30/03 9,823.14 12/31/03 11,057.82 03/31/04 11,404.58 06/30/04 11,269.73 09/30/04 11,000.02 12/31/04 12,175.16 03/31/05 12,040.31 06/30/05 12,059.57 09/30/05 13,061.32 12/31/05 13,346.23 03/31/06 14,217.90 06/30/06 14,760.27 09/30/06 14,818.38
RUSSELL 1000 VALUE INDEX 09/30/96 10,000.00 12/31/96 10,997.46 03/31/97 11,279.13 06/30/97 12,942.22 09/30/97 14,230.66 12/31/97 14,866.87 03/31/98 16,599.39 06/30/98 16,674.02 09/30/98 14,743.46 12/31/98 17,191.67 03/31/99 17,438.52 06/30/99 19,404.40 09/30/99 17,504.06 12/31/99 18,456.06 03/31/00 18,544.21 06/30/00 17,675.12 09/30/00 19,064.87 12/31/00 19,751.50 03/31/01 18,594.96 06/30/01 19,502.22 09/30/01 17,365.74 12/31/01 18,646.58 03/31/02 19,409.19 06/30/02 17,755.92 09/30/02 14,422.57 12/31/02 15,752.56 03/31/03 14,986.36 06/30/03 17,575.46 09/30/03 17,938.06 12/31/03 20,483.32 03/31/04 21,102.53 06/30/04 21,288.45 09/30/04 21,616.25 12/31/04 23,860.44 03/31/05 23,879.74 06/30/05 24,279.29 09/30/05 25,221.77 12/31/05 25,542.20 03/31/06 27,055.47 06/30/06 27,213.85 09/30/06 28,904.64
$10,000 OVER TEN YEARS This chart assumes a $10,000 investment in Class A shares of Large Cap Value Fund on September 30, 1996, reflects deduction of the 5.75% sales load and assumes all dividends reinvested. The chart does not reflect the deduction of taxes that a shareholder would pay on distributions or the redemption of fund shares. The Russell 1000 Value Index is an unmanaged index representing the performance of those Russell 1000 Index companies with lower price-to-book ratios and lower forecasted growth values. AVERAGE ANNUAL RETURNS
PERIODS ENDED 9-30-06 1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION --------------------- ------ ------- -------- --------------- A Shares 13.45% 7.59% 4.56% -- A Shares with sales charge 6.98% 6.32% 3.95% -- B Shares 12.54% 6.75% 3.78% -- B Shares with CDSC 7.54% 6.44% 3.78% -- C Shares 12.63% 6.72% N/A 1.25% (1-29-99) C Shares with CDSC 11.63% 6.72% N/A 1.25% (1-29-99)
The performance data above represents past performance that is not predictive of future results. The investment return and principal value of an investment in the Fund will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The figures above do not reflect deduction of the maximum front-end sales charge of 5.75% for Class A shares or the contingent deferred sales charge of 5% for Class B shares and 1% for Class C shares, as applicable, except where noted. The figures do not reflect the deduction of taxes that a shareholder would pay on distributions or redemption of Fund shares. Such figures would be lower if the maximum sales charge and any applicable taxes were deducted. PORTFOLIO COMPOSITION BY SECTOR AS OF 9-30-06 Consumer Discretionary 9.73% Consumer Staples 12.96 Energy 13.94 Financials 17.73 Health Care 5.90 Industrials 17.17 Information Technology 2.56 Materials 4.96 Telecommunication Services 3.05 Utilities 1.24 Exchange Traded Funds 6.01 Asset Backed Commercial Paper 2.84 Commercial Paper 3.33 Repurchase Agreement 0.23 Liabilities in excess of other assets (1.65) ------ Total net assets 100.00% ======
72 See accompanying notes. SECURITY Performance Summary LARGE CAP VALUE FUND September 30, 2006 (unaudited) PERFORMANCE INFORMATION ABOUT YOUR FUND'S EXPENSES CALCULATING YOUR ONGOING FUND EXPENSES EXAMPLE As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, which may include sales charges (loads) on purchase payments; contingent deferred sales charges on redemptions; and redemption fees, if any; and (2) ongoing costs, including management fees; distribution and/or service fees (12b-1); and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period, April 1, 2006 - September 30, 2006. ACTUAL EXPENSES The first line for each class of shares in the table provides information about actual account values and actual expenses. You may use the information in this table, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the table under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line for each class of shares in the table provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other mutual funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads) on purchase payments, contingent deferred sales charges on redemptions, and redemption fees, if any. Therefore, the second line for each class of shares is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. FUND EXPENSES
BEGINNING ENDING EXPENSES ACCOUNT ACCOUNT PAID VALUE VALUE DURING 04-01-06 09-30-06(1) PERIOD(2) --------- ----------- --------- Large Cap Value Fund - Class A Actual $1,000.00 $1,042.20 $ 7.53 Hypothetical 1,000.00 1,017.70 7.44 Large Cap Value Fund - Class B Actual 1,000.00 1,037.60 11.44 Hypothetical 1,000.00 1,013.84 11.31 Large Cap Value Fund - Class C Actual 1,000.00 1,036.90 11.39 Hypothetical 1,000.00 1,013.89 11.26
(1) The actual ending account value is based on the actual total return of the Fund for the period from April 1, 2006 to September 30, 2006 after actual expenses and will differ from the hypothetical ending account value which is based on the Fund expense ratio and a hypothetical annual return of 5% before expenses. The actual cumulative return at net asset value for the period from April 1, 2006 to September 30, 2006 was 4.22%, 3.76% and 3.69%, for Class A, B and C shares, respectively. (2) Expenses are equal to the Fund's annualized expense ratio (1.47%, 2.24% and 2.23% for Class A, B and C shares, respectively) multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 73 Schedule of Investments Security Large Cap Value Fund September 30, 2006
SHARES VALUE -------- ---------- COMMON STOCK - 95.3% AEROSPACE & DEFENSE - 2.8% United Technologies Corporation 35,400 $ 2,242,590 ----------- AGRICULTURAL PRODUCTS - 2.4% Archer-Daniels-Midland Company (1) 51,500 1,950,820 ----------- ALUMINUM - 0.7% Alcoa, Inc. 20,100 563,604 ----------- BROADCASTING & CABLE TV - 4.2% CBS Corporation (CI.B) 88,200 2,484,594 Clear Channel Communications, Inc. 31,800 917,430 ----------- 3,402,024 ----------- COMPUTER HARDWARE - 2.1% Hewlett-Packard Company 46,500 1,706,085 ----------- CONSTRUCTION & ENGINEERING - 2.4% Shaw Group, Inc. * 81,400 1,924,296 ----------- CONSUMER FINANCE - 4.0% First Marblehead Corporation (1) 47,300 3,275,998 ----------- DIVERSIFIED CHEMICALS - 2.6% Dow Chemical Company 30,100 1,173,298 E.I. Du Pont de Nemours & Company 22,100 946,764 ----------- 2,120,062 ----------- DRUG RETAIL - 3.3% CVS Corporation 82,100 2,637,052 ----------- ELECTRIC UTILITIES - 1.2% Edison International 24,300 1,011,852 ----------- EXCHANGE TRADED FUNDS - 6.0% iShares Russell 1000 Value Index Fund 31,600 2,435,728 iShares S&P 500 Value Index Fund 34,100 2,447,698 ----------- 4,883,426 ----------- HEALTH CARE SERVICES - 3.1% Medco Health Solutions, Inc. * 41,500 2,494,565 ----------- HYPERMARKETS & SUPER CENTERS - 3.0% Costco Wholesale Corporation 48,900 2,429,352 ----------- INDUSTRIAL CONGLOMERATES - 9.3% General Electric Company 73,400 2,591,020 McDermott International, Inc. * 71,250 2,978,250 Tyco International, Ltd. 69,600 1,948,104 ----------- 7,517,374 ----------- INTEGRATED OIL & GAS - 8.6% Chevron Corporation 22,400 1,452,864 ConocoPhillips 20,300 1,208,459 Exxon Mobil Corporation 35,100 2,355,210
SHARES VALUE -------- ---------- COMMON STOCK (CONTINUED) INTEGRATED OIL & GAS (CONTINUED) Sasol, Ltd. ADR 59,800 $ 1,966,822 ----------- 6,983,355 ----------- INTEGRATED TELECOMMUNICATION SERVICES - 0.2% Windstream Corporation 11,476 151,369 ----------- IT CONSULTING & OTHER SERVICES - 0.5% Unisys Corporation * 66,400 375,824 ----------- MANAGED HEALTH CARE - 2.8% WellPoint, Inc. * 29,700 2,288,385 ----------- MOVIES & ENTERTAINMENT - 5.5% News Corporation 95,500 1,876,575 Time Warner, Inc. 112,500 2,050,875 Viacom, Inc. (CI.B) * 15,100 561,418 ----------- 4,488,868 ----------- MULTI-LINE INSURANCE - 4.8% American International Group, Inc. 58,300 3,862,958 ----------- OIL & GAS DRILLING - 0.5% Transocean, Inc. * (1) 5,500 402,765 ----------- OIL & GAS EQUIPMENT & SERVICES - 2.0% Halliburton Company 58,400 1,661,480 ----------- OIL & GAS STORAGE & TRANSPORTATION - 2.8% Williams Companies, Inc. 94,500 2,255,715 ----------- OTHER DIVERSIFIED FINANCIAL SERVICES - 5.0% Citigroup, Inc. 46,500 2,309,655 JPMorgan Chase & Company 37,600 1,765,696 ----------- 4,075,351 ----------- PACKAGED FOODS & MEATS - 1.4% Tyson Foods, Inc. (1) 69,800 1,108,424 ----------- PROPERTY & CASUALTY INSURANCE - 3.9% Berkshire Hathaway, Inc. * 33 3,161,400 ----------- RAILROADS - 2.8% Union Pacific Corporation 25,400 2,235,200 ----------- SPECIALTY CHEMICALS - 1.6% Rohm & Haas Company 28,100 1,330,535 ----------- TOBACCO - 2.9% Altria Group, Inc. 31,100 2,380,705 ----------- WIRELESS TELECOMMUNICATION SERVICES - 2.9% Alltel Corporation 11,100 616,050
The accompanying notes are an integral part of the financial statements. 74 Schedule of Investments Security Large Cap Value Fund September 30, 2006 - continued
SHARES VALUE -------- ----------- COMMON STOCK (CONTINUED) WIRELESS TELECOMMUNICATION SERVICES (CONTINUED) Sprint Nextel Corporation 99,200 $ 1,701,280 ----------- 2,317,330 ----------- TOTAL COMMON STOCK (Cost $67,276,518) $77,238,764 -----------
PRINCIPAL AMOUNT VALUE ---------- ----------- CORPORATE BOND - 0.0% SERVICES - 0.0% American ECO Corporation 9.63%, 2008 (2)(3)(4)(5) $ 125,000 -- ----------- TOTAL CORPORATE BOND (Cost $125,000) $ -- ----------- ASSET BACKED COMMERCIAL PAPER - 2.9% MISC. RECEIVABLES - 2.9% 1,000,000 999,854 Fairway Finance Corporation 5.25%, 10/2/2006 Jupiter Securitization Corporation 5.26%, 10/4/2006 1,300,000 1,299,430 ----------- 2,299,284 ----------- TOTAL ASSET BACKED COMMERCIAL PAPER (Cost $2,299,284) $ 2,299,284 ----------- COMMERCIAL PAPER - 3.3% BROKERAGE - 1.2% Morgan Stanley 5.31%, 10/5/2006 1,000,000 999,410 ----------- ELECTRIC - 2.1% Florida Power & Light Company 5.25%, 10/3/2006 1,700,000 1,699,504 ----------- TOTAL COMMERCIAL PAPER (Cost $2,698,914) $ 2,698,914 ----------- REPURCHASE AGREEMENT - 0.2% United Missouri Bank, 4.88%, dated 09-29-06, matures 10-02-06; repurchase amount of $189,077 (Collateralized by FHLB, 2.625%, 05-15-07 with a value of $193,062) $ 189,000 $ 189,000 ----------- TOTAL REPURCHASE AGREEMENT (Cost $189,000) $ 189,000 ----------- TOTAL INVESTMENTS (SECURITY LARGE CAP VALUE FUND) (Cost $72,587,716) - 101.7% $82,425,962 LIABILITIES IN EXCESS OF OTHER ASSETS - (1.7)% (1,343,068) ----------- TOTAL NET ASSETS -100.0% $81,082,894 ===========
Footnotes Percentages are stated as a percent of net assets. For federal income tax purposes the identified cost of investments owned at 9/30/2006 was $72,700,322. * - Non-income producing security (1) - Security is segregated as collateral for open written options contracts. (2) - Security is illiquid. See Notes to Financials. (3) - In Default (4) - Private Placement (5) - Security is fair valued by the Board of Directors. See Notes to Financials. See notes to financial statements. The accompanying notes are an integral part of the financial statements. 75 SECURITY LARGE CAP VALUE FUND Statement of Assets and Liabilities September 30, 2006 ASSETS: Investments, at value(1) ......................................... $82,425,962 Cash ............................................................. 743 Receivables: Securities sold ............................................... 154,691 Fund shares sold .............................................. 556,871 Dividends ..................................................... 129,510 Prepaid Expenses ................................................. 23,383 ----------- Total assets ..................................................... 83,291,160 ----------- LIABILITIES: Payable for: Securities purchased .......................................... 1,645,744 Fund shares redeemed .......................................... 388,147 Written options, at value (Premiums received, $67,841) ........ 60,415 Management fees ............................................... 42,154 Custodian fees ................................................ 3,798 Transfer agent and administration fees ........................ 17,239 Professional fees ............................................. 15,300 12b-1 distribution plan fees .................................. 26,169 Directors' fees ............................................... 6,000 Other ......................................................... 3,300 ----------- Total liabilities ................................................ 2,208,266 ----------- NET ASSETS ....................................................... $81,082,894 =========== NET ASSETS CONSIST OF: Paid in capital .................................................. $76,701,372 Accumulated undistributed net investment income .................. 21,221 Accumulated undistributed net realized loss on sale of investments and options written ........................................... (5,485,370) Net unrealized appreciation in value of investments and options written ....................................................... 9,845,671 ----------- Net assets ....................................................... $81,082,894 =========== CLASS A: Capital shares outstanding (unlimited number of shares authorized) ....................... 8,472,288 Net assets ....................................................... $64,786,166 Net asset value per share ........................................ $ 7.65 =========== Maximum offering price per share (net asset value divided by 94.25%) ........................... $ 8.12 =========== CLASS B: Capital shares outstanding (unlimited number of shares authorized) ....................... 1,777,116 Net Assets ....................................................... $12,760,924 Net asset value, offering and redemption price per share (excluding any applicable contingent deferred sales charge) ... $ 7.18 =========== CLASS C: Capital shares outstanding (unlimited number of shares authorized) ....................... 483,482 Net assets ....................................................... $ 3,535,804 Net asset value, offering and redemption price per share (excluding any applicable contingent deferred sales charge) ... $ 7.31 =========== (1) Investments, at cost ......................................... $72,587,716
Statement of Operations For the Year Ended September 30, 2006 INVESTMENT INCOME: Dividends ..................................................... $ 996,957 Interest ...................................................... 122,386 ----------- Total investment income ....................................... 1,119,343 ----------- EXPENSES: Management fees ............................................... 437,307 Custodian fees ................................................ 12,271 Transfer agent/maintenance fees ............................... 178,416 Administration fees ........................................... 63,853 Directors' fees ............................................... 35,157 Professional fees ............................................. 16,813 Reports to shareholders ....................................... 30,794 Registration Fees ............................................. 40,116 Other Expenses ................................................ 24,151 12b-1 distribution plan fees - Class A ........................ 139,700 12b-1 distribution plan fees - Class B ........................ 84,547 12b-1 distribution plan fees - Class C ........................ 29,434 ----------- Total expenses ................................................ 1,092,559 Less: Earnings credits ........................................ (31) ----------- Net expenses .................................................. 1,092,528 ----------- Net investment income ......................................... 26,815 ----------- NET REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain during the period on: Investments ................................................... 2,223,331 Options written ............................................... 128,393 ----------- Net realized gain ............................................. 2,351,724 ----------- Net unrealized appreciation during the period on: Investments ................................................... 4,878,067 Options written ............................................... 3,850 ----------- Net unrealized appreciation ................................... 4,881,917 ----------- Net realized and unrealized gain .............................. 7,233,641 ----------- Net increase in net assets resulting from operations .......... $ 7,260,456 ===========
76 See accompanying notes. SECURITY Statement of Changes in Net Assets LARGE CAP VALUE FUND
YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, 2006 2005 ------------- ------------- INCREASE IN NET ASSETS FROM OPERATIONS: Net investment income ....................... $ 26,815 $ 226,529 Net realized gain during the period on investments and options written .......... 2,351,724 6,823,643 Net unrealized appreciation during the period on investments and options written ....... 4,881,917 2,430,519 ------------ ------------ Net increase in net assets resulting from operations ............................... 7,260,456 9,480,691 ------------ ------------ DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income Class A .................................. (232,389) -- Class B .................................. -- -- Class C .................................. -- -- ------------ ------------ Total distributions to shareholders ......... (232,389) -- ------------ ------------ CAPITAL SHARE TRANSACTIONS: Proceeds from sale of shares Class A .................................. 52,794,309 6,416,077 Class B .................................. 8,335,522 1,294,323 Class C .................................. 2,030,893 1,300,122 Distributions reinvested Class A .................................. 214,200 -- Class B .................................. -- -- Class C .................................. -- -- Cost of shares redeemed Class A .................................. (39,239,195) (11,718,072) Class B .................................. (5,067,244) (4,481,711) Class C .................................. (1,707,635) (1,393,049) ------------ ------------ Net increase (decrease) from capital share transactions ............................. 17,360,850 (8,582,310) ------------ ------------ Net increase in net assets .................. 24,388,917 898,381 ------------ ------------ NET ASSETS: Beginning of period ......................... 56,693,977 55,795,596 ------------ ------------ End of period ............................... $ 81,082,894 $ 56,693,977 ============ ============ Accumulated undistributed net investment income at end of period .................. $ 21,221 $ 226,795 ============ ============ CAPITAL SHARE ACTIVITY: Shares sold Class A .................................. 7,129,132 1,026,323 Class B .................................. 1,198,221 220,087 Class C .................................. 287,449 213,510 Shares reinvested Class A .................................. 30,999 -- Class B .................................. -- -- Class C .................................. -- -- Shares redeemed Class A .................................. (5,369,253) (1,883,545) Class B .................................. (753,462) (763,775) Class C .................................. (250,401) (231,421)
77 See accompanying notes. SECURITY Financial Highlights LARGE CAP VALUE FUND Selected data for each share of capital stock outstanding throughout each period
YEAR ENDED SEPTEMBER 30, -------------------------------------------------- CLASS A 2006 2005(f) 2004 2003 2002(c, e) ------- ------- ------- ------- ------- ---------- PER SHARE DATA Net asset value, beginning of period $ 6.78 $ 5.71 $ 5.11 $ 4.25 $ 5.37 ------- ------- ------- ------- ------- Income (loss) from investment operations: Net investment income(b) 0.01 0.03 0.01 0.02 0.01 Net gain (loss) on securities (realized and unrealized) 0.90 1.04 0.60 0.84 (1.10) ------- ------- ------- ------- ------- Total from investment operations 0.91 1.07 0.61 0.86 (1.09) ------- ------- ------- ------- ------- Less distributions: Dividends from net investment income (0.04) -- (0.01) -- (0.03) ------- ------- ------- ------- ------- Total distributions (0.04) -- (0.01) -- (0.03) ------- ------- ------- ------- ------- Net asset value, end of period $ 7.65 $ 6.78 $ 5.71 $ 5.11 $ 4.25 ======= ======= ======= ======= ======= TOTAL RETURN(a) 13.45% 18.74% 11.98% 20.24% (20.51%) ------- ------- ------- ------- ------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $64,786 $45,295 $43,071 $45,858 $32,997 ------- ------- ------- ------- ------- Ratios to average net assets: Net investment income 0.17% 0.56% 0.19% 0.41% 0.20% Total expenses(g) 1.49% 1.61% 1.52% 1.45% 1.37% Net expenses(h) 1.49% 1.61% 1.52% 1.45% 1.37% ------- ------- ------- ------- ------- Portfolio turnover rate 54% 110% 75% 76% 68%
YEAR ENDED SEPTEMBER 30, ----------------------------------------------------- CLASS B 2006 2005(f) 2004 2003 2002(c, e) ------- ------- ------- ------- ------- ---------- PER SHARE DATA Net asset value, beginning of period $ 6.38 $ 5.42 $ 4.87 $ 4.08 $ 5.18 ------- ------ ------- ------- ------- Income (loss) from investment operations: Net investment loss(b) (0.04) (0.01) (0.03) (0.02) (0.04) Net gain (loss) on securities (realized and unrealized) 0.84 0.97 0.58 0.81 (1.06) ------- ------ ------- ------- ------- Total from investment operations 0.80 0.96 0.55 0.79 (1.10) ------- ------ ------- ------- ------- Net asset value, end of period $ 7.18 $ 6.38 $ 5.42 $ 4.87 $ 4.08 ======= ====== ======= ======= ======= TOTAL RETURN(a) 12.54% 17.71% 11.29% 19.36% (21.24%) ------- ------ ------- ------- ------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $12,761 $8,500 $10,164 $11,687 $ 4,905 ------- ------ ------- ------- ------- Ratios to average net assets: Net investment loss (0.58%) (0.16%) (0.57%) (0.42%) (0.71%) Total expenses(g) 2.26% 2.36% 2.27% 2.20% 2.27% Net expenses(h) 2.26% 1.61% 1.52% 1.45% 1.37% ------- ------ ------- ------- ------- Portfolio turnover rate 54% 110% 75% 76% 68%
78 See accompanying notes. SECURITY Financial Highlights LARGE CAP VALUE FUND Selected data for each share of capital stock outstanding throughout each period
YEAR ENDED SEPTEMBER 30, ----------------------------------------------------- CLASS C 2006 2005(f) 2004 2003 2002(c, d, e) ------- ------ ------- ------ ------ ------------- PER SHARE DATA Net asset value, beginning of period $ 6.49 $ 5.52 $ 4.96 $ 4.16 $ 5.28 ------ ------ ------ ------ ------- Income (loss) from investment operations: Net investment loss(b) (0.04) (0.01) (0.03) (0.02) (0.04) Net gain (loss) on securities (realized and unrealized) 0.86 0.98 0.59 0.82 (1.08) ------ ------ ------ ------ ------- Total from investment operations 0.82 0.97 0.56 0.80 (1.12) ------ ------ ------ ------ ------- Net asset value, end of period $ 7.31 $ 6.49 $ 5.52 $ 4.96 $ 4.16 ====== ====== ====== ====== ======= TOTAL RETURN(a) 12.63% 17.57% 11.29% 19.23% (21.21%) ------ ------ ------ ------ ------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $3,536 $2,899 $2,561 $2,130 $ 1,510 ------ ------ ------ ------ ------- Ratios to average net assets: Net investment loss (0.60%) (0.18%) (0.57%) (0.33%) (0.72%) Total expenses(g) 2.25% 2.36% 2.28% 2.20% 2.25% Net expenses(h) 2.25% 2.36% 2.28% 2.20% 2.25% ------ ------ ------ ------ ------- Portfolio turnover rate 54% 110% 75% 76% 68%
(a) Total return information does not reflect deduction of any sales charges imposed at the time of purchase for Class A shares or upon redemption for Class B and C shares. (b) Net investment income (loss) was computed using average shares outstanding throughout the period. (c) As required, effective October 1, 2001, the Funds adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premiums on fixed income securities. The effect of this change for the period ended September 30, 2002, was to increase net investment income per share by less than 1/2 of a cent, decrease net realized and unrealized gains and losses per share by less than 1/2 of a cent and increase the ratio of net investment income to average net assets from 0.06% to 0.07%. Per share, ratios and supplemental data for periods prior to October 1, 2001 have not been restated to reflect this change in presentation. (d) The financial highlights for Class C shares exclude the historical financial highlights of Class S shares. Class S shares were exchanged for Class C shares on June 3, 2002. (e) Effective May 1, 2002 the fee structure for Security Large Cap Value Fund changed. Per share information reflects this change. (f) Security Management Company, LLC (SMC) became the adviser of Security Large Cap Value Fund effective June 30, 2005. Prior to June 30, 2005, SMC paid Dreyfus Corporation for sub-advisory services. (g) Total expense information reflects expense ratios absent fund expense reductions by the Investment Manager. (h) Net expense information reflects the expense ratios after voluntary expense waivers, reimbursements, and custodian earnings credits, as applicable. 79 See accompanying notes. This page left blank intentionally. 80 SECURITY Manager's Commentary MID CAP GROWTH FUND November 15, 2006 (unaudited) (SECURITY BENEFIT (SM) LOGO) Security Management Company, LLC Adviser, Security Management Company, LLC (PHOTO OF JAMES P. SCHIER) James P. Schier Senior Portfolio Manager TO OUR SHAREHOLDERS: For the year ended September 30, 2006, the Security Mid Cap Growth Fund returned 2.81%(1), lagging the benchmark Russell 2500 Growth Index's return of 6.53%. The Fund also lagged its peer group median return of 4.69%. Our approach with the Mid Cap Growth Fund is to seek securities of companies that are able to grow and/or reinvest in increasingly profitable ventures and hold them over three to five years to capture the best part of the improvements in profits or profitability. We are focused on investing in securities when we find opportunities, with our individual position sizes reflecting the magnitude and the confidence in the opportunity. For this Fund, we target securities of companies that appear likely to generate above average profitability at prices that, as of yet, do not reflect that potential. TECHNOLOGY, INDUSTRIALS AND MATERIALS DRIVE POSITIVE CONTRIBUTIONS Stock selection and an overweight position in technology drove positive returns. Finisar Corporation, Maxwell Technologies, Inc., Tyler Technologies, Inc., and BEA Systems, Inc., all gained more than 30% on strong business momentum. Finisar gained 165% as strong demand for data transfer caused metro network to upgrade. Over-weight exposure to industrials was beneficial as this sector performed better than the average equity. Stock selection in materials was also positive as Pactiv Corporation, the packaging company, gained 62%. The company posted good results during an adverse raw material commodity price environment and is a perceived beneficiary from lower resin prices. HEALTH CARE AND ENERGY PROVE MORE DIFFICULT The market displayed a much greater than normal level of fear for biotechnology and health care service companies during the trailing year. One of our holdings, Sciclone, declined 60% as a key drug for the treatment of Hepatitis C failed in a clinical trial. USPI, a healthcare service company, fell 36% on concerns of slowing growth in the short-term. Over the long-term, the need for surgery centers continues to be robust. The company's business model, which includes joint ventures with key anchor hospitals and an emphasis on cost containment, should keep the company's growth on track. Energy stocks provided negative returns and the Fund's average 18% weighting proved to be a significant headwind. Following a period of being a strong leader, the sector experienced a significant pullback after oil prices had a period of unprecedented and sustained appreciation. Our work continues to suggest the rise in energy prices is not a transitory phenomenon. We continue to hold a significant exposure to the sector. We do not believe that a robust commodity-price environment is required for our holdings in this sector to be significant performance contributors in the years ahead. Among our individual holdings, Evergreen Energy, Inc., declined 38% for no material reason. The company is in the early stages of establishing a clean coal technology that greatly enhances the attractiveness of this energy source from an environmental standpoint. The company has continued to deliver on all its progress metrics and continues to offer bright and significant potential. Consequently, the position continues to be held. OUTLOOK FOR 2007 We continue to be surprised by the strength of the market and maintain our cautious stance for the U.S. equity market. Despite the higher levels of short-term interest rates, high energy costs ($70 oil), and an increasingly unpredictable geopolitical environment, the broad market averages have advanced again in 2006. If anything, we are more cautious now than last year at this time. We continue to find the most opportunities in the energy and industrial sectors. With large exposures in these areas, we are not likely to increase beyond today's significant levels. Over the past six months, the Fund has increased its commitments to the utility and consumer staple sectors. On behalf of Security Management Company, I would like to thank you for trusting your funds with us. We are excited to see what opportunities present themselves in the future. As always, we continue to do our best to seek the potential available in small and mid capitalization companies. Sincerely, James P. Schier, Senior Portfolio Manager (1) Performance figures are based on Class A shares and do not reflect deduction of the sales charges or taxes that a shareholder would pay on distributions or redemptions of shares. 81 SECURITY Performance Summary MID CAP GROWTH FUND September 30, 2006 (unaudited) PERFORMANCE SECURITY MID CAP GROWTH FUND VS. RUSSELL 2500 GROWTH INDEX (PERFORMANCE GRAPH) Mid Cap Growth Fund 09/30/96 9,425.00 12/31/96 9,371.02 03/31/97 8,633.14 06/30/97 9,850.64 09/30/97 11,363.28 12/31/97 11,041.08 03/31/98 12,185.50 06/30/98 11,938.41 09/30/98 9,948.68 12/31/98 12,889.75 03/31/99 12,857.07 06/30/99 14,948.19 09/30/99 15,013.53 12/31/99 20,580.87 03/31/00 24,622.33 06/30/00 23,280.84 09/30/00 25,946.85 12/31/00 23,961.75 03/31/01 19,782.16 06/30/01 22,051.62 09/30/01 16,037.54 12/31/01 20,461.05 03/31/02 20,974.48 06/30/02 17,247.37 09/30/02 13,368.14 12/31/02 14,813.35 03/31/03 14,642.20 06/30/03 18,863.72 09/30/03 20,613.18 12/31/03 23,108.82 03/31/04 24,407.96 06/30/04 24,348.91 09/30/04 21,691.59 12/31/04 25,325.00 03/31/05 23,445.98 06/30/05 24,531.64 09/30/05 26,410.66 12/31/05 27,107.19 03/31/06 30,470.20 06/30/06 27,603.74 09/30/06 27,152.33
Russell 2500 Growth Index 09/30/96 10,000.00 12/31/96 10,093.80 03/31/97 9,286.21 06/30/97 10,796.38 09/30/97 12,592.52 12/31/97 11,584.25 03/31/98 12,873.94 06/30/98 12,245.81 09/30/98 9,526.65 12/31/98 11,941.74 03/31/99 11,816.52 06/30/99 13,802.29 09/30/99 13,323.92 12/31/99 18,569.48 03/31/00 21,380.54 06/30/00 19,904.69 09/30/00 19,319.24 12/31/00 15,582.13 03/31/01 12,479.82 06/30/01 15,133.27 09/30/01 11,036.53 12/31/01 13,894.15 03/31/02 13,484.67 06/30/02 11,242.20 09/30/02 9,099.75 12/31/02 9,853.19 03/31/03 9,538.08 06/30/03 11,705.26 09/30/03 12,871.20 12/31/03 14,415.86 03/31/04 15,209.71 06/30/04 15,230.54 09/30/04 14,376.21 12/31/04 16,519.84 03/31/05 15,805.22 06/30/05 16,368.54 09/30/05 17,397.54 12/31/05 17,870.65 03/31/06 19,984.17 06/30/06 18,760.77 09/30/06 18,534.96
$10,000 OVER TEN YEARS This chart assumes a $10,000 investment in Class A shares of Security Mid Cap Growth Fund on September 30, 1996, reflects deduction of the 5.75% sales load and assumes all dividends reinvested. The chart does not reflect the deduction of taxes that a shareholder would pay on distributions of the redemption of fund shares. The Russell 2500 Growth Index is an unmanaged index that measures this performance of securities of small-to-mid U.S. companies with greater-than-average growth orientation. AVERAGE ANNUAL RETURNS
PERIODS ENDED 9-30-06 1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION --------------------- ------ ------- -------- --------------- A Shares 2.81% 11.11% 11.07% -- A Shares with sales charge (3.09%) 9.79% 10.42% -- B Shares 2.12% 10.26% 10.26% -- B Shares with CDSC (2.54%) 9.99% 10.26% -- C Shares 2.20% 10.32% N/A 8.74% (1-29-99) C Shares with CDSC 1.26% 10.32% N/A 8.74% (1-29-99)
The performance data above represents past performance that is not predictive of future results. The investment return and principal value of an investment in the Fund will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The figures above do not reflect deduction of the maximum front-end sales charge of 5.75% for Class A shares or the contingent deferred sales charge of 5% for Class B shares and 1% for Class C shares, as applicable, except where noted. The figures do not reflect the deduction of taxes that a shareholder would pay on distributions or redemption of shares. Such figures would be lower if the maximum sales charge and any applicable taxes were deducted. PORTFOLIO COMPOSITION BY SECTOR AS OF 9-30-06 Consumer Discretionary 6.40% Consumer Staples 1.82 Energy 17.11 Financials 8.20 Health Care 11.17 Industrials 18.82 Information Technology 26.02 Materials 4.21 Exchange Traded Funds 1.54 Warrants 0.33 Commercial Paper 1.70 Asset Backed Commerical Paper 2.83 Repurchase Agreement 0.35 Liabilities in excess of other assets (0.50) ------ Total net assets 100.00% ======
82 See accompanying notes. SECURITY Performance Summary MID CAP GROWTH FUND September 30, 2006 (unaudited) PERFORMANCE INFORMATION ABOUT YOUR FUND'S EXPENSES CALCULATING YOUR ONGOING FUND EXPENSES EXAMPLE As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, which may include sales charges (loads) on purchase payments; contingent deferred sales charges on redemptions; and redemption fees, if any; and (2) ongoing costs, including management fees; distribution and/or service fees (12b-1); and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period, April 1, 2006 - September 30, 2006. ACTUAL EXPENSES The first line for each class of shares in the table provides information about actual account values and actual expenses. You may use the information in this table, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the table under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line for each class of shares in the table provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other mutual funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads) on purchase payments, contingent deferred sales charges on redemptions, and redemption fees, if any. Therefore, the second line for each class of shares is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. FUND EXPENSES
BEGINNING ENDING EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING 04-01-06 09-30-06(1) PERIOD(2) ------------- ------------- ------------- Mid Cap Growth Fund - Class A Actual $1,000.00 $ 891.10 $ 6.68 Hypothetical 1,000.00 1,018.00 7.13 Mid Cap Growth Fund - Class B Actual 1,000.00 887.70 10.22 Hypothetical 1,000.00 1,014.24 10.91 Mid Cap Growth Fund - Class C Actual 1,000.00 888.30 10.22 Hypothetical 1,000.00 1,014.24 10.91
(1) The actual ending account value is based on the actual total return of the Fund for the period from April 1, 2006 to September 30, 2006 after actual expenses and will differ from the hypothetical ending account value which is based on the Fund's expense ratio and a hypothetical annual return of 5% before expenses. The actual cumulative return at net asset value for the period from April 1, 2006 to September 30, 2006 was (10.89%), (11.23%) and (11.17%), for Class A, B and C shares, respectively. (2) Expenses are equal to the Fund's annualized expense ratio (1.41%, 2.16% and 2.16% for Class A, B and C shares, respectively) multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 83 Schedule of Investments Security Mid Cap Growth Fund September 30, 2006
SHARES VALUE --------- ------------ COMMON STOCK - 95.2% APPAREL, ACCESSORIES & LUXURY GOODS - 0.7% Maidenform Brands, Inc. * 87,500 $ 1,688,750 ------------ APPLICATION SOFTWARE - 1.2% TIBCO Software, Inc. * 307,000 2,756,860 ------------ ASSET MANAGEMENT & CUSTODY BANKS - 3.0% Northern Trust Corporation (1) 116,000 6,777,880 ------------ AUTO PARTS & EQUIPMENT - 0.6% HydroGen Corporation * (2) 253,722 1,268,610 ------------ BIOTECHNOLOGY - 4.6% CellGenesys, Inc. * 229,000 1,046,530 Combinatorx, Inc. * 152,000 946,960 Human Genome Sciences, Inc. * 179,800 2,074,892 Incyte Corporation* 355,000 1,501,650 lomai Corporation * 244,000 1,154,120 Kosan Biosciences, Inc. * 169,100 816,753 Ligand Pharmaceuticals, Inc. (CI.B) * 196,900 1,974,907 Zymogenetics, Inc. * 55,900 943,033 ------------ 10,458,845 ------------ BROADCASTING & CABLE TV - 1.3% Salem Communications Corporation 180,000 2,035,800 WorldSpace, Inc. * 290,000 994,700 ------------ 3,030,500 ------------ COAL & CONSUMABLE FUELS - 5.1% Evergreen Energy, Inc. * 1,113,900 11,707,089 ------------ COMMUNICATIONS EQUIPMENT - 7.8% ADC Telecommunications, Inc. * 233,000 3,495,000 Finisar Corporation* 2,145,000 7,786,350 PC-Tel, Inc. * 287,250 3,016,125 Symmetricom, Inc. * 440,100 3,551,607 ------------ 17,849,082 ------------ COMPUTER STORAGE & PERIPHERALS - 0.9% Novatel Wireless, Inc. * 220,000 2,118,600 ------------ CONSTRUCTION & ENGINEERING - 4.4% Insituform Technologies, Inc. * 168,000 4,079,040 Shaw Group, Inc. * 253,700 5,997,468 ------------ 10,076,508 ------------ CONSUMER FINANCE - 2.4% First Marblehead Corporation (1) 78,000 5,402,280 ------------ DATA PROCESSING & OUTSOURCED SERVICES - 1.0% Euronet Worldwide, Inc. * 94,700 2,324,885 ------------ DIVERSIFIED COMMERCIAL & PROFESSIONAL SERVICES - 1.6% Equifax, Inc. 41,390 1,519,427
SHARES VALUE --------- ------------ COMMON STOCK (CONTINUED) DIVERSIFIED COMMERCIAL & PROFESSIONAL SERVICES (CONTINUED) Navigant Consulting, Inc. * 110,000 $ 2,206,600 ------------ 3,726,027 ------------ ELECTRICAL COMPONENTS & EQUIPMENT - 7.2% Millennium Cell, Inc. * 141,500 149,990 Power-One, Inc. * 1,359,800 9,844,952 Roper Industries, Inc. (1) 117,000 5,234,580 UQM Technologies, Inc. * 477,816 1,309,216 ------------ 16,538,738 ------------ ELECTRONIC EQUIPMENT MANUFACTURERS - 3.9% Aeroflex, Inc. * 240,000 2,467,200 Flir Systems, Inc. * 239,000 6,491,240 ------------ 8,958,440 ------------ ELECTRONIC MANUFACTURING SERVICES - 3.3% Maxwell Technologies, Inc. * 370,000 7,525,800 ------------ EXCHANGE TRADED FUNDS - 1.5% iShares Russell 2000 Growth Index Fund 25,000 1,808,250 iShares S&P MidCap 400 Growth Index Fund 23,000 1,732,360 ------------ 3,540,610 ------------ GENERAL MERCHANDISE STORES - 0.7% Fred's, Inc. 133,400 1,683,508 ------------ HEALTH CARE EQUIPMENT - 0.9% Orthovita, Inc. * 375,000 1,308,750 Strategic Diagnostics, Inc. * 206,300 794,255 ------------ 2,103,005 ------------ HEALTH CARE FACILITIES - 1.9% United Surgical Partners International, Inc. * 125,000 3,103,750 US Physical Therapy, Inc. * 97,000 1,156,240 ------------ 4,259,990 ------------ HEALTH CARE SERVICES - 1.8% Providence Service Corporation * 150,000 4,138,500 ------------ HEALTH CARE SUPPLIES - 0.5% Regeneration Technologies, Inc. * 165,000 1,158,300 ------------ HEAVY ELECTRICAL EQUIPMENT - 0.9% Plug Power, Inc. * 504,000 2,051,280 ------------ HOMEFURNISHING RETAIL - 0.3% Kirkland's, Inc. * 118,825 581,054 ------------ INDUSTRIAL MACHINERY - 0.9% Basin Water, Inc. * 164,000 1,343,160 Tennant Company 34,200 832,428 ------------ 2,175,588 ------------
The accompanying notes are an integral part of the financial statements. 84 Schedule of Investments Security Mid Cap Growth Fund September 30, 2006 - continued
SHARES VALUE --------- ------------ COMMON STOCK (CONTINUED) IT CONSULTING & OTHER SERVICES - 0.6% Keane, Inc. * 98,700 $ 1,422,267 ------------ METAL & GLASS CONTAINERS - 4.2% Pactiv Corporation * 340,000 9,662,800 ------------ MOVIES & ENTERTAINMENT - 0.5% Lions Gate Entertainment Corporation * 116,700 1,168,167 ------------ OIL & GAS DRILLING - 2.9% ENSCO International, Inc. 82,300 3,607,209 Helmerich & Payne, Inc. 130,000 2,993,900 ------------ 6,601,109 ------------ OIL & GAS EQUIPMENT & SERVICES - 1.2% BJ Services Company 80,000 2,410,400 Superior Energy Services, Inc. * 15,700 412,282 ------------ 2,822,682 ------------ OIL & GAS REFINING & MARKETING - 5.9% Nova Oil, Inc. * 416,100 1,456,350 Rentech, Inc. * 2,300,000 10,649,000 Syntroleum Corporation * 320,000 1,532,800 ------------ 13,638,150 ------------ OIL & GAS STORAGE & TRANSPORTATION - 2.0% Williams Companies, Inc. 190,000 4,535,300 ------------ PACKAGED FOODS & MEATS - 1.8% Hormel Foods Corporation 116,000 4,173,680 ------------ PHARMACEUTICALS - 1.5% Connetics Corporation * 200,000 2,180,000 Hollis-Eden Pharmaceuticals, Inc. * 257,744 1,363,466 ------------ 3,543,466 ------------ PUBLISHING - 0.6% Dow Jones & Company, Inc. 41,000 1,375,140 ------------ RAILROADS - 1.7% Kansas City Southern* 141,000 3,850,710 ------------ REGIONAL BANKS - 1.0% Boston Private Financial Holdings, Inc. 80,000 2,230,400 ------------ SEMICONDUCTOR EQUIPMENT - 0.0% Semitool, Inc. * 5,450 56,353 ------------ SEMICONDUCTORS -5.9% Applied Micro Circuits Corporation * 1,100,000 3,179,000 hi/fn, Inc. * 125,400 590,634 IXYS Corporation * 610,000 5,117,900 Mindspeed Technologies, Inc. * 1,516,700 2,623,891 Netlogic Microsystems, Inc. * 40,000 1,014,800
SHARES VALUE --------- ------------ COMMON STOCK (CONTINUED) SEMICONDUCTORS (CONTINUED) QuickLogic Corporation * 300,000 $ 1,062,000 ------------ 13,588,225 ------------ SPECIALIZED CONSUMER SERVICES - 1.7% Weight Watchers International, Inc. 88,000 3,901,920 ------------ SYSTEMS SOFTWARE - 1.4% Progress Software Corporation * 21,900 569,400 Sybase, Inc. * 106,950 2,592,468 ------------ 3,161,868 ------------ THRIFTS & MORTGAGE FINANCE - 1.9% Clayton Holdings, Inc. * 352,000 4,424,640 ------------ TRADING COMPANIES & DISTRIBUTORS - 1.3% MSC Industrial Direct Company, Inc. 75,900 3,092,166 ------------ TRUCKING - 0.7% J.B.Hunt Transport Services, Inc. (1) 72,000 1,495,440 ------------ TOTAL COMMON STOCK (Cost $185,521,028) $218,645,212 ------------ PREFERRED STOCK - 0.1% ENVIRONMENTAL & FACILITIES SERVICES - 0.1% ThermoEnergy Corporation PIPE * (2)(3)(4)(5) 745,000 201,820 ------------ TOTAL PREFERRED STOCK (Cost $702,947) $ 201,820 ------------ WARRANTS - 0.3% WARRANTS - 0.3% Hollis-Eden Pharmaceuticals, Inc. $ 15.45, 6/19/2007 (3) 8,143 601 Lime Energy Company $ 1.00, 3/19/2009 (3) 20,767 20,116 Nova Oil, Inc. $ 2.57, 7/5/2011 (3) 208,050 603,700 Orthovita, Inc. $ 4.00, 6/26/2008 (3) 75,000 52,492 Syntroleum Corporation $ 7.60, 5/26/2008 14,100 22,419 ThermoEnergy Corporation $ 0.75, 7/14/2008 (2)(3)(5) 745,000 68.689 ------------ 768,017 ------------ TOTAL WARRANTS (Cost $849,026) $ 768,017 ------------
The accompanying notes are an integral part of the financial statements. 85 Schedule of Investments Security Mid Cap Growth Fund September 30, 2006 - continued
PRINCIPAL AMOUNT VALUE ---------- ------------ ASSET BACKED COMMERCIAL PAPER - 2.8% MISC. RECEIVABLES - 2.8% Fairway Finance Corporation 5.255%, 10/3/2006 1,000,000 $ 999,708 5.255%, 10/4/2006 1,100,000 1,099,518 5.255%, 10/10/2006 1,500,000 1,498,028 Jupiter Securitization Corporation 5.26%, 10/6/2006 1,800,000 1,798,685 5.26%, 10/11/2006 1,100,000 1,098,393 ------------ 6,494,332 ------------ TOTAL ASSET BACKED COMMERCIAL PAPER (Cost $6,494,332) $ 6,494,332 ------------ COMMERCIAL PAPER - 1.7% BANKING - 0.6% UBS Finance (DE) LLC 5.25%, 10/2/2006 1,300,000 1,299,810 ------------ BROKERAGE - 0.7% Credit Suisse First Boston USA 5.26%, 10/5/2006 1,600,000 1,599,065 ------------ FINANCIAL-OTHER - 0.4% Countrywide Financial Corporation 5.29%, 10/12/2006 1,000,000 998,384 ------------ TOTAL COMMERCIAL PAPER (Cost $3,897,259) $ 3,897,259 ------------ REPURCHASE AGREEMENT - 0.4% United Missouri Bank, 4.88%, dated 09-29-06, matures 10-02-06; repurchase amount of $806,328 (Collateralized by U.S. Treasury Note, 3.25%, 01-15-09 with a value of $822,376) $ 806,000 $ 806,000 ------------ TOTAL REPURCHASE AGREEMENT (Cost $806,000) $ 806,000 ------------ TOTAL INVESTMENTS (SECURITY MID CAP GROWTH FUND) (Cost $198,270,592) - 100.5% $230,812,640 LIABILITIES IN EXCESS OF OTHER ASSETS - (0.5)% (1,138,405) ------------ TOTAL NET ASSETS - 100.0% $229,674,235 ============
Footnotes Percentages are stated as a percent of net assets. For federal income tax purposes the identified cost of investments owned at 9/30/2006 was $198,849,382. * - Non-income producing security (1) - Security is segregated as collateral for open written options contracts. (2) - Security is illiquid. See Notes to Financials. (3) - Security is fair valued by the Board of Directors. See Note 8 in Notes to Financials. (4) - PIPE (Private Investment in Public Equity) - Stock issued by a company in the secondary market as a means of raising capital more quickly and less expensively than through registration on a secondary public offering. (5) - Security is restricted. See Notes to Financials. See notes to financial statements. The accompanying notes are an integral part of the financial statements. 86 SECURITY MID CAP GROWTH FUND Statement of Assets and Liabilities September 30, 2006 ASSETS: Investments, at value(1) ........................................ $230,812,640 Cash ............................................................ 920 Receivables: Fund shares sold ............................................. 113,297 Securities sold .............................................. 127,020 Dividends .................................................... 49,711 Prepaid expenses ................................................ 19,021 ------------ Total assets .................................................... 231,122,609 ------------ LIABILITIES: Payable for: Securities purchased ......................................... 519,503 Fund shares redeemed ......................................... 166,080 Written options, at value (premiums received, $258,245) ............................. 462,580 Management fees .............................................. 141,699 Custodian fees ............................................... 2,435 Transfer agent and administration fees ....................... 42,093 Professional fees ............................................ 25,948 12b-1 distribution plan fees ................................. 70,486 Directors' fees .............................................. 6,000 Other ........................................................ 11,550 ------------ Total liabilities ............................................... 1,448,374 ------------ NET ASSETS....................................................... $229,674,235 ============ NET ASSETS CONSIST OF: Paid in capital ................................................. $176,323,382 Accumulated undistributed net realized gain on sale of investments and options written ................... 21,013,141 Net unrealized appreciation in value of investments and options written .............................. 32,337,712 ------------ Net assets ...................................................... $229,674,235 ============ CLASS A: Capital shares outstanding (unlimited number of shares authorized) ...................... 15,968,398 Net assets ...................................................... $192,158,699 Net asset value per share ....................................... $ 12.03 ============ Maximum offering price per share (net asset value divided by 94.25%) .......................... $ 12.76 ============ CLASS B: Capital shares outstanding (unlimited number of shares authorized) ...................... 2,175,563 Net assets ...................................................... $ 22,010,410 Net asset value, offering and redemption price per share (excluding any applicable contingent deferred sales charge) ....................................... $ 10.12 ============ CLASS C: Capital shares outstanding (unlimited number of shares authorized) ...................... 1,393,567 Net assets ...................................................... $ 15,505,126 Net asset value, offering and redemption price per share (excluding any applicable contingent deferred sales charge) ....................................... $ 11.13 ============ (1)Investments, at cost ......................................... $198,270,592
Statement of Operations For the Year Ended September 30, 2006 INVESTMENT INCOME: Dividends .................................................... $ 760,024 Interest ..................................................... 355,674 ------------ Total investment income ...................................... 1,115,698 ------------ EXPENSES: Management fees .............................................. 1,759,408 Custodian fees ............................................... 23,608 Transfer agent/maintenance fees .............................. 458,227 Administration fees .......................................... 223,519 Directors' fees .............................................. 35,180 Professional fees ............................................ 48,182 Reports to shareholders ...................................... 78,113 Registration fees ............................................ 48,868 Other expenses ............................................... 30,197 12b-1 distribution plan fees - Class A ....................... 483,678 12b-1 distribution plan fees - Class B ....................... 250,456 12b-1 distribution plan fees - Class C ....................... 160,714 ------------ Total expenses ............................................... 3,600,150 ------------ Net investment loss .......................................... (2,484,452) ------------ NET REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain during the period on: Investments .................................................. 30,732,059 Options written .............................................. 1,149,569 ------------ Net realized gain ............................................ 31,881,628 ------------ Net unrealized appreciation (depreciation) during the period on: Investments .................................................. (25,058,971) Options written .............................................. 94,776 ------------ Net unrealized depreciation .................................. (24,964,195) ------------ Net realized and unrealized gain ............................. 6,917,433 ------------ Net increase in net assets resulting from operations ................................. $ 4,432,981 ============
87 See accompanying notes. SECURITY Statement of Changes in Net Assets MID CAP GROWTH FUND
YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, 2006 2005 ------------- ------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS: Net investment loss ......................... $ (2,484,452) $ (2,111,085) Net realized gain during the period on investments and options written .......... 31,881,628 12,943,161 Net change in unrealized appreciation (depreciation) during the period on investments and options written .......... (24,964,195) 30,372,234 ------------ ------------ Net increase in net assets resulting from operations ............................... 4,432,981 41,204,310 ------------ ------------ DISTRIBUTIONS TO SHAREHOLDERS FROM: Net realized gain Class A .................................. (13,404,927) (9,955,799) Class B .................................. (2,137,907) (2,023,316) Class C .................................. (1,288,551) (1,044,883) ------------ ------------ Total distributions to shareholders ......... (16,831,385) (13,023,998) ------------ ------------ CAPITAL SHARE TRANSACTIONS: Proceeds from sale of shares Class A .................................. 64,440,077 39,688,683 Class B .................................. 3,192,315 4,639,146 Class C .................................. 3,755,889 3,851,285 Distributions reinvested Class A .................................. 12,899,625 9,564,132 Class B .................................. 2,106,540 1,981,156 Class C .................................. 1,195,749 955,741 Cost of shares redeemed Class A .................................. (58,969,056) (38,532,269) Class B .................................. (8,845,377) (9,060,461) Class C .................................. (4,824,246) (5,198,188) ------------ ------------ Net increase from capital share transactions ............................. 14,951,516 7,889,225 ------------ ------------ Net increase in net assets .................. 2,553,112 36,069,537 ------------ ------------ NET ASSETS: Beginning of period ......................... 227,121,123 191,051,586 ------------ ------------ End of period ............................... $229,674,235 $227,121,123 ============ ============ Accumulated undistributed net investment income at end of period .................. $ -- $ -- ============ ============ CAPITAL SHARE ACTIVITY: Shares sold Class A .................................. 5,111,243 3,433,535 Class B .................................. 297,700 459,016 Class C .................................. 323,232 352,361 Shares reinvested Class A .................................. 1,075,865 797,012 Class B .................................. 207,746 191,231 Class C .................................. 107,242 84,579 Shares redeemed Class A .................................. (4,738,606) (3,301,939) Class B .................................. (827,165) (917,791) Class C .................................. (415,740) (473,376)
88 See accompanying notes. SECURITY Financial Highlights MID CAP GROWTH FUND Selected data for each share of capital stock outstanding throughout each period
YEAR ENDED SEPTEMBER 30, ------------------------------------------------------- CLASS A 2006 2005 2004(e) 2003 2002(d) ------- -------- -------- -------- -------- ------- PER SHARE DATA Net asset value, beginning of period $ 12.65 $ 11.02 $ 10.84 $ 7.03 $ 8.48 -------- -------- -------- -------- ------- Income (loss) from investment operations: Net investment loss(b) (0.12) (0.10) (0.13) (0.10) (0.09) Net gain (loss) on securities (realized and unrealized) 0.47 2.46 0.71 3.91 (1.30) -------- -------- -------- -------- ------- Total from investment operations 0.35 2.36 0.58 3.81 (1.39) -------- -------- -------- -------- ------- Less distributions: Distributions from realized gains (0.97) (0.73) (0.40) -- (0.06) -------- -------- -------- -------- ------- Total distributions (0.97) (0.73) (0.40) -- (0.06) -------- -------- -------- -------- ------- Net asset value, end of period $ 12.03 $ 12.65 $ 11.02 $ 10.84 $ 7.03 ======== ======== ======== ======== ======= TOTAL RETURN(a) 2.81% 21.76% 5.23% 54.20% (16.64%) -------- -------- -------- -------- ------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $192,159 $183,676 $149,715 $134,208 $90,948 -------- -------- -------- -------- ------- Ratios to average net assets: Net investment loss (0.93%) (0.85%) (1.11%) (1.14%) (0.92%) Total expenses(b) 1.40% 1.42% 1.41% 1.41% 1.20% -------- -------- -------- -------- ------- Portfolio turnover rate 41% 31% 50% 57% 47%
YEAR ENDED SEPTEMBER 30, --------------------------------------------------- CLASS B 2006 2005 2004(e) 2003 2002(d) ------- ------- ------- ------- ------- ------- PER SHARE DATA Net asset value, beginning of period $ 10.86 $ 9.61 $ 9.57 $ 6.26 $ 7.62 ------- ------- ------- ------- ------- Income (loss) from investment operations: Net investment loss(b) (0.18) (0.16) (0.19) (0.15) (0.16) Net gain (loss) on securities (realized and unrealized) 0.41 2.14 0.63 3.46 (1.14) ------- ------- ------- ------- ------- Total from investment operations 0.23 1.98 0.44 3.31 (1.30) ------- ------- ------- ------- ------- Less distributions: Distributions from realized gains (0.97) (0.73) (0.40) -- (0.06) ------- ------- ------- ------- ------- Total distributions (0.97) (0.73) (0.40) -- (0.06) ------- ------- ------- ------- ------- Net asset value, end of period $ 10.12 $ 10.86 $ 9.61 $ 9.57 $ 6.26 ======= ======= ======= ======= ======= TOTAL RETURN(a) 2.12% 20.95% 4.44% 52.88% (17.35%) ------- ------- ------- ------- ------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $22,010 $27,115 $26,578 $26,459 $17,502 ------- ------- ------- ------- ------- Ratios to average net assets: Net investment loss (1.68%) (1.61%) (1.86%) (1.89%) (1.84%) Total expenses(b) 2.15% 2.17% 2.16% 2.16% 2.11% ------- ------- ------- ------- ------- Portfolio turnover rate 41% 31% 50% 57% 47%
89 See accompanying notes. SECURITY Financial Highlights MID CAP GROWTH FUND Selected data for each share of capital stock outstanding throughout each period
YEAR ENDED SEPTEMBER 30, ------------------------------------------------------ CLASS C 2006 2005 2004(e) 2003 2002(c, d) ------- ------- ------- ------- ------- ---------- PER SHARE DATA Net asset value, beginning of period $ 11.84 $ 10.43 $ 10.34 $ 6.76 $ 8.22 ------- ------- ------- ------- ------- Income (loss) from investment operations: Net investment loss(b) (0.19) (0.18) (0.21) (0.16) (0.16) Net gain (loss) on securities (realized and unrealized) 0.45 2.32 0.70 3.74 (1.24) ------- ------- ------- ------- ------- Total from investment operations 0.26 2.14 0.49 3.58 (1.40) ------- ------- ------- ------- ------- Less distributions: Distributions from realized gains (0.97) (0.73) (0.40) -- (0.06) ------- ------- ------- ------- ------- Total distributions (0.97) (0.73) (0.40) -- (0.06) ------- ------- ------- ------- ------- Net asset value, end of period $ 11.13 $ 11.84 $ 10.43 $ 10.34 $ 6.76 ======= ======= ======= ======= ======= TOTAL RETURN(a) 2.20% 20.83% 4.59% 52.96% (17.30%) ------- ------- ------- ------- ------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in thousands) $15,505 $16,330 $14,759 $11,279 $ 5,883 ------- ------- ------- ------- ------- Ratios to average net assets: Net investment loss (1.68%) (1.60%) (1.86%) (1.89%) (1.85%) Total expenses(b) 2.15% 2.17% 2.16% 2.16% 2.12% ------- ------- ------- ------- ------- Portfolio turnover rate 41% 31% 50% 57% 47%
(a) Total return information does not reflect deduction of any sales charges imposed at the time of purchase for Class A shares or upon redemption for Class B and C shares. (b) Net investment loss was computed using average shares outstanding throughout the period. (c) The financial highlights for Class C shares exclude the historical financial highlights of Class S shares. Class S shares were exchanged for Class C shares on June 3, 2002. (d) Effective May 1, 2002 the fee structure for Security Mid Cap Growth Fund changed. Per share information reflects this change. (e) The financial highlights for the Mid Cap Growth Fund exclude the historical financial highlights of the Technology Series Class A, B and C shares. The assets of the Technology Series were acquired by the Mid Cap Growth Fund on October 3, 2003. 90 See accompanying notes. Notes to Financial Statements September 30, 2006 1. SIGNIFICANT ACCOUNTING POLICIES Security Large Cap Value, Equity and Mid Cap Growth Funds (the Funds) are registered under the Investment Company Act of 1940, as amended, as open-end management investment companies. The shares of Security Equity Fund are currently issued in multiple Series, with each Series, in effect, representing a separate fund. The Equity Fund accounts for the assets of each Series separately. Class "A" shares are generally 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 for purchases of $1 million or more. Class "A" shares sold without a front-end sales charge are subject to a contingent deferred sales charge if redeemed within one year of purchase. Class "B" shares are offered without a front-end sales charge but incur additional class-specific expenses. Class B shares are typically subject to a contingent deferred sales charge for six years and automatically convert to Class A shares after eight years. Redemptions of Class "B" shares within five years of acquisition incur a contingent deferred sales charge. Class "C" shares are offered without a front-end sales charge but incur additional class-specific expenses. Redemptions of Class "C" shares within one year of acquisition incur a contingent deferred sales charge. The following is a summary of the significant accounting policies followed by the Funds in the preparation of their financial statements. A. SECURITY VALUATION - Valuations of the Funds' or Series' securities are supplied by pricing services approved by the Board of Directors. The Funds' officers, under the general supervision of the Board of Directors, regularly review procedures used by, and valuations provided by, the pricing services. Each security owned by the Funds or Series that is listed on a securities exchange is valued at its last sale price on that exchange on the date as of which assets are valued. Where the security is listed on more than one exchange, the Funds or Series will use the price of that exchange that it generally considers to be the principal exchange on which the stock is traded. Securities listed on the Nasdaq Stock Market, Inc. ("Nasdaq") will be valued at the Nasdaq Official Closing Price. Securities for which market quotations are not readily available are valued by a pricing service considering securities with similar yields, quality, type of issue, coupon, duration and rating. If there is no bid price or if the bid price is deemed to be unsatisfactory by the Board of Directors or by the Funds' or Series' investment manager, then the securities are valued in good faith by such method as the Board of Directors determines will reflect the fair value. If events occur that will affect the value of a Fund's or Series' portfolio securities before the NAV has been calculated (a "significant event"), the security will generally be priced using a fair value procedure. If the Valuation Committee determines a significant event has occurred, it will evaluate the impact of that event on an affected security or securities, to determine whether a fair value adjustment would materially affect the fund's NAV per share. Some of the factors which may be considered by the Board of Directors in determining fair value are fundamental analytical data relating to the investment; the nature and duration of any restrictions on disposition; trading in similar securities of the same issuer or comparable companies; information from broker-dealers; and an evaluation of the forces that influence the market in which the securities are purchased and sold. The Funds or Series generally will value short-term debt securities at prices based on market quotations for such securities or securities of similar type, yield, quality and duration, except those securities purchased with 60 days or less to maturity are valued on the basis of amortized cost which approximates market value. Generally, trading in foreign securities markets is substantially completed each day at various times prior to the close of the New York Stock Exchange. The values of foreign securities are determined as of the close of such foreign markets or the close of the New York Stock Exchange, if earlier. All investments quoted in foreign currency are valued in U.S. dollars on the basis of the foreign currency exchange rates prevailing at the close of business. Investments in foreign securities may involve risks not present in domestic investments. The Valuation Committee will determine the current value of such foreign securities by taking into consideration certain factors which may include those discussed above, as well as the following factors, among others: the value of the securities traded on other foreign markets, ADR trading, closed-end fund trading, foreign currency exchange activity, and the trading prices of financial products that are tied to foreign securities such as WEBS(R). In addition, the Board of Directors has authorized the Valuation Committee and Administrator to use prices and other information supplied by IDC's Fair Value Information Service in valuing such securities. Since foreign securities may be denominated in a foreign currency and involve settlement and pay interest or dividends in foreign currencies, changes in the relationship of these foreign currencies to the U.S. dollar can significantly affect the value of the investments and earnings of the Funds or Series. Foreign investments may also subject the Series/Fund to foreign government exchange restrictions, expropriation, taxation or other political, social or economic developments, all of which could affect the market and/or credit risk of the investments. B. REPURCHASE AGREEMENTS - In connection with transactions in repurchase agreements, it is the Funds' or Series' policy that their custodian take possession of the underlying collateral and that the fair value of the collateral exceed the principal amount of the repurchase transaction, including accrued interest, at all times. If the seller defaults, and the fair value of the collateral declines, realization of the collateral by the Funds may be delayed or limited. C. FOREIGN CURRENCY TRANSACTIONS - The accounting records of the Funds or Series are maintained in U.S. dollars. All assets and liabilities initially expressed in foreign currencies are converted into U.S. dollars at prevailing exchange rates. Purchases and sales of investment securities, dividend and interest income, and certain expenses are translated at the rates of exchange prevailing on the respective dates of such transactions. The Funds or Series do not isolate that portion of the results of operations resulting from changes in the foreign exchange rates on investments from the fluctuations arising from changes 91 Notes to Financial Statements September 30, 2006 in the market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss on investments. Net realized foreign exchange gains or losses arise from sales of portfolio securities, sales of foreign currencies, and the difference between asset and liability amounts initially stated in foreign currencies and the U.S. dollar value of the amounts actually received or paid. Net unrealized foreign exchange gains or losses arise from changes in the value of portfolio securities and other assets and liabilities at the end of the reporting period, resulting from changes in the exchange rates. D. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS - Global Series of the Security Equity Fund may enter into forward foreign exchange contracts in order to manage foreign currency risk from purchase or sale of securities denominated in foreign currency. The Series may also enter into such contracts to manage changes in foreign currency exchange rates on portfolio positions. These contracts are marked to market daily, by recognizing the difference between the contract exchange rate and the current market rate as unrealized gains or losses. Realized gains or losses are recognized when contracts are settled and are reflected in the Statement of Operations. These contracts involve market risk in excess of the amount reflected in the Statement of Assets and Liabilities. The face or contract amount in U.S. dollars reflects the total exposure these funds have in that particular currency contract. Losses may arise due to changes in the value of the foreign currency or if the counterparty does not perform under the contract. E. FUTURES - The Funds or Series may utilize futures contracts to a limited extent, with the objectives of maintaining full exposure to the underlying stock market, enhancing returns, maintaining liquidity, and minimizing transaction costs. The Funds or Series, as applicable, may purchase futures contracts to immediately position incoming cash in the market, thereby simulating a fully invested position in the underlying index while maintaining a cash balance for liquidity. In the event of redemptions, the Funds or Series, as applicable, may pay departing shareholders from its cash balances and reduce their futures positions accordingly. Returns may be enhanced by purchasing futures contracts instead of the underlying securities when futures are believed to be priced more attractively than the underlying securities. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of stocks contained in the indexes and the prices of futures contracts, and the possibility of an illiquid market. Futures contracts are valued based upon their quoted daily settlement prices. Upon entering into a futures contract, the Funds or Series are required to deposit and maintain as collateral either cash or securities, representing the initial margin, equal to a certain percentage of the contract value. Cash deposits are shown as restricted cash on the Statement of Assets and Liabilities; securities held as collateral are noted in the Schedule of Investments. Subsequent changes in the value of the contract are recorded as unrealized gains or losses. Variation margin is paid or received in cash daily by the Funds or Series. The Funds or Series realize a gain or loss when the contract is closed or expires. F. OPTIONS PURCHASED AND WRITTEN - The Funds or Series may purchase put and call options and write such options on a covered basis on securities that are traded on recognized securities exchanges and over-the-counter markets. Call and put options on securities give the holder the right to purchase or sell (and the writer the obligation to sell or purchase), respectively, a security at a specified price, until a certain date. Options may be used to hedge the Funds' or Series' portfolio, to increase returns or to maintain exposure to the equity markets. The primary risks associated with the use of options are an imperfect correlation between the change in market value of the securities held by the Fund or Series and the price of the option, the possibility of an illiquid market, and the inability of the counterparty to meet the terms of the contract. The premium received for a written option is recorded as an asset with an equal liability which is marked to market based on the option's quoted daily settlement price. Fluctuations in the value of such instruments are recorded as unrealized appreciation (depreciation) until terminated, at which time realized gains and losses are recognized. G. SECURITY TRANSACTIONS AND INVESTMENT INCOME - Security transactions are accounted for on the date the securities are purchased or sold (trade date). Realized gains and losses are reported on an identified cost basis. Dividend income is accrued as of ex-dividend date, except that certain dividends for foreign securities where the ex-dividend date may have passed are recorded as soon as the Fund or Series is informed of the dividend in the exercise of reasonable diligence. Interest income is recognized on the accrual basis including the amortization of premiums and accretion of discounts on debt securities. H. EXPENSES - Expenses that are directly related to one of the Funds or Series are charged directly to that Fund or Series. Other operating expenses are allocated to the Funds or Series on the basis of relative net assets. Class specific expenses, such as 12b-1 fees, are borne by that class. Income, other expenses and realized and unrealized gains and losses of a Fund or Series are allocated to each respective class in proportion to the relative net assets of each class. I. DISTRIBUTIONS TO SHAREHOLDERS - Distributions to shareholders are recorded on the ex-dividend date. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. J. TAXES - The Fund or Series complied with the requirements of the Internal Revenue Code applicable to regulated investment companies and distributed all of their taxable net income and net realized gains sufficient to relieve them from all, or substantially all, federal income, excise and state income taxes. Therefore, no provision for federal or state income tax is required. K. EARNINGS CREDITS - Under the fee schedule with the custodian, the Funds or Series earn credits based on overnight custody cash balances. These credits are utilized to reduce related custodial expenses. The custodian fees disclosed in the Statement of Operations are before the reduction in expense from the related earnings credits. L. USE OF ESTIMATES - The preparation of financial statements in conformity with U.S. generally accepted accounting 92 Notes to Financial Statements September 30, 2006 principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. M. SECURITIES SOLD SHORT - Certain Funds or Series may make short sales "against the box," in which the Fund or Series enters into a short sale of a security it owns. At no time will more than 15% of the value of the Funds' or Series' net assets be in deposits on short sales against the box. If a Fund or Series makes a short sale, the Fund or Series does not immediately deliver from its own account the securities sold and does not receive the proceeds from the sale. To complete the sale, the Fund or Series must borrow the security (generally from the broker through which the short sale is made) in order to make delivery to the buyer. The Fund or Series must replace the security borrowed by purchasing it at the market price at the time of replacement or delivering the security from its own portfolio. The Fund or Series is said to have a "short position" in securities sold until it delivers them to the broker, at which time it receives the proceeds of the sale. Certain Funds or Series may make short sales that are not "against the box," which create opportunities to increase the Fund's or Series' return but, at the same time, involve specific risk considerations and may be considered a speculative technique. Such short sales theoretically involve unlimited loss potential, as the market price of securities sold short may continually increase, although a Fund or Series may mitigate such losses by replacing the securities sold short before the market price has increased significantly. For financial statement purposes, an amount equal to the settlement amount is included in the Statement of Assets and Liabilities as an asset and an equivalent liability. The amount of the liability is subsequently marked-to-market to reflect the current value of the short position. Subsequent fluctuations in the market prices of securities sold, but not yet purchased, may require purchasing the securities at prices which differ from the market value reflected on the Statement of Assets and Liabilities. The Fund or Series are liable for any dividends or interest payable on securities while those securities are in a short position. As collateral for its short positions, the Fund or Series are required under the Investment Company Act of 1940 to maintain segregated assets consisting of cash, cash equivalents or liquid securities. These segregated assets are valued consistent with Note 1a above. These segregated assets are required to be adjusted daily to reflect changes in the market value of the securities sold short. N. INDEMNIFICATIONS - Under the Funds' or Series' organizational documents, its Officers and Directors are indemnified against certain liabilities arising out of the performance of their duties to the Funds or Series. In addition, in the normal course of business, the Funds or Series enter into contracts that provide general indemnification to other parties. The Funds' or Series' maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Funds or Series that have not yet occurred, and may not occur. However, the Funds have not had prior claims or losses pursuant to these contracts and expect the risk of loss to be remote. O. RECENT ACCOUNTING PRONOUNCEMENTS - In June 2006, the Financial Accounting Standards Board issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FAS 109, Accounting for Income Taxes (FIN 48), to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. Security Equity Fund, Security Large Cap Value Fund and Security Mid Cap Growth Fund will adopt FIN 48 as of October 1, 2007, as required. The cumulative effect of adopting FIN 48 will be recorded in retained earnings and other accounts, as applicable. The Funds have not determined the effect, if any, the adoption of FIN 48 will have on the Funds' financial position and results of operations. In September 2006, the Financial Accounting Standards Board (FASB) issued Statement on Financial Accounting Standards No. 157, "Fair Value Measurements" (FAS 157). This standard clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosure about the use of fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. As of September 30, 2006, the Funds are currently evaluating the impact of FAS 157. 2. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES Management fees are payable to Security Management Company, LLC (SMC or Investment Manager) as follows:
MANAGEMENT FEES (AS A % OF NET ASSETS) -------------- Security Equity Fund: Alpha Opportunity Series* 2.19%(1) Equity Series 0.75% Global Series 1.00% Mid Cap Value Series 1.22%(2) Select 25 Series 0.75% Small Cap Growth Series 1.00% Security Large Cap Value Fund 0.65% Security Mid Cap Growth Fund 0.75%
* Alpha Opportunity Series' management fee will range from 1.25% to 2.75% of average daily net assets as discussed below. (1) SMC receives a management fee from the Alpha Opportunity Series that consists of two components. The first component is an annual base fee equal to 2.00% of Alpha Opportunity Series average daily net assets. The second component is a base fee adjustment that either increases or decreases the base fee, depending on how Alpha Opportunity Series (calculated by reference to its Class A shares) performed relative to the S&P 500 Index over the prior 12-month period (the "Measuring Period"). SMC will receive the base fee of 2.00% without adjustment if the performance of Alpha 93 Notes to Financial Statements September 30, 2006 Opportunity Series (calculated by reference to its Class A shares) matches the performance of the S&P 500 Index. The maximum base fee adjustment at each calculation period is 0.75% up or down in the event that Alpha Opportunity Series outperforms or underper-forms the S&P 500 Index by 15% or more. SMC calculates the base fee adjustment each month based upon Alpha Opportunity Series' performance relative to the S&P 500 Index during the Measuring Period ending on the last day of the month. If Alpha Opportunity Series outperforms the S&P 500 Index over the Measuring Period, the base fee is adjusted upward. The upward adjustment is equal to the amount by which Alpha Opportunity Series' performance exceeds that of the S&P 500 Index divided by 15 and multiplied by the average daily net assets of Alpha Opportunity Series during the Measuring Period to determine the base fee adjustment for the month. If Alpha Opportunity Series underperforms the Index, the base fee is adjusted downward on the same basis. SMC will determine the dollar amount of any performance adjustment each month by multiplying the adjustment percentage by the average daily net assets of the Alpha Opportunity Series during the Measuring Period and dividing that number by the number of days in the Measuring Period and then multiplying that amount by the number of days in the current month. (2) Management fees are payable at an annual rate of 1.00% of the average daily net assets of $200 million or less, and 0.75% of the average daily net assets of the Mid Cap Value Series in excess of $200 million. SMC also acts as the administrative agent and transfer agent for the Funds, and as such performs administrative functions, transfer agency and dividend disbursing services, and the bookkeeping, accounting and pricing functions for each Fund or Series. For these services, the Investment Manager receives the following:
ADMINISTRATIVE FEES (AS A % OF NET ASSETS) ----------------------------------- Security Equity Fund: Alpha Opportunity Series 0.15% Equity Series 0.095% Global Series 0.05% + greater of 0.10% or $60,000 Mid Cap Value Series 0.095% Select 25 Series 0.095% Small Cap Growth Series 0.095% Security Large Cap Value Fund 0.095% Security Mid Cap Growth Fund 0.095% Minimum charge per Series or Fund $25,000 Certain out-of-pocket charges Varies
SMC is paid the following for providing transfer agent services to the Funds: Annual per account charge $5.00 - $8.00 Transaction fee $0.60 - $1.10 Annual minimum charge (per Series or Fund) $25,000 Certain out-of-pocket charges Varies
SMC has agreed to limit the total expenses for each class of the Select 25 Series to 1.75% of average net assets, Mid Cap Value Series and Small Cap Growth Series to 2.00% of average net assets exclusive of interest, taxes, extraordinary expenses, brokerage fees and commissions and 12b-1 fees for the aforementioned Series. SMC has agreed to limit the total other expenses of Alpha Opportunity Series to 0.50% The expense limits are voluntary limits that may be terminated at any time without notice to shareholders. The Funds have adopted Distribution Plans related to the offering of Class A, Class B and Class C shares pursuant to Rules 12b-1 under the Investment Company Act of 1940. The plans provide for payments at an annual rate of 1.00% of the average daily net assets of each Fund's or Series' Class B and Class C shares, and 0.25% of the average daily net assets of each Fund's or Series' Class A shares. Effective August 25, 2005, Global Series ceased charging 12b-1 fees on Class B shares in accordance with the NASD sales cap regulations. This fee may be reinstated at any time. Security Distributors, Inc. (SDI), a wholly-owned subsidiary of Security Benefit Corporation and the distributor of the Funds or Series, received net underwriting commissions on sales of shares after allowances to brokers and dealers as follows:
SDI UNDERWRITING COMMISSIONS ------------ Security Equity Fund: Alpha Opportunity Series $ 7,146 Global Series 70,977 Mid Cap Value Series 290,815 Select 25 Series 225 Small Cap Growth Series 7,579
Certain officers and directors of the Funds are also officers and/or directors of Security Benefit Life Insurance Company, a subsidiary of Security Benefit Corporation and its affiliates, which include SMC and SDI. At September 30, 2006, Security Benefit Corporation and its subsidiaries owned over five percent of the outstanding shares of the Funds or Series, as follows:
FUND OR SERIES PERCENT OF OUTSTANDING SHARES OWNED -------------- ----------------------------------- Security Equity Fund: Alpha Opportunity Series 38.81% Equity Series 14.03% Global Series 9.71% Select 25 Series 17.36% Security Large Cap Value Fund 21.45% Security Mid Cap Growth Fund 5.72%
94 Notes to Financial Statements September 30, 2006 3. UNREALIZED APPRECIATION/DEPRECIATION For federal income tax purposes, the amounts of unrealized appreciation (depreciation) on investments at September 30, 2006, were as follows:
GROSS GROSS NET UNREALIZED UNREALIZED UNREALIZED APPRECIATION APPRECIATION (DEPRECIATION) (DEPRECIATION) ------------ -------------- -------------- Security Equity Fund: Alpha Opportunity Series $ 209,022 $ (710,634) $ (501,612) Equity Series 88,480,916 (14,685,903) 73,795,013 Global Series 38,609,896 (2,546,910) 36,062,986 Mid Cap Value Series 178,778,719 (21,215,871) 157,562,848 Select 25 Series 9,074,717 (1,096,868) 7,977,849 Small Cap Growth Series 6,325,487 (1,031,791) 5,293,696 Security Large Cap Value Fund 10,619,785 (894,145) 9,725,640 Security Mid Cap Growth Fund 49,316,929 (17,353,671) 31,963,258
4. INVESTMENT TRANSACTIONS Investment transactions for the year ended September 30, 2006, (excluding overnight investments and short-term commercial paper) were as follows:
PROCEEDS PURCHASES FROM SALES ------------ ------------ Security Equity Fund: Alpha Opportunity Series $202,652,430 $202,320,665 Equity Series 136,632,170 183,847,555 Global Series 43,750,348 74,920,747 Mid Cap Value Series 426,955,246 227,339,139 Select 25 Series 44,744,396 13,323,567 Small Cap Growth Series 71,481,282 54,741,561 Security Large Cap Value Fund 50,676,676 35,578,198 Security Mid Cap Growth Fund 93,369,307 105,884,000
5. OPEN FUTURES CONTRACTS Open futures contracts for Alpha Opportunity Series as of September 30, 2006, were as follows:
ALPHA OPPORTUNITY SERIES S&P 500 Index Futures ------------------------ POSITION Long NUMBER OF CONTRACTS 38 EXPIRATION DATE 12-15-2006 CONTRACT AMOUNT $12,597,697 MARKET VALUE $12,781,300 UNREALIZED GAIN $183,603
6. OPTIONS WRITTEN The following options written were outstanding for Equity Series at September 30, 2006: EQUITY SERIES CALL OPTIONS WRITTEN OUTSTANDING
EXPIRATION EXERCISE NUMBER OF MARKET COMMON STOCK DATE PRICE CONTRACTS VALUE ------------ ---------- -------- --------- -------- First Marblehead Corporation 10-20-06 $60.00 344 $319,920 Transocean, Inc. 11-17-06 80.00 362 63,350 Tyson Foods, Inc. 11-17-06 15.00 1,262 151,440 ----- -------- Total call options outstanding (premiums received, $320,689) 1,968 $534,710 ===== ========
EQUITY SERIES PUT OPTIONS WRITTEN OUTSTANDING
EXPIRATION EXERCISE NUMBER OF MARKET COMMON STOCK DATE PRICE CONTRACTS VALUE ------------ ---------- -------- --------- -------- McDermott International, Inc. 10-20-06 $40.00 980 $93,100 --- ------- Total put options outstanding (premiums received, $142,320) 980 $93,100 === =======
Transactions in options written for Equity Series for the year ended September 30, 2006, were as follows: EQUITY SERIES CALL OPTIONS WRITTEN
NUMBER OF PREMIUM CONTRACTS AMOUNT --------- --------- Balance at September 30, 2005 1,194 $ 240,933 Opened 4,801 624,277 Expired (3,448) (528,309) Exercised (579) (16,212) ------ --------- Balance at September 30, 2006 1,968 $ 320,689 ====== =========
EQUITY SERIES PUT OPTIONS WRITTEN
NUMBER OF PREMIUM CONTRACTS AMOUNT --------- ---------- Balance at September 30, 2005 -- $ -- Opened 8,885 1,111,406 Expired (4,949) (581,529) Exercised (2,806) (342,858) Bought Back (150) (44,699) ------ ---------- Balance at September 30, 2006 980 $ 142,320 ====== ==========
The following options written were outstanding for Mid Cap Value Series at September 30, 2006: MID CAP VALUE SERIES CALL OPTIONS WRITTEN OUTSTANDING
EXPIRATION EXERCISE NUMBER OF MARKET COMMON STOCK DATE PRICE CONTRACTS VALUE ------------ ---------- -------- --------- ---------- First Marblehead Corporation 12-15-06 $60.00 785 $ 879,200 Granite Construction, Inc. 12-15-06 55.00 849 331,110 Great Plains Energy, Inc. 10-20-06 30.00 1,420 163,300 Tyson Foods, Inc. 11-17-06 15.00 2,800 336,000 W.R. Berkley Corporation 10-20-06 35.00 400 46,000 ----- ---------- Total call options outstanding (premiums received, $1,118,958) 6,254 $1,755,610 ===== ==========
95 Notes to Financial Statements September 30, 2006 MID CAP VALUE SERIES PUT OPTIONS WRITTEN OUTSTANDING
EXPIRATION EXERCISE NUMBER OF MARKET COMMON STOCK DATE PRICE CONTRACTS VALUE ------------ ---------- -------- --------- -------- Arch Coal, Inc. 10-20-06 $30.00 1,200 $246,000 ----- -------- Total put options outstanding (premiums received, $129,596) 1,200 $246,000 ===== ========
Transactions in options written for Mid Cap Value Series for the year ended September 30, 2006, were as follows: MID CAP VALUE SERIES CALL OPTIONS WRITTEN
NUMBER OF PREMIUM CONTRACTS AMOUNT --------- ----------- Balance at September 30, 2005 6,504 $ 1,134,237 Opened 24,805 5,211,855 Bought Back (1,630) (737,618) Expired (11,402) (1,826,862) Exercised (12,023) (2,662,654) ------- ----------- Balance at September 30, 2006 6,254 $ 1,118,958 ======= ===========
MID CAP VALUE SERIES PUT OPTIONS WRITTEN
NUMBER OF PREMIUM CONTRACTS AMOUNT --------- ----------- Balance at September 30, 2005 4,066 $ 523,507 Opened 14,914 1,995,007 Expired (12,190) (1,811,046) Exercised (5,590) (577,872) ------- ----------- Balance at September 30, 2006 1,200 $ 129,596 ======= ===========
The following options written were outstanding for Select 25 Series at September 30, 2006: SELECT 25 SERIES CALL OPTIONS WRITTEN OUTSTANDING
EXPIRATION EXERCISE NUMBER OF MARKET COMMON STOCK DATE PRICE CONTRACTS VALUE ------------ ---------- -------- --------- -------- BJ Services Company 10-20-06 $37.50 162 $ 810 First Marblehead Corporation 10-20-06 60.00 75 69,750 --- ------- Total call options outstanding (premiums received, $41,934) 237 $70,560 === =======
Transactions in options written for Select 25 Series for the year ended September 30, 2006, were as follows: SELECT 25 SERIES CALL OPTIONS WRITTEN
NUMBER OF PREMIUM CONTRACTS AMOUNT --------- -------- Balance at September 30, 2005 -- $ -- Opened 673 87,226 Expired (361) (43,192) Exercised (75) (2,100) ---- -------- Balance at September 30, 2006 237 $ 41,934 ==== ========
SELECT 25 SERIES PUT OPTIONS WRITTEN
NUMBER OF PREMIUM CONTRACTS AMOUNT --------- -------- Balance at September 30, 2005 -- $ -- Opened 174 22,400 Expired (90) (13,748) Exercised (84) (8,652) --- -------- Balance at September 30, 2006 -- $ -- === ========
The following options written were outstanding for Security Large Cap Value Fund at September 30, 2006: SECURITY LARGE CAP VALUE FUND CALL OPTIONS WRITTEN OUTSTANDING
EXPIRATION EXERCISE NUMBER OF MARKET COMMON STOCK DATE PRICE CONTRACTS VALUE ------------ ---------- -------- --------- ------- Archer-Daniels-Midland Company 10-20-06 $40.00 204 $ 9,180 First Marblehead Corporation 10-20-06 60.00 13 12,090 Transocean, Inc. 11-17-06 80.00 55 9,625 Tyson Foods, Inc. 11-17-06 15.00 246 29,520 --- ------- Total call options outstanding (premiums received, $67,840) 518 $60,415 === =======
Transactions in options written for Security Large Cap Value Fund for the year ended September 30, 2006, were as follows: LARGE CAP VALUE FUND CALL OPTIONS WRITTEN
NUMBER OF PREMIUM CONTRACTS AMOUNT --------- -------- Balance at September 30, 2005 264 $ 23,375 Opened 1,206 137,738 Expired (609) (58,821) Exercised (343) (34,452) ----- -------- Balance at September 30, 2006 518 $ 67,840 ===== ========
LARGE CAP VALUE FUND PUT OPTIONS WRITTEN
NUMBER OF PREMIUM CONTRACTS AMOUNT --------- -------- Balance at September 30, 2005 -- $ -- Opened 461 93,490 Bought Back (23) (6,854) Exercised (97) (21,917) Expired (341) (64,719) ---- -------- Balance at September 30, 2006 -- $ -- ==== ========
96 Notes to Financial Statements September 30, 2006 The following options written were outstanding for Security Mid Cap Growth Fund at September 30, 2006: SECURITY MID CAP GROWTH FUND CALL OPTIONS WRITTEN OUTSTANDING
EXPIRATION EXERCISE NUMBER OF MARKET COMMON STOCK DATE PRICE CONTRACTS VALUE ------------ ---------- -------- --------- -------- First Marblehead Corporation 12-15-06 60.00 220 $246,400 JB Hunt Transport Services, Inc. 10-20-06 20.00 720 72,000 Northern Trust Corporation 01-19-07 55.00 290 139,200 Roper Industries, Inc. 10-20-06 45.00 83 4,980 ----- -------- Total call options outstanding (premiums received, $258,244) 1,313 $462,580 ===== ========
Transactions in options written for Security Mid Cap Growth Fund for the year ended September 30, 2006, were as follows: SECURITY MID CAP GROWTH FUND CALL OPTIONS WRITTEN
NUMBER OF PREMIUM CONTRACTS AMOUNT --------- --------- Balance at September 30, 2005 1,555 $ 412,720 Opened 6,009 996,827 Expired (4,822) (689,786) Exercised (1,429) (461,517) ------ --------- Balance at September 30, 2006 1,313 $ 258,244 ====== =========
SECURITY MID CAP GROWTH FUND PUT OPTIONS WRITTEN
NUMBER OF PREMIUM CONTRACTS AMOUNT --------- --------- Balance at September 30, 2005 1,227 $ 81,323 Opened 2,062 407,193 Expired (2,867) (459,783) Exercised (422) (28,733) ------ --------- Balance at September 30, 2006 -- $ -- ====== =========
97 Notes to Financial Statements September 30, 2006 7. RESTRICTED SECURITIES As of September 30, 2006, the following Funds or Series contained restricted securities. Market value, cost, percentage of total net assets and acquisition dates are as follows:
MARKET VALUE MARKET % OF ACQUISITION VALUE COST NET ASSETS DATE -------- ---------- ------------ ----------- Security Equity Fund: Global Series $148,538 $ 116,996 0.1% 3-25-04 Mid Cap Value Series 633,610 2,094,000 0.1% 7-14-05 Security Mid Cap Growth Fund 270,510 894,000 0.1% 7-14-05
8. FAIR VALUED SECURITIES As of September 30, 2006, the following Funds or Series contained securities that were fair valued by the Board of Directors. Market value, cost and percentage of total net assets are as follows:
MARKET VALUE MARKET % OF VALUE COST NET ASSETS ---------- ---------- ------------ Security Equity Fund: Mid Cap Value Series $2,627,962 $3,208,337 0.3% Security Large Cap Value Fund -- 125,000 0.0% Security Mid Cap Growth Fund 947,418 1,551,832 0.4%
9. ILLIQUID SECURITIES As of September 30, 2006, the following Funds or Series contained securities that were considered illiquid. Market value, cost and percentage of total net assets are as follows:
MARKET VALUE MARKET % OF VALUE COST NET ASSETS ----------- ----------- ------------ Security Equity Fund: Mid Cap Value Series $45,971,392 $49,677,305 5.4% Security Large Cap Value Fund -- 125,000 0.0% Security Mid Cap Growth Fund 1,539,119 2,062,228 0.7%
10. FEDERAL TAX MATTERS The tax character of distributions paid during the fiscal years ended September 30, 2006 and 2005, was the same as that reported in the Statement of Changes in Net Assets, except as follows:
ORDINARY CAPITAL INCOME GAIN TOTAL ---------- -------- ---------- 2006 Security Equity Fund: Alpha Opportunity Series $1,674,911 $303,639 $1,978,550 2005 Security Equity Fund: Alpha Opportunity Series $1,099,071 $186,310 $1,285,381
Note: For federal income tax purposes, short term capital gain distributions are treated as ordinary income distributions. 98 Notes to Financial Statements September 30, 2006 As of September 30, 2006 the components of distributable earnings on a tax basis were:
UNDISTRIBUTED UNDISTRIBUTED ACCUMULATED UNREALIZED TOTAL ORDINARY LONG-TERM CAPITAL AND APPRECIATION ACCUMULATED INCOME GAIN OTHER LOSSES* (DEPRECIATION)** EARNINGS/(DEFICIT) ------------- ------------- ------------- ---------------- ------------------ Security Equity Fund: Alpha Opportunity Series $ 1,969,025 $ 368,755 $ -- $ (595,621) $ 1,742,159 Equity Series 5,800,679 27,173,244 -- 73,630,213 106,604,136 Global Series 68,515 22,807,551 (5,914,060) 36,061,930 53,023,936 Mid Cap Value Series 11,335,111 34,143,040 -- 156,809,792 202,287,943 Select 25 Series -- -- (17,302,526) 7,949,223 (9,353,303) Small Cap Growth Series -- -- (2,060,375) 5,293,696 3,233,321 Security Large Cap Value Fund 21,221 -- (5,372,764) 9,733,065 4,381,522 Security Mid Cap Growth Fund 1,579,334 22,297,681 (2,285,084) 31,758,922 53,350,853
* Certain Funds had net capital loss carryovers and deferred post October losses as identified elsewhere in the Notes. ** The differences between book-basis and tax-basis unrealized appreciation (depreciation) are attributable primarily to the tax deferral of wash sale losses, the differences between book and tax basis passive foreign investment companies and bond discount accretion. As of September 30, 2006, the accumulated net realized loss on sales of investments for federal income tax purposes which are available to offset future taxable gains and post-October losses that are deferred to the first day of the next fiscal year are as follows:
CAPITAL LOSS DEFERRED CARRYOVERS POST- UTILIZED CAPITAL LOSS OCTOBER IN 2006 CARRYOVERS EXPIRES IN LOSSES ------------ ------------ ---------- ---------- Security Equity Fund: Global Series $ -- $ 651,525 2009 $4,353,895 442,978 908,640 2010 96,592 -- 2011 2,397,360 -- 2012 ---------- ----------- $2,936,930 $ 1,560,165 ========== =========== Select 25 Series* $ 263,458 $ 1,867,435 2008 $ -- -- 3,495,954 2009 -- 6,080,559 2010 -- 5,819,939 2011 -- 38,639 2012 ---------- ----------- $ 263,458 $17,302,526 $ -- ========== =========== Small Cap Growth Series $1,865,093 $ 2,060,375 2010 $ -- ========== =========== Security Large Cap Value Fund $2,409,607 $ 5,372,764 2011 $ -- ========== =========== Security Mid Cap Growth Fund $ 567,035 $ 1,701,105 2009 $ -- -- 567,035 2010 -- 16,944 2011 ---------- ----------- $ 567,035 $ 2,285,084 $ -- ========== ===========
* The Security Equity Fund - Select 25 Series obtained approximately $1,236,753, $3,140,789 and $1,728,838 of capital losses (included above) from its merger with Security Equity Fund - Social Awareness Series, Enhanced Index Series and Large Cap Growth Series, respectively, on June 16, 2006 (see Note 12), which may be applied against realized net taxable capital gains in future years or until September 30, 2012, subject to certain limitations imposed by Section 382 of the Internal Revenue Code. 99 Notes to Financial Statements September 30, 2006 Net investment income and net realized gains (losses) may differ for financial statement and tax purposes because of temporary or permanent book/tax differences. These differences are primarily due to post-October losses, losses deferred due to wash sales, foreign currency gains and losses, and the "mark-to-market" of certain passive foreign investment companies (PFICs) for tax purposes. To the extent these differences are permanent, reclassifications are made to the appropriate equity accounts in the period that the differences arise. On the Statement of Assets and Liabilities the following adjustments were made for permanent tax differences:
ACCUMULATED UNDISTRIBUTED NET REALIZED NET INVESTMENT PAID-IN- GAIN/(LOSS) INCOME CAPITAL ------------ -------------- --------- Security Equity Fund: Alpha Opportunity Series $ (254,410) $ 212,342 $ 42,068 Equity Series (666,284) 666,284 -- Global Series 3,952,016 (3,952,016) -- Mid Cap Value Series (1,056,502) 1,056,502 -- Select 25 Series -- 376,395 (376,395) Small Cap Growth Series -- 722,692 (722,692) Security Mid Cap Growth Fund (2,484,452) 2,484,452 --
11. AFFILIATED TRANSACTIONS* Investments representing 5% or more of the outstanding voting securities of a portfolio company of a fund result in that portfolio company being considered an affiliated company of such fund, as defined in the 1940 Act. The aggregate market value of all securities of affiliated companies held in the Mid Cap Value Series of the Security Equity Fund as of September 30, 2006 amounted to $34,703,340 which represents 4.05% of net assets. There were no affiliated companies held in any other Fund or Series. Transactions in the Mid Cap Value Series during the year ended September 30, 2006 in which the portfolio company is an "affiliated person" are as follows:
NORTH POINTE THERMOENERGY THERMOENERGY HYDROGEN MERIX HOLDINGS CORPORATION CORPORATION CORPORATION, LLC CORPORATION CORPORATION OPTEUM, INC. PIPES WARRANTS ---------------- ----------- ----------- ------------ ------------ ------------ SEPTEMBER 30, 2005 Balance Shares 547,442 828,600 259,300 -- 1,745,000 1,745,000 Cost $2,443,018 $ 8,322,465 $3,111,600 $1,646,500 $ 447,500 Gross Additions Shares 185,408 647,400 210,700 1,474,400 -- -- Cost $1,093,264 $ 7,265,569 $2,749,635 $16,310,457 $ -- $ -- Gross Reductions Shares -- -- -- -- -- -- Cost $ -- $ -- $ -- $ -- $ -- $ -- SEPTEMBER 30, 2006 Balance Shares 732,850 1,476,000 470,000 1,474,400 1,745,000 1,745,000 Cost $3,536,282 $15,588,034 $5,861,235 $16,310,457 $1,646,500 $ 447,500 Realized Gain/(Loss) $ 29,316 -- -- -- -- -- Investment Income -- -- -- $ 590,220 -- --
* As a result of the Security Mid Cap Values Series' beneficial ownership of the common stock of these portfolio companies, applicable regulations require that the Series state that it may be deemed an affiliate of the respective portfolio company. The Series disclaims that the "affiliated persons" are affiliates of the Distributor, Advisor, Series or any other client of the Advisor. 12. ACQUISITION OF THE ENHANCED INDEX SERIES, LARGE CAP GROWTH SERIES AND SOCIAL AWARENESS SERIES OF SECURITY EQUITY FUND Pursuant to a plan of reorganization approved by the shareholders of the Enhanced Index Series, Large Cap Growth Series and Social Awareness Series of Security Equity Fund, Select 25 Series of Security Equity Fund acquired all of the net assets of Enhanced Index Series, Large Cap Growth Series and Social Awareness Series on June 16, 2006 which totaled $10,521,264, $9,349,430 and $15,026,332, respectively. A total of 1,113,825 shares of Enhanced Index Series, 1,516,468 shares of Large Cap Growth Series and 734,975 shares of Social Awareness Series were exchanged for 1,136,596 shares, 995,315 shares and 1,592,592 shares, respectively of Select 25 Series immediately after the closing date. This exchange qualified as a tax-free reorganization under Section 368(a)(1)(c) of the Internal Revenue Code. Enhanced Index Series' net assets included $134,643 of unrealized appreciation and $3,166,376 of accumulated realized loss on investments. Large Cap Growth Series' net assets included $950,756 of unrealized appreciation and $1,763,332 of accumulated realized loss on investments. Social Awareness Series' net assets included $1,208,145 of unrealized appreciation and $2,034,274 of accumulated realized loss. The aggregate net assets of Select 25 Series immediately before the acquisition totaled $28,909,382 and following the acquisition, the combined net assets of Select 25 Series totaled $63,806,408. 100 Report of Independent Registered Public Accounting Firm TO THE BOARD OF DIRECTORS AND SHAREHOLDERS SECURITY EQUITY FUND, SECURITY LARGE CAP VALUE FUND AND SECURITY MID CAP GROWTH FUND We have audited the accompanying statements of assets and liabilities, including the schedules of investments, of Security Equity Fund (comprised of Alpha Opportunity, Equity, Global, Mid Cap Value, Select 25 and Small Cap Growth), Security Large Cap Value Fund and Security Mid Cap Growth Fund (the Funds) as of September 30, 2006, and the related statements of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for the periods indicated therein. These financial statements and financial highlights are the responsibility of the Funds' management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Funds' internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Funds' internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of September 30, 2006, by correspondence with the custodians and brokers or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of each of the respective entities/series constituting the Funds at September 30, 2006, and the results of their operations for the year then ended, changes in their net assets for each of the two years in the period then ended, and their financial highlights for the periods indicated therein, in conformity with U.S. generally accepted accounting principles. ERNST & YOUNG LLP Kansas City, Missouri November 20, 2006 101 Special Shareholders' Meeting (unaudited) A special meeting of the shareholders of Enhanced Index Series, Large Cap Growth Series and the Social Awareness Series of Security Equity Fund was held on June 1, 2006. Each matter voted upon at the meeting, as well as the number of votes cast for, against or withheld, and the number of abstentions with respect to such matters are set forth below: (1) The approval of a plan of reorganization providing for the acquisition of all of the assets and liabilities of Security Equity Fund, Enhanced Index Series by Security Equity Fund, Select 25 Series solely in exchange for shares of the Select 25 Series, followed by the complete liquidation of the Enhanced Index Series. The following votes were cast regarding this matter:
VOTES FOR VOTES AGAINST/ABSTENTIONS --------- ------------------------- Security Equity Fund, Enhanced Index Series 653,873 287,461
(2) The approval of a plan of reorganization providing for the acquisition of all of the assets and liabilities of Security Equity, Large Cap Growth Series by Security Equity Fund, Select 25 Series solely in exchange for shares of the Security Equity Fund, Select 25 Series shares followed by the complete liquidation of the Large Cap Growth Series. The following votes were cast regarding this matter:
VOTES FOR VOTES AGAINST/ABSTENTIONS --------- ------------------------- Security Equity Fund, Large Cap Growth Series 931,051 417,632
(2) The approval of a plan of reorganization providing for the acquisition of all of the assets and liabilities of Security Equity Fund, Social Awareness Series by Security Equity Fund, Select 25 Series solely in exchange for shares of the Security Equity Fund, Select 25 Series, followed by the complete liquidation of the Social Awareness Series. The following votes were cast regarding this matter:
VOTES FOR VOTES AGAINST/ABSTENTIONS --------- ------------------------- Security Equity Fund, Social Awareness Series 307,135 142,368
102 Directors and Officers (unaudited) The business address of each director and officer is One Security Benefit Place, Topeka, KS 66636-0001. DIRECTORS
NAME (DATE OF BIRTH) YEAR ELECTED*** PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS --------------- ------------------------------------------- Donald A. Chubb, Jr.** Business broker, Griffith & Blair Realtors (12-14-46) Director - Jayhawk Area Boy Scouts Council 1994 Harry W. Craig, Jr.** Chairman, CEO, Secretary & Director, The Martin Tractor Company, Inc.; (05-11-39) Director - Stormont-Vail Corporation 2004 Director - Concerned Citizens for Topeka Director - Oscar S. Stauffer Executive in Residence Jerry B. Farley** President, Washburn University (09-20-46) President, J&J Bonanza 2005 Penny A. Lumpkin** Partner, Vivians' Gift Shop (Corporate Retail) (08-20-39) Vice President, Palmer Companies, Inc. 1993 (Small Business and Shopping Center Development) Vice President, PLB (Real Estate Equipment Leasing) Vice President, Town Crier (Retail) Prior to 1999: Vice President & Treasurer, Palmer News, Inc. Vice President, M/S News, Inc. Secretary, Kansas City Periodicals Prior to 2002: Vice President, Bellaire Shopping Center (Managing and Leasing) Partner, Goodwin Enterprises (Retail) Maynard F. Oliverius** President & Chief Executive Officer, Stormont-Vail HealthCare (12-18-43) DIrector - VHA Mid-America 1998 Director - Go Topeka Michael G. Odlum* President & Managing Member Representative, Security Management Company, LLC (01-12-52) Senior Vice President and Chief Investment Officer, Security Corporation and 2006 (Acting Chairman Security Benefit Life Insurance Company of the Board) Director, Security Distributors, Inc. 2004 (President) Director, Vice President and Chief Investment Officer, First Security 2004 (Director) Benefit Life Insurance and Annuity Company of New York
* This director is deemed to be an "interested person" of the Funds under the Investment Company Act of 1940, as amended, by reason of his position with the Funds' Investment Manager and/or the parent of the Investment Manager. ** These directors serve on the Fund's joint audit committee, the purpose of which is to meet with the independent auditors, to review the work of the auditors, and to oversee the handling by Security Management Company, LLC of the accounting function for the Funds. *** Each director oversees 28 Security Fund portfolios and serves until the next annual meeting, or until a successor has been duly elected and qualified. 103 Directors and Officers (unaudited) (continued) OFFICERS
NAME (DATE OF BIRTH) YEAR ELECTED*** PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS --------------- ------------------------------------------- Steven M. Bowser Vice President & Senior Portfolio Manager, Security Management Company, LLC; (02-11-60) Vice President & Senior Portfolio Manager, Security Benefit Life Insurance Vice President - 2003 Company Christina Fletcher Vice President & Portfolio Manager, Security Management Company, LLC (07-25-72) Credit Analyst/Portfolio Manager, Horizon Cash Management Vice President - 2005 Senior Money Market Trader, Scudder Investments Brenda M. Harwood Vice President & Chief Compliance Officer, Security Management Company, LLC; (11-03-63) Assistant Vice President, Security Benefit Life Insurance Company Chief Compliance Vice President, Assistant Treasurer & Director, Security Distributors, Inc. Officer - 2004 Treasurer - 1988 Richard J. King Vice President & Head of Fixed Income Asset Management, Security Management (03-59) Company, LLC; Vice President - 2005 Vice President & Head of Fixed Income Asset Management, Security Benefit Life Insurance Company Partner, Head of Portfolio Management, INVESCO Mark Lamb Vice President, Security Management Company, LLC, (02-03-60) Vice President, Security Benefit Life Insurance Company Vice President - 2003 Amy J. Lee Secretary, Security Management Company, LLC & Security Distributors, Inc.; (06-05-61) Secretary & Chief Compliance Officer, Security Distributors, Inc. Secretary - 1987 Vice President, Associate General Counsel & Assistant Secretary, Security Benefit Life Insurance Company Director, Brecek & Young Advisors, Inc. Mark Mitchell Vice President & Portfolio Manager, Security Management Company, LLC (08-24-64) Vice President & Portfolio Manager, Security Benefit Life Insurance Company Vice President - 2003 Christopher Phalen Vice President & Portfolio Manager, Security Management Company, LLC; (11-9-70) Assistant Vice President & Portfolio Manager, Security Benefit Life Vice President - 2002 Insurance Company James P. Schier Vice President & Senior Portfolio Manager, Security Management Company, LLC; (12-28-57) Vice President & Senior Portfolio Manager, Security Benefit Life Insurance Vice President - 1998 Company Cindy L. Shields Vice President & Head of Equity Asset Management, Security Management (06-05-67) Company, LLC, Vice President - 1988 Vice President & Head of Equity Asset Management, Security Benefit Life Insurance Company Christopher D. Swickard Assistant Secretary, Security Management Company, LLC; (10-09-65) Second Vice President & Assistant General Counsel, Security Benefit Life Assistant Secretary - Insurance Company 1996 Assistant Secretary, Security Distributors, inc. David G. Toussaint Vice President & Portfolio Manager, Security Management Company, LLC; (10-10-66) Assistant Vice President & Portfolio Manager, Security Benefit Life Vice President - 2001 Insurance Company Eric Welt Vice President, Director of Portfolio Risk Analysis & Consultant Relations, (10-31-67) Portfolio Risk Manager, Security Management Company, LLC; Vice President - 2006 Associate Director - Senior Due Diligence Analyst, Bear Stearns & Company
* Officers serve until the next annual meeting or until a successor has been duly elected and qualified. 104 TAX INFORMATION (unaudited) In accordance with the provisions of the Internal Revenue Code, the percentage of ordinary dividends (including short-term capital gains) attributable to the fiscal year ended September 30, 2006, which qualify for the dividends received deduction for corporate shareholders is 3% for the Alpha Opportunity Series and 100% for the Equity Series and the Security Large Cap Value Fund. For the fiscal year ended September 30, 2006, certain dividends paid by the Funds may be subject to a maximum tax rate of 15%, as provided by the Jobs and Growth Tax Relief Reconciliation Act of 2003. The percentage of ordinary income distributions for the fiscal year ended September 30, 2006, taxed at the maximum rate of 15% is 4% for the Alpha Opportunity Series and 100% for the Equity Series and the Security Large Cap Value Fund. For federal income tax purposes, the Funds designate capital gain dividends for the fiscal year ended September 30, 2006 as follows: Security Equity Fund: Alpha Opportunity Series $ 310,649 Equity Series 12,570,669 Mid Cap Value Series 33,921,702 Security Mid Cap Growth Fund 16,831,385
Additional information for foreign shareholders only: For the year ended September 30, 2006, 12% of the ordinary distributions paid by Alpha Opportunity Series and 3% of the ordinary distributions paid by the Equity Series qualify as interest related dividends under the Internal Revenue Code Section 871(k)(1)(C). For the year ended September 30, 2006, 100% of the ordinary distributions paid by the Alpha Opportunity Series and 2% of the ordinary distributions paid by the Equity Series qualify as short term capital gain dividends under the Internal Revenue Code Section 871(k)(2)(C). OTHER INFORMATION Each of the Security Funds files a complete schedule of portfolio holdings with the U.S. Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The Forms N-Q of each such Fund are available on the Commission's website at www.sec.gov. The Forms N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The portfolio holdings of each of the Security Funds are available on their website, www.securitybenefit.com or by calling 1-800-888-2461. A description of the policies and procedures that the Security Funds use to determine how to vote proxies relating to portfolio securities is available upon request, free of charge by calling 1-800-888-2461, or accessing the U.S. Securities and Exchange Commission website at www.sec.gov. Information regarding how the Security Funds voted proxies relating to portfolio securities during the 12 month period ended June 30, 2006 is available upon request, free of charge by calling 1-800-888-2461, or accessing the U.S. Securities and Exchange Commission website at www.sec.gov. The statement of additional information ("SAI") includes additional information about the Funds' Directors and is available upon request without charge by calling 1-800-888-2461. 105 THE SECURITY GROUP OF MUTUAL FUNDS Security Equity Fund - Alpha Opportunity Series - Equity Series - Global Series - Mid Cap Value Series - Select 25 Series - Small Cap Growth Series Security Large Cap Value Fund Security Mid Cap Growth Fund Security Income Fund - Capital Preservation Series - Diversified Income Series - High Yield Series - Income Opportunity Series Security Cash Fund SECURITY FUNDS OFFICERS AND DIRECTORS DIRECTORS Donald A. Chubb, Jr. Harry W. Craig, Jr. Jerry B. Farley Penny A. Lumpkin Michael G. Odlum Maynard F. Oliverius OFFICERS Michael G. Odlum, President Steve M. Bowser, Vice President Christina Fletcher, Vice President Richard J. King, Vice President Mark Lamb, Vice President Mark Mitchell, Vice President Christopher Phalen, Vice President James P. Schier, Vice President Cindy L. Shields, Vice President David G. Toussaint, Vice President Eric Welt, Vice President Amy J. Lee, Secretary Christopher D. Swickard, Assistant Secretary Brenda M. Harwood, Chief Compliance Officer & Treasurer This report is submitted for the general information of the shareholders of the Funds. The report is not authorized for distribution to prospective investors in the Funds unless preceded or accompanied by an effective prospectus which contains details concerning the sales charges and other pertinent information. (SECURITY BENEFIT(SM) LOGO) Security Distributors, Inc. One Security Benefit Place - Topeka, Kansas 66636-0001 - securitybenefit.com ITEM 2. CODE OF ETHICS. The Registrant has adopted a code of ethics that applies to its principal executive officer and principal financial officer. A copy of the Registrant's code of ethics is filed herewith as Exhibit 10(a)(1). No amendments were made to the provisions of the code of ethics during the period covered by this report. No implicit or explicit waivers to the provisions of the code of ethics were granted during the period covered by this report. The Registrant hereby undertakes to provide any person without charge, upon request, a copy of its Code by calling the Registrant at 1-800-888-2461. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. The Registrant's Board of Directors has determined that Maynard Oliverius, a member of the Audit Committee of the Board, is an audit committee financial expert. Mr. Oliverius is "independent" for purposes of this item. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. (a) Audit Fees. The aggregate fees billed for each of the last two fiscal years (the "Reporting Periods") for professional services rendered by the Registrant's principal accountant (the "Auditor") for the audit of the Registrant's annual financial statements, or services that are normally provided by the Auditor in connection with the statutory and regulatory filings or engagements for the Reporting Periods, were $129,000 in 2005 and $118,500 in 2006. (b) Audit-Related Fees. The aggregate fees billed in the Reporting Periods for assurance and related services by the Auditor that are reasonably related to the performance of the audit of the Registrant's financial statements and are not reported under paragraph (a) of this Item 4 were $3,000 in 2005 and $3,300 in 2006. These services consisted of a review of the Registrant's semi-annual financial statements. The aggregate fees billed in the Reporting Periods for assurance and related services by the Auditor to the Registrant's investment adviser (not including any sub-investment adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the Registrant ("Service Affiliates") which required pre-approval by the Audit Committee were $17,000 in 2005 and $18,000 in 2006, which related to the review of the transfer agent function. (c) Tax Fees. The aggregate fees billed to the Registrant in the Reporting Periods for professional services rendered by the Auditor for tax compliance, tax advice and tax planning ("Tax Services") were $23,000 in 2005 and $20,000 in 2006. These services consisted of (i) review or preparation of U.S. federal, state and excise tax returns; (ii) U.S. federal and state tax planning, advice and assistance regarding statutory, regulatory or administrative developments, (iii) tax advice regarding tax qualification matters and/or treatment of various financial instruments held or proposed to be acquired or held, and (iv) calculation of tax adjustments for potential Passive Foreign Investment Companies (as determined by Fund personnel) and (v) review of U.S. federal excise distribution calculations. The aggregate fees billed in the Reporting Periods for Tax Services by the Auditor to Service Affiliates which required pre-approval by the Audit Committee were $0 in 2005 and $0 in 2006. (d) All Other Fees. The aggregate fees billed to the Registrant in the Reporting Periods for products and services provided by the Auditor, other than the services reported in paragraphs (a) through (c) of this Item, were $0 in 2005 and $0 in 2006. The aggregate fees billed in the Reporting Periods for Non-Audit Services by the Auditor to Service Affiliates, other than the services reported in paragraphs (b) through (d) of this Item, which required pre-approval by the Audit Committee were $0 in 2005 and $0 in 2006. (e) (1) Audit Committee Pre-Approval Policies and Procedures. The Registrant's Audit Committee has established policies and procedures for pre-approval of the auditor's engagements for audit and non-audit services to the Registrant. Pre-approval considerations include whether the proposed services are compatible with maintaining the auditor's independence as specified in applicable rules. (e) (2) Percentage of Non-Audit Services Approved under (c)(7)(i)(C). The percentage of the services described in each of (b) through (d) of this Item 4 (only those that relate to the Registrant) that were approved by the Audit Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X was 0%, 0% and 0%, respectively. (f) Not applicable. (g) Non-Audit Fees. The aggregate non-audit fees billed by the Auditor for services rendered to the Registrant, and rendered to Service Affiliates, for the Reporting Periods were $43,000 in 2005 and $41,300 in 2006. (h) Auditor Independence. The Registrant's Audit Committee was provided with information relating to the provision of non-audit services by Ernst & Young, LLP to the Registrant (and its affiliates) that were not pre-approved by the Audit Committee so that a determination could be made whether the provision of such services is compatible with maintaining Ernst & Young, LLP's independence. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable. ITEM 6. SCHEDULE OF INVESTMENTS. The Schedule of Investments is included under Item 1 of this form. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not applicable. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The registrant does not currently have in place procedures by which shareholders may recommend nominees to the registrant's board. There have been no changes to the procedures by which shareholders may recommend nominees to the registrant's board. ITEM 11. CONTROLS AND PROCEDURES. (a) The registrant's President and Treasurer have concluded that the registrant's disclosure controls and procedures (as defined in rule 30a-3(c) under the Investment Company Act of 1940) are effective based on their evaluation of these disclosure controls and procedures within 90 days of the filing date of this report on Form N-CSR. (b) There were no significant changes in the registrant's internal controls, or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. ITEM 12. EXHIBITS. (a) (1) Code of Ethics pursuant to Item 2 above. (2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and required by Rule 30a-2(a) under the Investment Company Act of 1940, are attached hereto. (b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and required by Rule 30a-2(a) under the Investment Company Act of 1940, are attached hereto. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SECURITY EQUITY FUND By: /s/ MICHAEL G. ODLUM ------------------------------------ Michael G. Odlum, President Date: December 5, 2006 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ MICHAEL G. ODLUM ------------------------------------ Michael G. Odlum, President Date: December 5, 2006 By: /s/ BRENDA M. HARWOOD ------------------------------------ Brenda M. Harwood, Treasurer Date: December 5, 2006