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 811-03225
SECURITY MUNICIPAL BOND 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 MUNICIPAL BOND 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: December 31
Date of reporting period: December 31, 2004
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.
SECURITY
FUNDS(SM)
ANNUAL REPORT
DECEMBER 31, 2004
- SECURITY MUNICIPAL BOND FUND
- SECURITY INCOME FUND
- DIVERSIFIED INCOME SERIES
- HIGH YIELD SERIES
- INCOME OPPORTUNITY SERIES
- SECURITY CASH FUND
[SECURITY DISTRIBUTORS, INC. LOGO]
A Member of The Security Benefit
Group of Companies
SECURITY MUNICIPAL BOND
SECURITY INCOME FUND
SECURITY CASH FUND
DECEMBER 31, 2004
ANNUAL REPORT
TABLE OF CONTENTS
Security Municipal Bond Fund............................... 2
Security Income Fund
Diversified Income Series................................ 10
High Yield Series........................................ 21
Income Opportunity Series................................ 32
Security Cash Fund......................................... 43
Notes to Financial Statements.............................. 51
Report of Independent Registered Public Accounting Firm.... 56
Directors and Officers..................................... 57
1
SECURITY
Manager's Commentary MUNICIPAL BOND FUND
February 15, 2005 (unaudited)
SOLOMAN BROTHERS
Asset Management
Advisor, Salomon Brothers Asset
Management, Inc.
[PHOTO OF ROBERT AMODEO]
TO OUR SHAREHOLDERS:
PERFORMANCE REVIEW
For the 12 months ended December 31, 2004, the Security Municipal Bond Fund,
excluding sales charges, returned 2.58%.(1) This compared with the Fund's
unmanaged benchmark, the Lehman Brothers Municipal Bond Fund that returned 4.48%
for the same period.
Certain investors may be subject to the Federal Alternative Minimum Tax and
state and local taxes may apply. Capital gains, if any, are fully taxable.
Please consult your personal tax advisor.
MARKET AND ECONOMIC OVERVIEW
Despite rising interest rates, surging oil prices and an expanding economy, the
overall municipal bond market generated solid results in 2004, with the Lehman
Municipal Bond Index returning 4.48%. As the year began, it was widely expected
that the Federal Reserve Board (the Fed) would have to raise interest rates to
ward off a potential increase in inflation. This came to pass in late June, as
the Fed raised its target for the federal funds rate by 0.25% to 1.25%. This was
followed by four subsequent rate hikes, bringing the federal funds rate to 2.25%
by the end of the year.
As one would expect, the short end of the yield curve rose in conjunction with
the Fed rate hikes. However, intermediate and longer term bond yields
surprisingly did not rise, but were stable or declined slightly. As such, the
overall yield curve flattened as the difference between short- and long-term
yields narrowed during the year. This flattening also occurred in the municipal
bond market, but to a lesser extent.
New municipal bond issuance from state and local governments was approximately
$358 billion in 2004. While this was roughly 6% less than 2003's record level,
it was still the third largest amount of new issuance during a calendar year.
New supply was generally met with strong demand, in particular by institutions
and property and casualty insurers. As was the case in the Treasury market, the
shorter end of the municipal bond curve generated the weakest results, while the
longer end of the curve outperformed. From a credit quality perspective, lower
quality municipals outperformed their higher quality counterparts.
CONTRIBUTORS TO PERFORMANCE
As we began 2004, the Fund was defensively positioned in anticipation of the Fed
raising interest rates. As such, the Fund's duration was shorter than that of
the benchmark and we favored higher quality securities. In addition, we
emphasized the 10-year portion of the yield curve and focused on premium coupon
securities while avoiding discounted coupons.
This strategy produced mixed results. While our exposure to 10-year yields was
beneficial as they outperformed shorter maturity bonds, an underweight to longer
term securities detracted from relative results. In addition, our high quality
bias was not rewarded by the market, as more speculative issues outperformed. In
particular, our lack of tobacco and airline securities hurt relative results.
However, given the market environment, we did not believe the risks associated
with these securities warranted their purchase.
At the end of the reporting period, the Fund's portfolio continues to be
defensively positioned.
Certain investors may be subject to the federal Alternative Minimum Tax, and
state and local taxes may apply. Capital gains, if any, are fully taxable.
Please consult your personal tax or legal adviser.
Sincerely,
Robert Amodeo
Portfolio Manager
1 Performance figures are based on Class A shares and do not reflect deduction
of the sales charge or taxes that a shareholder would pay on distributions or
the redemption of Fund shares. Fee waivers and/or reimbursements reduced Fund
expenses and in the absence of such waivers, the performance quotes would be
reduced.
Past performance is no guarantee of future results. The performance returns
shown above do not reflect the deduction of sales charges, which, if
reflected, would reduce performance. The views expressed are opinions of the
portfolio manager as of December 31, 2004, and are subject to change based on
market and other conditions. These views may differ from those of other
portfolio managers or the firm as a whole. These opinions are not intended to
be a forecast of future events, a guarantee of future results or investment
advice. Portfolio allocation is subject to change at any time. The mention of
any individual securities should neither constitute or be construed as a
recommendation to purchase or sell securities and information provided
regarding such individual securities is not a sufficient basis upon which to
make an investment decision. Any statistics have been obtained from sources
the portfolio manager believed to be reliable, but the accuracy and
completeness of the information cannot be guaranteed. Portfolio allocations,
holdings and characteristics are subject to change at any time. All
investments involve risk including possible loss principal.
Please refer to page 5 for a list and percentage breakdown of the Fund's
holdings.
Your clients should consider the investment objectives, risks, charges and
expenses of a fund carefully before investing. The prospectus contains this
and other important information. Your clients should read the prospectus
carefully before investing.
2
SECURITY
Manager's Commentary MUNICIPAL BOND FUND
February 15, 2005 (unaudited)
PERFORMANCE
MUNICIPAL BOND FUND VS. LEHMAN BROTHERS MUNICIPAL BOND
INDEX
[PERFORMANCE GRAPH]
DATE value
- ---------- ----------
LEHMAN BROTHERS MUNICIPAL BOND INDEX
12/31/94 10,000.00
3/31/95 10,702.89
6/30/95 10,961.36
9/30/95 11,276.63
12/31/95 11,741.69
3/31/96 11,600.07
6/30/96 11,689.00
9/30/96 11,956.93
12/31/96 12,261.61
3/31/97 12,233.04
6/30/97 12,656.05
9/30/97 13,037.69
12/31/97 13,391.24
3/31/98 13,545.41
6/30/98 13,750.93
9/30/98 14,173.97
12/31/98 14,259.13
3/31/99 14,385.44
6/30/99 14,138.35
9/30/99 14,075.73
12/31/99 13,964.36
3/31/00 14,373.64
06/30/00 14,591.22
09/30/00 14,943.75
12/31/00 15,597.42
3/31/01 15,944.46
6/30/01 16,049.41
9/30/01 16,499.39
12/31/01 16,390.11
3/31/02 16,544.65
6/30/02 17,150.04
9/30/02 17,964.73
12/31/02 17,963.51
3/31/03 18,180.37
6/30/03 18,649.93
9/30/03 18,665.24
12/31/03 18,920.82
3/31/04 19,246.49
6/30/04 18,790.11
9/30/04 19,521.82
12/31/04 19,766.50
DATE value
- ---------- ----------
MUNI BOND
12/31/1994 9,525.00
3/31/1995 10,168.36
6/30/1995 10,269.63
9/29/1995 10,498.04
12/29/1995 10,999.93
3/29/1996 10,723.29
6/28/1996 10,770.88
9/30/1996 11,002.69
12/31/1996 11,274.53
3/31/1997 11,200.54
6/30/1997 11,564.58
9/30/1997 11,895.96
12/31/1997 12,205.35
3/31/1998 12,315.23
6/30/1998 12,449.56
9/30/1998 12,954.97
12/31/1998 12,942.67
3/31/1999 12,969.60
6/30/1999 12,649.58
9/30/1999 12,590.45
12/31/1999 12,495.15
3/31/2000 12,882.80
6/30/2000 13,056.99
9/29/2000 13,369.73
3/30/2001 14,317.03
6/29/2001 14,302.51
9/28/2001 14,796.22
12/31/2001 14,606.60
3/28/2002 14,733.04
6/28/2002 15,244.48
9/30/2002 16,078.41
12/31/2002 16,081.50
3/31/2003 16,186.99
6/30/2003 16,531.41
9/30/2003 16,472.14
12/31/2003 16,651.04
3/31/2004 16,818.11
6/30/2004 16,416.38
9/30/2004 16,987.30
12/31/2004 17,080.06
Municipal Bond Fund $ 17,080
Lehman Brothers Municipal Bond Index $ 19,767
$10,000 OVER 10 YEARS
This chart assumes a $10,000 investment in Class A shares of Municipal Bond Fund
on December 31, 1994, and reflects deduction of the 4.75% sales load. The chart
does not reflect the deduction of taxes that a shareholder would pay on
distributions or redemption of fund shares.
PORTFOLIO COMPOSITION BY QUALITY RATING
(BASED ON STANDARD AND POOR'S RATINGS)
AAA 74.13%
AA 20.09
A 1.82
BBB 2.37
Cash & other assets, less liabilities 1.59
AVERAGE ANNUAL RETURNS
YEARS ENDED 12-31-04 1 YEAR 5 YEARS 10 YEARS
- -------------------- ------ ------- --------
A Shares (2.32%) 5.43% 5.51%
B Shares (3.28%) 5.32% 5.21%
The performance data above represents past performance which is not predictive
of future results. For Class A shares these figures reflect deduction of the
maximum sales charge of 4.75%. For Class B shares the figures reflect deduction
of the maximum contingent deferred sales charge, ranging from 5% in the first
year to 0% in the sixth and following years. 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 applicable taxes were deducted.
The investment return and principal value of an investment will fluctuate so
that an investor's shares, when redeemed, may be worth more or less than their
original cost. Fee waivers and/or reimbursements reduced expenses and in the
absence of such waivers, the performance quoted would be reduced.
See accompanying notes.
3
SECURITY
Manager's Commentary MUNICIPAL BOND FUND
February 15, 2005 (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, July 1, 2004 - December 31, 2004.
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 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
07-01-04 12-31-04(1) PERIOD(2)
------------- ------------- -------------
Security Municipal Bond Fund -
Class A
Actual $ 1,000.00 $ 1,040.40 $ 5.13
Hypothetical 1,000.00 1,020.11 5.08
Security Municipal Bond Fund -
Class B
Actual 1,000.00 1,035.50 8.95
Hypothetical 1,000.00 1,016.34 8.87
(1) The actual ending account value is based on the actual total return of the
Fund for the period July 1, 2004 to December 31, 2004 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 July 1, 2004 to December 31, 2004 was 4.04% and 3.55%, for
Class A and B shares, respectively.
(2) Expenses are equal to the Fund's annualized expense ratio (1.00% and 1.75%
for Class A and B shares, respectively) multiplied by the average account
value over the period, multiplied by 184/366 (to reflect the one-half year
period).
4
Schedule of Investments SECURITY
December 31, 2004 MUNICIPAL BOND FUND
PRINCIPAL MARKET
AMOUNT VALUE
----------- -----------
MUNICIPAL BONDS - 98.4%
ARIZONA - 2.0%
Arizona State Transportation Board,
5.00% - 2013 $ 250,000 $ 277,560
-----------
CALIFORNIA - 3.5%
California State FSA-CR, 6.00% - 2016 200,000 238,890
Los Angeles California Regional
Airports Revenue, 2.22% - 2025(1) 250,000 250,000
-----------
488,890
-----------
CONNECTICUT - 1.9%
Connecticut Special Tax Obligation
Transportation Infrastructure,
5.00% - 2023 250,000 266,622
-----------
FLORIDA - 2.0%
Florida State Board of Education,
5.00% - 2011 250,000 276,857
-----------
ILLINOIS - 9.6%
Chicago, IL Board of Education,
5.75% - 2027 225,000 250,846
Chicago, IL Board of Education,
5.75% - 2027 25,000 27,401
Chicago, IL Midway Airport,
5.625% - 2029 250,000 261,658
Cook County, IL, 5.625% - 2016 275,000 300,424
Illinois Development Finance Authority,
5.25% - 2012 220,000 246,404
Illinois Educational Facility,
Northwestern University,
5.50% - 2013 225,000 252,339
-----------
1,339,072
-----------
INDIANA - 3.7%
Indiana Bond Bank, 5.00% - 2023 500,000 519,575
-----------
KANSAS - 2.0%
Wyandotte County, Kansas City,
KS Unified Government Utility
System, 5.75% - 2024 250,000 277,877
-----------
MARYLAND - 6.3%
Maryland State Health & Higher
Education, 6.00% - 2017 300,000 329,577
Northeast Maryland Waste Disposal
Authority, 5.50% - 2016 500,000 547,080
-----------
876,657
-----------
MASSACHUSETTS - 2.8%
Massachusetts State Water Pollution
Abatement Trust, 5.75% - 2029 70,000 79,884
Massachusetts State Water Pollution
Abatement Trust, 5.75% - 2029 280,000 310,349
-----------
390,233
-----------
MICHIGAN - 4.2%
Michigan State, 5.50% - 2015 500,000 582,265
-----------
NEVADA - 7.4%
Clark County, NV School District,
5.50% - 2016 1,000,000 1,025,680
-----------
NEW JERSEY - 7.2%
North Brunswick Township, NJ Board
of Education, 6.30% -2013 1,000,000 1,003,580
-----------
NEW YORK - 19.0%
New York, NY City Municipal Water
Finance Authority, 5.50% - 2023 250,000 254,070
New York, NY Transitional Finance
Authority, 5.50% - 2017 250,000 279,448
New York State Dorm Authority,
5.50% - 2012 750,000 858,203
New York State Environmental
Facilities Corporation, 5.00% -2016 460,000 515,136
New York State Urban Development
Corporation, 5.375% - 2025 700,000 736,211
-----------
2,643,068
-----------
OREGON - 1.9%
Umatilla County, Oregon Hospital Facility,
5.00% - 2008 250,000 267,073
-----------
PENNSYLVANIA - 4.1%
Philadelphia, PA School District,
5.50% - 2031 500,000 571,435
-----------
PUERTO RICO - 4.1%
Puerto Rico Electric Power Authority,
5.25% - 2014 500,000 570,635
-----------
TENNESSEE - 3.7%
Memphis-Shelby County, TN Airport
Authority, 6.00% - 2024 300,000 330,699
Tennessee Housing Development
Agency, 6.35% - 2031 185,000 191,952
-----------
522,651
-----------
TEXAS - 6.8%
Lower Colorado River Authority, Texas,
6.00% - 2013 250,000 282,330
North Harris Montgomery Community
College, 5.375% - 2016 500,000 553,315
North Texas Municipal Water District
Water System, 5.00% - 2015 105,000 115,618
-----------
951,263
-----------
WASHINGTON - 6.2%
Energy Northwest Washington Electric,
6.00% - 2016 500,000 578,615
Seattle, WA, 5.75% - 2028 250,000 278,505
-----------
857,120
-----------
TOTAL MUNICIPAL BONDS (cost $ 12,935,482) 13,708,113
CASH & OTHER ASSETS, LESS LIABILITIES - 1.6% 221,728
-----------
TOTAL NET ASSETS - 100.0% 13,929,841
===========
For federal income tax purposes, the identified cost of investments owned at
December 31, 2004 was $13,253,320.
(1) Variable rate security. Rate indicated is rate effective at December 31,
2004.
See accompanying notes.
5
SECURITY
MUNICIPAL BOND FUND
Statement of Assets and Liabilities
December 31, 2004
ASSETS:
Investments, at value(1)..................................... $ 13,708,113
Cash......................................................... 21,046
Receivables:
Interest.................................................. 202,249
Security Management Company............................... 7,136
Prepaid expenses............................................. 15,994
------------
Total assets................................................. 13,954,538
------------
LIABILITIES:
Payable for:
Fund shares redeemed...................................... 837
Management fees........................................... 5,909
Custodian fees............................................ 13
Transfer agent and administration fees.................... 4,437
Professional fees......................................... 7,160
12b-1 distribution plan fees.............................. 3,410
Other..................................................... 2,931
------------
Total liabilities............................................ 24,697
------------
NET ASSETS................................................... $ 13,929,841
============
NET ASSETS CONSIST OF:
Paid in capital.............................................. $ 13,477,775
Accumulated undistributed net investment income.............. 1,989
Accumulated net realized loss on sales of investments........ (322,554)
Net unrealized appreciation in value of investments.......... 772,631
------------
Net assets................................................... $ 13,929,841
============
CLASS A:
Capital shares outstanding
(unlimited number of shares authorized)................... 1,263,319
Net assets................................................... $ 13,212,391
Net asset value and redemption price per share............... $ 10.46
============
Offering price per share (net asset value
divided by 95.25%)........................................ $ 10.98
============
CLASS B:
Capital shares outstanding
(unlimited number of shares authorized)................... 68,503
Net assets................................................... $ 717,450
Net asset value, offering and redemption price
per share (excluding any applicable contingent
deferred sales charge).................................... $ 10.47
============
(1) Investments, at cost..................................... $ 12,935,482
Statement of Operations
For the Year Ended December 31, 2004
INVESTMENT INCOME:
Interest.................................................. $ 662,753
------------
Total investment income................................... 662,753
------------
EXPENSES:
Management fees........................................... 71,092
Custodian fees............................................ 416
Transfer/maintenance fees................................. 21,250
Administration fees....................................... 24,910
Directors' fees........................................... 25,241
Professional fees......................................... 10,999
Reports to shareholders................................... 2,235
Registration fees......................................... 31,708
Other expenses............................................ 7,027
12b-1 distribution plan fees - Class A.................... 33,579
12b-1 distribution plan fees - Class B.................... 7,869
------------
Total expenses............................................ 236,326
Less: Reimbursement of expenses - Class A................. (82,823)
Reimbursement of expenses - Class B................ (4,759)
Earnings credit.................................... (682)
------------
Net expenses.............................................. 148,062
------------
Net investment income..................................... 514,691
------------
NET REALIZED AND UNREALIZED LOSS:
Net realized loss during the period on:
Investments............................................... (4,714)
------------
Realized loss............................................. (4,714)
------------
Net change in unrealized depreciation during the period on:
Investments............................................... (170,246)
------------
Unrealized depreciation................................... (170,246)
------------
Net loss.................................................. (174,960)
------------
Net increase in net assets resulting from operations...... $ 339,731
============
See accompanying notes.
6
SECURITY
Statement of Changes in Net Assets MUNICIPAL BOND FUND
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2004 2003
------------ ------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS:
Net investment income.................................................. $ 514,691 $ 563,834
Net realized gain (loss) during the year on investments................ (4,714) 351,518
Net change in unrealized depreciation during the year on investments... (170,246) (376,094)
------------ ------------
Net increase in net assets resulting from operations................... 339,731 539,258
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A.............................................................. (481,008) (553,093)
Class B.............................................................. (22,142) (35,571)
------------ ------------
Total distributions to shareholders.................................... (503,150) (588,664)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares
Class A.............................................................. 503,887 14,548,378
Class B.............................................................. 43,568 100,907
Distributions reinvested
Class A.............................................................. 281,358 321,753
Class B.............................................................. 20,081 31,830
Cost of shares redeemed
Class A.............................................................. (1,138,095) (15,673,226)
Class B.............................................................. (261,176) (833,749)
------------ ------------
Net decrease from capital share transactions........................... (550,377) (1,504,107)
------------ ------------
Net decrease in net assets............................................. (713,796) (1,553,513)
------------ ------------
NET ASSETS:
Beginning of period.................................................... 14,643,637 16,197,150
------------ ------------
End of period.......................................................... $ 13,929,841 $ 14,643,637
============ ============
Accumulated undistributed net investment income at end of period....... $ 1,989 $ -
============ ============
CAPITAL SHARE ACTIVITY:
Shares sold
Class A.............................................................. 47,953 1,387,929
Class B.............................................................. 4,138 9,469
Shares reinvested
Class A.............................................................. 26,976 30,537
Class B.............................................................. 1,923 3,016
Shares redeemed
Class A.............................................................. (109,057) (1,495,530)
Class B.............................................................. (24,948) (78,681)
See accompanying notes.
7
Financial Highlights
Selected data for each share of capital stock outstanding SECURITY
throughout each period MUNICIPAL BOND FUND
YEAR ENDED,
DECEMBER 31,
CLASS A 2004 2003 2002 2001 2000
- ------------------------------------------------------ -------- -------- ------- -------- -------
PER SHARE DATA
Net asset value, beginning of period $ 10.57 $ 10.60 $ 10.15 $ 10.20 $ 9.48
-------- -------- ------- -------- -------
Income (loss) from investment operations:
Net investment income(c) 0.38 0.38 0.45 0.43 0.45
Net gain (loss) on securities (realized and unrealized) (0.11) (0.01) 0.55 (0.05) 0.72
-------- -------- ------- -------- -------
Total from investment operations 0.27 0.37 1.00 0.38 1.17
-------- -------- ------- -------- -------
Less distributions:
Dividends from net investment income (0.38) (0.40) (0.43) (0.43) (0.45)
Distributions from realized gains - - (0.12) - -
-------- -------- ------- -------- -------
Total distributions (0.38) (0.40) (0.55) (0.43) (0.45)
-------- -------- ------- -------- -------
Net asset value, end of period $ 10.46 $ 10.57 $ 10.60 $ 10.15 $ 10.20
======== ======== ======= ======== =======
TOTAL RETURN(a) 2.58% 3.55% 10.11% 3.79% 12.66%
-------- -------- ------- -------- -------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 13,212 13,718 $14,567 $ 15,67 $16,679
-------- -------- ------- -------- -------
Ratios to average net assets:
Net investment income (loss) 3.66% 3.61% 4.09% 4.20% 4.60%
Total expenses 1.00% 1.01% 1.00% 0.99% 1.00%
Gross expenses(b) 1.62% 1.34% 1.26% 1.17% 1.16%
Net expenses(d) 1.00% 1.00% 1.00% 0.99% 1.00%
-------- -------- ------- -------- -------
Portfolio turnover rate 17% 57% 50% 54% 52%
YEAR ENDED,
DECEMBER 31,
CLASS B 2004 2003 2002 2001 2000
- ------------------------------------------------------ ---------- ---------- ---------- -------- --------
PER SHARE DATA
Net asset value, beginning of period $ 10.59 $ 10.62 $ 10.16 $ 10.22 $ 9.50
---------- ---------- ---------- -------- --------
Income (loss) from investment operations:
Net investment income (loss)(c) 0.31 0.31 0.36 0.35 0.38
Net gain (loss) on securities (realized and unrealized) (0.13) (0.02) 0.57 (0.05) 0.71
---------- ---------- ---------- -------- --------
Total from investment operations 0.18 0.29 0.93 0.30 1.09
---------- ---------- ---------- -------- --------
Less distributions:
Dividends from net investment income (0.30) (0.32) (0.35) (0.36) (0.37)
Distributions from realized gains - - (0.12) - -
---------- ---------- ---------- -------- --------
Total distributions (0.30) (0.32) (0.47) (0.36) (0.37)
---------- ---------- ---------- -------- --------
Net asset value, end of period $ 10.47 $ 10.59 $ 10.62 $ 10.16 $ 10.22
========== ========== ========== ======== ========
TOTAL RETURN(a) 1.72% 2.82% 9.37% 2.91% 11.79%
RATIOS/SUPPLEMENTAL DATA
---------- ---------- ---------- -------- --------
Net assets, end of period (in thousands) $ 717 $ 926 $ 1,630 $ 1,766 $ 1,605
---------- ---------- ---------- -------- --------
Ratios to average net assets:
Net investment income (loss) 2.91% 2.88% 3.34% 3.45% 3.85%
Total expenses 1.75% 1.76% 1.75% 1.74% 1.75%
Gross expenses(b) 2.36% 2.08% 2.01% 1.93% 1.96%
Net expenses(d) 1.75% 1.75% 1.75% 1.74% 1.75%
---------- ---------- ---------- -------- --------
Portfolio turnover rate 17% 57% 50% 54% 52%
---------- ---------- ---------- -------- --------
See accompanying notes.
8
Financial Highlights
Selected data for each share of capital stock SECURITY
outstanding throughout each period MUNICIPAL BOND FUND
(a) Total return information does not take into account any charges paid at
time of purchase or contingent deferred sales charge paid at time of
redemption.
(b) Gross expense information reflects expense ratios absent fund expense
reductions by the Investment Manager.
(c) Net investment income was computed using the average month-end shares
outstanding throughout the period.
(d) Net expense information reflects expense ratios after expense reductions
or fee waivers and reduction of custodian expenses.
See accompanying notes.
9
SECURITY INCOME FUND
MANAGERS' COMMENTARY DIVERSIFIED INCOME SERIES
FEBRUARY 15, 2005 (unaudited)
[SECURITY FUNDS LOGO]
Advisor, Security Management Company, LLC
[PHOTO OF STEVEN M. BOWSER]
Stewen M. Bowser
Portfolio Manager
[PHOTO OF CHRISTOPHER L. PHALEN]
Christopher L. Phalen Portfolio Manager
TO OUR SHAREHOLDERS:
December 31, 2004 marked the fifth consecutive year in which the fixed income
markets produced positive returns for investors. 2004 will be recalled as a
solid year for bonds, despite the predictions of higher interest rates from most
prognosticators in January. The equity market outpaced bonds for the second
consecutive year, but bonds have outperformed equities during this half-decade
by more than 12% - the first time since the early 1970s. The Diversified Income
Series advanced 3.37% for the year 2004.(1) The benchmark Lehman Brothers
Aggregate Bond Index gained 4.34% over the same period.
FIXED INCOME PERFORMANCE IN 2004
Action from the Federal Reserve's Open Market Committee (FOMC) became apparent
the last half of 2004, as they raised short-term interest rates by 125 basis
points (in 25 basis point increments) over the course of five meetings. Despite
this fact, the overall yield curve actually flattened (short rates increased
while the longer rates fell), enabling fixed income portfolios to continue to
provide positive returns. 2004 will be remembered as the "bearish bond market
that never came." The top investment grade fixed income performers of 2005 were
corporate bonds, followed closely by mortgage-backed securities.
The majority of the negative variance from the benchmark by the Series can be
attributed to the flattening of the yield curve. The Series was overweight in
the intermediate part of the curve, namely the 5- to 10-year maturity range, due
to overweight allocations to corporate bonds and mortgage-backed securities.
Portfolios that are "barbelled," or more concentrated in the "tails" of the
curve, namely the shorter 2-year and longer 30-year bonds perform much better in
flattening scenarios. Portfolios of more intermediate maturities suffer
performance in these instances and the Series was no different.
The Series held an over weight position of corporate bonds and mortgage-backed
securities in 2004 due to the expectations of rising interest rates. These
securities have additional yield, or "spread" versus U.S. Treasuries and are
more able to offset the negative impact of a rising interest rate environment.
However, the rise in interest rates only affected the shortest part of the yield
curve and not the longer maturities. These issues continued to outperform
through this period. The Series did not contain enough of the longer maturity
bonds versus the index - as we felt the impending rise in interest rates would
negatively impact these issues. But as said before, the bear market never
materialized in the magnitude we expected.
THE COMPOSITION OF PORTFOLIO ASSETS
At the end of the year, the Diversified Income Series held 47% mortgage-backed
securities, 31% investment grade corporate issues, 5% U.S. Treasury issues, 16%
Federal agency securities, and 0% cash. This represents an overweight position
in corporate bonds and mortgage backed securities, and an underweight position
in U.S. Treasuries.
OUTLOOK FOR 2005
Overall, the economic indicators point to a relatively positive year in 2005 for
the U.S. economy. We continue to expect the U.S. economy to grow at a healthy
rate (consensus 3.6% GDP growth) and the Federal Reserve should continue to
increase interest rates in order to control inflation. We also expect corporate
profitability to remain positive, although we expect the growth rate will slow.
The positive outlook for the economy is not without some risks. Investors remain
concerned about foreign countries financing our trade deficit, our government
budget deficit, potential fall in the dollar and the debt burden of the average
consumer. In this environment, our strategy is expected to continue focusing on
overweighting corporate bonds and mortgage-backed securities to take advantage
of their yield advantage over U.S. treasuries. The one caveat we have with this
strategy is that the current valuation of corporate bonds is relatively high (or
in other words - overvalued), so a reduction to this allocation may be in order
at some point during the year. We plan to maintain a duration less than the
benchmark due to the continued concern with rising interest rates.
Sincerely,
Steven M. Bowser and Christopher L. Phalen Portfolio Managers
(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 fund shares. Fee waivers and/or reimbursements reduced
fund expenses and in the absence of such waivers, the performance quoted
would be less.
10
SECURITY INCOME FUND
Managers' Commentary DIVERSIFIED INCOME SERIES
February 15, 2005 (unaudited)
PERFORMANCE
DIVERSIFIED INCOME SERIES VS. LEHMAN BROTHERS AGGREGATE BONDS INDEX
[PERFORMANCE GRAPH]
DIVERSIFIED INCOME INVESTMENT INFORMATION
DATE value
- ---------- ---------
LEHMAN BROTHERS AGGREGATE BOND INDEX
12/31/94 10,000.00
3/31/95 10,504.40
6/30/95 11,144.44
9/30/95 11,363.64
12/31/95 11,847.61
3/31/96 11,636.27
6/30/96 11,702.71
9/30/96 11,918.19
12/31/96 12,275.86
3/31/97 12,207.67
6/30/97 12,657.35
9/30/97 13,078.07
12/31/97 13,463.36
3/31/98 13,672.47
6/30/98 13,992.06
9/30/98 14,583.44
12/31/98 14,632.60
3/31/99 14,558.24
6/30/99 14,429.98
9/30/99 14,528.79
12/31/99 14,511.10
3/31/00 14,831.44
06/30/00 15,088.48
09/30/00 15,543.87
12/31/00 16,198.86
3/31/01 16,689.16
6/30/01 16,782.31
9/30/01 17,556.88
12/31/01 17,563.34
3/31/02 17,580.58
6/30/02 18,231.22
9/30/02 19,067.63
12/31/02 19,366.99
3/31/03 19,636.20
6/30/03 20,127.12
9/30/03 20,098.07
12/31/03 20,162.53
3/31/04 20,697.40
6/30/04 20,193.08
9/30/04 20,838.61
12/31/04 21,037.32
DATE value
- ---------- ---------
DIVERSIFIED INCOME SERIES
12/31/1994 9,525.00
3/31/1995 9,936.51
6/30/1995 10,666.03
9/29/1995 10,967.86
12/29/1995 11,594.56
3/29/1996 11,208.95
6/28/1996 11,220.89
9/30/1996 11,443.68
12/31/1996 11,738.12
3/31/1997 11,649.28
6/30/1997 12,026.13
9/30/1997 12,444.50
12/31/1997 12,815.21
3/31/1998 12,993.96
6/30/1998 13,330.74
9/30/1998 13,930.42
12/31/1998 13,978.20
3/31/1999 13,751.33
6/30/1999 13,535.58
9/30/1999 13,552.64
12/31/1999 13,472.00
3/31/2000 13,706.31
6/30/2000 13,840.62
9/29/2000 14,223.33
12/29/2000 14,773.06
3/30/2001 15,187.10
6/29/2001 15,206.12
9/28/2001 15,847.62
12/31/2001 15,852.98
3/28/2002 15,820.51
6/28/2002 16,371.37
9/30/2002 17,052.19
12/31/2002 17,283.94
3/31/2003 17,482.39
6/30/2003 17,893.43
9/30/2003 17,760.20
12/31/2003 17,753.09
3/31/2004 18,167.35
6/30/2004 17,684.03
9/30/2004 18,171.26
12/31/2004 18,351.22
DIVERSIFIED INCOME SERIES $ 18,351
LEHMAN BROTHERS AGGREGATE BOND INDEX $ 21,037
$10,000 OVER 10 YEARS
This chart assumes a $10,000 investment in Class A shares of Diversified Income
Series on December 31, 1994, and reflects deduction of the 4.75% sales load. The
chart does not reflect the deduction of taxes that a shareholder would pay on
distributions or redemption of fund shares.
PORTFOLIO COMPOSITION BY QUALITY RATING
(BASED ON STANDARD AND POOR'S RATINGS)
AAA 67.37%
AA 4.70
A 13.04
BBB 13.68
BB 0.19
B 0.18
Cash & other assets, less liabilities 0.84
AVERAGE ANNUAL RETURNS
SINCE
PERIODS ENDED 12-31-04 1 YEAR 5 YEARS 10 YEARS INCEPTION
- ---------------------- ------ ------- -------- ---------
A Shares (1.54%) 5.34% 6.28% N/A
B Shares (2.40%) 5.26% 6.00% N/A
C Shares 1.61% N/A N/A 5.77%
(5-1-00)
- -----------------
The performance data above represents past performance which is not predictive
of future results. For Class A shares these figures reflect deduction of the
maximum sales charge of 4.75%. For Class B shares the figures reflect deduc-
tion of the maximum contingent deferred sales charge, ranging from 5% in the
first year to 0% in the sixth and following years, and 1% for Class C shares.
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
applicable taxes were deducted. Fee waivers and/or reimbursements reduced
expenses of the Fund and in the absence of such waivers, the performance quoted
would be reduced. The investment return and principal value of an investment
will fluctuate so that an investor's shares, when redeemed, may be worth more or
less than their original cost.
See accompanying notes.
11
SECURITY INCOME FUND
Managers' Commentary DIVERSIFIED INCOME SERIES
February 15, 2005 (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, July 1, 2004 - December 31, 2004.
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 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
07-01-04 12-31-04(1) PERIOD(2)
------------- ------------- -------------
Diversified Income Series -
Class A
Actual $ 1,000.00 $ 1,037.70 $ 4.87
Hypothetical 1,000.00 1,020.36 4.82
Diversified Income Series -
Class B
Actual 1,000.00 1,037.90 8.71
Hypothetical 1,000.00 1,016.59 8.62
Diversified Income Series -
Class C
Actual 1,000.00 1,034.00 8.69
Hypothetical 1,000.00 1,016.59 8.62
(1) The actual ending account value is based on the actual total return of the
Series for the period July 1, 2004 to December 31, 2004 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 July 1, 2004 to December 31, 2004 was 3.77%, 3.79% and 3.40%, for
Class A, B and C class shares, respectively.
(2) Expenses are equal to the Series annualized expense ratio (0.95%, 1.70% and
1.70% for Class A, B and C class shares, respectively) multiplied by the
average account value over the period, multiplied by 184/366 (to reflect the
one-half year period).
12
SECURITY INCOME FUND
Schedule of Investments DIVERSIFIED INCOME SERIES
December 31, 2004
PRINCIPAL MARKET
AMOUNT VALUE
CORPORATE BONDS - 30.5%
AIRLINES - 1.1%
Delta Air Lines, Inc.:
7.779% - 2005 $ 19,000 $ 17,473
9.50% - 2008(1) 231,000 214,253
Qantas Airways, Ltd.,
5.125% - 2013(1) 350,000 346,564
Southwest Airlines Company,
7.875% - 2007 450,000 492,609
----------
1,070,899
----------
AUTOMOTIVE - 1.8%
Ford Motor Credit Company:
6.50% - 2007 300,000 311,954
5.80% - 2009 300,000 306,643
General Motors Corporation,
8.80% - 2021 650,000 703,370
Johnson Controls, Inc.,
4.875% - 2013 350,000 354,555
----------
1,676,522
----------
BANKING - 3.3%
BCH Cayman Islands, Ltd.,
7.70% - 2006 300,000 318,415
Bank of America Corporation,
7.80% - 2010 300,000 348,870
BankBoston Capital Trust,
3.04% - 20283 700,000 675,010
Chase Capital III, 2.95% - 2027(3) 700,000 662,030
Danske Bank A/S, 7.40% - 2010(1,3) 475,000 514,359
Key Bank N.A., 7.00% - 2011 300,000 337,205
US Central Credit Union, 2.70% - 2009 295,455 289,935
----------
3,145,824
----------
BROKERAGE - 1.1%
Credit Suisse First Boston USA,
6.125% - 2011 300,000 327,143
Legg Mason, Inc., 6.75% - 2008 350,000 381,163
Waddell & Reed Financial, Inc.,
7.50% - 2006 300,000 311,184
----------
1,019,490
----------
BUILDING MATERIALS - 0.7%
CRH America, Inc., 6.95% - 2012 300,000 341,956
Masco Corporation, 5.875% - 2012 300,000 321,509
----------
663,465
----------
CHEMICALS - 0.9%
PPG Industries, Inc., 7.40% - 2019 350,000 418,100
Pioneer Hi-Bred International, Inc.,
5.75% - 2009 375,000 399,027
----------
817,127
----------
CONSUMER PRODUCTS - 0.4%
Newell Rubbermaid, Inc., 6.75% - 2012 300,000 341,830
----------
DIVERSIFIED MANUFACTURING - 1.8%
General Electric Company,
5.00% - 2013 300,000 307,790
Hutchison Whampoa International,
Ltd., 5.45% - 2010(1) 650,000 673,191
Tyco International Group, 7.00% - 2028 350,000 406,923
United Technologies Corporation,
6.35% - 2011 300,000 334,217
----------
1,722,121
----------
ELECTRIC - 1.4%
Arizona Public Service Company,
6.375% - 2011 300,000 330,736
Calpine Corporation, 8.75% - 2007 25,000 21,875
Cincinnati Gas & Electric Company,
5.70% - 2012 300,000 317,829
National Rural Utilities, 5.50% - 2005 300,000 300,262
Oncor Electric Delivery Company,
6.375% - 2015 300,000 330,548
----------
1,301,250
----------
ENERGY - INDEPENDENT - 0.8%
Devon Financing Corporation, ULC,
6.875% - 2011 300,000 339,767
Pancanadian Petroleum, 6.30% - 2011 350,000 384,539
----------
724,306
----------
ENERGY - INTEGRATED - 0.4%
Conoco, Inc., 6.95% - 2029 350,000 413,299
----------
ENTERTAINMENT - 1.3%
Liberty Media Corporation,
7.875% - 2009 350,000 390,061
Time Warner, Inc., 6.875% - 2018 350,000 395,758
Viacom, Inc., 5.625% - 2007 400,000 418,200
----------
1,204,019
----------
FINANCIAL COMPANIES - CAPTIVE - 0.3%
General Motors Acceptance Corporation,
6.125% - 2006 300,000 307,555
----------
FINANCIAL COMPANIES - NONCAPTIVE CONSUMER -
0.7%
Countrywide Capital, 8.00% - 2026 300,000 315,205
SLM Corporation, 5.05% - 2014 325,000 326,777
----------
641,982
----------
FINANCIAL COMPANIES - NONCAPTIVE DIVERSIFIED
- 1.7%
CIT Group, Inc., 7.625% - 2005 150,000 154,321
Core Investment Grade Trust,
4.727% - 2007 1,100,000 1,125,476
General Electric Capital Corporation,
5.875% - 2012 300,000 324,605
----------
1,604,402
----------
See accompanying notes.
13
SECURITY INCOME FUND
Schedule of Investments DIVERSIFIED INCOME SERIES
December 31, 2004
PRINCIPAL MARKET
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
FINANCIAL - OTHER - 0.3%
Abbey National plc, 6.69% - 2005 $ 300,000 $ 307,479
----------
FOOD & BEVERAGE - 0.4%
Fosters Brewing Group, 6.875% - 2011(1) 300,000 338,495
----------
GAMING - 0.2%
Park Place Entertainment,
7.875% - 2005 175,000 181,562
----------
HEALTH CARE - 0.4%
Anthem, Inc., 6.80% - 2012 300,000 339,623
----------
INDUSTRIAL - OTHER - 0.4%
Eaton Corporation, 5.75% - 2012 325,000 350,628
----------
INSURANCE - LIFE - 0.1%
Transamerica Capital II, 7.65% - 2026(1) 100,000 112,390
----------
INSURANCE - PROPERTY & CASUALTY - 0.5%
Nationwide Mutual Insurance Company,
8.25% - 2031(1) 400,000 494,352
----------
MEDIA - CABLE - 2.0%
Comcast Corporation, 5.30% - 2014 325,000 335,177
Cox Communications, Inc.,
6.40% - 2008 300,000 321,704
Cox Enterprises, Inc., 4.375% - 2008(1) 300,000 299,728
Jones Intercable, Inc., 7.625% - 2008 275,000 304,273
Lenfest Communications, Inc.,
10.50% - 2006 250,000 273,523
Time Warner Entertainment,
7.25% - 2008 300,000 333,295
----------
1,867,700
----------
MEDIA - NONCABLE - 0.7%
Clear Channel Communications, Inc.,
4.625% - 2008 300,000 304,635
Thomson Corporation, 4.75% - 2010 650,000 662,079
----------
966,714
----------
PHARMACEUTICALS - 0.4%
Eli Lilly & Company, 7.125% - 2025 300,000 362,585
----------
PIPELINES - 1.4%
Consolidated Natural Gas Company,
6.625% - 2013 350,000 390,801
Duke Energy Field Services Corporation,
7.50% - 2005 300,000 307,926
Express Pipeline LP, 6.47% - 2013(1) 286,933 297,395
Kinder Morgan Energy, 7.50% - 2010 300,000 346,790
----------
1,342,912
----------
RAILROADS - 0.8%
Canadian National Railway Company,
6.25% - 2034 700,000 757,438
----------
REAL ESTATE INVESTMENT TRUSTS - 0.7%
Reckson Operating Partnership,
5.15% - 2011 700,000 706,049
----------
RETAILERS - 0.8%
May Department Stores Company,
3.95% - 2007 350,000 350,591
Tandy Corporation, 6.95% - 2007 400,000 432,886
----------
783,477
----------
SERVICES - 0.2%
American Eco Corporation,
9.625% - 2008*(4,5) 25,000 -
MasTec, Inc., 7.75% - 2008 150,000 145,875
----------
145,875
----------
SUPERMARKETS - 0.5%
Safeway, Inc., 6.50% - 2008 400,000 433,144
----------
TECHNOLOGY - 0.8%
Pitney Bowes, Inc., 5.875% - 2006 350,000 361,152
Science Applications International
Corporation, 7.125% - 2032 300,000 353,366
----------
714,518
----------
TELECOMMUNICATIONS - WIRELESS - 0.6%
America Movil S.A. de C.V.,
5.50% - 2014 250,000 246,976
Vodafone Airtouch, 7.625% - 2005 350,000 352,041
----------
599,017
----------
TRANSPORTATION SERVICES - 1.6%
Erac USA Finance Company:
7.35% - 20081 350,000 386,656
6.70% - 20341 1,000,000 1,086,068
----------
1,472,724
----------
TOTAL CORPORATE BONDS
(cost $27,505,034) 28,930,773
----------
MORTGAGE BACKED SECURITIES - 47.3%
U.S. GOVERNMENT SPONSORED AGENCIES - 43.4%
Federal Home Loan Mortgage Corporation:
#E01378, 5.00% - 2018 2,152,943 2,188,126
#E01488, 5.00% - 2018 1,645,606 1,672,498
#E01538, 5.00% - 2018 1,705,091 1,732,956
#C44050, 7.00% - 2030 43,346 45,955
#C01172, 6.50% - 2031 81,077 85,096
#C01210, 6.50% - 2031 89,916 94,439
#C50964, 6.50% - 2031 82,397 86,481
#C50967, 6.50% - 2031 34,290 36,015
#C01277, 7.00% - 2031 165,078 174,878
#C01292, 6.00% - 2032 318,853 329,834
#C62801, 6.00% - 2032 195,333 202,060
#C01287, 6.50% - 2032 236,126 247,830
#C76358, 5.00% - 2033 1,508,871 1,502,977
#C78238, 5.50% - 2033 1,548,679 1,574,721
#A16943, 6.00% - 2033 1,528,715 1,579,877
#G08014, 5.00% - 2034 1,987,609 1,975,127
#G08015, 5.50% - 2034 1,966,702 1,999,216
#A17903, 6.00% - 2034 1,573,609 1,626,354
See accompanying notes.
14
SECURITY INCOME FUND
Schedule of Investments DIVERSIFIED INCOME SERIES
December 31, 2004
PRINCIPAL MARKET
AMOUNT VALUE
MORTGAGE BACKED SECURITIES (CONTINUED)
Federal National Mortgage Association:
#2544732, 5.50% - 2017 $ 1,871,207 $ 1,935,946
#720714, 4.50% - 2018 1,674,050 1,672,491
#750465, 5.00% - 2018 1,711,930 1,740,968
#780952, 4.00% - 2019 2,015,164 1,968,452
#252806, 7.50% - 2029 60,845 65,216
#252874, 7.50% - 2029 55,394 59,373
#535277, 7.00% - 2030 52,713 55,859
#190307, 8.00% - 2030 33,179 35,976
#253356, 8.00% - 2030 40,398 43,804
#541735, 8.00% - 2030 34,447 37,351
#585348, 6.50% - 2031 69,128 72,520
#254477, 5.50% - 2032 728,688 740,180
#254198, 6.00% - 2032 459,515 475,405
#254377, 6.00% - 2032 629,912 652,215
#666750, 6.00% - 2032 678,934 702,412
#254346, 6.50% - 2032 247,166 259,294
#545691, 6.50% - 2032 332,482 348,795
#659790, 6.50% - 2032 263,932 277,028
#640008, 7.00% - 2032 173,692 184,057
#702879, 5.00% - 2033 1,671,734 1,661,927
#709805, 5.00% - 2033 1,397,116 1,388,920
#688328, 5.50% - 2033 1,276,270 1,296,794
#689108, 5.50% - 2033 744,500 756,960
#709748, 5.50% - 2033 1,627,996 1,655,243
#713971, 5.50% - 2033 1,462,650 1,486,171
#754903, 5.50% - 2033 1,428,454 1,450,383
#725033, 6.00% - 2034 1,294,717 1,339,370
#255554, 5.50% - 2035 1,600,000 1,625,290
----------
41,142,840
----------
U.S. GOVERNMENT AGENCY SECURITIES - 1.9%
Government National Mortgage Association:
#313107, 7.00% - 2022 132,609 140,923
#328618, 7.00% - 2022 21,025 22,344
#352022, 7.00% - 2023 65,602 69,716
#369303, 7.00% - 2023 66,932 71,129
#347017, 7.00% - 2024 54,436 57,849
#371006, 7.00% - 2024 33,830 35,952
#371012, 7.00% - 2024 49,211 52,296
#780454, 7.00% - 2026 83,747 88,998
#464356, 6.50% - 2028 67,258 70,816
#462680, 7.00% - 2028 58,402 62,064
#518436, 7.25% - 2029 52,433 56,020
#491492, 7.50% - 2029 59,528 63,930
#510704, 7.50% - 2029 72,627 77,998
#781079, 7.50% - 2029 32,554 34,961
#479229, 8.00% - 2030 24,853 26,966
#479232, 8.00% - 2030 35,199 38,192
#508342, 8.00% - 2030 69,483 75,391
#538285, 6.50% - 2031 98,425 103,632
#564472, 6.50% - 2031 211,920 223,278
#552324, 6.50% - 2032 168,993 177,933
II #1260, 7.00% - 2023 13,373 14,166
II #1849, 8.50% - 2024 8,848 9,623
II #2320, 7.00% - 2026 31,616 33,490
II #2270, 8.00% - 2026 26,179 28,291
II #2445, 8.00% - 2027 30,525 32,987
II #2689, 6.50% - 2028 41,643 43,755
II #2616, 7.00% - 2028 41,083 43,517
II #2909, 8.00% - 2030 37,874 40,929
-------------
1,797,146
-------------
NON-AGENCY SECURITIES - 2.0%
Chase Commercial Mortgage Securities
Corporation:
1997-1 B, 7.37% - 2007 CMO 1,500,000 1,612,444
1998-1 B, 6.56% - 2008 CMO 225,000 244,195
Global Rate Eligible Asset Trust
1998-A, 7.33% - 2006(5) 41,815 -
-------------
1,856,639
-------------
TOTAL MORTGAGE BACKED SECURITIES
(cost $44,467,996) 44,796,625
-------------
U.S. GOVERNMENT SPONSORED AGENCY BONDS & NOTES - 16.3%
Federal Farm Credit Bank,
5.45% - 2013 1,000,000 1,066,833
Federal Home Loan Bank:
2.50% - 2006 1,000,000 993,414
6.375% - 2006 800,000 840,009
Federal Home Loan Mortgage Corporation:
2.850% - 2007 2,000,000 1,977,978
6.625% - 2009 1,000,000 1,118,341
Federal National Mortgage Association:
7.49% - 2005 285,000 287,263
7.65% - 2005 250,000 252,393
7.875% - 2005 500,000 503,778
3.00% - 2006(2) 1,800,000 1,802,032
6.00% - 2008 400,000 430,416
6.375% - 2009 1,500,000 1,654,939
6.625% - 2009 1,000,000 1,116,574
5.50% - 2011 1,000,000 1,072,351
7.00% - 2020 76,594 79,841
6.625% - 2030 250,000 297,916
7.125% - 2030 1,000,000 1,257,867
Financing Corporation,
9.65% - 2018 500,000 733,521
----------
15,485,466
----------
TOTAL U.S. GOVERNMENT SPONSORED AGENCY BONDS & NOTES
(cost $14,481,965) 15,485,466
See accompanying notes.
15
SECURITY INCOME FUND
Schedule of Investments DIVERSIFIED INCOME SERIES
December 31, 2004
PRINCIPAL MARKET
AMOUNT VALUE
U.S. GOVERNMENT SECURITIES - 5.1%
U.S. Treasury Bond,
5.375% - 2031 $ 1,000,000 $ 1,081,328
U.S. Treasury Notes:
4.625% - 2006 1,000,000 1,023,047
6.25% - 2007 1,500,000 1,596,563
6.50% - 2010 1,000,000 1,132,148
-------------
4,833,086
-------------
TOTAL U.S. GOVERNMENT SECURITIES
(cost $4,582,921) 4,833,086
-------------
TOTAL INVESTMENTS - 99.2%
(cost $91,037,916) 94,045,950
CASH & OTHER ASSETS, LESS LIABILITIES - 0.8% 796,527
-------------
TOTAL NET ASSETS - 100.0% $ 94,842,477
=============
For federal income tax purposes, the identified cost of investments owned at
December 31, 2004 was $92,429,103.
*Non-income producing security
CMO (Collateralized Mortgage Obligation)
plc (public limited company)
(1) Security is a 144A series. The total market value of 144A securities is
$4,763,450 (cost $4,480,770), or 5.0% of total net assets.
(2) Security is a step bond. Rate indicated is rate effective at December 31,
2004.
(3) Variable rate security. Rate indicated is rate effective December 31, 2004.
(4) Security is in default due to bankruptcy.
(5) Security is fair valued by the Board of Directors. The total market value of
fair valued securities amounts to $0, or 0.0% or net assets.
See accompanying notes.
16
SECURITY INCOME FUND
DIVERSIFIED INCOME SERIES
Statement of Assets and Liabilities
December 31, 2004
ASSETS:
Investments, at value1.......................... $ 94,045,950
Receivables:
Fund shares sold............................. 33,177
Interest..................................... 908,321
Prepaid expenses ............................... 19,365
--------------
Total assets.................................... 95,006,813
--------------
LIABILITIES:
Cash overdraft.................................. 23,265
Payable for:
Fund shares redeemed......................... 6,193
Management fees.............................. 29,106
Custodian fees .............................. 575
Transfer agent and administration fees ...... 29,609
Professional fees............................ 7,792
12b-1 distribution plan fees................. 59,235
Other........................................ 8,561
--------------
Total liabilities............................... 164,336
--------------
NET ASSETS...................................... $ 94,842,477
==============
NET ASSETS CONSIST OF:
Paid in capital................................. $ 99,860,407
Accumulated net investment loss................. (552,162)
Accumulated net realized loss
on sales of investments...................... (7,473,802)
Net unrealized appreciation
in value of investments......................
3,008,034
--------------
Net assets ..................................... $ 94,842,477
==============
CLASS A:
Capital shares outstanding
(unlimited number of shares authorized)...... 15,830,988
Net assets...................................... $ 75,292,299
Net asset value and redemption price
per share.................................... $ 4.76
==============
Offering price per share (net asset value
divided by 95.25%)........................... $ 5.00
==============
CLASS B:
Capital shares outstanding
(unlimited number of shares authorized)...... 3,025,479
Net assets...................................... $ 14,331,453
Net asset value, offering and redemption
price per share (excluding any applicable
contingent deferred sales charge)............ $ 4.74
==============
CLASS C:
Capital shares outstanding
(unlimited number of shares authorized)...... 1,103,746
Net assets...................................... $ 5,218,725
Net asset value, offering and redemption
price per share (excluding any applicable
contingent deferred sales charge)............ $ 4.73
==============
(1)Investments, at cost......................... $ 91,037,916
Statement of Operations
For the Year Ended December 31, 2004
INVESTMENT INCOME:
Dividends.................................. $ 17,625
Interest................................... 4,869,531
-------------
Total investment income.................... 4,887,156
-------------
EXPENSES:
Management fees............................ 333,499
Custodian fees............................. 8,022
Transfer/maintenance fees.................. 258,403
Administration fees........................ 95,497
Directors' fees ........................... 3,581
Professional fees ......................... 13,549
Reports to shareholders.................... 13,057
Registration fees.......................... 39,104
Other expenses............................. 6,463
12b-1 distribution plan fees - Class A .... 191,789
12b-1 distribution plan fees - Class B .... 131,240
12b-1 distribution plan fees - Class C .... 54,462
-------------
Total expenses............................. 1,148,666
Less: Reimbursement of expenses - Class A (83,897)
Reimbursement of expenses - Class B (14,435)
Reimbursement of expenses - Class C (5,875)
-------------
Net expenses............................... 1,044,459
-------------
Net investment income...................... 3,842,697
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized loss during the period on
Investments................................ (173,715)
-------------
Realized loss.............................. (173,715)
-------------
Net change in unrealized depreciation
during the period on Investments........... (689,342)
-------------
Unrealized depreciation.................... (689,342)
-------------
Net loss................................... (863,057)
-------------
Net increase in net assets
resulting from operations................ $ 2,979,640
=============
See accompanying notes.
17
SECURITY INCOME FUND
Statement of Changes in Net Assets DIVERSIFIED INCOME SERIES
YEAR ENDED YEAR ENDED
DECEMBER 31, 2004 DECEMBER 31, 2003
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS:
Net investment income.................................................... $ 3,842,697 $ 3,931,606
Net realized gain (loss) during the period on investments................ (173,715) 130,607
Net change in unrealized depreciation during the period on investments... (689,342) (1,568,329)
----------------- -----------------
Net increase in net assets resulting from operations..................... 2,979,640 2,493,884
----------------- -----------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A............................................................... (3,473,423) (3,217,166)
Class B............................................................... (504,874) (657,724)
Class C............................................................... (207,103) (217,243)
----------------- -----------------
Total distributions to shareholders...................................... (4,185,400) (4,092,133)
----------------- -----------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares
Class A............................................................... 20,132,166 67,407,259
Class B............................................................... 6,958,364 7,584,770
Class C............................................................... 1,459,722 4,528,548
Distributions reinvested
Class A............................................................... 2,998,350 2,656,615
Class B............................................................... 473,120 619,506
Class C............................................................... 192,657 201,205
Cost of shares redeemed
Class A............................................................... (24,824,137) (59,426,786)
Class B............................................................... (5,835,767) (15,368,517)
Class C............................................................... (2,198,352) (3,667,625)
----------------- -----------------
Net increase (decrease) from capital share transactions.................. (643,877) 4,534,975
----------------- -----------------
Net increase (decrease) in net assets.................................... (1,849,637) 2,936,726
----------------- -----------------
NET ASSETS:
Beginning of period...................................................... 96,692,114 93,755,388
----------------- -----------------
End of period............................................................ $ 94,842,477 $ 96,692,114
================= =================
Accumulated net investment loss at end of period......................... $ (552,162) $ (56,124)
================= =================
CAPITAL SHARE ACTIVITY:
Shares sold
Class A............................................................... 4,206,848 13,817,711
Class B............................................................... 1,459,436 1,553,908
Class C............................................................... 307,396 929,547
Shares reinvested
Class A............................................................... 629,350 546,822
Class B............................................................... 99,693 127,876
Class C............................................................... 40,652 41,662
Shares redeemed
Class A............................................................... (5,170,948) (12,185,960)
Class B............................................................... (1,220,488) (3,171,755)
Class C............................................................... (462,503) (759,585)
See accompanying notes.
18
Financial Highlights SECURITY INCOME FUND
DIVERSIFIED INCOME SERIES
Selected data for each share of capital stock outstanding throughout each period
YEAR ENDED
DECEMBER 31,
CLASS A 2004 2003 2002 2001(g) 2000(e)
- ------------------------------------------------------ -------- ------- -------- ------- ------------
PER SHARE DATA
Net asset value, beginning of period $ 4.82 $ 4.90 $ 4.73 $ 4.66 $ 4.52
-------- ------- -------- ------- ------------
Income (loss) from investment operations:
Net investment income (loss)(c) 0.20 0.20 0.24 0.26 0.28
Net gain (loss) on securities (realized and unrealized) (0.04) (0.07) 0.18 0.07 0.14
-------- ------- -------- ------- ------------
Total from investment operations 0.16 0.13 0.42 0.33 0.42
-------- ------- -------- ------- ------------
Less distributions:
Dividends from net investment income (0.22) (0.21) (0.25) (0.26) (0.28)
Distributions from realized gains - - - - -
-------- ------- -------- ------- ------------
Total distributions (0.22) (0.21) (0.25) (0.26) (0.28)
-------- ------- -------- ------- ------------
Net asset value, end of period $ 4.76 $ 4.82 $ 4.90 $ 4.73 $ 4.66
======== ======= ======== ======= ============
TOTAL RETURN(a) 3.37% 2.72% 9.04% 7.33% 9.68%
-------- ------- -------- ------- ------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 75,292 $77,950 $ 68,489 $59,168 $ 63,293
-------- ------- -------- ------- ------------
Ratios to average net assets:
Net investment income (loss) 4.18% 4.17% 4.98% 5.57% 6.18%
Total expenses 0.95% 0.95% 0.95% 0.95% 0.96%
Gross expenses(b) 1.06% 1.04% 1.02% 1.04% 1.19%
Net expenses(d) 0.95% 0.95% 0.95% 0.95% 0.96%
-------- ------- -------- ------- ------------
Portfolio turnover rate 44% 45% 33% 38% 71%
YEAR ENDED
DECEMBER 31,
CLASS B 2004 2003 2002 2001(g) 2000(e)
- ------------------------------------------------------ -------- ------- -------- ------- ------------
PER SHARE DATA
Net asset value, beginning of period $ 4.80 $ 4.88 $ 4.71 $ 4.65 $ 4.51
-------- ------- -------- ------- ------------
Income (loss) from investment operations:
Net investment income (loss)(c) 0.16 0.17 0.20 0.22 0.23
Net gain (loss) on securities (realized and unrealized) (0.04) (0.08) 0.18 0.07 0.16
-------- ------- -------- ------- ------------
Total from investment operations 0.12 0.09 0.38 0.29 0.39
-------- ------- -------- ------- ------------
Less distributions:
Dividends from net investment income (0.18) (0.17) (0.21) (0.23) (0.25)
Distributions from realized gains - - - - -
-------- ------- -------- ------- ------------
Total distributions (0.18) (0.17) (0.21) (0.23) (0.25)
-------- ------- -------- ------- ------------
Net asset value, end of period $ 4.74 $ 4.80 $ 4.88 $ 4.71 $ 4.65
======== ======= ======== ======= ============
TOTAL RETURN(a) 2.60% 1.96% 8.29% 6.36% 8.89%
-------- ------- -------- ------- ------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 14,331 $12,902 $ 20,365 $13,685 $ 13,850
-------- ------- -------- ------- ------------
Ratios to average net assets:
Net investment income (loss) 3.43% 3.43% 4.22% 4.83% 5.40%
Total expenses 1.70% 1.70% 1.70% 1.70% 1.71%
Gross expenses(b) 1.81% 1.79% 1.77% 1.79% 2.02%
Net expenses(d) 1.70% 1.70% 1.70% 1.70% 1.71%
-------- ------- -------- ------- ------------
Portfolio turnover rate 44% 45% 33% 38% 71%
-------- ------- -------- ------- ------------
See accompanying notes.
19
Financial Highlights SECURITY INCOME FUND
DIVERSIFIED INCOME SERIES
Selected data for each share of capital stock outstanding throughout each period
YEAR ENDED,
DECEMBER 31,
CLASS C 2004 2003 2002(h) 2001(g) 2000(f)
- ------------------------------------------------------- -------- ------- -------- ------- ------------
PER SHARE DATA
Net asset value, beginning of period $ 4.79 $ 4.87 $ 4.70 $ 4.65 $ 4.42
-------- ------- -------- ------- ------------
Income (loss) from investment operations:
Net investment income (loss)(c) 0.16 0.17 0.19 0.21 0.21
Net gain (loss) on securities (realized and unrealized) (0.04) (0.07) 0.19 0.08 0.19
-------- ------- -------- ------- ------------
Total from investment operations 0.12 0.10 0.38 0.29 0.40
-------- ------- -------- ------- ------------
Less distributions:
Dividends from net investment income (0.18) (0.18) (0.21) (0.24) (0.17)
Distributions from realized gains - - - - -
-------- ------- -------- ------- ------------
Total distributions (0.18) (0.18) (0.21) (0.24) (0.17)
-------- ------- -------- ------- ------------
Net asset value, end of period $ 4.73 $ 4.79 $ 4.87 $ 4.70 $ 4.65
======== ======= ======== ======= ============
TOTAL RETURN(a) 2.61% 1.98% 8.30% 6.30% 7.88%
-------- ------- -------- ------- ------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 5,219 $ 5,840 $ 4,901 $ 1,760 $ 442
-------- ------- -------- ------- ------------
Ratios to average net assets:
Net investment income (loss) 3.43% 3.42% 4.18% 4.84% 5.32%
Total expenses 1.70% 1.70% 1.70% 1.69% 1.67%
Gross expenses(b) 1.81% 1.80% 1.77% 1.79% 1.84%
Net expenses(d) 1.70% 1.70% 1.70% 1.69% 1.67%
-------- ------- -------- ------- ------------
Portfolio turnover rate 44% 45% 33% 38% 40%
(a) Total return information does not take into account any charges paid at
time of purchase or contingent deferred sales charge paid at time of
redemption.
(b) Gross expense information reflects expense ratios absent fund expense
reductions by the Investment Manager.
(c) Net investment income was computed using the average month-end shares
outstanding throughout the period.
(d) Net expense information reflects expense ratios after expense reductions
or fee waivers and reduction to custodian expenses.
(e) Portfolio turnover calculation excludes the portfolio investments in the
Limited Maturity Series and Corporate Bond Series prior to merger.
(f) Class C shares were initially offered for sale on May 1, 2000. Percentage
amounts for the period, except for total return, have been annualized.
(g) As required, effective January 1, 2001, the Series 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 December 31, 2001 was to decrease net investment
income per share by less than 1/2 of a cent, increase net realized and
unrealized gains and losses by less than 1/2 of a cent and increase the
ratio of net investment income to average net assets from 0.01% to 0.18%.
Per share, ratios and supplemental data for periods prior to January 1,
2001 have not been restated to reflect this change in presentation.
(h) 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.
See accompanying notes.
20
SECURITY INCOME FUND
Manager's Commentary HIGH YIELD SERIES
February 15, 2005 (unaudited)
- --------------------------------------------------------------------------------
[SECURITY FUNDS LOGO]
Advisor, Security Management Company, LLC
[PHOTO OF DAVID TOUSSAINT PORTFOLIO MANAGER]
TO OUR SHAREHOLDERS:
The high yield market's strong momentum from 2003 carried over into 2004 helping
the market to record another year of double-digit returns. The U.S. economic
expansion continued and corporate profits improved which helped push corporate
default rates lower. The high yield market, as measured by the Lehman Brothers
High Yield Index, was able to produce an 11.10% return for the year and was able
to outperform most equity indices for the fifth straight year. The High Yield
Series was up 10.96%.1
CONTINUED STRONG PERFORMANCE IN 2004
For the year, high yield bonds significantly outperformed other fixed income
asset class returns with government bonds at 3.5%, higher quality corporate
bonds at 5.2%, and leveraged bank loans at 4.6%. Despite the interest rate moves
by the Fed during the year, investors continued to have a strong appetite for
risk as they reached for higher yielding investments. The lower quality
CCC-rated bonds, coming of a very strong 2003, continued to do well and after
having a strong fourth quarter, were able to outperform the higher quality
BB-rated bonds by 4.2% for the year.
During the second half of 2004, the High Yield Series moved to an overweight of
lower quality rated bonds to enhance the yield and to take advantage of the
healthy economy and declining corporate default rate. Over the past few years,
lower rated bonds have become a larger part of the market and the four largest
issuers in the high yield index are CCC-rated. The high yield corporate default
rate, after peaking in January 2002 at 11.6%, finished the year at 2.7%, down
from 5.4% in January 2004. The dramatic decline in the default rate has caused
bond yield spreads over Treasuries to fall significantly, thereby causing bond
prices to increase and resulting in higher returns. High yield corporate bond
spreads tightened throughout the year and were within reach of historic lows at
year end.
SEARCH FOR YIELD PROVES SUCCESSFUL
The Series move to overweight lower quality issues helped the series to perform
well. The Series typically invests in higher quality bonds but with the
improving economy, a short-term overweight to lower quality proved to be
successful. One component of this overweight was the Series exposure to the
metals sector. One holding in particular, AK Steel, contributed significantly to
returns by producing a 26% return as steel prices appreciated sharply due to
strong demand from China. Another contributor to performance was the Series
holdings in lower quality companies in the energy sector. As oil prices rose,
companies such as El Paso, an exploration and production company, and Petro Geo,
an oilfield services company, returned 18% and 14%, respectively. Another
successful strategy during the year was to invest in industrial companies such
as Goodyear Tire and Shaw Group. As the economy gained strength, so did these
companies. Finally, Nextel Communications, a holding for the past five years,
continued to perform well in 2004 by returning 18%, capped off with its
announcement near year end that it was being acquired by Sprint Corporation.
CHEMICAL UNDERWEIGHT AND DEFENSIVE HOLDINGS SLIGHTLY UNDERPERFORMED MARKET
The Series biggest detractor from performance was its underweight to the
chemical sector. The rising oil and natural gas prices did not hurt the chemical
companies as they were able to pass on their higher input costs to customers by
raising prices. Another factor dampening performance was the Series investment
in lower yielding securities such as shorter maturity bonds and cash holdings.
The Series was positioned for increases in yields on longer dated Treasuries.
This did not come to fruition so the lower yields on these securities caused
them to underperform the overall market.
OUTLOOK AND STRATEGY FOR 2005
For 2005, the economy is expected to maintain its current growth rate and the
corporate default rate is expected to decline further to below 2% by mid-2005,
which is expected to mark the bottom of the credit cycle. Default rates are
expected to trend upward thereafter, and are forecasted to end 2005 around 2.7%.
Therefore, the search for yield through the lower quality credits is expected to
continue in the short term. However, we believe the amount of lower quality
issuance over the last two years may cause the default rate to increase modestly
into 2006. With this in mind, the Series may move back into higher quality
corporate bonds later in 2005.
Sincerely,
David Toussaint
Portfolio Manager
(1) Performance figures are based on Class A shares and do not reflect
deduction of sales charge or taxes a shareholder would pay on
distributions or redemptions of shares.
21
SECURITY INCOME FUND
Manager's Commentary HIGH YIELD SERIES
February 15, 2005 (unaudited)
PERFORMANCE
HIGH YIELD SERIES VS. LEHMAN BROTHERS HIGH YIELD INDEX
[PERFORMANCE GRAPH]
HIGH YIELD INVESTMENT INFORMATION
DATE value
- ---------- ---------
LEHMAN BROTHERS HIGH YIELD VALUE INDEX
8/5/96 10,000.00
9/30/96 10,351.60
12/31/96 10,713.39
3/31/97 10,833.03
6/30/97 11,336.46
9/30/97 11,851.52
12/31/97 12,081.46
3/31/98 12,487.78
6/30/98 12,625.65
9/30/98 12,050.69
12/31/98 12,307.03
3/31/99 12,533.43
6/30/99 12,566.52
9/30/99 12,386.91
12/31/99 12,589.80
3/31/00 12,295.73
06/30/00 12,437.20
09/30/00 12,507.18
12/31/00 11,851.92
3/31/01 12,604.41
6/30/01 12,317.36
9/30/01 11,796.11
12/31/01 12,477.29
3/31/02 12,687.30
6/30/02 11,878.19
9/30/02 11,529.80
12/31/02 12,306.90
3/31/03 13,243.88
6/30/03 14,581.95
9/30/03 14,985.63
12/31/03 15,871.49
3/31/04 16,243.91
6/30/04 16,087.61
9/30/04 16,867.08
12/31/04 17,639.12
DATE value
- ---------- ---------
HIGH YIELD SERIES
8/6/1996 9,525.00
9/30/1996 9,781.13
12/31/1996 10,019.35
3/31/1997 10,194.64
6/30/1997 10,599.53
9/30/1997 11,003.32
12/31/1997 11,278.65
3/31/1998 11,641.71
6/30/1998 11,747.59
9/30/1998 11,547.45
12/31/1998 11,835.90
3/31/1999 11,951.34
6/30/1999 11,911.59
9/30/1999 11,778.78
12/31/1999 11,770.53
3/31/2000 11,539.45
6/30/2000 11,534.45
9/29/2000 11,686.67
12/29/2000 11,408.90
3/30/2001 11,935.96
6/29/2001 11,704.42
9/28/2001 11,206.81
12/31/2001 11,966.49
3/28/2002 12,272.56
6/28/2002 11,738.61
9/30/2002 11,178.30
12/31/2002 11,764.15
3/31/2003 12,300.92
6/30/2003 13,392.56
9/30/2003 13,729.67
12/31/2003 14,307.86
3/31/2004 14,653.42
6/30/2004 14,531.64
9/30/2004 15,105.25
12/31/2004 15,874.54
High Yield Series $15,875
Lehman Brothers High Yield Index $17,639
$10,000 OVER 10 YEARS
This chart assumes a $10,000 investment in Class A shares of High Yield Series
on August 15, 1996 (date of inception), and reflects deduction of the 4.75%
sales load. The chart does not reflect the deduction of taxes that a shareholder
would pay on distributions or redemption of fund shares.
PORTFOLIO COMPOSITION BY QUALITY RATING (BASED ON STANDARD AND POOR'S RATINGS)
BBB 0.97%
BB 21.58
B 49.93
CCC 12.46
CC 1.56
NR 6.60
Preferred Stocks 0.50
Common Stocks 3.10
Cash & Other assets, less liabilities 3.30
AVERAGE ANNUAL RETURNS
PERIODS ENDED 12-31-04 SINCE
1 YEAR 5 YEARS INCEPTION
------ ------- ----------
A Shares 5.66% 5.17% 5.68%
B Shares 5.09% 5.06% 5.49%
C Shares 9.12% N/A 6.37%
(5-1-00)
- ----------------
The performance data above represents past performance which is not predictive
of future results. For Class A shares these figures reflect deduction of the
maximum sales charge of 4.75%. For Class B shares the figures reflect deduction
of the maximum contingent deferred sales charge, ranging from 5% in the first
year to 0% in the sixth and following years, and 1% for Class C shares. 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
applicable taxes were deducted. Fee waivers and/or reimbursements reduced
expenses of the Series and in the absence of such waivers, the performance
quoted would be reduced. The investment return and principal value of an
investment will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
See accompanying notes.
22
SECURITY INCOME FUND
Manager's Commentary HIGH YIELD SERIES
February 15, 2005 (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, July 1, 2004 - December 31, 2004.
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 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
07-01-04 12-31-04(1) PERIOD(2)
------------- ------------- -------------
High Yield Series -
Class A
Actual $1,000.00 $1,092.50 $ 8.15
Hypothetical 1,000.00 1,017.34 7.86
--------- --------- ---------
High Yield Series -
Class B
Actual 1,000.00 1,089.00 12.08
Hypothetical 1,000.00 1,013.57 11.64
--------- --------- ---------
High Yield Series -
Class C
Actual 1,000.00 1,088.40 12.07
Hypothetical 1,000.00 1,013.57 11.64
(1) The actual ending account value is based on the actual total return of the
Series for the period July 1, 2004 to December 31, 2004 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 July 1, 2004 to December 31, 2004 was 9.25%, 8.90% and 8.84%,
for Class A, B and C class shares, respectively.
(2) Expenses are equal to the Series annualized expense ratio (1.55%, 2.30%
and 2.30% for Class A, B and C class shares, respectively) multiplied by
the average account value over the period, multiplied by 184/366 (to
reflect the one-half year period).
23
Schedule of Investments SECURITY INCOME FUND
December 31, 2004 HIGH YIELD SERIES
PRINCIPAL
AMOUNT OR
NUMBER MARKET
OF SHARES VALUE
CONVERTIBLE BONDS - 7.8%
AIRLINES - 2.2%
Continental Airlines, Inc.,
4.50% - 2007 $ 1,175,000 $ 984,062
----------
AUTOMOTIVE - 0.8%
Sonic Automotive, Inc., 5.25% - 2009 350,000 348,250
----------
CONSTRUCTION MACHINERY - 1.3%
United Rentals, Inc., 1.875% - 2023 575,000 577,875
----------
ELECTRIC UTILITIES - 2.2%
AES Corporation, 4.50% - 2005 950,000 954,750
----------
MEDIA - CABLE - 0.7%
Mediacom Communications Corporation,
5.25% - 2006 325,000 320,125
----------
TELECOMMUNICATIONS - WIRELESS - 0.6%
Nextel Communications, Inc.,
5.25% - 2010 250,000 255,938
----------
TOTAL CONVERTIBLE BONDS
(cost $ 3,279,364) 3,441,000
----------
PREFERRED STOCK - 0.5%
PUBLISHING - 0.5%
Primedia, Inc. (Cl.D) 2,100 210,000
----------
TOTAL PREFERRED STOCK
(cost $ 129,862) 210,000
----------
COMMON STOCKS - 3.1%
HEALTH CARE FACILITIES - 1.1%
Service Corporation International* 63,947 476,405
----------
REAL ESTATE INVESTMENT TRUSTS - 1.3%
Bimini Mortgage Management, Inc.* 15,250 244,915
HomeBanc Corporation* 32,700 316,536
----------
561,451
----------
WIRELESS TELECOMMUNICATION SERVICE - 0.7%
Nextel Communications, Inc.* 11,000 330,000
----------
TOTAL COMMON STOCKS
(cost $ 1,194,813) 1,367,856
----------
CORPORATE BONDS - 85.3%
AEROSPACE & DEFENSE - 3.2%
BE Aerospace, Inc., 8.875% - 2011 375,000 391,875
Esterline Technologies Corporation,
7.75% - 2013 350,000 382,375
K&F Acquisition, Inc., 7.75% - 2014(4) 100,000 103,250
Sequa Corporation, 9.00% - 2009 125,000 140,938
Vought Aircraft Industries, Inc.,
8.00% - 2011 400,000 389,000
----------
1,407,438
----------
AIRLINES - 1.6%
Delta Air Lines, Inc., 7.70% - 2005 650,000 601,250
Pegasus Aviation Lease Securitization,
8.42% - 2030(5) 244,615 -
United Air Lines, Inc., 7.73% - 2010(3) 99,974 88,857
----------
690,107
----------
AUTOMOTIVE - 1.8%
Adesa, Inc., 7.625% - 2012 250,000 263,750
Allied Holdings, Inc., 8.625% - 2007 225,000 180,281
Group 1 Automotive, Inc., 8.25% - 2013 100,000 106,250
Lear Corporation, 7.96% - 2005 85,000 86,357
TRW Automotive, Inc., 9.375% - 2013 134,000 155,440
----------
792,078
----------
BANKING - 0.6%
E*Trade Financial Corporation,
8.00% - 2011(4) 200,000 215,000
FCB/NC Capital Trust I, 8.05% - 2028 50,000 51,084
----------
266,084
----------
BUILDING MATERIALS - 2.9%
Building Materials Corporation:
7.75% - 2005 209,000 212,657
8.00% - 2007 450,000 465,750
8.00% - 2008 175,000 180,250
Goodman Global Holdings,
7.875% - 2012(4) 200,000 198,000
THL Buildco, Inc., 8.50% - 2014(4) 200,000 209,000
----------
1,265,657
----------
CHEMICALS - 1.1%
ISP Holdings, Inc., 10.625% - 2009 200,000 221,500
United Agri Products, 8.25% - 2011(4) 226,000 242,385
----------
463,885
----------
CONSTRUCTION MACHINERY - 3.2%
Case New Holland, Inc., 9.25% - 2011(4) 350,000 389,375
Navistar International Corporation,
7.50% - 2011 250,000 268,125
Shaw Group, Inc., 10.75% - 2010 700,000 771,750
----------
1,429,250
----------
CONSUMER PRODUCTS - 1.0%
Sealy Mattress Company, 8.25% - 2014 250,000 265,000
WH Holdings/WH Capital, 9.50% - 2011 150,000 165,000
----------
430,000
----------
ELECTRIC - 3.1%
CMS Energy Corporation, 7.50% - 2009 175,000 186,375
Calpine Corporation, 8.75% - 2007 125,000 109,375
East Coast Power LLC:
6.737% - 2008 29,835 31,159
7.066% - 2012 56,347 60,360
Edison Mission Energy, 10.00% - 2008 450,000 516,375
NRG Energy, Inc., 8.00% - 2013(4) 250,000 272,500
Reliant Energy, Inc., 6.75% - 2014 100,000 99,375
Texas Genco LLC, 6.875% - 2014(4) 100,000 103,375
----------
1,378,894
----------
See accompanying notes.
24
Schedule of Investments SECURITY INCOME FUND
December 31, 2004 HIGH YIELD SERIES
PRINCIPAL MARKET
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
ENERGY - INDEPENDENT - 4.0%
El Paso Production Holding Company,
7.75% - 2013 $ 250,000 $ 261,875
Houston Exploration, 7.00% - 2013 50,000 53,000
Magnum Hunter Resources, Inc.,
9.60% - 2012 532,000 603,820
Range Resources Corporation,
7.375% - 2013 175,000 187,688
Stone Energy Corporation,
6.75% - 2014(4) 100,000 99,750
TransMontaigne, Inc., 9.125% - 2010 500,000 542,500
----------
1,748,633
----------
ENERGY - INTEGRATED - 0.4%
Petrobras International Finance Company:
9.00% - 2008(1) 75,000 88,313
9.125% - 2013 75,000 85,125
----------
173,438
----------
ENTERTAINMENT - 3.1%
Blockbuster, Inc., 9.00% - 2012(4) 200,000 197,500
Cinemark USA, Inc., 9.00% - 2013 350,000 399,437
Marquee Holdings, Inc.,
0.00% - 2014(1,4) 750,000 506,250
Speedway Motorsports, Inc.,
6.75% - 2013 250,000 263,125
----------
1,366,312
----------
ENVIRONMENTAL - 1.9%
Allied Waste North America:
8.875% - 2008 150,000 160,500
6.50% - 2010 500,000 490,000
Casella Waste Systems, Inc.,
9.75% - 2013 100,000 110,500
Great Lakes Dredge & Dock Company,
7.75% - 2013 100,000 91,000
----------
852,000
----------
FINANCIAL - OTHER - 0.7%
Arch Western Finance, 6.75% - 2013 300,000 309,750
----------
FOOD & BEVERAGE - 6.7%
ASG Consolidated LLC/Finance, Inc.,
0.00% - 2011(1,4) 800,000 510,000
Canandaigua Brands, Inc.,
8.625% - 2006 241,000 257,267
Dean Foods Company, 8.15% - 2007 650,000 708,500
Dole Foods Company, Inc.:
7.25% - 2010 350,000 359,625
8.875% - 2011 50,000 54,375
Land O' Lakes, Inc., 8.75% - 2011 725,000 721,375
Pinnacle Foods Holding, Inc.,
8.25% - 2013(4) 375,000 357,188
----------
2,968,330
----------
GAMING - 5.1%
American Casino & Entertainment,
7.85% - 2012 200,000 212,500
Harrah's Operating Company, Inc.,
7.875% - 2005 525,000 546,000
MGM Grand, Inc., 6.95% - 2005 125,000 125,313
MGM Mirage, Inc., 6.75% - 2012 375,000 394,687
Mandalay Resort Group, 6.50% - 2009 200,000 211,000
Mirage Resorts, Inc., 6.625% - 2005 125,000 125,312
Mohegan Tribal Gaming, 6.375% - 2009 250,000 256,875
Park Place Entertainment, 7.875% - 2005 175,000 181,563
Station Casinos, Inc., 6.00% - 2012 200,000 203,750
----------
2,257,000
----------
HEALTH CARE - 5.4%
Alderwoods Group, Inc., 7.75% - 2012(4) 100,000 108,000
Fisher Scientific International, Inc.,
8.00% - 2013 500,000 567,500
HCA, Inc., 6.375% - 2015 200,000 200,810
Hanger Orthopedic Group,
10.375% - 2009 600,000 619,500
Healthsouth Corporation, 8.50% - 2008 225,000 233,437
Inverness Medical Innovations, Inc.,
8.75% - 2012(4) 250,000 261,250
Rural/Metro Corporation,
7.875% - 2008 100,000 96,000
Stewart Enterprises, Inc.,
10.75% - 2008 250,000 270,625
----------
2,357,122
----------
INDUSTRIAL - OTHER - 1.9%
Coleman Cable, Inc., 9.875% - 2012(4) 100,000 106,250
Corrections Corporation of America,
7.50% - 2011 50,000 53,437
Iron Mountain, Inc.:
8.25% - 2011 250,000 257,812
7.75% - 2015 25,000 25,375
Usec, Inc., 6.625% - 2006 400,000 406,000
----------
848,874
----------
INSURANCE - LIFE - 0.2%
Genamerica Capital, Inc., 8.525% - 2027(4) 75,000 83,962
----------
INSURANCE - PROPERTY & CASUALTY - 0.4%
Fairfax Financial Holdings, 7.75% - 2012 175,000 178,500
----------
LODGING - 0.9%
Starwood Hotels & Resorts,
7.375% - 2007(1) 150,000 159,938
Sun International Hotels,
8.875% - 2011 200,000 218,500
----------
378,438
----------
See accompanying notes.
25
Schedule of Investments SECURITY INCOME FUND
December 31, 2004 HIGH YIELD SERIES
PRINCIPAL MARKET
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
MEDIA - CABLE - 2.8%
CSC Holdings, Inc.:
7.25% - 2008 $ 125,000 $ 131,875
6.75% - 2012(4) 175,000 180,250
Cablevision Systems Corporation,
6.669% - 2009(2,4) 500,000 530,000
Charter Communications Holdings, Inc., LLC:
8.625% - 2009 100,000 86,750
11.125% - 2011 200,000 181,000
Shaw Communications, Inc.,
7.25% - 2011 125,000 137,813
----------
1,247,688
----------
MEDIA - NONCABLE - 2.9%
Entercom Radio Capital, 7.625% - 2014 75,000 80,719
Intelsat, Ltd., 7.625% - 2012 750,000 729,375
RH Donnelley Finance Corporation:
8.875% - 2010 200,000 223,000
10.875% - 2012 125,000 148,438
USA Networks, Inc., 6.75% - 2005 75,000 77,078
----------
1,258,610
----------
METALS & MINING - 2.7%
AK Steel Corporation, 7.875% - 2009 775,000 789,531
Asarco, Inc., 7.875% - 2013 100,000 85,000
Asia Aluminum Holdings, Ltd.,
8.00% - 2011(4) 200,000 202,000
Bulong Operations, 12.50% - 2008(3,5) 75,000 -
Imco Recycling, 9.00% - 2014(4) 100,000 104,000
----------
1,180,531
----------
OIL FIELD SERVICES - 5.5%
BRL Universal Equipment,
8.875% - 2008 525,000 551,906
Hanover Compressor Company,
9.00% - 2014 100,000 111,250
Key Energy Services, Inc.,
8.375% - 2008 200,000 209,500
North America Energy Partner,
8.75% - 2011 150,000 153,000
Parker Drilling Company:
10.125% - 2009 550,000 577,500
7.15% - 2010(2,4) 325,000 340,438
Petroleum Geo-Services:
8.00% - 2006 150,000 153,000
10.00% - 2010 300,000 342,000
----------
2,438,594
----------
PACKAGING - 4.2%
Ball Corporation, 6.875% - 2012 500,000 537,500
Owens-Brockway Glass Containers,
7.75% - 2011 50,000 54,125
Owens-Illinois, Inc., 8.10% - 2007 675,000 718,875
Solo Cup Company, 8.50% - 2014 500,000 520,000
----------
1,830,500
----------
PAPER - 1.9%
Appleton Papers, Inc., 8.125% - 2011 200,000 215,500
Boise Cascade, LLC:
5.005% - 2012(2,4) 100,000 103,750
7.125% - 2014(4) 100,000 105,750
Sino-Forest Corporation,
9.125% - 2011(4) 375,000 409,688
----------
834,688
----------
PHARMACEUTICALS - 0.8%
AmerisourceBergen Corporation,
8.125% - 2008 200,000 222,500
Bergen Brunswig Corporation,
7.25% - 2005 115,000 116,725
----------
339,225
----------
PIPELINES - 1.3%
Northwest Pipelines Corporation,
8.125% - 2010 100,000 110,625
Sonat, Inc., 7.625% - 2011 450,000 465,750
----------
576,375
----------
REFINING - 1.0%
Citgo Petroleum Corporation,
6.00% - 2011(4) 100,000 99,500
Crown Central Petroleum Corporation,
10.875% - 2005 140,000 133,000
Frontier Oil Corporation,
6.625% - 2011(4) 200,000 204,000
----------
436,500
----------
RETAILERS - 0.0%
Ames Department Stores, Inc.,
10.00% - 2006(3,5) 200,000 -
----------
SERVICES - 0.5%
American Eco Corporation,
9.625% - 2008(3,5) 125,000 -
MasTec, Inc., 7.75% - 2008 225,000 218,812
----------
218,812
----------
SUPERMARKETS - 0.5%
Fleming Companies, Inc.,
9.875% - 2012(3) 100,000 2,375
Roundy's, Inc., 8.875% - 2012 200,000 218,500
----------
220,875
----------
TECHNOLOGY - 3.0%
Advanced Micro Devices, 7.75% - 2012(4) 550,000 572,687
Worldspan LP, 9.625% - 2011 750,000 746,250
----------
1,318,937
----------
See accompanying notes.
26
Schedule of Investments SECURITY INCOME FUND
December 31, 2004 HIGH YIELD SERIES
PRINCIPAL MARKET
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
TELECOMMUNICATIONS - WIRELESS - 2.6%
IWO Escrow Company,
0.00% - 2015(1,4) $ 250,000 $ 155,000
Telemig Celular, 8.75% - 2009(4) 500,000 518,750
Ubiquitel Operating Company,
9.875% - 2011(4) 400,000 449,000
-----------
1,122,750
-----------
TELECOMMUNICATIONS - WIRELINES - 3.5%
Exodus Communications, Inc.,
11.625% - 2010(3,5) 147,512 -
LCI International, Inc., 7.25% - 2007 1,475,000 1,434,437
Qwest Corporation, 7.875% - 2011(4) 100,000 108,500
-----------
1,542,937
-----------
TEXTILE - 0.6%
Invista, 9.25% - 2012(4) 250,000 278,750
-----------
TOBACCO - 0.1%
Dimon, Inc., 7.75% - 2013 50,000 52,500
-----------
TRANSPORTATION SERVICES - 2.2%
Overseas Shipholding Group, Inc.,
8.25% - 2013 500,000 556,250
Stena AB:
9.625% - 2012 75,000 84,750
7.50% - 2013 250,000 261,875
Teekay Shipping Corporation,
8.32% - 2008 80,000 81,300
-----------
984,175
-----------
TOTAL CORPORATE BONDS
(cost $36,544,085) 37,528,199
-----------
REPURCHASE AGREEMENT - 2.1%
United Missouri Bank, 1.74%, dated 12-31-04,
matures 1-03-04; repurchase amount
of $ 916,133 (Collateralized by FHLMC,
0.00%, 1-14-05 with a value of
$935,115) 916,000 916,000
-----------
TOTAL REPURCHASE AGREEMENT
(cost $916,000) 916,000
-----------
TOTAL INVESTMENTS - 98.8%
(cost $42,064,124) 43,463,055
CASH & OTHER ASSETS, LESS LIABILITIES - 1.2% 541,463
-----------
TOTAL NET ASSETS - 100.0% $44,004,518
===========
For federal income tax purposes, the identified cost of investments owned at
December 31, 2004 was $41,855,919.
*Non-income producing security
(1) Security is a step bond. Rate indicated is rate effective at December 31,
2004.
(2) Variable rate security. Rate indicated is rate effective at December 31,
2004.
(3) Security is in default
(4) Security is a 144A Series. The total market value of 144A securities is
$8,325,097 (cost $7,944,834), or 18.9% of total net assets.
(5) Security is fair valued by the Board of Directors. The total market value
of fair valued securities amounts to $0, or 0.0% of total net assets.
See accompanying notes.
27
SECURITY INCOME FUND
HIGH YIELD SERIES
Statement of Assets and Liabilities
December 31, 2004
ASSETS:
Investments, at value(1).......................... $ 43,463,055
Cash ............................................. 840
Receivables:
Fund shares sold ............................ 14,601
Interest .................................... 741,076
Dividends ................................... 5,559
Prepaid expenses ................................. 16,829
-------------
Total assets ..................................... 44,241,960
-------------
LIABILITIES:
Payable for:
Securities purchased ........................ 147,715
Fund shares redeemed ........................ 16,791
Management fees ............................. 22,075
Custodian fees ............................. 474
Transfer agent and administration fees ...... 15,960
Professional fees ........................... 7,120
12b-1 distribution plan fees ................ 26,533
Other ....................................... 774
-------------
Total liabilities ................................ 237,442
-------------
NET ASSETS ....................................... $ 44,004,518
=============
NET ASSETS CONSIST OF:
Paid in capital .................................. $ 43,876,963
Accumulated undistributed net investment
income ...................................... 99,105
Accumulated net realized loss
on sales of investments ..................... (1,370,481)
Net unrealized appreciation in value
of investments .............................. 1,398,931
-------------
Net assets ...................................... $ 44,004,518
=============
CLASS A:
Capital shares outstanding
(unlimited number of shares authorized) ..... 2,628,880
Net assets ....................................... $ 33,393,484
Net asset value and redemption price
per share ................................... $ 12.70
=============
Offering price per share (net asset value
divided by 95.25%) .......................... $ 13.33
=============
CLASS B:
Capital shares outstanding
(unlimited number of shares authorized) ..... 666,653
Net assets ....................................... $ 8,436,734
Net asset value, offering and redemption
price per share (excluding any applicable
contingent deferred sales charge) ........... $ 12.66
=============
CLASS C:
Capital shares outstanding
(unlimited number of shares authorized) ..... 170,967
Net assets ....................................... $ 2,174,300
Net asset value, offering and redemption
price per share (excluding any applicable
contingent deferred sales charge) ........... $ 12.72
=============
(1) Investments, at cost ......................... $ 42,064,124
Statement of Operations
For the Year Ended December 31, 2004
INVESTMENT INCOME:
Dividends ................................... $ 37,016
Interest .................................... 2,922,227
-------------
Total investment income ..................... 2,959,243
-------------
EXPENSES:
Management fees ............................. 235,791
Custodian fees .............................. 6,858
Transfer/maintenance fees ................... 144,425
Administration fees ......................... 42,987
Directors' fees ............................ 1,420
Professional fees .......................... 10,671
Reports to shareholders ..................... 3,805
Registration fees ........................... 32,103
Other expenses .............................. 4,793
12b-1 distribution plan fees - Class A ..... 72,307
12b-1 distribution plan fees - Class B ..... 84,347
12b-1 distribution plan fees - Class C ..... 19,410
-------------
Total expenses .............................. 658,917
Less: Earnings credits ...................... (285)
-------------
Net expenses ............................... 658,632
-------------
Net investment income ....................... 2,300,611
-------------
NET REALIZED AND UNREALIZED GAIN:
Net realized gain during the period on:
Investments ................................. 727,249
-------------
Realized gain ............................... 727,249
-------------
Net change in unrealized appreciation
during the period on:
Investments ................................. 1,079,012
-------------
Unrealized appreciation ..................... 1,079,012
-------------
Net gain .................................... 1,806,261
-------------
Net increase in net assets
resulting from operations ................ $ 4,106,872
=============
See accompanying notes.
28
Statement of Changes in Net Assets SECURITY INCOME FUND
HIGH YIELD SERIES
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2004 2003
------------- -----------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS:
Net investment income ................................................................... $ 2,300,611 $ 1,153,374
Net realized gain (loss) during the period on investments ............................... 727,249 (508,409)
Net change in unrealized appreciation during the period on investments .................. 1,079,012 2,674,793
------------- -----------
Net increase in net assets resulting from operations .................................... 4,106,872 3,319,758
------------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A ............................................................................ (1,746,511) (668,146)
Class B ............................................................................ (439,760) (350,630)
Class C ............................................................................ (101,205) (84,765)
Return of capital
Class A ............................................................................ (45,842) -
Class B ............................................................................ (15,118) -
Class C ............................................................................ (3,316) -
------------- -----------
Total distributions to shareholders ..................................................... (2,351,752) (1,103,541)
------------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares
Class A ............................................................................ 17,655,634 28,833,035
Class B ............................................................................ 2,913,685 4,561,756
Class C ............................................................................ 563,465 2,090,841
Distributions reinvested
Class A ............................................................................ 1,756,690 596,524
Class B ............................................................................ 424,041 325,307
Class C ............................................................................ 79,970 66,819
Cost of shares redeemed
Class A ............................................................................ (13,124,177) (10,914,814)
Class B ............................................................................ (3,568,699) (1,792,407)
Class C ............................................................................ (408,828) (1,005,027)
------------- -----------
Net increase from capital share transactions ............................................ 6,291,781 22,762,034
------------- -----------
Net increase in net assets .............................................................. 8,046,901 24,978,251
------------- -----------
NET ASSETS:
Beginning of period ..................................................................... 35,957,617 10,979,366
------------- -----------
End of period ........................................................................... $ 44,004,518 $35,957,617
============= ===========
Accumulated undistributed net investment income at end of period ........................ $ 99,105 $ 78,328
============= ===========
CAPITAL SHARE ACTIVITY:
Shares sold
Class A ............................................................................ 1,440,453 2,442,224
Class B ............................................................................ 238,674 395,141
Class C ............................................................................ 45,679 185,262
Shares reinvested
Class A ............................................................................ 143,599 51,287
Class B ............................................................................ 34,790 28,429
Class C ............................................................................ 6,527 5,795
Shares redeemed
Class A ............................................................................ (1,072,501) (940,096)
Class B ............................................................................ (292,701) (156,253)
Class C ............................................................................ (33,593) (87,479)
See accompanying notes.
29
Financial Highlights SECURITY INCOME FUND
HIGH YIELD SERIES
Selected data for each share of capital stock outstanding throughout each period
YEAR ENDED,
DECEMBER 31,
CLASS A 2004 2003 2002 2001(f) 2000
- ---------------------------------------------------------- ----------- ------- ------- -------- -------------
PER SHARE DATA
Net asset value, beginning of period $ 12.17 $ 10.66 $ 11.68 $ 12.14 $ 13.65
--------- ------- ------- -------- ---------
Income (loss) from investment operations:
Net investment income (loss)(c) 0.73 0.70 0.81 1.06 1.10
Net gain (loss) on securities (realized and unrealized) 0.55 1.54 (1.00) (0.47) (1.50)
--------- ------- ------- -------- ---------
Total from investment operations 1.28 2.24 (0.19) 0.59 (0.40)
--------- ------- ------- -------- ---------
Less distributions:
Dividends from net investment income (0.73) (0.73) (0.83) (1.05) (1.11)
Distributions from realized gains - - - - -
Return of capital (0.02) - - - -
--------- ------- ------- -------- ---------
Total distributions (0.75) (0.73) (0.83) (1.05) (1.11)
--------- ------- ------- -------- ---------
Net asset value, end of period $ 12.70 $ 12.17 $ 10.66 $ 11.68 $ 12.14
========= ======= ======= ======== =========
TOTAL RETURN(a) 10.96% 21.65% (1.66%) 4.93% (3.03%)
--------- ------- ------- -------- ---------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 33,393 $25,777 $ 6,009 $ 5,919 $ 6,612
--------- ------- ------- -------- ---------
Ratios to average net assets:
Net investment income (loss) 6.05% 6.40% 7.31% 8.80% 8.62%
Total expenses 1.48% 1.28% 1.48% 1.09% 0.79%
Gross expenses(b) 1.48% 1.28% 1.48% 1.42% 1.39%
Net expenses(d) 1.48% 1.27% 1.48% 1.09% 0.79%
--------- ------- ------- -------- ---------
Portfolio turnover rate 73% 61% 80% 65% 28%
YEAR ENDED,
DECEMBER 31,
CLASS B 2004 2003 2002 2001(f) 2000
- --------------------------------------------------------- ----------- ------- ------- -------- -------------
PER SHARE DATA
Net asset value, beginning of period $ 12.14 $ 10.63 $ 11.65 $ 12.11 $ 13.62
----------- ------- ------- -------- ---------
Income (loss) from investment operations:
Net investment income (loss)(c) 0.65 0.67 0.73 0.96 1.00
Net gain (loss) on securities (realized and unrealized) 0.53 1.48 (1.01) (0.47) (1.50)
----------- ------- ------- -------- ---------
Total from investment operations 1.18 2.15 (0.28) 0.49 (0.50)
----------- ------- ------- -------- ---------
Less distributions:
Dividends from net investment income (0.64) (0.64) (0.74) (0.95) (1.01)
Distributions from realized gains - - - - -
Return of capital (0.02) - - - -
----------- ------- ------- -------- ---------
Total distributions (0.66) (0.64) (0.74) (0.95) (1.01)
----------- ------- ------- -------- ---------
Net asset value, end of period $ 12.66 $ 12.14 $ 10.63 $ 11.65 $ 12.11
=========== ======= ======= ======== =========
TOTAL RETURN (a) 10.09% 20.82% (2.40%) 4.08% (3.77%)
----------- ------- ------- -------- ---------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 8,437 $ 8,324 $ 4,450 $ 4,231 $ 3,914
----------- ------- ------- -------- ---------
Ratios to average net assets:
Net investment income (loss) 5.31% 5.92% 6.56% 7.98% 7.77%
Total expenses 2.22% 2.08% 2.23% 1.90% 1.51%
Gross expenses(b) 2.22% 2.08% 2.23% 2.21% 1.84%
Net expenses(d) 2.22% 2.08% 2.23% 1.90% 1.51%
----------- ------- ------- -------- ---------
Portfolio turnover rate 73% 61% 80% 65% 28%
----------- ------- ------- -------- ---------
See accompanying notes.
30
Financial Highlights SECURITY INCOME FUND
HIGH YIELD SERIES
Selected data for each share of capital stock outstanding throughout each period
YEAR ENDED
DECEMBER 31,
CLASS C 2004 2003 2002 2001(f) 2000(e)
- ------------------------------------------------------- ---------- ------- -------- ---------- ------------
PER SHARE DATA
Net asset value, beginning of period $ 12.19 $ 10.67 $ 11.69 $ 12.16 $ 12.90
---------- ------- -------- -------- ---------
Income (loss) from investment operations:
Net investment income (loss)(c) 0.65 0.66 0.73 0.81 0.62
Net gain (loss) on securities (realized and unrealized) 0.54 1.50 (1.01) (0.33) (0.69)
---------- ------- -------- -------- ---------
Total from investment operations 1.19 2.16 (0.28) 0.48 (0.07)
---------- ------- -------- -------- ---------
Less distributions:
Dividends from net investment income (0.64) (0.64) (0.74) (0.95) (0.67)
Distributions from realized gains - - - - -
Return of capital (0.02) - - - -
---------- ------- -------- -------- ---------
Total distributions (0.66) (0.64) (0.74) (0.95) (0.67)
---------- ------- -------- -------- ---------
Net asset value, end of period $ 12.72 $ 12.19 $ 10.67 $ 11.69 $ 12.16
========== ======= ======== ======== =========
TOTAL RETURN(a) 10.12% 20.82% (2.39%) 4.04% (1.24%)
---------- ------- -------- -------- ---------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 2,174 $ 1,857 $ 520 $ 368 $ 50
---------- ------- -------- -------- ---------
Ratios to average net assets:
Net investment income (loss) 5.31% 5.85% 6.60% 7.60% 8.05%
Total expenses 2.22% 2.08% 2.24% 2.11% 1.58%
Gross expenses(b) 2.22% 2.08% 2.24% 2.25% 2.02%
Net expenses(d) 2.22% 2.07% 2.24% 2.11% 1.58%
---------- ------- -------- -------- ---------
Portfolio turnover rate 73% 61% 80% 65% 39%
(a) Total return information does not take into account any charges paid at
time of purchase or contingent deferred sales charge paid at time of
redemption.
(b) Gross expense information reflects expense ratios absent fund expense
reductions by the Investment Manager.
(c) Net investment income was computed using the average month-end shares
outstanding throughout the period.
(d) Net expense information reflects expense ratios after expense reductions
or fee waivers and reduction to custodian expenses.
(e) Class C shares were initially offered for sale on May 1, 2000. Percentage
amounts for the period, except for total return, have been annualized.
(f) As required, effective January 1, 2001, the Series 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 December 31, 2001 was to decrease net investment
income per share by less than 1/2 of a cent, increase net realized and
unrealized gains and losses by less than 1/2 of a cent and increase the
ratio of net investment income to average net assets from 0.01% to 0.18%.
Per share, ratios and supplemental data for periods prior to January 1,
2001 have not been restated to reflect this change in presentation.
See accompanying notes.
31
SECURITY INCOME FUND
Managers' Commentary INCOME OPPORTUNITY SERIES
February 15, 2005 (unaudited)
Subadvisor, Four Corners
Capital Management, LLC
[FOUR CORNERS CAPITAL MANAGEMENT LOGO]
[PHOTO OF MICHAEL P. MCADAMS] [PHOTO OF ROBERT I. BERNSTEIN]
Michael P. McAdams Robert I. Bernstein
Portfolio Manager Portfolio Manager
TO OUR SHAREHOLDERS:
The Income Opportunity Series (the "Series") was launched on March 31, 2004. The
investment objective of the Series is to seek a high level of current income.
The Series seeks to meet this objective by investing primarily in U.S.
dollar-denominated floating rate senior secured corporate loans ("Senior
Loans.") Senior Loans are typically used to finance, in part, leveraged
buy-outs, recapitalizations, mergers, acquisitions, stock repurchases as well as
fund corporate growth. While the Series investments are typically rated below
investment grade by credit rating agencies, they benefit from being secured by
collateral and holding one of the most senior positions within a borrower's
capital structure. Senior loan issuers also pay a floating rate of interest
based on a spread over bank corporate lending rates, which helps minimize the
impact of interest rate fluctuations. Thus, income received by the Series is,
over time, expected to rise and fall with increases and decreases in the general
level of short-term interest rates.
PERFORMANCE REVIEW
During the nine months ended December 31, 2004, the Series Class A shares
returned 3.46%(1). In comparison, the Series benchmark, the S&P/LSTA Leveraged
Loan Index returned 3.44%(2). We believe the performance difference between the
Series and the index is attributable to an active portfolio management, which
seeks to systematically minimize risk across the portfolio while remaining
focused on opportunistically recognizing gains as they become available. In
addition to paying competitive current monthly distributions during the period
from commencement of operations until December 31, 2004, the Series NAV rose
from $10.04 to $10.11.
MARKET OVERVIEW
2004 was a dynamic year for the Senior Loan market. Following is a review of the
two developments that most influenced the performance of the Series since its
inception:
- - Historically Low Default Rates. The recession of the early 2000s
contributed to an increase in default rates for Senior Loans to a record
7%. But, with the benefit of several years of economic recovery, 2004 saw
the 12-month default rate for Senior Loans fall to 1.1%(3). This
significant decline in market defaults benefited the Series by reducing
the likelihood of defaults and price declines in portfolio holdings.
However, reduced concern for significant near-term defaults by market
participants allowed borrowers to raise debt at more favorable terms and
contributed to the lowering of credit spreads by approximately .75% over
the period.
- - Short-Term Interest Rates Increased Sharply. Commensurate with economic
recovery, the Federal Reserve, which had lowered the Fed Funds Target Rate
over the prior four years to a 46-year low of 1.00% as of May of 2003,
systematically raised short-term interest rates to offset the threat of
inflation. During 2004, the Fed raised rates by 0.25% on five occasions -
collectively moving the target rate from 1.00% at mid-year to 2.25% by
year-end. In the short run, we have yet to see the benefit of all of these
rate increases in Senior Loan yields due to the aforementioned spread
declines.
CREDIT SELECTION AND PORTFOLIO CONSTRUCTION
At the core of Four Corners' investment philosophy is our belief that long-term
outperformance in Senior Loans is best achieved by minimizing losers rather than
picking winners or stretching credit standards for yield. In deciding which
loans we choose for the Series, we typically consider macroeconomic and
industry-specific factors as well as the results of in-depth fundamental credit
research on each loan issuer. As part of the issuer analysis, we assess the
likelihood of a loan's default and the value of collateral underlying the loan;
that is, we practice traditional "second way-out" investing. Our investment
process also focuses on the market liquidity of each loan. In constructing a
portfolio from the universe of available opportunities, portfolio
diversification is considered critical to managing credit risk. As of the Series
fiscal year-end, there were 73 issuers in 29 industries in the portfolio.
32
SECURITY INCOME FUND
Managers' Commentary INCOME OPPORTUNITY SERIES
February 15, 2005 (unaudited)
MARKET OUTLOOK
We remain watchful of trends in the dollar, global trade and government deficits
in the US. Additionally, war, hostilities and political turmoil throughout the
world are always a concern. However, in the short term, the primary concern for
the Senior Loan market is credit standards that ultimately determine future
default rates among issuers and industries. Credit standards remain solid as
highlighted by expected low default rates through 2005, as predicted by both
Standard & Poor's and Moody's Investors Service. However, there is a downside in
that lower default rates tend to result in lower credit spreads and, over time,
potentially less rigorous loan origination standards as portfolio managers
throughout the market become less concerned about appropriate risk/return
balancing in such a favorable environment and try to stretch for yield.
Sincerely,
Michael P. McAdams and Robert I. Bernstein Portfolio Managers
(1) Performance figures are based on Class A shares and do not reflect
deduction of the sales charge or taxes that a shareholder would pay on
distributions or the redemption of Series shares.
(2) The S&P/LSTA Leveraged Loan Index is produced by a unit of the Standard &
Poor's Corporation with the Loan Syndication & Trading Association, the
trade association of the Senior Loan market.
(3) The default rate is calculated as the number of defaults over the last
twelve months divided by the number of issuers in the S&P/LSTA Leveraged
Loan Index at the beginning of the twelve-month period.
PERFORMANCE
INCOME OPPORTUNITY SERIES VS. S&P/LSTA LEVERAGED LOAN INDEX
[PERFORMANCE GRAPH]
INCOME OPPORTUNITY INVESTMENT INFORMATION
DATE value
- ---------- ---------
INCOME OPPORTUNITY
3/31/04 9,525.00
4/30/04 9,562.93
5/31/04 9,577.46
6/30/04 9,639.61
7/31/04 9,662.81
8/31/04 9,688.41
9/30/04 9,728.82
10/31/04 9,782.27
11/30/04 9,817.60
12/31/04 9,855.46
DATE value
- ---------- ---------
S&P/LSTA LEVERAGED LOAN INDEX
3/31/04 10,000.00
4/30/04 10,045.00
5/31/04 10,052.03
6/30/04 10,123.40
7/31/04 10,150.73
8/31/04 10,172.05
9/30/04 10,213.76
10/31/04 10,259.72
11/30/04 10,314.09
12/31/04 10,352.26
Income Opportunity Series $ 9,855
S&P/LSTA Leveraged Loan Index $ 10,352
$10,000 SINCE INCEPTION
This chart assumes a $10,000 investment in Class A shares of Income Opportunity
Series on March 31, 2004 (commencement of operations), and reflects deduction of
the 4.75% sales load. The chart does not reflect the deduction of taxes that a
shareholder would pay on distributions or redemption of fund shares.
PORTFOLIO COMPOSITION BY QUALITY RATING
(BASED ON STANDARD AND POOR'S RATING)
BB 42.35%
B 50.33
CCC 1.30
Not Rated 3.92
Cash & other assets, less liabilities 2.10
AVERAGE ANNUAL RETURNS
PERIODS ENDED 12-31-04 SINCE INCEPTION
A Shares (1.45%) (3-31-04)
B Shares (2.13%) (3-31-04)
C Shares 1.88% (3-31-04)
The performance data above represents past performance which is not predictive
of future results. For Class A shares these figures reflect deduction of the
maximum sales charge of 4.75%. For Class B shares the figures reflect deduction
of the maximum contingent deferred sales charge, ranging from 5% in the first
year to 0% in the sixth and following years, and 1% for Class C shares. 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
applicable taxes were deducted. The investment return and principal value of an
investment will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
See accompanying notes.
33
SECURITY INCOME FUND
Managers' Commentary INCOME OPPORTUNITY SERIES
February 15, 2005 (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, July 1, 2004 - December 31, 2004.
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 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
07-01-04 12-31-041 PERIOD(2)
------------- ------------- -------------
Income Opportunity Series -
Class A
Actual $ 1,000.00 $ 1,019.80 $ 7.31
Hypothetical 1,000.00 1,017.90 7.30
Income Opportunity Series -
Class B
Actual 1,000.00 1,015.90 11.05
Hypothetical 1,000.00 1,014.18 11.04
Income Opportunity Series -
Class C
Actual 1,000.00 1,016.00 11.05
Hypothetical 1,000.00 1,014.18 11.04
(1) The actual ending account value is based on the actual total return of the
Series for the period July 1, 2004 to December 31, 2004 after actual
expenses and will differ from the hypothetical ending account value which
is based on the Sseries expense ratio and a hypothetical annual return of
5% before expenses. The actual cumulative return at net asset value for
the period July 1, 2004 to December 31, 2004 was 1.98%, 1.59% and 1.60%,
for Class A, B and C shares, respectively.
(2) Expenses are equal to the Series annualized expense ratio (1.44%, 2.18%
and 2.18% for Class A, B and C class shares, respectively) multiplied by
the average account value over the period, multiplied by 184/366 (to
reflect the one-half year period).
34
SECURITY INCOME FUND
Schedule of Investments INCOME OPPORTUNITY SERIES
December 31, 2004
PRINCIPAL MARKET
AMOUNT VALUE
SENIOR FLOATING RATE INTERESTS(2) - 97.9%
AEROSPACE & DEFENSE - 2.7%
K & F Industries, Inc., Term Loan B,
4.931% - 2012 $ 989,583 $ 1,004,840
Titan Corporation, Term Loan B,
5.011% - 2009 994,911 1,006,415
-------------
2,011,255
-------------
AUTOMOTIVE - 1.0%
NFIL Holdings Corporation:
Term Loan, 4.33% - 2010 190,476 192,381
Term Loan B, 4.42% - 2010 556,214 561,776
-------------
754,157
-------------
BEVERAGE & TOBACCO - 1.3%
Constellation Brands, Inc., Term Loan B,
4.404% - 2011 1,000,000 1,013,250
-------------
BROADCAST RADIO & TELEVISION - 4.0%
Panamsat Corporation, Term Loan,
5.16% - 2011 992,470 997,329
RCN, Term Loan - 2011(1,3) 1,000,000 1,005,000
Raycom Media, Inc., Term Loan B,
4.563% - 2012 1,000,000 1,011,250
-------------
3,013,579
-------------
BUILDING & DEVELOPMENT - 10.5%
Adams Outdoor Advertising, LP,
Term Loan, 4.33% - 2011 995,000 1,006,194
Builders First Source, Term Loan,
5.04% - 2010 992,500 1,001,184
CB Richard Ellis Services,
Term Loan C, 4.387% - 2010 930,427 936,824
General Growth Properties,
Term Loan B, 4.53% - 2008 1,000,000 1,002,500
Headwaters, Inc., Term Loan,
5.33% - 2011 921,875 933,014
Lake Las Vegas Resort:
Term Loan, 2.50% - 2009 1,000,000 1,005,313
Term Loan B, 8.06% - 2010(3) 1,000,000 1,007,500
South Edge, LLC, Term Loan C,
4.688% - 2009 1,000,000 1,007,500
-------------
7,900,029
-------------
CABLE TELEVISION - 8.0%
Cablecom:
Term Loan B, 5.74% - 2012 500,000 503,750
Term Loan C, 6.09% - 2013 500,000 503,750
Century Cable, Term Loan,
7.25% - 2009 1,000,000 992,857
Charter Operating, Term Loan,
5.13% - 2010 1,000,000 993,542
Mediacomm Group, LLC,
Term Loan B, 4.587% - 2013 1,000,000 1,002,500
NTL Investment Holdings, Term Loan,
5.204% - 2012 1,000,000 1,005,000
UPC Financing Partnership/Distribution,
Term Loan, 5.98% - 2011 1,000,000 1,010,938
-------------
6,012,337
-------------
CHEMICALS & PLASTICS 2.7%
Brenntag, Term Loan, 4.73% - 2012 1,000,000 1,005,792
Rockwood Specialties, Term Loan,
4.38% - 2012 1,000,000 1,005,781
-------------
2,011,573
-------------
CONTAINERS & GLASS PRODUCTS - 3.5%
Graham Packaging Company,
Term Loan B, 4.91% - 2011 1,000,000 1,012,857
Owens-Illinois Group, Inc.,
Term Loan C, 5.20% - 2008 605,172 615,762
Solo Cup, Term Loan B, 4.876% - 2011 992,500 1,009,869
-------------
2,638,488
-------------
DRUGS - 2.7%
Accredo Health, Inc.,Term Loan B,
4.23% - 2011 995,000 1,001,219
Warner Chilcott Bridge Facility,
Term Loan - 2005(1,3) 1,000,000 995,000
-------------
1,996,219
-------------
ECOLOGICAL SERVICES & EQUIPMENT - 1.9%
Duratek, Inc., Term Loan, 6.20% - 2009 739,131 736,821
Environmental Systems Products
Holdings, Term Loan, 5.735% - 2008 718,589 725,775
-------------
1,462,596
-------------
ELECTRONIC/ELECTRIC - 2.7%
Memec Group Holdings, Ltd.,
Term Loan B, 10.501% - 2010 1,000,000 1,000,000
Monitronics International, Inc.,
Term Loan B, 6.91% - 2009 989,975 1,001,112
-------------
2,001,112
-------------
EQUIPMENT LEASING - 1.3%
United Rentals:
Term Loan, 4.67% - 2011 496,250 502,298
Term Loan B, 3.611% - 2011 500,000 506,094
-------------
1,008,392
-------------
FARMING & AGRICULTURAL - 1.3%
United Industries Corporation,
Term Loan, 4.63% - 2011 995,000 1,009,925
-------------
FINANCIAL INTERMEDIARIES - 2.7%
LNR Property Corporation:
Term Loan - 2007(1,3) 1,000,000 1,000,000
Term Loan B - 2007(1,3) 1,000,000 1,003,750
Refco Group, LLC, Term Loan,
5.163% - 2011 997,500 1,007,974
-------------
3,011,724
-------------
See accompanying notes.
35
SECURITY INCOME FUND
Schedule of Investments INCOME OPPORTUNITY SERIES
December 31, 2004
PRINCIPAL MARKET
AMOUNT VALUE
SENIOR FLOATING RATE INTERESTS(2) (CONTINUED)
FOOD PRODUCTS - 4.0%
Culligan Corporation, Term Loan B,
4.85% - 2011 $ 1,000,000 $ 1,015,000
Golden State Foods Corporation,
Term Loan B, 4.63% - 2011 995,000 1,009,925
Michael Foods, Inc., Term Loan,
6.59% - 2011 1,000,000 1,026,250
-------------
3,051,175
-------------
FOREST PRODUCTS - 1.3%
Boise Cascade:
Term Loan B, 4.688% - 2011 520,548 526,187
Term Loan C, 4.688% - 2010 479,452 480,051
-------------
1,006,238
-------------
HEALTH CARE - 5.2%
Southerncare, Term Loan B,
5.66% - 2010 1,000,000 1,012,500
Team Health, Inc., Term Loan B,
5.81% - 2011 992,500 993,741
U.S. Oncology, Term Loan,
5.113% - 2011 997,500 1,006,228
VWR International, Term Loan B,
4.50% - 2011 877,833 892,098
-------------
3,904,567
-------------
HOME FURNISHINGS - 2.7%
Desa, LLC, Term Loan, 7.25% - 2011 1,000,000 1,007,500
Prestige Brands, Inc., Term Loan B,
4.903% - 2011 1,046,581 1,057,047
-------------
2,064,547
-------------
HOTELS, MOTELS, INNS & CASINOS - 6.7%
Boyd Gaming Corporation,
Term Loan B, 3.805% - 2011 997,500 1,010,218
CNL Hotels & Resorts, Term Loan,
4.831% - 2006 1,000,000 1,015,000
Pinnacle Entertainment, Term Loan,
5.42% - 2010 1,000,000 1,012,500
Seminole Tribe of Florida, Term Loan,
6.50% - 2011 1,000,000 1,007,500
Wynn Las Vegas, Term Loan,
0.771% - 2011(4) 1,000,000 1,011,667
-------------
5,056,885
-------------
INDUSTRIAL EQUIPMENT - 1.3%
Invensys plc, Term Loan B,
5.477% - 2009 988,579 1,002,172
-------------
INSURANCE - 1.3%
Conseco, Term Loan, 5.68% - 2010 960,000 976,000
-------------
LEISURE - 4.0%
Regal Cinemas Corporation,
Term Loan B, 4.56% - 2010 962,349 970,529
WMG Acquisition Corporation:
Term Loan, 5.209% - 2011 992,500 1,004,906
Term Loan B, 6.905% - 2011 1,000,000 1,005,000
-------------
2,980,435
-------------
NONFERROUS METALS & MINERALS - 1.3%
Novelis, Inc., Term Loan - 2005(1,3) 1,000,000 990,000
-------------
OIL & GAS - 4.0%
Alon USA, Inc., Term Loan B,
10.00% - 2008 1,000,000 1,020,000
El Paso, Term Loan, 5.056% - 2009 1,003,445 1,009,873
U.S. Shipping, Term Loan B,
3.678% - 2010(4) 997,115 1,005,840
-------------
3,035,713
-------------
PUBLISHING - 3.9%
Advertising Directory Solutions, Inc.,
Term Loan, 4.40% - 2011 1,000,000 1,007,500
RH Donnelley, Inc., Term Loan D,
4.19% - 2011 874,003 882,105
Transwestern Publishing Company,
Term Loan B, 4.227% - 2012 1,057,666 1,069,235
-------------
2,958,840
-------------
RETAILERS - 4.0%
Harbor Freight Tools, Term Loan B,
4.697% - 2010 997,500 998,747
Jean Coutu Group, Inc., Term Loan,
4.438% - 2010 997,500 1,011,896
Jostens, Inc., Term Loan B,
4.67% - 2011 1,000,000 1,006,429
-------------
3,017,072
-------------
SURFACE TRANSPORTATION - 1.3%
Horizon Lines Holding Corporation,
Term Loan, 5.17% - 2011 995,000 1,006,609
-------------
TELECOMMUNICATIONS & CELLULAR COMMUNICATIONS - 1.3%
American Tower, Term Loan A,
1.75% - 2011(3) 1,000,000 1,005,000
-------------
UTILITIES - 9.3%
NRG Energy, Inc., Term Loan,
1.875% - 2006(3) 1,000,000 1,002,917
Reliant Energy, Term Loan,
4.795% - 2010 1,000,000 1,011,667
Riverside Rocky Mountain Project,
Term Loan, 6.38% - 2011 1,000,000 1,015,000
Texas Genco, Term Loan,
3.536% - 2011(3) 1,000,000 1,013,036
Tucson Electric Power, Term Loan,
4.80% - 2009 1,000,000 1,008,333
Unisource Energy, Term Loan,
0.50% - 2011(3) 1,000,000 988,750
Vulcan Energy, Term Loan,
5.53% - 2010 980,357 991,999
-------------
7,031,702
-------------
TOTAL SENIOR FLOATING RATE INTERESTS
(cost $74,380,926) 74,931,591
-------------
See accompanying notes.
36
SECURITY INCOME FUND
Schedule of Investments INCOME OPPORTUNITY SERIES
December 31, 2004
PRINCIPAL
AMOUNT OR
NUMBER MARKET
OF SHARES VALUE
TEMPORARY CASH INVESTMENTS - 10.5%
State Street General Account
Money Market Fund $ 4,000,000 $ 4,000,000
State Street General Account
U.S. Government
Money Market Fund 4,000,000 4,000,000
--------------
8,000,000
--------------
TOTAL TEMPORARY CASH INVESTMENTS
(cost $ 8,000,000) 8,000,000
--------------
REPURCHASE AGREEMENT - 3.8%
State Street, 0.80%, dated 12-31-04,
matures 01-03-05; repurchase amount
of $ 2,853,748 (Collateralized by
FNMA, 6.25%, 07-15-32 with a value
of $ 2,912,913) 2,853,558 2,853,558
--------------
TOTAL REPURCHASE AGREEMENT
(cost $ 2,853,558) 2,853,558
--------------
TOTAL INVESTMENTS - 112.2%
(cost $ 85,234,484) 85,785,149
LIABILITIES, LESS CASH & OTHER ASSETS - (12.2%) (9,244,679)
--------------
TOTAL NET ASSETS - 100.0% 76,540,470
==============
For federal income tax purposes, the identified cost of investments owned at
December 31, 2004 was $85,316,634.
plc (public limited company)
LP (Limited Partnership)
(1) Security not fully funded at December 31, 2004. Therefore, no interest
rate is available.
(2) Senior loans in which the Series invests generally pay interest rates
which are periodically adjusted by reference to a base short-term,
floating lending rate plus a premium. These base lending rates are
generally (i) the lending rate offered by one or more major European
banks, such as the London Inter-Bank Offered Rate (LIBOR), (ii) the prime
rate offered by one or more major United States banks, or (iii) the bank's
certificate of deposit rate. Senior floating rate interests often require
prepayments from excess cash flows or permit the borrower to repay at its
election. The rate at which the borrower repays cannot be predicted with
accuracy. As a result, the actual remaining maturity may be substantially
less than the stated maturities shown. The interest rate indicated is the
rate in effect at December 31, 2004.
(3) Purchased on a delayed delivery basis.
(4) Portion purchased on a delayed delivery basis.
See accompanying notes.
37
SECURITY INCOME FUND
INCOME OPPORTUNITY SERIES
Statement of Assets and Liabilities
December 31, 2004
ASSETS:
Investments, at value(1) ................................. $ 85,785,149
Cash ..................................................... 200,486
Receivables:
Fund shares sold ..................................... 135,940
Securities sold....................................... 3,963,691
Interest ............................................. 316,729
Prepaid expenses.......................................... 19,212
---------------
Total assets ............................................. 90,421,207
---------------
LIABILITIES:
Payable for:
Securities purchased.................................. 13,460,417
Fund shares redeemed.................................. 200,072
Dividends payable to shareholders .................... 7,098
Management fees....................................... 50,484
Custodian fees........................................ 1,644
Transfer agent and administration fees ............... 14,742
Professional fees..................................... 17,000
12b-1 distribution plan fees.......................... 128,580
Other................................................. 700
---------------
Total liabilities ........................................ 13,880,737
---------------
NET ASSETS................................................ $ 76,540,470
===============
NET ASSETS CONSIST OF:
Paid in capital .......................................... $ 76,048,586
Accumulated net investment loss .......................... (73,767)
Accumulated undistributed net realized gain
on sales of investments............................... 14,986
Net unrealized appreciation in value
of investments........................................ 550,665
---------------
Net assets ............................................... $ 76,540,470
===============
CLASS A:
Capital shares outstanding
(unlimited number of shares authorized)............... 2,735,635
Net assets ............................................... $ 27,645,625
Net asset value and redemption
price per share....................................... $ 10.11
===============
Offering price per share (net asset value
divided by 95.25%).................................... $ 10.61
CLASS B:
Capital shares outstanding
(unlimited number of shares authorized)............... 1,841,245
Net assets................................................ $ 18,606,444
Net asset value, offering and redemption price
per share (excluding any applicable
contingent deferred sales charge)..................... $ 10.11
===============
CLASS C:
Capital shares outstanding
(unlimited number of shares authorized)............... 2,997,055
Net assets................................................ $ 30,288,401
Net asset value, offering and redemption price
per share (excluding any applicable
contingent deferred sales charge)..................... $ 10.11
===============
(1) Investments, at cost ................................. $ 85,234,484
Statement Of Operations
For the Period Ended December 31, 2004*
INVESTMENT INCOME:
Interest .............................................. $ 1,969,100
---------------
Total investment income ............................... 1,969,100
---------------
EXPENSES:
Management fees........................................ 345,137
Custodian fees ........................................ 17,395
Transfer/maintenance fees ............................. 17,230
Administration fees.................................... 65,705
Directors' fees........................................ 1,504
Professional fees...................................... 25,398
Reports to shareholders................................ 3,442
Registration fees...................................... 29,564
Other expenses ........................................ 3,919
12b-1 distribution plan fees - Class A ................ 38,381
12b-1 distribution plan fees - Class B ................ 130,194
12b-1 distribution plan fees - Class C ................ 147,704
---------------
Total expenses ........................................ 825,573
Less: earnings credits................................. (1,213)
---------------
Net expenses .......................................... 824,360
---------------
Net investment income.................................. 1,144,740
---------------
NET REALIZED AND UNREALIZED GAIN:
Net realized gain during the period on
Investments ........................................... 221,601
---------------
Realized gain.......................................... 221,601
---------------
Net change in unrealized appreciation
during the period on:
Investments............................................ 550,665
---------------
Unrealized appreciation................................ 550,665
---------------
Net gain .............................................. 772,266
---------------
Net increase in net assets ............................
resulting from operations.......................... $ 1,917,006
===============
* For the period February 11, 2004 (date of inception) to December 31, 2004.
See accompanying notes.
38
Statement of Changes in Net Assets SECURITY INCOME FUND
INCOME OPPORTUNITY SERIES
YEAR ENDED
DECEMBER 31,
2004*
------------
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income................................................................... $ 1,144,740
Net realized gain during the period on investments...................................... 221,601
Net change in unrealized appreciation during the period on investments.................. 550,665
------------
Net increase in net assets resulting from operations.................................... 1,917,006
------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A............................................................................... (511,754)
Class B............................................................................... (328,607)
Class C............................................................................... (389,058)
Net realized gain
Class A............................................................................... (70,515)
Class B............................................................................... (47,426)
Class C............................................................................... (77,762)
------------
Total distributions to shareholders..................................................... (1,425,122)
------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares
Class A............................................................................... 28,706,725
Class B............................................................................... 18,069,896
Class C............................................................................... 30,187,185
Distributions reinvested
Class A............................................................................... 571,331
Class B............................................................................... 373,344
Class C............................................................................... 446,038
Cost of shares redeemed
Class A............................................................................... (1,805,320)
Class B............................................................................... (11,420)
Class C............................................................................... (489,193)
------------
Net increase from capital share transactions............................................ 76,048,586
------------
Net increase in net assets.............................................................. 76,540,470
------------
NET ASSETS:
Beginning of period..................................................................... -
------------
End of period .......................................................................... $ 76,540,470
============
Accumulated net investment loss at end of period........................................ $ (73,767)
============
CAPITAL SHARE ACTIVITY:
Shares sold
Class A............................................................................... 2,857,806
Class B............................................................................... 1,805,380
Class C............................................................................... 3,001,202
Shares reinvested
Class A............................................................................... 56,594
Class B............................................................................... 36,994
Class C............................................................................... 44,186
Shares redeemed
Class A............................................................................... (178,765)
Class B............................................................................... (1,129)
Class C............................................................................... (48,333)
* For the period February 11, 2004 (date of inception) to December 31, 2004.
See accompanying notes.
39
Statement of Cash Flows SECURITY INCOME FUND
For the Period Ended December 31, 2004* INCOME OPPORTUNITY SERIES
PERIOD ENDED
DECEMBER 31, 2004*
------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS: $ 1,917,006
ADJUSTMENTS TO RECONCILE NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
TO NET CASH USED IN OPERATING ACTIVITIES:
Realized and unrealized gain on investments............................................. (772,266)
Amortization of discount/premium........................................................ 92,816
Proceeds from disposition of investment securities...................................... 86,474,149
Purchase of investment securities....................................................... (162,083,122)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Increase in interest receivable and prepaid expenses.................................... (335,941)
Increase in expenses.................................................................... 213,150
------------
Net cash used in operating activities...................................................... (74,494,208)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from shares sold............................................................... 76,827,866
Payments on shares redeemed............................................................. (2,105,861)
Dividends paid in cash(a)............................................................... (27,311)
------------
Net cash provided by financing activities.................................................. 74,694,694
------------
NET INCREASE IN CASH....................................................................... 200,486
Cash at the beginning of the period -
------------
CASH AT THE END OF THE PERIOD.............................................................. $ 200,486
------------
(a) Non-cash financing activities not included herein consists of reinvestment
of dividends of $1,390,713.
* For the period February 11, 2004 (date of inception) to December 31, 2004.
See accompanying notes.
40
SECURITY INCOME FUND
Financial Highlights INCOME OPPORTUNITY SERIES
Selected data for each share of capital stock outstanding throughout each period
YEAR ENDED
DECEMBER 31,
CLASS A 2004(e)
- ------- ------------
PER SHARE DATA
Net asset value, beginning of period $ 10.04
--------
Income (loss) from investment operations:
Net investment income (loss)(c) 0.22
Net gain (loss) on investments (realized and unrealized) 0.13
--------
Total from investment operations 0.35
--------
Less distributions:
Dividends from net investment income (0.25)
Distributions from realized gains (0.03)
--------
Total distributions (0.28)
--------
Net asset value, end of period $ 10.11
========
TOTAL RETURN(a) 3.46%
--------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 27,646
--------
Ratios to average net assets:
Net investment income (loss) 2.92%
Total expenses 1.43%
Gross expenses(b) 1.43%
Net expenses(d) 1.42%
--------
Portfolio turnover rate 146%
YEAR ENDED
DECEMBER 31,
CLASS B 2004(e)
- ------- ------------
PER SHARE DATA
Net asset value, beginning of period $ 10.04
--------
Income (loss) from investment operations:
Net investment income (loss)(c) 0.17
Net gain (loss) on investments (realized and unrealized) 0.12
--------
Total from investment operations 0.29
--------
Less distributions:
Dividends from net investment income (0.19)
Distributions from realized gains (0.03)
--------
Total distributions (0.22)
--------
Net asset value, end of period $ 10.11
========
TOTAL RETURN(a) 2.87%
--------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 18,606
--------
Ratios to average net assets:
Net investment income (loss) 2.20%
Total expenses 2.17%
Gross expenses(b) 2.17%
Net expenses(d) 2.17%
--------
Portfolio turnover rate 146%
See accompanying notes.
41
SECURITY INCOME FUND
Financial Highlights INCOME OPPORTUNITY SERIES
Selected data for each share of capital stock outstanding throughout each period
YEAR ENDED
DECEMBER 31,
CLASS C 2004(e)
- ------- ------------
PER SHARE DATA
Net asset value, beginning of period $ 10.04
--------
Income (loss) from investment operations:
Net investment income (loss)(c) 0.16
Net gain (loss) on investments (realized and unrealized) 0.13
--------
Total from investment operations 0.29
--------
Less distributions:
Dividends from net investment income (0.19)
Distributions from realized gains (0.03)
--------
Total distributions (0.22)
--------
Net asset value, end of period $ 10.11
========
TOTAL RETURN(a) 2.88%
--------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 30,288
--------
Ratios to average net assets:
Net investment income (loss) 2.17%
Total expenses 2.17%
Gross expenses(b) 2.17%
Net expenses(d) 2.17%
--------
Portfolio turnover rate 146%
(a) Total return information does not take into account any sales charges paid
at time of purchase or contingent deferred sales charge paid at time of
redemption.
(b) Gross expense information reflects expense ratios absent fund expense
reductions by the Investment Manager.
(c) Net investment income was computed using the average month-end shares
outstanding throughout the period.
(d) Net expense information reflects expense ratios after reduction of custodian
expenses.
(e) The Income Opportunity Series was initially capitalized on February 11,
2004, with a net asset value of $10.00 per share. The Series commenced
operations on March 31, 2004 with a net asset value of $10.04. Percentage
amounts for the period have been annualized, except for total return.
See accompanying notes.
42
Managers' Commentary SECURITY CASH FUND
February 15, 2005 (unaudited)
[SECURITY FUNDS LOGO]
Advisor, Security Management Company, LLC
TO OUR SHAREHOLDERS:
The main theme in the money markets during 2004 was The Federal Reser ve Bank's
(Fed) monetary policy committee increasing the federal funds rate by 125 basis
points. The Fed's attempt to restrain inflationary pressure on the economy
lifted money market yields, from historic lows. Security Cash Fund returned
0.40% for the 12-month period ended December 31, 2004.
Aside from higher short-term interest rates, the past year proved positive for
credit issuers. Companies continued to report strong cash flows and healthy
earnings driven by the recent economy and consumer spending. One concerning
trend is the growing tendency for firms to use their excess cash flow
(shareholder friendly) for increasing dividends or share repurchases, rather
than bolstering credit quality.
CHARACTERISTICS OF PORTFOLIO ASSETS
At December 31, 2004, the average maturity of the holdings in Cash Fund was 50
days, which is slightly longer than the benchmark. However, this longer maturity
has worked well by enhancing the yield and positioning the portfolio to benefit
from expected additional federal funds rate increases in 2005.
The yield curve for money market instruments trended upward for the latter half
of 2004, thus making it easier for the Fund to pick up additional yield, broadly
along the maturity spectrum and among various types of instruments. The majority
of the Fund's assets lie in the corporate debt sector via commercial paper,
floating rate securities and bankers acceptance, due to the strong fundamentals
of credit and because these three areas of the market represent good value
against other sectors. At the end of the year, approximately 58% of the Fund was
made up of Commercial Paper, 31% in Floating Rate securities (which includes
Corporate and U.S. Government-Backed), 12% in U.S. Government/Agency
obligations, 2% in funding agreements, and 1% in Bankers Acceptances and (4.0%)
in liabilities, less cash and other assets.
OUTLOOK FOR 2005
For 2005, we anticipate continued growth in the U.S. economy with the household
sector remaining an important factor, although becoming less of a driver of
growth relative to business investment. Also, we believe the Federal Reserve
will continue its "measured" increases in the federal funds rate. We plan to
continue investing in the corporate sector as companies have improved their
balance sheets and profitability in recent years.
As always, we will continue to monitor the economic and market conditions when
deciding portfolio strategies and will adjust the asset mix and maturity
structure in the portfolio accordingly.
Thank you for your investment in Security Cash Fund. As always, we appreciate
that you have chosen us to manage your assets and remain focused on achieving
the Fund's investment goals.
Sincerely,
Fixed Income Team
An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per share, it is possible to lose
money by investing in the Fund.
43
Managers' Commentary SECURITY CASH FUND
November 15, 2004 (unaudited)
PERFORMANCE
PORTFOLIO COMPOSITION BY QUALITY RATINGS
(BASED ON STANDARD AND POOR'S RATINGS)
AAA 15.78%
AA 6.88
A 80.81
Liabilities, less cash & other assets (3.47)
AVERAGE ANNUAL RETURNS
PERIOD ENDED 12-31-04 1 YEAR 5 YEARS 10 YEARS
- --------------------- ------ ------- --------
0.40% 2.02% 2.30%
The performance data above represents past performance which is not predictive
of future results. The figures do not reflect the deduction of taxes that a
shareholder would pay on distribution or redemption of fund shares. Such figures
would be lower if applicable taxes were deducted. The investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost. Fee waivers
and/or reimbursements reduced fund expenses and in the absence of such waivers,
the performance quoted would be reduced.
See accompanying notes.
44
Managers' Commentary SECURITY CASH FUND
February 15, 2004 (unaudited)
PERFORMANCE
INFORMATION ABOUT YOUR FUND'S EXPENSES
CALCULATING YOUR ONGOING FUND EXPENSES
EXAMPLE
As a shareholder of the Fund, you incur ongoing costs, including management fees
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, July 1, 2004 -December 31, 2004.
ACTUAL EXPENSES
The first line 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 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 funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only. 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
07-01-04 12-31-04(1) PERIOD(2)
------------- ------------- -------------
Security Cash Fund
Actual $ 1,000.00 $ 1,003.40 $ 4.99
Hypothetical 1,000.00 1,020.16 5.03
(1) The actual ending account value is based on the actual total return of the
Fund for the period July 1, 2004 to December 31, 2004 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
July 1, 2004 to December 31, 2004 was 0.34%.
(2) Expenses are equal to the Fund's annualized expense ratio 0.99% multiplied
by the average account value over the period, multiplied by 184/366 (to
reflect the one-half year period).
45
Schedule of Investments SECURITY CASH FUND
December 31, 2004
PRINCIPAL MARKET
AMOUNT VALUE
----------- ----------
BANKERS ACCEPTANCES - 1.0%
JP Morgan & Company, Inc.,
2.03%, 01-24-05 $ 500,000 $ 499,352
----------
TOTAL BANKERS ACCEPTANCES
(cost $499,352) 499,352
----------
COMMERCIAL PAPER - 57.8%
BANKING - 4.9%
ING (US) Funding:
2.20%, 01-18-05 2,000,000 1,997,922
2.40%, 02-16-05 413,000 411,733
----------
2,409,655
----------
BROKERAGE - 16.2%
Bear Stearns Companies, Inc.,
2.30%, 01-26-05 2,500,000 2,496,007
Credit Suisse First Boston,
2.34%, 01-20-05 1,000,000 998,765
Goldman Sachs, Inc.,
2.34%, 01-28-05 2,000,000 1,996,490
Morgan Stanley:
2.17%, 01-04-05 1,000,000 999,819
2.33%, 01-25-05 1,500,000 1,497,670
----------
7,988,751
----------
CONSUMER PRODUCTS - 4.4%
Procter & Gamble Company,
2.40%, 03-15-05 2,200,000 2,189,293
----------
ELECTRIC - 2.4%
Southern Company, 2.23%, 01-13-05 1,200,000 1,199,108
----------
FINANCIAL COMPANIES - DIVERSIFIED - 4.9%
Amstel Funding Corporation,
2.38%, 02-28-05 2,400,000 2,390,797
----------
FINANCIAL COMPANIES - NONCAPTIVE
DIVERSIFIED - 9.9%
CIT Group, Inc., 2.36%, 02-11-05 2,500,000 2,493,281
Citigroup, Inc.:
2.02%, 01-18-05 1,100,000 1,098,951
2.32%, 02-09-05 1,300,000 1,296,733
----------
4,888,965
----------
FOOD & BEVERAGE - 2.6%
Anheuser Busch Companies, Inc.,
2.39%, 03-22-05 1,300,000 1,293,095
----------
HEALTH CARE - 4.7%
Pfizer, Inc., 2.14%, 01-14-05 2,300,000 2,298,223
----------
HOME CONSTRUCTION - 2.2%
Fortune Brands, Inc., 2.31%, 02-14-05 1,100,000 1,096,894
----------
MEDIA - NONCABLE - 3.2%
Tribune Company, 2.27%, 01-06-05 1,600,000 1,599,496
----------
PHARMACEUTICALS - 2.4%
Abbott Laboratories, 2.20%, 02-01-05 1,200,000 1,197,727
----------
TOTAL COMMERCIAL PAPER
(cost $28,552,004) 28,552,004
----------
CORPORATE BONDS - 30.9%
AUTOMOTIVE - 0.5%
American Honda Finance,
2.14%, 01-11-05(1) 250,000 250,009
----------
BANKING - 4.9%
Wells Fargo & Company,
2,579%, 03-29-05(1) 2,400,000 2,401,382
----------
BROKERAGE - 6.9%
Lehman Brothers Holdings, Inc.,
3.049%, 03-28-05(1) 1,000,000 1,003,752
Merrill Lynch & Company,
2.82%, 03-21-05(1) 2,400,000 2,405,745
----------
3,409,497
----------
FINANCIAL - OTHER - 2.4%
Countrywide Home Loan,
2.425%, 02-23-05(1) 1,200,000 1,200,021
----------
FINANCIAL COMPANIES - CAPTIVE - 9.1%
Caterpillar Financial Services Corporation,
2.55%, 03-01-05(1) 2,500,000 2,501,761
General Electric Capital Corporation,
2.615%, 03-15-05(1) 2,000,000 2,000,546
----------
4,502,307
----------
FINANCIAL COMPANIES - NONCAPTIVE
CONSUMER - 7.1%
American Express Credit Corporation,
2.468%, 01-14-05(1) 1,500,000 1,501,021
JP Morgan Chase & Company,
2.609%, 02-22-05(1) 2,000,000 2,002,239
----------
3,503,260
----------
TOTAL CORPORATE BONDS
(cost $15,266,476) 15,266,476
----------
MISCELLANEOUS ASSETS - 2.0%
FUNDING AGREEMENTS - 2.0%
United of Omaha Life Insurance
Company, 2.38%, 01-01-05(1) 1,000,000 1,000,000
----------
TOTAL MISCELLANEOUS ASSETS
(cost $1,000,000) 1,000,000
----------
U.S. GOVERNMENT SPONSORED
AGENCIES - 11.7%
FEDERAL HOME LOAN BANK - 5.1%
1.38%, 03-28-05 1,500,000 1,496,356
3.02%, 01-18-06 1,000,000 999,950
----------
2,496,306
----------
FEDERAL HOME LOAN MORTGAGE
CORPORATION - 1.4%
1.21%, 01-06-05 700,000 699,882
----------
FEDERAL NATIONAL MORTGAGE
ASSOCIATION - 3.0%
2.419%, 01-07-05(1) 1,500,000 1,501,369
----------
See accompanying notes.
46
Schedule of Investments SECURITY CASH FUND
December 31, 2004
PRINCIPAL MARKET
AMOUNT VALUE
----------- -----------
MISCELLANEOUS ASSETS (CONTINUED)
SMALL BUSINESS ASSOCATION POOLS - 1.8%
#503295, 2.25%, 01-01-05(1) $ 147,786 $ 147,878
#503303, 2.25%, 01-01-05(1) 131,586 131,668
#502398, 2.375%, 01-01-05(1) 46,239 46,411
#503152, 2.375%, 01-01-05(1) 200,354 200,354
#503265, 2.50%, 01-01-05(1) 148,412 148,041
#501927, 3.25%, 01-01-05(1) 205,061 206,996
-----------
881,348
-----------
STUDENT LOAN MARKETING ASSOCIATION - 0.4%
1997-4 A2, 2.97%, 01-25-05(1) 213,778 214,302
-----------
TOTAL U.S. GOVERNMENT SPONSORED AGENCIES
(cost $5,793,207) 5,793,207
-----------
REPURCHASE AGREEMENT - 0.8%
United Missouri Bank, 1.74%, dated
12-31-04, matures 01-03-05;
repurchase amount of $374,053
(Collateralized by FHLMC 0.00%,
01-14-05 with a value of $381,639) 374,000 374,000
-----------
TOTAL REPURCHASE AGREEMENT
(cost $374,000) 374,000
-----------
TOTAL INVESTMENTS - 104.2%
(cost $51,485,039) 51,485,039
LIABILITIES, LESS CASH & OTHER
ASSETS - (4.2%) (2,087,018)
-----------
TOTAL NET ASSETS - 100.0% $49,398,021
===========
The identified cost of investments owned at December 31, 2004 was the same for
federal income tax and financial statement purposes.
(1) Variable rate security. Rate indicated is rate effective at December 31,
2004. Maturity date indicated is next interest reset date.
See accompanying notes.
47
SECURITY CASH FUND
Statement of Assets and Liabilities
December 31, 2004
ASSETS:
Investments, at value(1)......................... $ 51,485,039
Cash............................................. 29,242
Receivables:
Fund shares sold.............................. 153,196
Securities sold............................... 4,060
Interest...................................... 44,845
Prepaid expenses................................. 30,578
------------
Total assets..................................... 51,746,960
------------
LIABILITIES:
Payable for:
Securities purchased.......................... 999,950
Fund shares redeemed.......................... 1,291,027
Dividends payable to shareholders............. 482
Management fees............................... 21,579
Custodian fees................................ 1,304
Transfer agent and administration fees........ 22,171
Professional fees............................. 7,120
Other......................................... 5,306
------------
Total liabilities................................ 2,348,939
------------
NET ASSETS....................................... $ 49,398,021
============
NET ASSETS CONSIST OF:
Paid in capital.................................. 49,398,021
------------
Net assets....................................... $ 49,398,021
============
Capital shares outstanding
(unlimited number of shares authorized)....... 49,398,021
Net asset value per share........................ $ 1.00
============
(1) Investments, at cost......................... $ 51,485,039
Statement of Operations
For the Year Ended December 31, 2004
INVESTMENT INCOME:
Interest....................................... $ 716,036
------------
Total investment income........................ 716,036
------------
EXPENSES:
Management fees................................ 257,819
Custodian fees................................. 9,628
Transfer/maintenance fees...................... 246,450
Administration fees............................ 42,341
Directors' fees................................ 25,259
Professional fees.............................. 11,157
Reports to shareholders........................ 6,339
Registration fees.............................. 41,927
Other expenses................................. 9,145
------------
Total expenses................................. 650,065
Less: Reimbursement of expenses................ (140,181)
------------
Net expenses................................... 509,884
------------
Net investment income.......................... 206,152
------------
Net increase in net assets
resulting from operations................... $ 206,152
============
See accompanying notes.
48
Statement of Changes in Net Assets SECURITY CASH FUND
YEAR ENDED YEAR ENDED
DECEMBER 31, 2004 DECEMBER 31, 2003
----------------- -----------------
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income........................................... $ 206,152 $ 140,090
------------- -------------
Net increase in net assets resulting from operations............ 206,152 140,090
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income........................................... (206,152) (140,090)
------------- -------------
Total distributions to shareholders............................. (206,152) (140,090)
------------- -------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares.................................... 68,153,759 94,024,769
Distributions reinvested........................................ 203,276 151,879
Cost of shares redeemed......................................... (78,522,212) (104,292,914)
------------ -------------
Net decrease from capital share transactions.................... (10,165,177) (10,116,266)
------------- -------------
Net decrease in net assets...................................... (10,165,177) (10,116,266)
------------- -------------
NET ASSETS:
Beginning of period............................................. 59,563,198 69,679,464
------------- -------------
End of period................................................... $ 49,398,021 $ 59,563,198
============= =============
CAPITAL SHARE ACTIVITY:
Shares sold..................................................... 68,153,759 94,024,769
Shares reinvested............................................... 203,276 151,879
Shares redeemed................................................. (78,522,212) (104,292,914)
------------- -------------
Total capital share activity.................................... (10,165,177) (10,116,266)
============= =============
See accompanying notes.
49
Financial Highlights SECURITY CASH FUND
Selected data for each share of capital stock outstanding throughout each period
YEAR ENDED,
DECEMBER 31,
CLASS A 2004 2003 2002 2001 2000
- ------- -------- -------- -------- -------- ------------
PER SHARE DATA
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- ------------
Income (loss) from investment operations:
Net investment income (loss)(c) - - 0.01 0.03 0.05
Net gain (loss) on securities (realized and unrealized) - - - - -
-------- -------- -------- -------- ------------
Total from investment operations - - 0.01 0.03 0.05
-------- -------- -------- -------- ------------
Less distributions:
Dividends from net investment income -(e) -(e) (0.01) (0.03) (0.05)
Distributions from realized gains - - - - -
-------- -------- -------- -------- ------------
Total distributions - - (0.01) (0.03) (0.05)
-------- -------- -------- -------- ------------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ============
TOTAL RETURN (a) 0.40% 0.20% 0.85% 3.20% 5.56%
-------- -------- -------- -------- ------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 49,398 $ 59,563 $ 69,679 $ 67,638 $ 62,472
-------- -------- -------- -------- ------------
Ratios to average net assets:
Net investment income (loss) 0.40% 0.21% 0.84% 3.08% 5.48%
Total expenses 0.99% 1.00% 1.00% 1.00% 0.98%
Gross expenses(b) 1.26% 1.14% 1.07% 1.01% 0.98%
Net expenses(d) 0.99% 1.00% 1.00% 1.00% 0.98%
(a) Total return information does not take into account any charges paid at
time of purchase or contingent deferred sales charge paid at time of
redemption.
(b) Gross expense information reflects expense ratios absent fund expense
reductions by the Investment Manager.
(c) Net investment income was computed using the average month-end shares
outstanding throughout the period.
(d) Net expense information reflects expense ratios after expense reductions
or fee waivers and reduction to custodian expenses.
(e) Dividends from net investment income are less than $0.01 per share.
See accompanying notes.
50
Notes to Financial Statements
December 31, 2004
1. SIGNIFICANT ACCOUNTING POLICIES
Security Income Fund, Security Municipal Bond Fund and Security Cash Fund
(the Funds) are registered under the Investment Company Act of 1940, as amended,
as diversified open-end management investment companies. The shares of Security
Income Fund are currently issued in multiple series, with each series, in
effect, representing a separate fund. The Security Income Fund and Security
Municipal Bond Fund offer different classes and, therefore, are required to
account for each class separately and to allocate general expenses to each class
based on the net asset value of each series. 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 that purchases of Class "A" shares
of $1 million or more 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 may be subject to a contingent deferred sales charge for six years
and automatically convert to Class "A" shares after eight years. Redemptions of
the 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 the 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 Security Income and Security Municipal
Bond Funds' 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 a Fund 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 Fund will use the price of that exchange that it generally considers to be
the principal exchange on which the stock is traded. Fund securities listed on
the Nasdaq Stock Market, Inc. ("Nasdaq") will be valued at the Nasdaq Official
Closing Price, which may not necessarily represent the last sale price. If there
has been no sale on such exchange or Nasdaq on such day, the security is valued
at the closing bid price on such day. 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' 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
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 senior floating rate interests (loans) in which the Income Opportunity
Series invests are not listed on any securities exchange or board of trade.
Accordingly, determinations of the value of loans may be based on infrequent and
dated trades. Typically loans are valued using information provided by an
independent third party pricing service. If the pricing service cannot or does
not provide a valuation for a particular loan or such valuation is deemed
unreliable, such loan is fair valued. In determining fair value, consideration
is given to several factors, which may include, among others, one or more of the
following: the fundamental business data relating to the issuer or borrower; an
evaluation of the forces which influence the market in which these loans are
purchased and sold; type of holding; financial statements of the borrower; cost
at date of purchase; size of holding; credit worthiness and cash flow of issuer;
information as to any transactions in, or offers for, the holding; price and
extent of public trading in similar securities (or equity securities) of the
issuer/borrower, or comparable companies; coupon payments; quality, value and
saleability of collateral securing the loan; business prospects of the
issuer/borrower, including any ability to obtain money or resources from a
parent or affiliate; the portfolio manager's and/or the market's assessment of
the borrower's management; prospects for the borrower's industry, and multiples
(of earnings and/or cash flow) being paid for similar businesses in that
industry; borrower's competitive position within the industry; borrower's
ability to access additional liquidity through public and/or private markets;
and other relevant factors.
Security Cash Fund, by approval of the Board of Directors, utilizes the
amortized cost method for valuing portfolio securities, whereby all investments
are valued by reference to their acquisition cost as adjusted for amortization
of premiums or accretion of discounts, which approximates market value.
B. REPURCHASE AGREEMENTS - In connection with transactions in repurchase
agreements, it is the Funds' policy that its custodian take possession of the
underlying collateral securities, the fair value of which exceeds 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. SENIOR FLOATING RATE INTERESTS - Senior secured corporate loans pay
interest at rates which are periodically reset by reference to a base lending
rate plus a spread. These base lending rates are generally the prime rate
offered by a designated U.S. bank or the London InterBank Offered Rate (LIBOR)
or the prime
51
Notes to Financial Statements
December 31, 2004
rate offered by one or more major United States banks.
D. OPTIONS - Diversified Income Series and the High Yield 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, respectively (and the writer, the obligation to sell or purchase) a
security at a specified price, until a certain date. The primary risks
associated with the use of options are an imperfect correlation between the
change in market value of the securities held by these Series and the price of
the option, the possibility of an illiquid market, and the inability of the
counter-party to meet the terms of the contract.
The cash premiums received for a written option are 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.
E. SECURITY TRANSACTIONS AND INVESTMENT INCOME - Security transactions are
accounted for on the date the securities are purchased or sold (trade date).
Trade date for senior and subordinated loans purchased in the "primary market"
is considered the date on which the loan allocations are determined. Trade date
for senior and subordinated loans purchased in the "secondary market" is the
date on which the transaction is entered into. Realized gains and losses are
reported on an identified cost basis. Interest income is recognized on the
accrual basis, including the amortization of premiums and accretion of discounts
on debt securities. Interest income also includes pay-down gains and losses on
senior and subordinated loans. Each class of shares participates in investment
income, fund-level expenses and realized and unrealized gains and losses based
on the total net asset value of its shares in proportion to the total net assets
of the fund.
F. SECURITIES PURCHASED ON A WHEN-ISSUED DELAYED DELIVERY BASIS - The Funds
may purchase and sell interests in securities on a when-issued and delayed
delivery basis, with payment and delivery scheduled for a future date. No income
accrues to the Fund on such interests or securities in connection with such
transactions prior to the date the Series actually takes delivery of such
interests or securities. These transactions are subject to market fluctuations
and are subject to the risk that the value at delivery may be more or less than
the trade date purchase price. Although the Series will generally purchase these
securities with the intention of acquiring such securities, they may sell such
securities before the settlement date.
G. EXPENSES - Expenses that are directly related to one of the Funds are
charged directly to that Fund. Other operating expenses are allocated to the
Funds 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 are allocated to each respective class in
proportion to the relative net assets of each class.
H. 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.
I. TAXES - The Funds intend to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and distribute 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.
J. EARNINGS CREDITS - Under the fee schedule with the custodian, the Funds
can earn credits based on overnight custody cash balances. These credits can be
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.
K. USE OF ESTIMATES - The preparation of financial statements in conformity
with U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent 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. INDEMNIFICATIONS - Under the Funds' organizational documents, its Officers
and Directors are indemnified against certain liabilities arising out of the
performance of their duties to the Funds. In addition, in the normal course of
business, the Funds enter into contracts that provide general indemnification to
other parties. The Funds' maximum exposure under these arrangements is unknown
as this would involve future claims that may be made against the Fund 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.
2.MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES Management fees are
payable to Security Management Company, LLC (SMC) as follows:
MANAGEMENT
FEES (AS A %
OF NET ASSETS)
Security Municipal Bond Fund 0.50%
Security Income Fund:
Diversified Income Series 0.35%
High Yield Series 0.60%
Income Opportunity Series 0.80%(1)
Security Cash Fund 0.50%
(1) Management fees are payable at the rate of 0.80% of the average daily net
assets of $200 million or less, plus an additional 0.70% of the average daily
net assets of more than $200 million.
52
Notes to Financial Statements
December 31, 2004
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. For these services, the Investment Manager receives the
following:
ADMINISTRATIVE FEES
(AS A % OF NET ASSETS)*
-----------------------
Security Municipal Bond Fund 0.09%
Security Income Fund:
Diversified Income Series 0.09%
High Yield Series 0.09%
Income Opportunity Series 0.145%
Security Cash Fund 0.09%
- ---------------
* Effective February 1, 2004 the minimum annual charge for administrative fees
is $25,000.
SMC is paid the following for providing transfer agent services to the
Funds:
EFFECTIVE PRIOR TO
FEBRUARY 1, 2004 FEBRUARY 1, 2004
----------------- -----------------
Per account charge $ 5.00 - $ 8.00 $ 8.00
Transaction fee $ 0.60 - $ 1.10 $ 1.00
Minimum charge per fund $ 25,000 N/A
Reimbursement of certain
out-of-pocket charges Varies N/A
SMC pays Salomon Brothers Asset Management, Inc. an annual fee equal to
..22% of the average daily net assets of Security Municipal Bond Fund for
management services provided to the fund.
SMC pays Four Corners Capital Management, LLC an annual fee equal to .50%
of the average daily net assets of Income Opportunity Fund of $75 million or
less, plus .40% of such assets of more than $75 million up to $200 million, plus
..35% of such assets of more than $200 million for management services provided
to the fund.
The investment advisory contract for Security Income Fund provides that
the total annual expenses of each series of the fund (including management fees
and custodian fees net of earnings credits, but excluding interest, taxes,
brokerage commissions, extraordinary expenses and distribution fees paid under
the Class B and Class C distribution plans) will not exceed the level of
expenses which Security Income Fund is permitted to bear under the most
restrictive expense limitation imposed by any state in which shares of the Fund
are qualified for sale. For the period ended December 31, 2004, SMC agreed to
limit the total expenses of Diversified Income Fund to an annual rate of .95% of
the average daily net asset value of Class A shares and 1.70% of Class B shares
and Class C shares. SMC also agreed to limit the total expenses of the High
Yield Fund to 2.00% for Class A shares and 2.75% for Class B and Class C shares.
The investment advisory contract for Security Municipal Bond Fund pro- vides
that the total annual expenses of the fund, exclusive of interest, taxes, Rule
12b-1 fees, brokerage fees and commissions and extraordinary expenses, will not
exceed an amount equal to an annual rate of 1.00% of the average net assets of
Class A Shares and 1.75% of the average net assets of Class B shares as
calculated on a daily basis. SMC has agreed voluntarily to limit the total
expenses of Security Municipal Bond Fund to an annual rate of 1.00% of the
average daily net asset value of Class A shares and 1.75% for Class B shares.
The investment advisory contract for Security Cash Fund provides that the total
annual expenses of the fund, exclusive of interest, taxes, brokerage fees and
commissions and extraordinary expenses, will not exceed an amount equal to an
annual rate of 1.00% of the average net assets of the fund as calculated on a
daily basis. Furthermore, SMC voluntarily waived expenses to maintain a 0.10%
daily yield.
Security Income and Security Municipal Bond Funds have adopted
distribution plans related to the offering of Class B shares and Security Income
Fund has adopted a distribution plan relating to the offering of Class C shares,
each such distribution plan has been adopted pursuant to Rule 12b-1 of 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 Class B and Class C shares. Class A
shares of Security Income Fund and Security Municipal Bond Fund incur Rule 12b-1
distribution fees at an annual rate of .25% of the average daily net assets of
each series.
Security Distributors, Inc. (SDl), a wholly-owned subsidiary of Security
Benefit Corporation. and the national distributor of the Funds, retained
underwriting commissions on sales of shares after allowances to brokers and
dealers in the following amounts:
SDI UNDERWRITING COMMISSIONS
----------------------------
Municipal Bond Fund $ 450
Security Income Fund:
Diversified Series 12,372
High Yield Series 2,346
Income Opportunity Series 4,493
Certain officers and directors of the Funds are also officers and/or
directors of Security Benefit Life Insurance Company and its affiliates, which
include SMC and SDI.
At December 31, 2004, Security Benefit Corporation and its subsidiaries
owned over five percent of the outstanding shares of the Funds, as follows:
FUND OR SERIES PERCENT OF OUTSTANDING SHARES OWNED
- ---------------------------- -----------------------------------
Security Income Fund:
Diversified Income Series 10.12%
High Yield Series 17.55%
Income Opportunity Series 68.36%
Security Cash Fund 8.81%
53
Notes to Financial Statements
December 31, 2004
3. LINE OF CREDIT
The Income Opportunity Series of the Security Income Fund has a $10
million committed secured revolving line of credit with State Street Bank and
Trust Company. The Series may borrow money for temporary or emergency purposes
to fund shareholder redemptions. Borrowings under the agreement bear interest at
a variable rate per annum equal to the Bank's overnight federal funds rate as
determined by the Bank plus 0.50% per annum which rate shall change when such
federal funds rate changes. The Series did not borrow from the line during the
period ended December 31, 2004.
4. FEDERAL INCOME TAX MATTERS
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 interest income accrued for
defaulted and variable rate securites for tax purposes and differing book and
tax amortization methods for premium and market discount. To the extent these
differences are permanent differences, adjustments are made to the appropriate
equity accounts in the period that the differences arise.
The following adjustments were made to the Statements of Assets and
Liabilities as of December 31, 2004 to reflect permanent differences:
ACCUMULATED UNDISTRIBUTED
NET REALIZED NET INVESTMENT PAID-IN
GAIN (LOSS) INCOME CAPITAL
------------ -------------- ----------
Security Municipal
Bond Fund $ (33,346) $ (9,552) 42,898
Security Income Fund:
Diversified Income Series 1,232,806 (153,335) (1,079,471)
High Yield Series (42,642) 71,918 (29,276)
Income Opportunity Series (10,912) 10,912 -
The amounts of unrealized appreciation (depreciation) for federal income tax
purposes as of December 31, 2004, were as follows:
MUNICIPAL DIVERSIFIED HIGH INCOME
BOND INCOME YIELD OPPORTUNITY
FUND SERIES SERIES SERIES
---------- ------------ ---------- -----------
Gross unrealized
appreciation $ 457,129 $ 1,944,932 $2,539,261 $ 507,774
Gross unrealized
depreciaton (2,336) (328,085) (932,125) (39,259)
---------- ----------- ---------- -----------
Net unrealized
appreciation
(depreciation) $ 454,793 $ 1,616,847 $1,607,136 $ 468,515
========== =========== ========== ===========
At December 31, 2004, the following funds have capital loss carryovers to
offset future realized capital gains as follows:
CAPITAL LOSS EXPIRATION
CARRYOVER YEAR
------------ ----------
Security Municipal Bond Fund $ 4,714 2012
Security Income Fund:
Diversified Income Series $ 816,702 2005
801,693 2007
3,837,647 2008
433,468 2010
291,583 2011
453,684 2012
------------
$ 6,634,777
============
High Yield Series $ 170,973 2009
645,956 2010
553,553 2011
------------
$ 1,370,482
============
54
Notes to Financial Statements
December 31, 2004
The tax character of distributions paid during the fiscal years ended
December 31, 2004 and 2003, was the same as that reported in the Statement of
Changes in Net Assets, except as follows:
LONG-TERM
TAX-EXEMPT ORDINARY CAPITAL RETURN OF
INCOME INCOME GAIN CAPITAL TOTAL
---------- ---------- --------- --------- ---------
2003
Security Municipal Bond Fund $718,658 $ 16,319 $ 137,386 - $ 872,363
2004
Security Municipal Bond Fund 503,150 - - - 503,150
Security Income Fund
Diversified Income Series - 4,178,090 - 7,310 4,185,400
High Yield Series - 2,287,476 - 64,276 2,351,752
Income Opportunity Series - 1,425,122 - - 1,425,122
Note: For federal income tax purposes, short term capital gain distributions are
treated as ordinary income distributions.
As of December 31, 2004 the components of accumulated earnings/(deficit) on a
tax basis were the same as those reported in the Statement of Assets and
Liabilities, except as follows:
UNDISTRIBUTED UNDISTRIBUTED ACCUMULATED UNREALIZED
ORDINARY LONG-TERM CAPITAL AND APPRECIATION
INCOME GAIN OTHER LOSSES* (DEPRECIATION)**
------------- ------------- ------------- -----------------
Security Municipal Bond Fund $ 1,989 - $ (4,714) $ 454,793
Security Income Fund:
Diversified Income Series - - (6,634,777) 1,616,847
High Yield Series - - (1,370,482) 1,498,035
Income Opportunity Series 23,369 - - 468,515
* Certain Funds had net capital loss carryovers as identified elsewhere in the
Notes.
** The differences between book-basis and tax-basis unrealized appreciation
(depreciation) is attributable primarily to the tax deferral of wash sale
losses, and the differences between book and tax basis bond discount accretion.
5. INVESTMENT TRANSACTIONS
Investment transactions for the year ended December 31, 2004 (excluding
overnight investments and short-term debt securities) were as follows:
MUNICIPAL DIVERSIFIED HIGH INCOME
BOND INCOME YIELD OPPORTUNITY
FUND FUND FUND FUND
---------- ----------- ----------- ------------
Purchases $2,339,322 $40,894,965 $32,923,475 $134,549,606
Proceeds from sales $2,967,255 $40,996,638 $25,680,642 $ 62,285,438
55
Report of Independent Registered Public Accounting Firm
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
SECURITY MUNICIPAL BOND FUND, SECURITY INCOME FUND, AND SECURITY CASH FUND
We have audited the accompanying statements of assets and liabilities of
Security Municipal Bond Fund, Security Income Fund (comprised of Diversified
Income Series, High Yield Series and Income Opportunity Series), and Security
Cash Fund (collectively, the Funds), including the schedules of investments, as
of December 31, 2004, and the related statements of operations for the period
then ended, the statements of changes in net assets, and the financial
highlights for each of the periods indicated therein, and the statement of cash
flows for Security Income Fund - Income Opportunity Series for the period
February 11, 2004 (date of inception) to December 31, 2004. 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.
An audit includes 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
investments owned as of December 31, 2004, by correspondence with the custodian.
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 Funds at December 31, 2004, the results of their operations for the
period then ended, and changes in their net assets, and the financial highlights
for each of the periods indicated therein and cash flows of Security Income Fund
- - Income Opportunity Series for the period then ended in conformity with U.S.
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Kansas City, Missouri
February 4, 2005
56
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)
1994
Harry W. Craig, Jr. Chairman, CEO, Secretary & Director, The Martin Tractor Company, Inc.; President & Director,
(05-11-39) The Martin Tractor Company, Inc.
2004
Penny A. Lumpkin** Partner, Vivians' Gift Shop (Corporate Retail)
(08-20-39) Vice President, Palmer Companies, Inc. (Small Business and Shopping Center Development)
1993 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)
1998
John D. Cleland* Retired. Prior to January 1, 2003, Senior Vice President, Security Benefit Group, Inc. and
(05-01-36) Security Benefit Life Insurance Company
1991 (Director)
2000 (Chairman of the Board)
Michael G. Odlum* President & Managing Member Representative, Security Management Company, LLC
(01-12-52) Senior Vice President and Chief Investment Officer, Security Benefit Corporation and
2004 (President) Security Benefit Life Insurance Company
2004 (Director) Director, Security Distributors, Inc.
Director, Vice President and Chief Investment Officer, First Security Benefit Life Insurance and
Annuity Company of New York
President & Chief Operating Officer, Allied Investment Advisors, Inc.
Principal, Vanguard Group
- ----------------------
* These directors are deemed to be "interested persons" of the Funds under the
Investment Company Act of 1940, as amended, by reason of their positions
with the Funds' Investment Manager and/or the parent of the Investment
Manager.
** These directors serve on the Funds' joint audit committee, the purpose of
which is to meet with the independent auditors, to review the work of the
auditors, and to oversee the handling by Security Management Company, LLC of
the accounting function for the Funds.
*** Each director oversees 35 Security Fund portfolios and serves until the next
annual meeting, or until a successor has been duly elected and qualified.
57
Directors and Officers (unaudited) (continued)
OFFICERS
NAME
(DATE OF BIRTH)
TITLE
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, Security Benefit Life Insurance Company
Vice President
2003
Brenda M. Harwood Assistant Vice President, Chief Compliance Officer & Treasurer, Security Management Company, LLC;
(11-03-63) Assistant Vice President, Security Benefit Life Insurance Company
Treasurer Vice President & Director, Security Distributors, Inc.
1988
Mark Lamb Vice President, Security Management Company, LLC,
(02-03-60) Security Benefit Life Insurance Company
Vice President
2003
Amy J. Lee Secretary, Security Management Company, LLC & Security Distributors, Inc.;
(06-05-61) Vice President, Associate General Counsel & Assistant Secretary,
Secretary Security Benefit Life Insurance Company
1987
Mark Mitchell Vice President & Portfolio Manager, Security Management Company, LLC
(08-24-64)
Vice President
2003
James P. Schier Vice President & Senior Portfolio Manager, Security Management Company, LLC;
(12-28-57) Vice President, Security Benefit Life Insurance Company
Vice President
1998
Cindy L. Shields Vice President & Head of Equity Asset Management, Security Management Company, LLC,
(06-05-67) Security Benefit Life Insurance Company
Vice President
1988
Christopher D. Swickard Assistant Secretary, Security Management Company, LLC
(10-09-65) Second Vice President & Counsel,
Assistant Secretary Security Benefit Life Insurance Company
1996
- ----------------------------
* Officers serve until the next annual meeting or until a successor has been
duly elected and qualified.
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, 2004 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.
58
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59
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60
THE SECURITY GROUP OF MUTUAL FUNDS
Security Equity Fund
- Alpha Opportunity Series
- Enhanced Index Series
- Equity Series
- Global Series
- Large Cap Growth Series
- Mid Cap Value Series
- Select 25(R) Series
- Small Cap Growth Series
- Social Awareness Series
Security Large Cap Value Fund
Security Mid Cap Growth Fund
Security Income Fund
- Diversified Income Series
- High Yield Series
- Income Opportunity Series
- Capital Preservation Series
Security Municipal Bond Fund
Security Cash Fund
SECURITY FUNDS OFFICERS AND DIRECTORS
DIRECTORS
Donald A. Chubb, Jr.
John D. Cleland
Harry W. Craig, Jr.
Penny A. Lumpkin
Michael G. Odlum
Maynard F. Oliverius
OFFICERS
John D. Cleland, Chairman of the Board
Michael G. Odlum, President
Steve M. Bowser, Vice President, Equity Fund
Mark Lamb,Vice President, Equity Fund
Mark Mitchell, Vice President, Equity Fund
James P. Schier, Vice President, Equity and Mid Cap Growth Fund
Cindy L. Shields, Vice President, Equity Fund
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 DISTRIBUTORS, INC. LOGO]
One Security Benefit Place
Topeka, KS 66636-0001
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 $7,000 in 2003 and
$8,000 in 2004.
(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 $0 in 2003 and
$0 in 2004. 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 $14,000 in 2003 and $18,000 in 2004, which related to the
review of the transfer agent function.(1)
----------
(1) Prior to May 6, 2003, the Registrant's Audit Committee was not
required to pre-approve non-audit services. Therefore, the information
here represents only fees for pre-approved non-audit services rendered
after May 6, 2003, to Service Affiliates.
(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 $2,000 in
2003 and $2,000 in 2004. These services consisted of (i) review or
preparation of U.S. federal, state, local and excise tax returns; (ii) U.S.
federal, state and local 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) determination of Passive Foreign Investment Companies.
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 2003 and $0 in 2004.(2)
----------
(2) Prior to May 6, 2003, the Registrant's Audit Committee was not
required to pre-approve Tax Services. Therefore, the information here
represents only fees for pre-approved Tax Services rendered after May
6, 2003, to Service Affiliates.
(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 2003 and $0 in 2004.
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 2003 and $0 in 2004.(3)
----------
(3) Prior to May 6, 2003, the Registrant's Audit Committee was not
required to pre-approve these services. Therefore, the information
here represents only fees for pre-approved services rendered after May
6, 2003, to Service Affiliates.
(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 $16,000 in 2003 and $20,000 in 2004.
(h) Auditor Independence. The Registrant's Audit Committee was provided with
information relating to the provision of non-audit services by E&Y 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 E&Y'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 MUNICIPAL BOND FUND
By: MICHAEL G. ODLUM
-------------------------------
Michael G. Odlum, President
Date: March 9, 2005
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: MICHAEL G. ODLUM
-------------------------------
Michael G. Odlum, President
Date: March 9, 2005
By: BRENDA M. HARWOOD
-------------------------------
Brenda M. Harwood, Treasurer
Date: March 9, 2005