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ADVANTUS -TM- FAMILY OF FUNDS [LOGO]
PROSPECTUS DATED FEBRUARY 1, 1996
ADVANTUS MORTGAGE SECURITIES FUND, INC.
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400 Robert Street North - St. Paul, Minnesota 55101 - 1-800-443-3677
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Advantus Mortgage Securities Fund, Inc. ("Mortgage Securities Fund"
or the "Fund") is an open-end diversified management investment company,
commonly called a mutual fund. The Fund currently offers its shares
in three classes: Class A, Class B and Class C. Each class is sold
pursuant to different sales arrangements and bears different expenses.
The Fund's investment objective is to seek a high level of current
income consistent with prudent investment risk. Mortgage Securities
Fund pursues its objective by investing primarily in mortgage-related
securities which directly or indirectly provide funds for residential
mortgage loans made to home buyers throughout the United States.
These loans are originated primarily by savings and loan institutions,
mortgage bankers, commercial banks and other mortgage lenders and are
grouped into pools by various governmental, government-related and
private organizations.
There is risk in all investments. There can be no assurance that
the Fund will achieve its objective.
SHARES OF THE FUND MAY BE SOLD THROUGH BANKS OR OTHER FINANCIAL
INSTITUTIONS. THE FUND'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF,
OR GUARANTEED OR ENDORSED BY, ANY BANK, AND SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY. AN INVESTMENT IN THE FUND
INVOLVES INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL, DUE TO
FLUCTUATIONS IN THE FUND'S NET ASSET VALUE.
This Prospectus sets forth concisely the information which a
prospective investor should know about the Fund before investing and
it should be retained for future reference. A "Statement of
Additional Information" dated February 1, 1996, which provides a further
discussion of certain areas in this Prospectus and other matters which
may be of interest to some investors, has been filed with the
Securities and Exchange Commission and is incorporated herein by
reference. For a free copy, write or call the Fund at the address or
telephone number shown above.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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TABLE OF
CONTENTS
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<TABLE>
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PROSPECTUS SUMMARY......................... 3
FEES AND EXPENSES.......................... 6
FINANCIAL HIGHLIGHTS....................... 8
INVESTMENT OBJECTIVES, POLICIES AND
RISKS...................................... 10
PORTFOLIO TURNOVER......................... 17
MANAGEMENT OF THE FUND..................... 18
PURCHASE OF FUND SHARES.................... 20
SALES CHARGES.............................. 22
SPECIAL PURCHASE PLANS..................... 25
EXCHANGE AND TELEPHONE TRANSFER OF FUND
SHARES..................................... 26
REDEMPTION OF FUND SHARES.................. 27
TELEPHONE TRANSACTIONS..................... 29
REINSTATEMENT PRIVILEGE.................... 29
DIVIDENDS AND CAPITAL GAINS
DISTRIBUTIONS.............................. 29
TAXES...................................... 30
INVESTMENT PERFORMANCE..................... 31
LIMITATION OF DIRECTOR LIABILITY........... 33
GENERAL INFORMATION........................ 34
COUNSEL AND INDEPENDENT AUDITORS........... 34
CUSTODIAN.................................. 34
</TABLE>
No dealer, sales representative or other person has been authorized to give
any information or to make any representations other than those contained in
this Prospectus (and/or in the Statement of Additional Information referred to
on the cover page of this Prospectus), and if given or made, such information or
representations must not be relied upon as having been authorized by the Fund or
MIMLIC Sales. This Prospectus does not constitute an offer or solicitation by
anyone in any state in which such offer or solicitation is not authorized, or in
which the person making such offer or solicitation is not qualified to do so, or
to any person to whom it is unlawful to make such offer or solicitation.
2
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PROSPECTUS
SUMMARY
- ------------ Advantus Mortgage
Securities Fund, Inc. ("Mortgage Securities Fund" or the
"Fund") is an open-end diversified investment company, commonly called a mutual
fund. The Fund offers investors the choice between three classes of shares which
offer different sales charges and bear different expenses. These alternatives
permit an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other circumstances. The Fund is a
member of a family of mutual funds known as the "Advantus Funds." The Advantus
Funds consist of the Fund and seven other mutual funds, all of which share the
same investment adviser. Except for Advantus Money Market Fund, Inc., all of the
Advantus Funds offer more than one class of shares (the "Advantus Load Funds").
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INVESTMENT
OBJECTIVE A summary of the investment objective of the Fund, together with a
brief description of the types of securities in which the Fund will invest in
pursuit of its investment objective, can be found on the cover page of this
Prospectus. See also "Investment Objectives, Policies and Risks."
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INVESTMENT
ADVISER Advantus Capital Management, Inc. ("Advantus Capital") acts as
investment adviser to the Fund and receives an annual fee equal to a stated
percentage of average daily net assets of the Fund. Advantus Capital is a
wholly-owned subsidiary of MIMLIC Asset Management Company ("MIMLIC
Management'). MIMLIC Management is a subsidiary of The Minnesota Mutual Life
Insurance Company ("Minnesota Mutual"). See "Management of the Fund."
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HOW TO PURCHASE
FUND SHARES MIMLIC Sales Corporation ("MIMLIC Sales"), a subsidiary of MIMLIC
Management, acts as the principal underwriter (distributor) of the shares of the
Fund. Shares of the Fund may be purchased from MIMLIC Sales, and from certain
other broker-dealers, at the price per share next determined after receipt of a
purchase order in proper form. The minimum initial purchase is $250. Additional
investments can be made at any time for $25 or more. Shares of the Fund are sold
in three classes which are subject to different sales charges. Broker-dealers
and sales personnel of MIMLIC Sales may receive different compensation depending
on which class of shares they sell.
CLASS A SHARES. An investor who purchases Class A shares pays a sales charge
at the time of purchase. (Purchase orders for $1,000,000 or more will be
accepted for Class A shares only and are not subject to a sales charge at the
time of purchase.) Class A shares are not subject to any charges when they are
redeemed. The initial sales charge may be reduced or waived for certain
purchases. Class A shares are subject to a Rule 12b-1 fee payable at an annual
rate of .30% of the Fund's average daily net assets attributable to Class A
shares. See "Sales Charges--Class A Shares."
CLASS B SHARES. Class B shares are sold without an initial sales charge, but
are subject to a contingent deferred sales charge of up to 5% if redeemed within
six years of purchase. Class B shares are also subject to a higher Rule 12b-1
fee than Class A shares. The Rule 12b-1 fee for Class B shares will be paid at
an annual rate of 1.00% of the Fund's average daily net assets attributable to
Class B shares. Class B shares will automatically convert to Class A shares at
net asset value approximately twenty-eight to eighty-four months after purchase,
depending on the amount purchased. Class B shares provide an investor the
benefit of putting all of the investor's dollars to work from the time the
investment is made, but until conversion will have a higher
3
<PAGE>
expense ratio and pay lower dividends than Class A shares due to the higher Rule
12b-1 fee. See "Sales Charges--Class B Shares."
CLASS C SHARES. Class C shares are sold without either an initial sales
charge or a contingent deferred sales charge. Class C shares are also subject to
a higher Rule 12b-1 fee, paid at an annual rate of 1.00% of the Fund's average
daily net assets attributable to Class C shares. Class C shares will
automatically convert to Class A shares at net asset value approximately forty
to ninety-six months after purchase, depending on the amount purchased. Class C
shares also provide an investor the benefit of putting all of the investor's
dollars to work from the time the investment is made. Although not subject to a
contingent deferred sales charge, Class C shares must be held longer than Class
B shares before they convert automatically to Class A shares, and are subject to
the higher Rule 12b-1 fee during the longer holding period. In addition, like
Class B shares, Class C shares will have a higher expense ratio and pay lower
dividends than Class A shares, due to the higher Rule 12b-1 fee, prior to
conversion. See "Sales Charges--Class C Shares."
CHOOSING A CLASS. The decision as to which class of shares provides a more
suitable investment for an investor may depend on a number of factors, including
the amount and intended length of the investment. Investors making investments
that qualify for a waiver of initial sales charges should purchase Class A
shares. Other investors might consider Class B or Class C shares because all of
the purchase price is invested immediately. Investors who expect to hold shares
for relatively shorter periods of time may prefer Class C shares because such
shares may be redeemed at any time without payment of a contingent deferred
sales charge. Investors who expect to hold shares longer, however, may choose
Class B shares because such shares convert to Class A shares sooner than do
Class C shares and thus pay the higher Rule 12b-1 fee for a shorter period.
Orders for Class B or Class C shares for $1,000,000 or more will be treated as
orders for Class A shares or declined.
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HOW TO REDEEM
FUND SHARES Shareholders may redeem (sell) shares of the Fund at the per share
net asset value next determined following receipt by the Fund (at the mailing
address listed on the cover page) of a written redemption request. Class A and
Class C shares of the Fund are redeemable at net asset value without charge.
Class B shares of the Fund are also redeemable at net asset value but are
subject to a contingent deferred sales charge of up to 5% if redeemed within six
years of purchase. The amount of the contingent deferred sales charge, as well
as the period during which it applies, varies with the amount purchased. Shares
of the Fund may also be redeemed by telephone, if this option has been selected.
See "Redemption of Fund Shares."
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INCOME AND
TAXES Net investment income is the amount of dividends and interest earned on
the Fund's securities less operating expenses. It is distributed to shareholders
monthly. Capital gains may be realized on the sale of the Fund's securities.
Capital gains, when available, are generally distributed once a year during
December. See "Dividends and Capital Gains Distributions."
As a regulated investment company, the Fund is not taxed on the net investment
income and capital gains it distributes to its shareholders. For income tax
purposes, shareholders must report any net investment income and capital gains
distribution reported to them as income. Shareholders of the Fund receive an
annual statement detailing federal tax information. See "Taxes."
4
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RISK
FACTORS In addition to the other information set forth in this Prospectus,
prospective investors in the Fund should consider the following factors:
- - The Fund may, with respect to 25% of its total
assets, invest in excess of 5% of its total assets in securities of a single
issuer.
- - The value of fixed income securities, such as
those purchased by the Fund, may be expected to vary inversely to changes in
the prevailing market interest rates. In addition, in periods of declining
interest rates, the rate of prepayment of mortgages underlying
mortgage-related securities (such as those purchased by Mortgage Securities
Fund) tends to increase, with the result that such prepayments must be
reinvested at lower rates.
- - The Fund may invest up to 10% of its net assets
in securities which are restricted as to disposition or otherwise illiquid.
These may include inverse floating rate securities, which are extremely
sensitive to changes in interest rates, and "interest only" and "principal
only" stripped mortgage-backed securities, the yield and price of which are
extremely sensitive to the rate of principal payments (including prepayments)
on the underlying mortgage assets.
- - Mortgage Securities Fund may enter into
interest rate futures contracts, which provide for the future delivery of
fixed income securities, as a hedge against anticipated interest rate changes.
These instruments involve the additional risk to the Fund that futures prices
will not correlate with cash prices and that the Fund's investment adviser may
be incorrect in its expectations as to the direction and extent of interest
rate movements.
- - The Fund may purchase and sell certain types
of options contracts. The use of options contracts involves additional
potential risks, in addition to the risks associated with the underlying
securities on which such options are written, including the risk that the
prices of such underlying securities will not move as anticipated.
For discussions of risks associated with specific investments and risks
associated with investing in the Fund see "Investment Objectives, Policies and
Risks."
5
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<TABLE>
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The purpose of this table is to assist the investor in understanding the
FEES AND various costs and expenses that an investor in the Fund will bear
EXPENSES directly or indirectly.
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</TABLE>
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
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SHAREHOLDER TRANSACTION EXPENSES
MAXIMUM SALES LOAD IMPOSED ON PURCHASES
(AS A PERCENTAGE OF OFFER PRICE) 5.00% 0.00% 0.00%
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MAXIMUM DEFERRED SALES LOAD
(AS A PERCENTAGE OF REDEMPTION PROCEEDS) 0.00% 5.00% 0.00%
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SALES LOAD IMPOSED ON REINVESTED DIVIDENDS 0 0 0
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REDEMPTION FEES+ 0 0 0
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EXCHANGE FEES
- ON FIRST FOUR EXCHANGES EACH YEAR 0 0 0
- ON EACH ADDITIONAL EXCHANGE $7.50 $7.50 $7.50
+REDEMPTION PROCEEDS SENT BY WIRE ARE SUBJECT TO A WIRE
CHARGE OF $5.00, WHICH WILL BE ADDED TO THE AMOUNT
REDEEMED.
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE
NET ASSETS)
INVESTMENT ADVISORY FEES 0.575% 0.575% 0.575%
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RULE 12b-1 FEES (AFTER EXPENSES WAIVED) * 0.25%** 1.00% 1.00%
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OTHER EXPENSES (AFTER EXPENSES WAIVED)*** 0.475% 0.475% 0.475%
------- ------- -------
TOTAL FUND OPERATING EXPENSES
(AFTER EXPENSES WAIVED)*** 1.30% 2.05% 2.05%
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</TABLE>
<TABLE>
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*A LONG-TERM SHAREHOLDER MAY PAY MORE IN ASSET-BASED DURING THE CURRENT FISCAL YEAR, BUT IT RESERVES THE RIGHT TO
SALES CHARGES THAN THE ECONOMIC EQUIVALENT OF THE MAXIMUM CEASE SUCH WAIVER, IN WHOLE OR IN PART, AT ANY TIME.
FRONT-END SALES CHARGE PERMITTED BY THE NATIONAL ASSOCIATION ***THE FUND'S INVESTMENT ADVISER AND MIMLIC SALES
OF SECURITIES DEALERS, INC. (SEE "MANAGEMENT OF THE VOLUNTARILY ABSORBED OR WAIVED CERTAIN EXPENSES OF THE FUND
FUND--THE UNDERWRITER AND PLANS OF DISTRIBUTION"). FOR THE YEAR ENDED SEPTEMBER 30, 1995. IF THE FUND HAD BEEN
**THE FUND HAS ADOPTED A PLAN OF DISTRIBUTION, PURSUANT CHARGED FOR THESE EXPENSES, THE RATIO OF TOTAL FUND
TO RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT OF 1940, OPERATING EXPENSES TO AVERAGE DAILY NET ASSETS WOULD HAVE
WHICH PROVIDES FOR THE PAYMENT TO MIMLIC SALES OF A BEEN 1.42% FOR CLASS A SHARES, 2.11% FOR CLASS B SHARES AND
DISTRIBUTION FEE EQUAL TO AN ANNUAL RATE OF .30% OF AVERAGE 2.11% FOR CLASS C SHARES. IN ADDITION, IT IS THE FUND'S
DAILY NET ASSETS ATTRIBUTABLE TO CLASS A SHARES OF THE FUND. INVESTMENT ADVISER'S PRESENT INTENTION TO ABSORB OTHER
MIMLIC SALES IS CURRENTLY WAIVING THAT PORTION OF EXPENSES DURING THE CURRENT FISCAL YEAR WHICH EXCEED, AS A
DISTRIBUTION FEE WHICH EXCEEDS, AS A PERCENTAGE OF AVERAGE PERCENTAGE OF AVERAGE DAILY NET ASSETS, .475%. THE FUND'S
DAILY NET ASSETS ATTRIBUTABLE TO CLASS A SHARES, .25%. IT IS INVESTMENT ADVISER ALSO RESERVES THE OPTION TO REDUCE THE
MIMLIC SALES' PRESENT INTENTION TO WAIVE DISTRIBUTION FEES LEVEL OF OTHER EXPENSES WHICH IT WILL VOLUNTARILY ABSORB.
AS SUCH LEVEL
</TABLE>
6
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SHAREHOLDER EXPENSE
EXAMPLE You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return and (2) redemption at the end of each time period.
<TABLE>
<CAPTION>
YEAR REDEEMED CLASS A CLASS B CLASS C
<S> <C> <C> <C>
- ----------------------------------------------------
1 $ 63 $ 71 $ 21
3 89 99 64
5 118 125 110
10 199 210* 218**
</TABLE>
An investor would pay the following expenses on the same investment in Class B
shares, assuming no redemption:
<TABLE>
<CAPTION>
YEAR REDEEMED CLASS B
<S> <C> <C> <C>
- ----------------------------------------------------
1 $ 21
3 64
5 110
10 210*
</TABLE>
*REFLECTS CONVERSION OF CLASS B SHARES TO CLASS A SHARES (WHICH PAY LOWER
ONGOING EXPENSES) APPROXIMATELY SEVEN YEARS AFTER PURCHASE.
**REFLECTS CONVERSION OF CLASS C SHARES TO CLASS A SHARES (WHICH PAY LOWER
ONGOING EXPENSES) APPROXIMATELY EIGHT YEARS AFTER PURCHASE.
THE EXAMPLES CONTAINED IN THE TABLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
7
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<TABLE>
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FINANCIAL The following table shows important financial information for evaluating the Fund's results. This information has been
HIGHLIGHTS audited by KPMG Peat Marwick LLP, independent auditors.
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</TABLE>
<TABLE>
<CAPTION>
CLASS A
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PERIOD FROM
NOVEMBER 1,
YEAR ENDED 1993 TO
SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED OCTOBER 31,
1995 1994(E) 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
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NET ASSET VALUE, BEGINNING OF PERIOD $ 9.70 $ 11.06 $ 10.94 $ 10.80 $ 10.04 $ 10.24
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INCOME FROM INVESTMENT OPERATIONS:
NET INVESTMENT INCOME .62 .53 .63 .71 .79 .83
NET GAINS OR LOSSES ON SECURITIES
(BOTH REALIZED AND UNREALIZED) .65 (.99) .55 .15 .76 (.20)
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TOTAL FROM INVESTMENT OPERATIONS 1.27 (.46) 1.18 .86 1.55 .63
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LESS DISTRIBUTIONS:
DIVIDENDS FROM NET INVESTMENT INCOME (.61) (.53) (.63) (.72) (.79) (.83)
DISTRIBUTIONS FROM CAPITAL GAINS -- (.37) (.43) -- -- --
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TOTAL DISTRIBUTIONS (.61) (.90) (1.06) (.72) (.79) (.83)
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NET ASSET VALUE, END OF PERIOD $ 10.36 $ 9.70 $ 11.06 $ 10.94 $ 10.80 $ 10.04
------------- ------------- -------- -------- -------- --------
TOTAL RETURN (a) 13.5% (4.3)%(b) 11.4% 8.2% 16.0% 6.4%
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NET ASSETS, END OF PERIOD
(IN THOUSANDS) $25,317 $27,105 $27,073 $20,996 $16,554 $13,737
- -----------------------------------------------------------------------------------------------------------------------------------
RATIO OF EXPENSES TO AVERAGE DAILY
NET ASSETS (c) 1.29% 1.24%(d) 1.17% 1.25% 1.18% 1.05%
- -----------------------------------------------------------------------------------------------------------------------------------
RATIO OF NET INVESTMENT INCOME TO
AVERAGE DAILY NET ASSETS (c) 6.23% 5.73%(d) 5.77% 6.56% 7.64% 8.23%
- -----------------------------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE
(EXCLUDING SHORT-TERM SECURITIES) 203.7% 236.2% 135.0% 137.3% 48.4% 2.9%
<CAPTION>
1989 1988 1987 1986
<S> <C> <C> <C> <C> <C>
- ------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.16 $ 9.78 $ 10.63 $ 10.36
INCOME FROM INVESTMENT OPERATIONS:
NET INVESTMENT INCOME .86 .88 .88 1.00
NET GAINS OR LOSSES ON SECURITIES
(BOTH REALIZED AND UNREALIZED) .08 .37 (.66) .27
TOTAL FROM INVESTMENT OPERATIONS .94 1.25 .22 1.27
LESS DISTRIBUTIONS:
DIVIDENDS FROM NET INVESTMENT INCOME (.86) (.87) (.88) (1.00)
DISTRIBUTIONS FROM CAPITAL GAINS -- -- (.19) --
TOTAL DISTRIBUTIONS (.86) (.87) (1.07) (1.00)
NET ASSET VALUE, END OF PERIOD $ 10.24 $ 10.16 $ 9.78 $ 10.63
-------- -------- -------- --------
TOTAL RETURN (a) 9.8% 13.2% 2.0% 12.8%
- ------------------------------------
NET ASSETS, END OF PERIOD
(IN THOUSANDS) $14,881 $14,859 $13,213 $12,567
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RATIO OF EXPENSES TO AVERAGE DAILY
NET ASSETS (c) 1.04% .84% .60% .61%
- ------------------------------------
RATIO OF NET INVESTMENT INCOME TO
AVERAGE DAILY NET ASSETS (c) 8.64% 8.79% 8.61% 9.32%
- ------------------------------------
PORTFOLIO TURNOVER RATE
(EXCLUDING SHORT-TERM SECURITIES) 67.4% 35.3% 42.6% 85.9%
</TABLE>
<TABLE>
<S> <C>
(A) TOTAL RETURN FIGURES ARE BASED ON A SHARE OUTSTANDING OCTOBER 31, 1993, 1992, 1991, 1989, 1988, 1987 AND 1986,
THROUGHOUT THE PERIOD AND ASSUMES REINVESTMENT OF DISTRIBUTIONS RESPECTIVELY. IF CLASS A SHARES HAD BEEN CHARGED FOR THESE
AT NET ASSET VALUE. TOTAL RETURN FIGURES DO NOT REFLECT THE EXPENSES, THE RATIO OF EXPENSES TO AVERAGE DAILY NET ASSETS WOULD
IMPACT OF SALES CHARGES. HAVE BEEN 1.42%, 1.41%, 1.31%, 1.36%, 1.29%, 1.06%, 1.05%, .96%
(B) TOTAL RETURN IS PRESENTED FOR THE PERIOD FROM NOVEMBER 1, AND 1.16%, RESPECTIVELY, AND THE RATIO OF NET INVESTMENT INCOME
1993 TO SEPTEMBER 30, 1994. TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN 6.10%, 5.56%, 5.63%,
(C) THE FUND'S ADVISER AND DISTRIBUTOR VOLUNTARILY WAIVED OR 6.45%, 7.53%, 8.62%, 8.58%, 8.25%, AND 8.77%, RESPECTIVELY.
ABSORBED $36,128, $43,505, $34,773, $21,104, $11,682, $3,375, (D) ADJUSTED TO AN ANNUAL BASIS.
$28,926, $50,149 AND $55,273 IN EXPENSES FOR THE YEAR ENDED (E) DURING 1994, THE FUND CHANGED ITS FISCAL YEAR END FROM
SEPTEMBER 30, 1995, THE PERIOD ENDED SEPTEMBER 30, 1994 AND THE OCTOBER 31 TO SEPTEMBER 30.
YEARS ENDED
</TABLE>
8
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<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------------------------------------
FINANCIAL The following table shows important financial information for evaluating the Fund's results. This information has been
HIGHLIGHTS audited by KPMG Peat Marwick LLP, independent auditors.
- -----------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
-------------------------------- ---------------
PERIOD FROM PERIOD FROM
AUGUST 19, MARCH 1,
YEAR ENDED 1994(a) TO 1995(b) TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $9.90 $ 9.70 $ 9.83
--------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
NET INVESTMENT INCOME .53 .06 .31
NET GAINS OR LOSSES ON SECURITIES
(BOTH REALIZED AND UNREALIZED) .67 (.13) .47
--------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.20 (.07) .78
--------------------------------------------------
LESS DISTRIBUTIONS:
DIVIDENDS FROM NET INVESTMENT INCOME (.53) (.06) (.31)
DISTRIBUTIONS FROM CAPITAL GAINS -- -- --
--------------------------------------------------
TOTAL DISTRIBUTIONS (.53) (.06) (.31)
--------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.37 $ 9.70 $10.37
------ ------ ------
TOTAL RETURN (c) 12.7% (.7)%(g) 7.9%(e)
- ----------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (IN
THOUSANDS) $1,084 $ 60 $ 321
- ----------------------------------------------------------------------------------------
RATIO OF EXPENSES TO AVERAGE DAILY
NET ASSETS (d) 2.05% .28%(h) 2.05%(f)
- ----------------------------------------------------------------------------------------
RATIO OF NET INVESTMENT INCOME TO
AVERAGE DAILY NET ASSETS (d) 5.32% .60%(h) 5.26%(f)
- ----------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE (EXCLUDING
SHORT-TERM SECURITIES) 203.7% 236.2% 203.7%
</TABLE>
<TABLE>
<S> <C>
(A) COMMENCEMENT OF THE FUND'S CLASS B OPERATIONS. ENDED SEPTEMBER 30, 1995. IF CLASS C SHARES HAD BEEN CHARGED FOR
(B) COMMENCEMENT OF THE FUND'S CLASS C OPERATIONS. THESE EXPENSES, THE RATIO OF EXPENSES TO AVERAGE DAILY NET ASSETS
(C) TOTAL RETURN FIGURES ARE BASED ON A SHARE OUTSTANDING WOULD HAVE BEEN 2.11% AND THE RATIO OF NET INVESTMENT INCOME TO
THROUGHOUT THE PERIOD AND ASSUMES REINVESTMENT OF DISTRIBUTIONS AVERAGE DAILY ASSETS WOULD HAVE BEEN 5.20% FOR THE PERIOD FROM
AT NET ASSET VALUE. TOTAL RETURN FIGURES DO NOT REFLECT THE MARCH 1, 1995 TO SEPTEMBER 30, 1995.
IMPACT OF SALES CHARGES. (E) TOTAL RETURN IS PRESENTED FOR THE PERIOD MARCH 1, 1995,
(D) THE FUND'S ADVISER AND DISTRIBUTOR VOLUNTARILY WAIVED OR COMMENCEMENT OF OPERATIONS, TO SEPTEMBER 30, 1995.
ABSORBED $36,128 IN EXPENSES FOR THE YEAR ENDED SEPTEMBER 30, (F) ADJUSTED TO AN ANNUAL BASIS.
1995. IF CLASS B SHARES HAD BEEN CHARGED FOR THESE EXPENSES, THE (G) TOTAL RETURN IS PRESENTED FOR THE PERIOD FROM AUGUST 19,
RATIO OF EXPENSES TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN 1994, COMMENCEMENT OF OPERATIONS, TO SEPTEMBER 30, 1994.
2.11% AND THE RATIO OF NET INVESTMENT INCOME TO AVERAGE DAILY (H) RATIOS PRESENTED FOR THE PERIOD FROM AUGUST 19, 1994 TO
ASSETS WOULD HAVE BEEN 5.26% FOR THE YEAR SEPTEMBER 30, 1994 ARE NOT ANNUALIZED AS THEY ARE NOT INDICATIVE
OF ANTICIPATED ANNUAL RESULTS.
</TABLE>
9
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- ------------------------------------------
INVESTMENT
OBJECTIVES,
POLICIES AND RISKS
- --------------------
Mortgage Securities Fund is a mutual fund designed
for investors seeking a high level of current income consistent with prudent
investment risk. This investment objective of Mortgage Securities Fund may not
be changed without the approval of a majority of the outstanding shares of
Mortgage Securities Fund. There can be no assurance that Mortgage Securities
Fund will achieve its objective.
In seeking to achieve its objective, Mortgage Securities Fund invests
primarily in a diversified portfolio of mortgage-related securities. It is the
Fund's investment policy, except when the Fund assumes a temporary defensive
position, to have at least 65% of the value of its total assets invested in
mortgage-related securities. This investment policy is deemed fundamental and
may not be changed without approval by a majority of the outstanding shares of
the Fund. Mortgage Securities Fund's other investment policies, except
"fundamental" investment restrictions (see below), may be changed at any time
without shareholder approval, although shareholders will be notified of those
changes.
- ------------------------------------------
INVESTMENT
POLICIES The mortgage-related securities in which Mortgage Securities Fund
principally invests provide funds for mortgage loans made to residential home
buyers. These include securities which represent interests in pools of mortgage
loans made by lenders such as savings and loan institutions, mortgage bankers,
commercial banks and others. Pools of mortgage loans are assembled for sale to
investors (such as Mortgage Securities Fund) by various governmental,
government-related and private organizations. (Mortgage Securities Fund may also
invest to a limited extent in debt securities which, although not
mortgage-related, are secured by mortgages on commercial real estate or
residential rental properties. See "Other Securities.")
Interests in pools of mortgage-related securities differ from other forms of
debt securities, which normally provide for periodic payment of interest in
fixed amounts with principal payments at maturity or specified call dates.
Instead, these securities usually provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
residential or commercial mortgage loans, net of any fees paid, to the servicer,
the issuer or guarantor of such securities. Additional payments are caused by
repayments of principal resulting from the sale of the underlying residential
property, refinancing, curtailments (partial prepayment) or foreclosure, net of
fees or costs which may be incurred. Some mortgage-related securities (such as
securities issued by the Government National Mortgage Association) are described
as "modified pass-through." These securities entitle the holder to receive all
interest and principal payments owed on the mortgage pool, net of certain fees,
regardless of whether or not the mortgagor actually makes the payment.
The governmental and government-related guarantors do not guarantee Mortgage
Securities Fund's yield or the price of its shares. The net asset value of
Mortgage Securities Fund fluctuates in response to changes in the general level
of interest rates. When interest rates rise, prices of fixed income securities
held by Mortgage Securities Fund tend to fall and the rate of prepayment of
mortgages underlying mortgage-related securities tends to decline (lengthening
the average maturity of the Fund's portfolio). In periods of declining interest
rates, however, the prices of such securities tend to rise and the rate of
prepayment of mortgages underlying mortgage-related securities tends to
increase, and such prepayments must be reinvested at the then prevailing lower
interest rates. In addition, the
10
<PAGE>
net asset value of Mortgage Securities Fund may fluctuate in response to the
market's perception of the creditworthiness of the issuers of the Fund's
portfolio securities. See "Risks of Investing in the Fund."
The Fund expects that under normal circumstances the effective duration of its
portfolio will range from three to seven and one-half years. Duration is a
measure of the time-weighted average term to maturity of a security's payment
schedule, and of the relative price sensitivity of a security to changes in
interest rates. A security with a longer duration has greater price sensitivity,
and thus greater risk, relative to a similar security with a shorter duration.
As a rule of thumb, a portfolio of fixed income securities will experience a
percentage decrease in principal value equal to its duration for each 1%
increase in current interest rates. For example, if the Fund held securities
with an effective duration of five years and current interest rates increased by
1%, the principal value of such securities could be expected to decrease by
approximately 5%.
Mortgage Securities Fund expects under normal circumstances to have
substantially all of its assets in high-grade mortgage-related securities either
(i) issued by United States Government owned or sponsored corporations or (ii)
rated A or better by Moody's Investors Services, Inc., ("Moody's") or Standard &
Poor's Corporation ("S&P") or rated at a comparable level by an independent
publicly-recognized rating agency, or, if not rated, are of equivalent
investment quality as determined by the Fund's investment adviser. (See "Debt
Securities and Down-Graded Instruments" in the Statement of Additional
Information.) At times Mortgage Securities Fund may invest in mortgage-related
securities rated BBB or Baa by S&P's or Moody's, respectively, when deemed by
its investment adviser to be consistent with the Fund's objective of high
current income to the extent consistent with prudent investment risk; however,
no such investments will be made in excess of 20% of the value of Mortgage
Securities Fund's total assets. (Such investments will be considered mortgage-
related securities for purposes of the policy that Mortgage Securities Fund
invest at least 65% of the value of its total assets in mortgage-related
securities.) To the extent that the Fund invests in mortgage-related securities
rated BBB or Baa by S&P's or Moody's, respectively, however, it will be
investing in securities which have speculative elements. The Fund's investment
adviser monitors continuously the ratings of securities held by Mortgage
Securities Fund and the creditworthiness of their issuers. For further
information about risks associated with securities rated BBB or Baa by S&P's or
Moody's, respectively, see "Risks of Investing in the Fund." For further
information about the characteristics of mortgage-related securities, and for a
description of the ratings used by Moody's and S&P, see the Statement of
Additional Information.
U.S. GOVERNMENT SECURITIES. The principal governmental (i.e., backed by the
full faith and credit of the United States Government) guarantor of
mortgage-related securities is the Government National Mortgage Association
("GNMA"). GNMA is a wholly-owned United States Government corporation within the
Department of Housing and Urban Development. GNMA is authorized to guarantee,
with the full faith and credit of the United States Government, the timely
payment of principal and interest on securities issued by institutions approved
by GNMA (such as savings and loan institutions, commercial banks and mortgage
bankers) and backed by pools of FHA-insured or VA-guaranteed mortgages.
Government-related (i.e., not backed by the full faith and credit of the
United States Government) guarantors include the Federal National Mortgage
Association and the Federal Home Loan Mortgage Association. The Federal National
Mortgage Association ("FNMA") is a government-sponsored corporation owned
entirely by private stockholders. It is subject to
11
<PAGE>
general regulation by the Secretary of Housing and Urban Development. FNMA
purchases residential mortgages from a list of approved seller/servicers which
include state and federally-chartered savings and loan associations, mutual
savings banks, commercial banks and credit unions and mortgage bankers.
Pass-through securities issued by FNMA are guaranteed as to timely payment of
principal and interest by FNMA but are not backed by the full faith and credit
of the United States Government.
The Federal Home Loan Mortgage Corporation ("FHLMC") is a corporate
instrumentality of the United States Government and was created by Congress in
1970 for the purpose of increasing the availability of mortgage credit for
residential housing. Its stock is publicly traded. FHLMC issues Participation
Certificates ("PCs") which represent interests in mortgages from FHLMC's
national portfolio. FHLMC guarantees the timely payment of interest and
principal on most PCs. There are some PCs, however, on which FHLMC guarantees
the timely payment of interest but only the ultimate payment of principal. PCs
are not backed by the full faith and credit of the United States Government.
NON-GOVERNMENTAL SECURITIES. Commercial banks, savings and loan institutions,
private mortgage insurance companies, mortgage bankers and other secondary
market issuers also create pass-through pools of conventional residential and
commercial mortgage loans. Such issuers may in addition be the originators and
servicers of the underlying mortgage loans as well as the guarantors of the
mortgage-related securities. Pools created by such non-governmental issuers
generally offer a higher rate of interest than government and government-related
pools because there are no direct or indirect government guarantees of payments
in the former pools. However, timely payment of interest and principal of these
pools is supported by various forms of insurance, guarantees and credit
enhancements, including individual loan, title, pool and hazard insurance. The
insurance and guarantees are issued by government entities, private insurers and
the mortgage poolers. Such insurance and guarantees and the creditworthiness of
the issuers thereof will be considered in determining whether a mortgage-related
security meets Mortgage Securities Fund's investment quality standards. There
can be no assurance that the private insurers can meet their obligations under
the policies. Mortgage Securities Fund may buy mortgage-related securities
without insurance or guarantees if through an examination of the loan experience
and practices of the poolers the Fund's investment adviser determines that the
securities meet the Fund's quality standards. Although the market for such
securities is becoming increasingly liquid, securities issued by certain private
organizations may not be readily marketable. Mortgage Securities Fund will not
purchase mortgage-related securities or any other assets which in its investment
adviser's opinion are illiquid if, as a result, more than 10% of the value of
the Fund's net assets will be illiquid.
COLLATERALIZED MORTGAGE OBLIGATIONS. The Fund may invest in collateralized
mortgage obligations ("CMOs"), in which several different series of bonds or
certificates secured by pools of mortgage-backed securities or mortgage loans,
are issued. The series differ from each other in terms of the priority rights
which each has to receive cash flows with the CMO from the underlying
collateral. Each CMO series may also be issued in multiple classes. Each class
of a CMO series, often referred to as a "tranche," is usually issued at a
specific coupon rate and has a stated maturity. The underlying security for the
CMO may consist of mortgage-backed securities issued or guaranteed by U.S.
Government agencies or whole loans. CMOs backed by U.S. Government agency
securities retain the credit quality of such agency securities and therefore
present minimal credit risk. CMOs backed by whole loans typically carry various
forms of credit enhancements to protect against credit losses and provide
12
<PAGE>
investment grade ratings. Unlike traditional mortgage pass-through securities,
which simply pass through interest and principal on a pro rata basis as
received, CMOs allocate the principal and interest from the underlying mortgages
among the several classes or tranches of the CMO in many ways. All residential,
and some commercial, mortgage-related securities are subject to prepayment risk.
A CMO does not eliminate that risk, but, by establishing an order of priority
among the various tranches for the receipt and timing of principal payments, it
can reallocate that risk among the tranches. Therefore, the stream of payments
received by a CMO bondholder may differ dramatically from that received by an
investor holding a traditional pass-through security backed by the same
collateral.
In the traditional form of CMO, interest is paid currently on all tranches but
principal payments are applied sequentially to retire each tranche in order of
stated maturity. Traditional sequential payment CMOs have evolved into numerous
more flexible forms of CMO structures which can vary frequency of payments,
maturities, prepayment risk and performance characteristics. The differences
between these new types of CMOs relate primarily to the manner in which each
varies the amount and timing of principal and interest received by each tranche
from the underlying collateral. Under all but the sequential payment structures,
specific tranches of CMOs have priority rights over other tranches with respect
to the amount and timing of cash flow from the underlying mortgages.
The primary risk associated with any mortgage security is the uncertainty of
the timing of cash flows; specifically, uncertainty about the possibility of
either the receipt of unanticipated principal in falling interest rate
environments (prepayment or call risk) or the failure to receive anticipated
principal in rising interest rate environments (extension risk). In a CMO, that
uncertainty may be allocated to a greater or lesser degree to specific tranches
depending on the relative cash flow priorities of those tranches. By
establishing priority rights to receive and reallocate payments of prepaid
principal, the higher priority tranches are able to offer better call protection
and extension protection relative to the lower priority classes in the same CMO.
For example, when insufficient principal is received to make scheduled principal
payments on all tranches, the higher priority tranches receive their scheduled
premium payments first and thus bear less extension risk than lower priority
tranches. Conversely, when principal is received in excess of scheduled
principal payments on all tranches (call risk), the lower priority tranches are
required to receive such excess principal until they are retired and thus bear
greater prepayment risk than the higher priority tranches. Therefore, depending
on the type of CMO purchased, an investment may be subject to a greater or
lesser risk of prepayment, and experience a greater or lesser volatility in
average life, yield, duration and price, than other types of mortgage-related
securities. For that reason, and except as otherwise provided (see the following
paragraphs for a discussion of the Fund's investment policies regarding CMOs
known as "Z" bonds and inverse or reverse floating CMOs), the Fund will not
purchase a CMO tranche unless, at the time of purchase, such tranche is part of
a series with either the first or second highest priority within the CMO to
receive cash flows. These types of CMOs tend to provide more predictable and
stable returns, but carry lower current yields, than other more volatile CMOs
(which have a lower cash flow priority). A CMO tranche may also have a coupon
rate which resets periodically at a specified increment over an index. These
floating rate CMOs are typically issued with lifetime caps on the level to which
the floating coupon rate is allowed to rise. The Fund may invest in such
securities, usually subject to a cap, provided such securities satisfy the same
requirements regarding cash flow priority applicable to the Fund's purchase of
CMOs generally. CMOs are typically
13
<PAGE>
traded over the counter rather than on centralized exchanges. Because CMOs of
the type purchased by the Fund tend to have relatively more predictable yields
and are relatively less volatile, they are also generally more liquid than CMOs
with greater prepayment risk and more volatile performance profiles.
The Fund may also purchase CMOs known as "accrual" or "Z" bonds. An accrual or
Z bond holder is not entitled to receive cash payments until one or more other
classes of the CMO have been paid in full from payments on the mortgage loans
underlying the CMO. During the period in which cash payments are not being made
on the Z tranche, interest accrues on the Z tranche at a stated rate, and this
accrued interest is added to the amount of principal which is due to the holder
of the Z tranche. After the other classes have been paid in full, cash payments
are made on the Z tranche until its principal (including previously accrued
interest which was added to principal, as described above) and accrued interest
at the stated rate have been paid in full. Generally, the date upon which cash
payments begin to be made on a Z tranche depends on the rate at which the
mortgage loans underlying the CMO are prepaid, with a faster prepayment rate
resulting in an earlier commencement of cash payments on the Z tranche. Like a
zero coupon bond, during its accrual period the Z tranche of a CMO has the
advantage of eliminating the risk of reinvesting interest payments at lower
rates during a period of declining market interest rates. At the same time,
however, and also like a zero coupon bond, the market value of a Z tranche can
be expected to fluctuate more widely with changes in market interest rates than
would the market value of a tranche which pays interest currently. Changes in
market interest rates also can be expected to influence prepayment rates on the
mortgage loans underlying the CMO of which a Z tranche is a part. As noted
above, such changes in prepayment rates will affect the date at which cash
payments begin to be made on a Z tranche, and therefore also will influence its
market value. As an operating policy, the Fund will not purchase a Z bond if the
Fund's aggregate investment in Z bonds which are then still in their accrual
periods would exceed 20% of the Fund's total assets (Z bonds which have begun to
receive cash payments are not included for purposes of this 20% limitation).
The Fund may also invest in inverse or reverse floating CMOs. Inverse or
reverse floating CMOs constitute a tranche of a CMO with a coupon rate that
moves in the reverse direction to an applicable index. Accordingly, the coupon
rate will increase as interest rates decrease. The Fund would be adversely
affected, however, by the purchase of such CMOs in the event of an increase in
interest rates since the coupon rate will decrease as interest rates increase,
and, like other mortgage-related securities, the value will decrease as interest
rates increase. Inverse or reverse floating rate CMOs are typically more
volatile than fixed or floating rate tranches of CMOs, and usually carry a lower
cash flow priority. As an operating policy, the Fund will treat inverse floating
rate CMOs as illiquid and, therefore, will limit its investments in such
securities, together with all other illiquid securities, to 10% of the Fund's
net assets.
STRIPPED MORTGAGE-BACKED SECURITIES. Stripped mortgage-backed securities
represent undivided ownership interests in a pool of mortgages, the cash flow of
which has been separated into its interest and principal components. "IOs"
(interest only securities) receive the interest portion of the cash flow while
"POs" (principal only securities) receive the principal portion. Stripped
mortgage-backed securities may be issued by U.S. Government agencies or by
private issuers. As interest rates rise and fall, the value of IOs tends to move
in the same direction as interest rates, unlike other mortgage-backed securities
(which tend to move in the opposite direction compared to interest rates). Under
the Internal Revenue Code of 1986, as amended, POs may generate taxable income
from the current
14
<PAGE>
accrual of original issue discount, without a corresponding distribution of cash
to the Fund.
The cash flows and yields on standard IO and PO classes are extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets. For example, a rapid or slow rate of
principal payments may have a material adverse effect on the performance and
prices of IOs or POs, respectively. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, an investor may fail to
recoup fully its initial investment in an IO class of a stripped mortgage-backed
security, even if the IO class is rated AAA or Aaa or is derived from a full
faith and credit obligation (i.e., a GNMA). Conversely, if the underlying
mortgage assets experience slower than anticipated prepayments of principal, the
price on a PO class will be affected more severely than would be the case with a
traditional mortgage-backed security, but unlike IOs, an investor will
eventually recoup fully its initial investment provided no default of the
guarantor occurs. As an operating policy the Fund will treat all IOs and POs as
illiquid securities. Therefore, the Fund will limit its investments in IOs and
POs, together with all other illiquid securities, to 10% of the Fund's net
assets. See "Investment Restrictions."
OTHER SECURITIES. Mortgage Securities Fund may invest up to 35% of the value
of its total assets in the following types of securities: (i) securities issued
or guaranteed by the United States Government, its agencies and
instrumentalities, (ii) certificates of deposit, bankers' acceptances and
interest-bearing savings deposits of banks having total assets of more than $1
billion and which are members of the Federal Deposit Insurance Corporation,
(iii) commercial paper of prime quality rated A-1 or higher by S&P or Prime-1 or
higher by Moody's or, if not rated, issued by companies which have an
outstanding debt issue rated AA or higher by S&P or Aa or higher by Moody's, and
(iv) debt securities which, although not mortgage-related securities, are rated
A or better by Moody's or S&P or, if not rated, are of equivalent investment
quality as determined by Mortgage Securities Fund's investment adviser; such
securities may entitle the holder to participate in income derived from
mortgaged properties or from sales thereof. When business or financial
conditions warrant, Mortgage Securities Fund may take a temporary defensive
position and invest without limit in the foregoing securities.
DIRECT INVESTMENTS IN MORTGAGES. Mortgage Securities Fund may invest up to
10% of the value of its net assets directly in mortgages securing residential or
commercial real estate (i.e., the Fund becomes the mortgagee). Such investments
are not "mortgage-related securities" as described above. They are normally
available from lending institutions which group together a number of mortgages
for resale (usually from 10 to 50 mortgages) and which act as servicing agent
for the purchaser with respect to, among other things, the receipt of principal
and interest payments. (Such investments are also referred to as "whole loans".)
The vendor of such mortgages receives a fee from Mortgage Securities Fund for
acting as servicing agent. The vendor does not provide any insurance or
guarantees covering the repayment of principal or interest on the mortgages.
Unlike pass-through securities, whole loans constitute direct investment in
mortgages inasmuch as Mortgage Securities Fund, rather than a financial
intermediary, becomes the mortgagee with respect to such loans purchased by the
Fund. At present, such investments are considered to be illiquid by the Fund's
investment adviser. Mortgage Securities Fund will invest in such mortgages only
if its investment adviser has determined through an examination of the mortgage
loans and their originators (which may include an examination of such factors as
percentage of family income dedicated to loan service and the relationship
between loan value and market value) that the purchase of the mortgages should
not represent a significant risk of loss to the Fund.
15
<PAGE>
WHEN-ISSUED SECURITIES. Mortgage Securities Fund may purchase securities on a
"when-issued" basis and may purchase or sell securities on a "forward
commitment" basis to hedge against anticipated changes in interest rates and
prices. Such transactions involve the potential risk of loss to the Fund because
interest rate changes in the marketplace prior to delivery of the security may
adversely affect the value of the security to be delivered. Such trading
practices are separate and distinct from the underlying securities and involve
different investment goals, such as hedging against anticipated changes in
interest rates and prices, as compared to those of investing in the underlying
securities. No more than 20% of the value of the Fund's total portfolio will be
committed to such transactions.
INTEREST RATE FUTURES CONTRACTS. The Fund may invest in contracts for the
future delivery of fixed income securities ("interest rate futures contracts").
The Fund will sell such contracts to protect itself against expected increases
in interest rates and purchase such contracts to protect itself against expected
decreases in such interest rates. Interest rate futures contracts will not be
entered into if immediately thereafter (a) more than 5% of the Fund's total
assets will be committed to initial margin or (b) the sum of the then aggregate
futures market prices of financial instruments required to be delivered upon
open futures contract sales and the aggregate purchase price under open futures
contract purchases would exceed 30% of the value of the Fund's total assets.
These instruments involve potential risk of loss to the Fund due to the
possibility that futures prices may not correlate with cash prices and that
Advantus Capital may be incorrect in its expectations as to the direction and
extent of interest rate movements. In addition, the value of such futures
contracts may not vary in direct proportion to the value of the Fund's portfolio
securities, in which case a closing transaction may fail to offset completely
decreases in the prices of debt securities in the Fund's portfolio or increases
in the prices of debt securities which the Fund may wish to purchase.
OPTIONS. The Fund may also purchase put and call options written by others
covering the types of securities in which the Fund may invest. The Fund may not
write put or call options. The Fund utilizes put and call options to provide
protection against adverse price or yield effects from anticipated changes in
prevailing interest rates. The use of options contracts involves risk of loss to
the Fund due to the possibility that the prices of the underlying securities on
which such options are written may not move as anticipated. The Fund will not
purchase a put or call option if, as a result, the aggregate cost of all
outstanding options purchased and held by the Fund plus all other illiquid
assets held by the Fund would exceed 10% of the value of the Fund's net assets.
INVESTMENT RESTRICTIONS Mortgage Securities Fund has certain investment
restrictions, set forth in their entirety in the Statement of Additional
Information, which are fundamental policies. Without the approval of the holders
of a majority of the outstanding shares of the Fund, the Fund will not: (i)
purchase any security (other than securities issued or guaranteed by the United
States Government, its agencies or instrumentalities) if, as a result, more than
5% of the Fund's total assets would be invested in securities of a single
issuer, except that up to 25% of the value of the Fund's total assets may be
invested without regard to this limitation; (ii) purchase any security if, as a
result, more than 25% 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 shall not apply to investments in the
mortgage and mortgage-finance industry (in which more than 25% of the value of
the Fund's total assets will, except for temporary defensive positions, be
invested) or securities issued or guaranteed by the United States Government,
its agencies or instrumentalities; (iii) borrow money, except from banks and
only as a temporary measure for
16
<PAGE>
extraordinary or emergency purposes and not in excess of 5% of its net assets;
(iv) invest more than a total of 5% of its total assets in securities of
businesses (including predecessors) less than three years old; or (v) invest
more than a total of 10% of the Fund's net assets in securities restricted as to
disposition under federal securities laws or otherwise or other illiquid assets
(which include put and call options).
- ------------------------------------------
RISKS OF INVESTING
IN THE FUND The Fund's yield and the price of the Fund's shares are not
guaranteed. There is risk in all investment and, depending on the performance of
the Fund's investments, the value of an investment in the Fund may decrease as
well as increase.
The Fund may, with respect to 25% of its total assets, invest in excess of 5%
of its total assets in securities of a single issuer. To the extent it does so,
the Fund may be less well diversified than other mutual funds which do not
invest in excess of 5% of their total assets in securities of a single issuer.
The net asset values of shares of Mortgage Securities Fund will fluctuate in
response to changes in interest rates. In general, when market interest rates
rise, prices of mortgage-related and fixed income securities (such as those held
by Mortgage Securities Fund) decline. When interest rates decline, prices of
mortgage-related and fixed income securities tend to rise. In periods of
declining mortgage interest rates, however, the rate of prepayment of mortgages
underlying mortgage-related securities tends to increase, with the result that
such prepayments must be reinvested by Mortgage Securities Fund at lower rates.
Although mortgage-related securities are generally supported by some form of
government or private guarantees and insurance, Mortgage Securities Fund's
shares are not guaranteed and there can be no assurance that private insurers
can meet their obligations.
The Fund may invest in corporate bonds rated BBB or Baa by S&P's or Moody's,
respectively. In addition, Mortgage Securities Fund may invest in
mortgage-related securities rated BBB or Baa by S&P's or Moody's, respectively.
To the extent the Fund invests in such securities, it will be investing in
securities which may involve risks and which in fact have speculative elements
not associated with bonds rated A or higher by S&P's or Moody's. S&P, in its
description, says that 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. Moody's says that,
with respect to bonds rated Baa, 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.
Some of the investment policies which the Fund may employ, such as investing
in options, interest rate futures contracts, when-issued securities and forward
commitments, involve special risks not associated with more traditional
investment instruments and policies. See "Investment Policies," above, and the
Statement of Additional Information for risks associated with specific
investments.
- ------------------------------------------
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
17
<PAGE>
result in higher brokerage and other costs for the Fund. Mortgage Securities
Fund's investment activities may result in the Fund's engaging in a considerable
amount of trading of securities held for less than one year. Accordingly, it can
be expected that the Fund will have a higher turnover rate, and thus a higher
incidence of brokerage and other costs, than might be expected from investment
companies which invest substantially all of their funds on a long-term basis.
Higher portfolio turnover rates (100% or more) may also result in greater tax
consequences for investors. A fund with a higher rate of portfolio turnover may
realize substantial additional capital gains, both long-term and short-term,
which gains would then result in additional taxable distributions to
shareholders. See "Dividends and Capital Gains Distributions" and "Taxes."
See "Financial Highlights," above, and the Statement of Additional
Information, for more information about the Fund's portfolio turnover policies
and rates.
- ------------------------------------------
MANAGEMENT
OF THE FUND
- ------------- Under Minnesota law,
the Board of Directors of the Fund has overall
responsibility for managing the Fund in good faith, in a manner reasonably
believed to be in the best interests of the Fund, and with the care an ordinary
prudent person in like position would exercise in similar circumstances.
However, this management may be delegated.
The Fund's investment adviser is Advantus Capital. Advantus Capital commenced
its business in June 1994, and provides investment advisory services to each of
the other Advantus Funds, one other mutual fund (MIMLIC Cash Fund, Inc.) and
various private accounts. Advantus Capital is a wholly-owned subsidiary of
MIMLIC Management which, prior to March 1, 1995, served as investment adviser to
the Fund. The same portfolio manager and other personnel who previously provided
investment advisory services to the Fund through MIMLIC Management continue to
provide the same services through Advantus Capital. MIMLIC Management commenced
its current business in January, 1984, and provides investment advisory services
to one other mutual fund (MIMLIC Series Fund, Inc.) and various private
accounts. The personnel of Advantus Capital and MIMLIC Management have also had
experience in managing investments for The Minnesota Mutual Life Insurance
Company ("Minnesota Mutual") and its separate accounts. MIMLIC Management is a
subsidiary of Minnesota Mutual, which was organized in 1880, and has assets of
more than $9.8 billion. The address of the Fund, Advantus Capital, MIMLIC
Management, MIMLIC Sales and Minnesota Mutual is 400 Robert Street North, St.
Paul, Minnesota 55101.
Advantus Capital selects and reviews the Fund's investments, and provides
executive and other personnel for the management of the Fund. The Fund's Board
of Directors supervises the affairs of the Fund as conducted by Advantus
Capital.
The name and title of the portfolio manager employed by Advantus Capital who
is primarily responsible for the day-to-day management of the Fund's portfolio,
the length of time employed in that position, and his other business experience
during the past five years are set forth below:
<TABLE>
<CAPTION>
PRIMARY PORTFOLIO BUSINESS EXPERIENCE DURING
PORTFOLIO MANAGER AND TITLE MANAGER SINCE PAST FIVE YEARS
<S> <C> <C>
- ----------------------------------------------------------------------------------
KENT R. WEBER JANUARY 1, 1990 VICE PRESIDENT OF ADVANTUS
VICE PRESIDENT CAPITAL; INVESTMENT OFFICER OF
AND PORTFOLIO MIMLIC MANAGEMENT
MANAGER
</TABLE>
18
<PAGE>
The Fund pays Advantus Capital an advisory fee equal on an annual basis to
.575% of the Fund's average daily net assets. For this fee, Advantus Capital
acts as investment adviser and manager for the Fund and pays the Fund's transfer
agent, dividend disbursing agent and redemption agent expenses. The Fund has
engaged Minnesota Mutual to act as its transfer agent, dividend disbursing agent
and redemption agent. In addition, separate from the investment advisory
agreement, the Fund has entered into an agreement with Minnesota Mutual under
which Minnesota Mutual provides accounting, legal and other administrative
services to the Fund. During the year ended September 30, 1995, the Fund paid
Minnesota Mutual $39,200 for such services.
Under the Advisory Agreement with Advantus Capital, 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. MIMLIC Sales, the underwriter of the Fund's shares, 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, shareholder reports for new shareholders and the costs of
sales literature. The Fund pays all other expenses not so expressly assumed.
For the year ended September 30, 1995, the expenses paid by the Fund (after
the voluntary absorption of certain expenses by the Fund's investment adviser
and the voluntary waiver of certain Class A Rule 12b-1 fees by MIMLIC Sales), as
a percentage of average daily net assets attributable to Class A, Class B and
Class C shares, were 1.29%, 2.05% and 2.05%, respectively. If the Fund had been
charged for the expenses voluntarily absorbed and waived, the annual operating
expenses, as a percentage of average net assets would have been 1.42%, 2.11% and
2.11% for Class A, Class B and Class C, respectively. Advantus Capital and
MIMLIC Sales reserve the option to reduce further the level of expenses which
each will voluntarily absorb or waive for the Fund.
- ------------------------------------------
THE UNDERWRITER AND
PLANS OF DISTRIBUTION The Fund has entered into a Distribution Agreement with
MIMLIC Sales pursuant to which MIMLIC Sales acts as the underwriter of the
Fund's shares. In addition, the Fund has adopted separate Plans of Distribution
applicable to Class A shares, Class B shares and Class C shares relating to the
payment of certain distribution expenses pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The Fund, pursuant to its Plans of Distribution,
pays fees to MIMLIC Sales equal, on an annual basis, to a percentage of the
Fund's average daily net assets attributable to Class A shares, Class B shares
and Class C shares, respectively, as set forth in the following table:
<TABLE>
<CAPTION>
RULE 12B-1 FEE AS PERCENTAGE OF
AVERAGE DAILY NET ASSETS
ATTRIBUTABLE TO
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
<S> <C> <C>
- ---------------------------------
.30% 1.00% 1.00%
</TABLE>
Such fees are used for distribution-related services and for servicing of
shareholder accounts.
All of the Rule 12b-1 fee payable by the Fund and attributable to Class A
shares, and a portion of the fee payable with respect to Class B and Class C
shares equal to .75% of the average daily net assets attributable to such Class
B and Class C shares, respectively, constitute distribution fees designed to
compensate MIMLIC Sales for advertising, marketing and distributing the Class A,
Class B and Class C shares of the Fund. The distribution fees may be used by
MIMLIC Sales for the purpose of financing any activity which is primarily
intended to result in the sale of shares of the Fund. For example, such
distribution fee may be used by MIMLIC Sales: (a) to compensate (in addition to
the sales load) broker-dealers, including MIMLIC Sales and its registered
representatives, for their sale of Fund
19
<PAGE>
shares and for providing administrative support services to their customers who
directly or beneficially own shares of the Fund, banks, and other financial
institutions; and (b) to pay other advertising and promotional expenses in
connection with the distribution of the Fund's shares. These advertising and
promotional expenses include, by way of example but not by way of limitation,
costs of prospectuses for other than current shareholders; preparation and
distribution of sales literature; advertising of any type; expenses of branch
offices provided jointly by MIMLIC Sales and any affiliate thereof; and
compensation paid to and expenses incurred by officers, employees or
representatives of MIMLIC Sales or of other broker-dealers, banks, or financial
institutions.
A portion of the Rule 12b-1 fee payable with respect to Class B and Class C
shares of the Fund, equal to .25% of the average daily net assets attributable
to such Class B and Class C shares, respectively, constitutes a shareholder
servicing fee designed to compensate MIMLIC Sales for the provision of certain
services to the holders of Class B and Class C shares. The services provided may
include personal services provided to shareholders, such as answering
shareholder inquiries regarding the Fund and providing reports and other
information, and services related to the maintenance of shareholder accounts.
MIMLIC Sales may use the Rule 12b-1 fee to make payments to qualifying broker-
dealers and financial institutions that provide such services.
MIMLIC Sales 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, MIMLIC Sales, 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. 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.
- ------------------------------------------
PURCHASE OF
FUND SHARES
- ------------- The Fund's shares may be
purchased at the public offering price from MIMLIC Sales
(the underwriter of the Fund's shares), and from certain other broker-dealers.
MIMLIC Sales reserves the right to reject any purchase order.
Certificates representing shares purchased are not currently issued. However,
shareholders will receive written confirmation of their purchases. Shareholders
will have the same rights of ownership with respect to such shares as if
certificates had been issued. SHAREHOLDERS WHO HOLD PREVIOUSLY ISSUED
CERTIFICATES REPRESENTING ANY OF THEIR SHARES WILL NOT BE ALLOWED TO REDEEM SUCH
CERTIFICATED SHARES BY TELEPHONE.
ALTERNATIVE PURCHASE ARRANGEMENTS. The Fund offers investors the choice among
three classes of shares which offer different sales charges and bear different
expenses. These alternatives permit an investor to choose the method of
purchasing shares that the investor believes is most beneficial given the amount
of the purchase, the length of time the investor expects to hold the shares and
other circumstances. For a detailed discussion of these alternative purchase
arrangements see "Sales Charges" below, or for a
20
<PAGE>
summary of these alternative purchase arrangements see "Prospectus Summary."
The decision as to which class of shares provides a more suitable investment
for an investor may depend on a number of factors, including the amount and
intended length of the investment. Investors making investments that qualify for
a waiver of initial sales charges should purchase Class A shares. Other
investors should consider Class B or Class C shares because all of the purchase
price is invested immediately. Investors who expect to hold shares for
relatively shorter periods of time may prefer Class C shares because such shares
may be redeemed at any time without payment of a contingent deferred sales
charge. Investors who expect to hold shares longer, however, may choose Class B
shares because such shares convert to Class A shares sooner than do Class C
shares and thus pay the higher Rule 12b-1 fee for a shorter period.
Purchase orders for $1,000,000 or more will be accepted for Class A shares
only and are not subject to a sales charge at the time of purchase. Orders for
Class B or Class C shares for $1,000,000 or more will be treated as orders for
Class A shares or declined.
PURCHASE BY CHECK. Investors may purchase shares of the Fund by completing an
account application and sending it, together with a check payable to the Fund,
to MIMLIC Sales, at P.O. Box 64132, St. Paul, Minnesota 55164-0132.
A purchase is effected, at the price next determined, on the business day on
which a purchase order and properly drawn check are received by MIMLIC Sales.
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 MIMLIC Sales at (800) 443-3677 for
instructions. Promptly after making an initial purchase by wire, an investor
should complete an account application and mail it to MIMLIC Sales.
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.
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
MIMLIC Sales and becomes effective, plus the applicable sales charge, if any.
The net asset value per share of each class 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 primary
closing time for business on the New York Stock Exchange (as of the date of this
Prospectus 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 (as of the
date hereof, New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day). The offering
price for a purchase order is based on the net asset value next determined after
receipt of such order in the office of the Fund.
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
21
<PAGE>
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. Interest rate
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 accurately reflect
the fair market value of such securities. Short-term investments in debt
securities are valued daily at market.
- ------------------------------------------
SALES
CHARGES
- -------- The sales charges applicable to
purchases of the Fund's shares, and also the Rule 12b-1 fees paid
by the Fund which are attributable to such shares, will vary depending on the
class of shares purchased, as described below. An investor should carefully
consider which sales charge alternative is most beneficial in the investor's
circumstances.
- ------------------------------------------
CLASS A
SHARES 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. MIMLIC Sales receives all
applicable sales charges. The Fund receives the net asset value. The current
sales charges are:
<TABLE>
<CAPTION>
SALES CHARGE AS A
PERCENTAGE OF:
NET
OFFERING AMOUNT
VALUE OF TOTAL INVESTMENT PRICE INVESTED
<S> <C> <C>
- -------------------------------------------------------------
LESS THAN $50,000 5.0% 5.26%
$50,000 BUT LESS THAN $100,000 4.5 4.71
$100,000 BUT LESS THAN $250,000 3.5 3.63
$250,000 BUT LESS THAN $500,000 2.5 2.56
$500,000 BUT LESS THAN $1,000,000 1.5 1.52
$1,000,000 AND OVER -0- -0-
</TABLE>
Note that the sales charge depends on the total value of your investment (net
asset value of shares currently owned plus the cost of any new investment) in
the Fund, and not on the amount of a single investment. For example, if you
already own shares with a net asset value of $40,000 and you decide to invest in
additional Class A shares having a public offering price of $10,000, you will
pay a sales charge equal to 4.5% of your entire additional $10,000 investment,
since the total value of your investment is now $50,000.
RULE 12B-1 FEES. Class A shares are subject to a Rule 12b-1 fee payable at an
annual rate of .30% of average daily net assets of the Fund attributable to
Class A shares. For additional information about this fee, see "Management of
the Fund--The Underwriter and Plans of Distribution," above.
If shares are purchased through a broker-dealer which has a selling agreement
with MIMLIC Sales, the broker-dealer will receive a commission from MIMLIC Sales
of up to 100% of the above sales charge. The amount of the commission will
depend on various factors,
22
<PAGE>
including whether or not the broker-dealer is affiliated with Minnesota Mutual
and the volume of sales of such broker-dealer. The exact amount of such
commission is subject to prior negotiation between MIMLIC Sales and each such
broker-dealer. A broker-dealer receiving more than 90% of the sales charge may
be deemed to be an "underwriter" under the Securities Act of 1933, as amended.
In addition, MIMLIC Sales or Minnesota Mutual will pay to such broker-dealers,
based uniformly on the sale of Fund shares by such broker-dealers, credits which
allow such broker-dealers' registered representatives who are responsible for
such broker-dealers' sales of Fund shares to attend conventions and other
meetings sponsored by Minnesota Mutual or its affiliates for the purpose of
promoting the sale of the insurance and/or investment products offered by
Minnesota Mutual and its affiliates. Such credits may cover the registered
representatives' transportation, hotel accommodations, meals, registration fees
and the like. Broker-dealers earning such credits will be allowed to elect to
receive from MIMLIC Sales or Minnesota Mutual, in lieu of such credits, cash in
an amount equal to the cost of providing such credits.
WAIVER OF SALES CHARGES FOR CLASS A SHARES. Officers, directors, full-time and
part-time employees, sales representatives, and retirees of the Fund, Advantus
Capital, MIMLIC Management, MIMLIC Sales, Minnesota Mutual or any of Minnesota
Mutual's other affiliated companies, any trust, pension or benefit plan for such
persons, the spouses, siblings, direct ancestors or direct descendents of such
persons, Minnesota Mutual and its affiliates themselves, advisory clients of
Advantus Capital or MIMLIC Management, 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 MIMLIC Sales, and certain
accounts sold by registered investment advisers who charge clients a fee for
their services are allowed to buy Class A shares of the Fund without paying the
FESC.
- ------------------------------------------
CLASS B
SHARES Class B shares of the Fund are sold without an initial sales charge so
that the Fund receives the full amount of the investor's purchase. However, a
contingent deferred sales charge ("CDSC") of up to 5% will be imposed if shares
are redeemed within six years of purchase. For additional information, see
"Redemption of Fund Shares." Class B shares will automatically convert to Class
A shares of the Fund on the fifteenth day of the month (or, if different, the
last business day prior to such date) following the expiration of a specified
holding period. In addition, Class B shares are subject to higher Rule 12b-1
fees as described below. The amount of the CDSC will depend on the number of
years since the purchase was made, the amount of shares originally purchased and
the dollar amount being redeemed. The amount of the applicable CDSC and the
holding period prior to conversion are determined in accordance with the
following table:
<TABLE>
<CAPTION>
SHARES CONVERT
TO CLASS A
IN THE
CDSC APPLICABLE IN YEAR MONTH AFTER
SHARES PURCHASED IN AN AMOUNT 1 2 3 4 5 6 EXPIRATION OF
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
LESS THAN $50,000 5.0% 4.5% 3.5% 2.5% 1.5% 1.5% 84 MONTHS
$50,000 BUT LESS THAN $100,000 4.5 3.5 2.5 1.5 1.5 0 76 MONTHS
$100,000 BUT LESS THAN $250,000 3.5 2.5 1.5 1.5 0 0 60 MONTHS
$250,000 BUT LESS THAN $500,000 2.5 1.5 1.5 0 0 0 44 MONTHS
$500,000 BUT LESS THAN $1,000,000 1.5 1.5 0 0 0 0 28 MONTHS
</TABLE>
23
<PAGE>
Proceeds from the CDSC are paid to MIMLIC Sales and are used to defray
expenses related to providing distribution-related services to the Fund in
connection with the sale of Class B shares, such as the payment of compensation
to selected broker-dealers, and for selling Class B shares. The combination of
the CDSC and the Rule 12b-1 fee enables the Fund to sell the Class B shares
without deduction of a sales charge at the time of purchase. Although Class B
shares are sold without an initial sales charge, MIMLIC Sales pays a sales
commission to broker-dealers, and to registered representatives of MIMLIC Sales,
who sell Class B shares. The amount of this commission may differ from the
amount of the commission paid in connection with sales of Class A shares. The
higher Rule 12b-1 fee will cause Class B shares to have a higher expense ratio
and to pay lower dividends than Class A shares.
RULE 12B-1 FEES. Class B shares are subject to a Rule 12b-1 fee payable at an
annual rate of 1.00% of the average daily net assets of the Fund attributable to
Class B shares. For additional information about this fee, see "Management of
the Fund--The Underwriter and Plans of Distribution," above.
CONVERSION FEATURE. On the fifteenth day of the month (or, if different, the
last business day prior to such date) after the expiration of the applicable
holding period described in the table above, Class B shares will automatically
convert to Class A shares and will no longer be subject to a higher Rule 12b-1
fee. Such conversion will be on the basis of the relative net asset values of
the two classes. Class A shares issued upon such conversion will not be subject
to any FESC or CDSC. Class B shares acquired by exchange from Class B shares of
another Advantus Load Fund will convert into Class A shares based on the time of
the initial purchase. Purchased Class B shares ("Purchased B Shares") will
convert after the specified number of months following the purchase date. All
Class B shares in a shareholder's account that were acquired through the
reinvestment of dividends and distributions ("Reinvestment B Shares") will be
held in a separate sub-account. Each time any Purchased B Shares convert to
Class A shares, a pro rata portion (based on the ratio that the total converting
Purchased B Shares bears to the shareholder's total converting and non-
converting Purchased B Shares immediately prior to the conversion) of the
Reinvestment B Shares then in the sub-account will also convert to Class A
shares.
The conversion of Class B shares to Class A shares is subject to the
continuing availability of a ruling from the Internal Revenue Service or an
opinion of counsel that payment of different dividends by each of the classes of
shares does not result in the Fund's dividends or distributions constituting
"preferential dividends" under the Internal Revenue Code of 1986, as amended,
and that such conversions do not constitute taxable events for Federal tax
purposes. There can be no assurance that such ruling or opinion will be
available, and the conversion of Class B shares to Class A shares will not occur
if such ruling or opinion is not available. In such event, Class B shares would
continue to be subject to higher expenses than Class A shares for an indefinite
period.
- ------------------------------------------
CLASS C
SHARES Class C shares of the Fund are sold without an initial sales charge so
that the Fund receives the full amount of the investor's purchase. Unlike Class
B shares, however, no CDSC is imposed when Class C shares are redeemed. Class C
shares will automatically convert to Class A shares of the Fund on the fifteenth
day of the month (or, if different, the last business day prior to such date)
following the expiration of a specified holding period. In addition, Class C
shares are subject to higher Rule 12b-1 fees (as described below), and are
subject to such higher fees for a longer period than are Class B shares because
of a longer
24
<PAGE>
holding period prior to conversion. The applicable holding period prior to
conversion is determined in accordance with the following table:
<TABLE>
<CAPTION>
SHARES
CONVERT TO
CLASS A IN
THE MONTH
AFTER
SHARES PURCHASED IN AN AMOUNT EXPIRATION OF
<S> <C>
- ---------------------------------------------------------
LESS THAN $50,000 96 MONTHS
$50,000 BUT LESS THAN $100,000 88 MONTHS
$100,000 BUT LESS THAN $250,000 72 MONTHS
$250,000 BUT LESS THAN $500,000 56 MONTHS
$500,000 BUT LESS THAN $1,000,000 40 MONTHS
</TABLE>
The longer period during which the Rule 12b-1 fee is charged enables the Fund to
sell the Class C shares without deduction of a sales charge at the time of
purchase and without imposing a CDSC at redemption. MIMLIC Sales does not pay a
sales commission to broker-dealers, or to registered representatives of MIMLIC
Sales, who sell Class C shares. The higher Rule 12b-1 fee will cause Class C
shares to have a higher expense ratio and to pay lower dividends than Class A
shares.
RULE 12B-1 FEES. Class C shares are subject to a Rule 12b-1 fee payable at an
annual rate of 1.00% of the average daily net assets of the Fund attributable to
Class C shares. For additional information about this fee, see "Management of
the Fund--The Underwriter and Plans of Distribution," above.
CONVERSION FEATURE. On the fifteenth day of the month (or, if different, the
last business day prior to such date) after the expiration of the applicable
holding period described in the table above, Class C shares will automatically
convert to Class A shares and will no longer be subject to a higher Rule 12b-1
fee. Such conversion will be on the basis of the relative net asset values of
the two classes. Class A shares issued upon such conversion will not be subject
to any FESC or CDSC. Class C shares acquired by exchange from Class C shares of
another Advantus Load Fund will convert into Class A shares based on the time of
the initial purchase. Purchased Class C shares ("Purchased C Shares") will
convert after the specified number of months following the purchase date. All
Class C shares in a shareholder's account that were acquired through the
reinvestment of dividends and distributions ("Reinvestment C Shares") will be
held in a separate sub-account. Each time any Purchased C Shares convert to
Class A shares, a pro rata portion (based on the ratio that the total converting
Purchased C Shares bears to the shareholder's total converting and non-
converting Purchased C Shares immediately prior to the conversion) of the
Reinvestment C Shares then in the sub-account will also convert to Class A
shares.
The conversion of Class C shares to Class A shares is subject to the
continuing availability of a ruling from the Internal Revenue Service or an
opinion of counsel that payment of different dividends by each of the classes of
shares does not result in the Fund's dividends or distributions constituting
"preferential dividends" under the Internal Revenue Code of 1986, as amended,
and that such conversions do not constitute taxable events for Federal tax
purposes. There can be no assurance that such ruling or opinion will be
available, and the conversion of Class C shares to Class A shares will not occur
if such ruling or opinion is not available. In such event, Class C shares would
continue to be subject to higher expenses than Class A shares for an indefinite
period.
- ------------------------------------------
SPECIAL
PURCHASE
PLANS
- ----------
The following are alternative purchase plans applicable to the
Fund, all of which offer the possibility of a reduced sales
charge:
- - Letter of Intent. (See instructions on
application.)
- - Combined purchases with spouse, children,
and/or single trust estates--all accounts,
25
<PAGE>
whether invested in Class A shares, Class B shares or Class C shares, or any
combination, are combined to determine sales charge. It is the obligation of
each investor desiring this discount in sales charge to notify MIMLIC Sales,
through his or her dealer or otherwise, that he or she is entitled to the
discount.
- - Group Purchases--individuals who are
members of a qualified group (which must meet criteria established by MIMLIC
Sales) may purchase shares at the reduced sales charge applicable to the group
taken as a whole.
- - Combined investments in all Advantus Load
Funds--all accounts, whether invested in Class A shares, Class B shares or
Class C shares, or any combination, are combined to determine sales charge.
- - Systematic Investment Plan--voluntary
periodic purchases enable an investor to lower his or her average cost per
share through the principle of "dollar cost averaging."
The Fund also offers an Automatic Investment Plan, which allows an investor to
automatically invest a specified amount in the Fund each month. For more
information on any of these plans, contact MIMLIC Sales or a MIMLIC Sales
representative.
- ------------------------------------------
EXCHANGE AND
TELEPHONE TRANSFER
OF FUND SHARES
- ---------------------
A shareholder can exchange some or all of his or
her Class A, Class B and Class C shares in the Fund, including shares acquired
by reinvestment of dividends, for shares of the same class of any of the other
Advantus Load Funds (provided that the shareholder has an already open account
in such other Advantus Load Fund), and can thereafter re-exchange such exchanged
shares back for shares of the same class of the Fund, 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. When Class B shares acquired through the exchange are redeemed, the
shareholder will be treated as if no exchange took place for the purpose of
determining the CDSC period and applying the CDSC.
Class A, Class B and Class C shares may also be exchanged for shares of
Advantus Money Market Fund, Inc. ("Money Market Fund") at net asset values. No
CDSC will be imposed at the time of any such exchange of Class B shares;
however, the Money Market Fund shares acquired in any such exchange will remain
subject to the CDSC otherwise applicable to such Class B shares as of the date
of exchange, and the period during which such shares of Money Market Fund are
held will not be included in the calculation of the CDSC due at redemption of
such Money Market Fund shares or any reacquired Class B shares, except as
follows. MIMLIC Sales is currently waiving the entire Rule 12b-1 fee due from
Money Market Fund. In the event MIMLIC Sales begins to receive any portion of
such fee, either (i) the time period during which shares of Money Market Fund
acquired in exchange for Class B shares are held will be included in the
calculation of the CDSC due at redemption, or (ii) such time period will not be
included but the amount of the CDSC will be reduced by the amount of any Rule
12b-1 payments made by Money Market Fund with respect to those shares.
Shares of Money Market Fund acquired in an exchange for Class A, Class B or
Class C shares from any of the Advantus Load Funds may also be re-exchanged at
relative net asset values for Class A, Class B and Class C shares, respectively,
of the Fund. Class C shares re-acquired in this manner will have a remaining
holding period prior to conversion equal to the remaining holding period
applicable to the prior Class C shares at the time of the initial exchange.
Shares of Money Market Fund not acquired in an exchange from any of the Advantus
Load Funds may be exchanged at relative net asset values for either Class A,
Class B or Class C shares of the
26
<PAGE>
Fund, subject to the sales charge applicable to the class selected.
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
pre-authorized telephone call (see "Telephone Transactions"). Up to four
exchanges each 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, MIMLIC Sales
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. Telephone
transfers and other exchanges can only be made between Advantus Fund accounts
having identical registrations. 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 "Taxes" 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. For further information
on the exchange privilege, contact MIMLIC Sales.
- ------------------------------------------
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 (provided
that such Advantus Fund accounts must have identical registrations) 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.
- ------------------------------------------
REDEMPTION OF
FUND SHARES
- --------------- 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 and Class C shares
may be redeemed without charge. A contingent deferred sales charge may be
applicable upon redemption of Class B shares (see "Contingent Deferred Sales
Charge," below). Both share certificates and stock powers, if any, tendered in
redemption must be endorsed and executed exactly as the Fund shares are
registered. If the redemption proceeds are less than $25,000 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 $25,000, no signature guarantee is required. However, if the redemption
proceeds are $25,000 or more or are to be paid to someone other than the
registered holder, or are to be mailed to an address other than the registered
shareholder's address, or the shares are to be transferred, or the request does
not come from such a plan trustee, the owner's signature must be guaranteed by
an eligible guarantor institution, including (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. A signature guarantee
is also
27
<PAGE>
required in connection with any redemption if, within the 30-day period prior to
receipt of the redemption request, instructions have been received to change the
shareholder's address of record. The Fund reserves the right to require
signature guarantees on all redemptions. 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 MIMLIC Sales by facsimile (FAX) transmission. MIMLIC Sales' FAX number is
1-612-223-5959.
CONTINGENT DEFERRED SALES CHARGE. The CDSC applicable upon redemption of
Class B shares will be calculated on an amount equal to the lesser of the net
asset value of the shares at the time of purchase or their net asset value at
the time of redemption. No charge will be imposed on increases in net asset
value above the initial purchase price. In addition, no charge will be assessed
on shares derived from reinvestment of dividends or capital gains distributions
or on shares held for longer than the applicable CDSC period. See "Sales
Charges--Class B Shares," above.
In determining whether a CDSC is payable with respect to any redemption, the
calculation will be determined in the manner that results in the lowest rate
being charged. Therefore, it will be assumed that shares that are not subject to
the CDSC are redeemed first, shares subject to the lowest level of CDSC are
redeemed next, and so forth. If a shareholder owns Class A or Class C shares in
addition to Class B shares, then absent a shareholder choice to the contrary,
Class C shares will first be redeemed in full, and Class B shares not subject to
a CDSC will next be redeemed in full, prior to any redemption of Class A shares.
Class A shares will also be redeemed in full, absent a shareholder choice to the
contrary, prior to any redemption of Class B shares which are subject to a CDSC.
The CDSC does not apply to: (1) redemption of Class B shares in connection
with the automatic conversion to Class A shares; (2) redemption of shares when a
Fund exercises its right to liquidate accounts which are less than the minimum
account size; and (3) redemptions in the event of the death or disability of the
shareholder within the meaning of Section 72(m)(7) of the Internal Revenue Code.
The CDSC will also not apply to certain exchanges. See "Exchange and Telephone
Transfer of Fund Shares," above.
TELEPHONE REDEMPTION. The Fund's share-
holders may elect this option by completing the appropriate portion of the
application, and may redeem shares by calling MIMLIC Sales at 1-800-443-3677
(see "Telephone Transactions"). The maximum amount which may be redeemed by
telephone is $25,000. The proceeds will be sent by check to the address of
record for the account. If the amount is $1,000 or more, and if the shareholder
has designated a bank account, the proceeds may be wired to the shareholder's
designated bank account, and the prevailing wire charge (currently $5.00) will
be added to the amount redeemed from the Fund. During periods of marked economic
or market changes, shareholders may experience difficulty in implementing a
telephone redemption due to a heavy volume of telephone calls. In such a
circumstance, shareholders should consider submitting a written redemption
request while continuing to attempt a telephone redemption. MIMLIC Sales
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
28
<PAGE>
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.
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 $250. Therefore, shareholders who invest
only $250 (the minimum investment in the Fund), and who redeem any amount in
excess of any market appreciation, may have the remaining shares redeemed by the
Fund. 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.
- ------------------------------------------
TELEPHONE
TRANSACTIONS
- -------------- Shareholders of the
Fund are permitted to exchange or redeem the Fund's shares
by telephone. See "Exchange and Telephone Transfer of Fund Shares" and
"Redemption of Fund Shares" for further details. The privilege to initiate such
transactions by telephone is not made available automatically but must be
elected by a shareholder on the account application.
The Fund and its transfer agent, Minnesota Mutual, will not be liable for
following instructions communicated by telephone which they reasonably believe
to be genuine; provided, however, that the Fund and Minnesota Mutual 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 and social security numbers, and providing
written confirmation of such transactions.
- ------------------------------------------
REINSTATEMENT
PRIVILEGE
- --------------- Shareholders who
redeem shares in the Fund have a one-time privilege to
apply their redemption proceeds (at no sales charge) to the purchase of shares
of any of the Advantus Load Funds by notifying MIMLIC Sales within 90 days after
their redemption. All shares issued as a result of the reinstatement privilege
applicable to redemptions of Class A and Class B shares will be issued only as
Class A shares. Any CDSC incurred in connection with the prior redemption
(within 90 days) of Class B shares will not be refunded or re-credited to the
shareholder's account. Shareholders who redeem Class C shares and exercise their
reinstatement privilege will be issued only Class C shares, which shares will
have a remaining holding period prior to conversion equal to the remaining
holding period applicable to the prior Class C shares at redemption. See "Taxes"
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.
- ------------------------------------------
DIVIDENDS AND
CAPITAL GAINS
DISTRIBUTIONS
- ---------------
The policy of Mortgage Securities Fund is to declare
dividends from net investment income on each business day
of the Fund, except that dividends for Saturdays, Sundays, and holidays are
declared on the next business day. Mortgage Securities Fund pays dividends after
the close of business on or about the last day of each month. Any net realized
capital gains are generally distributed once a year, during December.
Distributions paid by the Fund, if any, with respect to Class A, Class B and
Class C shares will be calculated in the same manner, at the same time, on
29
<PAGE>
the same day and will be in the same amount, except that the higher Rule 12b-1
fees applicable to Class B and Class C shares will be borne exclusively by such
shares. The per share distributions on Class B and Class C shares will be lower
than the per share distributions on Class A shares as a result of the higher
Rule 12b-1 fees applicable to Class B and Class C shares.
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 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 Load Funds (provided
that such Advantus Fund accounts must have identical registrations) at the net
asset value of such other Advantus Fund on the payable date for the dividends
being distributed. To use this privilege of investing dividends from the Fund in
shares of another of the Advantus Funds, shareholders must maintain a minimum
account value of $250 in both the Fund and the Advantus Fund in which dividends
are reinvested.
- ------------------------------------------
TAXES
- -----
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.
During the year ended September 30, 1995 the Fund fulfilled, and intends to
continue 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, is taxable to
shareholders as long-term capital gain, regardless of the length of time a
shareholder has held his 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. However, if a shareholder holds for less than six months a share
with respect to which a long-term capital gain distribution has been made, any
loss on the sale of such share will be treated as a long-term capital loss to
the extent that the shareholder previously recognized long-term capital gain.
Under the Revenue Reconciliation Act of 1993, long-term capital gains of
individuals are taxed at a maximum rate of 28%, while the highest marginal
regular tax rates on ordinary income for individuals for 1994 and subsequent
years are 36% (applicable to taxable income in excess of $115,000 for
individuals filing single returns and taxable income in excess of $140,000 for
married couples filing joint returns), and 39.6% (for both individuals filing
single returns and married couples filing joint returns with taxable income in
excess of $250,000). (Effective rates on ordinary income may be somewhat higher,
resulting from a combination of the nominal rates, a phase-out of personal
exemptions for individuals filing single returns with adjusted gross income in
excess of $111,800 and for married couples filing joint returns with
30
<PAGE>
adjusted gross income in excess of $167,700, and a partial disallowance of
itemized deductions for individuals with adjusted gross income in excess of
$111,800.)
It is not expected that any of the dividend distributions from the Fund will
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.
If shares of the Fund are sold or otherwise disposed of more than twelve
months from the date of acquisition, the Fund shareholder will realize a
long-term capital gain or loss equal to the difference between the purchase
price and the sale price of the shares disposed of, if, as is usually the case,
the Fund shares are a capital asset in the hands of the Fund shareholder.
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.
Before investing in the Fund, an investor should consult a tax adviser
concerning the consequences of any local and state tax laws, and of any
retirement plan offering tax benefits.
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. Such distributions received
by a Fund shareholder are ordinarily not subject to withholding of federal
income tax. However, a withholding of such tax at a rate of 31% may be made by
reason of the events specified in Section 3406 of the Code and the regulations
promulgated thereunder, including the failure of a Fund shareholder to supply
the Fund or its agent with such shareholder's taxpayer identification number.
Such withholding may also apply to a Fund shareholder who is otherwise exempt
from such withholding if such shareholder fails to properly document its status
as an exempt recipient.
- ------------------------------------------
INVESTMENT
PERFORMANCE
- -------------- 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 Class A, Class B and Class C shares of
the Fund. All quotations of yield, average annual total return and cumulative
total return are based upon historical information and are not intended to
indicate future performance. The investment return on and principal value of an
investment in the Fund will fluctuate, so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
The advertised yield of the Fund will be based upon a 30-day period stated in
the advertisement. Yield is calculated by dividing the net investment income per
share (as defined under Securities
31
<PAGE>
and Exchange Commission rules and regulations) earned during the period by the
maximum offering price per share on the last day of the period. The result is
then "annualized" using a formula that provides for semi-annual compounding of
income.
Both average annual total return and cumulative total return are based on a
hypothetical $1,000 payment to the Fund at the beginning of the advertised
period. Average annual total return is calculated by finding the average annual
compounded rate of return over the period that would equate the initial
investment to the ending redeemable value. Cumulative total return is the
percentage change between the public offering price of one Fund share at the
beginning of a period and the net asset value of that share at the end of the
period with dividend and capital gain distributions treated as reinvested. In
calculating both average annual total return and cumulative total return, the
maximum initial or deferred sales charge is deducted from the hypothetical
investment and all dividends and distributions during the period are assumed to
be reinvested. 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.
- ------------------------------------------
COMPARATIVE
RETURNS In addition to advertising yield, average annual total return and
cumulative total return, comparative performance information of the types shown
below may be used from time to time in advertising the Fund's shares. The Fund's
performance figures shown in the following table do not reflect the Fund's
maximum 5% initial sales charge or contingent deferred sales charge applicable
to Class A and Class B shares, respectively. Such figures do, however, reflect
the reinvestment of dividend and capital gains distributions in additional
shares and all recurring fees, such as investment management fees. Such figures
also reflect the voluntary absorption of certain expenses of the Fund by the
Fund's investment adviser described under "Management of the Fund" and waiver of
certain Class A 12b-1 fees by the Fund's Distributor. (See also, "Calculation of
Performance Data" in the Statement of Additional Information.)
<TABLE>
<CAPTION>
CHANGE FOR CALENDAR YEAR
FUND/INDEX 1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
MORTGAGE SECURITIES FUND:
CLASS A SHARES 17.3% -3.6% 8.4% 6.0% 16.0% 9.25%
CLASS B SHARES 16.5 N/A N/A N/A N/A N/A
CLASS C SHARES N/A N/A N/A N/A N/A N/A
LIPPER GINNIE MAE FUND INDEX 16.3 -2.5 6.4 6.5 14.6 9.63
</TABLE>
- ------------------------------------------
OTHER HISTORICAL ANNUAL
COMPOUND RETURNS*
<TABLE>
<CAPTION>
LAST 15 YEARS LAST 30 YEARS LAST 69 YEARS
1980-94 1965-94 1926-94
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
LONG-TERM CORP. BONDS 11.5% 7.3% 5.4%
LONG-TERM GOVT. BONDS 11.2% 7.0% 4.8%
U.S. TREASURY BILLS 7.5% 6.7% 3.7%
INFLATION RATE 4.6% 5.4% 3.1%
</TABLE>
*SOURCE: IBBOTSON ASSOCIATES
32
<PAGE>
- ------------------------------------------------------------
AVERAGE ANNUAL
TOTAL RETURNS The table below shows the average annual total returns for Class
A, Class B and Class C shares of the Fund for the periods indicated. Such
figures reflect the deduction of the Fund's maximum 5% sales load applicable to
Class A shares, the contingent deferred sales charge applicable to Class B
shares, the voluntary absorption of certain expenses of the Fund by the Fund's
investment adviser described under "Management of the Fund" and waiver of
certain Class A 12b-1 fees by the Fund's Distributor. (See also, "Calculation of
Performance Data" in the Statement of Additional Information.)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURN FOR THE
PERIODS SHOWN ENDING
SEPTEMBER 30, 1995
SINCE
1 YEAR 5 YEARS 10 YEARS INCEPTION
- ----------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A
SHARES 7.9% 7.8% 8.4% N/A
CLASS B
SHARES (1) 7.7% N/A N/A 6.6%
CLASS C
SHARES (2) N/A N/A N/A 7.9%(3)
</TABLE>
(1) INCEPTION WAS AUGUST 19, 1994.
(2) INCEPTION WAS MARCH 1, 1995.
(3) NOT ANNUALIZED.
- ------------------------------------------------------------
RANKINGS AND
RATINGS The Fund may from time to time also advertise rankings or other ratings
of the Fund as determined by Morningstar, Inc., Lipper Analytical Services,
Inc., INVESTORS DAILY, Wiesenberger Financial Services, FORTUNE MAGAZINE, or
other mutual fund rating firms.
Shareholders of the Fund may also telephone MIMLIC Sales at (800) 443-3677 for
current quotations of yield, average annual total return and cumulative total
return.
For additional information regarding the calculation of yield, average annual
total return and cumulative total return see the Statement of Additional
Information.
- ------------------------------------------
ADDITIONAL PERFORMANCE
INFORMATION Further information about the performance of the Fund is contained
in the Fund's Annual Report to Shareholders, which may be obtained without
charge by writing or calling the Fund at the address or telephone number shown
on the cover of this Prospectus.
- ------------------------------------------
LIMITATION
OF DIRECTOR
LIABILITY
- ------------
Under Minnesota law, the directors of the Fund owe the Fund
and its shareholders certain fiduciary duties, including a
duty of "loyalty" (to act in good faith and in the best interests of the Fund)
and a duty of "care" (to act with the care that a reasonably prudent person
would exercise under similar circumstances). Minnesota law authorizes
corporations to eliminate the personal monetary liability of directors to the
corporation or its shareholders for breach of the duty of "care." Directors of
corporations adopting such a limitation provision still owe the corporation a
duty of "care" but under most circumstances cannot be sued for monetary damages
for breaches of such duty. The Fund's Articles of Incorporation limit the
liability of directors to the fullest extent permitted by law.
Directors of the Fund remain fully liable (including possibly for monetary
damages) for breaches of their duty of "loyalty", for self-dealing, for bad
faith and intentional misconduct, and for violations of the Securities Act of
1933, the Securities Exchange Act of 1934, and certain provisions of Minnesota
corporation law. Additionally, the Investment Company Act of 1940 prohibits
limiting a Fund director's liability for gross negligence and reckless
misconduct, and it is uncertain whether and to what extent directors remain
liable for monetary damages for violations of the Investment Company Act.
33
<PAGE>
- ------------------------------------------
GENERAL
INFORMATION
- ------------- The Fund was incorporated
in October 1984 as a Minnesota corporation. The Fund's name
was changed, by vote of its shareholders, to its current name in February 1995.
The Fund's authorized capital stock is of three classes (Class A, Class B and
Class C), common shares, with a par value of $.01 per share. All shares of the
Fund are nonassessable, fully transferable and have one vote and equal rights to
share in dividends and assets of the Fund. The shares of the Fund possess no
preemptive or conversion rights. Cumulative voting is not authorized for the
Fund. This means that the holders of more than 50% of the shares of the Fund
voting for the election of directors of the Fund can elect 100% of the directors
if they choose to do so, and in such event the holders of the remaining shares
of the Fund will be unable to elect any directors.
On November 30, 1995, Minnesota Mutual and its subsidiaries owned shares in
each class of shares of the Fund as set forth in the following table:
<TABLE>
<CAPTION>
NUMBER OF SHARES OWNED BY MINNESOTA
SHARES OUTSTANDING MUTUAL AND SUBSIDIARIES
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------
2,255,748 139,048 28,629 300,500 5,431 1,053
</TABLE>
Minnesota Mutual, Advantus Capital, MIMLIC Management and MIMLIC Sales are all
organized as Minnesota corporations.
The Fund does not hold annual or periodically scheduled regular meetings of
shareholders. Regular and special shareholder meetings are held only at such
times and with such frequency as required by law. Minnesota corporation law does
not require an annual meeting; instead, it provides for the Board of Directors
to convene shareholder meetings when it deems appropriate. In addition, if a
regular meeting of shareholders has not been held during the immediately
preceding fifteen months, a shareholder or shareholders holding 3% or more of
the voting shares of the Fund may demand a regular meeting of shareholders of
the Fund by written notice of demand given to the chief executive officer or the
chief financial officer of the Fund. Within 30 days after receipt of the demand
by one of those officers, the Board of Directors shall cause a regular meeting
of shareholders to be called and held no later than 90 days after receipt of the
demand, all at the expense of the Fund. Additionally, the Investment Company Act
of 1940 requires shareholder votes for all amendments to fundamental investment
policies and restrictions and for all investment advisory contracts and
amendments thereto.
The Fund sends to its shareholders a six-month unaudited and annual audited
financial report of the Fund, which includes a list of investment securities
held by the Fund. Shareholder inquiries should be directed to a registered
representative of the shareholder's broker-dealer, or to the Underwriter or the
Fund at the telephone number or mailing address listed on the cover of this
Prospectus.
- ------------------------------------------
COUNSEL AND
INDEPENDENT
AUDITORS
- -------------
The firm of Dorsey & Whitney P.L.L.P., 220 South Sixth
Street,
Minneapolis, Minnesota 55402, is the General Counsel for the Fund. KPMG Peat
Marwick LLP, 4200 Norwest Center, 90 South Seventh Street, Minneapolis,
Minnesota 55402, are the independent auditors for the Fund.
- ------------------------------------------
CUSTODIAN
- -----------
Bankers Trust Company, 280 Park Avenue, New York, New York
10017 acts as custodian of the securities held by Mortgage Securities Fund.
34
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND, INC.
FUND INFORMATION:
INVESTMENT ADVISER
Advantus Capital Management, Inc.
400 Robert Street North
St. Paul, Minnesota 55101
(612) 292-5923
UNDERWRITER
MIMLIC Sales Corporation
P.O. Box 64132
St. Paul, Minnesota 55164-0132
(612) 228-4833
(800) 443-3677
TRANSFER AGENT AND DIVIDEND
DISBURSING AGENT
The Minnesota Mutual Life Insurance Company
400 Robert Street North
St. Paul, Minnesota 55101
(800) 443-3677
CUSTODIAN
Bankers Trust Company
280 Park Avenue
New York, New York 10017
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
GENERAL COUNSEL
Dorsey & Whitney P.L.L.P.
[LOGO]
ADVANTUS -TM-
FAMILY OF FUNDS
<PAGE>
PART B. INFORMATION REQUIRED IN A STATEMENT OF
ADDITIONAL INFORMATION
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
ADVANTUS HORIZON FUND, INC.
ADVANTUS SPECTRUM FUND, INC.
ADVANTUS MORTGAGE SECURITIES FUND, INC.
ADVANTUS MONEY MARKET FUND, INC.
ADVANTUS BOND FUND, INC.
ADVANTUS CORNERSTONE FUND, INC.
ADVANTUS ENTERPRISE FUND, INC.
ADVANTUS INTERNATIONAL BALANCED FUND, INC.
February 1, 1996
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information relates to the separate Prospectuses dated
February 1, 1996 and should be read in conjunction therewith. A copy of each
Prospectus may be obtained from MIMLIC Sales Corporation, P.O. Box 64132, St.
Paul, Minnesota 55101 (telephone (800) 443-3677).
THIS STATEMENT OF ADDITIONAL INFORMATION MUST BE ACCOMPANIED OR PRECEDED BY A
COPY OF THE CURRENT PROSPECTUS FOR EACH OF THE ADVANTUS FUNDS NAMED ABOVE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
GENERAL INFORMATION AND HISTORY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Horizon Fund. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Spectrum Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Mortgage Securities Fund. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Money Market Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
Bond Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Cornerstone Fund and Enterprise Fund. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
International Fund. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
Additional Investment Restrictions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
All Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
PORTFOLIO TURNOVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
DIRECTORS AND EXECUTIVE OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
DIRECTOR LIABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
INVESTMENT ADVISORY AND OTHER SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Control and Management of Advantus Capital and MIMLIC Sales . . . . . . . . . . . . . . . . . . . . .26
Investment Advisory Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
International Fund Sub-Adviser -- Templeton Counsel . . . . . . . . . . . . . . . . . . . . . . . . .29
International Fund Investment Sub-Advisory Agreement -- Templeton Counsel . . . . . . . . . . . . . .30
Distribution Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
Payment of Certain Distribution Expenses of the Funds . . . . . . . . . . . . . . . . . . . . . . . .32
MONEY MARKET FUND AMORTIZED COST METHOD OF PORTFOLIO VALUATION . . . . . . . . . . . . . . . . . . . . . . .35
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
CALCULATION OF PERFORMANCE DATA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
CAPITAL STOCK AND OWNERSHIP OF SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
HOW TO BUY SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46
NET ASSET VALUE AND PUBLIC OFFERING PRICE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46
</TABLE>
<PAGE>
<TABLE>
<S> <C>
REDUCED SALES CHARGES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49
Right of Accumulation-Cumulative Purchase Discount. . . . . . . . . . . . . . . . . . . . . . . . . .50
Letter of Intent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50
Combining Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51
Purchases of Class A shares by Certain Persons Affiliated with the Fund, Advantus Capital MIMLIC
Management, Templeton Counsel, MIMLIC Sales, Minnesota Mutual, or Any of Minnesota Mutual's Other
Affiliated Companies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51
SHAREHOLDER SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51
Open Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51
Systematic Investment Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52
Group Systematic Investment Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52
Automatic Investment Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53
Group Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53
Retirement Plans Offering Tax Benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53
Systematic Withdrawal Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54
Exchange and Telephone Transfer Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55
REDEMPTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55
Reinstatement Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56
DISTRIBUTIONS AND TAX STATUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58
APPENDIX A - MORTGAGE-RELATED SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
Underlying Mortgages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
Liquidity and Marketability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
Average Life. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
Yield Calculations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-2
APPENDIX B - BOND AND COMMERCIAL PAPER RATINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
Bond Ratings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
Commercial Paper Ratings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-2
APPENDIX C - FUTURES CONTRACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-1
Use of Futures Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-1
Description of Futures Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-1
Risks in Futures Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-3
Example of Futures Contract Sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-3
Example of Futures Contract Purchase. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-4
Tax Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-5
APPENDIX D - FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D-1
</TABLE>
<PAGE>
GENERAL INFORMATION AND HISTORY
Advantus Horizon Fund, Inc. ("Horizon Fund"), Advantus Spectrum Fund,
Inc. ("Spectrum Fund"), Advantus Mortgage Securities Fund, Inc. ("Mortgage
Securities Fund"), Advantus Money Market Fund, Inc. ("Money Market Fund"),
Advantus Bond Fund, Inc. ("Bond Fund"), Advantus Cornerstone Fund, Inc.
("Cornerstone Fund"), Advantus Enterprise Fund, Inc. ("Enterprise Fund") and
Advantus International Balanced Fund, Inc. ("International Fund"),
collectively referred to as the "Advantus Funds" or the "Funds," are open-end
diversified investment companies, commonly called mutual funds. Each of the
Advantus Funds, excluding Money Market Fund, offers more than one class of
shares (the "Advantus Load Funds"). The Advantus Load Funds currently offer
three classes of shares (Class A, Class B and Class C), except for
International Fund which currently offers its shares it two classes (Class A
and Class C). Each class is sold pursuant to different sales arrangements
and bears different expenses. The Funds are incorporated as Minnesota
corporations. Horizon Fund, Spectrum Fund, Mortgage Securities Fund and Money
Market Fund were incorporated in October 1984. Bond Fund was incorporated in
January 1987, and Cornerstone Fund, Enterprise Fund and International Fund
were incorporated in January 1994.
INVESTMENT OBJECTIVES AND POLICIES
The investment objective and policies of each of the Funds are
summarized on the front page of each Fund's Prospectus and are set forth in
detail in the text of each Fund's Prospectus under "Investment Objectives,
Policies and Risks."
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
Mortgage Securities Fund, Spectrum Fund and Bond 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 adviser anticipates a rise in interest rates
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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 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 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 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 appropriate high grade debt obligations, 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.) No when-issued or forward
commitments with respect to debt securities will be made if, as a result,
more than 20% of the value of the Fund's total assets would be committed to
such transactions.
INTEREST RATE FUTURES CONTRACTS
Mortgage Securities Fund and Bond Fund may each also enter into
contracts for the future delivery of fixed income securities commonly
referred to as "interest rate futures contracts." These futures contracts
will be used only as a hedge against anticipated interest rate changes. The
Fund will sell futures contracts to protect against expected increases in
interest rates and purchase futures contracts to offset the impact of
interest rate declines. The Fund will not enter into an interest rate
futures contracts if immediately thereafter (a) more than 5% of the value of
the Fund's total assets will be committed to initial margin or (b) the sum of
the then aggregate futures market prices of financial instruments required to
be delivered upon open futures contract sales and the aggregate purchase
prices under open futures contract purchases would exceed 30% of the value of
the Fund's total assets. In addition, when purchasing interest rate futures
contracts, the Fund will deposit and maintain in a separate account with its
custodian cash or cash equivalents in an amount equal to the market value of
such futures contracts, less any margin deposited on the Fund's long
position, to cover the Fund's obligation.
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<PAGE>
The Commodity Futures Trading Commission (the "CFTC"), a Federal
agency, regulates trading activity on the exchanges pursuant to the Commodity
Exchange Act, as amended. The CFTC requires the registration of "commodity
pool operators," defined as any person engaged in a business which is of the
nature of an investment trust, syndicate, or similar form or enterprise, and
who, in connection therewith, solicits, accepts, or receives from others,
funds, securities, or property for the purpose of trading in any commodity
for future delivery on or subject to the rules of any contract market. The
CFTC has adopted certain regulations which exclude from the definition of
"commodity pool operator" an investment company, like the Fund, registered
with the Securities and Exchange Commission under the Investment Company Act
of 1940, and any principal or employee thereof, which investment company
files a notice of eligibility with the CFTC and the National Futures
Association containing certain information about the investment company and
representing that it (i) will use commodity futures or commodity options
contracts solely for bona fide hedging purposes, (ii) will not enter into
commodity futures and commodity options contracts for which the aggregate
initial margin and premiums exceed 5% of the fair market value of its assets,
after taking into account unrealized profits and unrealized losses on any
such contracts it has entered into, (iii) will not be, and has not been,
marketing participations to the public as or in a commodity pool or otherwise
as or in a vehicle for trading in the commodity futures or commodity options
markets, (iv) will disclose in writing to each prospective participant the
purpose of and the limitations on the scope of the commodity futures and
commodity options trading in which the entity intends to engage, and (v) will
submit to such special calls as the CFTC may make to require the qualifying
entity to demonstrate compliance with these representations. The "bona fide
hedging" transactions and positions authorized by these regulations mean
transactions or positions in a contract for future delivery on any contract
market, where such transactions or positions normally represent a substitute
for transactions to be made or positions to be taken at a later time in a
physical marketing channel, and where they are economically appropriate to
the reduction of risks in the conduct and management of a commercial
enterprise, and where they arising from (i) the potential change in the value
of assets which a person owns, produces, manufactures, processes or
merchandises or anticipates owning, producing, manufacturing, processing or
merchandising, (ii) the potential change in the value of liabilities a person
owes or anticipates incurring, or (iii) the potential change in the value of
services which a person provides, purchases or anticipates providing or
purchasing; provided that, notwithstanding the foregoing, no transactions or
positions shall be classified as bona fide hedging unless their purpose is to
offset price risk incidental to commercial cash or spot operations and such
positions are established and liquidated in an orderly manner in accordance
with sound commercial practices and unless certain statements are filed with
the CFTC with respect to such transactions or positions. The Fund intends to
meet these requirements, or such other requirements as the CFTC or its staff
may from time to time issue, in order to render registration of the Fund and
any of its principals and employees as a commodity pool operator unnecessary.
The Fund will incur certain risks in employing interest rate futures
contracts to protect against cash market price volatility. One risk is the
prospect that futures prices will correlate imperfectly with the behavior of
cash prices. Another risk is that the Fund's investment adviser would be
incorrect in its expectation as to the extent of various investment rate
movements or the time span within which the movements take place.
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<PAGE>
For a detailed discussion of futures contracts and the risks of
investing therein, see Appendix C to this Statement of Additional Information.
OPTIONS - HORIZON FUND, CORNERSTONE FUND AND ENTERPRISE FUND
The Fund may write covered call options which are traded on national
securities exchanges with respect to common stocks in its portfolio ("covered
options") in an attempt to earn additional current income on its portfolio or
to guard against an expected decline in the price of a security. When the
Fund writes a covered call option, it gives the purchaser of the option the
right to buy the underlying security at the price specified in the option
(the "exercise price") at any time during the option period. If the option
expires unexercised, the Fund realizes income, typically in the form of
short-term capital gain, to the extent of the amount received for the option
(the "premium"). If the option is exercised, a decision over which the Fund
has no control, the Fund must sell the underlying security to the option
holder at the exercise price. By writing a covered option, the Fund
foregoes, in exchange for the premium less the commission ("net premium"),
the opportunity to profit during the option period from an increase in the
market value of the underlying security above the exercise price. The Fund
does not write call options in an aggregate amount greater than 15% of its
net assets.
The Fund purchases call options only to close out a position. When an
option is written on securities in the Fund's portfolio and it appears that
the purchaser of that option is likely to exercise the option and purchase
the underlying security, it may be considered appropriate to avoid
liquidating the Fund's position, or the Fund may wish to extinguish a call
option sold by it so as to be free to sell the underlying security. In such
instances the Fund may purchase a call option on the same security with the
same exercise price and expiration date which had been previously written.
Such a purchase would have the effect of closing out the option which the
Fund has written. The Fund realizes a short-term capital gain if the amount
paid to purchase the call option is less than the premium received for
writing a similar option. Generally, the Fund realizes a short-term loss if
the amount paid to purchase the call option is greater than the premium
received for writing the option. If the underlying security has
substantially risen in value, it may be difficult or expensive to purchase
the call option for the closing transaction.
OPTIONS - MORTGAGE SECURITIES FUND
Mortgage Securities Fund may purchase put and call options written by
others covering the types of securities in which the Fund may invest. The
Fund may not write put or call options. The Fund utilizes put and call
options to provide protection against adverse price or yield effects from
anticipated changes in prevailing interest rates.
A put option gives the buyer of such option, upon payment of a
premium, the right to deliver a specified amount of a security to the writer
of the option on or before a fixed date at a predetermined price. A call
option gives the purchaser of the option, upon payment of a premium, the
right to call upon the writer to deliver a specified amount of a security on
or before a fixed date at a predetermined price. The Fund will not purchase a
put or call option if, as a result, the aggregate cost of all outstanding
options purchased and held by the Fund plus all other illiquid assets held by
the Fund would exceed 10% of the value of the Fund's net assets. If an
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<PAGE>
option is permitted to expire without being sold or exercised, its premium
would be lost by the Fund.
In buying a call, the Fund would be in a position to realize a gain
if, during the option period, the price of the security increased by an
amount in excess of the premium paid. It would realize a loss if the price
of the security declined or remained the same or did not increase during the
period by more than the amount of the premium. By buying a put, the Fund
would be in a position to realize a gain if, during the option period, the
price of the security declines in an amount in excess of the premium paid.
It would realize a loss if the price of the security increased or remained
the same or did not decrease during that period by more than the amount of
the premium.
The Fund generally purchases options in negotiated transactions with
the writers of the options. The Fund purchases options only from investment
dealers and other financial institutions (such as commercial banks or savings
and loan institutions) deemed creditworthy by its investment adviser. The
Fund may dispose of an option by entering into a closing sale transaction
with the writer of the option. A closing sale transaction terminates the
obligation of the writer of the option and does not result in the ownership
of an option. The Fund realizes a profit or loss from a closing sale
transaction if the premium received from the transaction is more than or less
than the cost of the option. Options purchased by the Fund in negotiated
transactions are illiquid and there is no assurance that the Fund will be
able to effect a closing sale transaction at a time when its investment
adviser believes it would be advantageous to do so.
OPTIONS - SPECTRUM FUND AND BOND FUND
The Fund may write (sell) "covered" call options and purchase
"covered" put options. The Fund will not purchase call options except to
close out call options previously written by the Fund, nor will it write put
options except to close out put options previously purchased by the Fund.
The effect of writing covered call options and purchasing covered put options
will be to reduce the effect of price fluctuations of the securities owned by
the Fund (and involved in the options) on the Fund's net asset value per
share. Another effect may be the generation of additional revenues in the
form of premiums received for writing covered call options.
Spectrum Fund does not write covered call or purchase covered put
options if, as a result, the aggregate market value of all portfolio
securities covering such options exceeds an aggregate amount greater than 15%
of the market value of its net assets. Bond Fund will not write a covered
call option or purchase a put option if, as a result, the aggregate market
value of all portfolio securities covering call options or subject to put
options exceeds 25% of the market value of the Fund's net assets. In
addition, Bond Fund will purchase covered put options (and purchase call
options to close out call options previously written by the Fund) only to the
extent that the aggregate premiums paid for all such options held do not
exceed 2% of net assets.
A call option gives the holder (buyer) the "right to purchase" a
security at a specified price (the exercise price) at any time until a
certain date (the expiration date). So long as the obligation of the writer
of a call option continues, he may be assigned an exercise notice by the
broker-dealer through whom such option was sold, requiring him to deliver the
underlying security
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<PAGE>
against payment of the exercise price. This obligation terminates upon the
expiration of the call option, or such earlier time at which the writer
effects a closing purchase transaction by repurchasing the option which he
previously sold. To secure his obligation to deliver the underlying security
in the case of a call option, a writer is required to deposit in escrow the
underlying security or other assets in accordance with the rules of the
Exchanges and of the Options Clearing Corporation (the "OCC"), an institution
created to interpose itself between buyers and sellers of options. A put
option gives the holder (buyer) the "right to sell" a security at a specified
price (the exercise price) at any time until a certain date (the expiration
date).
The Fund will only write "covered" call and purchase "covered" put
options. This means that the Fund will only write a call option or purchase
a put option on a security which the Fund already owns. Each Fund will only
write covered call options and purchase covered put options in
exchange-traded standard contracts issued by the OCC, or write covered call
options and purchase covered put options in the over-the-counter ("OTC")
market in negotiated transactions entered into directly with investment
dealers meeting the creditworthiness criteria (described below) of the Fund's
investment adviser. Exchange-traded options are third-party contracts and
standardized strike prices and expiration dates, and are purchased from a
clearing corporation such as the OCC. Technically, the OCC assumes the other
side of every purchase and sale transaction on an Exchange and, by doing so,
guarantees the transaction. In contrast, OTC options are two-party contracts
with price and terms negotiated between buyer and seller. The Fund relies on
the dealer from whom it purchases an OTC option to perform if the option is
exercised, and will therefore only negotiate an OTC option with a dealer
subject to the following criteria: (i) the broker-dealer or its predecessor
must have been in business at least 15 years; (ii) the broker-dealer must
have, in the judgment of the Fund's investment adviser, a reputation for
sound management and ethical business practices; (iii) the broker-dealer must
be registered with the Securities and Exchange Commission; and (iv) the
broker-dealer must have at least $50 million in "Excess Capital." ("Excess
Capital" is that portion of a firm's permanent capital which is in excess of
the minimum capital required under the Uniform Net Capital Rule of the
Securities and Exchange Commission.) Broker-dealer subsidiaries of companies
having at least $1 billion in net worth shall also be considered
creditworthy, in the event of a lack of publicly available financial
information. To the extent the Fund invests in OTC options for which there
is no secondary market it will be investing in securities which are illiquid
and therefore subject to the Fund's 10% limitation on aggregate investment in
restricted or other illiquid securities (see "Investment Restrictions").
The writing of covered call options is a conservative investment
technique believed to involve relatively little risk (in contrast to the
writing of naked or uncovered options) but capable of enhancing total return.
When writing a covered call option, the Fund, in return for the premium,
gives up the opportunity for profit from a price increase in the underlying
security above the exercise price, but conversely retains the risk of loss
should the price of the security decline. If a call option which the Fund
has written expires, the Fund will realize a gain in the amount of the
premium; however, such gain may be offset by a decline in the market value of
the underlying security during the option period. If the call option is
exercised, the Fund will realize a gain or loss from the sale of the
underlying security. The Fund will purchase put options involving portfolio
securities only when the Fund's investment adviser believes that a temporary
defensive position is desirable in light of market conditions, but does not
desire to sell the
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portfolio security. Therefore, the purchase of put options will be utilized
to protect the Fund's holdings in an underlying security against a
substantial decline in market value. Such protection is, of course, only
provided during the life of the put option when the Fund, as the holder of
the put option, is able to sell the underlying security at the put exercise
price regardless of any decline in the underlying security's market price.
By using put options in this manner, the Fund will reduce any profit it might
otherwise have realized in its underlying security by the premium paid for
the put option and by transaction costs.
The Fund will purchase a call option only to close out a covered call
option it has written (a "closing purchase transaction"), and will write a
put option only to close out a put option it has purchased (a "closing sale
transaction"). Such closing transactions will be effected in order to
realize a profit on an outstanding call or put option, to prevent an
underlying security from being called or put, or, to permit the sale of the
underlying security. Furthermore, effecting a closing transaction will
permit the Fund to write another call option, or purchase another put option,
on the underlying security with either a different exercise price or
expiration date or both. If the Fund desires to sell a particular security
from its portfolio on which it has written a call option, or purchased a put
option, it will seek to effect a closing transaction prior to, or
concurrently with, the sale of the security. There is, of course, no
assurance that the Fund will be able to effect such closing transactions at a
favorable price. If the Fund cannot enter into such a transaction, it may be
required to hold a security that it might otherwise have sold, in which case
it would continue to be at market risk on the security. This could result in
higher transaction costs, including brokerage commissions. The Fund will pay
brokerage commissions in connection with the writing or purchase of options
to close out previously written options. Such brokerage commissions are
normally higher than those applicable to purchases and sales of portfolio
securities.
WARRANTS WITH CASH EXTRACTIONS
The International Fund may invest up to 5% of its assets in warrants,
including warrants used in conjunction with the cash extraction method.
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. If an investor wishes to replicate an
underlying share, the investor can use the warrant with cash extraction
method by purchasing warrants and holding cash. The cash component would be
determined by subtracting the market price of the warrant from the underlying
share price.
For example, ASSUME one share for company "Alpha" has a current share
price of $40 and issued warrants can be converted one for one share at an
exercise price of $31 exercisable two years from today. Also ASSUME that the
market price of the warrant is $10 ($40 - $31 + $1) because investors are
willing to pay a premium ($1) for previously stated reasons. If an investor
wanted to replicate an underlying share by engaging in a warrant with cash
extraction strategy, the amount of cash the investor would need to hold for
every warrant would be $30 ($40 - $10 = $30). A warrant with cash extraction
is, thus, simply a synthetically created quasi-convertible bond.
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If an underlying share issues no or a low dividend and has an
associated warrant with a market price that is low relative to its share
price, a warrant with cash extraction may provide attractive cash yields and
minimize capital loss risk, provided the underlying share is also considered
a worthy investment. For example, ASSUME Alpha's share is an attractive
investment opportunity and its share pays no dividend. Given the information
regarding Alpha provided above, also ASSUME that short-term cash currently
yields 5% per year and that the investor plans to hold the investment at
least two years, barring significant near-term capital appreciation. If the
share price were to fall below $30, the warrant with cash extraction strategy
would yield a lower loss than the underlying share because an investor cannot
lose more than the purchase cost of the warrant (capital risk minimized).
The cash component for this strategy would yield $3.08 after two years
(compound interest). The total value of the underlying investment would be
$43.08 versus $40.00 for the non-yielding underlying share (attractive
yield). Finally, it is important to note that this strategy will not be
pursued if it is not economically more attractive than underlying shares.
DEBT SECURITIES AND DOWN-GRADED INSTRUMENTS
Each of Horizon Fund, Spectrum Fund, Mortgage Securities Fund, Bond
Fund, Enterprise Fund and International Fund may invest in debt securities
rated BBB or Baa or higher by S&P or Moody's, respectively as described in
each Fund's Prospectus. (Cornerstone Fund may invest in debt securities
convertible into common stock which are rated lower than BBB or Baa. See the
Cornerstone Fund Prospectus for information regarding these securities and
the Fund's policy regarding them.)
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 each Fund's net asset value.
These Funds may, however, acquire debt securities which, after
acquisition, are down-graded by the rating agencies to a rating lower than
BBB or Baa by S&P's or Moody's, respectively. In such an event it is such
Funds' general policy to dispose of such down-graded securities except when,
in the judgment of the Funds' investment adviser, it is to the Funds'
advantage to continue to hold such securities. In no event, however, will
any such Fund hold more than 5% of its net assets in securities rated lower
than BBB or Baa by S&P's or Moody's, respectively. Although they may offer
higher yields than do higher rated securities, 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 Funds' 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 Funds' shares.
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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 Funds 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 Funds 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
Funds 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.
INVESTMENT RESTRICTIONS
Each of the Funds is "diversified" as defined in the Investment
Company Act of 1940. 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.
Each 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 a 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 a 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.
HORIZON FUND
Horizon Fund will NOT:
(1) Purchase any security (other than securities issued
or guaranteed by the United States Government, its agencies or
instrumentalities) if, as a result, more than 5% of the Fund's total
assets would be invested in securities of a single issuer, except
that up to 25% of the value of the Fund's total assets may be
invested without regard to this limitation;
[NOTE: SEE "ADDITIONAL INVESTMENT RESTRICTIONS" BELOW.]
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(2) Purchase any security if, as a result, more than 25% of the
Fund's total assets would be invested in the securities of issuers
conducting their principal business activities in a single industry;
(3) Purchase securities on margin (but it may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales or securities); or 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;
(4) Acquire more than 10% of any class of securities of an issuer
(taking all preferred stock issues of an issuer as a single class and
all debt issues of an issuer as a single class) or acquire more than
10% of the outstanding voting securities of an issuer;
(5) Borrow money, except from banks and only as a temporary measure
for extraordinary or emergency purposes and not in excess of 5% of
its net assets;
(6) Mortgage, pledge, hypothecate, or in any manner transfer, as
security for indebtedness, any assets of the Fund;
(7) Invest more than a total of 5% of its total assets in
securities of businesses (including predecessors) less than three
years old or equity securities which are not readily marketable;
(8) Purchase or retain securities of any company if officers and
directors of the Fund or of its investment adviser who individually
own more than 1/2 of 1% of the shares or securities of that company,
together own more than 5%;
(9) Make loans, except by purchase of bonds, debentures, commercial
paper, certificates of deposit, corporate notes and similar evidences
of indebtedness, which are a part of an issue to the public or to
financial institutions, and except loans of portfolio securities to
broker-dealers and financial institutions, determined by the Fund to
have sufficient financial responsibility, if such loans are secured
at all times by cash or securities issued or guaranteed by the United
States Government, its agencies or instrumentalities, in an amount
at all times equal to at least 100% of the market value of the
portfolio securities loaned and if, immediately after making such
loan, the total amount of portfolio securities loaned does not exceed
20% of the market value of the Fund's total assets;
(10) Buy or sell oil, gas or other mineral leases, rights or
royalty contracts, real estate or interests in real estate which are
not readily marketable, commodities or commodity contracts. (This
does not prevent the Fund from purchasing securities of companies
investing in the foregoing.);
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<PAGE>
(11) 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;
(12) Make investments for the purpose of exercising control
or management;
(13) Participate on a joint or joint and several basis in
any trading account in securities;
(14) Write put or call options, except covered call options
which are traded on national securities exchanges with respect to
common stocks in its portfolio, in an aggregate amount not greater
than 15% of its net assets; or purchase options, except call options in
order to close out a position;
(15) 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;
(16) Purchase or sell any securities other than Fund shares
from or to its investment adviser or any officer or director of the
Fund or its investment adviser; or
(17) Invest more than a total of 10% of the Fund's net assets in
securities restricted as to disposition under federal securities laws
or otherwise or other illiquid assets (which include repurchase
agreements with a maturity of over seven days).
SPECTRUM FUND
Spectrum Fund will NOT:
(1) Purchase any security (other than securities issued or
guaranteed by the United States Government, its agencies or
instrumentalities) if, as a result, more than 5% of the Fund's total
assets would be invested in securities of a single issuer, except that
up to 25% of the value of the Fund's total assets may be invested
without regard to this limitation;
(2) Purchase any security if, as a result, more than 25% of
the Fund's total assets would be invested in the securities of issuers
conducting their principal business activities in a single industry,
provided that (a) telephone, gas and electric public utilities are each
regarded as separate industries and (b) banking, savings and loan
associations, savings banks and finance companies as a group will not
be considered a single industry for the purpose of this limitation.
There is no limitation with respect to the concentration of investments
in securities issued or guaranteed by the United States Government, its
agencies or instrumentalities or certificates of deposit and bankers'
acceptances of United States banks and savings and loan associations;
[NOTE: SEE "ADDITIONAL INVESTMENT RESTRICTIONS" BELOW.]
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(3) Purchase any security on margin (but it may obtain
such short-term credits as may be necessary for the clearance of
purchases and sales of securities);
(4) 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;
(5) Acquire more than 10% of any class of securities of
an issuer (taking all preferred stock issues of an issuer as a single
class and all debt issues of an issuer as a single class) or acquire
more than 10% of the outstanding voting securities of an issuer;
(6) Borrow money, except from banks and only as a
temporary measure for extraordinary or emergency purposes and not in
excess of 5% of its net assets;
[NOTE: SEE "ADDITIONAL INVESTMENT RESTRICTIONS" BELOW.]
(7) Mortgage, pledge, hypothecate, or in any manner
transfer, as security for indebtedness, any assets of the Fund,
except that this limitation shall not apply to deposits made in
connection with the entering into and holding of interest rate
futures contracts;
(8) Invest more than a total of 5% of its total assets in
securities of businesses (including predecessors) less than three
years old or equity securities which are not readily marketable;
(9) Purchase or retain securities of any company if
officers and directors of the Fund or of its investment adviser who
individually own more than 1/2 of 1% of the shares of securities of
that company, together own more than 5%;
(10) Make loans, except by purchase of qualified debt
obligations referred to in the Prospectus and except loans of
portfolio securities to broker-dealers and financial institutions,
determined by the Fund's investment adviser to have sufficient
financial responsibility, if such loans are secured at all times by
cash or securities issued or guaranteed by the United States
Government, its agencies or instrumentalities, in an amount at all
times equal to at least 100% of the market value of the portfolio
securities loaned and if, immediately after making such loans, the
total amount of portfolio securities loaned does not exceed 20% of
the market value of the Fund's total assets;
(11) Buy or sell oil, gas or other mineral leases, rights
or royalty contracts, real estate or interests in real estate which
are not readily marketable, commodities or commodity contracts. (This
does not prevent the Fund from purchasing securities of companies
investing in the foregoing.);
(12) 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;
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<PAGE>
(13) Make investments for the purpose of exercising
control or management;
(14) Participate on a joint or joint and several basis in
any trading account in securities;
(15) Write call or purchase put options, except covered
options which are traded on national securities exchanges with
respect to securities in its portfolio, in an amount not greater than
15% of its net assets, or purchase a call option or write a put
option, except to close out a position;
(16) 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; or
(17) Invest more than a total of 10% of the Fund's net
assets in securities restricted as to disposition under federal
securities laws or otherwise or other illiquid assets.
MORTGAGE SECURITIES FUND
Mortgage Securities Fund will NOT:
(1) Purchase any security (other than securities issued
or guaranteed by the United States Government, its agencies or
instrumentalities) if, as a result, more than 5% of the Fund's total
assets would be invested in securities of a single issuer, except
that up to 25% of the value of the Fund's total assets may be
invested without regard to this limitation;
(2) Purchase any security if, as a result, more than 25%
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 shall not apply to investment
in the mortgage and mortgage-finance industry (in which more than
25% of the value of the Fund's total assets will, except for
temporary defensive positions, be invested) or securities issued or
guaranteed by the United States Government, its agencies or
instrumentalities;
[NOTE: SEE "ADDITIONAL INVESTMENT RESTRICTIONS" BELOW.]
(3) 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); or 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;
(4) Lend its portfolio securities;
(5) Borrow money except from banks and only as a
temporary measure for extraordinary or emergency purposes and not in
excess of 5% of its net assets;
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<PAGE>
(6) Mortgage, pledge, hypothecate, or in any manner
transfer, as security for indebtedness, any assets of the Fund,
except that this limitation shall not apply to deposits made in
connection with the entering into and holding of interest rate
futures contracts;
(7) Invest more than a total of 5% of its total assets in
securities of businesses (including predecessors) less than three
years old or equity securities which are not readily marketable;
(8) Purchase or retain securities of any company if
officers and directors of the Fund or of its investment adviser who
individually own more than 1/2 of 1% of the shares or securities of
the company, together own more than 5%;
(9) Make loans, except by purchase of qualified debt
obligations referred to in the Prospectus under "Investment
Objectives and Policies;"
(10) Buy or sell (a) oil, gas or other mineral leases,
rights or royalty contracts; (b) real estate, except that it may
invest in mortgage-related securities and whole loans and purchase
and sell securities of companies which deal in real estate or
interests therein; or (c) commodities or commodity contracts, except
that it may invest in interest rate futures contracts.
(11) 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;
(12) Make investments for the purpose of exercising
control or management;
(13) 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; or
(14) Invest more than a total of 10% of the Fund's net
assets in securities restricted as to disposition under federal
securities laws or otherwise or other illiquid assets (which include
put and call options).
MONEY MARKET FUND (Restriction number 15 is not "fundamental".)
Money Market Fund will NOT:
(1) Purchase any security (other than securities issued
or guaranteed by the United States Government, its agencies or
instrumentalities) if, as a result, more than 5% of the Fund's total
assets would be invested in securities of a single issuer;
(2) Purchase any security if, as a result, more than 25%
of the Fund's total assets would be invested in the securities of
issuers conducting their principal business activities in a single
industry; provided that (a) telephone, gas, and electric public
utilities are each
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<PAGE>
regarded as separate industries and (b) United States banks,
savings and loan associations, savings banks and finance
companies are each regarded as separate industries for the
purpose of this limitation. There are no limitations with respect
to the concentration of investments in securities issued or guaranteed
by the United States Government, its agencies or instrumentalities,
or certificates of deposit and bankers acceptances of domestic
branches of United States banks;
[NOTE: SEE "ADDITIONAL INVESTMENT RESTRICTIONS" BELOW.]
(3) 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); or 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, and only to the extent that the Fund's short
positions will not at the time of any short sale aggregate in total
sale prices more than 10% of its total assets;
(4) Acquire more than 10% of any class of securities of
an issuer (taking all preferred stock issues of an issuer as a single
class and all debt issues of an issuer as a single class) or acquire
more than 10% of the outstanding voting securities of an issuer;
(5) Borrow money or enter into reverse repurchase
agreements in excess of 5% of its net assets and, with respect to
borrowing money, only from banks and only as a temporary measure for
extraordinary or emergency purposes;
(6) Mortgage, pledge, hypothecate, or in any manner
transfer, as security for indebtedness, any assets of the Fund;
(7) Invest more than 5% of its total assets in securities
of businesses (including predecessors) less than three years old;
(8) Purchase or retain securities of any company if
officers and directors of the Fund or of its investment adviser who
individually own more than 1/2 of 1% of the shares or securities of
that company, together own more than 5%;
(9) Make loans, except by purchase of bonds, debentures,
commercial paper, corporate notes and similar evidences of
indebtedness, which are a part of an issue to the public or to
financial institutions;
(10) Buy or sell oil, gas or other mineral leases, rights
or royalty contracts, real estate or interests in real estate which
are not readily marketable, commodities or commodity contracts. (This
does not prevent the Fund from purchasing securities of companies
investing in the foregoing.);
(11) Act as an underwriter of securities, except to the
extent the Fund maybe deemed to be an underwriter in connection with
the disposition of portfolio securities;
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<PAGE>
(12) Make investments for the purpose of exercising control or
management;
(13) Participate on a joint or joint and several basis in any
trading account in securities;
(14) Write or purchase put or call options, or combinations thereof;
(15) Enter into repurchase agreements maturing in more than seven
days, purchase certificates of deposit of banks and savings and loan
associations which at the date of the investment have total assets (as
of the date of their most recent annual financial statements) of less
than $2 billion, purchase variable amount master demand notes, or invest
in any other illiquid assets, if such investments taken together exceed
10% of the Fund's net assets (This restriction is non-fundamental.); or
(16) 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.
BOND FUND (Restriction number 16 is not "fundamental".)
Bond Fund will NOT:
(1) Purchase any security (other than securities issued or
guaranteed by the United States Government, its agencies or
instrumentalities) if, as a result, more than 5% of the Fund's total
assets would be invested in securities of a single issuer, except that
up to 25% of the value of the Fund's total assets may be invested
without regard to this limitation;
(2) 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,
provided that (a) the electric, telephone, gas, gas transmission,
water, telegraph and satellite communications utilities are each
regarded as separate industries, and (b) banks, savings and loan
associations, savings banks, and finance companies are each regarded
as separate industries. There is no limitation with respect to the
concentration of investments in securities issued or guaranteed by
the United States Government, its agencies or instrumentalities.
(3) Purchase securities on margin (but it may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales or securities); or 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;
(4) Acquire more than 10% of any class of securities of an issuer
(taking all preferred stock issues of an issuer as a single class and
all debt issues of an issuer as a single class) or acquire more than
10% of the outstanding voting securities of an issuer;
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(5) Borrow money, except from banks and only as a temporary measure
for extraordinary or emergency purposes, including the meeting of
redemption requests which might otherwise require the untimely
disposition of securities, and not in excess of 5% of its net assets;
or enter into reverse repurchase agreements;
(6) Mortgage, pledge, hypothecate, or in any manner transfer, as
security for indebtedness, any assets of the Fund, except that this
limitation shall not apply to deposits made in connection with the
entering into and holding of interest rate futures contracts;
(7) Invest more than a total of 5% of its total assets in securities
of businesses (including predecessors) less than three years old or
equity securities which are not readily marketable;
(8) Purchase or retain securities of any company if officers and
directors of the Fund or of its investment adviser who individually own
more than 1/2 of 1% of the shares or securities of that company,
together own more than 5%;
(9) Make loans, except by purchase of qualified debt obligations
referred to in the Prospectus under "Investment Objectives and
Policies," and except loans of portfolio securities to broker-dealers
and financial institutions, determined by the Fund to have sufficient
financial responsibility, if such loans are secured at all times by
cash or securities issued or guaranteed by the United States
Government, its agencies or instrumentalities, in an amount at all
times equal to at least 100% of the market value of the portfolio
securities loaned and if, immediately after making such loan, the
total amount of portfolio securities loaned does not exceed 20% of
the market value of the Fund's total assets;
(10) Buy or sell oil, gas or other mineral leases, rights or
royalty contracts, real estate, or interests in real estate which are
not readily marketable, commodities or commodity contracts, except
that it may invest in interest rate futures contracts. (This does
not prevent the Fund from purchasing securities of companies investing
in the foregoing.);
(11) 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;
(12) Make investments for the purpose of exercising control
or management;
(13) Participate on a joint or joint and several basis in
any trading account in securities (but this does not prohibit the
"bunching" of orders for the sale or purchase of the Fund's portfolio
securities with other accounts advised by Advantus Capital to reduce
brokerage commissions or otherwise to achieve best overall execution);
(14) 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; or
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(15) Invest more than a total of 10% of the Fund's net assets in
securities restricted as to disposition under federal securities laws
or otherwise or other illiquid assets (which include repurchase
agreements with a maturity of over seven days and OTC options for
which there is no secondary market); or
(16) Invest more than 10% of its net assets in securities of
foreign issuers which are not U.S. dollar-denominated and publicly
traded in the United States (This restriction is non-fundamental.).
CORNERSTONE FUND AND ENTERPRISE FUND (The investment restrictions numbered 1
through 7 below are fundamental. Restrictions numbered 8 through 14 are not
fundamental and may be changed by the Funds' Boards of Directors.)
Cornerstone Fund and Enterprise 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;
(2) Purchase securities on margin (but it may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales or securities); or 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;
(3) Borrow money, except from banks and only as a temporary
measure for extraordinary or emergency purposes and not in excess of
5% of its net assets;
(4) Mortgage, pledge, hypothecate, or in any manner transfer, as
security for indebtedness, any assets of the Fund;
(5) Make loans, except by purchase of bonds, debentures, commercial
paper, certificates of deposit, corporate notes and similar evidences
of indebtedness, which are a part of an issue to the public or to
financial institutions, and except loans of portfolio securities to
broker-dealers and financial institutions, determined by the Fund to
have sufficient financial responsibility, if such loans are secured
at all times by cash or securities issued or guaranteed by the
United States Government, its agencies or instrumentalities, in an
amount at all times equal to at least 100% of the market value of the
portfolio securities loaned and if, immediately after making such loan,
the total amount of portfolio securities loaned does not exceed 20%
of the market value of the Fund's total assets;
(6) Buy or sell oil, gas or other mineral leases, rights
or royalty contracts, real estate, real estate limited partnership
interests, or interests in real estate which are not readily
marketable, commodities or commodity contracts. (This does not
prevent the Fund from purchasing securities of companies investing in
the foregoing.);
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(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) Purchase or retain securities of any company if officers and
directors of the Fund or of its investment adviser who individually
own more than 1/2 of 1% of the shares or securities of that company,
together own more than 5%;
(9) Make investments for the purpose of exercising control or
management;
(10) Participate on a joint or joint and several basis in any
trading account in securities;
(11) Write put or call options, except covered call options
which are traded on national securities exchanges with respect to
common stocks in its portfolio, in an aggregate amount not greater
than 15% of its net assets; or purchase options, except call options
in order to close out a position;
(12) Invest in the securities of other investment companies
with an aggregate value in excess of 5% of the Funds total assets,
except securities acquired as a result of a merger, consolidation
or acquisition of assets;
(13) Purchase or sell any securities other than Fund shares
from or to its investment adviser or any officer or director of the
Fund or its investment adviser; or
(14) Invest more than a total of 10% of the Fund's net assets in
securities or other assets, including repurchase agreements with a
maturity of over seven days, which are illiquid or securities of
businesses (including predecessors) less than three years old;
provided that investments in securities of businesses (including
predecessors) less than three years old will in no event exceed in
the aggregate more than 5% of the Fund's net assets.
INTERNATIONAL FUND (The investment restrictions numbered 1 through 7 below
are fundamental. Restrictions numbered 8 through 15 are not fundamental and
may be changed by the Fund's Board of Directors.)
International 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;
(2) Purchase securities on margin (but it may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales or securities); or make short sales except short sales
against the box where it owns the securities sold or, by virtue of
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<PAGE>
ownership of other securities, it has the right to obtain, without
payment of further consideration, securities equivalent in kind and
amount to those sold;
(3) Borrow money, except from banks and only as a temporary
measure for extraordinary or emergency purposes and not in excess
of 5% of its net assets;
(4) Mortgage, pledge, hypothecate, or in any manner transfer,
as security for indebtedness, any assets of the Fund;
(5) Make loans, except by purchase of bonds, debentures,
commercial paper, certificates of deposit, corporate notes and
similar evidences of indebtedness, which are a part of an issue to
the public or to financial institutions, and except loans of
portfolio securities to broker-dealers and financial institutions,
determined by the Fund to have sufficient financial responsibility,
if such loans are secured at all times by cash or securities issued
or guaranteed by the United States Government, its agencies or
instrumentalities, in an amount at all times equal to at least 100%
of the market value of the portfolio securities loaned and if,
immediately after making such loan, the total amount of portfolio
securities loaned does not exceed 20% of the market value of the
Fund's total assets;
(6) Buy or sell oil, gas or other mineral leases, rights or
royalty contracts, real estate, real estate limited partnership
interests, or interests in real estate which are not readily
marketable, commodities or commodity contracts, except the Fund may
purchase and sell futures contracts on financial instruments and
indices, and options on such futures contracts. (This does not
prevent the Fund from purchasing securities of companies investing in
the foregoing.);
(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) Purchase or retain securities of any company if officers
and directors of the Fund or of its investment adviser who individually
own more than 1/2 of 1% of the shares or securities of that company,
together own more than 5%;
(9) Make investments for the purpose of exercising control or
management;
(10) Participate on a joint or joint and several basis in any
trading account in securities;
(11) Write put or call options, except covered call options
which are traded on national securities exchanges with respect to
common stocks in its portfolio, in an aggregate amount not greater
than 15% of its net assets; or purchase options, except call options
in order to close out a position;
-20-
<PAGE>
(12) Invest in the securities of other investment companies
with an aggregate value in excess of 10% of the Fund's total assets,
except securities acquired as a result of a merger, consolidation or
acquisition of assets;
(13) Purchase or sell any securities other than Fund shares
from or to its investment adviser or any officer or director of the Fund
or its investment adviser;
(14) Invest more than a total of 10% of the Fund's net assets
in securities or other assets, including repurchase agreements with a
maturity of over seven days, which are illiquid or securities of
businesses (including predecessors) less than three years old; provided
that investments in securities of businesses (including predecessors)
less than three years old will in no event exceed in the aggregate more
than 5% of the Fund's net assets; or
(15) Invest more than 5% of its assets in warrants other than
warrants acquired in units or attached to other securities; provided,
that of such 5%, not more than 2% of the Fund's assets shall be invested
in warrants that are not exchange listed.
ADDITIONAL INVESTMENT RESTRICTIONS
Certain of the Funds have agreed with the staff of the Securities and
Exchange Commission that, as a non-fundamental operating policy, the
following additional investment restrictions, which modify certain of the
fundamental investment restrictions described above, will be observed:
(1) Horizon Fund, Spectrum Fund, Mortgage Securities Fund and
Money Market Fund will not 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 (see investment restriction number 2 for each Fund).
(2) Spectrum Fund, in applying the limitation on investments
in securities of issuers conducting their principal business activities
in a single industry (see Spectrum Fund investment restriction number 2,
as modified by additional investment restriction number 1 above), will
also apply such limitation to certificates of deposit and bankers'
acceptances of United States banks and savings and loan associations.
(3) Spectrum Fund shall include reverse repurchase agreements
as a "borrowing" for purposes of applying the Fund's 5% of net assets
limitation on borrowing money (see Spectrum Fund investment restriction
number 6).
ALL FUNDS
With respect to each of the Funds, any investment policy set forth
under "Investment Objectives, Policies and Risks" 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
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<PAGE>
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.
Horizon 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. For the fiscal year
ended September 30, 1995, the fiscal period ended September 30, 1994, and the
fiscal year ended October 31, 1993, the Fund's portfolio turnover rates were
46.8%, 43.5% and 47.0%, respectively.
Spectrum Fund's objective and policies may cause the annual portfolio
turnover rate to be higher than the average turnover rate of other investment
companies. Accordingly, the Fund may have high brokerage and other costs. A
portfolio turnover rate that exceeds 100% is considered high and will result
in higher costs. For the fiscal year ended September 30, 1995, the fiscal
period ended September 30, 1994, and the fiscal year ended October 31, 1993,
the Fund's portfolio turnover rates were 125.5%, 124.5% and 92.1%,
respectively.
Mortgage Securities Fund's investment activities may result in the
Fund's engaging in a considerable amount of trading of securities held for
less than one year. Accordingly, it can be expected that the Fund will have
a higher turnover rate, and thus a higher incidence of brokerage and other
costs, than might be expected from investment companies which invest
substantially all of their funds on a long-term basis. A portfolio turnover
rate that exceeds 100% is considered high and will result in higher costs.
For the fiscal year ended September 30, 1995, the fiscal period ended
September 30, 1994, and the fiscal year ended October 31, 1993, the Fund's
portfolio turnover rates were 203.7%, 236.2% and 135.0%, respectively.
Money Market Fund, consistent with its investment objective, attempts
to maximize yield through portfolio trading. This may involve selling
portfolio instruments and purchasing different instruments to take advantage
of disparities of yields in different segments of the high grade money market
or among particular instruments within the same segment of the market. As a
result, the Fund may have significant portfolio turnover. There usually are
no brokerage commissions paid by the Fund for such purchases since such
securities are purchased on a net basis. Since securities with maturities of
less than one year are excluded from required portfolio turnover rate
calculations, the Fund's portfolio turnover rate for reporting purposes is
zero.
Bond Fund makes changes in its portfolio securities which are
considered advisable in light of market conditions. 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. Rate of
portfolio turnover is not a limiting factor, however, and particular holdings
may be sold at any time, if, in the opinion of the Fund's investment adviser,
such a sale is advisable. A portfolio turnover rate that exceeds 100% is
considered high and will result in higher costs. For the fiscal year ended
September 30, 1995, the fiscal period ended September 30, 1994, and the
fiscal year ended October 31, 1993, the Fund's portfolio turnover rates were
270.7%, 163.5% and 139.5%, respectively. The substantial increase in the rate
of portfolio turnover for the year ended September 30, 1995 was attributable
to the fact that the Fund took advantage of opportunities created in the
corporate bond market as a result of tightening spreads between corporate
bonds and U.S. Treasury bonds. The Fund was able to buy corporate bonds at
very attractive prices when the spreads were wide and sell those bonds at
appreciated values when the spreads narrowed.
-22-
<PAGE>
Cornerstone Fund and Enterprise Fund each make changes in their
portfolio securities which are considered advisable in light of market
conditions. Frequent changes may result in higher brokerage and other costs
for the Funds. 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. Neither Fund emphasizes short-term trading
profits. For the fiscal year ended September 30, 1995 and the fiscal period
ended September 30, 1994, Cornerstone Fund's portfolio turnover rate was
160.1% and 8.1%, respectively. For the fiscal year ended September 30, 1995
and the fiscal period ended September 30, 1994, Enterprise Fund's portfolio
turnover rate was 48.8% and 5.0%, respectively. The apparent increase in
portfolio turnover rates from 1994 to 1995 is attributable to the fact that
the figures for 1994 represent only the 14 days from the Fund's date of
inception to the end of the fiscal period.
International Fund also makes changes in its portfolio securities
which are considered advisable in light of market conditions. The Fund does
not emphasize short-term trading profits. For the fiscal year ended September
30, 1995 and the fiscal period ended September 30, 1994, International Fund's
portfolio turnover rate was 52.0% and 12.1%, respectively. The apparent
increase in portfolio turnover rates from 1994 to 1995 is attributable to the
fact that the figures for 1994 represent only the 14 days from the Fund's
date of inception to the end of the fiscal period.
DIRECTORS AND EXECUTIVE OFFICERS
The names, addresses, principal occupations, and other affiliations of
directors and executive officers of each of the Funds are given below:
<TABLE>
<CAPTION>
Position with Principal Occupation and Other
Name and Address the Funds Affiliations (Past 5 Years)
- ---------------- ------------- ------------------------------
<S> <C> <C>
Paul H. Gooding* President Vice President and Treasurer of
Advantus Capital and Director Minnesota Mutual; President and
Management, Inc. Director of Advantus Capital;
400 Robert Street North President, Treasurer and Director
St. Paul, Minnesota 55101 of MIMLIC Management
Frederick P. Feuerherm* Treasurer Second Vice President of Minnesota
The Minnesota Mutual and Director Mutual; Vice President and Assistant
Life Insurance Company Secretary of MIMLIC Management
400 Robert Street North
St. Paul, Minnesota 55101
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
</TABLE>
-23-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
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
University of Minnesota the University of Minnesota
N309 Elliott Hall
Minneapolis, Minnesota 55455
Bardea C. Huppert* Vice President President of MIMLIC Sales; Second
MIMLIC Sales Corporation Vice President of Minnesota Mutual;
400 Robert Street North
St. Paul, Minnesota 55101
Michael J. Radmer Secretary Partner with the law firm of
Dorsey & Whitney P.L.L.P. Dorsey & Whitney P.L.L.P.
220 South Sixth Street
Minneapolis, Minnesota 55402
</TABLE>
_________________________
* Denotes directors and officers of the Funds who are "interested persons"
(as defined under the Investment Company Act of 1940) of the Funds, Advantus
Capital Management, Inc. ("Advantus Capital"), MIMLIC Asset Management
("MIMLIC Management") or MIMLIC Sales Corporation ("MIMLIC Sales").
_________________________
Legal fees and expenses are paid to the law firm of which Michael J.
Radmer is a partner. No compensation is paid by any of the Advantus Funds to
any of its officers or directors who is affiliated with Advantus Capital or
MIMLIC Management. Each director of the Funds who is not affiliated with
Advantus Capital or MIMLIC Management is also a director of the other two
investment companies of which Advantus Capital or MIMLIC Management is the
investment adviser (10 investment companies in total -- the "Fund Complex").
Such directors receive compensation in connection with all such investment
companies which, in the aggregate, is equal to $5,000 per year and $1,000 per
meeting attended (and reimbursement of travel expenses to attend directors'
meetings). The portion of such compensation borne by any Fund is a PRO RATA
portion based on the ratio that such Fund's total net assets bears to the
total net assets of the Fund Complex. During the fiscal year ended
September 30, 1995, each Director not affiliated with Advantus Capital or
MIMLIC Management was compensated by the Funds in accordance with the
following table:
-24-
<PAGE>
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Aggregate Benefits Estimated From Funds and
Compensation Accrued as Annual Fund Complex
from the Part of Fund Benefits Upon Paid to
Name of Director Funds(1) Expenses Retirement Directors
- ---------------- ------- -------- --------- ---------
<S> <C> <C> <C> <C>
Charles E. Arner $1,679.53 n/a n/a $9,000
Ellen S. Berscheid $1,679.53 n/a n/a $9,000
Ralph D. Ebbott $1,679.53 n/a n/a $9,000
</TABLE>
- ------------------
(1) During the fiscal year ended September 30, 1995, each Director not
affiliated with Advantus Capital or MIMLIC Management received $249.10 from
Horizon Fund, $413.31 from Spectrum Fund, $200.16 from Mortgage Securities
Fund, $210.06 from Money Market Fund, $107.73 from Bond Fund, $127.67 from
Enterprise Fund, $109.15 from Cornerstone Fund and $181.16 from
International Fund.
As of September 30, 1995, the directors and executive officers of the Funds
did not own any shares of the Funds, except for Frederick P. Feuerherm who
owned less than 1% of the outstanding shares of Spectrum Fund, Paul H.
Gooding who owned less than 1% of the outstanding shares of each of Horizon
Fund and Bond Fund, Bardea C. Huppert who owned less than 1% of the
outstanding shares of Horizon Fund, Spectrum Fund, Money Market Fund and Bond
Fund, and Michael J. Radmer who owned less than 1% of the outstanding shares
of Horizon Fund.
DIRECTOR LIABILITY
Under Minnesota law, the Board of Directors of each 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 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 each 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 Act 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 their 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
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<PAGE>
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 each of the Funds since March 1, 1995.
Prior to that date the Funds' investment adviser was MIMLIC Asset Management
Company ("MIMLIC Management"). Advantus Capital is a wholly-owned subsidiary
of MIMLIC Management. The same portfolio managers and other personnel who
previously provided investment advisory services to the Funds through MIMLIC
Management continue to provide the same services through Advantus Capital.
MIMLIC Sales acts as the Funds' underwriter. Both Advantus Capital and
MIMLIC Sales 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 MIMLIC Sales is 400 Robert
Street North, St. Paul, Minnesota 55101.
CONTROL AND MANAGEMENT OF ADVANTUS CAPITAL AND MIMLIC SALES
Advantus Capital was incorporated in Minnesota in June, 1994, and is a
wholly-owned subsidiary of MIMLIC Management. MIMLIC Management is a
subsidiary of The Minnesota Mutual Life Insurance Company ("Minnesota
Mutual"), which was organized in 1880, and has assets of more than $9.8
billion. MIMLIC Sales is also a subsidiary of MIMLIC Management. Paul H.
Gooding, President and a Director of each of the Funds, is President and
director of Advantus Capital, and President, Treasurer, and a Director of
MIMLIC Management. Frederick P. Feuerherm, Treasurer and a Director of each
of the Funds, is a Vice President and Assistant Secretary of MIMLIC
Management. Bardea C. Huppert, Vice President of each of the Funds, is
President of MIMLIC Sales. James P. Tatera, Senior Vice President and
Director of Advantus Capital, is also Vice President of MIMLIC Management.
INVESTMENT ADVISORY AGREEMENT
Advantus Capital acts as investment adviser and manager of the Funds
under Investment Advisory Agreements (the "Advisory Agreements") dated March
1, 1995 for each Fund, each of which Advisory Agreements was approved by
shareholders on February 14, 1995. The Advisory Agreements were last
approved by the Board of Directors of each Fund (including a majority of the
directors who are not parties to the contract, or interested persons of any
such party) on January 17, 1996. The Advisory Agreements will terminate
automatically in the event of their
-26-
<PAGE>
assignment. In addition, each Advisory Agreement is terminable at any time,
without penalty, by the Board of Directors of the respective 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, each 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 respective 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 Agreements each Fund pays Advantus Capital an
advisory fee equal on an annual basis to a percentage of that Fund's average
daily net assets as set forth in the following table:
Advisory Fee as Percentage
Fund of Average Net Assets
---- --------------------------
Horizon Fund .80%
Spectrum Fund .60%
Mortgage Securities Fund .575%
Money Market Fund .50%
Bond Fund .70%
Cornerstone Fund .80%
Enterprise Fund .80%
International Fund:
On the first $25 million in assets .95%
On the next $25 million in assets .80%
On the next $50 million in assets .75%
On all assets in excess of $100 million .65%
From the advisory fee received from International Fund, Advantus
Capital pays Templeton Investment Counsel, Inc. a sub-advisory fee equal to
.70% on the first $25 million of International Fund's average daily net
assets, .55% on the next $25 million, .50% on the next $50 million, and .40%
on all average daily net assets in excess of $100 million.
Prior to March 1, 1995, the fees paid by the Funds for investment
advisory services were paid to MIMLIC Management rather than to Advantus
Capital. MIMLIC Management was compensated at the same rate as is Advantus
Capital under the current Advisory Agreements. The fees paid by the Funds
during the fiscal year ended September 30, 1995, the fiscal period ended
September 30, 1994 and the fiscal year ended October 31, 1993 (before
Advantus Capital's or MIMLIC Management's absorption of certain expenses,
described below) were as follows:
-27-
<PAGE>
<TABLE>
<CAPTION>
Fund 1995 1994 1993
---- ---- ---- ----
<S> <C> <C> <C>
Horizon Fund $276,972 $222,869 $220,845
Spectrum Fund 338,669 404,391 463,963
Mortgage Securities Fund 155,798 144,561 137,830
Money Market Fund 148,238 110,595 118,134
Bond Fund 104,228 90,854 84,389
Cornerstone Fund 150,365 18,833 n/a
Enterprise Fund 167,883 19,519 n/a
International Fund 241,970 29,922 n/a
</TABLE>
For this fee, Advantus Capital acts as investment adviser and manager
for the Funds, and, except for Money Market Fund, pays the Funds' transfer
agent, dividend disbursing agent and redemption agent expenses. Money Market
Fund pays its own transfer agent, dividend disbursing agent, and redemption
agent expenses. All of the Funds have engaged Minnesota Mutual to act as
their transfer agent, dividend disbursing agent, and redemption agent. While
the advisory fees paid by Horizon Fund, Cornerstone Fund, Enterprise Fund and
International Fund are higher than those paid by most mutual funds, they are
partially offset by Advantus Capital's payment of certain expenses, such as
the transfer agent, dividend disbursing agent and redemption agent expenses,
which expenses are not customarily paid for by a mutual fund's investment
adviser. During the fiscal year ended September 30, 1995, Money Market Fund
paid Minnesota Mutual $93,369 for transfer agent services. In addition,
separate from the investment advisory agreement, each of the Funds has
entered into an agreement with Minnesota Mutual under which Minnesota Mutual
provides accounting, legal and other administrative services to the Funds.
Minnesota Mutual currently provides such services to the Funds at a monthly
cost of $3,600 for Horizon Fund, Spectrum Fund, Mortgage Securities Fund,
Bond Fund, Enterprise Fund, Cornerstone Fund, $3,000 for Money Market Fund,
and $2,500 for International Fund. During the fiscal year ended September 30,
1995, each of the Funds paid Minnesota Mutual the following amounts for such
services:
<TABLE>
<CAPTION>
Fund Amount
---- ------
<S> <C>
Horizon Fund $38,600
Spectrum Fund 39,600
Mortgage Securities Fund 39,200
Money Market Fund 33,400
Bond Fund 39,200
Cornerstone Fund 37,800
Enterprise Fund 37,800
International Fund 26,200
</TABLE>
Under the Advisory Agreements, Advantus Capital furnishes the Funds
office space and all necessary office facilities, equipment and personnel for
servicing the investments of the Funds, and pays the salaries and fees of all
officers and directors of the Funds who are affiliated with Advantus Capital.
In addition, except to the extent that MIMLIC Sales receives Rule 12b-1
distribution fees (see "Payment of Certain Distribution Expenses of the
Funds" below), MIMLIC
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<PAGE>
Sales bears all promotional expenses in connection with the distribution of
the Funds' 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 Funds pay all other
expenses not so expressly assumed.
The law of the state of California, in which the Funds' shares may be
offered for sale, currently requires that if a Fund's expenses, including
advisory fees but excluding interest, taxes, brokerage commissions, and
certain extraordinary expenses, whether such expenses are payable by the Fund
or its shareholders, exceed certain percentages of average net assets, MIMLIC
Management must reimburse the Fund for such excess expenses, and the
reimbursement of such excess expenses may not be limited to the amount of the
advisory fee. This limitation is currently 2 1/2% of the first $30,000,000
of average net assets, 2% of the next $70,000,000 of average net assets, and
1 1/2% of the remaining average net assets, but may be modified or eliminated
by future statutory or regulatory changes.
During the fiscal year ended September 30, 1995, the fiscal period
ended September 30, 1994, and the fiscal year ended October 31, 1993,
Advantus Capital or MIMLIC Management (which was formerly the Funds'
investment adviser) voluntarily absorbed certain expenses of the Funds (which
do not include certain Rule 12b-1 fees waived by MIMLIC Sales) as set forth
below:
<TABLE>
<CAPTION>
Fund 1995 1994 1993
----- ---- ---- ----
<S> <C> <C> <C>
Horizon Fund $ 2,814 $ -0- $ -0-
Spectrum Fund -0- -0- -0-
Mortgage Securities Fund 9,655 -0- -0-
Money Market Fund 151,288 156,505 139,512
Bond Fund 100,487 82,132 62,200
Cornerstone Fund 47,635 8,493 n/a
Enterprise Fund 43,566 8,124 n/a
International Fund 17,626 3,015 n/a
</TABLE>
The expenses so absorbed by Advantus Capital or MIMLIC Management were not
required to be reimbursed to the Funds under the expense limitation set forth
above.
INTERNATIONAL FUND SUB-ADVISER -- TEMPLETON COUNSEL
Templeton Investment Counsel, Inc., (hereinafter "Templeton Counsel"),
a Florida corporation with principal offices at 500 East Broward Boulevard,
Fort Lauderdale, Florida 33394 has been retained under an investment
sub-advisory agreement to provide investment advice and, in general, to
conduct the management investment program of the International Fund, subject
to the general control of the Board of Directors of the Fund. Templeton
Counsel is an indirect, wholly-owned subsidiary of Templeton Worldwide, Inc.,
Fort Lauderdale, Florida, which in turn is a wholly-owned subsidiary of
Franklin Resources, Inc. ("Franklin").
Franklin is a large, diversified financial services organization.
Through its operating subsidiaries, Franklin provides a variety of investment
products and services to institutions and
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<PAGE>
individuals throughout the United States and abroad. One of the
country's largest mutual fund organizations, Franklin's business includes the
provision of management, administrative and distribution services to the
Franklin/Templeton Group of Funds, which is distributed through a nationwide
network of banks, broker-dealers, financial planners and investment advisers.
Franklin is headquartered in San Mateo, California, and its common stock is
listed on the New York Stock Exchange under the ticker symbol BEN.
Certain clients of Templeton Counsel may have investment objectives
and policies similar to that of the International Fund. Templeton Counsel
may, from time to time make recommendations which result in the purchase or
sale of a particular security by its other clients simultaneously with Fund.
If transactions on behalf of more than one client during the same period
increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price. It is the
policy of Templeton Counsel to allocate advisory recommendations and the
placing of orders in a manner which is deemed equitable by Templeton Counsel
to the accounts involved, including the International Fund. When two or more
of the clients of Templeton Counsel (including the International Fund) are
purchasing the same security on a given day from the same broker-dealer, such
transactions may be averaged as to price.
INTERNATIONAL FUND INVESTMENT SUB-ADVISORY AGREEMENT -- TEMPLETON COUNSEL
Templeton Counsel acts as an investment sub-adviser to the
International Fund under an Investment Sub-Advisory Agreement (the "Templeton
Agreement") with Advantus Capital dated March 1, 1995, and approved by
shareholders of the Fund on February 14, 1995. The Templeton Agreement was
last approved for continuance by the Board of Directors of the Fund,
including a majority of the Directors who are not a party to the Templeton
Agreement or interested persons of any such party, on January 17, 1996. The
Templeton Agreement will terminate automatically upon the termination of the
Advisory Agreement and in the event of its assignment. In addition, the
Templeton Agreement is terminable at any time, without penalty, by the Board
of Directors of the Fund, by Advantus Capital or by a vote of the majority of
the International Fund's outstanding voting securities on 60 days' written
notice to Templeton Counsel and by Templeton Counsel on 60 days' written
notice to Advantus Capital. Unless sooner terminated, the Templeton
Agreement shall continue in effect from year to year if approved at least
annually by the Board of Directors of the Fund or by a vote of a majority of
the outstanding voting securities of the International Fund, provided that in
either event such continuance is also approved by the vote of a majority of
the directors who are not interested persons of any party to the Templeton
Agreement, cast in person at a meeting called for the purpose of voting on
such approval.
DISTRIBUTION AGREEMENT
The Board of Directors of each Fund, on January 17, 1996, including a
majority of the directors who are not parties to the contract, or interested
persons of any such party, last approved the respective Fund's Distribution
Agreement with MIMLIC Sales (the "Distribution Agreements"), each dated March
1, 1995. During the fiscal year ended September 30, 1995, the fiscal period
ended September 30, 1994, and the fiscal year ended October 31, 1993, the
commissions received by MIMLIC Sales under the Distribution Agreements,
except in the case of Money Market Fund (which does
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<PAGE>
not provide for MIMLIC Sales to receive a commission), with respect to shares
of all classes under the Distribution Agreements were as follow:
<TABLE>
<CAPTION>
Fund 1995 1994 1993
---- ---- ---- ----
<S> <C> <C> <C>
Horizon Fund $125,141 $150,713 $183,390
Spectrum Fund 226,547 341,528 787,407
Mortgage Securities Fund 97,402 182,209 286,131
Bond Fund 61,826 103,025 169,542
Cornerstone Fund 62,839 276 n/a
Enterprise Fund 57,059 -0- n/a
International Fund 150,769 -0- n/a
</TABLE>
During the same periods MIMLIC Sales retained from these commissions the
following amounts:
<TABLE>
<CAPTION>
Fund 1995 1994 1993
---- ---- ---- ----
<S> <C> <C> <C>
Horizon Fund $14,640 $17,868 $10,703
Spectrum Fund 27,391 41,001 28,240
Mortgage Securities Fund 5,436 6,096 8,935
Bond Fund 5,966 6,546 1,809
Cornerstone Fund 5,200 28 n/a
Enterprise Fund 6,201 n/a n/a
International Fund 16,080 n/a n/a
</TABLE>
The remainder of these commissions was paid to registered representatives of
MIMLIC Sales or to broker-dealers who have selling agreements with MIMLIC
Sales.
Each Distribution Agreement may be terminated by the respective Fund
or MIMLIC Sales 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 for the respective Fund 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 Agreements require MIMLIC Sales to pay all
advertising and promotional expenses in connection with the distribution of
the Funds' shares including paying for Prospectuses and Statements of
Additional Information (if any) for new shareholders, shareholder reports for
new shareholders, and the costs of sales literature.
In the Distribution Agreements, MIMLIC Sales undertakes to indemnify
the Funds against all costs of litigation and other legal proceedings, and
against any liability incurred by or imposed upon the Funds in any way
arising out of or in connection with the sale or distribution of the
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<PAGE>
Funds' shares, except to the extent that such liability is the result of
information which was obtainable by MIMLIC Sales only from persons affiliated
with the Funds but not with MIMLIC Sales.
PAYMENT OF CERTAIN DISTRIBUTION EXPENSES OF THE FUNDS
Money Market Fund has adopted a Plan of Distribution, and each of the
other Funds has adopted separate Plans of Distribution applicable to Class A
shares, Class B shares and Class C shares, respectively, relating to the
payment of certain distribution expenses pursuant to Rule 12b-1 under the
Investment Company Act of 1940. Money Market Fund, pursuant to its Plan of
Distribution, pays a fee to MIMLIC Sales which, on an annual basis, is equal
to .30% of the Fund's average daily net assets, and is to be used to pay
certain expenses incurred in the distribution and promotion of its shares.
Each of the other Funds, pursuant to its Plans of Distribution, also pays
fees to MIMLIC Sales which equal, on an annual basis, a percentage of the
Fund's average daily net assets attributable to Class A shares, Class B
shares and Class C shares, respectively, as set forth in the following table:
<TABLE>
<CAPTION>
Rule 12b-1 Fee as Percentage
of Average Daily Net Assets Attributable to
-------------------------------------------
Fund Class A Shares Class B Shares Class C Shares
- ---- -------------- -------------- --------------
<S> <C> <C> <C>
Horizon Fund .30% 1.00% 1.00%
Spectrum Fund .35% 1.00% 1.00%
Mortgage Securities Fund .30% 1.00% 1.00%
Bond Fund .30% 1.00% 1.00%
Cornerstone Fund .30% 1.00% 1.00%
Enterprise Fund .30% 1.00% 1.00%
International Fund .30% n/a 1.00%
</TABLE>
Such fees are also used for distribution-related services and for servicing of
shareholder accounts.
All of the Rule 12b-1 fees payable by Money Market Fund and all of the
Rule 12b-1 fees payable by the Advantus Load Funds and attributable to Class
A shares of such Funds, and a portion of the Rule 12b-1 fees payable with
respect to Class B and Class C shares equal to .75% of the average daily net
assets attributable to such Class B and Class C shares, constitute
distribution fees designed to compensate MIMLIC Sales for advertising,
marketing and distributing the shares of Money Market Fund and the Advantus
Load Funds.
The distribution fees may be used by MIMLIC Sales for the purpose of
financing any activity which is primarily intended to result in the sale of
shares of the particular Fund. For example, such distribution fee may be
used by MIMLIC Sales: (a) to compensate broker-dealers, including MIMLIC
Sales and its registered representatives, for their sale of a Fund's shares,
including the implementation of the programs described below with respect to
broker-dealers, banks, and other financial institutions; and (b) to pay other
advertising and promotional expenses in connection with the distribution of a
Fund's shares. These advertising and promotional
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<PAGE>
expenses include, by way of example but not by way of limitation, costs of
prospectuses for other than current shareholders; preparation and
distribution of sales literature; advertising of any type; expenses of branch
offices provided jointly by MIMLIC Sales and any affiliate thereof; and
compensation paid to and expenses incurred by officers, employees or
representatives of MIMLIC Sales or of other broker-dealers, banks, or
financial institutions.
A portion of the Rule 12b-1 fee payable with respect to Class B and
Class C shares of each of the Advantus Load Funds, equal to .25% of the
average daily net assets attributable to such Class B and Class C shares,
constitutes a shareholder servicing fee designed to compensate MIMLIC Sales
for the provision of certain services to the holders of Class B and Class C
shares.
Amounts expended by the Funds under the Plans are expected to be used
for the implementation by MIMLIC Sales of a dealer incentive program.
Pursuant to the program, MIMLIC Sales may provide compensation to investment
dealers for the provision of distribution assistance in connection with the
sale of the Funds' shares to such dealers' customers and for the provision of
administrative support services to customers who directly or beneficially own
shares of the Funds. The distribution assistance and administrative support
services rendered by dealers may include, but are not limited to, the
following: distributing sales literature; answering routine customer
inquiries concerning the Funds; assisting customers in changing dividend
options, account designation and addresses, and in enrolling into the
pre-authorized check plan or systematic 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 Funds' shares and
providing such other information and services as the Funds 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 Funds.
MIMLIC Sales may also provide compensation to certain institutions
such as banks ("Service Organizations") which have purchased shares of the
Funds for the accounts of their clients, or which have made the Funds' 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, MIMLIC Sales, 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 Funds and alternative means for continuing servicing of
such shareholders would be sought. In such event changes in the operation of
the Funds 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 contains, among other things, provisions
complying with the requirements of Rule 12b-1 discussed below. Rule 12b-1(b)
provides that any payments made by
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<PAGE>
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) 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 January 17, 1996, the directors of the
Funds so concluded.
During the fiscal year ended September 30, 1995, each of the Advantus
Load Funds made payments under its Plans of Distribution applicable to Class
A, Class B and Class C shares as follows (distribution fees waived by MIMLIC
Sales, if any, are shown in parentheses):
<TABLE>
<CAPTION>
Class A Class B Class C
------------------- ------- -------
<S> <C> <C> <C> <C>
Horizon Fund $ 50,147 ($50,147) $11,637 $ 270
Spectrum Fund 193,254 n/a 11,904 389
Mortgage Securities Fund 53,343 (26,473) 3,391 846
Bond Fund 14,333 (28,668) 5,214 346
Cornerstone Fund 18,055 (36,111) 7,262 142
Enterprise Fund 20,216 (40,433) 7,499 194
International Fund 38,856 (38,856) n/a 1,119
</TABLE>
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<PAGE>
Money Market Fund made no payments under its Plan of Distribution during the
fiscal year ended September 30, 1995. MIMLIC Sales waived distribution
fees from Money Market Fund in the amount of $88,943 during such period.
The Plans of Distribution could be construed as "compensation plans"
because MIMLIC Sales is paid a fixed fee and is given discretion concerning
what expenses are payable under the Plans. 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. MIMLIC Sales may spend more or
less for the distribution and promotion of the Funds' shares than it receives
as distribution fees pursuant to the Plans. However, to the extent fees
received exceed expenses, including indirect expense such as overhead, MIMLIC
Sales could be said to have received a profit.
MONEY MARKET FUND AMORTIZED COST METHOD OF
PORTFOLIO VALUATION
Money Market Fund values its portfolio securities at amortized cost in
accordance with Rule 2a-7 under the Investment Company Act of 1940, as
amended. This method involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuations in interest rates on the
market value of the instrument and regardless of any unrealized capital gains
or losses. While this method provides certainty in valuation, it may result
in periods during which value, as determined by amortized cost, is higher or
lower than the price the Fund would receive if it sold the instrument.
During periods of declining interest rates, the daily yield on shares of the
Fund computed by dividing the annualized daily income of the Fund by the net
asset value computed as described above may tend to be higher than a like
computation made by the Fund with identical investments utilizing a method of
valuation based upon market prices and estimates of market prices for all of
its securities.
Pursuant to Rule 2a-7, the Board of Directors of the Fund has
determined, in good faith based upon a full consideration of all material
factors, that it is in the best interests of the Fund and its shareholders to
maintain a stable net asset value per share by virtue of the amortized cost
method of valuation. The Fund will continue to use this method only so long
as the Board of Directors believes that it fairly reflects the market-based
net asset value per share. In accordance with Rule 2a-7, the Board of
Directors has undertaken, as a particular responsibility within the overall
duty of care owed to the Fund's shareholders, to establish procedures
reasonably designed, taking into account current market conditions and the
Fund's investment objectives, to stabilize the Fund's net asset value per
share at a single value. These procedures include the periodic determination
of any deviation of current net asset value per share calculated using
available market quotations from the Fund's amortized cost price per share,
the periodic review by the Board of the amount of any such deviation and the
method used to calculate any such deviation, the maintenance of records of
such determinations and the Board's review thereof, the prompt consideration
by the Board if any such deviation exceeds 1/2 of 1%, and the taking of such
remedial action by the Board as it deems appropriate where it believes the
extent of any such deviation may result in material dilution or other unfair
results to investors or existing
-35-
<PAGE>
shareholders. Such remedial action may include redemptions in kind, selling
portfolio instruments prior to realizing capital gains or losses, shortening
the average portfolio maturity, withholding dividends or utilizing a net
asset value per share as determined by using available market quotations.
The Fund will, in further compliance with Rule 2a-7, maintain a
dollar-weighted average portfolio maturity not exceeding 90 days and will
limit its portfolio investments to those United States dollar-denominated
instruments which the Board determines present minimal credit risks and which
are eligible securities. The Fund will limit its investments in the
securities of any one issuer to no more than 5% of the Fund's total assets
and it will limit investment in securities of less than the highest rated
category to 5% of the Fund's total assets. Investment in the securities of
any issuer of less than the highest rated category will be limited to the
greater of 1% of the Fund's total assets or one million dollars. In
addition, the Fund will reassess promptly any security which is in default or
downgraded from its rating category to determine whether that security then
presents minimal credit risks and whether continuing to hold the securities
is in the best interests of the Fund. In addition, the Fund will record,
maintain, and preserve a written copy of the above-described procedures and a
written record of the Board's considerations and actions taken in connection
with the discharge of its above-described responsibilities.
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
HORIZON FUND, SPECTRUM FUND, CORNERSTONE FUND AND ENTERPRISE FUND
In a number of security transactions, it is possible for Horizon Fund,
Spectrum Fund, Cornerstone Fund and Enterprise 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; these Funds trade in this manner
whenever the net price appears advantageous.
MORTGAGE SECURITIES FUND AND BOND FUND
Portfolio transactions of Mortgage Securities Fund and Bond Fund occur
primarily with issuers, underwriters or major dealers acting as principals.
Such transactions are normally on a net basis which do not involve payment of
brokerage commissions. The cost of securities purchased from an underwriter
usually includes a commission paid by the issuer to the underwriters;
transactions with dealers normally reflect the spread between bid and asked
prices. Premiums are paid with respect to options purchased by these two
Funds and brokerage commissions are payable with respect to transactions in
exchange-traded interest rate futures contracts.
MONEY MARKET FUND
Most transactions in portfolio securities of Money Market Fund are
purchases from issuers or dealers in money market instruments acting as
principal. There usually are no brokerage commissions paid by the Fund for
such purchases since securities are purchased on a net price
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<PAGE>
basis. Trading does, however, involve transaction costs. Transactions with
dealers serving as primary market makers reflect the spread between the bid
and asked prices of securities. Purchases of underwritten issues may be made
which reflect a fee paid to the underwriter.
INTERNATIONAL FUND
Templeton Counsel, as investment sub-adviser to the International
Fund, is primarily responsible for selecting and (where applicable)
negotiating commissions with the brokers who execute the transactions for the
Fund. Templeton Counsel, in managing the International Fund, follows the
same basic brokerage practices as those described below for Advantus Capital.
In addition, in selecting brokers for portfolio transactions, Templeton
Counsel takes into account its past experience as to brokers qualified to
achieve "best execution," including the ability to effect transactions at all
where a large block is involved, availability of the broker to stand ready to
execute possibly difficult transactions in the future, the financial strength
and stability of the broker, and whether the broker specializes in foreign
securities held by the International Fund. Purchases and sales of portfolio
securities within the United States other than on a securities exchange are
executed with primary market makers acting as principal, except where, in the
judgment of Templeton Counsel, better prices and execution may be obtained on
a commission basis or from other sources.
GENERALLY
Advantus Capital selects and (where applicable) negotiates commissions
with the brokers who execute the transactions for the Funds (except for
International Fund, as described above). During the fiscal year ended
September 30, 1995, the fiscal period ended September 30, 1994, and the
fiscal year ended October 31, 1993 brokerage commissions paid were:
<TABLE>
<CAPTION>
Fund 1995 1994 1993
---- ---- ---- ----
<S> <C> <C> <C>
Horizon Fund $ 40,274 $30,332 $80,111
Spectrum Fund 63,194 60,362 95,242
Mortgage Securities Fund -0- -0- -0-
Money Market Fund -0- -0- -0-
Bond Fund -0- -0- -0-
Cornerstone Fund 146,804 18,326 n/a
Enterprise Fund 29,639 10,942 n/a
International Fund 42,199 33,746 n/a
</TABLE>
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 Funds pay 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
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<PAGE>
of investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities, as well as analyses 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 Funds enable 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 Funds. To the extent such
commissions are directed to these other brokers who furnish research services
to Advantus Capital, Advantus Capital receives a benefit, not capable of
evaluation in dollar amounts, without providing any direct monetary benefit
to the Funds from these commissions.
There is no formula for the allocation by Advantus Capital of the
Funds' brokerage business to any broker-dealer for brokerage and research
services. However, Advantus Capital will authorize a 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. During the fiscal year ended September
30, 1995, Horizon Fund, Spectrum Fund, Cornerstone Fund, Enterprise Fund and
International Fund directed transactions to brokers because of research
services they provided, and paid commissions in connection with such
transactions, in the aggregate amounts set forth below:
<TABLE>
<CAPTION>
Aggregate Transactions Commissions Paid On
Fund Directed for Research Directed Transactions
---- ---------------------- ---------------------
<S> <C> <C>
Horizon Fund $20,850,319 $ 40,274
Spectrum Fund 37,291,180 63,194
Cornerstone Fund 62,868,963 146,803
Enterprise Fund 14,321,343 29,639
International Fund 23,014,149 42,199
</TABLE>
During the same period, Mortgage Securities Fund, Money Market Fund and Bond
Fund directed no transactions to brokers because of research services they
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 same security may be suitable for one or more of the Funds and the
other funds or private accounts managed by Advantus Capital or its
affiliates. If and when two or more funds or
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<PAGE>
accounts simultaneously purchase or sell the same security, the transactions
will be allocated as to price and amount in accordance with arrangements
equitable to each fund or account. The simultaneous purchase or sale of the
same securities by one Fund and other Funds or accounts may have a
detrimental effect on that Fund, as this may affect the price paid or
received by the Fund or the size of the position obtainable by the Fund.
The Funds 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 Funds. In the event any transactions
are executed on an agency basis, Advantus Capital will authorize the Funds 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 Funds as to which it exercises investment discretion. If the Funds
execute any transactions on an agency basis, they 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 Funds 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 Funds do not deem it practicable and in their 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.
Information regarding the acquisition by the Funds during the fiscal
year ended September 30, 1995, of securities of the Funds' regular brokers or
dealers, or the parents of those broker or dealers that derive more than 15
percent of their gross revenue from securities-related activities, is
presented below:
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<PAGE>
<TABLE>
<CAPTION>
Approximate
Value of Securities
Owned at End of
Name of Issuer Fiscal Period
-------------- ------------------
<S> <C> <C>
CORNERSTONE FUND
Lehman Brothers $728,437
</TABLE>
CALCULATION OF PERFORMANCE DATA
MONEY MARKET FUND
Money Market Fund may issue "current yield" and "effective yield"
quotations. "Current yields" are computed by determining the net change in
the value of a hypothetical account having a balance of one share at the
beginning of a recent seven calendar day period, and multiplying that change
by 365/7. "Effective yields" are computed by determining the net change in
the value of a hypothetical account having a balance of one share at the
beginning of a recent seven calendar day period, dividing that change by
seven, adding one to the quotient, raising the sum to the 365th power, and
subtracting one from the result. For purposes of the foregoing calculations,
the value of the hypothetical account includes accrued interest income plus
or minus amortized purchase discount or premium less accrued expenses, but
does not include realized gains and losses or unrealized appreciation and
depreciation. The Fund will also quote the average dollar-weighted portfolio
maturity for the corresponding seven-day period.
Although there can be no assurance that the net asset value of Money
Market Fund's shares will always be $1.00, Advantus Capital does not expect
that the net asset value of its shares will fluctuate since the Fund uses the
amortized cost method of valuation to maintain a stable $1.00 net asset
value. See "Money Market Fund Amortized Cost Method of Portfolio Valuation."
Principal is not, however, insured. Yield is a function of portfolio
quality and composition, maturity, and operating expenses. Yield information
is useful in reviewing the Fund's performance, but it may not provide a basis
for comparison with bank deposits or other investments, which pay a fixed
yield for a stated period of time, or other investment instruments, which may
use a different method of calculating yield.
For the seven calendar days ended September 30, 1995, Money Market
Fund's annualized current yield was 4.88% and its annualized effective yield
was 5.00%. The Fund's investment adviser was voluntarily absorbing certain
expenses of the Fund during that period. If the Fund had been charged these
expenses its current yield and effective yield for the same period would have
been 4.38% and 4.47%, respectively.
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<PAGE>
ADVANTUS LOAD FUNDS
Advertisements and other sales literature for the Advantus Load Funds
may refer to "yield," "average annual total return" and "cumulative total
return." Performance quotations are computed separately for each class of
shares of the Advantus Load Funds.
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
YIELD = 2[( ----- +1)6-1]
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.
The yield on investments in each of these Funds for the 30 day period
ended September 30, 1995 was as set forth in the table below. The Funds'
investment adviser was voluntarily absorbing certain expenses of certain of
the Funds during that period. If such Funds had been charged for these
expenses the yield on investments for the same period would have been lower,
as also shown in the table below in parentheses.
<TABLE>
<CAPTION>
Fund Yield
---- -----
Class A Class B Class C
------- ------- -------
<S> <C> <C> <C>
Horizon Fund -.48% (-.58%) -1.34% (-1.46%) -1.35% (-1.47%)
Spectrum Fund 2.21% (2.21%) 1.67% (1.67%) 1.66% (1.66%)
Mortgage Securities Fund 5.92% (5.40%) 5.43% (4.87%) 5.43% (4.88%)
Bond Fund 5.55% (5.19%) 4.94% (4.57%) 4.94% (4.56%)
Cornerstone Fund .42% (.31%) -.43% (-.56%) -.44% (-.56%)
Enterprise Fund -.72% (-.80%) -1.65% (-1.74%) -1.67% (-1.75%)
International Fund 1.55% (1.25%) n/a n/a .78% (.78%)
</TABLE>
-41-
<PAGE>
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:
P(1+T)n = 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.
The average annual total return on investments in each of the Advantus
Load Funds for the periods indicated ending September 30, 1995, were as set
forth in the table below. The Funds' investment adviser and distributor were
voluntarily absorbing and waiving certain expenses of certain of the Funds
during these periods. If such Funds had been charged for these expenses the
average annual total returns for the same periods would have been lower, as
also shown in the table below in parentheses.
-42-
<PAGE>
<TABLE>
<CAPTION>
1 Year 5 Year
------ ------
Fund Class A Class B Class C Class A Class B Class C
- ---- ------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Horizon Fund(1) 18.5% (18.4%) 18.7% (18.6%) n/a 14.4% (14.3%) n/a n/a
Spectrum Fund(2) 12.5% (12.5%) 12.6% (12.6%) n/a 10.9% (10.9%) n/a n/a
Mortgage Securities
Fund(1) 7.9% (7.7%) 7.7% (7.7%) n/a 7.8% (7.7%) n/a n/a
Bond Fund(3) 9.3% (8.4%) 8.9% (8.2%) n/a 8.3% (7.3%) n/a n/a
Cornerstone Fund(4) 18.2% (17.5%) 18.2% (17.9%) n/a n/a n/a n/a n/a
Enterprise Fund(4) 21.5% (21.1%) 21.7% (21.6%) n/a n/a n/a n/a n/a
International Fund(4) 2.0% (1.8%) n/a n/a n/a n/a n/a n/a n/a
<CAPTION>
10 Year Since Inception
------- ---------------
Fund Class A Class B Class C Class A Class B Class C
- ---- ------- ------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Horizon Fund(1) 11.3% (11.0%) n/a n/a n/a n/a 18.4% (18.3%) 18.4% (18.3%)
Spectrum Fund(2) n/a n/a n/a n/a 10.3% (9.5%) 11.7% (11.7%) 12.6% (12.6%)
Mortgage Securities
Fund(1) 8.4% (8.2%) n/a n/a n/a n/a 6.6% (6.6%) 7.9% (7.9%)
Bond Fund(3) n/a n/a n/a n/a 7.8% (6.7%) 7.1% (6.3%) 9.3% (8.8%)
Cornerstone Fund(4) n/a n/a n/a n/a 15.9% (15.3%) 16.4% (16.1%) 20.1% (19.9%)
Enterprise Fund(4) n/a n/a n/a n/a 19.6% (19.5%) 20.2% (20.0%) 20.4% (20.3%)
International Fund(4) n/a n/a n/a n/a .1% (-.1%) n/a n/a 10.3% (10.2%)
</TABLE>
- -----------------
(1) Class A Inception May 3, 1985.
Class B Inception August 19, 1994.
Class C Inception March 1, 1995.
(2) Class A Inception November 16, 1987.
Class B Inception August 19, 1994.
Class C Inception March 1, 1995.
(3) Class A Inception August 14, 1987.
Class B Inception August 19, 1994.
Class C Inception March 1, 1995.
(4) Class A and Class B Inception September 16, 1994.
Class C Inception March 1, 1995.
-43-
<PAGE>
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.
The cumulative total return on investments in each of the Advantus
Load Funds for the period indicated ended September 30, 1995, was a set forth
in the table below. The Funds' investment adviser was voluntarily absorbing
certain expenses of certain of the Funds during these periods. If such Funds
had been charged for these expenses the cumulative total return for the same
periods would have been lower, as also shown in the table below in
parentheses.
<TABLE>
<CAPTION>
Cumulative Total Return
-----------------------
Fund Class A Class B Class C
- ---- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Horizon Fund(1) 185.7% (180.1%) 20.8% (20.7%) 18.4% (18.3%)
Spectrum Fund(2) 115.7% (103.7%) 13.2% (13.2%) 12.6% (12.6%)
Mortgage Securities Fund(1) 140.6% (136.5%) 7.4% (7.3%) 7.9% (7.8%)
Bond Fund(3) 84.5% (70.9%) 8.0% (7.0%) 9.2% (8.8%)
Cornerstone Fund(4) 16.6% (16.0%) 17.1% (16.7%) 20.3% (19.9%)
Enterprise Fund(4) 20.5% (20.4%) 21.1% (20.9%) 20.4% (20.3%)
International Fund(4) .1% (-.1%) n/a n/a 10.3% (10.1%)
</TABLE>
- -------------------
(1) Class A Inception May 3, 1985.
Class B Inception August 19, 1994.
Class C Inception March 1, 1995.
(2) Class A Inception November 16, 1987.
Class B Inception August 19, 1994.
Class C Inception March 1, 1995.
(3) Class A Inception August 14, 1987.
Class B Inception August 19, 1994.
Class C Inception March 1, 1995.
(4) Class A and Class B Inception September 16, 1994.
Class C Inception March 1, 1995.
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
-44-
<PAGE>
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.
CAPITAL STOCK AND OWNERSHIP OF SHARES
Each Fund's shares of common stock, and each class thereof, 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.
Each of the Funds has 10 billion authorized shares of common stock.
Each of the Advantus Load Funds has designated 2 billion authorized shares as
Class A shares, 2 billion authorized shares as Class B shares (except for
International Fund), and 2 billion authorized shares as Class C shares. The
Funds have the following numbers of shares outstanding:
<TABLE>
<CAPTION>
Shares Outstanding at November 30, 1995
---------------------------------------
Fund Class A Class B Class C
---- ------- ------- -------
<S> <C> <C> <C>
Horizon Fund 1,677,746 147,355 5,896
Spectrum Fund 3,623,030 255,596 19,844
Mortgage Securities Fund 2,255,748 139,048 28,629
Money Market Fund 38,375,420 n/a n/a
Bond Fund 1,499,520 142,164 16,073
Cornerstone Fund 2,405,125 159,253 6,190
Enterprise Fund 2,190,055 135,052 5,534
International Fund 2,949,295 n/a 34,681
</TABLE>
As of November 30, 1995, no person held of record, to the knowledge of
the respective Funds, or owned more than 5% of the outstanding shares of any
of the Funds, except as set forth in the following table:
<TABLE>
<CAPTION>
Number of
Name and Address of Shareholder Shares Percentage
- ------------------------------- ------ ----------
<S> <C> <C>
HORIZON FUND
Minnesota Mutual and affiliates* 478,019 26.1%
SPECTRUM FUND
Minnesota Mutual and affiliates* 139,294 3.6%
</TABLE>
-45-
<PAGE>
<TABLE>
<S> <C> <C>
MORTGAGE SECURITIES FUND
Minnesota Mutual and affiliates* 306,984 12.7%
MONEY MARKET FUND
Minnesota Mutual and affiliates* 11,588,881 30.2%
BOND FUND
Minnesota Mutual and affiliates* 377,655 22.8%
CORNERSTONE FUND
Minnesota Mutual and affiliates* 2,124,793 82.7%
ENTERPRISE FUND
Minnesota Mutual and affiliates* 2,021,141 86.7%
INTERNATIONAL FUND
Minnesota Mutual and affiliates* 2,491,979 83.5%
</TABLE>
* 400 Robert Street North, St. Paul, Minnesota 55101.
HOW TO BUY SHARES
The procedures for purchasing shares of the Funds are summarized in
the Prospectus following the caption "Purchase of Fund Shares."
In addition to purchases of shares through insurance agents and
employees of Minnesota Mutual who are registered representatives of MIMLIC
Sales and who are licensed under applicable state and federal laws, shares
may also be purchased in writing as described in the Prospectus through firms
which are members of the National Association of Securities Dealers, Inc. and
which have selling agreements with MIMLIC Sales.
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 headings
"Purchase of Fund Shares" and "Sales Charges."
Shares of Money Market Fund may be purchased at a price equal to their
net asset value, which will normally be constant at $1.00 per share. See
"Money Market Fund Amortized Cost Method of Valuation." There is no
assurance that Money Market Fund can maintain the $1.00 per share value. The
portfolio securities in which the Advantus Load Funds invest fluctuate in
value, and hence the net asset value per share of each Fund also fluctuates.
-46-
<PAGE>
On September 30, 1995, the net asset value and public offering price
per share for Class A, Class B and Class C shares of each of the Funds
(except Money Market Fund) were calculated as follows:
HORIZON FUND
CLASS A SHARES
Net Assets ($36,039,924)
- ------------------------------ = Net Asset Value Per Share ($20.94)
Shares outstanding (1,721,318)
To obtain the maximum public offering price per share, the Fund's 5%
sales charge must be added to the net asset value obtained above:
$20.94
------ = Public Offering Price Per Share ($22.04)
.95
CLASS B SHARES
Net Assets ($2,592,256)
- --------------------------- = Net Asset Value AND Public
Shares outstanding (124,967) Offering Price Per Share ($20.74)
CLASS C SHARES
Net Assets ($102,678)
- --------------------------- = Net Asset Value AND Public
Shares outstanding (4,949) Offering Price Per Share ($20.75)
SPECTRUM FUND
CLASS A SHARES
Net Assets ($55,624,248)
- ------------------------------ = Net Asset Value Per Share ($14.79)
Shares outstanding (3,759,787)
To obtain the maximum public offering price per share, the Fund's 5%
sales charge must be added to the net asset value obtained above:
$14.79
------ = Public Offering Price Per Share ($15.57)
.95
CLASS B SHARES
Net Assets ($3,131,262)
- ---------------------------- = Net Asset Value AND Public
Shares outstanding (212,378) Offering Price Per Share ($14.74)
CLASS C SHARES
Net Assets ($198,926)
- --------------------------- = Net Asset Value AND Public
Shares outstanding (13,498) Offering Price Per Share ($14.74)
-47-
<PAGE>
MORTGAGE SECURITIES FUND
CLASS A SHARES
Net Assets ($25,316,583)
- ------------------------------ = Net Asset Value Per Share ($10.36)
Shares outstanding (2,444,711)
To obtain the maximum public offering price per share, the Fund's 5%
sales charge must be added to the net asset value obtained above:
$10.36
------ = Public Offering Price Per Share ($10.91)
.95
CLASS B SHARES
Net Assets ($1,084,219)
- ----------------------------- = Net Asset Value AND Public
Shares outstanding (104,594) Offering Price Per Share ($10.37)
CLASS C SHARES
Net Assets ($321,331)
- --------------------------- = Net Asset Value AND Public
Shares outstanding (30,995) Offering Price Per Share ($10.37)
BOND FUND
CLASS A SHARES
Net Assets ($15,315,447)
- ------------------------------ = Net Asset Value Per Share ($10.24)
Shares outstanding (1,496,326)
To obtain the maximum public offering price per share, the Fund's 5%
sales charge must be added to the net asset value obtained above:
$10.24
------ = Public Offering Price Per Share ($10.78)
.95
CLASS B SHARES
Net Assets ($1,141,804)
- ---------------------------- = Net Asset Value AND Public
Shares outstanding (111,592) Offering Price Per Share ($10.23)
CLASS C SHARES
Net Assets ($112,041)
- --------------------------- = Net Asset Value AND Public
Shares outstanding (10,955) Offering Price Per Share ($10.23)
CORNERSTONE FUND
CLASS A SHARES
Net Assets ($29,519,898)
- ------------------------------ = Net Asset Value Per Share ($12.96)
Shares outstanding (2,277,462)
To obtain the maximum public offering price per share, the Fund's 5%
sales charge must be added to the net asset value obtained above:
-48-
<PAGE>
$12.96
------ = Public Offering Price Per Share ($13.64)
.95
CLASS B SHARES
Net Assets ($1,635,392)
- ---------------------------- = Net Asset Value AND Public
Shares outstanding (126,777) Offering Price Per Share ($12.90)
CLASS C SHARES
Net Assets ($46,771)
- --------------------------- = Net Asset Value AND Public
Shares outstanding (3,625) Offering Price Per Share ($12.90)
ENTERPRISE FUND
CLASS A SHARES
Net Assets ($30,454,200)
- ------------------------------ = Net Asset Value Per Share ($14.08)
Shares outstanding (2,163,222)
To obtain the maximum public offering price per share, the Fund's 5%
sales charge must be added to the net asset value obtained above:
$14.08
------ = Public Offering Price Per Share ($14.82)
.95
CLASS B SHARES
Net Assets ($1,720,378)
- ---------------------------- = Net Asset Value AND Public
Shares outstanding (123,403) Offering Price Per Share ($13.94)
CLASS C SHARES
Net Assets ($70,976)
- --------------------------- = Net Asset Value AND Public
Shares outstanding (5,092) Offering Price Per Share ($13.94)
INTERNATIONAL FUND
CLASS A SHARES
Net Assets ($30,948,777)
- ------------------------------ = Net Asset Value Per Share ($10.79)
Shares outstanding (2,868,246)
To obtain the maximum public offering price per share, the Fund's 5%
sales charge must be added to the net asset value obtained above:
$10.79
------ = Public Offering Price Per Share ($11.36)
.95
CLASS C SHARES
Net Assets ($329,813)
- --------------------------- = Net Asset Value AND Public
Shares outstanding (30,622) Offering Price Per Share ($10.77)
REDUCED SALES CHARGES
Special purchase plans are enumerated in the text of each Fund's
Prospectus immediately following the caption "Special Purchase Plans" and are
fully described below.
-49-
<PAGE>
RIGHT OF ACCUMULATION-CUMULATIVE PURCHASE DISCOUNT
The front end sales charge and contingent deferred sales charge
applicable to each purchase of Class A shares and Class B shares,
respectively, of the Advantus Load Funds is based on the next computed net
asset value of all Class A, Class B and Class C shares of such Funds held by
the shareholder (including dividends reinvested and capital gains
distributions accepted in shares), plus the cost of all Class A, Class B and
Class C shares of such Funds currently being purchased. It is the obligation
of each shareholder desiring this discount in sales charge to notify MIMLIC
Sales, 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 MIMLIC Sales a signed "Letter of Intent"
form to purchase, and by in fact purchasing not less than $50,000 of shares
in one of the Funds (except Money Market Fund) within that time. The
13-month period is measured from the date the Letter of Intent is approved by
MIMLIC Sales, or at the purchaser's option, it may be made retroactive 90
days, in which case MIMLIC Sales 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, Class B and
Class C shares currently held in all Advantus Load Funds, 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, Class B and
Class C shares of all the Advantus Load Funds 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. In the case of Class A shares, this
is accomplished by holding 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 MIMLIC Sales 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 MIMLIC Sales on a timely basis, MIMLIC
Sales will redeem the appropriate number of shares, and then release or
deliver any remaining shares in the escrow account. In the case of Class B
shares, if the investor fails to purchase shares in the amount indicated, the
contingent deferred sales charge applicable to purchased Class B shares will
be calculated without regard to the Letter of Intent. The Letter of Intent
is not a binding obligation on the part of the investor to purchase, or the
respective Fund to sell, the full amount indicated. Nevertheless, the Letter
of Intent should be read carefully before it is signed.
-50-
<PAGE>
COMBINING PURCHASES
With respect to each of the Advantus Load Funds, purchases of Class A,
Class B and Class C 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.
PURCHASES OF CLASS A SHARES BY CERTAIN PERSONS AFFILIATED WITH THE FUND,
ADVANTUS CAPITAL MIMLIC MANAGEMENT, TEMPLETON COUNSEL, MIMLIC SALES,
MINNESOTA MUTUAL, OR ANY OF MINNESOTA MUTUAL'S OTHER AFFILIATED COMPANIES
Directors and officers of Advantus Capital, MIMLIC Management,
Templeton Counsel (with respect to International Fund only), MIMLIC Sales,
the Funds, Minnesota Mutual, or any of Minnesota Mutual'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 descendents
of such persons, Minnesota Mutual and its affiliates themselves, advisory
clients of Advantus Capital or MIMLIC Management, 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
MIMLIC Sales, and certain accounts sold by registered investment advisers who
charge clients a fee for their services may purchase Class A shares of the
Advantus Load Funds 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 respective Fund. These persons are not required to pay a
sales charge because of the reduced sales effort involved in their purchases.
SHAREHOLDER SERVICES
OPEN ACCOUNTS
A shareholder's investment is automatically credited to an open
account maintained for the shareholder by Minnesota Mutual. 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 Minnesota Mutual 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.
-51-
<PAGE>
The costs of maintaining the open account system are paid by Advantus
Capital in the case of the Advantus Load Funds. The costs of maintaining the
open account system for Money Market Fund are paid by the Fund. No direct
charges are made to shareholders. Although the Funds have no present
intention of making such direct charges to shareholders, they reserve the
right to do so. Shareholders will receive prior notice before any such
charges are made.
SYSTEMATIC INVESTMENT PLAN
Each Fund provides a convenient, voluntary method of purchasing shares
in the Fund through its "Systematic Investment 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, in
the case of the Advantus Load Funds, to employ the principle of dollar cost
averaging, described below.
By acquiring Fund shares on a regular basis pursuant to a Systematic
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. 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 your intention to invest $25 or
more monthly for at least one year. You 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 MIMLIC Sales in writing to pay them in cash. MIMLIC Sales 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 each 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
-52-
<PAGE>
participant's account. If the group is reduced to less than five
participants, the minimums set forth under "Systematic Investment Plan" shall
apply. The Plan may be terminated by MIMLIC Sales or the shareholder at any
time upon reasonable notice.
AUTOMATIC INVESTMENT PLAN
Each Fund offers an Automatic Investment Plan, which allows you to
automatically invest a specified amount in the Fund each month.
Shares of the respective Fund may be purchased through pre-authorized
bank drafts. With the cooperation of your bank, you may authorize MIMLIC
Sales to make a withdrawal from your checking account on the 1st or 15th day
of each month in the amount you specify to purchase shares of the Fund at the
public offering price next determined after receipt of the proceeds from your
bank draft. A minimum initial investment of $25 is required, and the minimum
subsequent monthly investment under this plan is $25.
You may discontinue your Automatic Investment Plan at any time.
Further information about the plans is available from MIMLIC Sales or your
MIMLIC Sales representative.
GROUP PURCHASES
An individual who is a member of a qualified group may also purchase
shares of the Funds (except Money Market 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, Class B and
Class C shares of the Funds being purchased by the individual member, but
also the aggregate dollar value of such Class A, Class B and Class C 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 MIMLIC Sales 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 MIMLIC Sales, must agree to include sales
and other materials related to the Funds in its publications and mailings to
members at reduced or no cost to MIMLIC Sales, and must seek, upon request,
to arrange for payroll deduction or other bulk transmission of investments to
the Funds.
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 any of the
Funds. 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.
-53-
<PAGE>
The initial investment in each 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 MIMLIC Sales.
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, including changes made by the Tax Reform Act of 1986.
SYSTEMATIC WITHDRAWAL PLANS
An investor owning shares in any one of the Funds 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. 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 respective 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 MIMLIC Sales.
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.
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. In addition,
withdrawal payments attributable to the redemption of Class B shares may be
subject to a contingent deferred sales charge. Accordingly, the shareholder
should consider whether a Systematic Withdrawal Plan and the specified
amounts to be withdrawn are appropriate in the circumstances. The Funds and
MIMLIC Sales make no recommendations or representations in this regard. It
may be appropriate for the shareholder to consult a tax adviser before
establishing such a plan.
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
respective Fund under this Plan, except in the case of Money Market Fund,
other than by reinvestment of distributions, it should be understood that, in
the case of
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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, and, in the case of Class B shares, he or she would be purchasing such
shares at net asset value while liquidations effected under the Plan would
involve the payment of a contingent deferred sales charge. 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 a "Systematic Withdrawal Plan" and a "Systematic
Investment Plan" in effect simultaneously as it is not, as explained above,
advantageous to do so.
EXCHANGE AND TELEPHONE TRANSFER PRIVILEGE
The exchange and telephone transfer privileges available in connection
with the Funds, the procedures for effecting such transactions and a
description of the applicable charges, are described in each Fund's
Prospectus in the text following the caption "Exchange and Telephone Transfer
of Fund Shares."
Telephone transfers and other exchanges may be made only between
already open Fund accounts having identical registrations.
REDEMPTIONS
The procedures for redemption of Fund shares, and the charges
applicable to redemptions of Class B shares, are summarized in the Prospectus
in the text following the caption "Redemption of Fund Shares."
Class B shares are subject to a contingent deferred sales charge of up
to 5% if redeemed within six years of purchase. See "Sales Charges-Class B
Shares" and "Redemption of Fund Shares" in the Prospectus.
The obligation of each of the Funds to redeem its shares when called
upon to do so by the shareholder is mandatory with the following exceptions.
Each 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.
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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 Securities and Exchange Commission, by
order, so permits; provided that applicable rules and regulations of the
Securities and Exchange Commission shall govern as to whether the conditions
prescribed in (b) or (c) exist.
REINSTATEMENT PRIVILEGE
The Prospectus for each of the Advantus Load Funds describes redeeming
shareholders' reinstatement privileges in the text following the caption
"Reinstatement Privilege." Written notice from persons wishing to exercise
this reinstatement privilege must be received by MIMLIC Sales 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 and Class B
shares will be issued only as Class A shares. Any CDSC incurred in
connection with the prior redemption (within 90 days) of Class B shares will
not be refunded or re-credited to the shareholder's account. Shareholders
who redeem Class C shares and exercise their reinstatement privilege will be
issued only Class C shares, which shares will have a remaining holding period
prior to conversion equal to the remaining holding period applicable to the
prior Class C shares at redemption.
See "Taxes" in the Prospectus 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 "Taxes" in the Prospectus regarding the
taxation of capital gains.
DISTRIBUTIONS AND TAX STATUS
GENERALLY
The tax status of the Funds and the distributions which they may make
are summarized in the text of the Prospectus following the caption "Taxes."
During the fiscal year ended September 30, 1995, each Fund fulfilled, and
each Fund intends to continue 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 Funds will not be liable for
federal income taxes to the extent they distribute their taxable income to
their shareholders.
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INTERNATIONAL FUND
Except for the transactions the Fund has identified as hedging
transactions, the Fund is required for federal income tax purposes to
recognize as income for each taxable year its net unrealized gains and losses
on forward currency contracts as of the end of the year as well as those
actually realized during the year. Except for transactions in forward
currency contracts that are classified as part of a "mixed straddle," gain or
loss recognized with respect to forward currency contracts is considered to
be 60% long-term capital gain or loss and 40% short-term capital gain or
loss, without regard to the holding period of the contract. In the case of a
transaction classified as a "mixed straddle," the recognition of losses may
be deferred to a later taxable year.
Sales of forward currency contracts that are intended to hedge against
a change in the value of securities or currencies held by the Fund may affect
the holding period of such securities or currencies and, consequently, the
nature of the gain or loss on such securities or currencies upon disposition.
It is expected that any net gain realized from the closing out of
forward currency contracts will be considered gain from the sale of
securities or currencies and therefore be qualifying income for purposes of
the requirement under the Code that a regulated investment company derive at
least 90% of its gross income from dividends interest, gains from the sale or
disposition of securities, or otherwise from the business of investing in
securities. Moreover, in connection with the Code requirement that a
regulated investment company must derive less than 30% of its gross income
from gains on the sale or disposition of stock, securities, or (in certain
cases) forward contracts or foreign currencies held less than three months,
the Fund may be required to defer the closing out of forward currency
contracts beyond the time when it would otherwise be advantageous to do so.
It is expected that unrealized gains on forward currency contracts, which
have been open for less than three months as of the end of the Fund's fiscal
year and which are recognized for tax purposes, will not be considered gains
on securities or currencies held less than three months for purposes of the
30% test, as discussed above.
Any realized gain or loss on closing out a forward currency contract
such as a forward commitment for the purchase or sale of foreign currency
will generally result in a recognized capital gain or loss for tax purposes.
Under Code Section 1256, forward currency contracts held by the Fund at the
end of each fiscal year will be required to be "marked to market" for federal
income tax purposes, that is, deemed to have been sold at market value. Code
Section 988 may also apply to forward currency contracts. Under Section 988,
each foreign currency gain or loss is generally computed separately and
treated as ordinary income or loss. In the case of overlap between Section
1256 and 988, special provisions determine the character and timing of any
income gain or loss. The Fund will attempt to monitor Section 988
transactions to avoid an adverse tax impact.
Under the Code, the Fund's taxable income for each year will be
computed without regard to any net foreign currency loss attributable to
transactions after October 31, and any such net foreign currency loss will be
treated as arising on the first day of the following taxable year.
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ALL FUNDS
Each 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 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 Fund distributions.
FINANCIAL STATEMENTS
Financial statements for the Funds are presented in Appendix D. These
financial statements have been audited by KPMG Peat Marwick LLP, independent
auditors. The accompanying financial statements are for year ended
September 30, 1995.
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APPENDIX A
MORTGAGE-RELATED SECURITIES
Mortgage-related securities represent an ownership interest in a pool
of residential mortgage loans. These securities are designed to provide
monthly payments of interest and principal to the investor. The mortgagor's
monthly payments to his lending institution are "passed-through" to investors
such as the Fund. Most insurers or services provide guarantees of payments,
regardless of whether or not the mortgagor actually makes the payment. The
guarantees made by issuers or servicers are backed by various forms of
credit, insurance and collateral.
UNDERLYING MORTGAGES
Pools consist of whole mortgage loans or participations in loans. The
majority of these loans are made to purchasers of 1-4 family homes. Some of
these loans are made to purchasers of mobile homes. The terms and
characteristics of the mortgage instruments are generally uniform within a
pool buy may vary among pools. For example, in addition to fixed-rate
fixed-term mortgages, the fund may purchase pools of variable rate mortgages,
growing equity mortgages, graduated payment mortgages and other types.
All servicers apply standards for qualification to local lending
institutions which originate mortgages for the pools. Servicers also
establish credit standards and underwriting criteria for individual mortgages
included in the pools. In addition, many mortgages included in pools are
insured through private mortgage insurance companies.
LIQUIDITY AND MARKETABILITY
Since the inception of the mortgage-related pass-through security in
1970, the market for these securities has expanded considerably. The size of
the primary issuance market and active participation in the secondary market
by securities dealers and many types of investors makes government and
government-related pass-through pools highly liquid. The recently introduced
private conventional pools of mortgages (pooled by commercial banks, savings
and loans institutions and others, with no relationship with government and
government-related entities) have also achieved broad market acceptance and
consequently an active secondary market has emerged. However, the market for
conventional pools is smaller and less liquid than the market for the
government and government-related mortgage pools. The Fund may purchase some
mortgage-related securities through private placements, in which case only a
limited secondary market exists, and the security is considered illiquid.
AVERAGE LIFE
The average life of pass-through pools varies with the maturities of
the underlying mortgage instruments. In addition, a pool's term may be
shortened by unscheduled or early payments of principal and interest on the
underlying mortgages. The occurrence of mortgage
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prepayments is affected by factors including the level of interest rates,
general economic conditions, the location and age of the mortgage and other
social and demographic conditions.
As prepayment rates of individual pools vary widely, it is not
possible to accurately predict the average life of a particular pool. For
pools of fixed-rate 30-year mortgages, common industry practice is to assume
that prepayments will result in a 12-year average life. Pools of mortgages
with other maturities or different characteristics will have varying
assumptions for average life. The assumed average life of pools of mortgages
having terms of less than 30 years is less than 12 years, but typically not
less than 5 years.
YIELD CALCULATIONS
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and
the associated average life assumption. In periods of falling interest rates
the rate of prepayment tends to increase, thereby shortening the actual
average life of a pool of mortgage-related securities. Conversely, in
periods of rising rates and the rate of prepayment tends to decrease, thereby
lengthening the actual average life of the pool. Historically, actual
average life has been consistent with the 12-year assumption referred to
above.
Actual prepayment experience may cause the yield to differ from the
assumed average life yield. Reinvestment of prepayments may occur at higher
or lower interest rates than the original investment, thus affecting the
yield of the Fund. The compounding effect from reinvestments of monthly
payments received by the Fund will increase the yield to shareholders
compared to bonds that pay interest semi-annually.
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APPENDIX B
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:
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AAA. Debt rated "AAA" has the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay principal is
extremely strong.
AA. Debt rated "AA" has a very strong capacity to pay interest
and repay principal and differs from the higher rated issues only in
small degree.
A. Debt rated "A" has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
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
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issuer has a strong position within the industry. The reliability and
quality of management are unquestioned.
B-3
<PAGE>
APPENDIX C
FUTURES CONTRACTS
USE OF FUTURES CONTRACTS
Prices of debt securities may be established in both the cash market
and the futures market. In the cash market, debt securities are purchased
and sold with payment for the full purchase price being made in cash,
generally within five business days after the trade. In the futures market,
a contract is made to purchase or sell a debt security in the future for a
set price on a certain date. Historically, prices established in the futures
markets have tended to move generally and in the aggregate in concert with
cash market prices and have maintained fairly predictable relationships. The
Fund may use interest rate futures solely as a defense, or hedge, against
anticipated interest rate changes and not for speculation. As described
below, this would include the use of futures contract sales to protect
against expected increases in interest rates and futures contract purchases
to offset the impact of interest rate declines.
The Fund currently could accomplish a similar result to that which it
hopes to achieve through the use of futures contracts by selling debt
securities with long maturities and investing in debt securities with short
maturities when interest rates are expected to increase, or conversely,
selling short-term debt securities and investing in long-term debt securities
when interest rates are expected to decline. However, because of the
liquidity that is often available in the futures market, such protection is
more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by the Fund, through using futures contracts.
DESCRIPTION OF FUTURES CONTRACTS
A futures contract sale creates an obligation by the Fund, as seller,
to deliver the specific type of financial instrument called for in the
contract at a specified future time for a specified price. A futures
contract purchase creates an obligation by the Fund, as purchaser, to take
delivery of the specific type of financial instrument at a specified future
time at a specified price. The specific securities delivered or taken,
respectively, at settlement date, would not be determined until at or near
that date. The determination would be in accordance with the rules of the
exchange on which the futures contract sale or purchase was made.
Although futures contracts by their terms call for actual delivery or
acceptance of securities, in most cases the contracts are closed out before
the settlement date without the making or taking of delivery of securities.
Closing out a futures contract sale is effected by the Fund entering into a
futures contract purchase for the same aggregate amount of the specific type
of financial instrument and the same delivery date. If the price in the sale
exceeds the price in the offsetting purchase, the Fund immediately is paid
the difference and thus realizes a gain. If the offsetting purchase price
exceeds the sale price, the Fund pays the difference and realizes a loss.
Similarly, the closing out of a futures contract purchase is effected by the
Fund's entering into a futures contract sale. If the offsetting sale price
exceeds the purchase price, the Fund realizes a gain, and if the purchase
price exceeds the offsetting sale price, the Fund realizes a loss. See
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"Risks of Futures Contracts", below, for a disclosure of the risks of being
unable to close out a position before the settlement date.
A public market now exists in futures contracts covering primarily the
following financial instruments: long-term United States Treasury Bonds;
Government National Mortgage Association modified pass-through
mortgage-backed securities (GNMA); three month United States Treasury Bills;
United States Treasury Notes; and bank certificates of deposit. It is
expected that other financial instruments will be subject to futures
contacts. There is a $100,000 minimum for futures contracts in United States
Treasury Bonds, GNMA pass-through securities, and United States Treasury
Notes, and a $1,000,000 minimum for contracts in United States Treasury Bills
and bank certificates of deposit. The Fund may invest in interest rate
futures contracts covering the financial instruments referred to above as
well as in new types of such contracts that become available in the future.
See "Example of Futures Contract Sale" and "Example of Futures Contract
Purchase" below.
Financial futures contracts are traded in an auction environment on
the floors of several exchanges--principally, the Chicago Board of Trade, the
Chicago Mercantile Exchange and the New York Futures Exchange. Each exchange
guarantees performance under contract provisions through a clearing
corporation, a nonprofit organization managed by the exchange membership.
The Fund will pay a commission on each contract, including offsetting
transactions. In addition, the Fund is required to maintain margin deposits
with brokerage firms through which it enters into futures contracts.
Currently, the initial margin deposit per contract is $1,500 for Treasury
Bills and commercial paper and $2,000 for Treasury Bonds and GNMAs. The Fund
will establish a custodial account with its bank custodian to hold initial
margin deposits. The account will be in the name of the futures commission
merchant through which the Fund entered into the futures contract. The
futures commission merchant will be able to gain access to the assets held in
this account only if he states that all conditions precedent to his right to
direct disposition have been satisfied. Margin balances will be adjusted
daily to reflect unrealized gains and losses on open contracts. The payments
to or withdrawals from this account are known as variation margin payments.
The Fund can withdraw amounts from this account in excess of the initial
margin payments, and it is the Fund's intention to promptly make withdrawals
of any such excess. If the margin account is depleted below the maintenance
level (a fixed percentage of the initial margin), the Fund will be required
to deposit an amount that will bring the margin account back up to its
initial margin level. If the Fund has an unrealized gain above the amount of
any net variation margin it has already received, the futures commission
merchant, as of the close of that trading day, may receive, on behalf of the
Fund, a variation margin payment from the clearing corporation in the amount
of the gain. By 10:30 A.M. the next day, the futures commission merchant
must notify the Fund of its entitlement to receive a variation margin payment
from the margin account, and the Fund will promptly demand payment of such
amount.
When purchasing interest rate futures contracts, the Fund will deposit
and maintain in a separate account with its custodian cash or cash
equivalents in an amount equal to the market value of such futures contracts,
less any margin deposited on the Fund's long position. These earmarked
assets will be used to cover the Fund's obligation and will not be used to
support any other transaction into which the Fund may enter.
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RISKS IN FUTURES CONTRACTS
One risk in employing futures contracts to protect against cash market
price volatility is the prospect that futures prices will correlate
imperfectly with the behavior of cash prices. The ordinary spreads between
prices in the cash and future markets, due to differences in the nature of
those markets, are subject to distortions. First, all participants in the
futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may
close futures contracts through offsetting transactions which could distort
the normal relationship between the cash and futures markets. Second, the
liquidity of the futures market depends on participants entering into
offsetting transactions rather than making or taking delivery. To the extent
participants decide to make or take delivery, liquidity in the futures market
could be reduced, thus producing distortion. Third, from the point of view
of speculators the deposit requirements in the futures market are less
onerous than margin requirements in the securities market. Therefore
increased participation by speculators in the futures market may cause
temporary price distortions. Due to the possibility of distortion, a correct
forecast of general interest trends by MIMLIC Management may still not result
in a successful transaction.
Another risk is that the Fund's investment adviser would be incorrect
in its expectation as to the extent of various interest rate movements or the
time span within which the movements take place. Closing out a futures
contract purchase at a loss because of higher interest rates will generally
have one of two consequences depending on whether, at the time of closing
out, the "yield curve" is normal (long-term rates exceeding short-term). If
the yield curve is normal, it is possible that the Fund will still be engaged
in a program of buying long-term securities, because the price of long-term
securities will likely have decreased. The closing out of the futures
contract purchase at a loss will reduce the benefit of the reduced price of
the securities purchased. If the yield curve is inverted, it is possible
that the Fund will retain its investments in short-term securities earmarked
for purchase of longer term securities. Thus, closing out of a loss will
reduce the benefit of the incremental income that the Fund will experience by
virtue of the high short-term rates.
A third risk in using interest rates futures contracts is the
possibility that the value of such futures contracts will not vary in direct
proportion to the value of the Fund's portfolio securities. Such deviations
may result in the failure of the closing of futures transactions to
completely offset decreases in the prices of debt securities in the Fund's
portfolio or increases in the prices of debt securities which the Fund may
wish to purchase.
In addition, although the Fund will only purchase and sell futures
contracts for which there is a public market, there can be no assurance that
the Fund will be able to close out its position by entering into an
offsetting transaction before the settlement date. In that event, the Fund
will be required to deliver or accept the underlying securities in accordance
with the terms of its commitment.
EXAMPLE OF FUTURES CONTRACT SALE
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The Fund would engage in a futures contract sale to maintain the
income advantage from continued holding of a long-term security while
endeavoring to avoid part or all of the loss in market value that would
otherwise accompany a decline in long-term securities prices. Assume that
the market value of a certain security in the Fund's portfolio tends to move
in concert with the futures market prices of long-term United States Treasury
bonds ("Treasury bonds"). The Fund wishes to fix the current market value of
this portfolio security until some point in the future. Assume the portfolio
security has a market value of $100, and the Fund believes that, because of
an anticipated rise in interest rates, the value will decline to $95. The
Fund might enter into futures contract sales of Treasury bonds for a price of
$98. If the market value of the portfolio security does indeed decline from
$100 to $95, the futures market price for the Treasury bonds might also
decline from $98 to $93.
In that case, the $5 loss in the market value of the portfolio
security would be offset by the $5 gain realized by closing out the futures
contract sale. Of course, the futures market price of Treasury bonds might
decline to more than $93 or to less than $93 because of the imperfect
correlation between cash and futures prices mentioned above.
The Fund could be wrong in its forecast of interest rates and the
futures market price could rise above $98. In this case, the market value of
the portfolio securities, including the portfolio security being protected,
would increase. The benefit of this increase would be reduced by the loss
realized on closing out the futures contract sale.
If interest rate levels did not change prior to settlement date, the
Fund, in the above example, would incur a loss of $2 if it delivered the
portfolio security on the settlement date (which loss might be reduced by an
offsetting transaction prior to the settlement date). In each transaction,
nominal transaction expenses would also be incurred.
EXAMPLE OF FUTURES CONTRACT PURCHASE
The Fund would engage in a futures contract purchase when it is not
fully invested in long-term securities but wishes to defer for a time the
purchase of long-term securities in light of the availability of advantageous
interim investments, e.g., short-term securities whose yields are greater
than those available on long-term securities. The Fund's basic motivation
would be to maintain for a time the income advantage from investing in the
short-term securities; the Fund would be endeavoring at the same time to
eliminate the effect of all or part of the increases in market price of the
long-term securities that the Fund may purchase.
For example, assume that the market price of a long-term security that
the Fund may purchase, currently yielding 10%, tends to move in concert with
futures market prices of Treasury bonds. The Fund wishes to fix the current
market price (and thus 10% yield) of the long-term security until the time
(four months away in this example) when it may purchase the security.
Assuming the long-term security has a market price of $100, and the
Fund believes that, because of an anticipated fall in interest rates, the
price will have risen to $105 (and the yield will have dropped to about
9-1/2%) in four months, the Fund might enter into futures contracts
C-4
<PAGE>
purchases of Treasury bonds for a price of $98. At the same time, the Fund
would assign a pool of investments in short-term securities that are either
maturing in four months or earmarked for sale in four months, for purchase of
the long-term security at an assumed market price of $100. Assume these
short-term securities are yielding 15%. If the market price of the long-term
bond does indeed rise from $100 to $105, the futures market price for
Treasury bonds might also rise from $98 to $103. In that case, the $5
increase in the price that the Fund pays for the long-term security would be
offset by the $5 gain realized by closing out the futures contract purchase.
The Fund could be wrong in its forecast of interest rates; long-term
interest rates might rise to above 10%, and the futures market price could
fall below $98. If short-term rates at the same time fall to 10% or below,
it is possible that the Fund would continue with its purchase program for
long-term securities. The market prices of available long-term securities
would have decreased. The benefit of this price decrease, and thus yield
increase, will be reduced by the loss realized on closing out the futures
contract purchase.
If, however, short-term rates remained above available long-term
rates, it is possible that the Fund would discontinue its purchase program
for long-term securities. The yields on short-term securities in the
portfolio, including those originally in the pool assigned to the particular
long-term security, would remain higher than yields on long-term bonds. The
benefit of this continued incremental income will be reduced by the loss
realized on closing out the futures contract purchase.
In each transaction, nominal transaction expenses would also be
incurred.
TAX TREATMENT
The amount of any gain or loss realized by the Fund on closing out a
futures contract may result in a capital gain or loss for federal income tax
purposes. Generally, futures contracts held by the Fund at the close of the
Fund's taxable year will be treated for federal income tax purposes as sold
for their fair market value on the last business day of such year. Forty
percent of any gain or loss resulting from such constructive sale will be
treated as short-term capital gain or loss and 60 percent of such gain or
loss will be treated as long-term capital gain or loss. The amount of any
capital gain or loss actually realized by the Fund in a subsequent sale or
other disposition of these futures contracts will be adjusted to reflect any
capital gain or loss taken into account by the Fund in a prior year as a
result of the constructive sale of the contract. Notwithstanding the rules
described above, with respect to futures contracts which are part of futures
contract sales, and in certain other situations, the Fund may make an
election which may have the effect of exempting all or a part of those
identified future contracts from being treated for federal income tax
purposes as sold on the last business day of the Fund's taxable year; all or
part of any gain or loss otherwise realized by the Fund on any closing
transaction may be deferred until all of the Fund's positions with respect to
the futures contract sales are closed; and, all or part of any gain or loss
may be treated as short-term capital gain or loss.
Under the Federal income tax provisions applicable to regulated
investment companies, at least 90% of the Fund's annual gross income must be
derived from dividends, interest, payments with respect to loans of
securities, and gains from the sale or other disposition of securities
C-5
<PAGE>
("qualifying income"). Under the Internal Revenue Code of 1986, as amended
(the "Code"), the Fund may include gains from forward contracts in
determining qualifying income. In addition, in order that the Fund continue
to qualify as a regulated investment company for Federal income tax purposes,
less than 30% of its gross income for any year must be derived from gains
realized on the sale or other disposition of securities held by the Fund for
less than three months. For this purpose, the Fund will treat gains realized
on the closing out of futures contracts as gains derived from the sale of
securities. This treatment could, under certain circumstances, require the
Fund to defer the closing out of futures contracts until after three months
from the date the fund acquired the contracts, even if it would be more
advantageous to close out the contracts prior to that time. However, under
the Code, a special rule is provided with respect to certain hedging
transactions which has the effect of allowing the Fund to engage in such
short-term transactions in limited circumstances. Any gains realized by the
Fund as a result of the constructive sales of futures contacts held by the
Fund at the end of its taxable year, as described in the preceding
paragraph, will in all instances be treated as derived from the sale of
securities held for three months or more, regardless of the actual period for
which the Fund has held the futures contracts at the end of the year.
C-6
<PAGE>
APPENDIX D - FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Advantus Horizon Fund, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments in securities, of the Advantus Horizon
Fund, Inc. (the Fund) as of September 30, 1995 and the related statement of
operations for the year then ended, the statement of changes in net assets for
the year ended September 30, 1995 and the period from November 1, 1993 to
September 30, 1994 and the financial highlights for the year ended September 30,
1995, the period from November 1, 1993 to September 30, 1994 and each of the
years in the three-year period ended October 31, 1993. These financial
statements and the financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by the
custodian. As to securities purchased or sold but not received or delivered, we
request confirmations from brokers, and where replies are not received, we carry
out other appropriate auditing procedures. 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
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of the Fund as of September 30, 1995 and the results of its operations,
changes in its net assets and financial highlights, for the periods stated in
the first paragraph above, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
November 3, 1995
20
<PAGE>
ADVANTUS HORIZON FUND
INVESTMENTS IN SECURITIES
SEPTEMBER 30, 1995
(Percentages of each investment category relate to total net assets.)
<TABLE>
<CAPTION>
MARKET
SHARES VALUE(A)
- ---------- ----------
<C> <S> <C>
COMMON STOCKS (97.2%)
CAPITAL GOODS (6.4%)
Machinery (6.4%)
19,300 Elsag Bailey Process Automation (b)(c)................. $ 629,663
16,988 General Electric Company............................... 1,082,985
13,400 Kaydon Corporation..................................... 395,300
8,985 York International Corp................................ 378,493
----------
2,486,441
----------
CONSUMER GOODS AND SERVICES (53.1%)
Consumer Goods (24.0%)
8,322 Colgate-Palmolive Company.............................. 554,453
30,381 Columbia/HCA Healthcare Corporation.................... 1,477,275
22,120 Fisher Scientific International Inc.................... 716,135
26,400 Idexx Laboratories Inc (b)............................. 983,400
7,000 Medtronic Inc.......................................... 376,250
11,941 Pepsico, Inc........................................... 608,991
16,200 Pfizer Inc............................................. 864,675
11,100 Procter & Gamble Company............................... 854,700
43,800 Pyxis Corporation (b).................................. 848,625
10,500 Teva Pharmaceutical Industries ADR (c)................. 379,313
17,400 United Health Care..................................... 850,425
31,397 Value Health Incorporated (b).......................... 832,021
----------
9,346,263
----------
<CAPTION>
MARKET
SHARES VALUE(A)
- ---------- ----------
<C> <S> <C>
CONSUMER GOODS AND SERVICES--CONTINUED
Consumer Services (10.4%)
21,800 Carmike Cinemas Inc (b)................................ $ 479,600
19,347 CUC International Inc (b).............................. 674,727
30,800 Gartner (b)............................................ 1,008,699
11,400 GTECH Holdings Corporation (b)......................... 343,425
16,000 International House of Pancakes (b).................... 420,000
12,800 Lone Star Steakhouse & Saloon, Inc (b)................. 524,800
19,370 Manpower............................................... 561,730
----------
4,012,981
----------
Retail (14.8%)
14,600 Barnes & Noble Inc (b)................................. 558,450
35,620 Borders Group Incorporated (b)......................... 609,993
33,000 BT Office Products International (b)................... 433,125
44,200 Casey's General Stores Inc............................. 1,000,025
29,700 Home Depot Inc......................................... 1,184,288
8,200 Kohl's Inc (b)......................................... 425,375
40,782 Office Depot, Inc (b).................................. 1,228,557
20,600 Orchard Supply Hardware (b)............................ 298,700
----------
5,738,513
----------
Consumer Cyclicals (3.9%)
12,295 Exide Corporation...................................... 614,750
</TABLE>
See accompanying notes to investments in securities.
8
<PAGE>
ADVANTUS HORIZON FUND
INVESTMENTS IN SECURITIES--CONTINUED
<TABLE>
<CAPTION>
MARKET
SHARES VALUE(A)
- ---------- ----------
<C> <S> <C>
CONSUMER GOODS AND SERVICES--CONTINUED
27,100 Tommy Hilfiger Corporation (b)......................... $ 880,750
----------
1,495,500
----------
CREDIT SENSITIVE (13.3%)
Finance (10.6%)
6,552 American International Group, Inc...................... 556,920
7,600 First Data Corp........................................ 471,200
11,000 First Financial Management............................. 1,073,874
6,205 First Union Corporation................................ 316,455
9,000 MGIC Investment Corporation............................ 515,250
11,350 Norwest Corporation.................................... 371,713
45,200 Roosevelt Financial Group, Inc......................... 796,650
----------
4,102,062
----------
Utilities (2.7%)
11,600 AT&T Corporation....................................... 762,700
8,175 Florida Progress Corporation........................... 264,666
----------
1,027,366
----------
INTERMEDIATE GOODS AND SERVICES (8.3%)
Energy (2.6%)
4,450 Amoco Corporation...................................... 285,356
3,800 Mobil Corporation...................................... 378,575
<CAPTION>
MARKET
SHARES VALUE(A)
- ---------- ----------
<C> <S> <C>
INTERMEDIATE GOODS AND SERVICES-- CONTINUED
2,860 Royal Dutch Petroleum ADR (c).......................... $ 351,065
----------
1,014,996
----------
Materials (3.1%)
9,530 Albany International Corp.............................. 222,764
12,000 Lubrizol Corporation................................... 391,500
19,173 McWhorter Technology Inc (b)........................... 294,785
7,240 Valspar Corporation.................................... 276,930
----------
1,185,979
----------
Transportation (2.6%)
28,700 American Freightways (b)............................... 430,500
3,800 Fritz Companies (b).................................... 280,013
3,940 Norfolk Southern Corporation........................... 294,515
----------
1,005,028
----------
TECHNOLOGY (16.1%)
23,324 Computer Associates International...................... 985,439
19,100 Danka Business Systems PLC (c)......................... 687,600
17,300 DSC Communications (b)................................. 1,025,024
13,100 EMC Corporation (b).................................... 237,438
13,200 Informix Corporation (b)............................... 429,000
15,300 Integrated Device Technology, Inc (b).................. 382,500
</TABLE>
See accompanying notes to investments in securities.
9
<PAGE>
ADVANTUS HORIZON FUND
INVESTMENTS IN SECURITIES--CONTINUED
<TABLE>
<CAPTION>
MARKET
SHARES VALUE(A)
- ---------- ----------
<C> <S> <C>
TECHNOLOGY--CONTINUED
6,300 Intel.................................................. $ 378,788
19,150 Oracle Corporation (b)................................. 734,881
12,700 Worldcom, Incorporated (b)............................. 407,988
3,200 Xerox Corporation...................................... 430,000
<CAPTION>
MARKET
SHARES VALUE(A)
- ---------- ----------
<C> <S> <C>
TECHNOLOGY--CONTINUED
11,400 3 Com (b).............................................. $ 518,700
----------
6,217,358
----------
Total common stocks
(cost: $25,233,341)................................................. 37,632,487
----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
- ----------
<C> <S> <C> <C> <C>
SHORT-TERM SECURITIES (3.2%)
$ 200,000 U.S. Treasury Bill..................................... 5.55%-5.57% 10/12/95 199,630
1,050,000 U.S. Treasury Bill..................................... 5.33%-5.48% 12/07/95 1,039,294
-----------
Total short-term securities (cost: $1,239,237)...................................... 1,238,924
-----------
Total investments in securities (cost: $26,472,578)(d).............................. $38,871,411
-----------
-----------
<FN>
Notes to Investments in Securities
(a) Securites are valued by procedures described in note 2 to the financial
statements.
(b) Presently non-income producing.
(c) The Fund held 5.3% of net assets in foreign securities as of September 30,
1995.
(d) At September 30, 1995 the cost of securities for federal income tax
purposes was $26,473,722. The aggregate unrealized appreciation and
depreciation of investments in securities based on this cost were:
Gross unrealized appreciation....................................................................... $ 13,036,527
Gross unrealized depreciation....................................................................... (638,838)
------------
Net unrealized appreciation......................................................................... $ 12,397,689
------------
------------
</TABLE>
10
<PAGE>
ADVANTUS HORIZON FUND
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1995
<TABLE>
<S> <C>
ASSETS
Investments in securities, at market value--see accompanying schedule for
detailed listing (identified cost: $26,472,578)................................ $ 38,871,411
Cash in bank on demand deposit.................................................. 113,601
Receivable for Fund shares sold................................................. 1,661
Dividends receivable............................................................ 23,624
------------
Total assets................................................................ 39,010,297
------------
LIABILITIES
Payable for investment securities purchased..................................... 142,727
Payable for Fund shares repurchased............................................. 85,991
Payable to Adviser.............................................................. 46,721
------------
Total liabilities........................................................... 275,439
------------
Net assets applicable to outstanding capital stock.............................. $ 38,734,858
------------
------------
Represented by:
Capital stock--$.01 par value (note 1)........................................ $ 18,512
Additional paid-in capital.................................................... 23,992,248
Accumulated net realized gains from investments............................... 2,325,265
Unrealized appreciation of investments........................................ 12,398,833
------------
Total--representing net assets applicable to outstanding capital stock...... $ 38,734,858
------------
------------
Net assets applicable to outstanding Class A Shares............................. $ 36,039,924
------------
------------
Net assets applicable to outstanding Class B Shares............................. $ 2,592,256
------------
------------
Net assets applicable to outstanding Class C Shares............................. $ 102,678
------------
------------
Shares outstanding and net asset value per share
Class A--Shares outstanding 1,721,318......................................... $ 20.94
------------
------------
Class B--Shares outstanding 124,967........................................... $ 20.74
------------
------------
Class C--Shares outstanding 4,949............................................. $ 20.75
------------
------------
</TABLE>
See accompanying notes to financial statements.
11
<PAGE>
ADVANTUS HORIZON FUND
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<S> <C>
Investment income:
Interest...................................................................... $ 134,983
Dividends..................................................................... 298,862
-----------
Total investment income..................................................... 433,845
-----------
Expenses (note 4):
Investment advisory fee....................................................... 276,972
Distribution fees--Class A.................................................... 100,294
Distribution fees--Class B.................................................... 11,637
Distribution fees--Class C.................................................... 270
Administrative services fee................................................... 38,600
Custodian fees................................................................ 7,535
Auditing and accounting services.............................................. 19,000
Legal fees.................................................................... 5,972
Directors' fees............................................................... 770
Registration fees............................................................. 40,126
Printing and shareholder reports.............................................. 28,452
Insurance..................................................................... 5,900
Other......................................................................... 17,022
-----------
Total expenses.............................................................. 552,550
Less fees and expenses waived or absorbed:
Class A distribution fees................................................... (50,147)
Other fund expenses......................................................... (2,814)
-----------
Total fees and expenses waived or absorbed.................................. (52,961)
-----------
Total net expenses.......................................................... 499,589
-----------
Investment loss--net........................................................ (65,744)
-----------
Realized and unrealized gains on investments:
Net realized gains on investments (note 3).................................... 2,609,672
Net change in unrealized appreciation or depreciation on investments.......... 5,347,200
-----------
Net gains on investments.................................................... 7,956,872
-----------
Net increase in net assets resulting from operations............................ $ 7,891,128
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
12
<PAGE>
ADVANTUS HORIZON FUND
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED SEPTEMBER 30, 1995 AND
PERIOD FROM NOVEMBER 1, 1993 TO SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Operations:
Investment loss--net................................................ $ (65,744) $ (3,911)
Net realized gains on investments................................... 2,609,672 736,521
Net change in unrealized appreciation or depreciation of
investments........................................................ 5,347,200 (290,620)
------------ ------------
Increase in net assets resulting from operations.................. 7,891,128 441,990
------------ ------------
Distributions to shareholders from net realized gains on investments:
Class A........................................................... (981,881) (940,050)
Class B........................................................... (16,148) --
------------ ------------
Total distributions............................................... (998,029) (940,050)
------------ ------------
Capital share transactions (notes 4 and 5):
Proceeds from sales:
Class A........................................................... 3,817,143 4,972,723
Class B........................................................... 2,211,285 96,045
Class C........................................................... 96,617 --
Shares issued as a result of reinvested dividends:
Class A........................................................... 973,291 917,268
Class B........................................................... 16,148 --
Payments for redemption of shares:
Class A........................................................... (6,723,485) (4,018,515)
Class B........................................................... (32,497) (10)
Class C........................................................... (1,043) --
------------ ------------
Increase in net assets from capital share transactions............ 357,459 1,967,511
------------ ------------
Total increase in net assets...................................... 7,250,558 1,469,451
Net assets at beginning of period..................................... 31,484,300 30,014,849
------------ ------------
Net assets at end of period........................................... $ 38,734,858 $ 31,484,300
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements.
13
<PAGE>
ADVANTUS HORIZON FUND
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
(1) ORGANIZATION
The Advantus Horizon Fund, Inc. (the Fund) is registered under the
Investment Company Act of 1940 (as amended) as a diversified, open-end
management investment company. On February 14, 1995 shareholders of the Fund
approved a name change to Advantus Horizon Fund, Inc. (effective March 1, 1995).
Prior to March 1, 1995 the Fund was known as MIMLIC Investors Fund I, Inc.
The Fund currently issues three classes of shares: Class A, Class B and
Class C shares. Class A shares are sold subject to a front-end sales charge.
Class B shares are sold subject to a contingent deferred sales charge payable
upon redemption if redeemed within six years of purchase. Class C shares are
sold without either a front-end sales charge or a contingent deferred sales
charge. Both Class B and Class C shares are subject to a higher Rule 12b-1 fee
than Class A shares. Both Class B and Class C shares automatically convert to
Class A shares at net asset value after a specified holding period. Such holding
periods decline as the amount of the purchase increases and range from 28 to 84
months after purchase for Class B shares and 40 to 96 months after purchase for
Class C shares. All three classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions, except that the
level of distribution fees and sales charges charged differs between Class A,
Class B and Class C shares. Income, expenses (other than distribution fees) and
realized and unrealized gains or losses on investments are allocated to each
class of shares based upon its relative net assets.
On January 18, 1994, the Board of Directors elected to change the fiscal
year end of the Fund from October 31 to September 30.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by the Fund are summarized as
follows:
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. When market quotations are not readily available, securities are
valued at fair value as determined in good faith 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.
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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.
Net investment income (loss) and net realized gains (losses) may differ for
financial statement and tax purposes primarily because of temporary book-to-tax
differences. The character of distributions made during the year from net
investment income or net realized gains may differ from their ultimate
characterization for federal income tax purposes. Also, due to the timing of
dividend distributions, the fiscal year in which amounts are distributed may
differ from the year that the income (loss) or realized gains (losses) were
recorded by the Fund.
On the statement of assets and liabilities, as a result of permanent
book-to-tax differences, a reclassification adjustment was made to increase
undistributed net investment income and decrease additional paid-in capital by
$65,744.
DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income are declared and paid quarterly.
Realized gains, if any, are paid annually.
(3) INVESTMENT SECURITY TRANSACTIONS
For the year ended September 30, 1995, purchases of securities and proceeds
from sales, other than temporary investments in short-term securities aggregated
$15,322,690 and $15,105,744, respectively.
(4) EXPENSES AND RELATED PARTY TRANSACTIONS
On February 14, 1995 shareholders of the Fund approved a new investment
advisory agreement with Advantus Capital Management, Inc. (Advantus Capital).
Advantus Capital is a wholly-owned subsidiary of MIMLIC Asset Management Company
(MIMLIC Management) which, prior to March 1, 1995, served as investment adviser
to the Fund. Under the agreement, Advantus Capital manages the Fund's assets and
provides research, statistical and advisory services and pays related office
rental and executive expenses and salaries. In addition, as part of the advisory
fee, Advantus Capital pays the expenses of the Fund's transfer, dividend
disbursing and redemption agent (The Minnesota Mutual Life Insurance Company
(Minnesota Mutual), the parent of MIMLIC Management). The fee for investment
management and advisory services is based on the average daily net assets of the
Fund at the annual rate of .80 percent, which is the same as under the old
agreement with MIMLIC Management.
The Fund has adopted separate Plans of Distribution applicable to Class A,
Class B and Class C shares, respectively, relating to the payment of certain
distribution expenses pursuant to Rule 12b-1 under the Investment Company Act of
1940 (as amended). The Fund pays distribution fees to MIMLIC Sales Corporation
(MIMLIC Sales), the underwriter of the Fund and a wholly-owned subsidiary of
MIMLIC
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(4) EXPENSES AND RELATED PARTY TRANSACTIONS--(CONTINUED)
Management, to be used to pay certain expenses incurred in the distribution,
promotion and servicing of the Fund's shares. The Class A Plan provides for a
fee up to .30 percent of average daily net assets of Class A shares. The Class B
and Class C Plans provide for a fee up to 1.00 percent of average daily net
assets of Class B and Class C shares, respectively. The Class B and Class C 1.00
percent fee is comprised of a .75 percent distribution fee and a .25 percent
service fee. MIMLIC Sales is currently waiving that portion of Class A
distribution fees which exceeds, as a percentage of average daily net assets,
.15 percent. MIMLIC Sales waived Class A distribution fees in the amount of
$50,147 for the year ended September 30, 1995.
The Fund also bears certain other operating expenses including outside
directors' fees, custodian fees, registration fees, printing and shareholder
reports, legal, auditing and accounting services, organizational costs and other
miscellaneous expenses.
The Fund pays an administrative services fee to Minnesota Mutual for
accounting, auditing, legal and other administrative services which Minnesota
Mutual provides. Prior to February 1, 1995, the administrative service fee was
$3,450 per month. Effective February 1, 1995, the administrative service fee is
$3,100 per month.
Advantus Capital (MIMLIC Management prior to March 1, 1995) directly incurs
and pays the above operating expenses and the Fund in turn reimburses Advantus
Capital. During the year ended September 30, 1995, Advantus Capital voluntarily
agreed to absorb $2,814 in expenses that were otherwise payable by the Fund.
Sales charges received by MIMLIC Sales for distributing the Fund's three
classes of shares amounted to $125,141.
As of September 30, 1995, Minnesota Mutual Life and subsidiaries and the
directors and officers of the Fund as a whole owned the following shares:
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OWNED
------------------ -------------------
<S> <C> <C>
Class A..................................................................... 535,417 31.1%
Class B..................................................................... 3,025 2.4%
Class C..................................................................... 569 11.5%
</TABLE>
Legal fees were paid to a law firm of which the Fund's secretary is a
partner in the amount of $5,588.
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(5) CAPITAL SHARE TRANSACTIONS
Transactions in shares for the year ended September 30, 1995 and the period
from November 1, 1993 to September 30, 1994 for Class A shares, the year ended
September 30, 1995 and the period from August 19, 1994 to September 30, 1994 for
Class B shares and the period from March 1, 1995 to September 30, 1995 for Class
C shares were as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
---------------------- -------------------- -----------
1995 1994 1995 1994 1995
---------- ---------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Sold........................................................... 209,657 290,469 119,911 5,594 5,001
Issued for reinvested distributions............................ 59,591 53,235 1,084 -- --
Redeemed....................................................... (358,505) (234,962) (1,621) (1) (52)
---------- ---------- --------- --------- -----
(89,257) 108,742 119,374 5,593 4,949
---------- ---------- --------- --------- -----
---------- ---------- --------- --------- -----
</TABLE>
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(6) FINANCIAL HIGHLIGHTS
Per share data for a share of capital stock and selected information for
each period are as follows:
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------
PERIOD FROM
NOVEMBER 1,
YEAR ENDED 1993 TO YEAR ENDED OCTOBER 31,
SEPTEMBER SEPTEMBER -------------------------
30, 1995 30, 1994 1993 1992 1991
----------- ----------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period...................... $ 17.34 $ 17.64 $ 16.73 $15.65 $11.41
----------- ----------- ------- ------ ------
Income from investment
operations:
Net investment income
(loss)..................... (.03) -- .05 .10 .17
Net gains or losses on
securities (both realized
and unrealized)............ 4.17 .25 1.20 1.47 4.25
----------- ----------- ------- ------ ------
Total from investment
operations............... 4.14 .25 1.25 1.57 4.42
----------- ----------- ------- ------ ------
Less distributions:
Dividends from net
investment income.......... -- -- (.05) (.12) (.18)
Distributions from capital
gains...................... (.54) (.55) (.29) (.37) --
----------- ----------- ------- ------ ------
Total distributions....... (.54) (.55) (.34) (.49) (.18)
----------- ----------- ------- ------ ------
Net asset value, end of
period...................... $ 20.94 $ 17.34 $ 17.64 $16.73 $15.65
----------- ----------- ------- ------ ------
----------- ----------- ------- ------ ------
Total return (b).............. 24.8% 1.4%(c) 7.6% 10.3% 38.9%
Net assets, end of period (in
thousands).................. $36,040 $31,387 $30,015 $24,919 $17,608
Ratio of expenses to average
daily net assets (g)........ 1.41% 1.43%(f) 1.31% 1.40% 1.36%
Ratio of net investment income
(loss) to average daily net
assets (g).................. (.15)% (.01)%(f) .27% .61% 1.20%
Portfolio turnover rate
(excluding short-term
securities)................. 46.8% 43.5% 47.0% 20.6% 16.9%
<FN>
- ----------
(a) Commencement of operations.
(b) Total return figures are based on a share outstanding throughout the
period and assumes reinvestment of distributions at net asset value. Total
return figures do not reflect the impact of sales charges.
(c) Total return is presented for the period from November 1, 1993 to
September 30, 1994.
(d) Total return is presented for the period from August 19, 1994,
commencement of operations, to September 30, 1994.
(e) Total return is presented for the period from March 1, 1995, commencement
of operations, to September 30, 1995.
(f) Adjusted to an annual basis.
(g) The Fund's Adviser and Distributor voluntarily waived or absorbed $52,961,
$51,147, $48,807, $32,341 and $22,098 in expenses for the year ended
September 30, 1995, the period ended September 30, 1994, and the years
ended October 31, 1993, 1992 and 1991, respectively. If Class A shares had
been charged for these expenses, the ratio of expenses to average daily
net assets would have been 1.57%, 1.61%, 1.49%, 1.55% and 1.54%,
respectively, and the ratio of net investment income to average daily net
assets would have been (.31)%, (.19)%, .09%, .46% and 1.02%, respectively.
If Class B shares had been charged for these expenses, the ratio of
expenses to average daily net assets would have been 2.25% and the ratio
of net investment loss to average daily net assets would have been (1.05)%
for the year ended September 30, 1995. If Class C Shares had been charged
for these expenses, the ratio of expenses to average daily net assets
would have been 2.25% and the ratio of net investment loss to average
daily net assets would have been (1.13)% for the period from March 1, 1995
to September 30, 1995.
(h) Ratios presented for the period from August 19, 1994 to September 30, 1994
are not annualized as they are not indicative of anticipated results.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
CLASS B CLASS C
---------------------------- ---------------
PERIOD FROM PERIOD FROM
AUGUST 19, MARCH 1,
YEAR ENDED 1994(A) TO 1995(A) TO
SEPTEMBER SEPTEMBER SEPTEMBER 30,
30, 1995 30, 1994 1995
----------- ----------- ---------------
<S> <C> <C> <C>
Net asset value, beginning of
period...................... $ 17.33 $ 17.11 $ 17.52
----------- ----------- ---------------
Income from investment
operations:
Net investment income
(loss)..................... (0.10) (.01) (.06)
Net gains or losses on
securities (both realized
and unrealized)............ 4.05 .23 3.29
----------- ----------- ---------------
Total from investment
operations............... 3.95 .22 3.23
----------- ----------- ---------------
Less distributions:
Dividends from net
investment income.......... -- -- --
Distributions from capital
gains...................... (.54) -- --
----------- ----------- ---------------
Total distributions....... (.54) -- --
----------- ----------- ---------------
Net asset value, end of
period...................... $ 20.74 $ 17.33 $ 20.75
----------- ----------- ---------------
----------- ----------- ---------------
Total return (b).............. 23.7% 1.3%(d) 18.4%(e)
Net assets, end of period (in
thousands).................. $2,592 $97 $103
Ratio of expenses to average
daily net assets (g)........ 2.24% .30%(h) 2.24%(f)
Ratio of net investment income
(loss) to average daily net
assets (g).................. (1.05)% (.13)%(h) (1.13)%(f)
Portfolio turnover rate
(excluding short-term
securities)................. 46.8% 43.5% 46.8%
</TABLE>
19
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Advantus Spectrum Fund, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments in securities, of the Advantus Spectrum
Fund, Inc. (the Fund) as of September 30, 1995 and the related statement of
operations for the year then ended, the statement of changes in net assets for
the year ended September 30, 1995 and the period from November 1, 1993 to
September 30, 1994 and the financial highlights for the year ended September 30,
1995, the period from November 1, 1993 to September 30, 1994 and each of the
years in the three-year period ended October 31, 1993. These financial
statements and the financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by the
custodian. As to securities purchased or sold but not received or delivered, we
request confirmations from brokers, and where replies are not received, we carry
out other appropriate auditing procedures. 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
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of the Fund as of September 30, 1995 and the results of its operations,
changes in its net assets and financial highlights, for the periods stated in
the first paragraph above, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
November 3, 1995
22
<PAGE>
ADVANTUS SPECTRUM FUND
INVESTMENTS IN SECURITIES
SEPTEMBER 30, 1995
(Percentages of each category relate to total net assets.)
<TABLE>
<CAPTION>
MARKET
SHARES VALUE(A)
- ------------ -------------
<C> <S> <C>
COMMON STOCKS (56.1%)
CAPITAL GOODS (5.9%)
Machinery (5.9%)
21,248 Case Corporation....................................... $ 780,864
16,626 General Electric Company............................... 1,059,908
5,640 Kaydon Corporation..................................... 166,380
21,700 Sensormatic Electronics Corporation.................... 499,100
6,600 United Waste Systems, Inc. (b)......................... 275,550
16,686 York International Corp. .............................. 702,898
-------------
3,484,700
-------------
CONSUMER GOODS AND SERVICES (20.6%)
Consumer Goods (11.8%)
9,921 Colgate-Palmolive Company.............................. 660,987
21,627 Columbia/HCA Healthcare Corporation.................... 1,051,613
11,540 Fisher Scientific International Inc. .................. 373,607
16,600 Gillette Company....................................... 790,575
14,104 Pepsico, Inc. ......................................... 719,304
20,820 Pfizer Inc. ........................................... 1,111,267
9,895 Procter & Gamble Company............................... 761,915
28,800 Pyxis Corporation (b).................................. 558,000
10,200 Teva Pharmaceutical Industries ADR (c)................. 368,475
20,400 Value Health Incorporated (b).......................... 540,600
-------------
6,936,343
-------------
Consumer Services (2.5%)
13,833 CUC International Inc. (b)............................. 482,426
<CAPTION>
MARKET
SHARES VALUE(A)
- ------------ -------------
<C> <S> <C>
CONSUMER GOODS AND SERVICES--CONTINUED
11,569 GTECH Holdings Corporation (b)......................... $ 348,516
23,118 Manpower............................................... 670,422
-------------
1,501,364
-------------
Retail (4.8%)
17,200 Heilig-Meyers Corporation.............................. 399,900
18,520 Home Depot Inc. ....................................... 738,485
11,800 Kohl's Inc. (b)........................................ 612,125
20,976 Office Depot, Inc. (b)................................. 631,902
11,900 Sears, Roebuck and Co. ................................ 438,812
-------------
2,821,224
-------------
Consumer Cyclicals (1.5%)
11,289 Exide Corporation...................................... 564,450
9,000 Tommy Hilfiger Corporation (b)......................... 292,500
-------------
856,950
-------------
CREDIT SENSITIVE (11.3%)
Finance (10.1%)
16,300 American Express Company............................... 723,313
9,167 American International Group, Inc...................... 779,195
10,650 Federal Home Loan Mortgage Corporation................. 736,181
10,110 First Data Corp. ...................................... 626,820
8,300 First Financial Management............................. 810,288
11,400 MBIA Inc. ............................................. 803,700
13,200 MGIC Investment Corporation............................ 755,700
23,300 Norwest Corporation.................................... 763,075
-------------
5,998,272
-------------
</TABLE>
See accompanying notes to investments in securities.
8
<PAGE>
ADVANTUS SPECTRUM FUND
INVESTMENTS IN SECURITIES--CONTINUED
<TABLE>
<CAPTION>
MARKET
SHARES VALUE(A)
- ------------ -------------
<C> <S> <C>
CREDIT SENSITIVE--CONTINUED
Utilities (1.2%)
7,255 Florida Progress Corporation........................... $ 234,880
12,100 New England Electric System............................ 447,700
-------------
682,580
-------------
INTERMEDIATE GOODS AND SERVICES (18.3%)
Energy (3.3%)
5,350 Amoco Corporation...................................... 343,069
11,100 Columbia Gas System, Inc. (b).......................... 428,738
5,330 Mobil Corporation...................................... 531,001
5,130 Royal Dutch Petroleum ADR (c).......................... 629,708
-------------
1,932,516
-------------
Materials (3.1%)
6,500 Dow Chemical Company................................... 484,250
16,190 Lubrizol Corporation................................... 528,199
30,700 Praxair Inc. .......................................... 821,225
-------------
1,833,674
-------------
Transportation (1.9%)
5,200 Fritz Companies (b).................................... 383,175
14,200 Landstar System, Inc. (b).............................. 342,575
5,315 Norfolk Southern Corporation........................... 397,296
-------------
1,123,046
-------------
<CAPTION>
MARKET
SHARES VALUE(A)
- ------------ -------------
<C> <S> <C>
TECHNOLOGY (10.0%)
1,200 C-Cube Microsystems Incorporated (b)................... $ 54,900
18,858 Computer Associates International...................... 796,751
21,100 Danka Business Systems PLC (c)......................... 759,600
8,760 DSC Communications (b)................................. 519,030
27,200 EMC Corporation (b).................................... 493,000
18,100 Equifax Incorporated................................... 757,937
8,900 Fore Systems Inc. (b).................................. 329,300
14,940 Informix Corporation (b)............................... 485,550
8,113 Intel.................................................. 487,794
13,265 Oracle Corporation (b)................................. 509,044
10,000 Worldcom, Incorporated (b)............................. 321,250
8,100 3 Com (b).............................................. 368,550
-------------
5,882,706
-------------
Total common stocks (cost: $27,681,596)................ 33,053,375
-------------
</TABLE>
See accompanying notes to investments in securities.
9
<PAGE>
ADVANTUS SPECTRUM FUND
INVESTMENTS IN SECURITIES--CONTINUED
<TABLE>
<CAPTION>
MARKET
PRINCIPAL VALUE(A)
- ------------ ------------
<C> <S> <C> <C> <C>
LONG-TERM DEBT SECURITIES (40.3%)
GOVERNMENT OBLIGATIONS (21.5%)
U.S. GOVERNMENT AND AGENCIES OBLIGATIONS (18.6%)
U.S. Treasury (10.6%)
$ 1,300,000 U.S. Treasury Bond..................................... 12.000% 08/15/13 $ 1,918,313
1,050,000 U.S. Treasury Bond..................................... 8.000% 11/15/21 1,222,920
1,250,000 U.S. Treasury Note..................................... 10.750% 08/15/05 1,655,076
600,000 U.S. Treasury Note..................................... 8.875% 11/15/98 649,500
750,000 U.S. Treasury Note..................................... 7.750% 11/30/99 797,344
------------
6,243,153
------------
Government National Mortgage Association (4.0%)
453,606 ....................................................... 7.500% 10/15/23 457,697
711,738 ....................................................... 8.000% 08/15/24 731,196
488,959 ....................................................... 6.500% 11/15/23 472,251
229,263 ....................................................... 7.500% 02/15/24 231,214
480,033 ....................................................... 7.500% 06/15/24 484,117
------------
2,376,475
------------
Other U.S. Government Agencies (3.9%)
71,609 Federal National Mortgage Association Principal only
PAC (d)............................................... 7.000% 07/25/22 71,132
500,000 Federal Home Loan Mortgage............................. 7.030% 04/05/04 503,168
1,250,000 Federal Home Loan Bank................................. 7.270% 10/17/97 1,250,651
500,000 Federal Farm Credit.................................... 6.960% 06/06/00 502,102
------------
2,327,053
------------
OTHER GOVERNMENT OBLIGATIONS (1.3%)
800,000 Quebec Province of Canada (c).......................... 7.500% 07/15/23 789,744
------------
STATE AND LOCAL GOVERNMENT OBLIGATIONS (1.6%)
924,000 Wyoming Community Development Authority................ 6.850% 06/01/10 910,140
------------
Total government obligations (cost: $12,487,571).................................. 12,646,565
------------
</TABLE>
See accompanying notes to investments in securities.
10
<PAGE>
ADVANTUS SPECTRUM FUND
INVESTMENTS IN SECURITIES--CONTINUED
<TABLE>
<CAPTION>
MARKET
PRINCIPAL VALUE(A)
- ------------ ------------
<C> <S> <C> <C> <C>
CORPORATE OBLIGATIONS (18.8%)
CAPITAL GOODS (2.4%)
Machinery (1.4%)
$ 750,000 Joy Technologies Incorporated.......................... 10.250% 09/01/03 $ 840,000
------------
Paper and Forest Products (1.0%)
500,000 Bowater Incorporated................................... 9.000% 08/01/09 584,452
------------
CONSUMER CYCLICAL (.9%)
Automotive (.9%)
500,000 Chrysler Corporation................................... 10.950% 08/01/17 559,019
------------
CONSUMER STAPLES (5.1%)
Drugs (1.4%)
850,000 American Home Products................................. 6.500% 10/15/02 845,716
------------
Entertainment (.9%)
500,000 Royal Caribbean Cruises Limited Notes.................. 8.250% 04/01/05 528,990
------------
Food (.6%)
342,857 General Mills Inc. .................................... 6.235% 03/15/97 344,354
------------
Media (2.2%)
500,000 News Corporation Limited............................... 7.750% 01/20/24 487,865
750,000 Time Warner Incorporated............................... 9.150% 02/01/23 811,916
------------
1,299,781
------------
ENERGY (1.8%)
Natural Gas Distribution (1.8%)
1,000,000 Consolidated Natural Gas............................... 8.750% 06/01/99 1,076,743
------------
FINANCIAL (5.5%)
Consumer Finance (4.3%)
900,000 Associates Corp of North America....................... 6.750% 10/15/99 910,148
250,000 Ford Motor Credit (e).................................. 5.340% 03/18/99 246,092
600,000 Ford Motor Credit...................................... 5.625% 12/15/98 587,886
500,000 GMAC................................................... 5.500% 12/15/01 467,625
300,000 Standard Credit Card Master Trust Series 95-5 A (e).... 6.340% 05/08/00 300,188
------------
2,511,939
------------
</TABLE>
See accompanying notes to investments in securities.
11
<PAGE>
<TABLE>
<CAPTION>
MARKET
PRINCIPAL VALUE(A)
- ------------ ------------
<C> <S> <C> <C> <C>
Real Estate (1.2%)
$ 500,000 Property Trust of America.............................. 7.500% 02/15/14 $ 473,850
250,000 Security Capital Industrial Trust Notes................ 7.875% 05/15/09 253,528
------------
727,378
------------
UTILITIES (.9%)
Electric (.9%)
500,000 Commonwealth Edison.................................... 8.250% 12/01/07 511,327
------------
TRANSPORTATION (2.2%)
Trucking (.9%)
500,000 Consolidated Freightways (f)........................... 7.350% 06/01/05 499,672
------------
Water Transportation (1.3%)
750,000 Overseas Shipholders................................... 8.750% 12/01/13 780,510
------------
Total corporate obligations (cost: $10,931,682)................................... 11,109,881
------------
Total long-term debt securities (cost: $23,419,253)............................... 23,756,446
------------
SHORT-TERM SECURITIES (3.5%)
650,000 Federal National Mortgage Association Discount Note.... 5.79% 12/15/95 642,048
100,000 U.S. Treasury Bill..................................... 5.46% 11/16/95 99,289
100,000 U.S. Treasury Bill..................................... 5.44% 12/07/95 98,982
1,200,000 Public Service Electric & Gas CP....................... 5.88% 10/26/95 1,194,825
------------
Total short-term securities (cost: $2,035,644).................................... 2,035,144
------------
Total investments in securities (cost: $53,136,493) (g)........................... $ 58,844,965
------------
------------
</TABLE>
Notes to Investments in Securities
(a) Securities are valued by procedures described in note 2 to the financial
statements.
(b) Presently non-income producing.
(c) The Fund held 4.3% of net assets in foreign securities as of September 30,
1995.
(d) Represents a debt security that entitles holders to receive only principal
payments on the underlying mortgages. The yield to maturity of a
principal-only security is sensitive to the rate of principal payments on
the underlying mortgage assets. A slower (more rapid) than expected rate of
principal repayments may have an adverse (positive) effect on yield to
matury. Interest rate disclosed represents current yield based upon the
current cost basis and estimated timing of future cash flows.
(e) Represents a debt security with a variable rate. The interest rate disclosed
is the rate in effect at September 30, 1995.
(f) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At September 30,
1995, the value of these securities amounted to $499,672 or .8% of net
assets.
(g) At September 30, 1995 the cost of securities for federal income tax purposes
was $53,198,742. The aggregate unrealized appreciation and depreciation of
investments in securities based on this cost were:
<TABLE>
<S> <C> <C>
Gross unrealized appreciation..................... $6,295,678
Gross unrealized depreciation..................... (649,455)
----------
Net unrealized appreciation....................... $5,646,223
----------
----------
</TABLE>
12
<PAGE>
ADVANTUS SPECTRUM FUND
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1995
<TABLE>
<S> <C>
ASSETS
Investments in securities, at market value--see accompanying schedule for
detailed listing (identified cost: $53,136,493)................................ $58,844,965
Cash in bank on demand deposit.................................................. 711,885
Receivable for Fund shares sold................................................. 125,583
Receivable for investment securities sold....................................... 321,204
Accrued interest and dividends receivable....................................... 501,698
-----------
Total assets................................................................ 60,505,335
-----------
LIABILITIES
Payable for investment securities purchased..................................... 1,312,320
Payable for Fund shares repurchased............................................. 169,648
Payable to Adviser.............................................................. 68,931
-----------
Total liabilities........................................................... 1,550,899
-----------
Net assets applicable to outstanding capital stock.............................. $58,954,436
-----------
-----------
Represented by:
Capital stock--$.01 par value (note 1)........................................ $ 39,857
Additional paid-in capital.................................................... 50,213,775
Undistributed net investment income........................................... 13,258
Accumulated net realized gains from investments............................... 2,979,074
Unrealized appreciation of investments........................................ 5,708,472
-----------
Total--representing net assets applicable to outstanding capital stock...... $58,954,436
-----------
-----------
Net assets applicable to outstanding Class A shares............................. $55,624,248
-----------
-----------
Net assets applicable to outstanding Class B shares............................. $ 3,131,262
-----------
-----------
Net assets applicable to outstanding Class C shares............................. $ 198,926
-----------
-----------
Shares outstanding and net asset value per share:
Class A--Shares outstanding 3,759,787......................................... $ 14.79
-----------
-----------
Class B--Shares outstanding 212,378........................................... $ 14.74
-----------
-----------
Class C--Shares outstanding 13,498............................................ $ 14.74
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
13
<PAGE>
ADVANTUS SPECTRUM FUND
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<S> <C>
Investment income:
Interest...................................................................... $2,205,188
Dividends..................................................................... 361,169
----------
2,566,357
----------
Expenses (note 4):
Investment advisory fee....................................................... 338,669
Distribution fees--Class A.................................................... 193,254
Distribution fees--Class B.................................................... 11,904
Distribution fees--Class C.................................................... 389
Administrative services fee................................................... 39,600
Custodian fees................................................................ 17,848
Auditing and accounting services.............................................. 31,850
Legal fees.................................................................... 5,264
Directors' fees............................................................... 1,276
Registration fees............................................................. 38,732
Printing and shareholder reports.............................................. 36,391
Insurance..................................................................... 6,087
Other......................................................................... 39,919
----------
Total expenses.............................................................. 760,183
----------
Investment income--net...................................................... 1,806,174
----------
Realized and unrealized gains on investments:
Net realized gains on investments (note 3).................................... 3,056,132
Net change in unrealized appreciation or depreciation on investments.......... 4,774,991
----------
Net gains on investments.................................................... 7,831,123
----------
Net increase in net assets resulting from operations............................ $9,637,297
----------
----------
</TABLE>
See accompanying notes to financial statements.
14
<PAGE>
ADVANTUS SPECTRUM FUND
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED SEPTEMBER 30, 1995 AND
PERIOD FROM NOVEMBER 1, 1993 TO SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Operations:
Investment income--net.............................................. $ 1,806,174 $ 1,160,613
Net realized gains on investments................................... 3,056,132 1,523,789
Net change in unrealized appreciation or depreciation of
investments........................................................ 4,774,991 (3,810,302)
----------- -----------
Increase (decrease) in net assets resulting from operations....... 9,637,297 (1,125,900)
----------- -----------
Distributions to shareholders from:
Investment income--net:
Class A........................................................... (1,755,964) (1,170,626)
Class B........................................................... (40,461) (982)
Class C........................................................... (1,580) --
Net realized gains on investments:
Class A........................................................... (1,538,743) (386,851)
Class B........................................................... (10,795) --
----------- -----------
Total distributions............................................... (3,367,543) (1,558,459)
----------- -----------
Capital share transactions (notes 4 and 5):
Proceeds from sales:
Class A........................................................... 5,987,210 9,665,718
Class B........................................................... 2,799,440 140,000
Class C........................................................... 199,159 --
Shares issued as a result of reinvested dividends:
Class A........................................................... 3,022,573 1,351,297
Class B........................................................... 49,410 982
Class C........................................................... 1,482 --
Payments for redemption of shares:
Class A........................................................... (14,784,420) (10,096,669)
Class B........................................................... (28,143) --
Class C........................................................... (7,348) --
----------- -----------
Increase (decrease) in net assets from capital share
transactions..................................................... (2,760,637) 1,061,328
----------- -----------
Total increase (decrease) in net assets........................... 3,529,117 (1,623,031)
Net assets at beginning of period..................................... 55,425,319 57,048,350
----------- -----------
Net assets at end of period (including undistributed net investment
income of $13,258 and $5,089, respectively).......................... $58,954,436 $55,425,319
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
15
<PAGE>
ADVANTUS SPECTRUM FUND
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
(1) ORGANIZATION
The Advantus Spectrum Fund, Inc. (the Fund) is registered under the
Investment Company Act of 1940 (as amended) as a diversified, open-end
management investment company. On February 14, 1995 shareholders of the Fund
approved a name change to Advantus Spectrum Fund, Inc. (effective March 1,
1995). Prior to March 1, 1995 the Fund was known as MIMLIC Asset Allocation
Fund, Inc.
The Fund currently issues three classes of shares: Class A, Class B and
Class C shares. Class A shares are sold subject to a front-end sales charge.
Class B shares are sold subject to a contingent deferred sales charge payable
upon redemption if redeemed within six years of purchase. Class C shares are
sold without either a front-end sales charge or a contingent deferred sales
charge. Both Class B and Class C are subject to a higher Rule 12b-1 fee than
Class A shares. Both Class B and Class C shares automatically convert to Class A
shares at net asset value after a specified holding period. Such holding periods
decline as the amount of the purchase increases and range from 28 to 84 months
after purchase for Class B shares and 40 to 96 months after purchase for Class C
shares. All three classes of shares have identical voting, dividend, liquidation
and other rights and the same terms and conditions, except that the level of
distribution fees and sales charges charged differs between Class A, Class B and
Class C shares. Income, expenses (other than distribution fees) and realized and
unrealized gains or losses on investments are allocated to each class of shares
based upon its relative net assets.
On January 18, 1994, the Board of Directors elected to change the fiscal
year end of the Fund from October 31 to September 30.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by the Fund are summarized as
follows:
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. When market quotations are not readily available, securities are
valued at fair value as determined in good faith 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.
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Net investment income and net realized gains (losses) may differ for
financial statement and tax purposes primarily because of temporary book-to-tax
differences. The character of distributions made during the year from net
investment income or net realized gains may differ from their ultimate
characterization for federal income tax purposes. Also, due to the timing of
dividend distributions, the fiscal year in which amounts are distributed may
differ from the year that the income or realized gains (losses) were recorded by
the Fund.
DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income are declared and paid quarterly.
Realized gains, if any, are paid annually.
(3) INVESTMENT SECURITY TRANSACTIONS
For the year ended September 30, 1995, purchases of securities and proceeds
from sales, other than temporary investments in short-term securities aggregated
$66,388,532 and $70,284,259, respectively.
(4) EXPENSES AND RELATED PARTY TRANSACTIONS
On February 14, 1995 shareholders of the Fund approved a new investment
advisory agreement with Advantus Capital Management, Inc. (Advantus Capital).
Advantus Capital is a wholly-owned subsidiary of MIMLIC Asset Management Company
(MIMLIC Management) which, prior to March 1, 1995, served as investment adviser
to the Fund. Under the agreement, Advantus Capital manages the Fund's assets and
provides research, statistical and advisory services and pays related office
rental and executive expenses and salaries. In addition, as part of the advisory
fee, Advantus Capital pays the expenses of the Fund's transfer, dividend
disbursing and redemption agent (The Minnesota Mutual Life Insurance Company
(Minnesota Mutual), the parent of MIMLIC Management). The fee for investment
management and advisory services is based on the average daily net assets of the
Fund at the annual rate of .60 percent, which is the same as under the old
agreement with MIMLIC Management.
The Fund has adopted separate Plans of Distribution applicable to Class A,
Class B and Class C shares, respectively, relating to the payment of certain
distribution expenses pursuant to Rule 12b-1 under the Investment Company Act of
1940 (as amended). The Fund pays distribution fees to MIMLIC Sales Corporation
(MIMLIC Sales), the underwriter of the Fund and a wholly-owned subsidiary of
MIMLIC Management, to be used to pay certain expenses incurred in the
distribution, promotion and servicing of the Fund's shares. The Class A Plan
provides for a fee up to .35 percent of average daily net assets of Class A
shares. The Class B and Class C Plans provide for a fee up to 1.00 percent of
average daily net assets of Class B and Class C shares, respectively. The Class
B and Class C 1.00 percent fee is comprised of a .75 percent distribution fee
and a .25 percent service fee.
The Fund also bears certain other operating expenses including outside
directors' fees, custodian fees, registration fees, printing and shareholder
reports, legal, auditing and accounting services, and other miscellaneous
expenses.
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(4) EXPENSES AND RELATED PARTY TRANSACTIONS--(CONTINUED)
The Fund pays an administrative services fee to Minnesota Mutual for
accounting, auditing, legal and other administrative services which Minnesota
Mutual provides. Prior to February 1, 1995, the administrative service fee was
$3,450 per month. Effective February 1, 1995, the administrative service fee is
$3,100 per month.
Advantus Capital (MIMLIC Management prior to March 1, 1995) directly incurs
and pays the above operating expenses and the Fund in turn reimburses Advantus
Capital.
Sales charges received by MIMLIC Sales for distributing the Fund's three
classes of shares amounted to $226,547.
As of September 30, 1995, Minnesota Mutual and subsidiaries and the
directors and officers of the Fund as a whole owned the following shares:
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OWNED
------------------ -----------------------
<S> <C> <C>
Class A........................................................... 225,226 6.0%
Class B........................................................... 3,994 1.9%
Class C........................................................... 764 5.7%
</TABLE>
Legal fees were paid to a law firm of which the Fund's secretary is a
partner in the amount of $4,879.
(5) CAPITAL SHARE TRANSACTIONS
Transactions in shares for the year ended September 30, 1995 and the period
from November 1, 1993 to September 30, 1994 for Class A shares, the year ended
September 30, 1995 and the period from August 19, 1994 to September 30, 1994 for
Class B shares and the period from March 1, 1995 to September 30, 1995 for Class
C shares were as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
----------------------- -------------------- -----------
1995 1994 1995 1994 1995
----------- ---------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Sold.............................................. 440,376 712,411 200,130 10,452 13,907
Issued for reinvested distributions............... 228,395 100,454 3,579 74 103
Redeemed.......................................... (1,073,619) (747,207) (1,857) -- (512)
----------- ---------- --------- --------- -----------
(404,848) 65,658 201,852 10,526 13,498
----------- ---------- --------- --------- -----------
----------- ---------- --------- --------- -----------
</TABLE>
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
6) RESTRICTED SECURITIES
At September 30, 1995, investments in securities includes an issue which
generally cannot be offered for sale to the public without first being
registered under the Securities Act of 1933 (restricted security). In the event
the securities are registered, those carrying registration rights allow for the
issuer to bear all the related costs; for issues without rights, the Fund may
incur such costs. The Fund currently limits investments in securities that are
not readily marketable, including restricted securities, to 10% of net assets at
the time of the purchase. Securities are valued by procedures described in note
2. The aggregate value of restricted securities held by the Fund at September
30, 1995 was $499,672 which represents .8% of net assets.
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(7) FINANCIAL HIGHLIGHTS
Per share data for a share of capital stock and selected information for
each period are as follows:
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------
PERIOD FROM
NOVEMBER 1,
YEAR ENDED 1993 TO YEAR ENDED OCTOBER 31,
SEPTEMBER 30, SEPTEMBER 30, ------------------------------------------
1995 1994 1993 1992 1991
--------------- --------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period....................... $ 13.28 $ 13.92 $ 13.63 $ 13.05 $ 10.87
------- ------- ------ ------ ------
Income from investment
operations:
Net investment income....... .45 .28 .29 .38 .48
Net gains or losses on
securities (both realized
and unrealized)............ 1.88 (.55) .86 1.01 2.28
------- ------- ------ ------ ------
Total from investment
operations............... 2.33 (.27) 1.15 1.39 2.76
------- ------- ------ ------ ------
Less distributions:
Dividends from net
investment income.......... (.44) (.28) (.31) (.38) (.51)
Distributions from capital
gains...................... (.38) (.09) (.55) (.43) (.07)
------- ------- ------ ------ ------
Total distributions....... (.82) (.37) (.86) (.81) (.58)
------- ------- ------ ------ ------
Net asset value, end of
period....................... $ 14.79 $ 13.28 $ 13.92 $ 13.63 $ 13.05
------- ------- ------ ------ ------
------- ------- ------ ------ ------
Total return (b).............. 18.4% (1.9)%(c) 8.7% 11.1% 26.0%
Net assets, end of period (in
thousands)................... $55,624 $55,286 $57,048 $38,417 $18,588
Ratio of expenses to average
daily net assets............. 1.33% 1.27%(f) 1.22% 1.35%(g) 1.35%(g)
Ratio of net investment income
to average daily net
assets....................... 3.22% 2.24%(f) 2.16% 3.02%(g) 4.07%(g)
Portfolio turnover rate
(excluding short-term
securities).................. 125.5% 124.5% 92.1% 123.3% 56.2%
<FN>
- ----------
(a) Commencement of operations.
(b) Total return figures are based on a share outstanding throughout the period
and assumes reinvestment of distributions at net asset value. Total return
figures do not reflect the impact of sales charges.
(c) Total return is presented for the period from November 1, 1993 to September
30, 1994.
(d) Total return is presented for the period from August 19, 1994, commencement
of operations, to September 30, 1994.
(e) Total return is presented for the period from March 1, 1995, commencement
of operations, to September 30, 1995.
(f) Adjusted to an annual basis.
(g) The Fund's Adviser voluntarily absorbed $13,585 and $19,759 in expenses for
the years ended October 31, 1992 and 1991 respectively. If Class A shares
had been charged for these expenses, the ratio of expenses to average daily
net assets would have been 1.40% and 1.50% respectively, and the ratio of
net investment income to average daily net assets would have been 2.97% and
3.92%, respectively.
(h) Ratios presented for the period from August 19, 1994 to September 30, 1994
are not annualized as they are not indicative of anticipated results.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
CLASS B CLASS C
---------------------------------- --------------
PERIOD FROM PERIOD FROM
AUGUST 19, MARCH 1,
YEAR ENDED 1994(A) TO 1995(A) TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Net asset value, beginning of
period...................... $ 13.27 $ 13.36 $ 13.36
------ ------ ------
Income from investment
operations:
Net investment income....... .39 .03 .24
Net gains or losses on
securities (both realized
and unrealized)............ 1.84 (.03) 1.43
------ ------ ------
Total from investment
operations............... 2.23 -- 1.67
------ ------ ------
Less distributions:
Dividends from net
investment income.......... (.38) (.09) (.29)
Distributions from capital
gains...................... (.38) -- --
------ ------ ------
Total distributions....... (.76) (.09) (.29)
------ ------ ------
Net asset value, end of
period...................... $ 14.74 $ 13.27 $ 14.74
------ ------ ------
------ ------ ------
Total return (b).............. 17.6% (.04)%(d) 12.6%(e)
Net assets, end of period (in
thousands).................. $3,131 $ 140 $ 199
Ratio of expenses to average
daily net assets............ 1.99% .23%(h) 2.00%(f)
Ratio of net investment income
to average daily net
assets...................... 2.30% .37%(h) 2.17%(f)
Portfolio turnover rate
(excluding short-term
securities)................. 125.5% 124.5% 125.5%
</TABLE>
21
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Advantus Mortgage Securities Fund, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments in securities, of the Advantus Mortgage
Securities Fund, Inc. (the Fund) as of September 30, 1995 and the related
statement of operations for the year then ended, the statement of changes in net
assets for the year ended September 30, 1995 and the period from November 1,
1993 to September 30, 1994 and the financial highlights for the year ended
September 30, 1995, the period from November 1, 1993 to September 30, 1994 and
each of the years in the three-year period ended October 31, 1993. These
financial statements and the financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by the
custodian. As to securities purchased or sold but not received or delivered, we
request confirmations from brokers, and where replies are not received, we carry
out other appropriate auditing procedures. 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
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of the Fund as of September 30, 1995 and the results of its operations,
changes in its net assets and financial highlights, for the periods stated in
the first paragraph above, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
November 3, 1995
19
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND
INVESTMENTS IN SECURITIES
SEPTEMBER 30, 1995
(Percentages of each category relate to total net assets.)
<TABLE>
<CAPTION>
MARKET
PRINCIPAL VALUE(A)
- ---------- -----------
<C> <S> <C> <C> <C>
LONG-TERM DEBT SECURITIES (98.3%)
U.S. GOVERNMENT AND AGENCIES OBLIGATIONS (75.3%)
Federal Home Loan Mortgage Corporation (12.4%)
$ 207,512 CMO Series L, Class 5....................................... 7.900% 05/01/01 $ 211,532
445,524 Bi-weekly................................................... 7.000% 12/01/22 441,095
740,122 Bi-weekly................................................... 6.500% 12/01/23 716,682
1,000,000 20 Year Gold................................................ 6.500% 07/01/13 974,259
1,000,000 Targeted Amortization Class CMO, Series 1640, Class B....... 6.500% 12/15/08 975,720
-----------
3,319,288
-----------
Federal National Mortgage Association (11.3%)
1,085,352 Bi-weekly................................................... 6.000% 07/01/07 1,051,933
1,400,000 CMO Sequential Payer, Series G92-45, Class D................ 6.000% 04/25/19 1,346,630
568,000 CMO PAC Targeted Amortization Class, Series G93-11, Class
H.......................................................... 6.000% 12/25/08 549,185
72,147 Principal only PAC, Series G93-28, Class A (b).............. 7.000% 07/25/22 71,667
-----------
3,019,415
-----------
Government National Mortgage Association (27.0%)
402,203 ............................................................ 8.000% 12/15/15 413,967
567,416 ............................................................ 8.000% 03/15/16 583,905
342,089 ............................................................ 8.000% 07/15/16 352,029
300,000 (e)......................................................... 8.000% 12/01/17 308,437
250,000 (e)......................................................... 7.000% 05/15/24 246,874
598,390 ............................................................ 7.000% 09/15/16 596,702
152,640 ............................................................ 7.000% 09/15/16 152,209
401,997 ............................................................ 7.500% 05/15/17 407,271
321,586 ............................................................ 7.500% 03/15/17 325,805
378,267 ............................................................ 7.000% 05/15/17 376,939
295,506 ............................................................ 7.000% 05/15/17 294,469
354,580 ............................................................ 7.000% 12/15/16 353,580
407,647 ............................................................ 7.000% 04/15/17 406,216
337,641 ............................................................ 7.000% 04/15/17 336,456
91,339 ............................................................ 7.000% 02/15/17 91,018
401,523 ............................................................ 7.000% 04/15/17 400,113
399,719 ............................................................ 7.000% 10/15/17 398,315
459,045 ............................................................ 7.000% 10/15/17 457,434
234,735 GNMA II..................................................... 9.000% 08/20/16 247,059
215,548 GNMA II..................................................... 9.000% 05/20/16 225,885
225,477 GNMA II..................................................... 9.000% 06/20/16 236,291
-----------
7,210,974
-----------
</TABLE>
See accompanying notes to investments in securities.
7
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND
INVESTMENTS IN SECURITIES--CONTINUED
<TABLE>
<CAPTION>
MARKET
PRINCIPAL VALUE(A)
- ---------- -----------
<C> <S> <C> <C> <C>
U.S. GOVERNMENT AND AGENCIES OBLIGATIONS--CONTINUED
Other U.S. Government Agency Obligations (24.6%)
$1,134,082 Vendee Mortgage Trust, Series 1994-2, Class 2 (c)........... 8.447% 05/15/24 $ 1,186,888
740,191 Vendee Mortgage Trust, Series 1995-1A, Class 1 (c).......... 7.207% 02/15/25 729,782
1,038,009 Vendee Mortgage Trust, Series 1995-1B, Class 2 (c).......... 7.793% 02/15/25 1,064,283
1,486,053 Vendee Mortgage Trust, Series 1995-2C, Class 3A (c)......... 8.793% 06/15/25 1,580,324
1,000,000 Vendee Mortgage Trust, Series 1995-3, Class 1C (c).......... 7.250% 07/15/14 1,012,813
1,000,000 Vendee Mortgage Trust, Series 1995-3, Class 1D (c).......... 7.250% 07/15/16 1,001,875
-----------
6,575,965
-----------
Total U.S. government and agencies obligations (cost: $19,644,821)............ 20,125,642
-----------
OTHER MORTGAGE-BACKED SECURITIES (23.0%)
1,302,883 Collaterized Mortgage Obligation Trust, Sequential Accrual,
Z Tranche, Series 14, Class Z (d).......................... 8.000% 01/01/17 1,325,435
1,000,000 CSFB Financial Corporation Senior Performance Note Mortgage
Revenue Series 1995-A, Class A (f)......................... 7.000% 11/15/05 1,000,938
115,244 FBC Mortgage Securities Trust 8, Series A, Class A.......... 5.000% 10/01/16 112,289
284,526 Green Tree Finance Company Limited Net Interest Margin
Trust, Series 1995-A, Class A.............................. 7.250% 07/15/05 284,518
1,041,946 International Capital Markets Acceptance Corporation (f).... 8.250% 09/01/15 1,050,412
304,793 Morgan Stanley Mortgage Trust CMO, Sequential Payer, Series
W, Class 5................................................. 9.050% 05/01/18 316,037
621,085 Salomon Brothers Mortgage Securities VI CMO, Sequential
Payer, Series 1986-1, Class A.............................. 6.000% 12/25/11 600,900
1,479,000 Wyoming Community Development Authority..................... 6.850% 06/01/10 1,456,814
-----------
Total other mortgage-backed securities (cost: $5,834,639)..................... 6,147,343
-----------
Total long-term debt securities (cost: $25,479,460)........................... 26,272,985
-----------
SHORT-TERM SECURITIES (2.0%)
550,000 U.S. Treasury Bill.......................................... 5.42% 12/07/95 544,392
-----------
Total short-term securities (cost: $544,503).................................. 544,392
-----------
Total investments in securities (cost: $26,023,963) (g)....................... $26,817,377
-----------
-----------
<FN>
Notes to Investments in Securities
- ----------------------------
(a) Securities are valued by procedures described in note 2 to the financial
statements.
(b) Represents a debt security that entitles holders to receive only principal
payments on the underlying mortgages. The yield to maturity of a
principal-only security is sensitive to the rate of principal payments on
the underlying mortgage assets. A slower (more rapid) than expected rate of
principal repayments may have an adverse (positive) effect on yield to
maturity. Interest rate disclosed represents current yield based upon the
current cost basis and estimated timing of future cash flows.
(c) Represents a debt security with a weighted average net pass-through rate
which varies based on the pool of underlying collateral. The rate disclosed
is the rate in effect at September 30, 1995.
</TABLE>
8
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND
INVESTMENTS IN SECURITIES--CONTINUED
<TABLE>
<S> <C>
Notes to Investments in Securities - continued
- ----------------------------------------------
(d) Represents a debt security that pays no interest or principal during the
initial accrual period, but accrues additional principal at a specified
rate. Interest rate disclosed represents current yield based upon estimated
timing of future cash flows.
(e) At September 30, 1995 the total cost of investments issued on a when-issued
or forward commitment basis is $555,570.
(f) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At September 30,
1995 the value of these securities amounted to $2,051,350 or 7.7% of net
assets.
(g) At September 30, 1995 the cost of securities for federal income tax
purposes was $26,023,963. The aggregate unrealized appreciation and
depreciation of investments in securities based on this cost were:
Gross unrealized appreciation.................................. $ 828,592
Gross unrealized depreciation.................................. (35,178)
---------
Net unrealized appreciation.................................... $ 793,414
---------
---------
</TABLE>
9
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1995
<TABLE>
<S> <C>
ASSETS
Investments in securities, at market value--see accompanying schedule for detailed
listing (identified cost: $26,023,963)............................................. $26,817,377
Cash in bank on demand deposit...................................................... 58,034
Receivable for Fund shares sold..................................................... 2,892
Receivable for investment securities sold........................................... 252,959
Accrued interest receivable......................................................... 243,615
-----------
Total assets.................................................................... 27,374,877
-----------
LIABILITIES
Payable for investment securities purchased......................................... 555,570
Payable for Fund shares repurchased................................................. 65,288
Payable to Adviser.................................................................. 28,390
Dividends payable to shareholders................................................... 3,496
-----------
Total liabilities............................................................... 652,744
-----------
Net assets applicable to outstanding capital stock.................................. $26,722,133
-----------
-----------
Represented by:
Capital stock--$.01 par value (note 1)............................................ $ 25,803
Additional paid-in capital........................................................ 27,405,599
Undistributed net investment income............................................... 51,042
Accumulated net realized loss from investments.................................... (1,553,725)
Unrealized appreciation of investments............................................ 793,414
-----------
Total--representing net assets applicable to outstanding capital stock.......... $26,722,133
-----------
-----------
Net assets applicable to outstanding Class A shares................................. $25,316,583
-----------
-----------
Net assets applicable to outstanding Class B shares................................. $ 1,084,219
-----------
-----------
Net assets applicable to outstanding Class C shares................................. $ 321,331
-----------
-----------
Shares outstanding and net asset value per share:
Class A--Shares outstanding 2,444,711............................................. $ 10.36
-----------
-----------
Class B--Shares outstanding 104,594............................................... $ 10.37
-----------
-----------
Class C--Shares outstanding 30,995................................................ $ 10.37
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
10
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<S> <C>
Investment income:
Interest.......................................................................... $2,035,149
Expenses (note 4):
Investment advisory fee........................................................... 155,798
Distribution fees--Class A........................................................ 79,816
Distribution fees--Class B........................................................ 3,391
Distribution fees--Class C........................................................ 846
Administrative services fee....................................................... 39,200
Custodian fees.................................................................... 9,920
Auditing and accounting services.................................................. 17,550
Legal fees........................................................................ 5,531
Directors' fees................................................................... 618
Registration fees................................................................. 38,784
Printing and shareholder reports.................................................. 19,611
Insurance......................................................................... 5,740
Other............................................................................. 11,411
----------
Total expenses.................................................................. 388,216
Less fees and expenses waived or absorbed:
Class A distribution fees....................................................... (26,473)
Other fund expenses............................................................. (9,655)
----------
Total fees and expenses waived or absorbed.................................... (36,128)
----------
Total net expenses............................................................ 352,088
----------
Investment income--net........................................................ 1,683,061
----------
Realized and unrealized gains on investments:
Net realized gains on investments (note 3)........................................ 140,686
Net change in unrealized appreciation or depreciation on investments.............. 1,594,464
----------
Net gains on investments........................................................ 1,735,150
----------
Net increase in net assets resulting from operations................................ $3,418,211
----------
----------
</TABLE>
See accompanying notes to financial statements.
11
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED SEPTEMBER 30, 1995 AND
PERIOD FROM NOVEMBER 1, 1993 TO SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Operations:
Investment income--net................................................... $ 1,683,061 $ 1,439,948
Net realized gains (losses) on investments............................... 140,686 (1,694,411)
Net change in unrealized appreciation or depreciation of investments..... 1,594,464 (983,565)
----------- -----------
Increase (decrease) in net assets resulting from operations............ 3,418,211 (1,238,028)
----------- -----------
Distributions to shareholders from:
Investment income--net
Class A................................................................ (1,636,844) (1,437,598)
Class B................................................................ (17,742) (316)
Class C................................................................ (4,382) --
Net realized gains on investments:
Class A................................................................ -- (915,257)
----------- -----------
Total distributions.................................................... (1,658,968) (2,353,171)
----------- -----------
Capital share transactions (notes 4 and 5):
Proceeds from sales:
Class A................................................................ 2,594,530 6,429,016
Class B................................................................ 990,008 60,000
Class C................................................................ 340,021 --
Shares issued as a result of reinvested dividends:
Class A................................................................ 969,887 1,530,031
Class B................................................................ 15,797 316
Class C................................................................ 2,840 --
Payments for redemption of shares:
Class A................................................................ (7,089,593) (4,337,552)
Class B................................................................ (2,536) --
Class C................................................................ (22,144) --
----------- -----------
Increase (decrease) in net assets from capital share transactions...... (2,201,190) 3,681,811
----------- -----------
Total increase (decrease) in net assets................................ (441,947) 90,612
Net assets at beginning of period.......................................... 27,164,080 27,073,468
----------- -----------
Net assets at end of period (including undistributed net investment income
of $51,042 and $26,949, respectively)..................................... $26,722,133 $27,164,080
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
12
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
(1) ORGANIZATION
The Advantus Mortgage Securities Fund, Inc. (the Fund) is registered under
the Investment Company Act of 1940 (as amended) as a diversified, open-end
management investment company. On February 14, 1995 shareholders of the Fund
approved a name change to Advantus Mortgage Securities Fund, Inc. (effective
March 1, 1995). Prior to March 1, 1995 the Fund was known as MIMLIC Mortgage
Securities Income Fund, Inc.
The Fund currently issues three classes of shares: Class A, Class B and
Class C shares. Class A shares are sold subject to a front-end sales charge.
Class B shares are sold subject to a contingent deferred sales charge payable
upon redemption if redeemed within six years of purchase. Class C shares are
sold without either a front-end sales charge or a contingent deferred sales
charge. Both Class B and Class C shares are subject to a higher Rule 12b-1 fee
than Class A shares. Both Class B and Class C shares automatically convert to
Class A shares at net asset value after a specified holding period. Such holding
period declines as the amount of the purchase increases and ranges from 28 to 84
months after purchase for Class B shares and 40 to 96 months after purchase for
Class C shares. All three classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions, except that the
level of distribution fees and sales charges charged differs between Class A,
Class B and Class C shares. Income, expenses (other than distribution fees) and
realized and unrealized gains or losses on investments are allocated to each
class of shares based upon its relative net assets.
On January 18, 1994, the Board of Directors elected to change the fiscal
year end of the Fund from October 31 to September 30.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by the Fund are summarized as
follows:
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. When market quotations are not readily available, securities are
valued at fair value as determined in good faith 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.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
SECURITIES PURCHASED ON A WHEN-ISSUED BASIS
Delivery and payment for securities which have been purchased by the Fund on
a forward commitment or when-issued basis can take place a month or more after
the transaction date. During this period, such securities are subject to market
fluctuations. As of September 30, 1995, the Fund had entered into outstanding
when-issued or forward commitments of $555,570. The Fund has segregated assets,
with the Fund's custodian, to cover such when-issued and forward commitment
transactions.
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.
Net investment income and net realized gains (losses) may differ for
financial statement and tax purposes primarily because of temporary book-to-tax
differences. The character of distributions made during the year from net
investment income or net realized gains may differ from their ultimate
characterization for federal income tax purposes. Also, due to the timing of
dividend distributions, the fiscal year in which amounts are distributed may
differ from the year that the income or realized gains (losses) were recorded by
the Fund.
For federal income tax purposes, the Fund has a capital loss carryover in
the amount of $1,513,301 which, if not offset by subsequent capital gains, will
expire September 30, 2004. It is unlikely the board of directors will authorize
a distribution of any net realized capital gain until the available capital loss
carryover has been offset or expires.
DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income are declared daily and paid monthly in
cash or reinvested in additional shares. Realized gains, if any, are paid
annually.
(3) INVESTMENT SECURITY TRANSACTIONS
For the year ended September 30, 1995, purchases of securities and proceeds
from sales, other than temporary investments in short-term securities aggregated
$53,904,662 and $55,609,136, respectively.
(4) EXPENSES AND RELATED PARTY TRANSACTIONS
On February 14, 1995 shareholders of the Fund approved a new investment
advisory agreement with Advantus Capital Management, Inc. (Advantus Capital or
the Adviser). Advantus Capital is a wholly-owned subsidiary of MIMLIC Asset
Management Company (MIMLIC Management) which, prior to March 1, 1995, served as
investment adviser to the Fund. Under the agreement, Advantus Capital manages
the Fund's assets and provides research, statistical and advisory services and
pays related office rental and executive expenses and salaries. In addition, as
part of the advisory fee, Advantus Capital pays the expenses of the Fund's
transfer, dividend disbursing and redemption agent (The Minnesota Mutual Life
Insurance Company [Minnesota
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(4) EXPENSES AND RELATED PARTY TRANSACTIONS--(CONTINUED)
Mutual], the parent of MIMLIC Management). The fee for investment management and
advisory services is based on the average daily net assets of the Fund at the
annual rate of .575 percent, which is the same as under the old agreement with
MIMLIC Management.
The Fund has adopted separate Plans of Distribution applicable to Class A,
Class B and Class C shares, respectively, relating to the payment of certain
distribution expenses pursuant to Rule 12b-1 under the Investment Company Act of
1940 (as amended). The Fund pays distribution fees to MIMLIC Sales Corporation
(MIMLIC Sales), the underwriter of the Fund and a wholly-owned subsidiary of
MIMLIC Management, to be used to pay certain expenses incurred in the
distribution, promotion and servicing of the Fund's shares. The Class A Plan
provides for a fee up to .30 percent of average daily net assets of Class A
shares. The Class B and Class C Plans provide for a fee up to 1.00 percent of
average daily net assets of Class B and Class C shares, respectively. The Class
B and Class C 1.00 percent fee is comprised of a .75 percent distribution fee
and a .25 percent service fee. MIMLIC Sales is currently waiving that portion of
Class A distribution fees which exceeds, as a percentage of average daily net
assets, .20 percent. MIMLIC sales waived Class A distribution fees in the amount
of $26,473 for the year ended September 30, 1995.
The Fund also bears certain other operating expenses including outside
directors' fees, custodian fees, registration fees, printing and shareholder
reports, legal, auditing and accounting services and other miscellaneous
expenses.
The Fund pays an administrative services fee to Minnesota Mutual for
accounting, auditing, legal and other administrative services which Minnesota
Mutual provides. Prior to February 1, 1995, the administrative service fee was
$3,600 per month. Effective February 1, 1995, the administrative service fee is
$3,100 per month.
Advantus Capital (MIMLIC Management prior to March 1, 1995) directly incurs
and pays the above operating expenses and the Fund in turn reimburses Advantus
Capital. During the year ended September 30, 1995, Advantus Capital voluntarily
agreed to absorb $9,655 in expenses that were otherwise payable by the Fund.
Sales charges received by MIMLIC Sales for distributing the Fund's three
classes of shares amounted to $97,402.
As of September 30, 1995, Minnesota Mutual and subsidiaries, and the
directors and officers of the Fund as a whole owned the following shares:
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OWNED
---------------- ----------------
<S> <C> <C>
Class A................................... 395,290 16.2%
Class B................................... 5,386 5.2%
Class C................................... 1,045 3.4%
</TABLE>
Legal fees were paid to a law firm of which the Fund's secretary is a
partner in the amount of $5,147.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(5) CAPITAL SHARE TRANSACTIONS
Transactions in shares for the year ended September 30, 1995 and the period
from November 1, 1993 to September 30, 1994 for Class A shares, the year ended
September 30, 1995 and the period from August 19, 1994 to September 30, 1994 for
Class B shares and the period from March 1, 1995 to September 30, 1995 for Class
C shares were as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------------ ------------- -------
1995 1994 1995 1994 1995
-------- -------- ------ ----- -------
<S> <C> <C> <C> <C> <C>
Sold......................................... 259,523 622,858 97,026 6,099 32,851
Issued for reinvested distributions.......... 97,409 148,532 1,653 32 276
Redeemed..................................... (704,962) (426,991) (216) -- (2,132)
-------- -------- ------ ----- -------
(348,030) 344,399 98,463 6,131 30,995
-------- -------- ------ ----- -------
-------- -------- ------ ----- -------
</TABLE>
(6) RESTRICTED SECURITIES
At September 30, 1995, investments in securities includes issues which
generally cannot be offered for sale to the public without first being
registered under the Securities Act of 1933 (restricted security). In the event
the securities are registered, those carrying registration rights allow for the
issuer to bear all the related costs; for issues without rights, the Fund may
incur such costs. The Fund currently limits investments in securities that are
not readily marketable, including restricted securities, to 10% of net assets at
the time of the purchase. Securities are valued by procedures described in note
2. The aggregate value of restricted securities held by the Fund at September
30, 1995 was $2,051,350 which represents 7.7% of net assets.
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(7) FINANCIAL HIGHLIGHTS
Per share data for a share of capital stock and selected information for
each period are as follows:
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------
PERIOD FROM
NOVEMBER 1,
YEAR ENDED 1993 TO YEAR ENDED OCTOBER 31,
SEPTEMBER SEPTEMBER 30, -----------------------------
30, 1995 1994 1993 1992 1991
----------- -------------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period.............. $ 9.70 $ 11.06 $ 10.94 $ 10.8 $ 10.04
Income from investment operations:
Net investment income........................... .62 .53 .63 .71 .79
Net gains or losses on securities (both realized
and unrealized)................................ .65 (.99) .55 .15 .76
----------- ------ ------- ------- -------
Total from investment operations.............. 1.27 (.46) 1.18 .86 1.55
----------- ------ ------- ------- -------
Less distributions:
Dividends from net investment income............ (.61) (.53) (.63) (.72) (.79)
Distributions from capital gains................ -- (.37) (.43) -- --
----------- ------ ------- ------- -------
Total distributions........................... (.61) (.90) (1.06) (.72) (.79)
----------- ------ ------- ------- -------
Net asset value, end of period.................... $10.36 $9.70 $11.06 $10.94 $10.80
----------- ------ ------- ------- -------
----------- ------ ------- ------- -------
Total return (a).................................. 13.5% (4.3)%(b) 11.4% 8.2% 16.0%
Net assets, end of period (in thousands).......... $25,317 $27,105 $27,073 $20,996 $16,554
Ratio of expenses to average daily net assets
(d).............................................. 1.29% 1.24%(c) 1.17% 1.25% 1.18%
Ratio of net investment income to average daily
net assets (d)................................... 6.23% 5.73%(c) 5.77% 6.56% 7.64%
Portfolio turnover rate (excluding short-term
securities)...................................... 203.7% 236.2% 135.0% 137.3% 48.4%
</TABLE>
- ----------
(a) Total return figures are based on a share outstanding throughout the period
and assumes reinvestment of distributions at net asset value. Total return
figures do not reflect the impact of sales charges.
(b) Total return is presented for the period from November 1, 1993 to September
30, 1994.
(c) Adjusted to an annual basis.
(d) The Fund's Adviser and Distributor voluntarily waived or absorbed $36,128,
$43,505, $34,773, $21,104 and $11,682 in expenses for the year ended
September 30, 1995, the period ended September 30, 1994, and the years ended
October 31, 1993, 1992 and 1991, respectively. If Class A shares had been
charged for these expenses, the ratio of expenses to average daily net
assets would have been 1.42%, 1.41%, 1.31%, 1.36% and 1.29%, respectively,
and the ratio of net investment income to average daily net assets would
have been 6.10%, 5.56%, 5.63%, 6.45% and 7.53%, respectively.
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(7) FINANCIAL HIGHLIGHTS--(CONTINUED)
<TABLE>
<CAPTION>
CLASS B CLASS C
-------------------------------- ------------
PERIOD FROM PERIOD FROM
AUGUST 19, MARCH 1,
YEAR ENDED 1994 (A) TO 1995 (A) TO
SEPTEMBER SEPTEMBER 30, SEPTEMBER
30, 1995 1994 30, 1995
------------ -------------- ------------
<S> <C> <C> <C>
Net asset value, beginning of period.............................. $ 9.70 $ 9.83 $ 9.90
Income from investment operations:
Net investment income........................................... .53 .06 .31
Net gains or losses on securities (both realized and
unrealized).................................................... .67 (.13) .47
------ ----- ------
Total from investment operations.............................. 1.20 (.07) .78
------ ----- ------
Less distributions:
Dividends from net investment income............................ (.53) (.06) (.31)
Distributions from capital gains................................ -- -- --
------ ----- ------
Total distributions........................................... (.53) (.06) (.31)
------ ----- ------
Net asset value, end of period.................................... $10.37 $9.70 $10.37
------ ----- ------
------ ----- ------
Total return (b).................................................. 12.7% (.7)%(c) 7.9%(d)
Net assets, end of period (in thousands).......................... $1,084 $60 $321
Ratio of expenses to average daily net assets (f)................. 2.05% .28%(g) 2.05%(e)
Ratio of net investment income to average daily net assets (f).... 5.32% .60%(g) 5.26%(e)
Portfolio turnover rate (excluding short-term securities)......... 203.7% 236.2% 203.7%
</TABLE>
- ----------
(a) Commencement of operations.
(b) Total return figures are based on a share outstanding throughout the period
and assumes reinvestment of distributions at net asset value. Total return
figures do not reflect the impact of sales charges.
(c) Total return is presented for the period from August 19, 1994, commencement
of operations, to September 30, 1994.
(d) Total return is presented for the period from March 1, 1995, commencement of
operations, to September 30, 1995.
(e) Adjusted to an annual basis.
(f) The Fund's Adviser and Distributor voluntarily waived or absorbed $36,128,
$43,505, $34,773, $21,104 and $11,682 in expenses for the year ended
September 30, 1995, the period ended September 30, 1994, and the years ended
October 31, 1993, 1992 and 1991, respectively. If Class B shares had been
charged for these expenses, the ratio of expenses to average daily net
assets would have been 2.11% and the ratio of net investment income to
average daily net assets would have been 5.26% for the year ended September
30, 1995. If Class C shares had been charged for these expenses, the ratio
of expenses to average daily net assets would have been 2.11% and the ratio
of net investment income to average daily net assets would have been 5.20%
for the period from March 1, 1995 to September 30, 1995.
(g) Ratios presented for the period from August 19, 1994 to September 30, 1994
are not annualized as they are not indicative of anticipated results.
18
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Advantus Money Market Fund, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments in securities, of the Advantus Money
Market Fund, Inc. (the Fund) as of September 30, 1995 and the related statement
of operations for the year then ended, the statement of changes in net assets
for the year ended September 30, 1995 and the period from November 1, 1993 to
September 30, 1994 and the financial highlights for the year ended September 30,
1995, the period from November 1, 1993 to September 30, 1994 and each of the
years in the three-year period ended October 31, 1993. These financial
statements and the financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. 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 audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of the Fund as of September 30, 1995 and the results of its operations,
changes in its net assets and financial highlights, for the periods stated in
the first paragraph above, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
November 3, 1995
12
<PAGE>
ADVANTUS MONEY MARKET FUND
INVESTMENTS IN SECURITIES
SEPTEMBER 30, 1995
(Percentages of each investment category relate to total net assets.)
<TABLE>
<CAPTION>
MARKET
PRINCIPAL VALUE(A)
- --------- ------------
<C> <S> <C> <C> <C>
U.S. GOVERNMENT AND AGENCIES OBLIGATIONS (7.5%)
$1,000,000 Farm Credit Discount Note......................... 5.72% 10/19/95 $ 997,060
200,000 Federal Home Loan Bank Discount Note.............. 5.75% 11/21/95 198,385
1,225,000 Federal National Mortgage Association Discount
Note............................................. 5.76% 02/22/96 1,197,616
205,000 U.S. Treasury Bill................................ 5.57% 10/12/95 204,630
120,000 U.S. Treasury Bill................................ 5.44% 12/07/95 118,796
------------
Total U.S. government and agencies obligations (cost: $2,716,487)....... 2,716,487
------------
COMMERCIAL PAPER (89.5%)
CAPITAL GOODS (8.3%)
Aerospace/Defense (4.5%)
1,650,000 Raytheon Co....................................... 5.80% 11/13/95 1,638,586
------------
Information Processing (3.7%)
1,360,000 Hewlett-Packard................................... 5.79% 10/17/95 1,356,384
------------
CONSUMER GOODS AND SERVICES (3.7%)
Management (3.7%)
1,330,000 PHH Corporation................................... 5.83% 11/01/95 1,323,238
------------
CONSUMER STAPLES (34.2%)
Drugs (7.9%)
1,030,000 American Home Products (c)........................ 5.89% 10/12/95 1,028,022
550,000 American Home Products (c)........................ 5.83% 11/13/95 546,168
1,300,000 Schering Corp..................................... 5.75% 01/17/96 1,278,115
------------
2,852,305
------------
Food (13.2%)
1,500,000 Brown Forman...................................... 5.85% 12/27/95 1,479,137
1,000,000 Campbell Soup..................................... 5.84% 11/21/95 991,796
1,100,000 Coca-Cola Company................................. 5.73% 11/22/95 1,090,931
1,200,000 CPC International Inc (c)......................... 5.82% 11/07/95 1,192,805
------------
4,754,669
------------
Media (6.9%)
1,300,000 McGraw-Hill Co.................................... 5.83% 10/24/95 1,295,086
1,200,000 American Broadcast (c)............................ 5.81% 10/04/95 1,199,251
------------
2,494,337
------------
Retail (6.2%)
1,250,000 Melville Corp..................................... 5.92% 10/23/95 1,245,400
1,000,000 Toys R Us, Inc.................................... 5.80% 10/25/95 996,056
------------
2,241,456
------------
</TABLE>
See accompanying notes to investments in securities.
4
<PAGE>
ADVANTUS MONEY MARKET FUND
INVESTMENTS IN SECURITIES--CONTINUED
<TABLE>
<CAPTION>
MARKET
PRINCIPAL VALUE(A)
- --------- ------------
COMMERCIAL PAPER -- CONTINUED
<C> <S> <C> <C> <C>
CREDIT SENSITIVE (2.8%)
Hardware and Tools (2.8%)
$1,000,000 Stanley Works..................................... 5.85% 10/05/95 $ 999,203
------------
ENERGY (8.9%)
Natural Gas Distribution (5.9%)
1,250,000 Consolidated Natural Gas.......................... 5.83% 10/16/95 1,246,822
900,000 Equitable Resources (c)........................... 5.83% 10/31/95 895,583
------------
2,142,405
------------
Oil and Gas Production (3.0%)
1,115,000 Atlantic Richfield................................ 5.71% 12/20/95 1,101,076
------------
FINANCIAL (18.5%)
Consumer Finance (18.5%)
1,300,000 Associates Corp................................... 5.78% 12/01/95 1,287,373
1,015,000 Ford Motor Credit................................. 5.80% 12/21/95 1,001,984
1,270,000 General Electric Capital Corp..................... 5.85% 10/19/95 1,266,186
1,130,000 GMAC.............................................. 5.98% 10/11/95 1,128,001
1,200,000 Norwest Financial................................. 5.85% 10/18/95 1,196,568
800,000 Pitney-Bowes Credit............................... 5.95% 10/02/95 799,744
------------
6,679,856
------------
UTILITIES (13.1%)
Electric (3.0%)
1,100,000 Midamerica Energy................................. 5.87% 10/20/95 1,096,486
------------
Telephones (10.1%)
915,000 AT&T Corp......................................... 5.82% 02/09/96 896,145
740,000 Bellsouth Capital................................. 5.79% 11/03/95 736,065
840,000 Southwestern Bell Capital (c)..................... 5.82% 10/10/95 838,675
1,175,000 US West Capital (c)............................... 5.83% 11/02/95 1,168,873
------------
3,639,758
------------
Total commercial paper (cost: $32,319,759).............................. 32,319,759
------------
Total investments in securities (cost: $35,036,246) (b)................. $ 35,036,246
------------
------------
<FN>
Notes to Investments in Securities
(a) Securities are valued by procedures described in note 1 to the financial
statements.
(b) Also represents the cost of securities for federal income tax purposes at
September 30, 1995.
(c) Commercial paper sold within terms of a private placement memorandum,
exempt from registration under Section 4(2) of the Securities Act of 1933,
as amended, and may be sold only to dealers in that program of other
"accredited investors." These securities have been determined to be liquid
under guidelines established by the board of directors.
</TABLE>
5
<PAGE>
ADVANTUS MONEY MARKET FUND
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1995
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value--see accompanying schedule for detailed listing
(identified cost: $35,036,246)...................................................... $ 35,036,246
Cash in bank on demand deposit....................................................... 336,506
Receivable for Fund shares sold...................................................... 840,284
------------
Total assets..................................................................... 36,213,036
------------
LIABILITIES
Payable for Fund shares repurchased.................................................. 77,578
Payable to Adviser................................................................... 24,636
Dividends payable to shareholders.................................................... 4,223
------------
Total liabilities................................................................ 106,437
------------
Net assets applicable to outstanding capital stock................................... $ 36,106,599
------------
------------
Represented by:
Capital stock--authorized 1 billion shares of $.01 par value; outstanding,
36,106,599 shares................................................................. $ 361,066
Additional paid-in capital......................................................... 35,745,533
------------
Total--representing net assets applicable to outstanding capital stock........... $ 36,106,599
------------
------------
Net asset value per share............................................................ $ 1.00
------------
------------
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
ADVANTUS MONEY MARKET FUND
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<S> <C>
Investment income:
Interest........................................................................... $ 1,713,401
------------
Expenses (note 3):
Investment advisory fee............................................................ 148,238
Distribution fees.................................................................. 88,943
Transfer Agent fees and expenses................................................... 93,369
Adminstrative services fee......................................................... 33,400
Custodian fees..................................................................... 10,635
Auditing and accounting services................................................... 12,420
Legal fees......................................................................... 4,734
Directors' fees.................................................................... 650
Registration fees.................................................................. 34,983
Printing and shareholder reports................................................... 32,560
Insurance.......................................................................... 5,740
Other.............................................................................. 26,564
------------
Total expenses................................................................... 492,236
Less fees and expenses waived or absorbed:
Distribution fees................................................................ (88,943)
Other fund expenses.............................................................. (151,288)
------------
Total fees and expenses waived or absorbed....................................... (240,231)
------------
Total net expenses............................................................... 252,005
------------
Investment income--net........................................................... 1,461,396
------------
Net increase in net assets resulting from operations................................. $ 1,461,396
------------
------------
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
ADVANTUS MONEY MARKET FUND
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED SEPTEMBER 30, 1995 AND
PERIOD FROM NOVEMBER 1, 1993 TO SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Operations:
Investment income--net............................................ $ 1,461,396 $ 652,265
----------- -----------
Increase in net assets resulting from operations................ 1,461,396 652,265
----------- -----------
Distributions to shareholders from net investment income............ (1,461,396) (652,265)
----------- -----------
Capital share transactions, at a constant net asset value of $1.00:
Proceeds from sales............................................... 65,293,589 48,553,873
Shares issued as a result of reinvested dividends................. 1,438,611 646,223
Payments for redemption of shares................................. (56,344,359) (46,586,984)
----------- -----------
Increase in net assets from capital share transactions.......... 10,387,841 2,613,112
----------- -----------
Total increase in net assets.................................... 10,387,841 2,613,112
Net assets at beginning of period................................... 25,718,758 23,105,646
----------- -----------
Net assets at end of period......................................... $36,106,599 $25,718,758
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
8
<PAGE>
ADVANTUS MONEY MARKET FUND
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Advantus Money Market Fund, Inc. (the Fund) is registered under the
Investment Company Act of 1940 (as amended) as a diversified, open-end
management investment company. On February 14, 1995, shareholders of the Fund
approved a name change to Advantus Money Market Fund, Inc. (effective March 1,
1995). Prior to March 1, 1995, the Fund was known as MIMLIC Money Market Fund,
Inc.
On January 18, 1994, the Board of Directors elected to change the fiscal
year end of the Fund from October 31 to September 30.
The significant accounting policies of the Fund are summarized as follows:
INVESTMENTS IN SECURITIES
All securities are valued at the close of each business day. Pursuant to
Rule 2a-7 of the Investment Company Act of 1940 (as amended), all securities are
valued at amortized cost which approximates market value, in order to maintain a
constant net asset value of $1.00.
Security transactions are accounted for on the date the securities are
purchased or sold. 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.
Net investment income may differ for financial statement and tax purposes
primarily because of temporary book-to-tax differences. The character of
distributions made during the year from net investment income may differ from
their ultimate characterization for federal income tax purposes. Also, due to
the timing of dividend distributions, the fiscal year in which amounts are
distributed may differ from the year that the income or realized gains (losses)
were recorded by the Fund.
DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income are declared daily and paid monthly in
cash or reinvested in additional shares. Capital gains, if any, are paid
annually.
(2) INVESTMENT SECURITY TRANSACTIONS
For the year ended September 30, 1995, purchases of securities and proceeds
from sales aggregated $211,021,643 and $199,737,455, respectively.
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(3) EXPENSES AND RELATED PARTY TRANSACTIONS
On February 14, 1995 shareholders of the Fund approved a new investment
advisory agreement with Advantus Capital Management, Inc. (Advantus Capital or
the Adviser). Under the agreement, Advantus Capital manages the Fund's assets
and provides research, statistical and advisory services and pays related office
rental and executive expenses and salaries. Advantus Capital is a wholly-owned
subsidiary of MIMLIC Asset Management Company (MIMLIC Management) which, prior
to March 1, 1995, served as investment adviser to the Fund. The fee for
investment management and advisory services is based on the average daily net
assets of the Fund at the annual rate of .50 percent, which is the same as under
the old agreement with MIMLIC Management.
The Fund pays The Minnesota Mutual Life Insurance Company (Minnesota
Mutual), the parent of MIMLIC Management, a flat fee of $977 per month plus
$1.50 per month per account for transfer agent fees and expenses.
The Fund has adopted a Plan of Distribution relating to the payment of
certain distribution expenses pursuant to Rule 12b-1 under the Investment
Company Act of 1940 (as amended). The Plan provides for a fee up to .30 percent
of average daily net assets to be paid to MIMLIC Sales Corporation (MIMLIC
Sales), the underwriter of the Fund and wholly-owned subsidiary of MIMLIC
Management, to be used to pay certain expenses incurred in the distribution,
promotion and servicing of the Fund's shares. MIMLIC Sales is currently waiving
all of the distribution fees from the Fund.
The Fund also bears certain other operating expenses including outside
directors' fees, custodian fees, registration fees, printing and shareholder
reports, legal, auditing and accounting services, organizational costs and other
miscellaneous expenses.
The Fund pays an administrative services fee to Minnesota Mutual for
accounting, auditing, legal and other administrative services which Minnesota
Mutual provides. Prior to February 1, 1995, the administrative service fee was
$3,350 per month. Effective February 1, 1995, the administrative service fee is
$2,500 per month.
Advantus Capital (MIMLIC Management prior to March 1, 1995) directly incurs
and pays the above operating expenses and the Fund in turn reimburses Advantus
Capital (MIMLIC Management prior to March 1, 1995). During the year ended
September 30, 1995 Advantus Capital and MIMLIC Management voluntarily agreed to
absorb $151,288 in expenses which were otherwise payable by the Fund.
As of September 30, 1995, Minnesota Mutual and subsidiaries and the
directors and officers of the Fund as a whole own 10,568,810 shares or 29.3
percent of the Fund's total shares outstanding.
Legal fees were paid to a law firm of which the Fund's secretary is a
partner in the amount of $4,350.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(4) FINANCIAL HIGHLIGHTS
Per share data for a share of capital stock and selected information for
each period are as follows:
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 1,
YEAR ENDED 1993 TO YEAR ENDED OCTOBER 31,
SEPTEMBER 30, SEPTEMBER 30, -------------------------
1995 1994 1993 1992 1991
------------- ------------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period............................ $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------------- ------------- ------- ------- -------
Income from investment operations:
Net investment income............ .049 .027 .025 .033 .056
------------- ------------- ------- ------- -------
Total from investment
operations.................... .049 .027 .025 .033 .056
------------- ------------- ------- ------- -------
Less distributions:
Dividends from net investment
income.......................... (.049) (.027) (.025) (.033) (.056)
------------- ------------- ------- ------- -------
Total distributions............ (.049) (.027) (.025) (.033) (.056)
------------- ------------- ------- ------- -------
Net asset value, end of period..... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------------- ------------- ------- ------- -------
------------- ------------- ------- ------- -------
Total return (a)................... 5.0% 2.7%(b) 2.5% 3.4% 5.9%
Net assets, end of period (in
thousands)........................ $36,107 $25,719 $23,106 $23,136 $33,889
Ratio of expenses to average daily
net assets (c).................... .85% .85%(d) .85% .85% .85%
Ratio of net investment income to
average daily net assets (c)...... 4.93% 2.95%(d) 2.45% 3.35% 5.63%
<FN>
- ----------
(a) Total return figures are based on a share outstanding throughout the period
and assumes reinvestment of distributions at net asset value.
(b) Total return is presented for the period from November 1, 1993 to September
30, 1994.
(c) The Fund's Adviser and Distributor voluntarily waived or absorbed $240,231,
$222,862, $210,392, $224,636 and $216,386 in expenses for the year ended
September 30, 1995, the period from November 1, 1993 to September 30, 1994
and the years ended October 31, 1993, 1992 and 1991, respectively. If the
Fund had been charged for these expenses, the ratio of expenses to average
daily net assets would have been 1.66%, 1.86%, 1.74%, 1.59% and 1.36%,
respectively, and the ratio of net investment income to average daily net
assets would have been 4.12%, 1.94%, 1.56%, 2.61% and 5.12%, respectively.
(d) Adjusted to an annual basis.
</TABLE>
11
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Advantus Bond Fund, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments in securities, of the Advantus Bond Fund,
Inc. (the Fund) as of September 30, 1995 and the related statement of operations
for the year then ended, the statement of changes in net assets for the year
ended September 30, 1995 and the period from November 1, 1993 to September 30,
1994 and the financial highlights for the year ended September 30, 1995, the
period from November 1, 1993 to September 30, 1994 and each of the years in the
three-year period ended October 31, 1993. These financial statements and the
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by the
custodian. As to securities purchased or sold but not received or delivered, we
request confirmations from brokers, and where replies are not received, we carry
out other appropriate auditing procedures. 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
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of the Fund as of September 30, 1995 and the results of its operations,
changes in its net assets and financial highlights, for the periods stated in
the first paragraph above, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
November 3, 1995
19
<PAGE>
ADVANTUS BOND FUND
INVESTMENTS IN SECURITIES
SEPTEMBER 30, 1995
(Percentages of each investment category relate to total net assets.)
<TABLE>
<CAPTION>
MARKET
PRINCIPAL VALUE(A)
- --------- ------------
<C> <S> <C> <C> <C>
LONG-TERM DEBT SECURITIES (92.2%)
GOVERNMENT OBLIGATIONS (28.7%)
U.S. GOVERNMENT AND AGENCIES OBLIGATIONS (23.0%)
$ 500,000 Federal Home Loan Bank........................... 8.460% 12/20/99 $ 502,520
500,000 Federal Home Loan Mortgage....................... 7.030% 04/05/04 503,168
455,997 Federal National Mortgage Association............ 7.000% 09/01/17 453,502
259,111 Government National Mortgage Association......... 7.000% 03/15/23 255,978
312,942 Government National Mortgage Association......... 7.000% 04/15/22 309,430
250,000 U.S. Treasury Note............................... 6.750% 05/31/99 256,172
750,000 U.S. Treasury Note............................... 10.750% 08/15/05 993,046
500,000 U.S. Treasury Note............................... 7.750% 11/30/99 531,563
------------
3,805,379
------------
OTHER GOVERNMENT (3.0%)
500,000 Quebec Province of Canada(b)..................... 7.500% 07/15/23 493,590
------------
LOCAL AND STATE GOVERNMENT OBLIGATIONS (2.7%)
462,000 Wyoming Community Development Authority.......... 6.850% 06/01/10 455,070
------------
Total government obligations (cost: $4,631,747)........................ 4,754,039
------------
CORPORATE OBLIGATIONS (63.5%)
BASIC INDUSTRIES (3.5%)
Primary Metals (3.5%)
530,000 Reynolds Metals Company.......................... 9.375% 06/15/99 578,705
------------
CAPITAL GOODS (8.9%)
Aerospace/Defense (3.0%)
500,000 Rockwell International........................... 6.750% 09/15/02 506,561
------------
Machinery (2.7%)
400,000 Joy Technologies Incorporated.................... 10.250% 09/01/03 448,000
------------
Telecommunications (3.2%)
500,000 Comsat Corporation............................... 7.700% 05/10/07 523,805
------------
CONSUMER CYCLICAL (3.4%)
Automotive (3.4%)
500,000 Chrysler Corporation............................. 10.950% 08/01/17 559,019
------------
CONSUMER STAPLES (13.0%)
Drugs (3.0%)
500,000 American Home Products........................... 6.500% 10/15/02 497,480
------------
Entertainment (1.6%)
250,000 Royal Caribbean Cruises.......................... 8.250% 04/01/05 264,495
------------
</TABLE>
See accompanying notes to investments in securities.
7
<PAGE>
ADVANTUS BOND FUND
INVESTMENTS IN SECURITIES--CONTINUED
<TABLE>
<CAPTION>
MARKET
PRINCIPAL VALUE(A)
- --------- ------------
<C> <S> <C> <C> <C>
CORPORATE OBLIGATIONS--CONTINUED
Food (2.2%)
$ 364,286 General Mills.................................... 6.235% 03/15/97 $ 365,876
------------
Media (3.3%)
500,000 Time Warner...................................... 9.150% 02/01/23 541,277
------------
Printing and Publishing (2.9%)
500,000 News America Corporation......................... 7.750% 01/20/24 487,865
------------
CREDIT SENSITIVE (3.1%)
Building Materials (3.1%)
500,000 CSR Finance...................................... 7.700% 07/21/25 513,512
------------
ENERGY (3.3%)
Natural Gas Distribution (3.3%)
500,000 Consolidated Natural Gas......................... 8.750% 10/01/19 539,844
------------
FINANCIAL (12.7%)
Commercial Finance (5.3%)
500,000 Banc One Corporation............................. 7.000% 07/15/05 504,152
400,000 GMAC............................................. 5.500% 12/15/01 374,100
------------
878,252
------------
Real Estate (7.4%)
237,105 Green Tree Financial, Net Interest Margin, Series
1995-A, Class A................................. 7.250% 07/15/05 237,098
500,000 Property Trust of America........................ 7.500% 02/15/14 473,850
500,000 Security Capital Industrial Trust................ 7.875% 05/15/09 507,054
------------
1,218,002
------------
UTILITIES (6.3%)
Electric (3.1%)
500,000 Commonwealth Edison.............................. 8.250% 12/01/07 511,328
------------
Telephones (3.2%)
500,000 Alltel Corporation............................... 10.375% 04/01/09 530,549
------------
TRANSPORTATION (9.3%)
Air Transportation (3.2%)
500,000 Delta Air Lines.................................. 9.200% 09/23/14 536,460
------------
Trucking (3.0%)
500,000 Consolidated Freightways(c)...................... 7.350% 06/01/05 499,672
------------
</TABLE>
8
<PAGE>
ADVANTUS BOND FUND
INVESTMENTS IN SECURITIES--CONTINUED
<TABLE>
<CAPTION>
MARKET
PRINCIPAL VALUE(A)
- --------- ------------
<C> <S> <C> <C> <C>
CORPORATE OBLIGATIONS--CONTINUED
Water Transportation (3.2%)
$ 500,000 Overseas Shipholding Group....................... 8.750% 12/01/13 $ 520,340
------------
Total corporate obligations (cost: $10,454,316)........................ 10,521,042
------------
Total long-term debt securities (cost: $15,086,063).................... 15,275,081
------------
SHORT-TERM SECURITIES (4.4%)
730,000 U.S. Treasury Bills..............................5.44%-5.45% 12/07/95 722,567
------------
Total short-term securities (cost: $722,676)........................... 722,567
------------
Total investments in securities (cost: $15,808,739)(d)................. $ 15,997,648
------------
------------
</TABLE>
Notes to Investments in Securities
(a) Securities are valued by procedures described in note 2 to the financial
statements.
(b) The Fund held 3.0% of net assets in foreign securities as of September 30,
1995.
(c) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At September 30,
1995, the value of these securities amounted to $499,672 or 3.0% of net
assets.
(d) At September 30, 1995 the cost of securities for federal income tax purposes
was $15,808,739. The aggregate unrealized appreciation and depreciation of
investments in securities based on this cost were:
<TABLE>
<S> <C>
Gross unrealized appreciation..................... $ 251,349
Gross unrealized depreciation..................... (62,440)
---------
Net unrealized appreciation....................... $ 188,909
---------
---------
</TABLE>
9
<PAGE>
ADVANTUS BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1995
<TABLE>
<S> <C>
ASSETS
Investments in securities, at market value--see accompanying schedule for
detailed listing (identified cost: $15,808,739)................................ $15,997,648
Receivable for Fund shares sold................................................. 5,239
Receivable for investment securities sold....................................... 867,658
Accrued interest receivable..................................................... 313,833
-----------
Total assets................................................................ 17,184,378
-----------
LIABILITIES
Cash overdraft.................................................................. 1,003
Payable for Fund shares repurchased............................................. 73,061
Payable for investment securities purchased..................................... 524,606
Payable to Adviser.............................................................. 14,493
Dividends payable to shareholders............................................... 1,923
-----------
Total liabilities........................................................... 615,086
-----------
Net assets applicable to outstanding capital stock.............................. $16,569,292
-----------
-----------
Represented by:
Capital stock--$.01 par value (note 1)........................................ $ 16,189
Additional paid-in capital.................................................... 16,752,143
Undistributed net investment income........................................... 6,706
Accumulated net realized losses from investments.............................. (394,655)
Unrealized appreciation of investments........................................ 188,909
-----------
Total--representing net assets applicable to outstanding capital stock...... $16,569,292
-----------
-----------
Net assets applicable to outstanding Class A Shares............................. $15,315,447
-----------
-----------
Net assets applicable to outstanding Class B Shares............................. $ 1,141,804
-----------
-----------
Net assets applicable to outstanding Class C Shares............................. $ 112,041
-----------
-----------
Shares outstanding and net asset value per share:
Class A--Shares outstanding 1,496,326......................................... $ 10.24
-----------
-----------
Class B--Shares outstanding 111,592........................................... $ 10.23
-----------
-----------
Class C--Shares outstanding 10,955............................................ $ 10.23
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
10
<PAGE>
ADVANTUS BOND FUND
STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<S> <C>
Investment income:
Interest........................................................................... $ 1,128,433
------------
Expenses (note 4):
Investment advisory fee............................................................ 104,228
Distribution fees--Class A......................................................... 43,001
Distribution fees--Class B......................................................... 5,214
Distribution fees--Class C......................................................... 346
Administrative services fee........................................................ 39,200
Custodian fees..................................................................... 2,674
Auditing and accounting services................................................... 10,550
Legal fees......................................................................... 5,098
Directors' fees.................................................................... 333
Registration fees.................................................................. 37,833
Printing and shareholder reports................................................... 20,735
Insurance.......................................................................... 5,420
Other.............................................................................. 8,423
------------
Total expenses................................................................. 283,055
Less fees and expenses waived or absorbed:
Class A distribution fees........................................................ (28,668)
Other fund expenses.............................................................. (100,487)
------------
Total fees and expenses waived or absorbed..................................... (129,155)
------------
Total net expenses............................................................. 153,900
------------
Investment income--net......................................................... 974,533
------------
Realized and unrealized gains (losses) on investments:
Net realized losses on investments (note 3)........................................ (56,377)
Net change in unrealized appreciation or depreciation on investments............... 1,185,953
------------
Net gains on investments....................................................... 1,129,576
------------
Net increase in net assets resulting from operations................................. $ 2,104,109
------------
------------
</TABLE>
See accompanying notes to financial statements.
11
<PAGE>
ADVANTUS BOND FUND
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED SEPTEMBER 30, 1995 AND
PERIOD FROM NOVEMBER 1, 1993 TO SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Operations:
Investment income--net........................................................ $ 974,533 $ 750,863
Net realized losses on investments............................................ (56,377) (338,278)
Net change in unrealized appreciation or depreciation on investments.......... 1,185,953 (1,403,507)
----------- -----------
Increase (decrease) in net assets resulting from operations................. 2,104,109 (990,922)
----------- -----------
Distributions to shareholders from:
Investment income--net:
Class A..................................................................... (939,133) (750,510)
Class B..................................................................... (28,946) (312)
Class C..................................................................... (1,889) --
Net realized gains on investments:
Class A..................................................................... -- (622,857)
----------- -----------
Total distributions......................................................... (969,968) (1,373,679)
----------- -----------
Capital share transactions (notes 4 and 5):
Proceeds from sales:
Class A..................................................................... 1,777,559 3,127,259
Class B..................................................................... 1,038,123 51,433
Class C..................................................................... 116,675 --
Shares issued as a result of reinvested dividends:
Class A..................................................................... 544,661 806,836
Class B..................................................................... 26,143 312
Class C..................................................................... 1,889 --
Payments for redemption of shares:
Class A..................................................................... (1,973,311) (2,185,713)
Class B..................................................................... (16,414) --
Class C..................................................................... (9,920) --
----------- -----------
Increase in net assets from capital share transactions...................... 1,505,415 1,800,127
----------- -----------
Total increase (decrease) in net assets..................................... 2,639,556 (564,474)
Net assets at beginning of period............................................... 13,929,736 14,494,210
----------- -----------
Net assets at end of period (including undistributed net investment income of
$6,706 and $2,141, respectively)............................................... $16,569,292 $13,929,736
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
12
<PAGE>
ADVANTUS BOND FUND
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
(1) ORGANIZATION
The Advantus Bond Fund, Inc. (the Fund) is registered under the Investment
Company Act of 1940 (as amended) as a diversified, open-end management
investment company. On February 14, 1995 shareholders of the Fund approved a
name change to Advantus Bond Fund, Inc. (effective March 1, 1995). Prior to
March 1, 1995 the Fund was known as MIMLIC Fixed Income Securities Fund, Inc.
The Fund currently issues three classes of shares: Class A, Class B and
Class C shares. Class A shares are sold subject to a front-end sales charge.
Class B shares are sold subject to a contingent deferred sales charge payable
upon redemption if redeemed within six years of purchase. Class C shares are
sold without either a front-end sales charge or a contingent deferred sales
charge. Both Class B and Class C shares are subject to a higher Rule 12b-1 fee
than Class A shares. Both Class B and Class C shares automatically convert to
Class A shares at net asset value after a specified holding period. Such holding
periods decline as the amount of the purchase increases and range from 28 to 84
months after purchase for Class B shares and 40 to 96 months after purchase for
Class C shares. All three classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions, except that the
level of distribution fees and sales charges charged differs between Class A,
Class B and Class C shares. Income, expenses (other than distribution fees) and
realized and unrealized gains or losses on investments are allocated to each
class of shares based upon its relative net assets.
On January 18, 1994, the Board of Directors elected to change the fiscal
year end of the Fund from October 31 to September 30.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by the Fund are summarized as
follows:
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. When market quotations are not readily available, securities are
valued at fair value as determined in good faith 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. Interest income, including amortization of bond premium
and discount computed on a level yield basis, is accrued daily.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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.
For federal income tax purposes, the Fund had a capital loss carryover at
September 30, 1995 of $394,655, which, if not offset by subsequent capital
gains, will expire from September 30, 2003 to September 30, 2004. It is unlikely
the board of directors will authorize a distribution of any net realized capital
gains until the available capital loss carryover has been offset or expired.
Net investment income and net realized gains (losses) may differ for
financial statement and tax purposes primarily because of temporary book-to-tax
differences. The character of distributions made during the year from net
investment income or net realized gains may differ from their ultimate
characterization for federal income tax purposes. Also, due to the timing of
dividend distributions, the fiscal year in which amounts are distributed may
differ from the year that the income or realized gains (losses) were recorded by
the Fund.
DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income are declared daily and paid monthly in
cash or reinvested in additional shares. Realized gains, if any, are paid
annually.
(3) INVESTMENT SECURITY TRANSACTIONS
For the year ended September 30, 1995, purchases of securities and proceeds
from sales, other than temporary investments in short-term securities aggregated
$39,992,974 and $37,897,269, respectively.
(4) EXPENSES AND RELATED PARTY TRANSACTIONS
On February 14, 1995 shareholders of the Fund approved a new investment
advisory agreement with Advantus Capital Management, Inc. (Advantus Capital or
the Adviser). Advantus Capital is a wholly-owned subsidiary of MIMLIC Asset
Management Company (MIMLIC Management) which, prior to March 1, 1995, served as
investment adviser to the Fund. Under the agreement, Advantus Capital manages
the Fund's assets and provides research, statistical and advisory services and
pays related office rental and executive expenses and salaries. In addition, as
part of the advisory fee, Advantus Capital pays the expenses of the Fund's
transfer, dividend disbursing and redemption agent (The Minnesota Mutual Life
Insurance Company (Minnesota Mutual), the parent of MIMLIC Management). The fee
for investment management and advisory services is based on the average daily
net assets of the Fund at the annual rate of .70 percent, which is the same as
under the old agreement with MIMLIC Management.
The Fund has adopted separate Plans of Distribution applicable to Class A,
Class B and Class C shares, respectively, relating to the payment of certain
distribution expenses pursuant to Rule 12b-1 under the Investment Company Act of
1940 (as amended). The Fund pays distribution fees to MIMLIC Sales Corporation
(MIMLIC Sales), the underwriter of the Fund and wholly-owned subsidiary of
MIMLIC
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(4) EXPENSES AND RELATED PARTY TRANSACTIONS--(CONTINUED)
Management, to be used to pay certain expenses incurred in the distribution,
promotion and servicing of the Fund's shares. The Class A Plan provides for a
fee up to .30 percent of average daily net assets of Class A shares. The Class B
and Class C Plans provide for a fee up to 1.00 percent of average daily net
assets of Class B and Class C shares, respectively. The Class B and Class C 1.00
percent fee is comprised of a .75 percent distribution fee and a .25 percent
service fee. MIMLIC Sales is currently waiving that portion of Class A
distribution fees which exceeds, as a percentage of average daily net assets,
.10 percent. MIMLIC Sales waived Class A distribution fees in the amount of
$28,668 for the year ended September 30, 1995.
The Fund also bears certain other operating expenses including outside
directors' fees, custodian fees, registration fees, printing and shareholder
reports, legal, auditing and accounting services, and other miscellaneous
expenses.
The Fund pays an administrative services fee to Minnesota Mutual for
accounting, auditing, legal and other administrative services which Minnesota
Mutual provides. Prior to February 1, 1995, the administrative service fee was
$3,600 per month. Effective February 1, 1995, the administrative service fee is
$3,100 per month.
Advantus Capital (MIMLIC Management prior to March 1, 1995) directly incurs
and pays the above operating expenses and the Fund in turn reimburses Advantus
Capital. During the year ended September 30, 1995, Advantus Capital and MIMLIC
Management voluntarily agreed to absorb $100,487 in expenses that were otherwise
payable by the Fund.
Sales charges received by MIMLIC Sales for distributing the Fund's three
classes of shares amounted to $61,826.
As of September 30, 1995, Minnesota Mutual Life and subsidiaries and the
directors and officers of the Fund as a whole own the following shares:
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OWNED
------------------ ---------------------
<S> <C> <C>
Class A..................................................................... 371,243 24.8%
Class B..................................................................... 5,495 4.9%
Class C..................................................................... 1,069 9.8%
</TABLE>
Legal fees were paid to a law firm of which the Fund's secretary is a
partner in the amount of $4,713.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(5) CAPITAL SHARE TRANSACTIONS
Transactions in shares for the year ended September 30, 1995 and the period
from November 1, 1993 to September 30, 1994 for Class A shares, the year ended
September 30, 1995 and the period from August 19, 1994 to September 30, 1994 for
Class B shares and the period from March 1, 1995 to September 30, 1995 for Class
C shares were as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
---------------------- -------------------- -----------
1995 1994 1995 1994 1995
---------- ---------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Sold.................................................. 181,987 307,605 105,047 5,310 11,740
Issued for reinvested distributions................... 55,696 78,367 2,629 33 189
Redeemed.............................................. (203,125) (217,456) (1,427) -- (974)
---------- ---------- --------- --------- -----------
34,558 168,516 106,249 5,343 10,955
---------- ---------- --------- --------- -----------
---------- ---------- --------- --------- -----------
</TABLE>
(6) RESTRICTED SECURITIES
At September 30, 1995, investments in securities includes an issue which
generally cannot be offered for sale to the public without first being
registered under the Securities Act of 1933 (restricted security). In the event
the securities are registered, those carrying registration rights allow for the
issuer to bear all the related costs; for issues without rights, the Fund may
incur such costs. The Fund currently limits investments in securities that are
not readily marketable, including restricted securities, to 10% of net assets at
the time of the purchase. Securities are valued by procedures described in note
2. The aggregate value of restricted securities held by the Fund at September
30, 1995 was $499,672 which represents 3.0% of net assets.
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(7) FINANCIAL HIGHLIGHTS
Per share data for a share of capital stock and selected information for
each period are as follows:
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------
PERIOD FROM
NOVEMBER 1,
YEAR ENDED 1993 TO YEAR ENDED OCTOBER 31
SEPTEMBER 30, SEPTEMBER 30, -------------------------
1995 1994 1993 1992 1991
------------- ------------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period.............. $ 9.50 $ 11.21 $ 10.72 $10.38 $ 9.79
------ ------ ------- ------ ------
Income from investment operations:
Net investment income........................... .64 .53 .63 .73 .79
Net gains or losses on securities (both realized
and unrealized)................................ .74 (1.24) .78 .36 .59
------ ------ ------- ------ ------
Total from investment operations.............. 1.38 (.71) 1.41 1.09 1.38
------ ------ ------- ------ ------
Less distributions:
Dividends from net investment income............ (.64) (.53) (.63) (.73) (.79)
Distributions from capital gains................ -- (.47) (.29) (.02) --
------ ------ ------- ------ ------
Total distributions........................... (.64) (1.00) (.92) (.75) (.79)
------ ------ ------- ------ ------
Net asset value, end of period.................... $ 10.24 $ 9.50 $ 11.21 $10.72 $10.38
------ ------ ------- ------ ------
------ ------ ------- ------ ------
Total return (a).................................. 15.1% (6.7)%(b) 14.0% 10.8% 14.7%
Net assets, end of period (in thousands).......... $15,315 $13,879 $14,494 $9,415 $5,967
Ratio of expenses to average daily net assets
(d).............................................. 1.00% 1.00%(c) 1.00% 1.00% .97%
Ratio of net investment income to average daily
net assets (d)................................... 6.58% 5.79%(c) 5.78% 6.88% 7.91%
Portfolio turnover rate (excluding short-term
securities)...................................... 270.7% 163.5% 139.5% 115.6% 92.7%
</TABLE>
- ----------
(a) Total return figures are based on a share outstanding throughout the period
and assumes reinvestment of distributions at net asset value. Total return
figures do not reflect the impact of sales charges.
(b) Total return is presented for the period from November 1, 1993 to September
30, 1994.
(c) Adjusted to an annual basis.
(d) The Fund's Adviser and Distributor voluntarily absorbed or waived $129,155,
$107,448, $86,877, $78,626 and $66,537 in expenses for the year ended
September 30, 1995, for the period from November 1, 1993 to September 30,
1994 and the years ended October 31, 1993, 1992 and 1991, respectively. If
Class A shares had been charged for these expenses, the ratio of expenses to
average daily net assets would have been 1.88%, 1.83%, 1.70%, 2.10% and
2.35%, respectively, and the ratio of net investment income to average daily
net assets would have been 5.70%, 4.95%, 5.08%, 5.78% and 6.53%,
respectively.
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(7) FINANCIAL HIGHLIGHTS--(CONTINUED)
<TABLE>
<CAPTION>
CLASS B CLASS C
-------------------------------- -------------
PERIOD FROM PERIOD FROM
AUGUST 19, MARCH 1, 1995
YEAR ENDED 1994 (A) TO (A) TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net asset value, beginning of period.............. $ 9.50 $ 9.68 $ 9.67
------ ------ ------
Income from investment operations:
Net investment income........................... .55 .06 .33
Net gains or losses on securities (both realized
and unrealized)................................ .73 (.18) .55
------ ------ ------
Total from investment operations.............. 1.28 (.12) .88
------ ------ ------
Less distributions:
Dividends from net investment income............ (.55) (.06) (.32)
Distributions from capital gains................ -- -- --
------ ------ ------
Total distributions........................... (.55) (.06) (.32)
------ ------ ------
Net asset value, end of period.................... $ 10.23 $ 9.50 $ 10.23
------ ------ ------
------ ------ ------
Total return (b).................................. 13.9% (1.2)%(c) 9.3%(d)
Net assets, end of period (in thousands).......... $1,142 $51 $112
Ratio of expenses to average daily net assets
(f).............................................. 1.90% .22%(g) 1.90%(e)
Ratio of net investment income to average daily
net assets (f)................................... 5.61% .69%(g) 5.54%(e)
Portfolio turnover rate (excluding short-term
securities)...................................... 270.7% 163.5% 270.7%
</TABLE>
- ----------
(a) Commencement of operations.
(b) Total return figures are based on a share outstanding throughout the period
and assumes reinvestment of distributions at net asset value. Total return
figures do not reflect the impact of sales charges.
(c) Total return is presented for the period from August 19, 1994, commencement
of operations, to September 30, 1994.
(d) Total return is presented for the period from March 1, 1995, commencement of
operations, to September 30, 1995.
(e) Adjusted to an annual basis.
(f) The Fund's Adviser and Distributor voluntarily absorbed or waived $129,155,
$107,448, $86,877, $78,626 and $66,537 in expenses for the year ended
September 30, 1995, for the period from November 1, 1993 to September 30,
1994 and the years ended October 31, 1993, 1992 and 1991, respectively. If
Class B shares had been charged for these expenses, the ratio of expenses to
average daily net assets would have been 2.56% and .35%, respectively, and
the ratio of net investment income to average daily net assets would have
been 4.95% and .56%, respectively, for the year ended September 30, 1995 and
the period from August 19, 1994, commencement of operations, to September
30, 1994, respectively. If Class C shares had been charged for these
expenses, the ratio of expenses to average daily net assets would have been
2.56% and the ratio of net investment income to average daily net assets
would have been 4.88% for the period from March 1, 1995, commencement of
operations, to September 30, 1995.
(g) Ratios presented for the periods from August 19, 1994 to September 30, 1994
are not annualized as they are not indicative of anticipated results.
18
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Advantus Cornerstone Fund, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments in securities, of the Advantus Cornerstone
Fund, Inc. (the Fund) as of September 30, 1995 and the related statement of
operations for the year then ended, the statement of changes in net assets for
the year ended September 30, 1995 and the period from June 20, 1994 to September
30, 1994 and the financial highlights for the year ended September 30, 1995 and
the period from September 16, 1994 to September 30, 1994. These financial
statements and the financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by the
custodian. As to securities purchased or sold but not received or delivered, we
request confirmations from brokers, and where replies are not received, we carry
out other appropriate auditing procedures. 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
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of the Fund as of September 30, 1995 and the results of its operations,
changes in its net assets and financial highlights, for the periods stated in
the first paragraph above, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
November 3, 1995
16
<PAGE>
ADVANTUS CORNERSTONE FUND
INVESTMENTS IN SECURITIES
SEPTEMBER 30, 1995
(Percentages of each investment category relate to total net assets.)
<TABLE>
<CAPTION>
MARKET
SHARES VALUE(A)
- ------------ ------------
<C> <S> <C>
COMMON STOCKS (96.8%)
CAPITAL GOODS (6.2%)
Machinery (6.2%)
26,300 Case Corporation........................ $ 966,525
7,700 ITT Corporation......................... 954,800
------------
1,921,325
------------
CONSUMER GOODS AND SERVICES (24.0%)
Consumer Goods (6.6%)
13,089 Columbia/HCA Healthcare
Corporation............................ 636,453
23,100 Mallinckrodt Group Inc.................. 915,337
18,900 Value Health Incorporated (b)........... 500,850
------------
2,052,640
------------
Consumer Services (2.2%)
33,800 Bowne & Company, Incorporated........... 684,450
------------
Retail (6.1%)
31,100 Federated Department Stores (b)......... 882,462
27,500 Sears, Roebuck and Co................... 1,014,063
------------
1,896,525
------------
Consumer Cyclicals (9.1%)
48,100 Burlington Industries (b)............... 607,262
30,600 Kellwood Company........................ 631,125
35,800 Owens-Corning Fiberglas Corporation
(b).................................... 1,597,575
------------
2,835,962
------------
CREDIT SENSITIVE (26.4%)
Finance (9.5%)
28,200 American Express Company................ 1,251,375
<CAPTION>
MARKET
SHARES VALUE(A)
- ------------ ------------
<C> <S> <C>
CREDIT SENSITIVE--CONTINUED
19,700 Golden West Financial Corporation....... $ 994,850
31,500 Lehman Brothers Holdings, Inc........... 728,437
------------
2,974,662
------------
Insurance (16.9%)
7,900 American Internationl Group, Inc........ 671,500
40,200 Green Point Financial Corporation....... 1,110,525
17,600 MBIA Inc................................ 1,240,800
20,500 RLI Corporation......................... 458,687
66,800 TIG Holdings Inc........................ 1,795,250
------------
5,276,762
------------
INTERMEDIATE GOODS AND SERVICES (30.3%)
Energy (14.4%)
25,300 Coflexip ADR (c)........................ 388,987
24,600 Columbia Gas System, Inc (b)............ 950,175
27,400 Tidewater Incorporated.................. 770,625
28,200 Tosco Corporation....................... 972,900
33,200 USX--Marathon Group..................... 655,700
41,300 YPF Sociedad Anonima ADR (c)............ 743,400
------------
4,481,787
------------
Materials (11.5%)
14,500 Aluminum Company of America............. 766,688
12,000 Citation Corporation (b)................ 216,000
13,400 Cytec Industries Inc (b)................ 775,525
7,600 Dow Chemical Company.................... 566,200
21,500 Fort Howard Corporation (b)............. 330,563
</TABLE>
See accompanying notes to investments in securities.
6
<PAGE>
ADVANTUS CORNERSTONE FUND
INVESTMENTS IN SECURITIES--CONTINUED
<TABLE>
<CAPTION>
MARKET
SHARES VALUE(A)
- ------------ ------------
INTERMEDIATE GOODS AND SERVICES-- CONTINUED
<C> <S> <C>
30,000 Morton International.................... $ 930,000
------------
3,584,976
------------
Transportation (4.4%)
10,500 Burlington Northern Santa Fe (b)........ 761,250
25,900 Teekay Shipping Corporation (b)(c)...... 621,600
------------
1,382,850
------------
<CAPTION>
MARKET
SHARES VALUE(A)
- ------------ ------------
<C> <S> <C>
TECHNOLOGY (9.9%)
44,400 EMC Corporation (b)..................... $ 804,750
14,500 B.F. Goodrich Company................... 955,188
20,300 Rohr Incorporated (b)................... 329,875
7,500 Xerox Corporation....................... 1,007,813
------------
3,097,626
------------
Total common stocks
(cost: $26,585,182) ................................... 30,189,565
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
- ---------
<C> <S> <C> <C> <C>
SHORT-TERM SECURITIES (4.1%)
$ 480,000 U.S. Treasury Bills........................ 5.55% 10/12/95 479,113
800,000 U.S. Treasury Bills........................ 5.41%-5.45% 12/07/95 791,842
------------
Total short-term securities (cost: $1,271,142)....................... 1,270,955
------------
Total investments in securities (cost: $27,856,324) (d).............. $ 31,460,520
------------
------------
<FN>
Notes to Investments in Securities
(a) Securites are valued by procedures described in note 2 to the financial
statements.
(b) Presently non-income producing.
(c) The Fund held 5.6% of net assets in foreign securities as of September 30,
1995.
(d) At September 30, 1995 the cost of securities for federal income tax
purposes was $27,858,988. The aggregate unrealized appreciation and
depreciation of investments in securities based on this cost were:
Gross unrealized appreciation........................................................................ $ 4,261,727
Gross unrealized depreciation........................................................................ (660,195)
------------
Net unrealized appreciation.......................................................................... $ 3,601,532
------------
------------
</TABLE>
7
<PAGE>
ADVANTUS CORNERSTONE FUND
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1995
<TABLE>
<S> <C>
ASSETS
Investments in securities, at market value--see accompanying schedule for detailed
listing (identified cost: $27,856,324).............................................. $ 31,460,520
Cash in bank on demand deposit....................................................... 79,465
Receivable for Fund shares sold...................................................... 7,154
Receivable for investment securities sold............................................ 1,173,698
Dividends receivable................................................................. 43,244
Organizational costs................................................................. 43,471
------------
Total assets..................................................................... 32,807,552
------------
LIABILITIES
Payable for Fund shares repurchased.................................................. 1,087
Payable for investment securities purchased.......................................... 1,525,338
Payable for organizational costs..................................................... 43,471
Payable to Adviser................................................................... 35,595
------------
Total liabilities................................................................ 1,605,491
------------
Net assets applicable to outstanding capital stock................................... $ 31,202,061
------------
------------
Represented by:
Capital stock--$.01 par value (note 1)............................................. $ 24,079
Additional paid-in capital......................................................... 25,814,130
Undistributed net investment income................................................ --
Accumulated net realized gains from investments.................................... 1,759,656
Unrealized appreciation of investments............................................. 3,604,196
------------
Total--representing net assets applicable to outstanding capital stock........... $ 31,202,061
------------
------------
Net assets applicable to outstanding Class A Shares.................................. $ 29,519,898
------------
------------
Net assets applicable to outstanding Class B Shares.................................. $ 1,635,392
------------
------------
Net assets applicable to outstanding Class C Shares.................................. $ 46,771
------------
------------
Shares outstanding and net asset value per share:
Class A--Shares outstanding 2,277,462.............................................. $ 12.96
------------
------------
Class B--Shares outstanding 126,777................................................ $ 12.90
------------
------------
Class C--Shares outstanding 3,625.................................................. $ 12.90
------------
------------
</TABLE>
See accompanying notes to financial statements.
8
<PAGE>
ADVANTUS CORNERSTONE FUND
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<S> <C>
Investment income:
Interest........................................................................... $ 88,637
Dividends.......................................................................... 354,807
------------
443,444
------------
Expenses (note 4):
Investment advisory fee............................................................ 150,365
Distribution fees--Class A......................................................... 54,166
Distribution fees--Class B......................................................... 7,262
Distribution fees--Class C......................................................... 142
Administrative services fee........................................................ 37,800
Amortization of organizational costs............................................... 11,099
Custodian fees..................................................................... 9,421
Auditing and accounting services................................................... 7,165
Legal fees......................................................................... 7,924
Directors' fees.................................................................... 344
Registration fees.................................................................. 35,428
Printing and shareholder reports................................................... 12,127
Insurance.......................................................................... 5,420
Other.............................................................................. 5,486
------------
Total expenses................................................................... 344,149
Less fees and expenses waived or absorbed:
Class A distribution fees........................................................ (36,111)
Other fund expenses.............................................................. (47,635)
------------
Total fees and expenses waived or absorbed..................................... (83,746)
------------
Total net expenses............................................................. 260,403
------------
Investment income--net......................................................... 183,041
------------
Realized and unrealized gains on investments:
Net realized gains on investments (note 3)......................................... 1,821,875
Net change in unrealized appreciation or depreciation on investments............... 3,101,643
------------
Net gains on investments......................................................... 4,923,518
------------
Net increase in net assets resulting from operations................................. $ 5,106,559
------------
------------
</TABLE>
See accompanying notes to financial statements.
9
<PAGE>
ADVANTUS CORNERSTONE FUND
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED SEPTEMBER 30, 1995 AND
PERIOD FROM JUNE 20, 1994 TO SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Operations:
Investment income--net..................................................... $ 183,041 $ 41,786
Net realized gains (losses) on investments................................. 1,821,875 (3,672)
Net change in unrealized appreciation or depreciation on investments....... 3,101,643 502,553
------------ ------------
Increase in net assets resulting from operations......................... 5,106,559 540,667
------------ ------------
Distributions to shareholders from:
Investment income--net:
Class A.................................................................. (231,132) --
Class B.................................................................. (5,632) --
Class C.................................................................. (87) --
Net realized gains on investments:
Class A.................................................................. (56,912) --
Class B.................................................................. (1,628) --
Class C.................................................................. (7) --
------------ ------------
Total distributions.................................................... (295,398) --
------------ ------------
Capital share transactions (notes 4 and 6):
Proceeds from sales:
Class A.................................................................. 14,465,694 10,080,240
Class B.................................................................. 1,365,600 88,098
Class C.................................................................. 42,221 --
Shares issued as a result of reinvested dividends:
Class A.................................................................. 15,156 --
Class B.................................................................. 7,260 --
Class C.................................................................. 94 --
Payments for redemption of shares:
Class A.................................................................. (172,556) --
Class B.................................................................. (41,569) (5)
Class C.................................................................. -- --
------------ ------------
Increase in net assets from capital share transactions................... 15,681,900 10,168,333
------------ ------------
Total increase in net assets............................................. 20,493,061 10,709,000
Net assets at beginning of period............................................ 10,709,000 --
------------ ------------
Net assets at end of period (including undistributed net investment income of
$0 and $42,711, respectively)............................................... $ 31,202,061 $ 10,709,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements.
10
<PAGE>
ADVANTUS CORNERSTONE FUND
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
(1) ORGANIZATION
Advantus Cornerstone Fund, Inc. (the Fund) was incorporated on January 27,
1994. The Fund is registered under the Investment Company Act of 1940 (as
amended) as a diversified, open-end management investment company. On February
14, 1995 shareholders of the Fund approved a name change to Advantus Cornerstone
Fund, Inc. (effective March 1, 1995). Prior to March 1, 1995 the Fund was known
as MIMLIC Value Fund, Inc.
The Fund currently issues three classes of shares: Class A, Class B and
Class C shares. Class A shares are sold subject to a front-end sales charge.
Class B shares are sold subject to a contingent deferred sales charge payable
upon redemption if redeemed within six years of purchase. Class C shares are
sold without either a front-end sales charge or a contingent deferred sales
charge. Both Class B and Class C shares are subject to a higher Rule 12b-1 fee
than Class A shares. Both Class B and Class C shares automatically convert to
Class A shares at net asset value after a specified holding period. Such holding
periods decline as the amount of the purchase increases and range from 28 to 84
months after purchase for Class B shares and 40 to 96 months after purchase for
Class C shares. All three classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions, except that the
level of distribution fees and sales charges charged differs between Class A,
Class B and Class C shares. Income, expenses (other than distribution fees) and
realized and unrealized gains or losses on investments are allocated to each
class of shares based upon its relative net assets.
On June 20, 1994, MIMLIC Asset Management Company (MIMLIC Management)
purchased 7,500 Class A shares and 7,500 Class B shares. Operations of the Fund
did not formally commence until September 16, 1994 when the shares became
effectively registered under the Securities Exchange Act of 1933. The Minnesota
Mutual Life Insurance Company (Minnesota Mutual), the parent of MIMLIC
Management, purchased 990,644 Class A shares for $10 million prior to
commencement of operations.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by the Fund are summarized as
follows:
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. When market quotations are not readily available, securities are
valued at fair value as determined in good faith 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.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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.
Net investment income and net realized gains (losses) may differ for
financial statement and tax purposes primarily because of temporary book-to-tax
differences. The character of distributions made during the year from net
investment income or net realized gains may differ from their ultimate
characterization for federal income tax purposes. Also, due to the timing of
dividend distributions, the fiscal year in which amounts are distributed may
differ from the year that the income or realized gains (losses) were recorded by
the Fund.
On the statement of assets and liabilities, as a result of permanent
book-to-tax differences, a reclassification adjustment was made to increase
undistributed net investment income and decrease additional paid-in capital by
$11,099.
DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income are declared and paid quarterly.
Realized gains, if any, are paid annually.
(3) INVESTMENT SECURITY TRANSACTIONS
For the year ended September 30, 1995, purchases of securities and proceeds
from sales, other than temporary investments in short-term securities aggregated
$43,619,339 and $28,188,885, respectively.
(4) EXPENSES AND RELATED PARTY TRANSACTIONS
On February 14, 1995 shareholders of the Fund approved a new investment
advisory agreement with Advantus Capital Management, Inc. (Advantus Capital or
the Adviser). Advantus Capital is a wholly-owned subsidiary of MIMLIC Management
which, prior to March 1, 1995, served as investment adviser to the Fund. Under
the agreement, Advantus Captital manages the Fund's assets and provides
research, statistical and advisory services and pays related office rental and
executive expenses and salaries. In addition, as part of the advisory fee,
Advantus Capital pays the expenses of the Fund's transfer, dividend disbursing
and redemption agent (Minnesota Mutual). The fee for investment management and
advisory services is based on the average daily net assets of the Fund at the
annual rate of .80 percent, which is the same as under the old agreement with
MIMLIC Management.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(4) EXPENSES AND RELATED PARTY TRANSACTIONS--(CONTINUED)
The Fund has adopted separate Plans of Distribution applicable to Class A,
Class B and Class C shares, respectively, relating to the payment of certain
distribution expenses pursuant to Rule 12b-1 under the Investment Company Act of
1940 (as amended). The Fund pays distribution fees to MIMLIC Sales Corporation
(MIMLIC Sales), the underwriter of the Fund and wholly-owned subsidiary of
MIMLIC Management, to be used to pay certain expenses incurred in the
distribution, promotion and servicing of the Fund's shares. The Class A Plan
provides for a fee up to .30 percent of average daily net assets of Class A
shares. The Class B and Class C Plans provide for a fee up to 1.00 percent of
average daily net assets of Class B and Class C shares. The Class B and Class C
1.00 percent fees are comprised of a .75 percent distribution fee and a .25
percent service fee. MIMLIC Sales is currently waiving that portion of Class A
distribution fees which exceeds, as a percentage of average daily net assets,
.10 percent. MIMLIC Sales waived Class A distribution fees in the amount of
$36,111 for the year ended September 30, 1995.
The Fund also bears certain other operating expenses including outside
directors' fees, custodian fees, registration fees, printing and shareholder
reports, legal, auditing and accounting services, organizational costs and other
miscellaneous expenses.
The Fund pays an administrative services fee to Minnesota Mutual for
accounting, auditing, legal and other administrative services which Minnesota
Mutual provides. Prior to February 1, 1995, the administrative service fee for
the Fund was $3,250 per month. Effective February 1, 1995, the administrative
service fee is $3,100 per month.
Advantus Capital (MIMLIC Management prior to March 1, 1995) directly incurs
and pays the above operating expenses and the Fund in turn reimburses Advantus
Capital. During the year ended September 30, 1995, Advantus Capital and MIMLIC
Management voluntarily agreed to absorb $47,635 in expenses that were otherwise
payable by the Fund.
Sales charges received by MIMLIC Sales for distributing the Fund's three
classes of shares amounted to $62,839.
As of September 30, 1995, Minnesota Mutual and subsidiaries and the
directors and officers of the Fund as a whole owned the following shares:
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OWNED
------------------ ---------------------
<S> <C> <C>
Class A..................................................................... 2,116,252 92.9%
Class B..................................................................... 7,613 6.0%
Class C..................................................................... 928 25.6%
</TABLE>
Legal fees were paid to a law firm of which the Fund's secretary is a
partner in the amount of $6,410.
(5) ORGANIZATIONAL COSTS
The Fund incurred organizational expenses in connection with the start-up
and initial registration. These costs will be amortized over 60 months on a
straight-line basis beginning with the commencement of
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(5) ORGANIZATIONAL COSTS--(CONTINUED)
operations. If any or all of the shares held by MIMLIC Management, or any other
holder, representing initial capital of the Fund are redeemed during the
amortization period, the redemption proceeds will be reduced by the pro rata
portion (based on the ratio that the number of initial shares redeemed bears to
the total number of outstanding initial shares of the Fund at the date of
redemption) of the unamortized organizational cost balance.
(6) CAPITAL SHARE TRANSACTIONS
Transactions in shares for the year ended September 30, 1995 and the period
from June 20, 1994 to September 30, 1994 for Class A and Class B shares and the
period from March 1, 1995 to September 30, 1995 for Class C shares were as
follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
--------------------- -------------------- -----------
1995 1994 1995 1994 1995
---------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Sold........................................................... 1,292,691 998,637 120,786 8,734 3,617
Issued for reinvested distributions............................ 1,391 -- 664 -- 8
Redeemed....................................................... (15,257) -- (3,406) (1) --
---------- --------- --------- --------- -----
1,278,825 998,637 118,044 8,733 3,625
---------- --------- --------- --------- -----
---------- --------- --------- --------- -----
</TABLE>
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(7) FINANCIAL HIGHLIGHTS
Per share data for a share of capital stock and selected information for
each period are as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
-------------------------------- -------------------------------- ---------------
PERIOD FROM PERIOD FROM PERIOD FROM
SEPTEMBER 16, SEPTEMBER 16, MARCH 1,
YEAR ENDED 1994 (A) TO YEAR ENDED 1994 (A) TO 1995 (A) TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994 1995
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period............................. $ 10.63 $ 10.77 $ 10.63 $ 10.77 $ 10.79
------- ------- ------- ------- -------
Income from investment operations:
Net investment income (loss)...... .12 .01 .02 (.01) .02
Net gains or losses on securities
(both realized and unrealized)... 2.42 (.15) 2.41 (.13) 2.14
------- ------- ------- ------- -------
Total from investment
operations..................... 2.54 (.14) 2.43 (.14) 2.16
------- ------- ------- ------- -------
Less distributions:
Dividends from net investment
income........................... (.16) -- (.11) -- (.05)
Distributions from capital
gains............................ (.05) -- (.05) -- --
------- ------- ------- ------- -------
Total distributions............. (.21) -- (.16) -- (.05)
------- ------- ------- ------- -------
Net asset value, end of period...... $ 12.96 $ 10.63 $ 12.90 $ 10.63 $ 12.90
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Total return (b).................... 24.4% (1.3)%(c) 23.2% (1.3)%(c) 20.1%(d)
Net assets, end of period (in
thousands)......................... $ 29,520 $ 10,616 $ 1,635 $ 93 $ 47
Ratio of expenses to average daily
net assets (e)..................... 1.35% .05%(g) 2.25% .09%(g) 2.25%(f)
Ratio of net investment income
(loss) to average daily net assets
(e)................................ 1.01% .07%(g) .05% .03%(g) (.07)%(f)
Portfolio turnover rate (excluding
short-term securities)............. 160.1% 8.1% 160.1% 8.1% 160.1%
<FN>
- ----------
(a) Commencement of operations.
(b) Total return figures are based on a share outstanding throughout the period
and assumes reinvestment of distributions at net asset value. Total return
figures do not reflect the impact of sales charges.
(c) Total return is presented for the period from September 16, 1994,
commencement of operations, to September 30, 1994.
(d) Total return is presented for the period from March 1, 1995, commencement
of operations, to September 30, 1995.
(e) The Fund's Distributor and Adviser voluntarily waived or absorbed $83,746
and $1,872 in expenses for the year ended September 30, 1995 and the period
ended September 30, 1994, respectively. If the Fund had been charged for
theses expenses, the ratio of expenses to average daily net assets would
have been 1.81% and .07% for Class A shares, respectively, 2.45% and .10%
for Class B shares, respectively and 2.34% for Class C shares. The ratio of
net investment income to average daily net assets would have been .56% and
.05% for Class A shares, respectively, (.15)% and .02% for Class B shares,
respectively and (.16)% for Class C shares.
(f) Adjusted to an annual basis.
(g) Ratios presented for the periods from September 16, 1994 to September 30,
1994 are not annualized as they are not indicative of anticipated results.
</TABLE>
15
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Advantus Enterprise Fund, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments in securities, of the Advantus Enterprise
Fund, Inc. (the Fund) as of September 30, 1995 and the related statement of
operations for the year then ended, the statement of changes in net assets for
the year ended September 30, 1995 and the period from June 20, 1994 to September
30, 1994 and the financial highlights for the year ended September 30, 1995 and
the period from September 16, 1994 to September 30, 1994. These financial
statements and the financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by the
custodian. As to securities purchased or sold but not received or delivered, we
request confirmations from brokers, and where replies are not received, we carry
out other appropriate auditing procedures. 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
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of the Fund as of September 30, 1995 and the results of its operations,
changes in its net assets and financial highlights, for the periods stated in
the first paragraph above, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
November 3, 1995
17
<PAGE>
ADVANTUS ENTERPRISE FUND
INVESTMENTS IN SECURITIES
SEPTEMBER 30, 1995
(Percentages of each investment category relate to total net assets.)
<TABLE>
<CAPTION>
MARKET
SHARES VALUE(A)
- ----------- ------------
<C> <S> <C>
COMMON STOCKS (89.2%)
CAPITAL GOODS (8.0%)
Machinery (8.0%)
15,000 AES China Generating Co Ltd (b)(c)........... $ 135,000
12,400 Blount Incorporated.......................... 590,550
21,500 Elsag Bailey Process Automation (b)(c)....... 701,438
9,600 J Ray McDermott Holdings Incorporated (b).... 216,000
22,300 United Waste Systems, Inc (b)................ 931,025
------------
2,574,013
------------
CONSUMER GOODS AND SERVICES (44.7%)
Consumer Goods (14.7%)
16,487 Columbia/HCA Healthcare Corporation.......... 801,680
19,000 Fisher Scientific International Inc.......... 615,125
25,200 Idexx Laboratories Inc (b)................... 938,700
5,800 Medtronic Inc................................ 311,750
8,132 Occusystems, Incorporated (b)................ 168,739
29,800 Pyxis Corporation (b)........................ 577,375
8,500 Teva Pharmaceutical Industries ADR (c)....... 307,063
7,600 United Health Care........................... 371,450
24,797 Value Health Incorporated (b)................ 657,121
------------
4,749,003
------------
Consumer Services (10.5%)
15,400 Carmike Cinemas (b).......................... 338,800
<CAPTION>
MARKET
SHARES VALUE(A)
- ----------- ------------
<C> <S> <C>
CONSUMER GOODS AND SERVICES--CONTINUED
9,466 CUC International Inc (b).................... $ 330,127
28,500 Gartner (b).................................. 933,375
12,800 GTECH Holdings Corporation (b)............... 385,600
7,700 International House of Pancakes (b).......... 202,125
9,800 Lone Star Steakhouse & Saloon, Inc (b)....... 401,800
16,500 Manpower..................................... 478,500
13,200 Sola International Inc (b)................... 292,050
------------
3,362,377
------------
Retail (14.2%)
2,900 Amerisource Health Corporation (b)........... 78,300
22,600 Barnes & Noble Inc (b)....................... 864,450
27,020 Borders Group Incorporated (b)............... 462,718
26,300 BT Office Products International (b)(c)...... 345,188
28,600 Casey's General Stores Inc................... 647,075
7,200 Eastbay Incorporated (b)..................... 142,200
16,500 Friedman's (b)............................... 358,875
18,600 Global Directmail Corporation (b)............ 458,025
8,100 Home Depot Inc............................... 322,988
6,200 Kohl's Inc (b)............................... 321,625
15,600 Office Depot, Inc (b)........................ 469,950
8,200 Orchard Supply Hardware (b).................. 118,900
------------
4,590,294
------------
</TABLE>
See accompanying notes to investments in securities.
6
<PAGE>
ADVANTUS ENTERPRISE FUND
INVESTMENTS IN SECURITIES--CONTINUED
<TABLE>
<CAPTION>
MARKET
SHARES VALUE(A)
- ----------- ------------
CONSUMER GOODS AND SERVICES--CONTINUED
<C> <S> <C>
Consumer Cyclicals (5.3%)
14,400 Cutter and Buck (b).......................... $ 106,200
9,309 Exide Corporation............................ 465,450
11,300 Stant Corporation............................ 113,000
31,200 Tommy Hilfiger Corporation (b)............... 1,014,000
------------
1,698,650
------------
CREDIT SENSITIVE (6.2%)
Finance (5.8%)
4,100 First Data Corp.............................. 254,200
8,800 First Financial Management................... 859,100
3,200 MGIC Investment Corporation.................. 183,200
31,900 Roosevelt Financial Group, Inc............... 562,237
------------
1,858,737
------------
Utilities (.4%)
9,200 Pansamsat Corporation (b).................... 140,300
------------
INTERMEDIATE GOODS AND SERVICES (7.8%)
Materials (3.8%)
6,500 Atchison Casting Corporation (b)............. 110,500
9,425 Cambrex Corporation.......................... 379,356
25,000 Citation Corporation (b)..................... 450,000
13,670 McWhorter Technology Inc (b)................. 210,176
2,300 Valspar Corporation.......................... 87,975
------------
1,238,007
------------
<CAPTION>
MARKET
SHARES VALUE(A)
- ----------- ------------
<C> <S> <C>
INTERMEDIATE GOODS AND SERVICES-- CONTINUED
Transportation (4.0%)
16,300 American Freightways (b)..................... $ 244,500
8,000 Fritz Companies (b).......................... 589,500
18,900 Landstar System, Inc (b)..................... 455,962
------------
1,289,962
------------
TECHNOLOGY (22.5%)
11,600 Avid Technology, Inc (b)..................... 498,800
13,100 The Bisys Group Inc (b)...................... 334,050
7,200 C-Cube Microsystems Incorporated (b)......... 329,400
6,500 Cognex Corporation (b)....................... 313,625
21,308 Computer Associates International (b)........ 900,263
12,800 Computron Software (b)....................... 220,800
25,800 Danka Business Systems PLC (c)............... 928,800
336 Datastream Systems, Incorporated (b)......... 7,644
14,400 DSC Communications (b)....................... 853,200
9,774 Fore Systems Inc (b)......................... 361,638
11,000 Informix Corporation (b)..................... 357,500
12,600 Integrated Device Technology, Inc (b)........ 315,000
14,800 Mercury Interactive Corporation (b).......... 410,700
</TABLE>
See accompanying notes to investments in securities.
7
<PAGE>
ADVANTUS ENTERPRISE FUND
INVESTMENTS IN SECURITIES--CONTINUED
<TABLE>
<CAPTION>
MARKET
SHARES VALUE(A)
- ----------- ------------
TECHNOLOGY--CONTINUED
<C> <S> <C>
15,300 Oracle Corporation (b)....................... $ 587,137
8,100 Telephone and Data Systems, Inc.............. 340,200
3,500 Uunet Technologies, Incorporated (b)......... 161,875
<CAPTION>
MARKET
SHARES VALUE(A)
- ----------- ------------
<C> <S> <C>
TECHNOLOGY--CONTINUED
7,500 3 Com (b).................................... $ 341,250
------------
7,261,882
------------
Total common stocks
(cost: $22,939,314)...................................... 28,763,225
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
- ----------
<C> <S> <C> <C> <C>
SHORT-TERM SECURITIES (12.1%)
$2,050,000 U.S. Treasury Bills............................... 5.50-5.57% 10/12/95 2,046,209
1,870,000 U.S. Treasury Bills............................... 5.34% 12/07/95 1,850,932
-----------
Total short-term securities (cost: $3,897,896)........................... 3,897,141
-----------
Total investments in securities (cost: $26,837,210) (d).................. $32,660,366
-----------
-----------
<FN>
Notes to Investments in Securities
(a) Securites are valued by procedures described in note 2 to the financial
statements.
(b) Presently non-income producing.
(c) The Fund held 7.5% of net assets in foreign securities as of September 30,
1995.
(d) At September 30, 1995 the cost of securities for federal income tax
purposes was $26,837,210. The aggregate unrealized appreciation and
depreciation of investments in securities based on this cost were:
Gross unrealized appreciation........... $6,453,505
Gross unrealized depreciation........... (630,349)
----------
Net unrealized appreciation............. $5,823,156
----------
----------
</TABLE>
8
<PAGE>
ADVANTUS ENTERPRISE FUND
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1995
<TABLE>
<S> <C>
ASSETS
Investments in securities, at market value--see accompanying
schedule for detailed listing (identified cost: $26,837,210).... $32,660,366
Cash in bank on demand deposit................................... 27,286
Receivable for Fund shares sold.................................. 6,706
Receivable for investment securities sold........................ 15,487
Dividends receivable............................................. 2,235
Organizational costs............................................. 42,624
-----------
Total assets................................................. 32,754,704
-----------
LIABILITIES
Payable for Fund shares repurchased.............................. 4,356
Payable for investment securities purchased...................... 424,806
Payable for organizational cost.................................. 42,624
Payable to Adviser............................................... 37,364
-----------
Total liabilities............................................ 509,150
-----------
Net assets applicable to outstanding capital stock............... $32,245,554
-----------
-----------
Represented by:
Capital stock--$.01 par value (note 1)......................... $ 22,917
Additional paid-in capital..................................... 25,394,444
Undistributed net investment income............................ --
Accumulated net realized gains from investments................ 1,005,037
Unrealized appreciation of investments......................... 5,823,156
-----------
Total--representing net assets applicable to outstanding
capital stock............................................... $32,245,554
-----------
-----------
Net assets applicable to outstanding Class A Shares.............. $30,454,200
-----------
-----------
Net assets applicable to outstanding Class B Shares.............. $ 1,720,378
-----------
-----------
Net assets applicable to outstanding Class C Shares.............. $ 70,976
-----------
-----------
Shares outstanding and net asset value per share
Class A--Shares outstanding 2,163,222.......................... $ 14.08
-----------
-----------
Class B--Shares outstanding 123,403............................ $ 13.94
-----------
-----------
Class C--Shares outstanding 5,092.............................. $ 13.94
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
9
<PAGE>
ADVANTUS ENTERPRISE FUND
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<S> <C>
Investment income:
Interest....................................................... $ 130,865
Dividends...................................................... 48,979
----------
Total investment income.................................... 179,844
----------
Expenses (note 4):
Investment advisory fee........................................ 167,883
Distribution fees--Class A..................................... 60,649
Distribution fees--Class B..................................... 7,499
Distribution fees--Class C..................................... 194
Administrative services fee.................................... 37,800
Amortization of organizational costs........................... 10,883
Custodian fees................................................. 12,537
Auditing and accounting services............................... 7,165
Legal fees..................................................... 7,857
Directors' fees................................................ 400
Registration fees.............................................. 35,174
Printing and shareholder reports............................... 13,164
Insurance...................................................... 5,500
Other.......................................................... 5,724
----------
Total expenses............................................. 372,429
Less fees and expenses waived or absorbed:
Class A distribution fees.................................... (40,433)
Other fund expenses.......................................... (43,566)
----------
Total fees and expenses waived or absorbed................. (83,999)
----------
Total net expenses......................................... 288,430
----------
Investment loss--net....................................... (108,586)
----------
Realized and unrealized gains on investments:
Net realized gains on investments (note 3)..................... 1,149,528
Net change in unrealized appreciation or depreciation on
investments................................................... 4,896,004
----------
Net gains on investments................................... 6,045,532
----------
Net increase in net assets resulting from operations............. $5,936,946
----------
----------
</TABLE>
See accompanying notes to financial statements.
10
<PAGE>
ADVANTUS ENTERPRISE FUND
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED SEPTEMBER 30, 1995 AND
PERIOD FROM JUNE 20, 1994 TO SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Operations:
Investment loss--net............................ $ (108,586) $ (6,282)
Net realized gains (losses) on investments...... 1,149,528 (23,671)
Net change in unrealized appreciation or
depreciation of investments.................... 4,896,004 927,152
----------- -----------
Increase in net assets resulting from
operations................................. 5,936,946 897,199
----------- -----------
Distributions to shareholders from:
Net realized gains on investments:
Class A....................................... (22,643) --
Class B....................................... (474) --
----------- -----------
Total distributions......................... (23,117) --
----------- -----------
Capital share transactions (notes 4 and 6):
Proceeds from sales:
Class A....................................... 11,923,790 12,075,000
Class B....................................... 1,409,271 88,098
Class C....................................... 66,063 --
Shares issued as a result of reinvested
dividends:
Class A....................................... 857 --
Class B....................................... 474 --
Payments for redemption of shares:
Class A....................................... (122,253) --
Class B....................................... (6,361) (5)
Class C....................................... (408) --
----------- -----------
Increase in net assets from capital share
transactions............................... 13,271,433 12,163,093
----------- -----------
Total increase in net assets................ 19,185,262 13,060,292
Net assets at beginning of period................. 13,060,292 --
----------- -----------
Net assets at end of period (including
undistributed net investment income of $0 and $0,
respectively).................................... $32,245,554 $13,060,292
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
11
<PAGE>
ADVANTUS ENTERPRISE FUND
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
(1) ORGANIZATION
Advantus Enterprise Fund, Inc. (the Fund) was incorporated on January 27,
1994. The Fund is registered under the Investment Company Act of 1940 (as
amended) as a diversified, open-end management investment company. On February
14, 1995 shareholders of the Fund approved a name change to Advantus Enterprise
Fund, Inc. (effective March 1, 1995). Prior to March 1, 1995 the Fund was known
as MIMLIC Small Company Fund, Inc.
The Fund currently issues three classes of shares: Class A, Class B and
Class C shares. Class A shares are sold subject to a front-end sales charge.
Class B shares are sold subject to a contingent deferred sales charge payable
upon redemption if redeemed within six years of purchase. Class C shares are
sold without either a front-end sales charge or a contingent deferred sales
charge. Both Class B and Class C shares are subject to a higher Rule 12b-1 fee
than Class A shares. Both Class B and Class C shares automatically convert to
Class A shares at net asset value after a specified holding period. Such holding
periods decline as the amount of the purchase increases and range from 28 to 84
months after purchase for Class B shares and 40 to 96 months after purchase for
Class C shares. All three classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions, except that the
level of distribution fees and sales charges charged differs between Class A,
Class B and Class C shares. Income, expenses (other than distribution fees) and
realized and unrealized gains or losses on investments are allocated to each
class of shares based upon its relative net assets.
On June 20, 1994, MIMLIC Asset Management Company (MIMLIC Management)
purchased 7,500 Class A shares and 7,500 Class B shares. Operations of the Fund
did not formally commence until September 16, 1994 when the shares became
effectively registered under the Securities Exchange Act of 1933. The Minnesota
Mutual Life Insurance Company (Minnesota Mutual), the parent of MIMLIC
Management, purchased 1,167,726 Class A shares for $12 million prior to
commencement of operations.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by the Fund are summarized as
follows:
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. When market quotations are not readily available, securities are
valued at fair value as determined in good faith 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.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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.
Net investment income (loss) and net realized gains (losses) may differ for
financial statement and tax purposes primarily because of temporary book-to-tax
differences. The character of distributions made during the year from net
investment income or net realized gains may differ from their ultimate
characterization for federal income tax purposes. Also, due to the timing of
dividend distributions, the fiscal year in which amounts are distributed may
differ from the year that the income (loss) or realized gains (losses) were
recorded by the Fund.
On the statement of assets and liabilities, as a result of permanent
book-to-tax differences, a reclassification adjustment was made to increase
undistributed net investment income by $108,586, decrease accumulated net
realized gains from investments by $97,703 and decrease additional paid-in
capital by $10,883.
DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income are declared and paid quarterly.
Realized gains, if any, are paid annually.
(3) INVESTMENT SECURITY TRANSACTIONS
For the year ended September 30, 1995, purchases of securities and proceeds
from sales, other than temporary investments in short-term securities aggregated
$20,981,574 and $9,172,892, respectively.
(4) EXPENSES AND RELATED PARTY TRANSACTIONS
On February 14, 1995 shareholders of the Fund approved a new investment
advisory agreement, effective March 1, 1995, with Advantus Capital Management,
Inc. (Advantus Capital or the Adviser). Advantus Capital is a wholly-owned
subsidiary of MIMLIC Management which, prior to March 1, 1995, served as
investment adviser to the Fund. Under the agreement, Advantus Capital manages
the Fund's assets and provides research, statistical and advisory services and
pays related office rental and executive expenses and salaries. In addition, as
part of the advisory fee, Advantus Capital pays the expenses of the Fund's
transfer, dividend disbursing and redemption agent (Minnesota Mutual). The fee
for investment management and advisory services is based on the average daily
net assets of the Fund at the annual rate of .80 percent, which is the same as
under the old agreement with MIMLIC Management.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(4) EXPENSES AND RELATED PARTY TRANSACTIONS--(CONTINUED)
The Fund has adopted separate Plans of Distribution applicable to Class A,
Class B and Class C shares, respectively, relating to the payment of certain
distribution expenses pursuant to Rule 12b-1 under the Investment Company Act of
1940 (as amended). The Fund pays distribution fees to MIMLIC Sales Corporation
(MIMLIC Sales), the underwriter of the Fund and a wholly-owned subsidiary MIMLIC
Management, to be used to pay certain expenses incurred in the distribution,
promotion and servicing of the Fund's shares. The Class A Plan provides for a
fee up to .30 percent of average daily net assets of Class A shares. The Class B
and Class C Plans provide for a fee up to 1.00 percent of average daily net
assets of Class B and Class C shares, respectively. The Class B and Class C 1.00
percent fee is comprised of a .75 percent distribution fee and a .25 percent
service fee. MIMLIC Sales is currently waiving that portion of Class A
distribution fees which exceeds, as a percentage of average daily net assets,
.10 percent. MIMLIC Sales waived Class A distribution fees in the amount of
$40,433 for the year ended September 30, 1995.
The Fund also bears certain other operating expenses including outside
directors' fees, custodian fees, registration fees, printing and shareholder
reports, legal, auditing and accounting services, organizational costs and other
miscellaneous expenses.
The Fund pays an administrative services fee to Minnesota Mutual for
accounting, auditing, legal and other administrative services which Minnesota
Mutual provides. Prior to February 1, 1995, the administrative service fee was
$3,250 per month. Effective February 1, 1995, the administrative service fee is
$3,100 per month.
Advantus Capital (MIMLIC Management prior to March 1, 1995) directly incurs
and pays the above operating expenses and the Fund in turn reimburses Advantus
Capital. During the period from October 1, 1994 to September 30, 1995, Advantus
Capital and MIMLIC Management voluntarily agreed to absorb $43,566 in expenses
that were otherwise payable by the Fund.
Sales charges received by MIMLIC Sales for distributing the Fund's three
classes of shares amounted to $57,059.
As of September 30, 1995, Minnesota Mutual and subsidiaries, and the
directors and officers of the Fund as a whole owned the following shares:
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OWNED
------------------ -------------------
<S> <C> <C>
Class A................................................. 2,012,765 93.0%
Class B................................................. 7,513 6.1%
Class C................................................. 863 16.9%
</TABLE>
Legal fees were paid to a law firm of which the Fund's secretary is a
partner in the amount of $6,342.
(5) ORGANIZATIONAL COSTS
The Fund incurred organizational expenses in connection with the start-up
and initial registration. These costs will be amortized over 60 months on a
straight-line basis beginning with the commencement of
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(5) ORGANIZATIONAL COSTS--(CONTINUED)
operations. If any or all of the shares held by MIMLIC Management, or any other
holder, representing initial capital of the Fund are redeemed during the
amortization period, the redemption proceeds will be reduced by the pro rata
portion (based on the ratio that the number of initial shares redeemed bears to
the total number of outstanding initial shares of the Fund at the date of
redemption) of the unamortized organizational cost balance.
(6) CAPITAL SHARE TRANSACTIONS
Transactions in shares for the year ended September 30, 1995 and the period
June 20, 1994 to September 30, 1994 for Class A and Class B shares and the
period from March 1, 1995 to September 30, 1995 for Class C shares were as
follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
--------------------- -------------------- -----------
1995 1994 1995 1994 1995
--------- ---------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Sold............................................... 997,759 1,175,226 115,168 8,700 5,124
Issued for reinvested distributions................ 79 -- 44 -- --
Redeemed........................................... (9,842) -- (508) (1) (32)
--------- ---------- --------- --------- -----------
987,996 1,175,226 114,704 8,699 5,092
--------- ---------- --------- --------- -----------
--------- ---------- --------- --------- -----------
</TABLE>
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(7) FINANCIAL HIGHLIGHTS
Per share data for a share of capital stock and selected information for
each period are as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------------------------- -------------------------------- --------------
PERIOD FROM PERIOD FROM PERIOD FROM
SEPTEMBER 16, SEPTEMBER 16, MARCH 1, 1995
YEAR ENDED 1994 (A) TO YEAR ENDED 1994 (A) TO (A) TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994 1995
-------------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period............................ $ 11.03 $ 11.12 $ 11.02 $ 11.12 $ 11.58
------- ------------- ------ ------ ------
Income from investment operations:
Net investment income (loss)..... (.04) -- (.09) (.01) (.06)
Net gains or losses on securities
(both realized and
unrealized)..................... 3.11 (.09) 3.03 (.09) 2.42
------- ------------- ------ ------ ------
Total from investment
operations....................... 3.07 (.09) 2.94 (.10) 2.36
------- ------------- ------ ------ ------
Less distributions:
Dividends from net investment
income.......................... -- -- -- -- --
Distributions from capital
gains........................... (.02) -- (.02) -- --
------- ------------- ------ ------ ------
Total distributions............ (.02) -- (.02) -- --
------- ------------- ------ ------ ------
Net asset value, end of period..... $ 14.08 $ 11.03 $ 13.94 $ 11.02 $ 13.94
------- ------------- ------ ------ ------
------- ------------- ------ ------ ------
Total return (b)................... 27.9% (.8)%(c) 26.7% (.9)%(c) 20.4%(d)
Net assets, end of period (in
thousands)........................ $ 30,454 $ 12,964 $ 1,720 $ 96 $ 71
Ratio of expenses to average daily
net assets (e).................... 1.34% .05%(g) 2.24% .09%(g) 2.24%(f)
Ratio of net investment income
(loss) to average daily net assets
(e)............................... (.48)% (.02)%(g) (1.45)% (.06)%(g) (1.57)%(f)
Portfolio turnover rate (excluding
short-term securities)............ 48.8% 5.0% 48.8% 5.0% 48.8%
<FN>
- ----------
(a) Commencement of operations.
(b) Total return figures are based on a share outstanding throughout the period
and assumes reinvestment of distributions at net asset value. Total return
figures do not reflect the impact of sales charges.
(c) Total return is presented for the period from September 16, 1994,
commencement of operations, to September 30, 1994.
(d) Total return is presented for the period from March 1, 1995, commencement
of operations, to September 30, 1995.
(e) The Fund's Distributor and Adviser voluntarily waived or absorbed $83,999
and $1,430 in expenses for the year ended September 30, 1995 and the period
ended September 30, 1994, respectively. If the Fund had been charged for
theses expenses, the ratio of expenses to average daily net asses would
have been 1.75% and .06% for Class A shares, respectively, 2.39% and .10%
for Class B shares, respectively, and 2.32% for Class C shares. The ratios
of net investment income (loss) to average daily net assets would have been
(.89)% and (.03)% for Class A shares, respectively, (1.60)% and (.07)% for
Class B shares, respectively and (1.65)% for Class C shares.
(f) Adjusted to an annual basis.
(g) Ratios presented for the period from September 16, 1994 to September 30,
1994 are not annualized as they are not indicative of anticipated results.
</TABLE>
16
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Advantus International Balanced Fund, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments in securities, of the Advantus
International Balanced Fund, Inc. (the Fund) as of September 30, 1995 and the
related statement of operations for the year then ended, the statement of
changes in net assets for the year ended September 30, 1995 and the period from
June 20, 1994 to September 30, 1994 and the financial highlights for the year
ended September 30, 1995 and the period from September 16, 1994 to September 30,
1994. These financial statements and the financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by the
custodian. As to securities purchased or sold but not received or delivered, we
request confirmations from brokers, and where replies are not received, we carry
out other appropriate auditing procedures. 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
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of the Fund as of September 30, 1995 and the results of its operations,
changes in its net assets and financial highlights, for the periods stated in
the first paragraph above, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
November 3, 1995
26
<PAGE>
ADVANTUS INTERNATIONAL BALANCED FUND
INVESTMENTS IN SECURITIES
SEPTEMBER 30, 1995
(Percentages of each investment category relate to total net assets.)
<TABLE>
<CAPTION>
MARKET
SHARES VALUE(a)
- ----------- ------------
<C> <S> <C>
COMMON STOCKS (64.6%)
AUSTRALIA (3.5%)
Banking (1.1%)
19,500 National Australia Bank........................................... $ 172,203
46,000 Westpac Banking................................................... 186,099
Building Materials and Components (.9%)
102,000 Pioneer International............................................. 269,457
Transportation (1.5%)
115,000 BTR Nylex Ltd..................................................... 308,139
15,000 Brambles Industries............................................... 165,297
------------
1,101,195
------------
AUSTRIA (1.9%)
Electrical and Electronics (.9%)
2,500 VA Technologie (b)(f)............................................. 288,905
Utilities--Gas and Electric (1.0%)
2,400 EVN Energie-Versorgung............................................ 290,773
------------
579,678
------------
BELGIUM (1.9%)
Chemicals (1.9%)
590 Solvay............................................................ 315,386
4,300 Union Miniere (b)................................................. 275,094
------------
590,480
------------
BRAZIL (.9%)
Telecommunications (.9%)
5,900 Telecomunicacoes Brasileiras ADR.................................. 272,875
------------
CANADA (2.2%)
Banking (1.0%)
12,000 Canadian Imperial Bank of Commerce................................ 312,931
Mining and Metals--Container (.8%)
32,000 Inmet Mining (b).................................................. 249,455
Utilities--Gas and Electric (.4%)
15,500 Nova Corporation of Alberta....................................... 122,268
------------
684,654
------------
</TABLE>
See accompanying notes to investments in securities.
7
<PAGE>
ADVANTUS INTERNATIONAL BALANCED FUND
INVESTMENTS IN SECURITIES--CONTINUED
<TABLE>
<CAPTION>
MARKET
SHARES VALUE(a)
- ----------- ------------
<C> <S> <C>
CHILE (.7%)
Utilities--Gas and Electric (.7%)
3,300 Compania de Telefonos de Chile ADR................................ $ 228,113
------------
CZECH REPUBLIC (.9%)
Energy Services (.9%)
7,415 Ceske Energeticke (b)............................................. 293,844
------------
FINLAND (1.5%)
Wholesale and International Trade (1.5%)
15,000 Amer Group........................................................ 288,711
4,700 Metsa-Serla....................................................... 187,545
------------
476,256
------------
FRANCE (4.5%)
Banking (1.0%)
7,500 Banque Nationale de Paris......................................... 294,797
Electrical and Electronics (.5%)
1,950 Alcatel Alsthom................................................... 164,454
Energy Sources (1.1%)
4,920 Societe Nationale Elf Aquitaine................................... 332,966
Health and Personal Care (1.1%)
17,000 Rhone-Poulenc..................................................... 344,490
Transportation (.8%)
8,600 Regie Nationale Des Usines Renault................................ 253,964
------------
1,390,671
------------
GERMANY (2.0%)
Banking (1.0%)
6,650 Deutsche Bank..................................................... 318,165
Chemicals (1.0%)
1,200 Bayer............................................................. 307,727
------------
625,892
------------
HONG KONG (3.3%)
Banking (1.1%)
24,000 Hong Kong and Shanghai Banking.................................... 333,698
Multi-Industry (1.1%)
61,000 Hutchison Whampoa................................................. 330,581
</TABLE>
See accompanying notes to investments in securities.
8
<PAGE>
ADVANTUS INTERNATIONAL BALANCED FUND
INVESTMENTS IN SECURITIES--CONTINUED
<TABLE>
<CAPTION>
MARKET
SHARES VALUE(a)
- ----------- ------------
<C> <S> <C>
HONG KONG--CONTINUED
Transportation (1.1%)
45,000 Swire Pacific..................................................... $ 356,495
------------
1,020,774
------------
INDIA (.5%)
Financial Services (.5%)
90,600 India Fund........................................................ 169,203
------------
INDONESIA (1.1%)
Financial Services (.8%)
200,000 J.F. Indonesia Fund (b)........................................... 243,160
Forest Products and Paper (.3%)
151,500 P.T. Barito Pacific Timber........................................ 111,987
------------
355,147
------------
JAPAN (2.3%)
Building Materials and Components (.4%)
9,000 Daito Trust Construction.......................................... 104,916
Electrical and Electronics (1.8%)
23,000 Hitachi........................................................... 251,799
1,000 Hitachi Koki...................................................... 8,685
6,000 Sony.............................................................. 312,621
Utilities--Gas and Electric (.1%)
3,000 Kyudenko.......................................................... 40,750
------------
718,771
------------
KOREA (.7%)
Financial Services (.7%)
4 Korea International Trust (b)..................................... 230,000
------------
MEXICO (.7%)
Chemicals (.4%)
48,000 Vitro............................................................. 127,748
Utilities--Gas and Electric (.3%)
2,800 Telefonos de Mexico ADR........................................... 88,900
------------
216,648
------------
</TABLE>
See accompanying notes to investments in securities.
9
<PAGE>
ADVANTUS INTERNATIONAL BALANCED FUND
INVESTMENTS IN SECURITIES--CONTINUED
<TABLE>
<CAPTION>
MARKET
SHARES VALUE(a)
- ----------- ------------
<C> <S> <C>
NETHERLANDS (4.1%)
Broadcasting, Advertising and Publishing (1.1%)
5,800 International Nederlanden Group................................... $ 338,261
Building Materials and Components (.7%)
6,850 European Vinyls................................................... 240,817
Insurance (1.3%)
11,015 Aegon............................................................. 400,379
Merchandising (1.0%)
4,200 Koninklijke Bijenkorf Beheer...................................... 308,492
------------
1,287,949
------------
NEW ZEALAND (2.0%)
Forest Products and Paper (1.0%)
108,000 Fletcher Challenge................................................ 291,510
15,323 Fletcher Forest................................................... 20,478
Wholesale and International Trade (1.0%)
417,050 Brierley Investments.............................................. 318,487
------------
630,475
------------
NORWAY (2.6%)
Energy Sources (1.0%)
23,000 Saga Petroleum.................................................... 297,799
Health and Personal Care (1.1%)
13,000 Hafslund Nycomed.................................................. 338,721
Mining and Metals--Container (.5%)
13,000 Elkem............................................................. 158,970
------------
795,490
------------
PHILIPPINES (1.0%)
Telecommunications (1.0%)
4,800 Philippine Long Distance Telephone................................ 320,552
------------
PORTUGAL (.7%)
Financial Services (.7%)
2,500 Capital Portugal Fund (b)......................................... 229,120
------------
SPAIN (6.4%)
Banking (2.2%)
18,000 Argentaria Corporacion Bancari de Espanol ADR..................... 324,000
</TABLE>
See accompanying notes to investments in securities.
10
<PAGE>
ADVANTUS INTERNATIONAL BALANCED FUND
INVESTMENTS IN SECURITIES--CONTINUED
<TABLE>
<CAPTION>
MARKET
SHARES VALUE(a)
- ----------- ------------
<C> <S> <C>
SPAIN--CONTINUED
12,000 Banco Bilbao Vizcaya (e)(f)....................................... $ 370,160
Energy Sources (1.0%)
9,800 Repsol............................................................ 309,059
Telecommunications (1.0%)
22,000 Telefonica de Espana.............................................. 303,596
Utilities--Gas and Electric (2.2%)
6,000 Empresa Nacional de Elecrricidad.................................. 308,791
50,072 Iberdrola......................................................... 379,635
------------
1,995,241
------------
SWEDEN (7.0%)
Banking (.5%)
9,600 Stadshypotek...................................................... 169,072
Business and Public Service (1.1%)
24,000 Esselte........................................................... 344,727
Forest Products and Paper (1.2%)
27,000 Stora Kopparbergs Bergslags....................................... 364,432
Health and Personal Care (2.7%)
11,000 Astra............................................................. 387,457
26,300 Svenska Handelsbanken............................................. 455,595
Transportation (1.5%)
18,500 Volvo............................................................. 454,007
------------
2,175,290
------------
SWITZERLAND (3.9%)
Electrical and Electronics (1.3%)
340 BBC Brown Boveri & Cie............................................ 396,206
Health and Personal Care (1.4%)
230 Societe Generale de Surveillance.................................. 428,354
Insurance (1.2%)
1,370 Zuerich Versicherung.............................................. 386,302
------------
1,210,862
------------
THAILAND (1.0%)
Financial Services (1.0%)
12,834 Thai Fund......................................................... 308,016
------------
</TABLE>
See accompanying notes to investments in securities.
11
<PAGE>
ADVANTUS INTERNATIONAL BALANCED FUND
INVESTMENTS IN SECURITIES--CONTINUED
<TABLE>
<CAPTION>
MARKET
SHARES VALUE(a)
- ----------- ------------
<C> <S> <C>
TURKEY (.6%)
Financial Services (.6%)
17,000 Turkish Growth Fund............................................... $ 197,625
------------
UNITED KINGDOM (6.7%)
Banking (1.0%)
27,281 Barclays Bank..................................................... 323,400
Building Materials and Components (.3%)
21,700 BICC.............................................................. 103,721
Energy Services (2.1%)
80,500 British Gas....................................................... 338,266
25,833 Welsh Water....................................................... 317,683
Electrical and Electronics (.3%)
7,200 Waste Management International ADR (b)............................ 79,200
Food and Household Products (2.2%)
415,000 Albert Fisher Group............................................... 348,115
121,844 Hillsdown Holdings................................................ 341,331
Merchandising (.8%)
22,600 Kwik Save Group................................................... 234,645
------------
2,086,361
------------
Total common stocks (cost: $18,765,967)........................... 20,191,182
------------
PREFERRED STOCKS AND OTHER (3.8%)
ARGENTINA (.6%)
Multi-Industry (.6%)
4,010 Compania de Inversiones en Telecomunications convertible
preferred-- 7.00% (e)............................................ 199,498
------------
GERMANY (.4%)
Energy Services (.4%)
825 Veba Warrants (expiring 04/06/98)................................. 110,449
------------
HONG KONG (.9%)
Multi-Industry (.9%)
284,000 Jardine Strategic Holdings LTD cumulative convertible
preferred--7.50%................................................. 293,940
------------
ITALY (1.1%)
Telecommunications (1.1%)
148,000 Stet Spa di Risp.................................................. 345,777
------------
</TABLE>
See accompanying notes to investments in securities.
12
<PAGE>
ADVANTUS INTERNATIONAL BALANCED FUND
INVESTMENTS IN SECURITIES--CONTINUED
<TABLE>
<CAPTION>
MARKET
SHARES VALUE(a)
- ----------- ------------
<C> <S> <C>
MEXICO (.6%)
Financial (.6%)
5,550 Nacional Financiera ADR--11.25%................................... $ 188,700
------------
UNITED KINGDOM (.2%)
Energy Services
27,900 Welsh Water....................................................... 45,592
------------
Total preferred stocks and other (cost: $1,227,929)............... 1,183,956
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
- -----------
<C> <S> <C> <C> <C>
LONG-TERM DEBT SECURITIES (25.9%)
AUSTRALIA (3.9%)
Government (3.9%)
1,273,000 Queensland Treasury Corporation (Australian Dollar)
(c)................................................... 8.000% 05/14/03 926,390
200,000 New South Wales Treasury (Australian Dollar) (c)....... 6.500% 05/01/06 126,535
230,000 Queensland Treasury Corporation (Australian Dollar)
(c)................................................... 8.875% 11/08/96 176,082
------------
1,229,007
------------
CANADA (4.6%)
Government (4.6%)
495,000 Canadian Government Bond (Canadian Dollar) (c)......... 10.500% 10/01/04 431,628
660,000 Canadian Government Bond (Canadian Dollar) (c)......... 5.750% 03/01/99 469,126
675,000 Canadian Government Bond (Canadian Dollar) (c)......... 9.500% 10/01/98 532,708
------------
1,433,462
------------
DENMARK (2.6%)
Government (2.6%)
4,672,000 Denmark Kingdom (Danish Krone) (c)..................... 7.000% 12/15/04 794,385
------------
FRANCE (2.7%)
Government (2.7%)
1,100,000 France Government Bond (French Franc) (c).............. 8.500% 11/12/96 229,177
1,026,000 France Government Bond (French Franc) (c).............. 8.500% 03/28/00 222,746
960,000 France Government Bond (French Franc) (c).............. 9.500% 01/25/01 216,981
</TABLE>
See accompanying notes to investments in securities.
13
<PAGE>
ADVANTUS INTERNATIONAL BALANCED FUND
INVESTMENTS IN SECURITIES--CONTINUED
<TABLE>
<CAPTION>
MARKET
PRINCIPAL VALUE(A)
- ----------- ------------
<C> <S> <C> <C> <C>
FRANCE--CONTINUED
774,000 France Government Bond (French Franc) (c).............. 10.000% 05/27/00 $ 176,407
------------
845,311
------------
GERMANY (4.6%)
Government (4.6%)
1,435,000 International Bank Reconstruction and Development
(Deutsch Mark) (c).................................... 6.125% 09/27/02 997,427
335,000 Germany Unity Fund (Deutsch Mark) (c).................. 8.000% 01/21/02 255,626
245,000 Germany Unity Fund (Deutsch Mark) (c).................. 8.750% 07/20/00 192,598
------------
1,445,651
------------
HONG KONG (1.0%)
Finance (1.0%)
400,000 PIV Investment Finance (U.S. Dollar) (c)............... 4.500% 12/01/00 323,000
------------
INDIA (.8%)
Finance (.8%)
250,000 Essar Gujarat (U.S. Dollar) (c)(d)(f).................. 7.900% 07/15/99 249,063
------------
ITALY (.8%)
Government (.8%)
430,000,000 Italy Government (Italian Lira) (c).................... 10.500% 07/15/00 259,014
------------
JAPAN (2.5%)
Finance (.7%)
18,000,000 Japan Development Bank (Japanese Yen) (c).............. 6.500% 09/20/01 224,316
Government (1.8%)
48,000,000 European Investment Bank (Japanese Yen) (c)............ 5.875% 11/26/99 569,285
------------
793,601
------------
NEW ZEALAND (1.6%)
Government (1.6%)
140,000 New Zealand Government Bond (New Zealand Dollar) (c)... 6.500% 02/15/00 87,143
430,000 New Zealand Government Bond (New Zealand Dollar) (c)... 10.000% 03/15/02 312,507
</TABLE>
See accompanying notes to investments in securities.
14
<PAGE>
ADVANTUS INTERNATIONAL BALANCED FUND
INVESTMENTS IN SECURITIES--CONTINUED
<TABLE>
<CAPTION>
MARKET
PRINCIPAL VALUE(A)
- ----------- ------------
<C> <S> <C> <C> <C>
NEW ZEALAND--CONTINUED
125,000 New Zealand Government Bond (New Zealand Dollar) (c)... 8.000% 04/15/04 $ 83,468
------------
483,118
------------
</TABLE>
<TABLE>
<C> <S> <C> <C> <C>
SPAIN (.8%)
Government (.8%)
29,350,000 Government of Spain (Spanish Peseta) (c)............... 12.250% 03/25/00 251,234
------------
Total long-term debt securities (cost: $7,971,498)........................... 8,106,846
------------
SHORT-TERM SECURITIES (1.5%)
AUSTRALIA (1.5%)
600,000 IBM Australia (Australian Dollar) (c).................. 12.000% 03/26/96 460,228
------------
Total short-term securities (cost: $445,818)................................. 460,228
------------
Total investments in securities (cost: $28,411,212) (g)...................... $ 29,942,212
------------
------------
<FN>
Notes to Investments in Securities
- ----------------------------
(a) Securities are valued by procedures described in note 2 to the financial
statements.
(b) Presently non-income producing.
(c) Principal amounts for foreign debt securities are denominated in the
currencies indicated.
(d) Represents a debt security with a variable rate. The interest rate
disclosed is the rate in effect at September 30, 1995.
(e) PRIDES--Preferred Redeemed Increased Dividend Equity Securities are
structured as convertible preferred securities issued by a company.
Investors receive an enhanced yield but based upon a specific formula,
potential appreciation is limited. PRIDES pay dividends, have voting
rights, are noncallable for three years and upon maturity, convert into
shares of common stock.
(f) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. The Fund
currently limits investments in illiquid securities to 10% of net assets at
the time of purchase. At September 30, 1995, the Fund held illiquid
securities in the amount of $908,128 which represents 2.9% of net assets.
(g) At September 30, 1995 the cost of securities for federal income tax
purposes was $28,721,915. The aggregate unrealized appreciation and
depreciation of investments in securities based on this cost were:
</TABLE>
<TABLE>
<S> <C> <C>
Gross unrealized appreciation..................... $2,469,529
Gross unrealized depreciation..................... (1,249,232)
----------
Net unrealized appreciation....................... $1,220,297
----------
----------
</TABLE>
15
<PAGE>
ADVANTUS INTERNATIONAL BALANCED FUND
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1995
<TABLE>
<S> <C>
ASSETS
Investments in securities, at market value--see accompanying schedule for detailed
listing (identified cost: $28,411,212)........................................... $ 29,942,212
Cash in bank on demand deposit.................................................... 1,610,358
Receivable for investment securities sold......................................... 409,266
Accrued interest and dividends receivable......................................... 291,457
Receivable for forward foreign currency contracts held, at value (note 4)......... 4,497,966
Receivable for fund shares sold................................................... 20,985
Receivable for refundable foreign income taxes withheld........................... 35,400
Organizational costs (note 6)..................................................... 32,403
-------------
Total assets.................................................................. 36,840,047
-------------
LIABILITIES
Payable for investment securities purchased....................................... 933,484
Payable to Adviser................................................................ 53,022
Payable for organizational costs (note 6)......................................... 32,403
Payable for forward foreign currency contracts held, at value (note 4)............ 4,542,548
-------------
Total liabilities............................................................. 5,561,457
-------------
Net assets applicable to outstanding capital stock................................ $ 31,278,590
-------------
-------------
Represented by:
Capital stock--$.01 par value (note 1).......................................... $ 28,989
Additional paid-in capital...................................................... 29,347,092
Undistributed net investment income............................................. 92,247
Accumulated net realized gains from investments................................. 326,069
Unrealized appreciation of investments and translation of assets and liabilities
in foreign currencies.......................................................... 1,484,193
-------------
Total--representing net assets applicable to outstanding capital stock........ $ 31,278,590
-------------
-------------
Net assets applicable to outstanding Class A shares............................... $ 30,948,777
-------------
-------------
Net assets applicable to outstanding Class C shares............................... $ 329,813
-------------
-------------
Shares outstanding and net asset value per share:
Class A--Shares outstanding 2,868,246........................................... $ 10.79
-------------
-------------
Class C--Shares outstanding 30,622.............................................. $ 10.77
-------------
-------------
</TABLE>
See accompanying notes to financial statements.
16
<PAGE>
ADVANTUS INTERNATIONAL BALANCED FUND
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<S> <C>
Investment income:
Interest........................................................................... $ 557,282
Dividends (net of foreign withholding taxes of $80,025)............................ 560,024
------------
Total investment income.......................................................... 1,117,306
------------
Expenses (note 5):
Investment advisory fee............................................................ 241,970
Distribution fees--Class A......................................................... 77,712
Distribution fees--Class C......................................................... 1,119
Administrative services fee........................................................ 26,200
Custodian fees..................................................................... 83,425
Auditing and accounting services................................................... 88,675
Legal fees......................................................................... 11,459
Amortization of organizational costs............................................... 8,273
Directors' fees.................................................................... 562
Registration fees.................................................................. 31,012
Printing and shareholder reports................................................... 15,233
Insurance.......................................................................... 5,740
Other.............................................................................. 6,336
------------
Total expenses................................................................... 597,716
Less fees and expenses waived or absorbed:
Class A distribution fees........................................................ (38,856)
Other fund expenses.............................................................. (17,626)
------------
Total fees and expenses waived or absorbed..................................... (56,482)
------------
Total net expenses............................................................. 541,234
------------
Investment income--net......................................................... 576,072
------------
Realized and unrealized gains (losses) on investments and foreign currencies:
Net realized gains (losses) from:
Investments (note 3)............................................................. 741,899
Foreign currency transactions.................................................... (73,257)
------------
668,642
------------
Net change in unrealized appreciation or depreciation on:
Investments...................................................................... 1,261,251
Translation of assets and liabilities in foreign currencies...................... (48,484)
------------
1,212,767
------------
Net gains on investments and foreign currencies.................................. 1,881,409
------------
Net increase in net assets resulting from operations................................. $ 2,457,481
------------
------------
</TABLE>
See accompanying notes to financial statements.
17
<PAGE>
ADVANTUS INTERNATIONAL BALANCED FUND
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED SEPTEMBER 30, 1995 AND
PERIOD FROM JUNE 20, 1994 TO SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Operations:
Investment income--net.............................................. $ 576,072 $ 18,405
Net realized gains (losses) on investments and foreign currency
transactions....................................................... 668,642 (9,584)
Net change in unrealized appreciation or depreciation of investments
and translation of assets and liabilities in foreign currencies.... 1,212,767 271,426
------------- -------------
Increase in net assets resulting from operations.................. 2,457,481 280,247
------------- -------------
Distributions to shareholders from:
Investment income--net:
Class A........................................................... (530,846) --
Class C........................................................... (2,174) --
Net realized gains on investments:
Class A........................................................... (310,236) --
Class C........................................................... (925) --
------------- -------------
Total distributions............................................. (844,181) --
------------- -------------
Capital share transactions (notes 5 and 7):
Proceeds from sales:
Class A........................................................... 14,280,071 15,150,000
Class C........................................................... 384,909 --
Shares issued as a result of reinvested dividends:
Class A........................................................... 75,357 --
Class C........................................................... 5,108 --
Payments for redemption of shares:
Class A........................................................... (443,874) --
Class C........................................................... (66,528) --
------------- -------------
Increase in net assets from capital share transactions.......... 14,235,043 15,150,000
------------- -------------
Total increase in net assets.................................... 15,848,343 15,430,247
Net assets at beginning of period..................................... 15,430,247 --
------------- -------------
Net assets at end of period including (undistributed net investment
income of $92,247 and $99,393, respectively)......................... $ 31,278,590 $ 15,430,247
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
18
<PAGE>
ADVANTUS INTERNATIONAL BALANCED FUND
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
(1) ORGANIZATION
The Advantus International Balanced Fund, Inc. (the Fund) was incorporated
on January 27, 1994. The Fund is registered under the Investment Company Act of
1940 (as amended) as a diversified, open-end management investment company. On
February 14, 1995 shareholders of the Fund approved a name change to Advantus
International Balanced Fund, Inc. (effective March 1, 1995). Prior to March 1,
1995 the Fund was known as MIMLIC International Balanced Fund, Inc.
The Fund currently issues two classes of shares: Class A and Class C shares.
Class A shares are sold subject to a front-end sales charge. Class C shares are
sold without a front-end sales charge, but are subject to a higher Rule 12b-1
fee than Class A shares. Class C shares automatically convert to Class A shares
at net asset value after a specified holding period. Such holding period
declines as the amount of the purchase increases and ranges from 40 to 96 months
after purchase for Class C shares. Both classes of shares have identical voting,
dividend, liquidation and other rights and the same terms and conditions, except
that the level of distribution fees and sales charges charged differs between
Class A and Class C shares. Income, expenses (other than distribution fees) and
realized and unrealized gains or losses on investments are allocated to each
class of shares based upon its relative net assets.
On June 20, 1994, MIMLIC Asset Management Company (MIMLIC Management)
purchased 15,000 Class A shares for $150,000. Operations of the Fund did not
formally commence until September 16, 1994 when the shares became effectively
registered under the Securities Exchange Act of 1933. The Minnesota Mutual Life
Insurance Company (Minnesota Mutual), the parent of MIMLIC Management, purchased
1,476,997 Class A shares for $15 million prior to commencement of operations.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by the Fund are summarized as
follows:
INVESTMENTS IN SECURITIES
Investments in securities traded on a U.S. or foreign securities 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. When market quotations are not readily available,
securities are valued at fair value as determined in good faith by the Board of
Directors. Such fair values are determined using pricing services or prices
quoted by independent brokers. Short-term securities with maturities of less
than 60 days when acquired, or which subsequently are within 60 days of
maturity, are valued at amortized cost which approximates market value.
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.
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
FOREIGN CURRENCY TRANSLATIONS AND FORWARD FOREIGN CURRENCY CONTRACTS
Securities and other assets and liabilities denominated in foreign
currencies are translated daily into U.S. dollars at the closing rate of
exchange. Foreign currency amounts related to the purchase or sale of
securities, income and expenses are translated at the exchange rate on the
transaction date. The Fund does not isolate that portion of the results of
operations resulting from changes in foreign exchange rates on investments from
the fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with net realized and unrealized gains or losses from
investments.
Net realized foreign exchange gains or losses arise from sales and
maturities of short-term securities, sales of foreign currencies, currency gains
or losses realized between trade and settlement dates on securities
transactions, the difference between the amounts of dividends, interest and
foreign withholding taxes recorded on the Fund's books and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in the value of assets and
liabilities, other than investments in securities, resulting from changes in
exchange rates.
The Fund also may enter into forward foreign currency exchange contracts for
operational purposes and to protect against adverse exchange rate fluctuations.
The net U.S. dollar value of foreign currency underlying all contractual
commitments held by the Fund and the resulting unrealized appreciation and
depreciation are determined using foreign currency exchange rates from an
independent pricing service. The Fund is subject to the credit risk that the
other party will not complete the obligations of the contract.
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.
Net investment income (loss) and net realized gains (losses) may differ for
financial statement and tax purposes primarily because of temporary book-to-tax
differences. The character of distributions made during the year from net
investment income or net realized gains may differ from their ultimate
characterization for federal income tax purposes. Also, due to the timing of
dividend distributions, the fiscal year in which amounts are distributed may
differ from the year that the income (loss) or realized gains (losses) were
recorded by the Fund.
On the statement of assets and liabilities, as a result of permanent
book-to-tax differences, adjustments have been made to decrease additional
paid-in capital in the amount $8,273, decrease undistributed net investment
income in the amount of $50,198 and increase accumulated realized gains in the
amount of $58,471.
DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income are declared and paid quarterly in cash
or reinvested in additional shares. Realized gains, if any, are paid annually.
(3) INVESTMENT SECURITY TRANSACTIONS
For the year ended September 30, 1995, purchases of securities and proceeds
from sales, other than temporary investments in short-term securities aggregated
$27,063,595 and $12,213,083, respectively.
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(4) FORWARD FOREIGN CURRENCY CONTRACTS
On September 30, 1995, the Fund had entered into forward foreign currency
exchange contracts that obligate the Fund to deliver currencies at specified
future dates. The unrealized depreciation of $44,582 on these contracts is
included in the accompanying financial statements. The terms of the open
contracts were as follows:
<TABLE>
<CAPTION>
EXCHANGE CURRENCY TO U.S. $ VALUE CURRENCY TO U.S. $ VALUE
DATE BE DELIVERED 9/30/95 BE RECEIVED 9/30/95
- ---------- ----------------------- ------------ ------------------------ ------------
<C> <C> <S> <C> <C> <C> <C>
10/31/95 30,400 US$ $ 30,400 48,988,827 ITL $ 30,400
10/04/95 14,379 US$ 14,379 9,082 GBP 14,374
10/02/95 12,331 US$ 12,331 1,231,259 JPY 12,481
10/05/95 28,908 US$ 28,908 123,668 FIM 29,028
10/31/95 35,233 US$ 35,233 173,364 FRF 35,307
10/05/95 12,404 US$ 12,404 7,809 GBP 12,359
10/06/95 5,360 US$ 5,360 3,369 GBP 5,332
10/06/95 13,994 US$ 13,994 21,140 NZD 13,917
10/06/95 31,674 US$ 31,674 19,940 GBP 31,558
10/04/95 31,157 US$ 31,157 193,720 NOK 30,966
10/06/95 31,115 US$ 31,115 19,555 GBP 30,949
10/04/95 8,663 US$ 8,663 868,082 JPY 8,800
10/03/95 13,282 US$ 13,282 1,306,960 JPY 13,248
10/04/95 13,160 US$ 13,160 1,323,635 JPY 13,417
10/09/95 31,258 US$ 31,258 40,994 AUD 30,942
10/31/95 30,038 US$ 30,038 147,802 FRF 30,101
10/31/95 33,415 US$ 33,415 164,417 FRF 33,485
10/04/95 15,412 GBP 24,393 24,266 US$ 24,266
10/04/95 26,434 CHF 23,005 22,896 US$ 22,896
10/03/95 133,529 US$ 133,529 214,368,223 ITL 133,024
10/02/95 133,927 US$ 133,927 214,979,855 ITL 133,404
10/25/95 96,623 US$ 96,623 137,500 DEM 96,630
10/23/95 192,582 US$ 192,582 275,000 DEM 193,261
10/02/95 266,412 US$ 266,412 32,869,875 ESP 266,822
10/05/95 18,500,000 JPY 187,532 190,649 US$ 190,649
10/23/95 18,500,000 JPY 187,532 178,399 US$ 178,399
10/23/95 21,000,000 JPY 212,874 202,098 US$ 202,098
10/23/95 550,000 DEM 386,522 373,253 US$ 373,253
10/25/95 275,000 DEM 193,261 188,627 US$ 188,627
10/06/95 1,000,000 CAD 742,424 737,208 US$ 737,208
10/06/95 460,000 CAD 341,515 339,033 US$ 339,033
10/23/95 275,000 DEM 193,261 194,045 US$ 194,045
10/25/95 137,500 DEM 96,630 97,428 US$ 97,428
10/12/95 550,000 DEM 386,522 382,569 US$ 382,569
10/04/95 522,554 DEM 367,233 367,690 US$ 367,690
------------ ------------
$4,542,548 $4,497,966
------------ ------------
------------ ------------
</TABLE>
21
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(4) FORWARD FOREIGN CURRENCY CONTRACTS--(CONTINUED)
<TABLE>
<S> <C>
CAD Canadian Dollar
CHF Swiss Franc
ESP Spanish Peseta
FIM Finnish Mark
FRF French Franc
ITL Italian Lira
JPY Japanese Yen
AUD Australian Dollar
DEM German Deutch Mark
GBP British Pound Sterling
CAD Canadian Dollar
NZD New Zealand Dollar
NOK Norwegian Krone
US$ United States Dollar
</TABLE>
(5) EXPENSES AND RELATED PARTY TRANSACTIONS
On February 14, 1995 shareholders of the Fund approved a new investment
advisory agreement, effective March 1, 1995, with Advantus Capital Management,
Inc. (Advantus Capital or the Adviser). Advantus Capital is a wholly-owned
subsidiary of MIMLIC Asset Management Company (MIMLIC Management) which, prior
to March 1, 1995, served as investment adviser to the Fund. Under the agreement,
Advantus Capital manages the Fund's assets and provides research, statistical
and advisory services and pays related office rental and executive expenses and
salaries. In addition, as part of the advisory fee, Advantus Capital pays the
expenses of the Fund's transfer, dividend disbursing and redemption agent (The
Minnesota Mutual Life Insurance Company (Minnesota Mutual), the parent of MIMLIC
Management). The fee for investment management and advisory services is based on
the average daily net assets of the Fund at the annual rate of .95 percent on
the first $25 million in net assets, .80 percent on the next $25 million, .75
percent on the next $50 million and .65 percent on net assets in excess of $100
million. Fees under the new agreement with Advantus Capital are the same as
under the old agreement with MIMLIC Management.
On February 14, 1995 shareholders of the Fund also approved a new
sub-advisory agreement between Advantus Capital and Templeton Investment
Counsel, Inc. (Templeton). From its advisory fee, Advantus Capital pays
Templeton, Inc. a fee equal to an annual rate of .70 percent on the first $25
million in net assets, .55 percent on the next $25 million, .50 percent on the
next $50 million and .40 percent on net assets in excess of $100 million. Fees
under the new sub-advisory agreement between Advantus Capital and Templeton
Investment Counsel, Inc. are the same as the old agreement between MIMLIC
Management and Templeton Investment Counsel, Inc.
The Fund has adopted separate Plans of Distribution applicable to Class A
and Class C shares, respectively, relating to the payment of certain
distribution expenses pursuant to Rule 12b-1 under the Investment Company Act of
1940 (as amended). The Fund pays distribution fees to MIMLIC Sales Corporation
(MIMLIC Sales), the underwriter of the Fund and a wholly-owned subsidiary of
MIMLIC Management, to be used to pay certain expenses incurred in the
distribution, promotion and servicing of the Fund's shares. The Class A Plan
provides for a fee up to .30 percent of average daily net assets of Class A
shares. The Class C Plan provides for a fee of up to 1.00 percent of average
daily net assets of Class C shares.
22
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(5) EXPENSES AND RELATED PARTY TRANSACTIONS--(CONTINUED)
The Class C 1.00 percent fee is comprised of a .75 percent distribution fee and
a .25 percent service fee. MIMLIC Sales is currently waiving that portion of
Class A distribution fees which exceeds, as a percentage of average daily net
assets, .15 percent for the Fund.
The Fund also bears certain other operating expenses including outside
directors' fees, custodian fees, registration fees, printing and shareholder
reports, legal, auditing and accounting services, organizational costs and other
miscellaneous expenses.
The Fund pays an administrative services fee to Minnesota Mutual for
accounting, auditing, legal and other administrative services which Minnesota
Mutual provides. Prior to February 1, 1995 the administrative services fee for
the Fund was $2,450 per month. Effective February 1, 1995 the administrative
services fee is $2,050 per month.
Advantus Capital (MIMLIC Management prior to March 1, 1995) directly incurs
and pays the above operating expenses and the Fund in turn reimburses Advantus
Capital. During the year ended September 30, 1995, Advantus Capital voluntarily
agreed to absorb $17,626 in expenses that were otherwise payable by the Fund.
Sales charges received by MIMLIC Sales for distributing the Fund's two
classes of shares amounted to $150,769.
As of September 30, 1995, Minnesota Mutual and subsidiaries and the
directors and officers of the Fund as a whole owned the following shares:
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OWNED
------------------ -------------------
<S> <C> <C>
Class A................................. 2,490,726 86.8%
Class C................................. 1,024 3.3%
</TABLE>
Legal fees were paid to a law firm of which the Fund's secretary is a
partner in the amount of $9,835.
(6) ORGANIZATIONAL COSTS
The Fund incurred organizational expenses in connection with the start-up
and initial registration. These costs will be amortized over 60 months on a
straight-line basis beginning with the commencement of operations. If any or all
of the shares held by MIMLIC Management, or any other holder, representing
initial capital of the Fund are redeemed during the amortization period, the
redemption proceeds will be reduced by the pro rata portion (based on the ratio
that the number of initial shares redeemed bears to the total number of
outstanding initial shares of the Fund at the date of redemption) of the
unamortized organizational cost balance.
23
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(7) CAPITAL SHARE TRANSACTIONS
Transactions in shares for the year ended September 30, 1995 and the period
from June 20, 1994 to September 30, 1994 for Class A shares and the period from
March 1, 1995 to September 30, 1995 for Class C shares were as follows:
<TABLE>
<CAPTION>
CLASS A CLASS C
---------------------- -----------
1995 1994 1995
---------- ---------- -----------
<S> <C> <C> <C>
Sold.................................... 1,411,085 1,491,997 36,260
Issued for reinvested distributions..... 7,265 -- 481
Redeemed................................ (42,101) -- (6,119)
---------- ---------- -----------
1,376,249 1,491,997 30,622
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
24
<PAGE>
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(8) FINANCIAL HIGHLIGHTS
Per share data for a share of capital stock and selected information for
each period are as follows:
<TABLE>
<CAPTION>
CLASS A CLASS C
--------------------------------- -------------
PERIOD FROM PERIOD FROM
SEPTEMBER 16, MARCH 1,
YEAR ENDED 1994(A) TO 1995(A) TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net asset value, beginning of period................... $ 10.34 $ 10.54 $ 9.95
------------- ------------- ------
Income from investment operations:
Net investment income................................ .20 .01 .11
Net gains or losses on securities (both realized and
unrealized)......................................... .56 (.21) .91
------------- ------------- ------
Total from investment operations................... .76 (.20) 1.02
------------- ------------- ------
Less distributions:
Dividends from net investment income................. (.19) -- (.13)
Distributions from capital gains..................... (.12) -- (.07)
------------- ------------- ------
Total distributions................................ (.31) -- (.20)
------------- ------------- ------
Net asset value, end of period......................... $ 10.79 $ 10.34 $ 10.77
------------- ------------- ------
------------- ------------- ------
Total return (b)....................................... 7.4% (1.9)%(c) 10.3%(d)
Net assets, end of period (in thousands)............... $30,949 $15,430 $ 330
Ratio of expenses to average daily net assets (e)...... 2.08% .47%(f) 2.93%(g)
Ratio of net investment income to average daily net
assets (e)............................................ 2.22% .14%(f) 1.39%(g)
Portfolio turnover rate (excluding short-term
securities)........................................... 52.0% 12.1% 52.0%
<FN>
- ----------
(a) Commencement of operations.
(b) Total return figures are based on a share outstanding throughout the period
and assumes reinvestment of distributions at net asset value. Total return
figures do not reflect the impact of sales charges.
(c) Total return is presented for the period from September 16, 1994,
commencement of operations, to September 30, 1994.
(d) Total return is presented for the period from March 1, 1995, commencement
of operations, to September 30, 1995.
(e) The Fund's Distributor and Adviser voluntarily waived or absorbed $56,482
and $4,034 in expenses for the year ended September 30, 1995 and the period
ended September 30, 1994, respectively. If the Fund had been charged for
theses expenses, the ratio of expenses to average daily net assets would
have been 2.30% and .49% for Class A shares, respectively, and 3.00% for
Class C shares. The ratios of net investment income to average daily net
assets would have been 2.00% and .12% for Class A shares, respectively, and
1.32% for Class C shares.
(f) Ratios presented for the period from September 16, 1994 to September 30,
1994 are not annualized as they are not indicative of anticipated results.
(g) Adjusted to an annual basis.
</TABLE>
25
