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STATEMENT OF ADDITIONAL INFORMATION
ADVANTUS REAL ESTATE SECURITIES FUND, INC.
February 25, 1999
AS SUPPLEMENTED MAY 21, 1999
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. THIS STATEMENT OF
ADDITIONAL INFORMATION RELATES TO THE SEPARATE PROSPECTUS DATED FEBRUARY 25,
1999, AND SHOULD BE READ IN CONJUNCTION THEREWITH. A COPY OF THE PROSPECTUS MAY
BE OBTAINED BY TELEPHONE FROM ADVANTUS SHAREHOLDER SERVICES AT (800) 665-6005 OR
BY WRITING TO ADVANTUS FUNDS GROUP, P.O. BOX 9767, PROVIDENCE, RHODE ISLAND
02940-5059.
THIS STATEMENT OF ADDITIONAL INFORMATION MUST BE ACCOMPANIED OR PRECEDED BY A
COPY OF THE CURRENT PROSPECTUS AND ANNUAL REPORT TO SHAREHOLDERS FOR THE FUND.
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TABLE OF CONTENTS
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GENERAL INFORMATION AND HISTORY. . . . . . . . . . . . . . . . . . . . . . . . . . .4
INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . . . . . . . . . . . .4
Real Estate Investment Trust Securities . . . . . . . . . . . . . . . . . . . . . .4
Debt and Money Market Securities. . . . . . . . . . . . . . . . . . . . . . . . . .4
Low Rated Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
Convertible Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
Foreign Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
Loans of Portfolio Securities . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Restricted and Illiquid Securities. . . . . . . . . . . . . . . . . . . . . . . . .8
When-Issued Securities and Forward Commitments. . . . . . . . . . . . . . . . . . .9
Repurchase Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Short Sales Against the Box . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Defensive Purposes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
PORTFOLIO TURNOVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
DIRECTORS AND EXECUTIVE OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . 14
DIRECTOR LIABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
INVESTMENT ADVISORY AND OTHER SERVICES . . . . . . . . . . . . . . . . . . . . . . 16
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Control and Management of Advantus Capital and Ascend Financial . . . . . . . . . 16
Investment Advisory Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Distribution Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Payment of Certain Distribution Expenses of the Fund. . . . . . . . . . . . . . . 18
Transfer Agent and Administrative Services. . . . . . . . . . . . . . . . . . . . 20
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE . . . . . . . . . . . . . . . . 20
CALCULATION OF PERFORMANCE DATA. . . . . . . . . . . . . . . . . . . . . . . . . . 22
CAPITAL STOCK AND OWNERSHIP OF SHARES. . . . . . . . . . . . . . . . . . . . . . . 24
HOW TO BUY SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Alternative Purchase Arrangements . . . . . . . . . . . . . . . . . . . . . . . . 24
Purchase by Check . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Purchase by Wire. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Timing of Purchase Orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Minimum Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Public Offering Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SALES CHARGES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Other Payments to Broker-Dealers . . . . . . . . . . . . . . . . . . . . . . . . 26
NET ASSET VALUE AND PUBLIC OFFERING PRICE. . . . . . . . . . . . . . . . . . . . . 26
REDUCED SALES CHARGES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Right of Accumulation-Cumulative Purchase Discount. . . . . . . . . . . . . . . . 27
Letter of Intent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Combining Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Group Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Waiver of Sales Charges For Certain Sales of Class A Shares . . . . . . . . . . . 28
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EXCHANGE AND TRANSFER OF FUND SHARES . . . . . . . . . . . . . . . . . . . . . . . 28
Systematic Exchange Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SHAREHOLDER SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Open Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Automatic Investment Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Group Systematic Investment Plan. . . . . . . . . . . . . . . . . . . . . . . . . 30
Retirement Plans Offering Tax Benefits. . . . . . . . . . . . . . . . . . . . . . 31
Systematic Withdrawal Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
REDEMPTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Signature Guarantee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Telephone Redemption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Delay in Payment of Redemption Proceeds . . . . . . . . . . . . . . . . . . . . . 34
Fund's Right to Redeem Small Accounts . . . . . . . . . . . . . . . . . . . . . . 34
Reinstatement Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
TELEPHONE TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
DISTRIBUTIONS AND TAX STATUS . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Dividends and Capital Gains Distributions . . . . . . . . . . . . . . . . . . . . 35
Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
APPENDIX A BOND AND COMMERCIAL PAPER RATINGS . . . . . . . . . . . . . . . . . . .A-1
APPENDIX B - FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . .B-1
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GENERAL INFORMATION AND HISTORY
Advantus Real Estate Securities Fund, Inc. (the "Fund") is an open-end
diversified investment companies, commonly called a mutual fund. The Fund,
together with twelve other mutual funds which share the same investment adviser,
are members of a family of mutual funds known as the "Advantus Funds." Each of
the Advantus Funds, excluding the Fund and Advantus Money Market Fund, Inc.,
offers more than one class of shares (the "Advantus Multiple Class Funds"). The
Fund currently offers one class of shares (Class A). The Fund was incorporated
as a Minnesota corporation in September, 1998.
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and principal investment policies of the Fund are
set forth in detail in the text of the Fund's Prospectus under "Investing in the
Fund - Investment Policies and Practices."
REAL ESTATE INVESTMENT TRUST SECURITIES
A real estate investment trust ("REIT") is a corporation or a business
trust that would otherwise be taxed as a corporation, which meets certain
requirements of the Internal Revenue Code of 1986, as amended (the "Code").
The Code permits a qualifying REIT to deduct dividends paid, thereby
effectively eliminating corporate level federal income tax and making the
REIT a pass-through vehicle for federal income tax purposes. In order to
qualify as a REIT, a company must derive at least 75% of its gross income
from real estate sources (rents, mortgage interest, and gains from sale of
real estate assets), and must distribute to shareholders annually 95% or more
of its taxable income. Moreover, at the end of each quarter of its taxable
year, at least 75% of the value of its total assets must be represented by
real estate assets, cash and cash items, and U.S. government securities.
REITs are sometimes informally characterized as equity REITs, mortgage
REITs and hybrid REITs. An equity REIT invests primarily in the fee ownership
or leasehold ownership of land and buildings and derives its income primarily
from rental income. A mortgage REIT invests primarily in mortgages on real
estate, and derives primarily from interest payments received on credit it has
granted. A hybrid REIT combines the characteristics of equity REITs and
mortgage REITs. It is anticipated, although not required, that under normal
circumstances, a majority of the Fund investments in REITs will consist of
equity REITs.
DEBT AND MONEY MARKET SECURITIES
The Fund may invest in long, intermediate and short-term debt securities
from various industry classifications and money market instruments. Such
instruments may include the following:
--Corporate obligations which at the time of purchase are rated within the
four highest grades assigned by Standard & Poor's Corporation ("S&P"),
Moody's Investors Services, Inc. ("Moody's") or any other national rating
service, or, if not rated, are of equivalent investment quality as
determined by the Fund's investment adviser or sub-adviser, as the case may
be. To the extent that the Fund invests in securities rated BBB or Baa by
S&P or Moody's, respectively, it will be investing in securities which have
speculative elements.
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See "Low Rated Securities," below. For a description of the ratings used
by Moody's and S&P, see Appendix A ("Bond and Commercial Paper Ratings")
below.
--Obligations of, or guaranteed by, the U.S. Government, its agencies or
instrumentalities.
--Debt obligations of banks.
In addition to the instruments described above, which will generally be
long-term, but may be purchased by the Fund within one year of the date of a
security's maturity, the Fund may also purchase other high quality securities
including:
-- Obligations (including certificates of deposit and bankers' acceptances) of
U.S. banks, savings and loan associations, savings banks which have total
assets (as of the date of their most recent annual financial statements at
the time of investment) of not less than $2,000,000,000; U.S. dollar
denominated obligations of Canadian chartered banks, London branches of
U.S. banks and U.S. branches or agencies of foreign banks which meet the
above-stated asset size; and obligations of any U.S. banks, savings and
loan associations and savings banks, regardless of the amount of their
total assets, provided that the amount of the obligations purchased does
not exceed $100,000 for any one U.S. bank, savings and loan association or
savings bank and the payment of the principal is insured by the Federal
Deposit Insurance Corporation or the Federal Savings and Loan Insurance
Corporation.
-- Obligations of the International Bank for Reconstruction and Development.'
--Commercial paper (including variable amount master demand notes) issued by
U.S. corporations or affiliated foreign corporations and rated (or
guaranteed by a company whose commercial paper is rated) at the date of
investment Prime-1 by Moody's or A-1 by S&P or, if not rated by either
Moody's or S&P, issued by a corporation having an outstanding debt issue
rated Aa or better by Moody's or AA or better by S&P and, if issued by an
affiliated foreign corporation, such commercial paper (not to exceed in the
aggregate 10% of such Fund's net assets) is U.S. dollar denominated and not
subject at the time of purchase to foreign tax withholding.
The Fund may also invest in securities which are unrated if the Fund's
investment adviser determines that such securities are of equivalent investment
quality to the rated securities described above. In the case of "split-rated"
securities, which result when nationally-recognized rating agencies rate the
security at different rating levels (e.g., BBB by S&P and Ba by Moody's), it is
the Fund's general policy to classify such securities at the higher rating level
where, in the judgment of the Fund's investment adviser or sub-adviser, such
classification reasonably reflects the security's quality and risk.
The market value of debt securities generally varies in response to changes
in interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of such
securities generally declines. These changes in market value will be reflected
in the Fund's net asset value.
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The Fund may, however, acquire debt securities which, after acquisition,
are down-graded by the rating agencies to a rating which is lower than the
applicable minimum rating described above. In such an event it is the Fund's
general policy to dispose of such down-graded securities except when, in the
judgment of the Fund's investment adviser it is to the Fund's advantage to
continue to hold such securities. In no event, however, will the Fund hold in
excess of 5% of its net assets in securities which have been down-graded
subsequent to purchase where such down-graded securities are not otherwise
eligible for purchase by the Fund. This 5% is in addition to securities which
the Fund may otherwise purchase under its usual investment policies.
LOW RATED SECURITIES
The Fund may also hold 5% of its net assets in securities rated below
"investment grade" (i.e. below BBB) where such securities were investment grade
at the time of purchase but subsequently down-graded. Debt securities rated
below the four highest categories (i.e., below BBB) are not considered
investment grade obligations and are commonly called "junk bonds." These
securities are predominately speculative and present more credit risk than
investment grade obligations. Bonds rated below BBB are also regarded as
predominately speculative with respect to the issuer's continuing ability to
meet principal and interest payments.
Low rated and unrated debt securities generally involve greater volatility
of price and risk of principal and income, including the possibility of default
by, or bankruptcy of, the issuers of the securities. In addition, the markets
in which low rated and unrated debt securities are traded are more limited than
those in which higher rated securities are traded. The existence of limited
markets for particular securities may diminish the Fund's ability to sell the
securities at fair value either to meet redemption requests or to respond to
changes in the economy or in the financial markets and could adversely affect
and cause fluctuations in the daily net asset value of the Fund's shares.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of low rated debt
securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low rated debt securities may be more complex
than for issuers of higher rated securities, and the ability of the Fund to
achieve its investment objective may, to the extent of investment in low rated
debt securities, be more dependent upon such creditworthiness analysis than
would be the case if the Fund were investing in higher rated securities.
Low rated debt securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment grade
securities. The prices of low rated debt securities have been found to be less
sensitive to interest rate changes than higher rated investments, but more
sensitive to adverse economic downturns or individual corporate developments. A
projection of an economic downturn or of a period of rising interest rates, for
example, could cause a decline in low rated debt securities prices because the
advent of a recession could lessen the ability of a highly leveraged company to
make principal and interest payments on its debt securities. If the issuer of
low rated debt securities defaults, the Fund may incur additional expenses to
seek recovery. The low rated bond market is relatively new, and many of the
outstanding low rated bonds have not endured a major business recession.
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CONVERTIBLE SECURITIES
The Fund may invest in debt or preferred equity securities convertible into
or exchangeable for equity securities. Traditionally, convertible securities
have paid dividends or interest at rates higher than common stocks but lower
than non-convertible securities. They generally participate in the appreciation
or depreciation of the underlying stock into which they are convertible, but to
a lesser degree. The total return and yield of lower quality (high yield/high
risk) convertible bonds can be expected to fluctuate more than the total return
and yield of higher quality, shorter-term bonds, but not as much as common
stocks. The Fund will limit its purchase of convertible debt securities to
those that, at the time of purchase, are rated at least BBB by S&P or Baa by
Moody's, or if not rated by S&P or Moody's, are of equivalent investment quality
as determined by the Fund's investment adviser.
FOREIGN SECURITIES
The Fund may invest up to 10% of the market value of its total assets in
securities of foreign issuers which are not publicly traded in the U.S.
(securities of foreign issuers which are publicly traded in the U.S., usually in
the form of sponsored American Depositary Receipts, are not subject to this 10%
limitation.) Investing in securities of foreign issuers may result in greater
risk than that incurred in investing in securities of domestic issuers. There
is the possibility of expropriation, nationalization or confiscatory taxation,
taxation of income earned in foreign nations or other taxes imposed with respect
to investments in foreign nations; foreign exchange controls (which may include
suspension of the ability to transfer currency from a given country), default in
foreign government securities, political or social instability or diplomatic
developments which could affect investments in securities of issuers in those
nations. In addition, in many countries there is less publicly available
information about issuers than is available in reports about companies in the
U.S. Foreign companies are not generally subject to uniform accounting,
auditing and financial reporting standards, and auditing practices and
requirements may not be comparable to those applicable to U.S. companies.
Further, the Fund may encounter difficulties or be unable to pursue legal
remedies and obtain judgments in foreign courts. Commission rates in foreign
countries, which are sometimes fixed rather than subject to negotiation as in
the U.S., are likely to be higher. Further, the settlement period of securities
transactions in foreign markets may be longer than in domestic markets. In many
foreign countries there is less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the U.S. The foreign securities markets of many of the countries in
which the Fund may invest may also be smaller, less liquid, and subject to
greater price volatility than those in th U.S. Also, some countries may
withhold portions of interest, dividends and gains at the source. The Fund may
also be unfavorably affected by fluctuations in the relative rates of exchange
between the currencies of different nations (i.e., when the currency being
exchanged has decreased in value relative to the currency being purchased).
There are further risk considerations, including possible losses through the
holding of securities in domestic and foreign custodial banks and depositories.
The countries of the European Monetary Union (EMU) began the process of
converting their individual country currencies to the EURO on January 1, 1999.
There is also a risk that the value of foreign securities of companies located
in EMU countries may decrease due to market volatility resulting from the
conversion of certain EMU country currencies to the Euro. It is not possible to
predict the impact of the Euro on the business or financial condition of
European issues or on the Fund. The transition and the elimination of currency
risk among EMU countries may change the economic environment and behavior of
investors, particularly in European markets. To the extent the Fund holds
non-U.S. dollar (Euro or other) denominated securities, it will still be exposed
to currency risk due to fluctuations in those currencies versus the U.S. dollar.
The Fund has no present intention of investing in securities of foreign
issuers other than in the form of American Depositary Receipts (ADR).
An ADR is sponsored if the original issuing company has selected a single
U.S. bank to serve as its U.S. depositary and transfer agent. This relationship
requires a deposit agreement which defines the rights and duties of both the
issuer and depositary. Companies that sponsor ADRs must also provide their ADR
investors with English translations of company information made public in their
own domiciled country. Sponsored ADR investors also generally have the same
voting rights as ordinary shareholders, barring any unusual circumstances. ADRs
which meet these
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requirements can be listed on U.S. stock exchanges. Unsponsored ADRs are
created at the initiative of a broker or bank reacting to demand for a specific
foreign stock. The broker or bank purchases the underlying shares and deposits
them in a depositary. Unsponsored shares issued after 1983 are not eligible for
U.S. stock exchange listings. Furthermore, they do not generally include voting
rights.
LOANS OF PORTFOLIO SECURITIES
For the purpose of realizing additional income, the Fund may make secured
loans of portfolio securities amounting to not more than 20% of its total
assets. Securities loans are made to broker-dealers or financial institutions
pursuant to agreements requiring that the loans be continuously secured by
collateral at least equal at all times to the value of the securities lent. The
collateral received will consist of cash, letters of credit or securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities. While
the securities are being lent, the Fund will continue to receive the equivalent
of the interest or dividends paid by the issuer on the securities, as well as
interest on the investment of the collateral or a fee from the borrower.
Although the Fund does not expect to pay commissions or other front-end fees
(including finders fees) in connection with loans of securities (but in some
cases may do so), a portion of the additional income realized will be shared
with the Fund's custodian for arranging and administering such loans. The Fund
has a right to call each loan and obtain the securities on five business days'
notice. The Fund will not have the right to vote securities while they are
being lent, but it will call a loan in anticipation of any important vote. The
risks in lending portfolio securities, as with other extensions of secured
credit, consist of possible delay in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. Loans will only be made to firms deemed by the
Fund's investment adviser to be of good standing and to have sufficient
financial responsibility, and will not be made unless, in the judgment of the
Fund's investment adviser, the consideration to be earned from such loans would
justify the risk. The creditworthiness of entities to which the Fund makes
loans of portfolio securities is monitored by the Fund's investment adviser
throughout the term of each loan.
RESTRICTED AND ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in securities restricted as
to disposition under the federal securities laws or otherwise, or other illiquid
assets. An investment is generally deemed to be "illiquid" if it cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the investment company is valuing the
investment. "Restricted securities" are securities which were originally sold in
private placements and which have not been registered under the Securities Act
of 1933 (the "1933 Act"). Such securities generally have been considered
illiquid by the staff of the Securities and Exchange Commission (the "SEC"),
since such securities may be resold only subject to statutory restrictions and
delays or if registered under the 1933 Act. Because of such restrictions, the
Fund may not be able to dispose of a block of restricted securities for a
substantial period of time or at prices as favorable as those prevailing in the
open market should like securities of an unrestricted class of the same issuer
be freely traded. The Fund may be required to bear the expenses of registration
of such restricted securities.
The SEC has acknowledged, however, that a market exists for certain
restricted securities (for example, securities qualifying for resale to certain
"qualified institutional buyers" pursuant to
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Rule 144A under the 1933 Act). Additionally, the Fund's investment adviser
believes that a similar market exists for commercial paper issued pursuant to
the private placement exemption of Section 4(2) of the 1933 Act. The Fund may
invest without limitation in these forms of restricted securities if such
securities are deemed by the Fund's investment adviser to be liquid in
accordance with standards established by the Fund's Board of Directors. Under
these guidelines, the Fund's investment adviser must consider (a) the frequency
of trades and quotes for the security, (b) the number of dealers willing to
purchase or sell the security and the number of other potential purchasers, (c)
dealer undertakings to make a market in the security, and (d) the nature of the
security and the nature of the marketplace trades (for example, the time needed
to dispose of the security, the method of soliciting offers and the mechanics of
transfer). At the present time, it is not possible to predict with accuracy how
the markets for certain restricted securities will develop. Investing in such
restricted securities could have the effect of increasing the level of the
Fund's illiquidity to the extent that qualified purchasers of the securities
become, for a time, uninterested in purchasing these securities.
If through the appreciation of restricted securities or the depreciation of
unrestricted securities, the Fund is in a position where more than 15% of its
net assets are invested in restricted and other illiquid securities, the Fund
will take appropriate steps to protect liquidity.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
The Fund may each purchase securities offered on a "when-issued" basis and
may purchase or sell securities on a "forward commitment" basis. When such
transactions are negotiated, the price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery and payment for
the securities takes place at a later date. Normally, the settlement date
occurs within two months after the transaction, but delayed settlements beyond
two months may be negotiated. During the period between a commitment to
purchase by the Fund and settlement, no payment is made for the securities
purchased by the Fund and, thus, no interest accrues to the Fund from the
transaction.
The use of when-issued transactions and forward commitments enables the
Fund to hedge against anticipated changes in interest rates and prices. For
instance, in periods of rising interest rates and falling prices, the Fund might
sell securities in its portfolio on a forward commitment basis to limit its
exposure to falling prices. In periods of falling interest rates and rising
prices, the Fund might sell a security in its portfolio and purchase the same or
a similar security on a when-issued or forward commitment basis, thereby fixing
the purchase price to be paid on the settlement date at an amount below that to
which the Fund anticipates the market price of such security to rise and, in the
meantime, obtaining the benefit of investing the proceeds of the sale of its
portfolio security at currently higher cash yields. Of course, the success of
this strategy depends upon the ability of the Fund's investment adviser to
correctly anticipate increases and decreases in interest rates and prices of
securities. If the Fund's investment adviser anticipates a rise in interest
rates and a decline in prices and, accordingly, the Fund sells securities on a
forward commitment basis in order to hedge against falling prices, but in fact
interest rates decline and prices rise, the Fund will have lost the opportunity
to profit from the price increase. If the investment adviser anticipates a
decline in interest rates and a rise in prices, and, accordingly, the Fund sells
a security in its portfolio and purchases the same or a similar security on a
when-issued or forward commitment basis in order to enjoy currently high cash
yields, but in fact interest rates increase and prices fall, the Fund will have
lost the opportunity to profit from investment of the proceeds of the sale of
the
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security at the increased interest rates. The likely effect of this hedging
strategy, whether the Fund's investment adviser is correct or incorrect in its
prediction of interest rate and price movements, is to reduce the chances of
large capital gains or losses and thereby reduce the likelihood of wide
variations in the Fund's net asset value.
When-issued securities and forward commitments may be sold prior to the
settlement date, but, except for mortgage dollar roll transactions, the Fund
enters into when-issued and forward commitments only with the intention of
actually receiving or delivering the securities, as the case may be. The Fund
may hold a when-issued security or forward commitment until the settlement date,
even if the Fund will incur a loss upon settlement. To facilitate transactions
in when-issued securities and forward commitments, the Fund's custodian bank
maintains, in a separate account of the Fund, liquid assets, such as cash,
short-term securities and other liquid securities (marked to the market daily),
having a value equal to, or greater than, any commitments to purchase securities
on a when-issued or forward commitment basis and, with respect to forward
commitments to sell portfolio securities of the Fund, the portfolio securities
themselves. If the Fund, however, chooses to dispose of the right to acquire a
when-issued security prior to its acquisition or dispose of its right to deliver
or receive against a forward commitment, it can incur a gain or loss. (At the
time the Fund makes the commitment to purchase or sell a security on a
when-issued or forward commitment basis, it records the transaction and reflects
the value of the security purchased or, if a sale, the proceeds to be received,
in determining its net asset value.)
The purchase of securities on a when-issued or forward commitment basis
exposes the Fund to risk because the securities may decrease in value prior to
their delivery. Purchasing securities on a when-issued or forward commitment
basis involves the additional risk that the return available in the market when
the delivery takes place will be higher than that obtained in the transaction
itself. The Fund's purchase of securities on a when-issued or forward
commitment basis while remaining substantially fully invested increases the
amount of the Fund's assets that are subject to market risk to an amount that is
greater than the Fund's net asset value, which could result in increased
volatility of the price of the Fund's shares. No more than 30% of the value of
the Fund's total assets will be committed to when-issued or forward commitment
transactions.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements. Repurchase agreements are
agreements by which the Fund purchases a security and obtains a simultaneous
commitment from the seller (a member bank of the Federal Reserve System or, if
permitted by law or regulation and if the Board of Directors of the Fund has
evaluated its creditworthiness through adoption of standards of review or
otherwise, a securities dealer) to repurchase the security at an agreed upon
price and date. The creditworthiness of entities with whom the Fund enters into
repurchase agreements is monitored by the Fund's investment adviser throughout
the term of the repurchase agreement. The resale price is in excess of the
purchase price and reflects an agreed upon market rate unrelated to the coupon
rate on the purchased security. Such transactions afford the Fund the
opportunity to earn a return on temporarily available cash. The Fund's
custodian, or a duly appointed subcustodian, holds the securities underlying any
repurchase agreement in a segregated account or such securities may be part of
the Federal Reserve Book Entry System. The market value of the collateral
underlying the repurchase agreement is determined on each business day. If at
any time the market value of the collateral falls below the repurchase price of
the repurchase agreement (including any accrued interest), the Fund promptly
receives additional collateral, so that the total collateral is in an amount
10
<PAGE>
at least equal to the repurchase price plus accrued interest. While the
underlying security may be a bill, certificate of indebtedness, note or bond
issued by an agency, authority or instrumentality of the U.S. Government, the
obligation of the seller is not guaranteed by the U.S. Government. In the event
of a bankruptcy or other default of a seller of a repurchase agreement, the Fund
could experience both delays in liquidating the underlying security and losses,
including: (a) possible decline in the value of the underlying security during
the period while the Fund seeks to enforce its rights thereto; (b) possible
subnormal levels of income and lack of access to income during this period; and
(c) expenses of enforcing its rights.
WARRANTS
The Fund may invest in warrants; however, not more than 5% of its net
assets (at the time of purchase) will be invested in warrants other than
warrants acquired in units or attached to other securities. Of such 5%, not
more than 2% of the Fund's assets at the time of purchase may be invested in
warrants that are not listed on the New York or American Stock Exchanges.
Warrants are instruments that allow investors to purchase underlying shares at a
specified price (exercise price) at a given future date. The market price of a
warrant is determined by market participants by the addition of two distinct
components: (1) the price of the underlying shares less the warrant's exercise
price, and (2) the warrant's premium that is attributed to volatility and
leveraging power. Warrants are pure speculation in that they have no voting
rights, pay no dividends and have no rights with respect to the assets of the
corporation issuing them. The prices of warrants do not necessarily move
parallel to the prices of the underlying securities.
SHORT SALES AGAINST THE BOX
The Fund may sell securities "short against the box." Whereas a short sale
is the sale of a security the Fund does not own, a short sale is "against the
box" if, at all times during which the short position is open, the Fund owns at
least an equal amount of the securities sold short or other securities
convertible into or exchangeable without further consideration for securities of
the same issue as the securities sold short. Short sales against the box are
typically used by sophisticated investors to defer recognition of capital gains
or losses. The Fund has no present intention to sell securities short in this
fashion.
DEFENSIVE PURPOSES
The Fund may invest approximately 5% of its net assets in cash or cash
items. In addition, for temporary or defensive purposes, the Fund may invest up
to 20% of its net assets in cash or cash items without limitation. The "cash
items" in which the Fund may invest, include short-term obligations such as
rated commercial paper and variable amount master demand notes; United States
dollar-denominated time and savings deposits (including certificates of
deposit); bankers' acceptances; obligations of the United States Government or
its agencies or instrumentalities; repurchase agreements collateralized by
eligible investments of the Fund; securities of other mutual funds which invest
primarily in debt obligations with remaining maturities of 13 months or less
(which investments also are subject to the advisory fee); and other similar
high-quality short-term United States dollar-denominated obligations. The other
mutual funds in which the Fund may so invest include money market funds advised
by the Fund's investment adviser.
11
<PAGE>
INVESTMENT RESTRICTIONS
The Fund is "diversified" as defined in the Investment Company Act of 1940
(the "1940 Act"). This means that at least 75% of the value of the Fund's total
assets is represented by cash and cash items, government securities, securities
of other investment companies, and securities of other issuers, which for
purposes of this calculation, are limited in respect of any one issuer to an
amount not greater in value than 5% of the Fund's total assets and to not more
than 10% of the outstanding voting securities of such issuer.
The Fund is also subject to certain "fundamental" investment restrictions,
which may not be changed without the vote of a "majority" of the Fund's
outstanding shares. As used in the Prospectus and this Statement of Additional
Information, "majority" means the lesser of (i) 67% of the Fund's outstanding
shares present at a meeting of the holders if more than 50% of the outstanding
shares are present in person or by proxy or (ii) more than 50% of the Fund's
outstanding shares. An investment restriction which is not fundamental may be
changed by vote of the Board of Directors without further shareholder approval.
Except as otherwise noted, each of the investment restrictions below is
fundamental.
(The investment restrictions numbered 1 through 7 below are fundamental.
Restrictions numbered 8 through 14 are not fundamental.)
The Fund will NOT:
(1) Purchase any security if, as a result, 25% or more of the Fund's total
assets would be invested in the securities of issuers conducting their
principal business activities in a single industry, except that this
limitation will not apply to investments in securities of issuers in
the real estate or real estate-related industry (in which 25% or more
of the value of the Fund's total assets will be invested).
(2) Purchase or sell real estate, except that the Fund may invest in
securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein.
(3) Purchase or sell physical commodities or futures or options
contracts with respect to physical commodities. This restriction
shall not restrict the Fund from purchasing or selling any financial
contracts or instruments which may be deemed commodities (including,
by way of example and not by way of limitation, options, futures, and
options on futures with respect, in each case, to interest rates,
currencies, stock indices, bond indicies or interest rate indicies)
or any security which is collateralized or otherwise backed by
physical commodities.
(4) Borrow money, or enter into reverse repurchase agreements, in excess
of one-third of its net assets, and, with respect to borrowing money,
only from banks for temporary purposes. For purposes of this
restriction, the use of options and futures transactions and the
purchase of securities on a when-issued or delayed delivery basis
shall not be deemed the borrowing of money.
(5) Issue any senior securities, as defined in the 1940 Act, other than
as set forth in restriction number 4 above and except to the extent
that using options and futures contracts or purchasing or selling
securities on a when-issued or forward commitment basis may be deemed
to constitute issuing a senior security.
12
<PAGE>
(6) Make loans to other persons, except that it may lend portfolio
securities representing up to one-third of the value of its total
assets. (The Fund, however, may purchase and hold debt instruments
and enter into repurchase agreements in accordance with its investment
objectives and policies.)
(7) Act as an underwriter of securities, except to the extent the Fund may
be deemed to be an underwriter, under the federal securities laws, in
connection with the disposition of portfolio securities.
(8) Make investments for the purpose of exercising control or management.
(9) Participate on a joint or joint and several basis in any trading
account in securities.
(10) Invest in the securities of other investment companies with an
aggregate value in excess of 5% of the Fund's total assets, except
securities acquired as a result of a merger, consolidation or
acquisition of assets.
(11) Invest more than a total of 15% of the Fund's net assets in securities
or other assets, including repurchase agreements with a maturity of
over seven days, which are illiquid.
(12) Purchase securities on margin (but it may obtain such short-term
credits as may be necessary for the clearance of purchases and sales
of securities).
(13) Make short sales except short sales against the box where it owns the
securities sold or, by virtue of ownership of other securities, it has
the right to obtain, without payment of further consideration,
securities equivalent in kind and amount to those sold.
(14) Make additional investments while its borrowings exceed 5% of its
total assets.
Any investment policy set forth under "Investing in the Fund -- Investment
Policies and Practices" in the Prospectus, or any restriction set forth above
which involves a maximum percentage of securities or assets shall not be
considered to be violated unless an excess over the percentage occurs
immediately after an acquisition of securities or utilization of assets and
results therefrom, or unless the Investment Company Act of 1940 provides
otherwise.
PORTFOLIO TURNOVER
Portfolio turnover is the ratio of the lesser of annual purchases or sales
of portfolio securities to the average monthly value of portfolio securities,
not including short-term securities. A 100% portfolio turnover rate would
occur, for example, if the lesser of the value of purchases or sales of
portfolio securities for a particular year were equal to the average monthly
value of the portfolio securities owned during such year.
The Fund makes changes in its portfolio securities which are considered
advisable in light of market conditions. Frequent changes may result in higher
brokerage and other costs for the Fund. Portfolio turnover rates may vary
greatly from year to year and within a particular year and may also be affected
by cash requirements for redemptions of Fund shares. The Fund does not
13
<PAGE>
emphasize short-term trading profits. The Fund had not commenced operations
prior to the date hereof.
DIRECTORS AND EXECUTIVE OFFICERS
The names, addresses, principal occupations, and other affiliations of
directors and executive officers of the Fund are given below:
<TABLE>
<CAPTION>
Position with Principal Occupation and other
Name and Address the Fund Affiliations (past 5 years)
- ---------------- --------- ---------------------------
<S> <C> <C>
William N. Westhoff* President and President, Treasurer and Director,
Advantus Capital Director Advantus Capital Management, Inc.;
Management, Inc. Senior Vice President and Treasurer,
400 Robert Street North Minnesota Life Insurance Company;
St. Paul, Minnesota 55101 Vice President and Director, Robert Street
Energy, Inc.; President, MCM Funding 1997-1,
Inc.; President, MCM Funding 1998-1, Inc.;
Senior Vice President, Global Investments,
American Express Financial Corporation,
Minneapolis, Minnesota, from August 1994 to
October 1997; Senior Vice President, Fixed
Income Management, American Express Financial
Corporation, Minneapolis, Minnesota, from
November 1989 to July 1994
Frederick P. Feuerherm* Vice President, Vice President, Assistant Secretary and
Advantus Capital Director and Director, Advantus Capital
Management, Inc. Treasurer Management, Inc.; Vice President,
400 Robert Street North Minnesota Life Insurance Company;
St. Paul, Minnesota 55101 Vice President and Director, MIMLIC Funding,
Inc.; Vice President and Assistant Secretary,
MCM Funding 1997-1, Inc.; Vice President and
Assistant Secretary, MCM Funding 1998-1, Inc.
Ralph D. Ebbott Director Retired, Vice President and Treasurer
409 Birchwood Avenue of Minnesota Mining and Manufacturing
White Bear Lake, Company (tape, adhesive, photographic,
Minnesota 55110 and electrical products) through June
1989
14
<PAGE>
Charles E. Arner Director Retired, Vice Chairman of The First
E-1218 First National National Bank of Saint Paul from
Bank Building November 1983 through June 1984;
332 Minnesota Street Chairman and Chief Executive Officer
St. Paul, Minnesota 55101 of The First National Bank of Saint Paul
from October 1980 through November
1983
Ellen S. Berscheid Director Regents' Professor of Psychology at the
University of Minnesota University of Minnesota
N309 Elliott Hall
Minneapolis, Minnesota 55455
Michael J. Radmer Secretary Partner with the law firm of
Dorsey & Whitney LLP Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, Minnesota 55402
</TABLE>
__________________________________
* Denotes directors of the Fund who are "interested persons" (as defined under
the Investment Company Act of 1940) of the Fund.
__________________________________
Legal fees and expenses are paid to the law firm of which Michael J. Radmer
is a partner. No compensation is paid by the Fund to any of its officers or
directors who is affiliated with Advantus Capital Management, Inc. ("Advantus
Capital").
Each director of the Fund who is not affiliated with Advantus Capital is
also a director of the other twelve investment companies of which Advantus
Capital is the investment adviser (13 investment companies in total -- the "Fund
Complex"). As of the date hereof, such directors receive compensation in
connection with all such investment companies which, in the aggregate, is equal
to $8,000 per year and $2,000 per meeting attended (and reimbursement of travel
expenses to attend directors' meetings). The portion of such compensation borne
by the Fund is a pro rata portion based on the ratio that the Fund's total net
assets bears to the total net assets of the Fund Complex. The Fund had not
commenced operations prior to the date hereof but it is estimated that each
Director not affiliated by Advantus Capital will be compensated by the Fund
during a fiscal year in accordance with the following table:
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Aggregate Benefits Estimated From Fund and
Compensation Accrued as Annual Fund Complex
Name of from the Part of Fund Benefits Upon Paid to
Director Fund(1) Expenses Retirement Directors
- -------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Charles E. Arner $26 n/a n/a $20,000
Ellen S. Berscheid $26 n/a n/a $20,000
Ralph D. Ebbott $26 n/a n/a $20,000
</TABLE>
(1) Estimate based on the relative net assets of the Fund and the other
investment companies in the Fund Complex as of the date hereof.
As of the date hereof, the directors and excutive officers of the
Fund did not own any shares of the Fund.
DIRECTOR LIABILITY
Under Minnesota law, the Board of Directors of the Fund owes certain
fiduciary duties to the Fund and to its shareholders. Minnesota law provides
that a director "shall discharge the duties of the position of director in
good faith, in a manner the director reasonably believes to be in the best
interest of the corporation, and with the care an ordinarily prudent person
in a like position would exercise under similar circumstances." Fiduciary
duties of a director of a Minnesota corporation include, therefore, both a
duty of "loyalty" (to act in good faith and act in a manner reasonably
believed to be in the best interests of the corporation) and a duty of "care"
(to act with the care an ordinarily prudent person in a like position would
exercise under similar circumstances). Minnesota law also authorizes
corporations to eliminate or limit the personal liability of a director to
the corporation or its shareholders for monetary damages for breach of the
fiduciary duty of "care." Minnesota law does not, however, permit a
corporation to eliminate or
15
<PAGE>
limit the liability of a director (i) for any breach of the directors' duty
of "loyalty" to the corporation or its shareholders, (ii) for acts or
omissions not in good faith or that involve intentional misconduct or a
knowing violation of law, (iii) for authorizing a dividend, stock repurchase
or redemption or other distribution in violation of Minnesota law or for
violation of certain provisions of Minnesota securities laws, or (iv) for any
transaction from which the director derived an improper personal benefit.
The Articles of Incorporation of the Fund limit the liability of directors to
the fullest extent permitted by Minnesota statutes, except to the extent that
such liability cannot be limited as provided in the Investment Company Act of
1940 (which prohibits any provisions which purport to limit the liability of
directors arising from such directors' willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of
heir role as directors).
Minnesota law does not eliminate the duty of "care" imposed upon a
director. It only authorizes a corporation to eliminate monetary liability for
violations of that duty. Minnesota law, further, does not permit elimination or
limitation of liability of "officers" to the corporation for breach of their
duties as officers (including the liability of directors who serve as officers
for breach of their duties as officers). Minnesota law does not permit
elimination or limitation of the availability of equitable relief, such as
injunctive or rescissionary relief. Further, Minnesota law does not permit
elimination or limitation of a director's liability under the Securities Act of
1933 or the Securities Exchange Act of 1934, and it is uncertain whether and to
what extent the elimination of monetary liability would extend to violations of
duties imposed on directors by the Investment Company Act of 1940 and the rules
and regulations adopted under such Act.
INVESTMENT ADVISORY AND OTHER SERVICES
GENERAL
Advantus Capital Management, Inc. ("Advantus Capital") has been the
investment adviser and manager of the Fund since its inception. Ascend
Financial Services, Inc. ("Ascend Financial") acts as the Fund's underwriter.
Both Advantus Capital and Ascend Financial act as such pursuant to written
agreements that will be periodically considered for approval by the directors or
shareholders of the Fund. The address of both Advantus Capital and Ascend
Financial is 400 Robert Street North, St. Paul, Minnesota 55101.
CONTROL AND MANAGEMENT OF ADVANTUS CAPITAL AND ASCEND FINANCIAL
Advantus Capital was incorporated in Minnesota in June 1994, and is a
wholly-owned subsidiary of Minnesota Life Insurance Company ("Minnesota Life").
Minnesota Life is a third-tier subsidiary of a mutual insurance holding company
called Minnesota Mutual Companies, Inc. Minnesota Life was organized in 1880,
and has assets of more than $15.7 billion. Ascend Financial is also a
subsidiary of Minnesota Life. William N. Westhoff, President and a Director of
the Fund, is President, Treasurer and Director of Advantus Capital. Frederick
P. Feuerherm, Vice President, Treasurer and a Director of the Fund, is a Vice
President, Assistant Secretary and Director of Advantus Capital. Richard W.
Worthing is a Vice President and Head of Equities with Advantus Capital.
16
<PAGE>
INVESTMENT ADVISORY AGREEMENT
Advantus Capital acts as investment adviser and manager of the Fund
under an Investment Advisory Agreement (the "Advisory Agreement") dated
October 22, 1998 for the Fund, which became effective on February 3, 1999,
when the Fund's initial shareholder approved the Advisory Agreement. The
Advisory Agreement was approved by the Board of Directors of the Fund
(including a majority of the directors who are not parties to the contract,
or interested persons of any such party) on October 22, 1998. The Advisory
Agreement will terminate automatically in the event of its assignment. In
addition, the Advisory Agreement is terminable at any time, without penalty,
by the Board of Directors of the Fund or by vote of a majority of the Fund's
outstanding voting securities on not more than 60 days' written notice to
Advantus Capital, and by Advantus Capital on 60 days' written notice to the
Fund. Unless sooner terminated, the Advisory Agreement shall continue in
effect for more than two years after its execution only so long as such
continuance is specifically approved at least annually by either the Board of
Directors of the Fund or by a vote of a majority of the outstanding voting
securities, provided that in either event such continuance is also approved
by the vote of a majority of the directors who are not parties to the
Advisory Agreement, or interested persons of such parties, cast in person at
a meeting called for the purpose of voting on such approval.
Pursuant to the Advisory Agreement the Fund pays Advantus Capital an
advisory fee equal on an annual basis to a .75% of the Fund's average daily net
assets. The Fund had not commenced operations prior to the date hereof.
Under the Advisory Agreement, Advantus Capital furnishes the Fund office
space and all necessary office facilities, equipment and personnel for servicing
the investments of the Fund, and pays the salaries and fees of all officers and
directors of the Fund who are affiliated with Advantus Capital. In addition,
except to the extent that Ascend Financial receives Rule 12b-1 distribution fees
(see "Payment of Certain Distribution Expenses of the Fund" below), Ascend
Financial bears all promotional expenses in connection with the distribution of
the Fund's shares, including paying for prospectuses and statements of
additional information for new shareholders, and shareholder reports for new
shareholders, and the costs of sales literature. The Fund pays all other
expenses not so expressly assumed.
17
<PAGE>
DISTRIBUTION AGREEMENT
The Board of Directors of the Fund, including a majority of the directors
who are not parties to the contract, or interested persons of any such party,
approved the Fund's Distribution Agreement with Ascend Financial (the
"Distribution Agreement"), on October 22, 1998.
The Distribution Agreement may be terminated by the Fund or Ascend
Financial at any time by the giving of 60 days' written notice, and terminates
automatically in the event of its assignment. Unless sooner terminated, the
Distribution Agreement shall continue in effect for more than two years after
its execution only so long as such continuance is specifically approved at least
annually by either the Board of Directors of the Fund or by a vote of a majority
of the outstanding voting securities, provided that in either event such
continuance is also approved by the vote of a majority of the directors who are
not parties to the Distribution Agreement, or interested persons of such
parties, cast in person at a meeting called for the purpose of voting on such
approval.
The Distribution Agreement requires Ascend Financial to pay all advertising
and promotional expenses in connection with the distribution of the Fund's
shares including paying for Prospectuses and Statement of Additional Information
(if any) for new shareholders, shareholder reports for new shareholders, and the
costs of sales literature.
In the Distribution Agreement, Ascend Financial undertakes to indemnify the
Fund against all costs of litigation and other legal proceedings, and against
any liability incurred by or imposed upon the Fund in any way arising out of or
in connection with the sale or distribution of the Fund's shares, except to the
extent that such liability is the result of information which was obtainable by
Ascend Financial only from persons affiliated with the Fund but not with Ascend
Financial.
PAYMENT OF CERTAIN DISTRIBUTION EXPENSES OF THE FUND
The Fund has adopted a Plan of Distribution applicable to Class A shares
relating to the payment of certain shareholder servicing expenses pursuant to
Rule 12b-1 under the Investment Company Act of 1940. The Fund, pursuant to its
Plan of Distribution, pays fees to Ascend Financial which equal, on an annual
basis, .25% of the Fund's average daily net assets attributable to Class A
shares.
The 12b-1 fees payable with respect to Class A shares, equal to .25% of the
average daily net assets, constitute a shareholder servicing fee designed to
compensate Ascend Financial for the provision of certain services to the holders
of Class A shares.
Amounts expended by the Fund under the Plan of Distribution are expected
to be used for the implementation by Ascend Financial of a dealer incentive
program. Pursuant to the program, Ascend Financial may provide compensation
to investment dealers for the provision of administrative support services
to customers who directly or beneficially own shares of the Fund. The
administrative support services rendered by dealers may include, but are not
limited to, the following: answering routine customer inquiries concerning
the Fund; assisting customers in changing dividend options, account
designation and addresses, and in enrolling into the pre-authorized check
plan or systematic
18
<PAGE>
withdrawal plan; assisting in the establishment and maintenance of customer
accounts and records and in the processing of purchase and redemption
transactions; investing dividends and any capital gains distributions
automatically in the Fund's shares and providing such other information and
services as the Fund or the customer may reasonably request. Such fees for
servicing customer accounts would be in addition to the portion of the sales
charge received or to be received by dealers which sell shares of the Fund.
Ascend Financial may also provide compensation to certain institutions such
as banks ("Service Organizations") which have purchased shares of the Fund for
the accounts of their clients, or which have made the Fund's shares available
for purchase by their clients, and/or which provide continuing service to such
clients. The Glass-Steagall Act and other applicable laws, among other things,
prohibit certain banks from engaging in the business of underwriting securities.
In such circumstances, Ascend Financial, if so requested, will engage such banks
as Service Organizations only to perform administrative and shareholder
servicing functions, but at the same fees and other terms applicable to dealers.
State law may, however, differ from the interpretation of the Glass-Steagall Act
expressed and banks and other financial institutions may therefore be required
to register as securities dealers pursuant to state law. If a bank were
prohibited from acting as a Service Organization, its shareholder clients would
be permitted to remain shareholders of the Fund and alternative means for
continuing servicing of such shareholders would be sought. In such event
changes in the operation of the Fund might occur and a shareholder serviced by
such bank might no longer be able to avail itself of any automatic investment or
other services then being provided by the bank. It is not expected that
shareholders would suffer any adverse financial consequences as a result of any
of these occurrences.
In addition, the Plan of Distribution contains, among other things,
provisions complying with the requirements of Rule 12b-1 discussed below. In
particular, each Plan provides that (1) the Plan will not take effect until
it has been approved by a vote of a majority of the outstanding voting
securities of the Fund, and by a majority vote of both the full board of
directors of the Fund and those directors who are not interested persons of
the Fund and who have no direct or indirect financial interest in the
operation of the Plan or in any agreements relating to it (the Independent
Directors), (2) the Plan will continue in effect from one year to another so
long as its continuance is specifically approved annually by a majority vote
of both the full board of directors and the Independent Directors, (3) the
Plan may be terminated at any time, without penalty, by vote of a majority of
the Independent Directors or by a vote of a majority of the outstanding
voting securities of the Fund, (4) the Plan may not be amended to increase
materially the amount of the fees payable thereunder unless the amendment is
approved by a vote of a majority of the outstanding voting securities of the
Fund, and all material amendments must be approved by a majority vote of both
the full board of directors and the Independent Directors, (5) while the Plan
is in effect, the selection and nomination of any new Independent Directors
is committed to the discretion of the Independent Directors then in office,
and (6) the Fund's underwriter will prepare and furnish to the board of
directors, and the board of directors will review, at least quarterly,
written reports which set forth the amounts expended under the Plan and the
purposes for which those expenditures were made.
Rule 12b-1(b) provides that any payments made by an investment company
in connection with the distribution of its shares may only be made pursuant
to a written plan describing all material aspects of the proposed financing
of distribution and also requires that all agreements with any person
relating to implementation of the plan must be in writing. In addition,
Rule 12b-1(b)(2) requires that such plan, together with any related
agreements, be approved by a vote of the board of directors and of the
directors who are not interested persons of the investment company and have
no direct or indirect financial interest in the operation of the plan or in
any agreements related to the plan, cast in person at a meeting called for
the purpose of voting on such plan or agreements. Rule 12b-1(b)(3) requires
that the plan or agreement provide, in substance: (1) that it shall continue
in effect for a period of more than one year from the date of its execution
or adoption only so long as such continuance is specifically approved at
least annually in the manner described in paragraph (b)(2) of Rule 12b-1; (2)
that any person authorized to direct the disposition of monies paid or
payable by the investment company pursuant to the plan or any related
agreement shall provide to the investment company's board of directors, and
the directors shall review, at least quarterly, a written report of the
amounts so expended and the purposes for which such expenditures were made;
and (3) in the case of a plan, that it may be terminated at any time by vote
of a majority of the members of the board of directors of the investment
company who are not interested persons of the investment company and have no
direct or indirect financial interest in the operation of the plan or in any
agreements related to the plan or by vote of a majority of the outstanding
voting securities of the investment company. Rule 12b-1(b)(4) requires that
such plans may not be amended to increase materially the amount to be spent
for distribution without shareholder approval and that all material
amendments of the plan must be approved in the manner described in paragraph
(b)(2) of Rule 12b-1. Rule 12b-1(c)
19
<PAGE>
provides that the investment company may rely upon Rule 12b-1(b) only if
selection and nomination of the investment company's disinterested directors are
committed to the discretion of such disinterested directors. Rule 12b-1(e)
provides that the investment company may implement or continue a plan pursuant
to Rule 12b-1(b) only if the directors who vote to approve such implementation
or continuation conclude, in the exercise of reasonable business judgment and in
light of their fiduciary duties under state law, and under Sections 36(a) and
(b) of the Investment Company Act of 1940, that there is a reasonable likelihood
that the plan will benefit the investment company and its shareholders. At the
Board of Directors meeting held October 22, 1998, the directors of the Fund so
concluded. Since the Fund had not commenced operations prior to the date
hereof, no information regarding 12b-1 fees paid by the Fund is provided.
The Plan of Distribution could be construed as a "compensation plan"
because Ascend Financial is paid a fixed fee and is given discretion
concerning what expenses are payable under the Plan of Distribution. Under a
compensation plan, the fee to the distributor is not directly tied to
distribution expenses actually incurred by the distributor, thereby
permitting the distributor to receive a profit if amounts received exceed
expenses. Ascend Financial may spend more or less for the servicing of
shareholder accounts than it receives as fees pursuant to the Plan of
Distribution. However, to the extent fees received exceed expenses,
including indirect expense such as overhead, Ascend Financial could be said
to have received a profit.
TRANSFER AGENT AND ADMINISTRATIVE SERVICES
The Fund pays its own transfer agent expenses and has engaged First Data
Investor Services Group, Inc. to act as its transfer agent.
In addition, separate from the Investment Advisory Agreement, the Fund
has entered into an agreement with Minnesota Life under which Minnesota Life
provides (i) accounting, legal and other administrative services and (ii)
shareholder servicing to the Fund. Minnesota Life currently provides
accounting, legal and administrative services at a monthly cost to the Fund
of $4,800.
The Fund also pays its own shareholder servicing expenses. Minnesota
Life currently provides shareholder servicing to the Fund at a cost to the
Fund of $5 per shareholder account per year.
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
In a number of security transactions, it is possible for the Fund to deal
in the over-the-counter security markets (including the so-called "third market"
which is the "over-the-counter" market for securities listed on the New York
Stock Exchange) without the payment of brokerage commissions but at net prices
including a spread or markup; the Fund trades in this manner whenever the net
price appears advantageous.
Advantus Capital selects and (where applicable) negotiates commissions with
the brokers who execute the transactions for the Fund. Since the Fund had not
commenced operations prior to the date hereof, no information regarding
brokerage commissions paid by the Fund is provided.
The primary criteria for the selection of a broker is the ability of the
broker, in the opinion of Advantus Capital, to secure prompt execution of the
transactions on favorable terms, including the reasonableness of the commission
and considering the state of the market at the time. In selecting a broker,
Advantus Capital considers whether such broker provides brokerage and research
services (as defined in the Securities Exchange Act of 1934), and generally the
Fund pays higher than the lowest commission rates available. Advantus Capital
may direct Fund transactions to brokers who furnish research services to
Advantus Capital. Such research services include advice, both directly and in
writing, as to the value of securities, the advisability of investing in,
purchasing or selling securities, and the availability of securities or
purchasers or sellers of securities, as well as analysis and reports concerning
issues, industries, securities, economic factors and trends, portfolio strategy,
and the performance of accounts. By allocating brokerage business in order to
obtain research services for Advantus Capital, the Fund enables Advantus Capital
to supplement its own investment research activities and allows Advantus Capital
to obtain the views and information of individuals and research staffs of many
different securities research firms prior to making investment decisions for the
Fund. To the extent such commissions are directed to these other brokers who
furnish research services to Advantus Capital, Advantus Capital receives a
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<PAGE>
benefit, not capable of evaluation in dollar amounts, without providing any
direct monetary benefit to the Fund from these commissions.
There is no formula for the allocation by Advantus Capital of the Fund's
brokerage business to any broker-dealer for brokerage and research services.
However, Advantus Capital will authorize the Fund to pay an amount of commission
for effecting a securities transaction in excess of the amount of commission
another broker would have charged only if Advantus Capital determines in good
faith that such amount of commission is reasonable in relation to the value of
the brokerage and research services provided by such broker viewed in terms of
either that particular transaction or Advantus Capital's overall
responsibilities with respect to the accounts as to which it exercises
investment discretion. Since the Fund had not commenced operations prior to the
date hereof, no information regarding brokerage commissions paid by the Fund is
provided.
No brokerage is allocated for the sale of Fund shares. Advantus Capital
believes that most research services obtained by it generally benefit one or
more of the investment companies which it manages and also benefit accounts
which it manages. Normally research services obtained through managed funds and
managed accounts investing in common stocks would primarily benefit such funds
and accounts; similarly, services obtained from transactions in fixed income
securities would be of greater benefit to the managed funds and managed accounts
investing in debt securities.
The Fund will not execute portfolio transactions through any affiliate,
unless such transactions, including the frequency thereof, the receipt of
commissions payable in connection therewith and the selection of the affiliated
broker-dealer effecting such transactions are not unfair or unreasonable to the
shareholders of the Fund. In the event any transactions are executed on an
agency basis, Advantus Capital will authorize the Fund to pay an amount of
commission for effecting a securities transaction in excess of the amount of
commission another broker-dealer would have charged only if Advantus Capital
determines in good faith that such amount of commission is reasonable in
relation to the value of the brokerage and research services provided by such
broker-dealer, viewed in terms of either that particular transaction or the
overall responsibilities of Advantus Capital with respect to the Fund as to
which it exercises investment discretion. If the Fund executes any transactions
on an agency basis, it will generally pay higher than the lowest commission
rates available.
In determining the commissions to be paid to an affiliated broker-dealer,
it is the policy of the Fund that such commissions will, in the judgment of
Advantus Capital, subject to review by the Fund's Board of Directors, be both
(a) at least as favorable as those which would be charged by other qualified
brokers in connection with comparable transactions involving similar securities
being purchased or sold on an exchange during a comparable period of time, and
(b) at least as favorable as commissions contemporaneously charged by such
affiliated broker-dealers on comparable transactions for their most favored
comparable unaffiliated customers. While the Fund does not deem it practicable
and in its best interest to solicit competitive bids for commission rates on
each transaction, consideration will regularly be given to posted commission
rates as well as to other information concerning the level of commissions
charged on comparable transactions by other qualified brokers.
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<PAGE>
CALCULATION OF PERFORMANCE DATA
Advertisements and other sales literature for the Fund may refer to
"yield," "average annual total return" and "cumulative total return."
Performance quotations are computed separately for each class of shares of the
Fund.
YIELD. Yield is computed by dividing the net investment income per share
(as defined under Securities and Exchange Commission rules and regulations)
earned during the computation period by the maximum offering price per share on
the last day of the period, according to the following formula:
a-b 6
YIELD = 2[( ----- +1) -1]
cd
Where: a = dividends and interest earned during
the period;
b = expenses accrued for the period (net of
reimbursements);
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends; and
d = the maximum offering price per share on the
last day of the period.
Since the Fund had not commenced operations prior to the date hereof, no
Fund yield information is provided.
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is computed by
finding the average annual compounded rates of return over the periods indicated
in the advertisement that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
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<PAGE>
n
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at the end of the
period of a hypothetical $1,000 payment made
at the beginning of such period.
Since the Fund had not commenced operations prior to the date hereof, no
information regarding the average annual total return of the Fund is provided.
CUMULATIVE TOTAL RETURN. Cumulative total return figures are computed by
finding the cumulative compounded rate of return over the period indicated in
the advertisement that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
ERV-P
CTR = ( ----- )100
P
Where: CTR = cumulative total return;
ERV = ending redeemable value at the end of the
period of a hypothetical $1,000 payment made
at the beginning of such period; and
P = initial payment of $1,000.
Since the Fund had not commenced operations prior to the date hereof, no
information regarding the cumulative total return of the Fund is provided.
The calculations for both average annual total return and cumulative total
return deduct the maximum sales charge from the initial hypothetical $1,000
investment, assume all dividends and capital gain distributions are reinvested
at net asset value on the appropriate reinvestment dates as described in the
Prospectus, and include all recurring fees, such as investment advisory and
management fees, charged as expenses to all shareholder accounts.
Such average annual total return and cumulative total return figures may
also be accompanied by average annual total return and cumulative total return
figures, for the same or other periods, which do not reflect the deduction of
any sales charges.
23
<PAGE>
CAPITAL STOCK AND OWNERSHIP OF SHARES
The Fund's shares of common stock have a par value $.01 per share, and have
equal rights to share in dividends and assets. The shares possess no preemptive
or conversion rights. Cumulative voting is not authorized. This means that the
holders of more than 50% of the shares voting for the election of directors can
elect 100% of the directors if they choose to do so, and in such event the
holders of the remaining shares will be unable to elect any directors.
The Fund has 10 billion authorized shares of common stock and has
designated 2 billion authorized shares as Class A shares. As of the date
hereof, there were 15,000 Class A shares of the Fund outstanding, all of
which were owned by Advantus Capital and its affiliates.
HOW TO BUY SHARES
The Fund's shares may be purchased at the public offering price from Ascend
Financial, and from certain other broker-dealers. Ascend Financial reserves the
right to reject any purchase order. Shares of the Fund may be purchased at a
price equal to its net asset value.
ALTERNATIVE PURCHASE ARRANGEMENTS
The Fund offers Class A shares of the Fund. Purchase orders for $1,000,000
or more are not subject to a sales charge at the time of purchase, but a
deferred sales charge will be imposed if such shares are sold within one year
after the date of purchase.
PURCHASE BY CHECK
New investors may purchase shares of the Fund by completing an account
application and sending it, together with a check payable to the Fund, directly
to First Data Investors Services Group, Inc. ("First Data"), the Fund's transfer
agent, at Advantus Funds Group, P.O. Box 9767, Providence, Rhode Island
02940-5059. Additional purchases may be made at any time by mailing a check,
payable to the Fund, to the same address. Checks for additional purchases
should be identified with the appropriate account number. Purchase orders may
also be submitted through Ascend Financial or other broker-dealers authorized to
sell shares of the Fund.
PURCHASE BY WIRE
Shares may also be purchased by Federal Reserve or bank wire. This method
will result in a more rapid investment in shares of the Fund. Before wiring any
funds, contact Minnesota Life, through its Advantus Shareholder Services
division, at (800) 665-6005 for instructions. Promptly after making an initial
purchase by wire, an investor should complete an account application and mail it
to First Data at Advantus Funds Group, P.O. Box 9767, Providence, Rhode Island
02940-5059.
Subsequent purchases may be made in the same manner. Wire purchases
normally take two or more hours to complete, and to be accepted the same day
must be received by 3:00 p.m. (Central Time). Banks may charge a fee for
transmitting funds by wire.
24
<PAGE>
TIMING OF PURCHASE ORDERS
An order in proper form for the purchase of shares of the Fund received by
the Fund prior to the close of normal trading on the New York Stock Exchange
("NYSE"), which is generally 3:00 p.m. Central Time, will be effected at the
price next determined on the date received by First Data. Orders received after
the close of the NYSE will be effected at the price next determined on the next
business day.
MINIMUM INVESTMENTS
A minimum initial investment of $250 is required, and the minimum
subsequent investment is $25.
PUBLIC OFFERING PRICE
The public offering price of the Fund will be the net asset value per share
of the Fund next determined after an order is received by First Data and becomes
effective, plus the applicable sales charge, if any. The net asset value per
share of Class A shares is determined by dividing the value of the securities,
cash and other assets (including dividends accrued but not collected) of the
Fund attributable to such class less all liabilities (including accrued expenses
but excluding capital and surplus) attributable to such class, by the total
number of shares of such class outstanding.
The net asset value of the shares of the Fund is determined as of the close
of normal trading on the New York Stock Exchange (as of the date of this
Statement of Additional Information the primary close of trading is 3:00 p.m.
(Central Time), but this time may be changed) on each day, Monday through
Friday, except (i) days on which changes in the value of the Fund's portfolio
securities will not materially affect the current net asset value of Fund
shares, (ii) days during which no Fund shares are tendered for redemption and no
order to purchase or sell Fund shares is received by the Fund and (iii)
customary national business holidays on which the New York Stock Exchange is
closed for trading.
Securities, including put and call options, which are traded
over-the-counter and on a national exchange will be valued according to the
broadest and most representative market. A security which is only listed or
traded on an exchange, or for which an exchange is the most representative
market, is valued at its last sale price (prior to the time as of which assets
are valued) on the exchange where it is principally traded. Lacking any sales
on the exchange where it is principally traded on the day of valuation, prior to
the time as of which assets are valued, the security generally is valued at the
last bid price on that exchange. Futures contracts will be valued in a like
manner, except that open futures contracts sales will be valued using the
closing settlement price or in the absence of such a price, the most recent
quoted bid price. All other securities for which over-the-counter market
quotations are readily available are valued on the basis of the last current bid
price. When market quotations are not readily available, such securities are
valued at fair value as determined in good faith by the Board of Directors.
Other assets also are valued at fair value as determined in good faith by the
Board of Directors. However, debt securities may be valued on the basis of
valuations furnished by a pricing service which utilizes electronic data
processing techniques to determine valuations for normal institutional-size
trading units of debt securities, without regard to sale or bid prices, when
such valuations are believed to more
25
<PAGE>
accurately reflect the fair market value of such securities. Short-term
investments in debt securities are valued daily at market.
SALES CHARGES
The public offering price of Class A shares of the Fund is the net asset
value of the Fund's shares plus the applicable front end sales charge ("FESC"),
which will vary with the size of the purchase. Ascend Financial receives all
applicable sales charges. The Fund receives the net asset value. The current
sales charges are:
Sales Charge as a Percentage of:
<TABLE>
<CAPTION>
Offering Net Amount Amount Paid to Broker-Dealers
Value of Total Investment Price Invested as a Percentage of Offering Price:
- ------------------------- ----- -------- ----------------------------------
<S> <C> <C> <C>
Less than $50,000 5.5% 5.82% 5.00%
$50,000 but less than
$100,000 4.5 4.71 4.00
$100,000 but less than
$250,000 3.5 3.63 3.00
$250,000 but less than
$500,000 2.5 2.56 2.25
$500,000 but less than
$1,000,000 2.0 2.04 1.75
$1,000,000 and over (1) 0 0 1.00*
</TABLE>
(1) A FESC will not be assessed for purchases of Class A shares of at least $1
million, but a contingent deferred sales charge of 1.00% will be imposed if such
shares are sold within one year after the date of purchase.
* These payments are paid by Ascend Financial or one of its affiliates, at its
own expense, and not by the Fund or its shareholders.
The sales charge applicable to an initial investment in the Fund depends on
the offering price of the investment. The sales charge applicable to subsequent
investments, however, depends on the offering price of that investment plus the
current net asset value of the investor's previous investments in the Fund. For
example, if an investor makes an initial investment with an offering price of
$40,000 the investor will pay a sales charge equal to 5.5% of the $40,000
investment, but if an investor already owns Class A shares with a current net
asset value of $40,000 and invests in additional Class A shares with an offering
price of $10,000 the investor will pay a sales charge equal to 4.5% of the
additional $10,000 since the total investment in the Fund would then be $50,000.
OTHER PAYMENTS TO BROKER-DEALERS
Broker-dealers selling Class A shares of the Fund will receive a
shareholder servicing fee (Rule 12b-1 fee) equal, on an annual basis, to .25%
of the net asset values attributable to Class A shares. All such shareholder
servicing fees are paid quarterly in arrears beginning with the second year
after the sale of the shares to which such fees are attributable (i.e., the
first payment is at the end of the fifteenth month).
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the public offering price and net asset value
per share is summarized in the Prospectus in the text following the heading
"Buying and Selling Shares."
The portfolio securities in which the Fund invests fluctuate in value, and
hence the net asset value per share of the Fund also fluctuates.
26
<PAGE>
Since the Fund had not commenced operations prior to the date hereof, no
information regarding the net asset value of the Fund's shares is provided.
REDUCED SALES CHARGES
Special purchase plans are enumerated in the text of the Fund's Prospectus
under "Buying and Selling Shares - Reducing Sales Charges" and are fully
described below.
RIGHT OF ACCUMULATION-CUMULATIVE PURCHASE DISCOUNT
The front end sales charge and contingent deferred sales charge applicable
to each purchase of Class A shares of the Fund is based on the next computed net
asset value of all Class A shares of the Fund held by the shareholder (including
dividends reinvested and capital gains distributions accepted in shares), plus
the cost of all Class A shares of the Fund currently being purchased. It is the
obligation of each shareholder desiring this discount in sales charge to notify
Ascend Financial, through his or her dealer or otherwise, that he or she is
entitled to the discount.
LETTER OF INTENT
The applicable sales charge is based on total purchases over a 13-month
period where there is an initial purchase equal to or exceeding $250,
accompanied by filing with Ascend Financial a signed "Letter of Intent" form to
purchase, and by in fact purchasing not less than $50,000 of shares in the Fund
within that time. The 13-month period is measured from the date the Letter of
Intent is approved by Ascend Financial, or at the purchaser's option, it may be
made retroactive 90 days, in which case Ascend Financial will make appropriate
adjustments on purchases during the 90-day period.
In computing the total amount purchased for purposes of determining the
applicable sales charge, the net asset value of Class A shares currently held in
the Fund, on the date of the first purchase under the Letter of Intent, may be
used as a credit toward Fund shares to be purchased under the Letter of Intent.
Class A shares of the Fund may also be included in the purchases during the
13-month period.
The Letter of Intent includes a provision for payment of additional
applicable sales charges at the end of the period in the event the investor
fails to purchase the amount indicated. This is accomplished by holding 5.5% of
the investor's initial purchase in escrow. If the investor's purchases equal
those specified in the Letter of Intent, the escrow is released. If the
purchases do not equal those specified in the Letter of Intent, he or she may
remit to Ascend Financial an amount equal to the difference between the dollar
amount of sales charges actually paid and the amount of sales charges that would
have been paid on the aggregate purchases if the total of such purchases had
been made at a single time. If the purchaser does not remit this sum to Ascend
Financial on a timely basis, Ascend Financial will redeem the appropriate number
of shares, and then release or deliver any remaining shares in the escrow
account. The Letter of Intent is not a binding obligation on the part of the
investor to purchase, or the Fund to sell, the full amount indicated.
Nevertheless, the Letter of Intent should be read carefully before it is signed.
27
<PAGE>
COMBINING PURCHASES
With respect to the Fund, purchases of Class A shares for any other account
of the investor, or such person's spouse or minor children, or purchases on
behalf of participants in a tax-qualified retirement plan may be treated as
purchases by a single investor for purposes of determining the availability of a
reduced sales charge.
GROUP PURCHASES
An individual who is a member of a qualified group may also purchase shares
of the Fund at the reduced sales charge applicable to the group taken as a
whole. The sales charge is calculated by taking into account not only the
dollar amount of the Class A shares of the Fund being purchased by the
individual member, but also the aggregate dollar value of such Class A shares
previously purchased and currently held by other members of the group. Members
of a qualified group may not be eligible for a Letter of Intent.
A "qualified group" is one which (i) has been in existence for more than
six months, (ii) has a purpose other than acquiring Fund shares at a discount,
and (iii) satisfies uniform criteria which enable Ascend Financial to realize
economies of scale in distributing such shares. A qualified group must have
more than ten members, must be available to arrange for group meetings between
representatives of Ascend Financial, must agree to include sales and other
materials related to the Fund in its publications and mailings to members at
reduced or no cost to Ascend Financial, and must seek, upon request, to arrange
for payroll deduction or other bulk transmission of investments to the Fund.
WAIVER OF SALES CHARGES FOR CERTAIN SALES OF CLASS A SHARES
Directors and officers of Advantus Capital, Ascend Financial, the Fund,
Minnesota Life, or any of Minnesota Life's other affiliated companies, and their
full-time and part-time employees, sales representatives and retirees, any
trust, pension, profit-sharing, or other benefit plan for such persons, the
spouses, siblings, direct ancestors or direct descendants of such persons,
Minnesota Life and its affiliates themselves, advisory clients of Advantus
Capital, employees of sales representatives employed in offices maintained by
such sales representatives, certain accounts as to which a bank or broker-dealer
charges an account management fee, provided the bank or broker-dealer has an
agreement with Ascend Financial, and certain accounts sold by registered
investment advisers who charge clients a fee for their services may purchase
Class A shares of the Fund at net asset value. These persons must give written
assurance that they have bought for investment purposes, and that the securities
will not be resold except through redemption or repurchase by, or on behalf of,
the Fund. These persons are not required to pay a sales charge because of the
reduced sales effort involved in their purchases.
EXCHANGE AND TRANSFER OF FUND SHARES
A shareholder can exchange some or all of his or her Class A shares in the
Fund, including shares acquired by reinvestment of dividends, for shares of the
same class of any of the other Advantus Multiple Class Funds (provided such Fund
is available in the shareholder's State), and can thereafter re-exchange such
exchanged shares back for shares of the same class of the Fund,
28
<PAGE>
provided that the minimum amount which may be transferred is $250. The exchange
will be made on the basis of the relative net asset values without the
imposition of any additional sales load.
Class A shares may also be exchanged for shares of the Money Market Fund at
their net asset values. Ascend Financial is currently waiving the entire Rule
12b-1 fee due from Money Market Fund. In the event Ascend Financial begins to
receive any portion of such fee such time period will not be included.
Shares of Money Market Fund acquired in an exchange for Class A shares of
the Fund may also be re-exchanged at relative net asset values for Class A
shares of the Fund.
The exchange privilege is available only in states where such exchanges may
legally be made (at the present time the Fund believes this privilege is
available in all states). An exchange may be made by written request or by a
telephone call, unless the shareholder has elected on the account application
not to have telephone transaction privileges. Up to twelve exchanges each
calendar year may be made without charge. A $7.50 service charge will be
imposed on each subsequent exchange and/or telephone transfer. No service
charge is imposed in connection with systematic exchange plans. However, the
Fund reserves the right to restrict the frequency of, or otherwise modify,
condition, terminate, or impose additional charges upon, the exchange and/or
telephone transfer privileges, upon 60 days' prior notice to shareholders. An
exchange is considered to be a sale of shares for federal income tax purposes on
which an investor may realize a long- or short-term capital gain or loss. See
"Distributions and Tax Status" for a discussion of the effect of redeeming
shares within 90 days after acquiring them and subsequently acquiring new shares
in any mutual fund at a reduced sales charge.
SYSTEMATIC EXCHANGE PLAN
Shareholders of the Fund may elect to have shares of the Fund
systematically exchanged for shares of any of the other Advantus Funds on a
monthly basis. The minimum amount which may be exchanged on such a systematic
basis is $25. The terms and conditions otherwise applicable to exchanges
generally, as described above, also apply to such systematic exchange plans.
SHAREHOLDER SERVICES
OPEN ACCOUNTS
A shareholder's investment is automatically credited to an open account
maintained for the shareholder by First Data. Stock certificates are not
currently issued. Following each transaction in the account, a shareholder will
receive a confirmation statement disclosing the current balance of shares owned
and the details of recent transactions in the account. After the close of each
year First Data sends to each shareholder a statement providing federal tax
information on dividends and distributions paid to the shareholder during the
year. This should be retained as a permanent record. A fee may be charged for
providing duplicate information.
The open account system provides for full and fractional shares expressed
to four decimal places and, by making the issuance and delivery of stock
certificates unnecessary, eliminates problems of handling and safekeeping, and
the cost and inconvenience of replacing lost, stolen, mutilated or destroyed
certificates.
29
<PAGE>
The costs of maintaining the open account system are paid by the Fund. No
direct charges are made to shareholders. Although the Fund has no present
intention of making such direct charges to shareholders, it reserves the right
to do so. Shareholders will receive prior notice before any such charges are
made.
AUTOMATIC INVESTMENT PLAN
The Fund provides a convenient, voluntary method of purchasing shares in
the Fund through its "Automatic Investment Plan" (the "Plan").
The principal purposes of the Plan are to encourage thrift by enabling you
to make regular purchases in amounts less than normally required, and to employ
the principle of dollar cost averaging, described below.
By acquiring Fund shares on a regular basis pursuant to the Automatic
Investment Plan, or investing regularly on any other systematic plan, the
investor takes advantage of the principle of dollar cost averaging. Under
dollar cost averaging, if a constant amount is invested at regular intervals at
varying price levels, the average cost of all the shares will be lower than the
average of the price levels. This is because the same fixed number of dollars
buys more shares when price levels are low and fewer shares when price levels
are high. There is no guarantee, however, that the automatic investment plan
will always result in a lower cost per share compared to other investment
programs. It is essential that the investor consider his or her financial
ability to continue this investment program during times of market decline as
well as market rise. The principle of dollar cost averaging will not protect
against loss in a declining market, as a loss will result if the plan is
discontinued when the market value is less than cost.
A Plan may be opened by indicating an intention to invest $25 or more
monthly for at least one year. Investors will receive a confirmation showing
the number of shares purchased, purchase price, and subsequent new balance of
shares accumulated.
An investor has no obligation to invest regularly or to continue the Plan,
which may be terminated by the investor at any time without penalty. Under the
Plan, any distributions of income and realized capital gains will be reinvested
in additional shares at net asset value unless a shareholder instructs the Fund
in writing to pay them in cash. The Fund reserves the right to increase or
decrease the amount required to open and continue a Plan, and to terminate any
Plan after one year if the value of the amount invested is less than $250.
GROUP SYSTEMATIC INVESTMENT PLAN
This Plan provides employers and employees with a convenient means for
purchasing shares of the Fund under various types of employee benefit and thrift
plans, including payroll withholding and bonus incentive plans. The Plan may be
started with an initial cash investment of $50 per participant for a group
consisting of five or more participants. The shares purchased by each
participant under the Plan will be held in a separate account in which all
dividends and capital gains will be reinvested in additional shares of the Fund
at net asset value. To keep his or her account open, subsequent payments
totaling $25 per month must be made into each participant's account. If the
group is reduced to less than five participants, the minimums set forth under
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<PAGE>
"Automatic Investment Plan" shall apply. The Plan may be terminated by the Fund
or the shareholder at any time upon reasonable notice.
RETIREMENT PLANS OFFERING TAX BENEFITS
The federal tax laws provide for a variety of retirement plans offering tax
benefits. These plans may be funded with shares of the Fund. The plans include
H.R. 10 (Keogh) plans for self-employed individuals and partnerships,
individual retirement accounts (IRA's), corporate pension trust and profit
sharing plans, including 401(k) plans, and retirement plans for public school
systems and certain tax exempt organizations, e.g. 403(b) plans.
The initial investment in the Fund by such a plan must be at least $250 for
each participant in a plan, and subsequent investments must be at least $25 per
month for each participant. Income dividends and capital gain distributions
must be reinvested. Plan documents and further information can be obtained from
Ascend Financial.
An investor should consult a competent tax or other adviser as to the
suitability of Fund shares as a vehicle for funding a plan, in whole or in part,
under the Employee Retirement Income Security Act of 1974 and as to the
eligibility requirements for a specific plan and its state as well as federal
tax aspects.
SYSTEMATIC WITHDRAWAL PLANS
An investor owning shares in the Fund having a value of $5,000 or more at
the current public offering price may establish a Systematic Withdrawal Plan
providing for periodic payments of a fixed or variable amount. Withdrawal
payments for Class A shares of the Fund purchased in amounts of $1 million or
more may also be subject to a contingent deferred sales charge ("CDSC"). As a
result, a shareholder should consider whether a Systematic Withdrawal Plan is
appropriate. It may be appropriate for the shareholder to consult a tax adviser
before establishing such a plan.
The Plan is particularly convenient and useful for trustees in making
periodic distributions to retired employees. Through this Plan a trustee can
arrange for the retirement benefit to be paid directly to the employee by the
Fund and to continue the tax-free accumulation of income and capital gains prior
to their distribution to the employee. An investor may terminate the Plan at any
time. A form for use in establishing such a plan is available from Ascend
Financial.
A shareholder under a Systematic Withdrawal Plan may elect to receive
payments monthly, quarterly, semiannually, or annually for a fixed amount of not
less than $50 or a variable amount based on (1) the market value of a stated
number of shares, (2) a specified percentage of the account's market value or
(3) a specified number of years for liquidating the account (e.g., a 20-year
program of 240 monthly payments would be liquidated at a monthly rate of 1/240,
1/239, 1/238, etc.). The initial payment under a variable payment option may be
$50 or more.
All shares under the Plan must be left on deposit. Income dividends and
capital gain distributions will be reinvested without a sales charge at net
asset value determined on the record date.
31
<PAGE>
Since withdrawal payments represent proceeds from the liquidation of
shares, withdrawals may reduce and possibly exhaust the initial investment,
particularly in the event of a decline in net asset value.
Under this Plan, any distributions of income and realized capital gains
must be reinvested in additional shares, and are reinvested at net asset value.
If a shareholder wishes to purchase additional shares of the Fund under this
Plan, other than by reinvestment of distributions, it should be understood that,
in the case of Class A shares, he or she would be paying a sales commission on
such purchases, while liquidations effected under the Plan would be at net asset
value. Purchases of additional shares concurrent with withdrawals are
ordinarily disadvantageous to the shareholder because of sales charges and tax
liabilities. Additions to a shareholder account in which an election has been
made to receive systematic withdrawals will be accepted only if each such
addition is equal to at least one year's scheduled withdrawals or $1,200,
whichever is greater. A shareholder may not have an "Automatic Withdrawal Plan"
and a "Systematic Investment Plan" in effect simultaneously as it is not, as
explained above, advantageous to do so.
REDEMPTIONS
Registered holders of shares of the Fund may redeem their shares at the per
share net asset value next determined following receipt by the Fund (at its
mailing address listed on the cover page) of a written redemption request signed
by all shareholders exactly as the account is registered (and a properly
endorsed stock certificate if one has been issued). Class A shares may be
redeemed without charge. However, a contingent deferred sales charge may be
applicable upon redemption of certain Class A shares. Both share certificates
and stock powers, if any, tendered in redemption must be endorsed and executed
exactly as the Fund shares are registered. Any certificates should be sent to
the Fund by certified mail.
Payment will be made as soon as possible, but not later than seven days
after receipt of a properly executed written redemption request (and any
certificates). The amount received by the shareholder may be more or less than
the shares' original cost.
If stock certificates have not been issued, and if no signature guarantee
is required, shareholders may also submit their signed written redemption
request to the Fund by facsimile (FAX) transmission. The Fund's FAX number is
(508) 871-3560.
The Fund will pay in cash all redemption requests by any shareholder of
record, limited in amount during any 90-day period to the lesser of $250,000 or
1% of the net asset value of the Fund at the beginning of such period. When
redemption requests exceed such amount, however, the Fund reserves the right to
make part or all of the payment in the form of securities or other assets of the
Fund. An example of when this might be done is in case of emergency, such as in
those situations enumerated in the following paragraph, or at any time a cash
distribution would impair the liquidity of the Fund to the detriment of the
existing shareholders. Any securities being so distributed would be valued in
the same manner as the portfolio of the Fund is valued. If the recipient sold
such securities, he or she probably would incur brokerage charges. The Fund has
filed with the Securities and Exchange Commission a notification of election
pursuant to Rule 18f-1 under the Investment Company Act of 1940 in order to make
such redemptions in kind.
32
<PAGE>
Redemption of shares, or payment, may be suspended at times (a) when the
New York Stock Exchange is closed for other than customary weekend or holiday
closings, (b) when trading on said Exchange is restricted, (c) when an emergency
exists, as a result of which disposal by the Fund of securities owned by it is
not reasonably practicable, or it is not reasonably practicable for the Fund
fairly to determine the value of its net assets, or during any other period when
the SEC, by order, so permits; provided that applicable rules and regulations of
the SEC shall govern as to whether the conditions prescribed in (b) or (c)
exist.
SIGNATURE GUARANTEE
In order to protect both shareholders and the Fund against fraudulent
orders, a shareholder signature is required to be guaranteed in certain cases.
No signature guarantee is required if the redemption proceeds are less than
$50,000 and are to be paid to the registered holder and sent to the address of
record for that account, or if the written redemption request is from
pre-authorized trustees of plans, trusts and other tax-exempt organizations and
the redemption proceeds are less than $50,000.
A signature guarantee is required, however, if (i) the redemption proceeds
are $50,000 or more, (ii) the redemption proceeds are to be paid to someone
other than the registered holder, (iii) the redemption proceeds are to be mailed
to an address other than the registered shareholder's address, (iv) within the
30-day period prior to receipt of the redemption request, instructions have been
received to change the shareholder's address of record, or, in the case of
redemptions to be paid by wire, instructions have been received within such
period to change the shareholder's bank wire instructions, (v) the shares are
requested to be transferred to the account of another owner, or (vi) in the case
of plans, trusts, or other tax-exempt organizations, the redemption request is
not from a pre-authorized trustee. The Fund reserves the right to require
signature guarantees on all redemptions.
A signature guarantee must be provided by an eligible guarantor
institution. A notarized signature is not sufficient. Eligible guarantors
include (1) national or state banks, savings associations, savings and loan
associations, trust companies, savings banks, industrial loan companies and
credit unions; (2) national securities exchanges, registered securities
associations and clearing agencies; (3) securities broker-dealers which are
members of a national securities exchange or a clearing agency or which have
minimum net capital of $100,000; or (4) institutions that participate in the
Securities Transfer Agent Medallion Program ("STAMP") or other recognized
signature medallion program.
TELEPHONE REDEMPTION
The Fund's shareholders have this privilege automatically, unless they
have elected on the account application not to have such privilege, and may
redeem shares by calling Advantus Shareholder Services at (800) 665-6005 (see
"Telephone Transactions"). A telephone redemption request will not be
honored, however, if the shareholder's address of record or bank wire
instructions have been changed without a guarantee of the shareholder's
signature (see "Signature Guarantee" above) within the 30-day period prior
to receipt of the redemption request. The maximum amount which may be
redeemed by telephone is $50,000. The proceeds will be sent by check to the
address of record for the account. If the amount is $500 or more, and if the
shareholder has designated a bank account, the proceeds may be wired to the
shareholder's
33
<PAGE>
designated bank account, and the prevailing wire charge (currently $5.00) will
be added to the amount redeemed from the Fund. The Fund reserves the right to
modify, terminate or impose charges upon the telephone redemption privilege.
DELAY IN PAYMENT OF REDEMPTION PROCEEDS
Payment of redemption proceeds will ordinarily be made as soon as possible
and within the periods of time described above. However, an exception to this
is that if redemption is requested after a purchase by non-guaranteed funds
(such as a personal check), the Fund will delay mailing the redemption check or
wiring proceeds until it has reasonable assurance that the purchase check has
cleared (good payment has been collected). This delay may be up to 14 days from
the purchase date.
FUND'S RIGHT TO REDEEM SMALL ACCOUNTS
The Fund has the right to redeem the shares in inactive accounts which, due
to redemptions and not to decreases in market value of the shares in the
account, have a total current value of less than $150. Before redeeming an
account, the Fund will mail to the shareholder a written notice of its intention
to redeem, which will give the investor an opportunity to make an additional
investment. If no additional investment is received by the Fund within 60 days
of the date the notice was mailed, the shareholder's account will be redeemed.
REINSTATEMENT PRIVILEGE
The Prospectus for Fund describes redeeming shareholders' reinstatement
privileges in "Buying and Selling Shares" in the Fund's Prospectus. Written
notice from persons wishing to exercise this reinstatement privilege must be
received by Ascend Financial within 90 days after the date of the redemption.
The reinstatement or exchange will be made at net asset value next determined
after receipt of the notice and will be limited to the amount of the redemption
proceeds or to the nearest full share if fractional shares are not purchased.
All shares issued as a result of the reinstatement privilege applicable to
redemptions of Class A shares will be issued as Class A shares.
See "Distributions and Tax Status" below for a discussion of the effect of
redeeming shares within 90 days after acquiring them and subsequently acquiring
new shares in any mutual fund at a reduced sales charge. Should an investor
utilize the reinstatement privilege following a redemption which resulted in a
loss, all or a portion of that loss might not be currently deductible for
Federal income tax purposes, for an investor which is not tax-exempt.
Exercising the reinstatement privilege would not alter any capital gains taxes
payable on a realized gain, for an investor which is not tax-exempt. See
discussion under "Distributions and Tax Status" below regarding the taxation of
capital gains.
TELEPHONE TRANSACTIONS
Shareholders of the Fund are permitted to exchange or redeem the Fund's
shares by telephone. See "Exchange and Transfer of Fund Shares" and
"Redemptions" for further details. The privilege to initiate such transactions
by telephone is made available automatically unless the shareholder elects on
the account application not to have such privilege.
34
<PAGE>
Shareholders, or persons authorized by shareholders, may initiate telephone
transactions by telephoning Advantus Shareholder Services, toll free, at
1-800-665-6005. Automated service is available 24 hours a day, and service
representatives are available Monday through Friday, from 8:00 a.m. to 4:45 p.m.
(Central Time). Telephone transaction requests received after 3:00 p.m.
(Central Time) will be treated as received the next business day. The maximum
amount which may be redeemed by telephone is $50,000. During periods of marked
economic or market changes, shareholders may experience difficulty in
implementing a telephone exchange or redemption due to a heavy volume of
telephone calls. In such a circumstance, shareholders should consider
submitting a written request while continuing to attempt a telephone exchange or
redemption. The Fund reserves the right to modify, terminate or impose charges
upon the telephone exchange and redemption privileges upon 60 days' prior notice
to shareholders.
The Fund will not be liable for following instructions communicated by
telephone which it reasonably believes to be genuine; provided, however, that
the Fund will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine, and that if they do not, they may be
liable for any losses due to unauthorized or fraudulent instructions. The
procedures for processing telephone transactions include tape recording of
telephone instructions, asking shareholders for their account number and a
personal identifying number, and providing written confirmation of such
transactions.
DISTRIBUTIONS AND TAX STATUS
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
The policy of the Fund is to pay dividends from net investment income
quarterly. Any net realized capital gains are generally distributed once a
year, during December.
Any dividend payments or net capital gains distributions made by the Fund
are in the form of additional shares of the same class of the Fund rather than
in cash, unless a shareholder specifically requests the Fund in writing that the
payment be made in cash. The distribution of these shares is made at net asset
value on the payment date of the dividend, without any sales or other charges to
the shareholder. The taxable status of income dividends and/or net capital
gains distributions is not affected by whether they are reinvested or paid in
cash. Authorization to pay dividends in cash may be made on the application
form, or at any time by letter.
Upon written request to the Fund, a shareholder may also elect to have
dividends from the Fund invested without sales charge in shares of Money Market
Fund or shares of the same class of another of the Advantus Multiple Class Funds
at the net asset value of such other Advantus Multiple Class Fund on the payable
date for the dividends being distributed (subject to the applicable sales
charge). To use this privilege of investing dividends from the Fund in shares
of another of the Funds, shareholders must maintain a minimum account value of
$250 in both the Fund and the other Fund in which dividends are reinvested.
35
<PAGE>
TAXATION
The following is a general summary of certain federal tax considerations
affecting the Fund and its shareholders. No attempt is made to present a
detailed explanation of the tax treatment of the Fund or its shareholders, and
the discussion here is not intended as a substitute for careful tax planning.
The Fund intends to fulfill the requirements of Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"), as a regulated
investment company. If so qualified, the Fund will not be liable for federal
income taxes to the extent it distributes its taxable income to its
shareholders.
Distributions of investment company taxable income from the Fund generally
will be taxable to shareholders as ordinary income, regardless of whether such
distributions are paid in cash or are invested in additional shares of the
Fund's stock. A distribution of net capital gain (a "capital gain
distribution"), whether paid in cash or reinvested in shares, generally is
taxable to shareholders as long-term capital gain, regardless of the length of
time a shareholder has held his or her shares or whether such gain was realized
by the Fund before the shareholder acquired such shares and was reflected in the
price paid for the shares. Long-term capital gains of individuals are taxed at
a maximum rate of 20%, and the highest marginal regular tax rates on ordinary
income for individuals is 39.6%.
Dividend distributions from the Fund attributable to dividends that the
Fund receives from REITs will not qualify for the 70% dividend received
deduction for corporations.
Prior to purchasing shares of the Fund, prospective shareholders (except
for tax qualified retirement plans) should consider the impact of dividends or
capital gains distributions which are expected to be announced, or have been
announced but not paid. Any such dividends or capital gains distributions paid
shortly after a purchase of shares by an investor prior to the record date will
have the effect of reducing the per share net asset value by the amount of the
dividends or distributions. All or a portion of such dividends or
distributions, although in effect a return of capital, is subject to taxation.
The Code provides that a shareholder who pays a sales charge in acquiring
shares of a mutual fund, redeems those shares within 90 days after acquiring
them, and subsequently acquires new shares in any mutual fund for a reduced
sales charge or no sales charge (pursuant to a reinvestment right acquired with
the first shares), may not take into account the sales charge imposed on the
first acquisition, to the extent of the reduction in the sales charge on the
second acquisition, for purposes of computing gain or loss on disposition of the
first acquired shares. The amount of sales charge disregarded under this rule
will, however, be treated as incurred in connection with the acquisition of the
second acquired shares.
36
<PAGE>
Shareholders of the Fund receive an annual statement detailing federal tax
information. Distributions by the Fund, including the amount of any redemption,
are reported to shareholders in such annual statement and to the Internal
Revenue Service to the extent required by the Code.
The Fund is required by federal law to withhold 31% of reportable payments
(including dividends, capital gain distributions, and redemptions) paid to
certain accounts whose owners have not complied with IRS regulations. In order
to avoid this backup withholding requirement, each shareholder will be asked to
certify on the shareholder's account application that the social security or
taxpayer identification number provided is correct and that the shareholder is
not subject to backup withholding for previous underreporting to the IRS.
Some of the investment practices that may be employed by the Fund will be
subject to special provisions that, among other things, may defer the use of
certain losses of such Fund, affect the holding period of the securities held by
the Fund and affect the character of the gains or losses realized. These
provisions may also require the Fund to mark-to-market some of the positions in
its portfolio (i.e., treat them as closed out) or to accrue original discount,
both of which may cause the Fund to recognize income without receiving cash with
which to make distributions in amounts necessary to satisfy the distribution
requirements for qualification as a regulated investment company and for
avoiding income and excise taxes. Accordingly, in order to make the required
distributions, the Fund may be required to borrow or liquidate securities. The
Fund will monitor its transactions and may make certain elections in order to
mitigate the effect of these rules and prevent disqualification of the Fund as a
regulated investment company.
The Fund may invest in REITs that hold residual interests in real estate
mortgage investment conduits ("REMICs"). Under Treasury regulations that have
not yet been issued, but may apply retroactively, a portion of the Fund's income
from a REIT that is attributable to the REIT's residual interest in a REMIC
(referred to in the Code as an "excess inclusion") will be subject to federal
income tax in all events. These regulations are also expected to provide that
excess inclusion income of a regulated investment company, such as the Fund,
will be allocated to shareholders of the regulated investment company in
proportion to the dividends received by them with the same consequences as if
the shareholders held the related REMIC residual interest directly. In general,
excess inclusion income allocated to shareholders (i) cannot be offset by net
operating losses (subject to a limited exception for certain thrift
institutions) and (ii) will constitute unrelated business taxable income to
entities (including a qualified pension plan, an individual retirement account,
a 401K plan, a Keogh plan or other tax-exempt entity) subject to tax on
unrelated business income, thereby potentially requiring such an entity that is
allocated excess inclusion income, and otherwise might not be required to file a
tax return, to file a tax return and pay tax on some income. In addition, if at
any time during any taxable year a "disqualified organization" (as defined in
the Code) is a record holder of a share in a regulated investment company, then
the regulated investment company will be subject to a tax equal to that portion
of its excess inclusion income for the taxable year that is allocable to the
disqualified organization, multiplied by the highest Federal income tax rate
imposed on corporations.
The Fund is subject to a non-deductible excise tax equal to 4 percent of
the excess, if any, of the amount required to be distributed pursuant to the
Code for each calendar year over the amount
37
<PAGE>
actually distributed. In order to avoid the imposition of this excise tax, the
Fund generally must declare dividends by the end of a calendar year representing
98 percent of the Fund's ordinary income for the calendar year and 98 percent of
its capital gain net income (both long-term and short-term capital gains) for
the twelve-month period ending October 31 of the calendar year.
The foregoing relates only to federal taxation. Prospective shareholders
should consult their tax advisers as to the possible application of state and
local income tax laws to ownership of Fund shares.
FINANCIAL STATEMENTS
Financial statements for the Fund are presented in Appendix B. These
financial statements have been audited by KPMG Peat Marwick LLP, independent
auditors.
38
<PAGE>
APPENDIX A
BOND AND COMMERCIAL PAPER RATINGS
BOND RATINGS
Moody's Investors Service, Inc. describes its five highest ratings for
corporate bonds and mortgage-related securities as follows:
Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment some time in the future.
Bonds which are rated Baa are considered medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
Moody's Investors Service, Inc. also applies numerical modifiers, 1, 2, and
3, in each of these generic rating classifications. The modifier 1 indicates
that the security ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the
issue ranks in the lower end of its generic rating category.
Standard & Poor's Corporation describes its five highest ratings for
corporate bonds and mortgage-related securities as follows:
AAA. Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
A-1
<PAGE>
AA. Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A. Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB. Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB. Debt rated "BB" has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions that could lead
to inadequate capacity to meet timely interest and principal payments.
Standard & Poor's Corporation applies indicators "+", no character, and "-"
to the above rating categories. The indicators show relative standing within
the major rating categories.
COMMERCIAL PAPER RATINGS
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's Investors Service, Inc. Among the factors considered by Moody's
Investors Service, Inc. in assigning the ratings are the following: (1)
evaluation of the management of the issuer, (2) economic evaluation of the
issuer's industry or industries and an appraisal of speculative-type risks which
may be inherent in certain areas; (3) evaluation of the issuer's products in
relation to competition and customer acceptance; (4) liquidity; (5) amount and
quality of long-term debt; (6) trend of earnings over a period of ten years; (7)
financial strength of a parent company and the relationships which exist with
the issuer; an (8) recognition by the management of obligations which may be
present or may arise as a result of public interest questions and preparations
to meet such obligations.
The rating A-1 is the highest rating assigned by Standard & Poor's
Corporation to commercial paper which is considered by Standard & Poor's
Corporation to have the following characteristics:
Liquidity ratios of the issuer are adequate to meet cash redemptions.
Long-term senior debt is rated "A" or better. The issuer has access to at
least two additional channels of borrowing. Basic earnings and cash flow
have an upward trend with allowance made for unusual circumstances.
Typically, the issuer's industry is well established and the issuer has a
strong position within the industry. The reliability and quality of
management are unquestioned.
A-2
<PAGE>
APPENDIX B
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
Advantus Real Estate Securities Fund, Inc.:
We have audited the statement of assets and liabilities of Advantus Real
Estate Securities Fund, Inc. as of February 2, 1999. This financial statement
is the responsibility of Fund's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. Our procedures included
confirmation of cash in bank by correspondence with the custodian. Investment
securities held in custody are confirmed to us by the custodian. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the statement of assets and liabilities referred to above
presents fairly, in all material respects, the financial position of Advantus
Real Estate Securities Fund, Inc. at February 2, 1999, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 2, 1999
B-1
<PAGE>
ADVANTUS REAL ESTATE SECURITIES FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 2, 1999
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Cash in bank................................................ $ 1,320
U.S. Treasury Bill, 4.378%, 4/15/99......................... 148,680
----------------
Total assets........................................... $ 150,000
----------------
----------------
Represented by:
Capital stock - authorized 10 billion shares (Class A - 2
billion shares, 8 billion shares of unallocated $.01 par
value) (note 1).......................................... $ 150
Additional paid-in capital............................... 149,850
----------------
Total - representing net assets applicable to
outstanding capital stock.............................. $ 150,000
----------------
----------------
Shares outstanding and net asset value per share:
Class A - Shares outstanding 15,000...................... $ 10.00
----------------
----------------
</TABLE>
See accompanying notes to statement of assets and liabilities.
B-2
<PAGE>
ADVANTUS REAL ESTATE SECURITIES FUND, INC.
Notes to Statement of Assets and Liabilities
February 2, 1999
(1) ORGANIZATION
Advantus Real Estate Securities Fund, Inc. (the Fund) was incorporated on
September 25, 1998. The Fund is registered under the Investment Company Act of
1940 (as amended) as a diversified, open-end management investment company.
The Fund currently issues one class of shares: Class A shares. Class A
shares are sold subject to a front-end sales charge.
The only transaction of the Fund since inception has been the initial sale
on February 1, 1999 of 15,000 shares of Class A shares to Minnesota Life
Insurance Company.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in the financial statements.
Actual results could differ from those estimates.
INVESTMENTS IN SECURITIES
Investments in securities traded on a national exchange are valued at the
last sales price on that exchange prior to the time when assets are valued;
securities traded in the over-the-counter market and listed securities for which
no sale was reported on that date are valued on the basis of the last current
bid price by an independent pricing service or at a price deemed best to reflect
fair value as quoted by dealers who make markets in these securities. When
market quotations are not readily available, securities are valued at fair value
as determined in good faith under procedures adopted by the Board of Directors.
Such fair values are determined using pricing services or prices quoted by
independent brokers. Short-term securities are valued at market.
Security transactions are accounted for on the date the securities are
purchased or sold. Realized gains and losses are calculated on the
identified-cost basis. Dividend income is recognized on the ex-dividend date
and interest income, including amortization of bond premium and discount
computed on a level yield basis, is accrued daily.
FEDERAL TAXES
The Fund's policy is to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute all
of its taxable income to shareholders. Therefore, no income tax provision is
required. The Fund's policy is to make required minimum distributions prior to
December 31, in order to avoid federal excise tax.
B-3
<PAGE>
ADVANTUS REAL ESTATE SECURITIES FUND, INC.
Notes to Statement of Assets and Liabilities - continued
(3) EXPENSES AND RELATED PARTY TRANSACTIONS
The Fund has entered into an investment advisory agreement with Advantus
Capital Management, Inc. (Advantus Capital or the Adviser), a wholly-owned
subsidiary of Minnesota Life Insurance Company (Minnesota Life), under which
Advantus Capital manages the Fund's assets and provides research, statistical
and advisory services and pays related office rental and executive expenses and
salaries. The fee for investment management and advisory services is based on
the average daily net assets of the Fund at the annual rate of .75 percent.
The Fund has adopted a Plan of Distribution applicable to Class A relating
to the payment of certain servicing expenses pursuant to Rule 12b-1 under the
Investment Company Act of 1940 (as amended). Pursuant to Rule 12b-1, the Fund
pays fees to Ascend Financial Services, Inc. (Ascend Financial), the underwriter
of the Fund and wholly-owned subsidiary of Advantus Capital to be used to pay
certain expenses incurred in the servicing of the Fund's shares. The Class A
Plan provides for a service fee up to .25 percent of average daily net assets of
Class A shares. Ascend Financial intends to waive that portion of Class A
service fees which exceeds, as a percentage of average daily net assets, .10
percent during the current fiscal year.
The Fund has entered into a shareholder and administrative services
agreement with Minnesota Life for shareholder services, accounting, auditing,
legal and other administrative services which Minnesota Life provides. Under
this agreement, the administrative services fee for the Fund is $4,800 per
month, and the shareholder services fee is equal to $5 per annum per shareholder
account.
The Fund also bears certain other operating expenses including outside
directors' fees, custodian fees, registration fees, fees for printing and
shareholders reports, legal fees, fees for auditing and accounting services and
other miscellaneous expenses.
Advantus Capital directly incurs and pays the above operating expenses
relating to the Fund and the Fund in turn reimburses Advantus Capital. Advantus
Capital intends to voluntarily absorb certain operating expenses, other than
investment advisory fees and Rule 12b-1 fees, which exceed, as a percentage of
average daily net assets, .65% during the current fiscal year.
Organizational expenses are expected to be incurred in connection with the
start-up and initial registration of the Fund. These expenses will be paid by
Advantus Capital. The Fund does not intend to reimburse Advantus Capital for
these costs.
B-4
