<PAGE>
[LOGO]
ADVANTUS
FAMILY OF FUNDS
ANNUAL REPORT TO SHAREHOLDERS
ADVANTUS MORTGAGE SECURITIES FUND
SEPTEMBER 30, 1998
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND
TABLE OF CONTENTS
PERFORMANCE UPDATE 2
INVESTMENTS IN SECURITIES 7
STATEMENT OF ASSETS AND LIABILITIES 10
STATEMENT OF OPERATIONS 11
STATEMENTS OF CHANGES IN NET ASSETS 12
NOTES TO FINANCIAL STATEMENTS 13
INDEPENDENT AUDITORS' REPORT 18
FEDERAL INCOME TAX INFORMATION 19
SHAREHOLDER SERVICES 21
<PAGE>
LETTER FROM THE PRESIDENT [PHOTO]
Dear Shareholder:
Economic prosperity and record-setting U.S. markets over the last few years have
lulled many Americans into dreaming of perpetual gain. In this year, the effects
of global economic turmoil and market volatility have awakened us.
The global economy has been exposed to the negative effects of Asia's economic
debacle for over a year, and this negative growth is highly contagious. About 40
percent of the world's economies are in recession. Japan continues to seek the
financial stimulus necessary to recover. In Russia, a backlash against
capitalism continues to unfold. Also, Latin America, Brazil in particular, has
seen its competitive position deteriorate sharply. We anticipate that world
growth will slow to an annual rate of 1 percent by the end of 1998. This is a
dramatic change from one year ago (down 3 percent).
As expected, the U.S. economy is slowing. The growth forecast for our country at
the end of this reporting period (September 30, 1998) was 1.5 to 2 percent, a
drop from the 3 percent experienced a year ago. Current economic conditions
favor bonds, as yields will likely decline in light of slowing economic
conditions. Deflation fears have sustained a global "flight to quality" as
investors dumped the riskier assets of developing countries and sought the
relative safety of high quality bonds in the major countries.
We anticipate that there will be a continuation of tight fiscal policy. However,
monetary policy will change. We expect interest rates to move lower in the
upcoming quarters, as we believe it is likely that the Federal Reserve Board
will aggressively lower the Fed Funds rate to inject liquidity into a globally
stressed financial system.
The yield curve should steepen, with short-term interest rates declining further
than long-term interest rates. We expect the corporate bond sector will
stabilize and spreads will recover as the Fed acts to provide liquidity.
Many stocks have declined significantly in response to reduced earnings
expectations, and many stocks are now attractively valued. Interest rates have
declined, which improves the relative value of stocks. However, we expect that
stocks may remain volatile for the near term.
We have witnessed a significantly higher level of volatility in the U.S. stock
markets as most indices and stock funds came under pressure. The flight to
quality in all kinds of securities was reinforced and magnified by more visible
risks in a number of sectors.
A declining equity market hurt corporate bonds as investors began worrying about
the likelihood of lower earnings. Companies with international exposure became a
concern. Liquidity in the corporate bond market began to evaporate, as traders
became reluctant to bid on corporate bonds. These factors pushed corporate bond
spreads even wider, causing them to underperform U.S. Treasury securities.
In the pages that follow, the Fund's manager will give you information about how
the economy and conditions within the market affected the Fund during this
reporting period. The manager will specifically discuss your Advantus Fund's
performance and share some strategies that were used to manage the Fund.
Meanwhile, continue investing for the long term. We believe that you will derive
the greatest benefit by doing so. Be thoughtful about the diversification of
your portfolio, and maintain a high quality portfolio. Consider putting a
periodic investment program in place. It will help you weather volatility in the
markets.
Sincerely,
/s/ William N. Westhoff
William N. Westhoff, President
Advantus Funds
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND
PERFORMANCE UPDATE
[PHOTO]
KENT WEBER, CFA
PORTFOLIO UPDATE
The Advantus Mortgage Securities Fund is
a mutual fund designed for investors
seeking a high level of current income
consistent with prudent investment risk.
The Fund hopes to achieve its income
objective by investing primarily in a
diversified portfolio of mortgage-related
securities.
-Dividends declared daily and paid monthly.
-Capital gains distributions paid annually.
PERFORMANCE
The performance of your Advantus Mortgage Securities Fund for the year ended
September 30, 1998 was as follows for the three classes of shares currently
outstanding:
<TABLE>
<S> <C>
Class A............. 8.73 percent*
Class B............. 7.92 percent*
Class C............. 7.92 percent*
</TABLE>
The Fund's benchmark index, the Lehman Brothers Mortgage-Backed Securities
Index,** returned 8.62 percent, and the Lehman Brothers GNMA Index+ returned
8.38 percent for the same period.
In prior reporting periods, the Lehman Brothers GNMA Index+ was used as the
Fund's benchmark. The Lehman Brothers Mortgage-Backed Securities Index** better
fits our stated investment objective than did the Lehman Brothers GNMA Index.+
PERFORMANCE ANALYSIS
It has been a tumultuous year in the fixed income market. The relative stability
that we experienced in the first half of this reporting period was shaken by
some unprecedented market behaviors later in the period. For more than a year,
economic events in Asia have affected world markets. The continuing saga of this
financial turmoil throughout the world and the realization of slower growth in
the U.S. caused treasury securities to rally to unthinkably low yields and
caused current coupon mortgage-treasury spreads to widen to new highs. Rates for
intermediate maturity treasuries are down more than one percent, while current
coupon mortgages now out yield similar maturity treasuries by more than 1.75
percent (up from 1.1 percent).
The magnitude and swiftness in which these events occurred surprised even the
most seasoned investors. In less then three months' time, market psychology
shifted 180 degrees. Investors quickly put aside discerning, value investing
themes in favor of a complete aversion for risk. The only market segment
generating excitement was treasuries. Unfortunately, this severe sector rotation
(out of mortgages and corporates and into treasuries) only further reduced
liquidity in both the mortgage and corporate bond markets. These events tend to
serve as the beginning ingredients of a classic credit crunch unless the Federal
Reserve acts quickly. And indeed, the Federal Reserve did respond; it calmed the
market by cutting the Federal Funds rate slightly (1/4 percent) on the belief
that inflation is no longer our enemy given current world events.
Earlier in the reporting period--prior to the market's current bout with spread
widening--we were under weighted in straight agency mortgage securities. We
seized an opportunity to add value by swapping credit and
2
<PAGE>
ADVANTUS MORTGAGE
SECURITIES FUND
SEPTEMBER 30, 1998
liquidity risk for prepayment risk. To accomplish this, we over weighted AA to
BBB rated (investment grade) securities; commercial mortgage securities and
other prepayment-challenged securities. The common theme among all of these
securities is that they offered improved prepayment protection going into the
rally. Unfortunately, liquidity--not relative value--was king late in the
reporting period (the third calendar quarter). Even though we had better call
protection going into this rally, many of these securities experienced a more
dramatic widening in spreads then did straight agency pass-throughs.
The Fund benefited from its over weighting in GNMA, versus FNMA and FHLMC, as
investors paid up to own GNMA securities due to their lower prepayment risk.
Also, by holding more duration then the Index we were able to offset some of the
ill effects of incremental spread widening experienced by non-index securities.
On the other hand, the over allocation to commercial and AA to BBB rated
mortgage bonds hindered performance as these sectors experienced the brunt of
spread-widening activity.
The Fund remains focused on high quality (credit and cash flow) assets. As of
the end of the reporting period on September 30, 1998, the average credit
quality of the Fund remained solid at AA2. The Fund is well diversified, and we
believe it is a more holistic representation of the domestic mortgage market and
not just the agency pass-through sector.
The effective duration of the Lehman Brothers Mortgage-Backed Securities Index
declined considerably as a result of the recent treasury rally (which was caused
by a marked increase in expectations of future prepayments). The Index stands
tall at 1.7 years--.8 years shorter than it was during the second quarter.
However, a change in the composition of the Index going forward will also
contribute to a change in the Index duration. As higher-coupon, shorter-duration
mortgage bonds are replaced with lower-coupon, longer-duration bonds, the Index
will begin to extend. Over the next 12 months, assuming mortgage rates remain
steady, we anticipate that the duration of the Index could extend by up to one
year.
OUTLOOK
Going forward we will look to maintain the Fund's duration at, or moderately
longer, than the Index. We will also continue to pursue a value style of
investing, in which we seek to behave like stock pickers in a bond market. Over
the long run, we are better equipped to add more value through fundamental
security selection, as well as sector over weightings and under weightings, than
by making big bets on the direction of interest rates. But before we can move
forward in a meaningful manner, the markets must stabilize, and the flight to
quality must subside. Until then, liquidity will remain king and risk aversion
will run rampant. In this environment, agency mortgage securities and AA rated
securities represent some of the most undervalued sectors of the mortgage
market. Therefore, we will pursue new investment opportunities in these areas.
*Historical performance is not an indication of future performance. These
performance results do not reflect the impact of Class A's maximum 5 percent
front-end sales charge or Class B's maximum 5 percent contingent deferred sales
charge. Investment returns and principal values will fluctuate so that shares
upon redemption may be worth more or less than their original cost.
**The Lehman Brothers Mortgage-Backed Securities Index is an unmanaged benchmark
composite which includes all fixed-rate securities backed by mortgage pools of
the Government National Mortgage Association (GNMA), Federal Home Loan Mortgage
Corporation (FHLMC) and Federal National Mortgage Association (FNMA).
+The Lehman Brothers GNMA Index includes 15 and 30 year fixed rate securities
backed by mortgage pools of the Government National Mortgage Association.
3
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ADVANTUS MORTGAGE
SECURITIES FUND
SEPTEMBER 30, 1998
OUTLOOK -- CONTINUED
The domestic economy is no longer an oasis of prosperity able to function
independently of world events. We expect rates to continue to drift lower in the
months ahead (but in a more orderly fashion) as the economy calls for additional
monetary injections to fight off the ill effects of the global financial crisis
and the domestic liquidity crisis. The mortgage market has already priced in
very aggressive prepayment assumptions and, therefore, is well positioned to
handle such events. At some point, spread products such as mortgages and
corporates will once again return to their vague status. This will likely take
some time to turn around. But as the market's obsession with safety and
liquidity subsides and the reality of a lower interest rate era sets in, we
believe investors will begin to seek higher-yielding fixed income assets to meet
their needs. The mortgage market will be there to lend a helping hand.
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL
$10,000 INVESTMENT IN ADVANTUS MORTGAGE SECURITIES FUND,
LEHMAN BROTHERS GNMA INDEX, LEHMAN BROTHERS
MORTGAGE-BACKED SECURITIES INDEX, AND CONSUMER PRICE INDEX
On the following three charts you can see how the total return for each of the
three classes of shares of the Advantus Mortgage Securities Fund compared to the
Lehman Brothers GNMA Index, the Lehman Brothers Mortgage-Backed Securities
Index, and the Consumer Price Index. The four lines in the Class A graph
represent the cumulative total return of a hypothetical $10,000 investment made
on September 30, 1988 through September 30, 1998. The four lines in the Class B
and Class C graphs represent the cumulative total return of a hypothetical
$10,000 investment made on the inception date of Class B and Class C shares
(August 19, 1994 and March 1, 1995, respectively) through September 30, 1998.
CLASS A
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN:
One year 3.30%
Five year 5.51%
Ten year 8.04%
Lehman Brothers Mortgage-Backed
Class A Lehman Brothers GNMA Index CPI Securities Index
9/30/88 $10,000 $10,000 $10,000 $10,000
10/31/88 $9,956 $10,221 $10,033 $10,219
10/31/89 $10,935 $11,388 $10,493 $11,363
10/31/90 $11,636 $12,332 $11,154 $12,325
10/31/91 $13,500 $14,439 $11,480 $14,410
10/31/92 $14,606 $15,709 $11,848 $15,584
10/31/93 $16,274 $16,899 $12,166 $16,814
9/30/94 $15,568 $16,788 $12,533 $16,546
9/30/95 $17,674 $19,151 $12,809 $18,783
9/30/96 $18,527 $20,276 $13,194 $19,873
9/30/97 $20,448 $22,357 $13,487 $21,867
9/30/98 $21,658 $24,230 $13,679 $23,754
</TABLE>
4
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ADVANTUS MORTGAGE
SECURITIES FUND
SEPTEMBER 30, 1998
CLASS B
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN:
One year 2.92%
Since inception (8/19/94) 7.81%
Class B Lehman Brothers GNMA Index CPI
8/19/94 $10,000 $10,000 $10,000
9/30/94 $9,928 $9,874 $10,067
9/30/95 $10,742 $11,264 $10,289
9/30/96 $11,297 $11,926 $10,598
9/30/97 $12,521 $13,150 $10,833
9/30/98 $13,633 $14,251 $10,987
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN:
<S> <C>
One year
Since inception (8/19/94)
Lehman Brothers Mortgage-Backed Securities
Index
8/19/94 $10,000
9/30/94 $9,874
9/30/95 $11,209
9/30/96 $11,859
9/30/97 $13,049
9/30/98 $14,175
</TABLE>
CLASS C
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN:
One year 7.92%
Since inception (3/1/95) 8.25%
Class C Lehman Brothers GNMA Index CPI
3/1/95 $10,000 $10,000 $10,000
9/30/95 $10,791 $10,817 $10,146
9/30/96 $11,230 $11,452 $10,450
9/30/97 $12,314 $12,628 $10,682
9/30/98 $13,290 $13,685 $10,834
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN:
<S> <C>
One year
Since inception (3/1/95)
Lehman Brothers Mortgage-Backed Securities
Index
3/1/95 $10,000
9/30/95 $10,793
9/30/96 $11,419
9/30/97 $12,565
9/30/98 $13,649
</TABLE>
The preceding charts are useful because they provide you with more information
about your investments. There are limitations, however. An index may reflect the
performance of securities that the Fund may not hold. Also, the index does not
deduct sales charges, investment advisory fees and other fund expenses, whereas
your Fund does. Performance presented for the Fund reflects the deduction of the
maximum 5 percent front-end sales charge for Class A and the maximum applicable
contingent deferred sales charge for Class B shares. Sales charges pay for your
financial professional's investment advice. Individuals cannot buy even an
unmanaged index fund without incurring some charges and expenses.
Historical performance is not an indication of future performance. Investment
returns and principal values will fluctuate so that shares upon redemption may
be worth more or less than their original cost.
5
<PAGE>
ADVANTUS MORTGAGE
SECURITIES FUND
SEPTEMBER 30, 1998
PRUDENT SECTOR DIVERSIFICATION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
FMNA 6.5%
FHLMC 3.3%
GNMA 20.2%
Vendee
Mortgage
Trust
Participation
Certificates 7.4%
Other
Mortgage-
Backed
Securities 61.4%
Preferred
Stock 1.2%
</TABLE>
HIGH QUALITY ASSETS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Preferred Stock 1.2%
AAA Rated 64.4%
AA Rated 12.7%
A Rated 11.7%
BBB Rated 10.0%
</TABLE>
SOLID LIQUIDITY
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Preferred Stock 1.2%
Private 144A Issues 7.9%
Public Issues 90.9%
</TABLE>
6
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND
INVESTMENTS IN SECURITIES
SEPTEMBER 30, 1998
(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 (99.4%)
U.S. GOVERNMENT AND AGENCIES OBLIGATIONS (37.6%)
Federal Home Loan Mortgage Corporation (FHLMC) (3.3%)
$1,000,000 ................................................. 6.000% 09/01/18 $ 1,005,190
554,992 ................................................. 6.500% 12/01/23 562,218
----------------
1,567,408
----------------
Federal National Mortgage Association (FNMA) (6.5%)
757,500 (d).............................................. 6.000% 10/01/28 755,725
750,000 (d).............................................. 6.500% 10/15/28 762,187
1,438,624 ................................................. 8.000% 07/15/16 1,506,959
----------------
3,024,871
----------------
Government National Mortgage Association (GNMA) (20.3%)
1,000,000 (d).............................................. 6.500% 10/15/28 1,021,250
240,000 ................................................. 6.500% 09/15/28 245,244
1,000,000 (d).............................................. 6.500% 10/01/28 1,021,250
497,000 (d).............................................. 6.500% 10/15/28 505,076
500,000 (d).............................................. 6.500% 10/15/28 510,625
1,000,000 (d).............................................. 6.500% 10/15/28 1,021,250
2,974,805 ................................................. 7.000% 10/15/17 3,090,139
293,797 ................................................. 8.500% 04/20/17 309,988
716,163 ................................................. 8.500% 05/20/17 755,631
901,799 Project Loan..................................... 8.000% 05/01/17 983,525
----------------
9,463,978
----------------
Vendee Mortgage Trust Participation Certificate (7.5%)
625,760 (c).............................................. 7.210% 02/15/25 654,584
816,258 (c).............................................. 7.793% 02/15/25 865,234
1,000,000 (c).............................................. 8.000% 07/15/18 1,032,500
873,280 (c).............................................. 8.293% 12/15/26 937,684
----------------
3,490,002
----------------
Total U.S. government and agencies obligations (cost:
$17,036,976)...................................................... 17,546,259
----------------
OTHER MORTGAGE-BACKED SECURITIES (61.8%)
Asset-Backed Securities (3.7%)
976,478 Metropolitan Asset-144A Issue (e)................ 6.980% 05/20/12 989,905
693,151 Tyron Mortgage Funding........................... 7.750% 12/20/09 713,697
----------------
1,703,602
----------------
Collateralized Mortgage Obligations/Mortgage Revenue Bonds (46.3%)
511,905 American Housing Trust........................... 8.125% 06/25/18 531,089
668,344 Asset Securitization Corporation................. 7.100% 08/13/29 717,227
468,694 Banco Hipotecario Nacional-144A Issue (b)(e)..... 7.916% 07/25/09 360,894
</TABLE>
See accompanying notes to investments in securities.
7
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND
INVESTMENTS IN SECURITIES--CONTINUED
<TABLE>
<CAPTION>
MARKET
PRINCIPAL VALUE(a)
- ---------- ----------------
OTHER MORTGAGE-BACKED SECURITIES--CONTINUED
<C> <S> <C> <C> <C>
$1,386,329 Bear Stearns Mortgage Securities, Inc............ 6.750% 04/30/30 $ 1,398,459
730,407 Bear Stearns Mortgage Securities, Inc............ 8.000% 11/25/29 744,102
1,100,000 California Housing Finance Agency................ 7.760% 08/01/25 1,156,375
745,000 California Housing Finance Agency................ 8.160% 02/01/28 783,181
459,833 Collateralized Mortgage Trust.................... 5.000% 07/01/18 452,825
1,150,000 CSFB Finance Company-144A Issue (e).............. 7.180% 11/15/05 1,127,000
602,218 GE Capital Mortgage Securities................... 6.000% 04/25/09 611,888
500,000 GE Capital Mortgage Securities................... 6.500% 12/25/23 507,336
1,244,888 GE Capital Mortgage Securities-144A Issue (e).... 6.500% 04/25/24 1,235,551
1,000,000 Lee County Florida............................... 6.700% 09/01/25 1,015,000
1,028,000 Lehman Brothers Grantor Trust.................... 7.000% 12/01/22 1,048,560
500,000 Louisiana Housing Finance Agency................. 6.375% 12/01/23 516,907
616,353 Norwest Mortgage, Inc............................ 7.500% 12/25/26 629,450
1,175,200 Paine Webber Mortgage Acceptance Corporation..... 6.927% 02/25/24 1,200,402
658,970 Paine Webber Mortgage Acceptance Corporation..... 8.125% 07/25/09 678,740
1,000,000 Pennsylvania Housing Finance..................... 7.410% 10/01/17 1,035,395
1,198,382 Prudential Home Mortgage Securities.............. 6.050% 04/25/24 1,208,118
1,172,902 Prudential Home Mortgage Securities.............. 6.500% 10/25/23 1,164,801
644,592 Prudential Home Mortgage Securities.............. 6.500% 04/25/26 647,009
872,000 Prudential Home Mortgage Securities.............. 7.000% 06/25/23 872,089
490,220 Prudential Home Mortgage Securities.............. 8.000% 06/25/22 553,642
821,396 Santa Barbara Funding II......................... 5.000% 03/20/18 806,340
637,400 Wyoming Community Development.................... 6.850% 06/01/10 636,205
----------------
21,638,585
----------------
Commercial Mortgage-Backed Securities (11.8%)
1,250,000 Covenant Retirement Community.................... 6.250% 12/01/22 1,262,891
530,000 Los Angeles Housing Authority.................... 6.750% 11/01/03 557,815
900,000 Massachusetts Industrial Financial............... 7.100% 02/01/10 931,304
874,000 Pleasant Hill Revenue Bond....................... 7.950% 09/20/15 974,606
1,675,988 Rosewood Care Center............................. 7.250% 11/01/13 1,777,118
----------------
5,503,734
----------------
Total other mortgage-backed securities (cost: $28,083,558)......... 28,845,921
----------------
Total long-term debt securities (cost: $45,120,534)................ 46,392,180
----------------
</TABLE>
See accompanying notes to investments in securities.
8
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND
INVESTMENTS IN SECURITIES--CONTINUED
<TABLE>
<CAPTION>
MARKET
SHARES VALUE(a)
- ---------- ----------------
<C> <S> <C>
PREFERRED STOCK (1.2%)
FINANCIAL (1.2%)
Real Estate Investment Trust (1.2%)
11,000 Duke Realty Investments, Inc.-7.99%.............. $ 565,812
----------------
Total preferred stock (cost: $550,000)........... 565,812
----------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
- ----------
<C> <S> <C> <C> <C>
SHORT-TERM SECURITIES (4.1%)
$1,928,099 Federated Prime Obligation Fund, current rate 5.470%............... 1,928,099
-------------
Total short-term securities (cost: $1,928,099)..................... 1,928,099
-------------
Total investments in securities (cost: $47,598,633) (f)............ $48,886,091
-------------
-------------
</TABLE>
Notes to Investments in Securities
- ----------------------------
(a) Securities are valued by procedures described in note 2 to the financial
statements.
(b) The Fund held .8% of the net assets in foreign securities as of September
30, 1998.
(c) Represents a debt secutity 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, 1998.
(d) At September 30, 1998 the total cost of investments issued on a when-issued
or forward commitment basis is $5,564,573.
(e) Represents ownership in a restricted security which has not been registered
with the Security and Exchange Commission under the Securities Act of 1933.
(See note 6 to the financial statements.) Information concerning the
restricted securities held at September 30, 1998, which includes acquisition
date and cost, is as follows:
<TABLE>
<CAPTION>
ACQUISITION
SECURITY: DATE COST
- --------------------------------------- ----------- -----------
<S> <C> <C>
Banco Hipotecario Nacional 144A 04/30/97 $ 468,694
Issue................................
CSFB Finance Company 144A Issue........ various 1,145,969
GE Capital Mortgage Securities 144A various 1,241,386
Issue................................
Metropolitan Asset 144A Issue.......... various 971,373
-----------
$ 3,827,422
-----------
-----------
</TABLE>
(f) At September 30, 1998 the cost of securities for federal income tax purposes
was $47,599,706. The aggregate unrealized appreciation and depreciation of
investments in securities based on this cost were:
<TABLE>
<S> <C>
Gross unrealized appreciation.......... $1,429,463
Gross unrealized depreciation.......... (143,078)
----------
Net unrealized appreciation............ $1,286,385
----------
----------
</TABLE>
9
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
<TABLE>
<S> <C>
ASSETS
Investments in securities, at market
value--see accompanying schedule for
detailed listing
(identified cost: $47,598,633)........ $48,886,091
Receivable for Fund shares sold........ 658,638
Receivable for investment securities
sold.................................. 5,237,908
Accrued interest receivable............ 397,404
-----------
Total assets....................... 55,180,041
-----------
LIABILITIES
Bank overdraft......................... 895,608
Payable for investment securities
purchased............................. 7,380,985
Payable for Fund shares redeemed....... 180,188
Payable to Adviser..................... 33,137
-----------
Total liabilities.................. 8,489,918
-----------
Net assets applicable to outstanding
capital stock......................... $46,690,123
-----------
-----------
Represented by:
Capital stock--authorized 10 billion
shares (Class A--2 billion shares,
Class B--2 billion shares, Class
C--2 billion shares and 4 billion
shares unallocated) of $.01 par
value (note 1)...................... $ 43,416
Additional paid-in capital........... 45,827,659
Accumulated net realized losses from
investments......................... (468,410)
Unrealized appreciation on
investments......................... 1,287,458
-----------
Total--representing net assets
applicable to outstanding capital
stock............................. $46,690,123
-----------
-----------
Net assets applicable to outstanding
Class A shares........................ $32,267,670
-----------
-----------
Net assets applicable to outstanding
Class B shares........................ $10,079,440
-----------
-----------
Net assets applicable to outstanding
Class C shares........................ $ 4,343,013
-----------
-----------
Shares outstanding and net asset value
per share:
Class A--Shares outstanding
3,002,157........................... $ 10.75
-----------
-----------
Class B--Shares outstanding
935,785............................. $ 10.77
-----------
-----------
Class C--Shares outstanding
403,656............................. $ 10.76
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
10
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C>
Investment income:
Interest............................. $2,866,847
Dividends............................ 43,945
----------
Total investment income.......... 2,910,792
----------
Expenses (note 4):
Investment advisory fee.............. 239,294
Distribution fees--Class A........... 91,756
Distribution fees--Class B........... 80,316
Distribution fees--Class C........... 29,996
Administrative services fee.......... 44,000
Custodian fees....................... 10,033
Auditing and accounting services..... 25,258
Legal fees........................... 7,377
Directors' fees...................... 848
Registration fees.................... 42,635
Printing and shareholder reports..... 30,807
Insurance............................ 4,790
Other................................ 5,685
----------
Total expenses................... 612,795
Less fees and expenses waived or
absorbed:
Class A distribution fees............ (15,291)
Other fund expenses.................. (119,413)
----------
Total fees and expenses waived or
absorbed......................... (134,704)
----------
Total net expenses............... 478,091
----------
Investment income--net........... 2,432,701
----------
Realized and unrealized gains on
investments:
Net realized gains on investments
(note 3)............................ 585,744
Net change in unrealized appreciation
or depreciation on investments...... 392,690
----------
Net gains on investments......... 978,434
----------
Net increase in net assets resulting
from operations....................... $3,411,135
----------
----------
</TABLE>
See accompanying notes to financial statements.
11
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Operations:
Investment income--net............... $ 2,432,701 $ 1,972,236
Net realized gain on investments..... 585,744 148,640
Net change in unrealized appreciation
or depreciation on investments...... 392,690 791,063
----------- -----------
Increase in net assets resulting
from operations................. 3,411,135 2,911,939
----------- -----------
Distributions to shareholders from:
Investment income--net:
Class A............................ (1,866,254) (1,630,387)
Class B............................ (428,822) (289,700)
Class C............................ (161,070) (93,478)
Tax return of capital:
Class A............................ (99,215) --
Class B............................ (30,946) --
Class C............................ (12,017) --
----------- -----------
Total distributions.............. (2,598,324) (2,013,565)
----------- -----------
Capital share transactions (notes 4 and
5):
Proceeds from sales:
Class A............................ 9,621,075 8,672,015
Class B............................ 6,091,960 3,147,537
Class C............................ 4,378,096 1,651,549
Proceeds from issuance of shares as a
result of reinvested dividends:
Class A............................ 1,276,840 1,164,456
Class B............................ 368,689 228,846
Class C............................ 146,111 78,808
Payments for redemption of shares:
Class A............................ (7,308,009) (6,201,994)
Class B............................ (2,624,311) (760,150)
Class C............................ (2,429,147) (729,285)
----------- -----------
Increase in net assets from
capital share transactions...... 9,521,304 7,251,782
----------- -----------
Total increase in net assets..... 10,334,115 8,150,156
Net assets at beginning of year........ 36,356,008 28,205,852
----------- -----------
Net assets at end of year (including
undistributed net investment income of
$0 and $23,445, respectively)......... $46,690,123 $36,356,008
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
12
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(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. The Fund's investment objective is to seek a high
level of current income consistent with prudent investment risk.
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 charged differs between Class A, Class B and Class C shares.
Income, expenses (other than distribution fees) and realized and unrealized
gains or losses are allocated to each class of shares based upon its relative
net assets.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by the Fund are summarized as
follows:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in the financial statements. Actual
results could differ from those estimates.
INVESTMENTS IN SECURITIES
Investments in securities traded on a national exchange are valued at the
last sales price on that exchange prior to the time when assets are valued;
securities traded in the over-the-counter market and listed securities for which
no sale was reported on that date are valued on the basis of the last current
bid price, by an independent pricing service or at a price deemed best to
reflect fair value quoted by dealers who make markets in these securities. When
market quotations are not readily available, securities are valued at fair value
as determined in good faith under procedures adopted by the Board of Directors.
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.
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, 1998, the Fund had entered into outstanding
when-issued or forward commitments of $5,564,573. The Fund has segregated
assets, with the Fund's custodian, to cover such when-issued and forward
commitment transactions.
13
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND
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 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 $467,336 which, if not offset by subsequent capital gains, will
expire September 30, 2003. 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, 1998, purchases of securities and proceeds
from sales, other than temporary investments in short-term securities aggregated
$72,601,019 and $61,066,237, respectively.
(4) EXPENSES AND RELATED PARTY TRANSACTIONS
The Fund has an investment advisory agreement with Advantus Capital
Management, Inc. (Advantus Capital or the Adviser), a wholly-owned subsidiary of
Minnesota Life Insurance Company (Minnesota Life), formerly known as The
Minnesota Mutual Life Insurance Company. 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 Life.
Effective October 26, 1998, the Funds transfer agent is First Data Investor
Services Group, Inc. 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.
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 Ascend Financial Services,
Inc. (Ascend), the underwriter of the Fund and wholly-owned subsidiary of
Advantus Capital, 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. Ascend is currently waiving that portion of Class
A distribution fees which exceeds, as a percentage of average daily net assets,
.25 percent. Ascend waived Class A distribution fees in the amount of $15,291
for the year ended September 30, 1998.
14
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(4) EXPENSES AND RELATED PARTY TRANSACTIONS--(CONTINUED)
The Fund also bears certain other operating expenses including outside
directors' fees, custodian fees, registration fees, printing and shareholder
reporting fees, legal, auditing and accounting services fees and other
miscellaneous expenses.
The Fund pays an administrative services fee, equal to $3,700 per month, to
Minnesota Life for accounting, auditing, legal and other administrative services
which Minnesota Life provides. Prior to February 1, 1998, the administrative
services fee was $3,600 per month. Effective October 26, 1998, Minnesota Life
became the shareholder services agent for the Fund. Under the new shareholder
and administrative services agreement, the administrative services fee remains
unchanged, and for shareholder services performed by Minnesota Life, the Adviser
will pay Minnesota Life an annual account servicing fee as agreed by the Adviser
and Minnesota Life.
Advantus Capital directly incurs and pays the above operating expenses and
the Fund in turn reimburses Advantus Capital. During the year ended September
30, 1998, Advantus Capital voluntarily agreed to absorb $119,413 in expenses
that were otherwise payable by the Fund.
Sales charges received by Ascend for distributing the Fund's three classes
of shares amounted to $268,951.
As of September 30, 1998, Minnesota Life and subsidiaries and the directors
and officers of the Fund as a whole owned 633,007 Class A shares which
represents 21.1 percent of the total outstanding Class A shares.
During the year ended September 30, 1998, legal fees were paid to a law firm
of which the Fund's secretary is a partner in the amount of $7,345.
(5) CAPITAL SHARE TRANSACTIONS
Transactions in shares for the years ended September 30, 1998 and 1997 were
as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
---------------------- --------------------- ---------------------
1998 1997 1998 1997 1998 1997
---------- ---------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Sold........................................... 903,705 841,660 571,435 296,289 410,305 159,102
Issued for reinvested distributions............ 119,619 112,100 34,443 22,005 13,630 7,526
Redeemed....................................... (685,656) (605,665) (245,853) (72,194) (227,658) (70,547)
---------- ---------- ---------- --------- ---------- ---------
Increase (decrease).......................... 337,668 348,095 360,025 246,100 196,277 96,081
---------- ---------- ---------- --------- ---------- ---------
---------- ---------- ---------- --------- ---------- ---------
</TABLE>
(6) RESTRICTED SECURITIES
At September 30, 1998, 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 securities). 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, 1998 was $3,713,350 which represents 8.0 percent of net
assets.
(7) YEAR 2000 (UNAUDITED)
In 1995, Minnesota Life began addressing computer system requirements and
applications to be Year 2000 ready. Based on a current study, Minnesota Life
plans to spend approximately $14 million through 1999 to modify its computer
information systems, enabling proper processing of transactions relating to the
year 2000 and beyond. The Fund will not be charged for these expenses.
15
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND
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
--------------------------------------------------------------------------------
PERIOD FROM
NOVEMBER 1,
YEAR ENDED SEPTEMBER 30, 1993 TO YEAR ENDED
------------------------------------------------ SEPTEMBER 30, OCTOBER 31,
1998 1997 1996 1995(a) 1994(b) 1993
------------ --------- --------- --------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period.... $ 10.54 $ 10.23 $ 10.36 $ 9.70 $ 11.06 $ 10.94
------------ --------- --------- --------- ------- ------------
Income from investment operations:
Net investment income................. .64 .70 .62 .62 .53 .63
Net gains or losses on securities
(both realized and unrealized)...... .25 .33 (.13) .65 (.99) .55
------------ --------- --------- --------- ------- ------------
Total from investment
operations...................... .89 1.03 .49 1.27 (.46) 1.18
------------ --------- --------- --------- ------- ------------
Less distributions:
Dividends from net investment
income.............................. (.65) (.72) (.62) (.61) (.53) (.63)
Distributions from capital gains...... -- -- -- -- (.37) (.43)
Tax return of capital................. (.03) -- -- -- -- --
------------ --------- --------- --------- ------- ------------
Total distributions............... (.68) (.72) (.62) (.61) (.90) (1.06)
------------ --------- --------- --------- ------- ------------
Net asset value, end of period.......... $ 10.75 $ 10.54 $ 10.23 $ 10.36 $ 9.70 $ 11.06
------------ --------- --------- --------- ------- ------------
------------ --------- --------- --------- ------- ------------
Total return (d)........................ 8.73% 10.37% 4.83% 13.53% (4.34)% 11.43%
Net assets, end of period (in
thousands)............................ $ 32,268 $ 28,089 $ 23,692 $ 25,317 $27,105 $27,073
Ratio of expenses to average daily net
assets (e)............................ .95% .95% 1.26% 1.29% 1.24%(f) 1.17%
Ratio of net investment income to
average daily net assets (e).......... 6.02% 6.77% 6.05% 6.23% 5.73%(f) 5.77%
Portfolio turnover rate (excluding
short-term securities)................ 152.5% 85.1% 125.2% 203.7% 236.2% 135.0%
</TABLE>
- ----------
(a) Effective March 1, 1995, the Fund entered into a new investment advisory
agreement with Advantus Capital Management, Inc. Prior to March 1, 1995,
the Fund had an investment advisory agreement with MIMLIC Asset Management
Company.
(b) During 1994, the Fund changed its fiscal year end from October 31 to
September 30.
(c) Commencement of operations.
(d) 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 front-end or contingent deferred sales
charges. For period less than one year, total returns presented are not
annualized.
16
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND
NOTES TO FINANCIAL STATEMENTS--CONTINUED
<TABLE>
<CAPTION>
CLASS B
----------------------------------------------------------------
PERIOD FROM
AUGUST 19,
YEAR ENDED SEPTEMBER 30, 1994(c) TO
----------------------------------------------- SEPTEMBER 30,
1998 1997 1996 1995(a) 1994
------------ --------- --------- -------- --------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period.... $ 10.56 $ 10.24 $ 10.37 $ 9.70 $9.83
------------ --------- --------- -------- -----
Income from investment operations:
Net investment income................. .57 .63 .54 .53 .06
Net gains or losses on securities
(both realized and unrealized)...... .24 .33 (.13) .67 (.13)
------------ --------- --------- -------- -----
Total from investment
operations...................... .81 .96 .41 1.20 (.07)
------------ --------- --------- -------- -----
Less distributions:
Dividends from net investment
income.............................. (.57) (.64) (.54) (.53) (.06)
Distributions from capital gains...... -- -- -- -- --
Tax return of capital................. (.03) -- -- -- --
------------ --------- --------- -------- -----
Total distributions............... (.60) (.64) (.54) (.53) (.06)
------------ --------- --------- -------- -----
Net asset value, end of period.......... $ 10.77 $ 10.56 $ 10.24 $10.37 $9.70
------------ --------- --------- -------- -----
------------ --------- --------- -------- -----
Total return (d)........................ 7.92% 9.65% 4.06% 12.74% (.72)%
Net assets, end of period (in
thousands)............................ $ 10,079 $ 6,079 $ 3,375 $1,084 $ 60
Ratio of expenses to average daily net
assets (e)............................ 1.70% 1.70% 2.01% 2.05% .28%(g)
Ratio of net investment income to
average daily net assets (e).......... 5.33% 6.08% 5.38% 5.32% .60%(g)
Portfolio turnover rate (excluding
short-term securities)................ 152.5% 85.1% 125.2% 203.7% 236.2%
<CAPTION>
CLASS C
---------------------------------------------------------------
PERIOD FROM
MARCH 1,
YEAR ENDED SEPTEMBER 30, 1995(c) TO
---------------------------------------------- SEPTEMBER 30,
1998 1997 1996 1995
------------ -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period.... $10.55 $10.23 $10.37 $ 9.90
------ ------ ------ ------
Income from investment operations:
Net investment income................. .57 .63 .54 .31
Net gains or losses on securities
(both realized and unrealized)...... .24 .33 (.14) .47
------ ------ ------ ------
Total from investment
operations...................... .81 .96 .40 .78
------ ------ ------ ------
Less distributions:
Dividends from net investment
income.............................. (.57) (.64) (.54) (.31)
Distributions from capital gains...... -- -- -- --
Tax return of capital................. (.03) -- -- --
------ ------ ------ ------
Total distributions............... (.60) (.64) (.54) (.31)
------ ------ ------ ------
Net asset value, end of period.......... $10.76 $10.55 $10.23 $10.37
------ ------ ------ ------
------ ------ ------ ------
Total return (d)........................ 7.92% 9.66% 4.07% 7.91%
Net assets, end of period (in
thousands)............................ $4,343 $2,187 $1,139 $ 321
Ratio of expenses to average daily net
assets (e)............................ 1.70% 1.70% 2.01% 2.05%(f)
Ratio of net investment income to
average daily net assets (e).......... 5.40% 6.11% 5.39% 5.26%(f)
Portfolio turnover rate (excluding
short-term securities)................ 152.5% 85.1% 125.2% 203.7%
</TABLE>
- ----------
(e) The Fund's Adviser and Distributor voluntarily waived or absorbed $134,706,
$121,780, $35,718, $36,128, $43,505 and $34,773 in expenses for the years
ended September 30, 1998, 1997, 1996 and 1995, the period ended September
30, 1994 and the year ended October 31, 1993, respectively. If Class A
shares had been charged for these expenses, the ratio of expenses to
average daily net assets would have been 1.29%, 1.37%, 1.40%, 1.42%, 1.41%
and 1.31%, respectively, and the ratio of net investment income to average
daily net assets would have been 5.68%, 6.35%, 5.91%, 6.10%, 5.56% and
5.63%, respectively. If Class B shares had been charged for these expenses,
the ratio of expenses to average daily net assets would have been 1.99%,
2.07%, 2.09% and 2.11%, and the ratio of net investment income to average
daily net assets would have been 5.04%, 5.71%, 5.30% and 5.26% for the
years ended September 30, 1998, 1997, 1996 and 1995, respectively. If Class
C shares had been charged for these expenses, the ratio of expenses to
average daily net assets would have been 1.99%, 2.07%, 2.08% and 2.11%,
respectively, and the ratio of net investment income to average daily net
assets would have been 5.11%, 5.74%, 5.32% and 5.20% for the years ended
September 30, 1998, 1997, 1996 and the period ended September 30, 1995,
respectively.
(f) Adjusted to an annual basis.
(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.
17
<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, 1998 and the related
statement of operations for the year then ended, the statement of changes in net
assets for the two years then ended and the financial highlights for the four
years then ended, the period from November 1, 1993 to September 30, 1994 and for
the year 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, 1998 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 6, 1998
18
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND
FEDERAL INCOME TAX INFORMATION
The following information for federal income tax purposes is presented as an
aid to shareholders in reporting the distributions paid by the Fund in the
fiscal year ended September 30, 1998. Dividends for the 1998 calendar year will
be reported to you on Form 1099-Div in late January 1999. Shareholders should
consult a tax adviser on how to report these distributions for state and local
purposes.
CLASS A
<TABLE>
<CAPTION>
PAYABLE DATE PER SHARE
- ------------------------------------------------------------------------------------------------------------ ---------
<S> <C>
Income distributions--taxable as dividend income, 1.7% qualifying for deduction by corporations
October 31, 1997............................................................................................ $ .0591
November 30, 1997........................................................................................... .0503
December 31, 1997........................................................................................... .0584
January 31, 1998............................................................................................ .0365
February 28, 1998........................................................................................... .0556
March 31, 1998.............................................................................................. .0655
April 30, 1998.............................................................................................. .0553
May 31, 1998................................................................................................ .0530
June 30, 1998............................................................................................... .0598
July 31, 1998............................................................................................... .0649
August 31, 1998............................................................................................. .0559
September 30, 1998.......................................................................................... .0693
---------
$ .6836
---------
---------
</TABLE>
The distribution of $.0693 payable on September 30, 1998 consisted of $.0333
from tax return of capital and $.0360 from net investment income.
CLASS B
<TABLE>
<CAPTION>
PAYABLE DATE PER SHARE
- ------------------------------------------------------------------------------------------------------------ ---------
<S> <C>
Income distributions--taxable as dividend income, 1.7% qualifying for deduction by corporations
October 31, 1997............................................................................................ $ .0525
November 30, 1997........................................................................................... .0438
December 31, 1997........................................................................................... .0517
January 31, 1998............................................................................................ .0297
February 28, 1998........................................................................................... .0495
March 31, 1998.............................................................................................. .0588
April 30, 1998.............................................................................................. .0488
May 31, 1998................................................................................................ .0463
June 30, 1998............................................................................................... .0533
July 31, 1998............................................................................................... .0582
August 31, 1998............................................................................................. .0492
September 30, 1998.......................................................................................... .0628
---------
$ .6046
---------
---------
</TABLE>
The distribution of $.0628 payable on September 30, 1998 consisted of $.0333
from tax return of capital and $.0295 from net investment income.
19
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND
FEDERAL INCOME TAX INFORMATION--CONTINUED
CLASS C
<TABLE>
<CAPTION>
PAYABLE DATE PER SHARE
- ------------------------------------------------------------------------------------------------------------ ---------
<S> <C>
Income distributions--taxable as dividend income, 1.7% qualifying for deduction by corporations
October 31, 1997............................................................................................ $ .0524
November 30, 1997........................................................................................... .0438
December 31, 1997........................................................................................... .0517
January 31, 1998............................................................................................ .0297
February 28, 1998........................................................................................... .0495
March 31, 1998.............................................................................................. .0588
April 30, 1998.............................................................................................. .0487
May 31, 1998................................................................................................ .0462
June 30, 1998............................................................................................... .0533
July 31, 1998............................................................................................... .0582
August 31, 1998............................................................................................. .0491
September 30, 1998.......................................................................................... .0627
---------
$ .6041
---------
---------
</TABLE>
The distribution of $.0627 payable on September 30, 1998 consisted of $.0333
from tax return of capital and $.0294 from net investment income.
20
<PAGE>
SHAREHOLDER SERVICES
The Advantus Family of Funds offers a variety of services that enhance your
ability to manage your assets. Check each Fund's prospectus for the details of
the services and any limitations that apply to a particular Fund.
EXCHANGE PRIVILEGES: You can move all or part of your investment dollars from
one fund to any other Advantus Fund you own (for identical registrations within
the same class) at any time as your needs change. Exchanges are at the then
current net asset value (exchanges from the Advantus Money Market Fund will
incur the applicable sales charge, if not previously subjected to the charge).
Shareholders may make twelve exchanges each calendar year without incurring a
transaction charge. Thereafter, there will be a $7.50 transaction charge for
each additional exchange within the calendar year.
INCOME DISTRIBUTION FLEXIBILITY: You can have your fund dividends and other
distributions automatically reinvested with no sales charge, direct them from
one Advantus Fund to any other you own within the Fund family or, if you desire,
we'll pay you in cash.
SYSTEMATIC WITHDRAWAL PLAN: You can set up a plan to receive a check at
specified intervals from your fund account--subject to minimum guidelines.
Depending upon the performance of the underlying investment options, the value
may be worth more or less than the original amount invested when withdrawn.
DIRECT DEPOSITS: At your request we will deposit your dividends or systematic
withdrawals directly into your checking or savings account instead of sending
you a check.
TELEPHONE EXCHANGE: You may move money from one Advantus account to any other
Advantus account you own (with identical registrations within the same class)
just by calling our toll free number. The Telephone Exchange privilege will
automatically be established unless otherwise indicated on the Account
Application. Telephone Exchange may be changed (added/deleted) at any time by
submitting a request in writing.
SYSTEMATIC EXCHANGE: You may move a set amount of money monthly from one
Advantus Fund to another Advantus Fund (with identical registrations within the
same class) to diversify your investment portfolio and take advantage of
dollar-cost averaging.
AUTOMATIC PAYMENT OF INSURANCE PREMIUMS: You may automatically pay your
Minnesota Life insurance premiums out of your Advantus Money Market account.
REDUCED SALES CHARGES: Letter of Intent, combined purchases with spouse,
children or single trust estates, and the Right of Accumulation make it possible
for you to reduce the sales charge, if any.
SPECIAL PURCHASE PLANS: Special purchase plans enable you to open an Advantus
Fund account for as little as $25 and lower your average share cost through
"dollar-cost averaging." (Dollar-cost averaging does not assure a profit, nor
does it prevent loss in declining markets). The Automatic Investment Plan allows
you to invest automatically each month from your checking or savings account.
IRAS, OTHER QUALIFIED PLAN: You can use the Advantus Family of Funds for your
Traditional or Roth Individual Retirement Account or other qualified plan
including: SEP IRA's, SIMPLE IRA's, Profit Sharing, 401(k), Money Purchase or
Defined Benefit plans.
GROUP INVESTMENT PLAN: This plan provides employers and employees with a
convenient means for investing in the funds through payroll deduction.
TELEPHONE REDEMPTION: You may call us and redeem shares over the phone. The
proceeds will be sent by check to the address of record for the account or wire
transferred to your bank of record for the account. Wire transfers are for
amounts over $500. The prevailing wire charge will be added to the withdrawal
amount. The Telephone Redemption privilege will automatically be established
unless otherwise indicated on the
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Account Application. Telephone Redemption may be changed (added/deleted) at any
time by submitting a request in writing. To have the redemption automatically
deposited into your checking account, please send a voided check from your bank.
Depending on the performance of the underlying investment options, the value may
be worth more or less than the original amount invested upon redemption. Some
limitations apply, please refer to the prospectus for details.
ACCOUNT UPDATES: You'll receive written confirmation of every transaction you
initiate and quarterly statements to help you track all of your Advantus Fund
investments and annual tax statements. Semi-annual and annual reports will
provide you with portfolio information, fund performance data and the current
investment outlook.
TOLL-FREE SERVICE LINE: For your convenience in obtaining information and
assistance directly from Advantus Shareholder Services, call 1-800-665-6005.
Advantus Account Representatives are available Monday through Friday from 8 a.m.
to 4:45 p.m. Central Time. Our voice response system is available 24 hours,
seven days a week. This system allows you to access current net asset values,
account balances and recent account activity.
HOW TO INVEST
You can invest in one or more of the ten Advantus Funds through a local
Registered Representative of Ascend Financial Services, Inc., distributor of the
Funds. Contact your representative for information and a prospectus for any of
the Advantus Funds you are interested in. To find a Registered Representative
near you, call the toll-free service line (1-800-665-6005).
MINIMUM INVESTMENTS: Your initial investment in any of the Advantus Funds can
be as small as $25 when you use the Automatic Investment Plan. Minimum lump-sum
initial investment is $250. Minimum subsequent investment is $25.
THE FUND'S MANAGER
Advantus Capital Management, Inc., investment adviser to the Fund, selects
and reviews the Fund's investments and provides executive and other personnel
for the Fund's management. (For the Advantus International Balanced Fund, Inc.,
the sub-adviser, Templeton Investment Counsel, Inc., selects the Fund's
investments.)
Advantus Capital Management, Inc. manages twelve mutual funds containing
$2.6 billion in assets in addition to $11.1 billion in assets for other clients.
Advantus Capital's seasoned portfolio managers average more than 13 years of
investment experience.
ADVANTUS FAMILY OF FUNDS
Advantus Bond Fund
Advantus Horizon Fund
Advantus Spectrum Fund
Advantus Enterprise Fund
Advantus Cornerstone Fund
Advantus Money Market Fund
Advantus Mortgage Securities Fund
Advantus International Balanced Fund
Advantus Venture Fund
Advantus Index 500 Fund
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THIS REPORT HAS BEEN PREPARED FOR SHAREHOLDERS AND MAY BE DISTRIBUTED
TO OTHERS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST.
[ADVANTUS -TM- FAMILY OF FUNDS]
ASCEND FINANCIAL SERVICES, INC.,
SECURITIES DEALER, MEMBER NASD/SIPC
400 ROBERT STREET NORTH
ST. PAUL, MN 55101-2098
1-800-AFS-1838
(1-800-237-1838)
<PAGE>
ASCEND FINANCIAL SERVICES, INC. BULK RATE
400 ROBERT STREET NORTH U.S. POSTAGE PAID
ST. PAUL, MN 55101-2098 ST. PAUL, MN
PERMIT NO. 3547
ADDRESS SERVICE REQUESTED
F.48641 Rev. 11-1998
